JUDGMENT No. !99. 1. BB CATCHWORDS TRADE PRACTICES - misleading and deceptive conduct - investment advice - gold mining venture - certainty of return of premiums on special units in unit trust - implied representations - no facts to justify - accessorial liability where accessory's conduct is principal's contravention - position of investment advisers with interest in investment. Trade Practices Act 1974 s.52, s.75B(1) Federal Court of Australia Act s.51A Yorke v Lucas (1985) 61 ALR 307 COLIN FREDERICK WRIGHT and MAUREEN MARGARET WRIGHT v WHEELER GRACE & PIERUCCI PTY LTD, ROBERT JOSEPH PIERUCCI, GLENN JOHN WHEELER, MICHAEL JAMES GRACE and PETER FRANCIS COLLINS No. WAG [2) FRENCH J. PERTH 22 April 1988 IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY ee ee ee No. WAG 108 of 1986 BETWEEN: COLIN FREDERICK WRIGHT Pirst Applicant MAUREEN MARGARET WRIGHT Second Applicant and WHEELER GRACE & PIERUCCI PTY LTD First Respondent ROBERT JOSEPH PIERUCCI Second Respondent GLENN JOHN WHEELER Third Respondent MICHAEL JAMES GRACE Fourth Respondent and PETER FRANCIS COLLINS Fifth Respondent MINUTE OF ORDER JUDGE MAKING ORDER: FRENCH J. DATE OF ORDER: 22 APRIL 1988 WHERE MADE: PERTH THE COURT ORDERS THAT:- 1. There be judgment for the first applicant against the first respondent in the sum of $2,554.05. 2. There be judgment for the second applicant against the first respondent in the sum of $2,554.05. The application be dismissed as against the second, third, fourth and fifth respondents. costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY eee we No. WAG 108 of 1986 BETWEEN: COLIN FREDERICK WRIGHT First Applicant MAUREEN MARGARET WRIGHT Second Applicant and WHEELER GRACE & PIERUCCI PTY LTD First Respondent ROBERT JOSEPH PIERUCCI Second Respondent GLENN JOHN WHEELER Third Respondent MICHAEL JAMES GRACE Fourth Respondent and PETER FRANCIS COLLINS Fifth Respondent CORAM: FRENCH J. 22 April 1988 REASONS FOR JUDGMENT Introduction On 9 May 1985, Colin Wright and his wife invested $5,000 each in a gold mining company operating in the Mt. Magnet area. The company was called Carbon Gold Pty Ltd and it carried on its 2. Mining activities as trustee of a unit trust called "The Carbon Gold Unit Trust". Mr and Mrs Wright bought 10 special units each in the Trust at $500.00 per unit, made up of an issue price of 1 cent and a premium of $499.99. In the event, the venture failed. Fo. the year from September 1984 to the end of September 1985 gold sales yielded $149,260 against expenditure of $2.77 m. The net loss for the period was $2.58 m. On 3 December 1985 all but one of the directors resigned and effective control of the company passed to Resmin Pty Ltd, a management company associated with the merchant bank, Rothwells Limited. Three persons nominated by Resmin were appointed to the board which continued the company's activities for a few months then realised the assets and effectively wound up the trust. For each $500.00 unit purchased, special unit holders, including Mr and Mrs Wright, received a return of $289 together with 200 shares and 40 options in a company called Finders Gold N.L., shortly to be listed on the Stock Exchange. The Wrights say that they invested in Carbon Gold on the strength of representations made to Mr Wright by Mr Peter Collins on behalf of Wheeler Grace & Pierucci Pty Ltd ("WGP"), a financial consultant and investment adviser which was actively seeking finance for the venture. The representations are said to have been made at a meeting held for prospective investors at the WGP premises on 8 May 1985. WGP itself had 1500 ordinary units in the Trust and at the relevant time was represented on the Carbon Gold board by Pierucci and Collins. 3. As the statement of claim now stands, the Wrights say that the representations which related to the excellence of the proposed investment, the early return of the premium, the imminent restructuring of the trust and the prospective value of the units were false. They allege the company is liable to them for the loss that they have suffered because the making of the representations constituted a contravention on its part of s.52 of the Twade Practices Act. They complain in the alternative that the representations were made negligently and they say that the company's directors, Messrs. Wheeler, Grace and Pierucci, are also liable to them for the loss as they were accessories to the contravention of s.52 and were, in any event, negligent in allowing Collins to make the statements he did. The trial occupied some five and a half days. The amount of damages in issue is a little in excess of $5,000. Statements made from the bar table by Mr Olivier, counsel for the Wrights, suggest that the application is regarded by a number of investors in the trust as a test case, albeit on the facts rather than on any issue of principle. To that extent it may have an importance that goes beyond appearance. It is certainly of importance for the respondents, who were initially accused not only of misleading and deceptive conduct and negligence, but also of fraud, an allegation that was later dropped, but not before it had received considerable publicity. Against that background it is necessary to consider something of the history of events leading up to the meeting at which it is said the representations complained of were made. Factual Background Carbon Gold Pty Ltd ("Carbon Gold") takes its name from a technique for treating gold bearing ore, known as Carbon in Pulp ("CIP") processing. In 1984, Raymond Arthur Couche, a consultant chemical and metallurgical engineer, developed the concept of a mobile CIP processor, which could treat gold bearing ore. He planned to design and build such a plant to provide a processing service, under suitable joint venture arrangements, to the owners of small open cut gold mining operations. As a preliminary step, he proposed to use the plant to treat tailings. However other parties with other ideas became involved in his plans. Mr Nigel Guest, who was associated with Couche in the early planning stages, introduced him to an accountant, Michael Elphick, and subsequently to WGP and its principals. When Carbon Gold Pty Ltd was incorporated on 28 August 1984 its directors were Messrs. Couche, Guest, Elphick, Wheeler, Grace, Pierucci and Mr R. Garton-Smith, a solicitor representing WGP. 5,500 units in the Carbon Gold Unit Trust were issued, 1,500 to each of Couche, Guest and Elphick and 1,000 to WGP, which was to be responsible for fund yaising for the Trust. The holdings were later altered when Elphick surrendered 500 units to WGP. The units held by these "promoters" were ordinary one cent units. Potential investors were asked to subscribe to special units of $500 each. The -pecial units were 1 cent units subject to a premium of $499.99, to be repaid prior to any distribution to ordinary unit holders. 5. The concept of using Carbon Gold as a vehicle for providing joint venture processing services did not last long and it was decided that the company should acquire mining tenements and treat its own ore. It acquired a gold mining lease in the Mt. Magnet area, incorporating a no longer operating mine called "Lindsay's Reward". It took out options to purchase the Longreef Gold Mine, 500 metres to the north of Lindsay's Reward and an area a little south of that known as the "Wheel of Fortune". The company also later purchased a mine called "Reid's Ridge" located at Payne's Find. Using the services of WGP, the company began to raise money from subscribers to the unit trust. At a meeting of directors held on 26 October 1984 it was reported that $301,000 had been raised. The board resolved to enter into a formal underwriting agreement in respect of the balance of $199,000 then required. WGP was to be paid 2 1/2% of the underwritten amount. The agreement made pursuant to this resolution was ratified by the board on 7 November 1984. By December 1984 the company had engaged Magnetite Development Pty Ltd with a view to the latter re-opening and operating the Lindsay's Reward mine and with the object of extracting a minimum of 4,000 tonnes of high grade ore at that site. 6. On 5 December 1984, Pierucci reported to the board that $826,000 had been subscribed to the Trust, with a further $100,000 pledged by small investors. It was resolved that the issue be closed at $1,250,000 with a right to accept over-subscriptions to $1.85m or such lesser amount as was received to midday on 19 December 1984. At the same meeting Guest advised that the cash flow evaluations from the re-opening of the Lindsay's Reward Mine indicated that the return of the investors' contributions (i.e. the premium paid on the special units) should be scheduled earlier than originally projected. In a memorandum prepared for the board on 23 December 1984, he reported in glowing terms on progress at the mine and other areas in which the company was interested. He predicted that a transportable plant could be commissioned on site in May 1985 and could begin processing open cut ore for 30 months at a monthly net profit of $700,000. This was regarded as a short term measure until the mine had been rehabilitated for underground work. Development costs of $3m to $4m were to come from a public unit issue in July/August 1985. Annexed to the report was a statement of projected income and expenditure for 1985 and monthly cash flow projections for 6 tenement areas, including Lindsay's Reward. While the annexures did not specify a date for repayment of special unit premiums, a note to the summary sheet indicates that it was contemplated that some $2.5m would be paid to special unit holders by 31 December 1985. A draft letter to unit holders, approved at a meeting of the board held on 4 January 1985, included the statement that:- 7. "Present cash flow projections indicate that Special Unit holders could receive their full preferential distributions by September '85 and requirements for Stock Exchange listing will be progressed accordingly." There is an entry in biro aitering the words "by September ''85" to "by the end of 1985", but there was no evidence as to its source, timing, the reason for the correction or whether it was reflected in the letter as sent. At a board meeting held on 31 January 1985 Guest reported that the mine had been dewatered and was being surveyed to determine what further work was required. Production ona small scale could be expected within 2 weeks and some ore would be processed through the State Battery early in February. The open cut ore predicted in his progress report of 23 December had not materialised and the best that he could tell the board was that "there may be a small open cut resource (30-100,000 tonnes) ." Discussion and negotiations relating to possible acquisition of other tenements were also reported. At the next meeting of the board on 7 February, Garton-Smith for the WGP interests, moved a series of resolutions, including a proposal that the company seek to raise funds of $lm to acquire the Reid's Ridge mine. Funds were to be sought first from existing unit holders, second from the company's consultants, and if these avenues were unproductive, through the services of Messrs. Wheeler, Grace and Pierucci. The resolution was carried unanimously by the board. rn 8. On 14 March 1985, financial statements and revised budgets were tabled and a special payment of $65,000 to WGP ratified. The payment was in recognition of funds raised by WGP over and above those contemplated by the underwriting agreement. At Garton-Smith's request the minutes noted Pierucci's confidence that further subscriptions for special units could be raised at the rate of $200,000 per month in the months of March, April and May. He also asked that it be recorded in the minutes that the cash flow projections tabled were based upon processed ore averaging 15 grammes per tonne. The minutes go on to note Couche''s advice to the meeting that, from a technical viewpoint, he considered the cash flow projections realistic, although perhaps conservative. It was also agreed by the board at this meeting that a commission of 6% be paid to WGP on any new funds raised as a result of a proposed written invitation to unit holders to subscribe to additional special units or from new subscribers. The evidence to this point indicates, on the surface at least, a relatively smooth progress in the affairs of Carbon Gold in relation to the raising of funds, the rehabilitation of Lindsay's Reward and the investigations and negotiations in connection with possible acquisition of further tenements. The meeting of the board held on 3 April 1985, however, saw a bomb shell dropped by the WGP interests. At that meeting, and without any prior notice to Couche, Guest or Elphick, 9. Garton-Smith successfully moved that standing orders be suspended so that he could propose a series of some 17 resolutions. On ascertaining that Wheeler, Grace and Pierucci proposed to vote for the resolutions regardless of any discussion, Guest left the meeting. The minutes record that Wheeler then said that he and Messrs. Grace, Pierucci and Garton-Smith were not familiar with gold mining ventures and were concerned with the Trust's financial position. The motions to be put would call for a cessation of any further work on mine development and plant construction until such time as an independent consultant had reported that the venture was viable. The minutes further report that Messrs. Wheeler, Grace and Pierucci indicated to the board:- "that they had no true understanding of the present position of the company and the progress on the Lindsays Reward property. As the persons responsible for raising funds from investors, they wanted to obtain= an independent report on the company's activities to date, and the likelihood of future profits 1f the company pursued its present course of action to reopen the mine and process the ore using the company's own plant." Couche and Elphick both spoke of the harmful technical and financial effects of a suspension of work. Couche said that the action proposed would be suicidal and put the project in extreme jeopardy. Elphick contended that the costs associated with suspending operations would not be much less than continuing them. In spite of their protests the motion was passed although Couche asked that it be recorded in the minutes that he considered the action to. be totally, practically and _ technically, irresponsible and not in the best interests of unit holders. 10. It was resolved that an independent consultant be appointed to review the geological information, mining programme and mining operation overall and to report on the viability of the venture. It was also resolved that active fund raising activities should cease forthwith, provided that funds received on an unsolicited basis could be accepted and held. Garton-Smith said he was concerned that a letter (not in evidence), sent to unit holders on 15 March was misleading and any further fund raising activities should be deferred until a favourable report from an independent consultant was received. He also said that any investor presently contemplating acquiring units should be asked to defer his decision and that no additional information concerning the company's operations should be passed on. Couche is the only person present at the meeting who gave evidence at the trial and it appears from his testimony not only that the motions were moved without prior warning but also that none of the directors associated with WGP disclosed what, if any information or advice they were acting on or its source. A meeting of the board was held the following day at which only Couche, Guest and Elphick were present. They considered a letter dated 3 April from Magnetite Development Pty Ltd expressing amazement at the suspension decision = and threatening unspecified legal action. Without the impeding presence of the WGP representatives the board was able to mitigate the most dramatic of the decisions of the previous day by resolving:- ll. «seein view of the advice contained in the letter from Magnetite Development, and additional opinions obtained from other technically competent persons, that the Board direction to close down mining operations for the present, be ignored." At a further meeting on 11 April 1985 notice was given that Wheeler, Grace and Garton-Smith proposed to resign as directors of the company and it was resolved to accept their resignations with effect from 12 April 1985, upon receipt of written notices. Wheeler moved, and it was resolved, that four new directors be appointed, they being Peter Collins, a senior client advisor employed by WGP, and Ian Cavanagh, John Wilberforce and John Warne, all of whom were substantial investors in the Trust. It does not seem that this shift in the composition of the board had anything to do with the decision taken by Couche, Guest and Elphick on 4 April. Indeed, WGP continued to be represented on the board by Pierucci and the new appointee, Collins. It was also resolved at this meeting that Mr Bruce Harris' appointment, as independent consultant, be ratified and that the full co-operation of the board and the company's consultants would be extended to him so that his report could be completed without delay. On 16 April the board formally appointed as directors Messrs. Cavanagh, Wilberforce, Warne and Collins, all of whom were present at that meeting. Guest reported that Bruce Harris had been engaged to prepare a report on the position of the Mt. Magnet ay 12. mine development and exploration to date. He had been requested to present the report in a form suitable for publication ina prospectus. It was also resolved that the decision of the previous board to pay commission of 6% to WGP on funds contributed by their clients should be ratified. The finance sub-committee established by that meeting of the board held what appears to have been its first meeting on 22 April. Cavanagh, Pierucci, Guest and Elphick were present. Concern was expressed about a projected deficit for June and July and various ways of overcoming it were discussed. At the same meeting Pierucci said that WGP "may still require a report from Harris before their staff would feel at ease in raising additional funds from investors". However the minutes record him as agreeing that in view of favourable comments that Harris had made unofficially, if Harris were prepared to address senior management of WGP and express confidence in the project, his people would raise the balance of funds ($600,000) in line with the projections. The softening of WGP's attitude to fund raising for the Trust as reflected in the report of Pierucci's comments made so soon after the meeting of 3 April, was not explained in any satisfactory way. Harris did not complete his repurt until June 1985. It was tendered through Couche on the basis that it was evidence of material before the board at the time of its publication, but not as proof of its content. It was only a 13. preliminary report as its title indicates. It incorporated a report on mining operations at Lindsay's Reward and Reid's Ridge prepared by Mr R. Fraser of Fraser Mining & Construction Pty Ltd and dated 27 May 1985. While no inference can be drawn as to the correctness or otherwise of the views expressed and the statements made therein by Fraser and Harris, it can be said that they did not exude a general air of confidence about the future of the venture. Their approach was neutral and emphasised the need for substantial additional information and exploratory work before a report suitable for inclusion in a prospectus could be prepared. Having regard to the uncertainties and reservations expressed in the two reports, it is difficult to imagine what favourable comments could have been made by Harris to cause Pierucci to change his attitude to further fund raising. On 26 April Pierucci confirmed that he and Collins had agreed to continue to raise funds on the basis of cash flow projections. There is no evidence of the previously proposed input by Harris ever having taken place. It was agreed at the meeting that a regulag monthly newspaper be prepared and issued to unit holders to keep them informed of developments and activities. It was also noted that "...the speculative nature of the investment should continually be stressed to Unit Holders and prospective Unit Holders". At that meeting the board also resolved that a solicitor be instructed to "commence preparation of a deed suitable for a public Trust and, to make arrangements for public listing". 14. After the meeting a four page memorandum on Carbon Gold letterhead dated 29 April was prepared by Guest. It was entitled "Background Information" and contained an explanation of the structure and activities of Carbon Gold and the Trust. The document is of some importance as it was one of two made available to Wright and other investors at a meeting organised by Collins and held at the WGP office on 8 May 1985. The second document was a "Circular to Unit Holders" dated 6 May 1985. At the end of April Carbon Gold had extracted about 13 ounces of gold from Lindsay's Reward. The company acquired the Reid's Ridge mine in that same month, but by late November to early December 1985, when Couche resigned from the board, it had only produced about 100 ounces. Couche became progressively disenchanted with Guest after April as he was, to use Couche''s words producing more bullish statements than he appreciated. Ultimately, Guest fell out with the other directors and was removed from the board on 14 August 1985. In spite of the fact that Couche was called as a witness, the Court has been left with only a sketchy account of the failure of the Trust and its ultimate surrender to the Rothwells related management company, Resmin Pty Ltd, in December 1985. Against this background I turn to the circumstances under which the Wrights became investors. 15. The Wrights' Investment Decision (i The Meeting of 8 May 1985 Mr Wright is a member of a golf club known as the Lake Karrinyup Country Club. Through that association and a group of friends at the club, sometimes called "the dirty dozen", he had known Peter Collins since 1975. Prior to May 1985 he had used the services of WGP on two occasions, each time through Collins. While lunching at the club one Friday shortly before 8 May, Wright heard of a meeting to be held at the premises of WGP to explain a gold investment opportunity. Although he knew little more than that about it, he went along to the meeting with his son Phillip. There they were met by Collins who took them into a room set up like a small theatre where drinks were provided while other prospective investors arrived. Wright was given two documents, the "Background Information" memorandum dated 29 April, and the "Circular to Unit Holders" dated 6 May. He did not read them immediately. There were other friends from the "dirty dozen" present as well as people he had never met before. Nigel Guest was there, and a person whom Wright recalled as either a geologist or an engineer, but whose name he could not remember. It may have been Kennedy, who was the principal of Magnetite Development Pty Ltd, or a geologist, Mullumby. Wright was unable to recall any of Messrs. Wheeler, Grace or Pierucci being present. 16. Collins acted as an informal MC and introduced Guest to the meeting. Guest gave an account of the background of Carbon Gold, its origins and objectives and the extension of its proposed activities to gold mining as distinct from mere provision of plant. The technical person, who may have been Mullumby or Kennedy, spoke next. Wright's recall of these addresses was not clear. There was some confusion in his mind between Guest's speech and the technical offering. It is more likely, as Wright agreed in cross-examination, that it was Guest who spoke of figures and returns to investors. He got the impression from Guest that there were "heaps of gold" in the ground and ""mega-bucks" to be made. He remembered a reference to $32m worth of gold in the ground and a statement that production would start within 2 weeks, yielding a certain number of tonnes. On the basis of the represented grammes ef gold per tonne of ore, he did his own calculation that the mine could produce about half a million dollars a month which would allow repayment of the $2.5m being raised from investors within 5 months. This fitted in with what he was told by Collins about the return of the premiums. Collins was the third speaker and, according to Wright:- "He told us that if we were interested in that Trust what we would do is we would pay $500 per 1 cent unit, and that in October of that year that $500, $499.99 would be returned and that the 1 cent would then become 1,000 50 cent shares in some new company to be floated. There was no name of a company or whatever it was but the important thing was that the $499.99 would be returned to us. It was pictorially drawn on this white board: here is your unit, this is the arrow going to what happens in October. October was written on the board and the square showing the 1 cent becoming the 1,000 50 cent shares." 17. There were no strings attached to the promise of repayment of the premium by October 1985. The representation, he said, made him very confident that there was no risk attaching to the investment. AS to the Trust's future, Collins described a proposed restructuring whereby a public company would be floated and each unit holder would receive 1,000 50 cent shares. He said that the shares might attain a market value of $2 upon listing but Wright conceded that this possibility was dependent on a number of contingencies including the state of the market. At one point in his evidence he described Collins' reference to a $2 share value as a "fairly confident forecast". In the end however, I am unable to conclude that Collins said anything more about the valuation than that the shares might reach $2. Generally speaking his attitude as Wright said, was "very positive and conveyed to the assembled investors that what was offered was a good investment and could yield substantial returns". It was not said that the venture was speculative. In private conversation after the formal addresses, Collins told Wright that special unit holders were at no risk, that they would get their return before the promoters could get theirs. Wright resisted the suggestion put to him in cross-examination that the return of the premiums was somehow expressly or by necessary implication tied to the correctness of 18. the production estimates offered by the speakers preceding Collins. His evidence was credible and not seriously undermined in cross-examination. It was corroborated by that of his son who said in relation to the premium that:- "...it was almost as though you were loaning money to the company. There was no idea that it was at all any speculative venture." He too recalled Collins saying to them after the formal part of the meeting that the investors - "you guys" - had nothing to lose because they had to get the money back prior to him or the other promoters getting any of their money back. Mr John Green, another investor present at the meeting also gave evidence. He recalled someone speaking about the prospective yield of the mine and the description by an engineer of some of the problems associated with the deeper shafts. He remembered Collins saying that the premiums on the units would be repaid in September or October of that year. His own view was that this was optimistic and that there might be delay occasioned through contingencies, such as bad weather or problems with contractors. He was inclined to think a more realistic time for return of investors' funds would be about the first quarter of 1986. He assumed that the premiums would be repaid out of the proceeds of sale of gold produced by the mine, but contemplated the possibility that the company might refinance to effect such repayment and keep face with its investors. 19, Green's evidence does not conflict in substance with that given by Wright and his son. Although it included evidence of his reaction to the representations, that is to some extent subjective and dependent in part upon factors personal to the witness and of little aid to the characterisation of the conduct complained of. Similar fact evidence relating to the representations said tq have been made by Collins to two other investors on aS nee occasios€ close in time to 8 May was also admitted. In the end AER G 'am able without any assistance from that evidence to t Collins did at the meeting make the unqualified premiums would be repaid to investors by October ane fe ter the meeting Wright took home with him two applicatiéi' forms and told his wife about the investment. He read the Background Information memorandum and the Circular to Unit Holders. He and his wife then completed applications for 10 special unste apiece. He delivered the signed forms in person to er Collins the offices of WGP the following day. The Wrights Bixeceived unit certificates evidencing their holdings. Bp was no further contact from Carbon Gold until June Meived a newsletter. However, in August 1985 Guest eter, which is not in evidence, but evidently related Bt with other members of the board. The letter was 20. rebutted by a reply signed by Couche and the Wrights were informed that Guest had been removed from the board by unanimous resolution of the other directors. Wright later attended a meeting of investors chaired by a new Chairman of Directors, Mr Stan Lewis, at which time he was given copies of minutes of meetings of the directors of Carbon Gold, including the minutes of the 3 April. He told the Court that had he been aware of the proceedings of the meeting of 3 April when he was being invited to invest on 8 May, he would not have accepted the invitation to take up units. (ii) The Circulars of 29 April and 6 May 1985 v These two documents were taken from the meeting by Wright and perused by him later at home. That of 29 April described the Lindsay's Reward mine and development by Carbon Gold as having "proven and probable reserves with an in situ value of $16,000,000 and possible reserves valued at $32,000,000". The mine, it said, would be "fully operational" within two weeks on an upgraded basis (1,250 tonnes per month). Later in the same document more detailed reference was made to the Lindsay's Reward mine specifying proven and probable and possible reserves and average gold content between 23 and 25 grammes per tonne. Reference was made also to the Longreef mine and the block known as the "Wheel of Fortune". The Reid's Ridge mine, under consideration for purchase by the companv, was said to be an operating mine developed to the 90 metre level and "still in 25 grammes plus ore". It was said to have the capacity to return about $3m profit per annun. 21. The Carbon Gold Trust structure was also touched upon in his document and reference made to the entitlements of ordinary and special unit holders. As to the special units the circular said that, in essence, no distribution could be made to ordinary unit holders until the holders of special units had received or been credited by way of distribution with a sum equal to the premiums paid by them. No time was indicated within which such repayment would be made. Generally speaking, the document conveyed an optimistic view of the future of the Carbon Gold operation. The circular of 6 May was issued under Couche's hand. Enclosed with it was a sketch map bearing the title "Sketch Map Showing Location of Main Known Auriferous Areas on Tenements of Carbon Gold Pty Ltd". It bore a diagrammatic representation of the relative locations of the various tenements with lines indicating ore body locations. The circular made particular reference to the Lindsay's Reward Mine and progress being made with main shaft development, the installation of various items of plant and the excavation of open cut ore. A continuing drilling programme was described and the presence of gold in areas designated Jaspilite (1) and Jaspilite (2) was reported. With ore from an area known as the Yuletide Prospect, and 10,000 tonnes of up to 4 grammes mullock supplementing "the rich underground ore from Lindsay's Reward", a total recovery of "up to 13,000 ounces" was predicted to December 31. 22. The circular also reported that steps were being taken to attain Stock Exchange listing. An outline of what was described in the circular as "Preliminary details of a likely scenario" was attached. The "scenario" under the heading "Restructuring to Stock Exchange Listing" had nine numbered paragraphs. Paragraph 7 provided for conversion of the special units to ordinary units as follows:- "The new (including the old ordinary previously converted to new) units would not be eligible for receipt of distributions until 1/1/86 - i.e. the present Special Units, subsequently re-classified as ordinary units would receive all distributions till 31/12/85, which would be limited to $2.5million or the repayment of the original $499 premium on the 5,000 units." Some emphasis was placed on this paragraph in cross- examination of Wright as indicating a more extended time for return of premiums than that said to have been promised by Collins. Paragraph 9 of the annexure spoke of "projected profits of up to $6 million for the year ended 30/6/86". After the section on Stock Exchange listing the circular referred to what was called the "Corporate Philosophy" of Carbon Gold and the "totally new concept...being evolved in the profitable development of "small" open-cut and underground gold deposits". 23. The tone of the text was optimistic:- "The technology we are developing will not only make these small mines per se commercially viable, but of course the concept of feeding output from say 6 small mines into one large central plant only 500 metres away will result in beneficial economies of scale from production to processing." The last paragraph related to subscription to special units and said:- "There are still a few Units available, and with the possibility of a significant open-cut deposit, you may wish to think about taking up some more Units. If you require an application form, these are available from the office. It would help later listing requirements if Units could be subscribed for individually (husband and wife and children), rather than jointly, as we need at least 300 separate Unit Holders under Stock Exchange requirements." Cross-examined about para.7 of the annexure to the circular, Wright maintained that, at the oral presentation, October was given as the time when premiums would be repaid. Some reliance was also placed on the words "likely scenario" as qualifying the hypothesised preliminary steps set out in the annexure and therefore generally qualifying the representation as to repayment of the premiums. In my opinion, the words "likely scenario" referred to the probability that the sequence of steps set out in the annexure would be the actual procedure followed to achieve public listing. They do not detract from the certainty with which the oral representation as to repayment of premiums was conveyed by Collins. 24. The Causes of Action In the statement of claim, which was amended by leave after the close of the applicants' case, they allege in para. 4 that at the meeting of 8 May, Collins orally represented to Wright:- "(a) that the investment in the Trust was an excellent one which would produce very substantial profits to the investors; (b) Investors who were prepared to invest $500.00 per unit in the Trust would receive a return of $499.99 per unit by October 1985; (c) the Trust would be restructured and its assets so revalued that 1,000 fully paid bonus units of 50 cents each in the restructured Trust would be issued in respect of each special 1 cent unit held in the Trust; (ad) each unit in the restructured Trust would have a value of at least $2.00 immediately upon it being listed on the associated Australian stock exchanges." The representations specified in (c)}) and (d) above, are also said to have been contained in the Circular to Unit Holders dated 6 May. Insofar as the pleaded representations constituted statements of advice, information or opinion, they are said, in para.9, to incorporate the following implied representations of existing fact:- 25. (i) That Collins believed, or alternatively had reason to believe, that each of the statements were in fact accurate. (ii) That Collins on behalf of WGP had made enquiries to establish that the said statements were reliable and well informed. (iii) That Collins knew of facts which justified the making of the said statements. (iv) That Collins had experience and expertise in giving advice to persons who were interested in investing in ventures of the type carried on by the Carbon Gold Unit Trust. (v) That WGP by Collins was making the said statements in circumstances in which its servants or agents were exercising all due care and diligence. According to the pleading in para. 8 the express representations were false in that:- 1. The investment in the Trust was never an excellent one by reason that the assets of the Trust were not in fact substantiated and were in any event highly speculative in nature. 2. No substantial profits were in fact produced by the Trust. 3. Investors in the Trust did not in fact receive a return of $499.99 by October 1985 or any return by that date; and 4. The Trust was never restructured as represented or at all. The implied representations are said in para. 10 to be falsified on the following bases:- 1. WGP, by its servants or agents, never believed, or alternatively, never had reason to believe, that each of the said statements were in fact accurate. 26. . 2. WGP, by its servants or agents, failed to make any or any adequate enquiries to establish whether, in fact, the said statements were reliable and well informed. 3. WGP, by its servants or agents, knew of no or no sufficient facts which justified the making of the statements. 4. WGP, by its servants or agents, did not in fact have any or any sufficient expertise in giving advice in relation to the said investment; and 5. WGP, by its servants or agents, made the said statements in circumstances in which it failed to exercise all reasonable care and diligence and knowing that the applicants were relying upon the game. The making of the representations, express and implied, is said to have constituted conduct in trade or commerce by WGP which was misleading or deceptive or likely to mislead or deceive in contravention of 8.52. (para.11) The making of the representations by Collins is also said in para.12 to have constituted negligent conduct on the part of WGP. The company is alleged to have made no or no sufficient enquiries to establish that the statements were reliable and well informed. It is further pleaded that it knew of no or no sufficient facts to justify making them, had no experience or expertise in giving advice with respect to the Carbon Gold Unit Trust and failed to have any regard or proper regard to the high risks associated with investment in such trusts. The applicants attempted to bring Messrs. Wheeler, Grace and Pierucci individually within the ambit of their claim by a 27. plea that they had aided, abetted, counselled or procured the contraventions of s.52 by WGP and alternatively, that they were directly or indirectly knowingly concerned in or parties to the contravention. The particulars in support of this plea disclose that it relies upon the following factors, none of which seems to bear any logical relationship to the basis upon which they are said to be liable:- 1. The fact that Wheeler, Grace and Pierucci were directors of WGP and responsible for conducting its dealings with persons interested in investing in the Unit Trust. 2. The fact that at all material times each of them was directly or indirectly involved in instructing Collins to solicit invitations for the purchase of the units. 3. That Wheeler, Grace and Pierucci failed to have regard to the contents of the geological report prepared by John B. Oliver and Associates and also failed to have regard to the minutes of the meeting of 3 April. The claim of negligence against these three directors was also raised on the basis of insufficient enquiry, no or no sufficient knowledge of facts to justify the making of the statements, no experience or expertise in giving advice with respect to the Trust, failure to have regard to the high risks associated with the investment in such Trusts and failure to have regard to the Oliver report. 28. As against Collins, the applicants claim damages on the basis that he too was involved in the contravention by WGP. Although there is a claim for common law damages against all respondents, the pleadings do not appear to contemplate a cause of action in negligence against Collins personally, although it is, by virtue of his allegedly negligent conduct that WGP is said to have been negligent. In this connection I have regard to para.12 of the amended statement of claim which was rather confusingly pleaded. It alleged that the representation referred to in paras.4 and 9 were made "by the first respondent's servants or agents negligently, in that the said mis-statements were made by the fifth respondent when he possessed special skill or knowledge concerning the said representations, or was otherwise in a special relationship with the applicants, and with the intention of inducing the applicants to enter into the said contracts and in so doing he failed to use reasonable care to ensure the accuracy of the said representations". Particulars were incorporated in this paragraph beginning with the words "the first respondent by the fifth respondent was negligent in that it caused or permitted the statements to be made in circumstances in which...". Counsel for the Wrights characterised the paragraph as raising a plea against WGP by reason of Collins' conduct. At no time did he characterise it as raising a claim against Collins personally for negligence. 29. The No Case Submission At the close of the applicants' case, counsel for the respondents indicated his intention to submit that none of his clients had a case to answer. The basis on which he put this submission was that if one accepted all the evidence called for the applicants at face value, there was insufficient in law to support any of the causes of action which had been set up. It was submitted that the respondents should not be put to their election. I reserved on that question but after having heard his address and Mr Olivier's reply, I formed the view that the determination of the submission would involve a comprehensive consideration of the evidence and that in the circumstances the respondents should elect whether or not to call evidence. In the event they elected not to call evidence and both Mr McCusker and Mr Olivier were permitted to make further submissions following that ruling. The Case Against WGP The preliminary question in relation to both the trade practices and common law claims is whether the statements made by Collins at the meeting of 8 May are attributable to WGP. Counsel for the respondents contended that there was no evidence that Collins spoke for WGP. He was, after all, a director of Carbon Gold. In my opinion, the meeting of 8 May was 30. a WGP presentation. It was conducted by Collins, a WGP employee, on WGP premises and pursuant to the stated intention of both Pierucci and himself at the Carbon Gold board meeting on 26 April, to continue to raise funds for the company. Insofar as he made statements relating to the issue of special units, they were in his capacity as an employee of WGP and in making the Carbon Gold circular available at the meeting he did so in the same capacity. I have no doubt that WGP regarded itself as entitled to receive the agreed commission on funds raised at the meeting. As to the pleaded representations no direct evidence was given to the effect that Collins told the investors that the investment in the Trust was an excellent one which would produce very substantial profits. Nevertheless, I have no difficulty in accepting Wrights' evidence that his attitude was "very positive and conveyed to the assembled investors that what was offered was a good investment and could yield substantial returns". To say of an investment that it is good does not in these circumstances say much about either the risk or the possible return. A good investment might be low risk with a low to moderate return. It might on the other hand be high risk but offer the possibility of a high return. On the evidence in this case the message conveyed was normative rather than factual in character. Putting to one side the question of repayment of the premiums, which is in a different category from the possible profitability of the investment, there is no misrepresentation 31. made out by reason of these essentially evaluative statements. Having said that, I am satisfied that the combined message from all speakers at the meeting conveyed an optimistic prognosis unsullied by any warnings as to the speculative nature of the venture. As to the second representation, the evidence is quite convincing that Collins told those at the meeting, and repeated it after the meeting to Wright and his son, that investors in the special units, for the amount of $500, would receive a return of $499.99 per unit by the end of October 1985. The evidence for Wright and his son and for Green in that respect, is all one way. There was nothing from the respondents to contradict it. In saying that, I have regard to the submission made as to the effect of the "likely scenario" for stock exchange listing annexed to the Circular to Unit Holders, and the reference in that annexure to the receipt of distribution by 31 December 1985. But as I have already found, there is nothing there which substantially detracts from the force of the oral representations. As to the restructuring of the Trust, it seems clear that that was propounded as a firm commitment. And as appears from the minutes of the meeting of the Carbon Gold board held on 26 April 1985, such a commitment did exist. It was also reflected in the circular of 6 May although it noted that "various routes are being looked at, all of which will protect the interests of 32. Special Unit Holders". It is against this background that the "likely scenario" set out in the annexure can be understood as one probable, but not the only possible, way in which public listing could be achieved. As to the alleged representation that each unit in the Trust would have a value of at least $2 immediately after listing, I am satisfied that no such statement was made. Collins canvassed the possibility that each unit or share in the public company might have a value of $2, but this is very different from the contention that it would have such a value. Nor can any such representation be found in the Circular to Unit Holders. Given the predictive and promissory character of the express representations, it is only the implied representations that are of real significance. To the extent that the Wrights rely upon mere non~fulfilment of the predictions or promises, they cannot succeed in making a case of misleading and deceptive conduct under s.52. It is necessary therefore to consider the implied representations embodied in Collins' express statements. Of the express statements pleaded I have found only those relating to the return of premiums and the restructuring of the Trust to have been made. As to the latter, I am satisfied that no case of misleading or deceptive conduct or negligence can be built upon it. It properly reflects the intention of the Carbon Gold board to achieve public listing for the venture in one way or another. To the extent that it conveyed implied representations that 33. Collins held the belief that restructuring would proceed and that he knew of facts justifying this belief, the representations were true. The remaining express representation, namely, that relating to return of premiums by the end of October 1985, was in the end the only one of any significance to the case. It conveyed the implied representations that Collins believed it to be a correct prognosis and that he knew of facts which, in an objective sense, would justify his belief. In the circumstances it conveyed that he was making the statement with due care and in the application of his own experience and expertise. It is important not to allow the represented date of repayment to assume too much significance. The real impact of his statement was that return of the investors' premium payments was a certainty within the comparatively short term future. In my opinion Collins had no warrant to make an unqualified statement of this kind and no proper grounds upon which it could be justified. It may have been his belief that the premium would be returned as promised, but he had no facts to justify the certainty with which that assertion was made. His statement was inconsistent with the comment made during the board meeting at which he was present on 26 April that "... the speculative nature of the investment should continually be stressed to Unit Holders and prospective Unit Holders". That tee heme wet 34. comment cannot be reconciled with the existence of facts which would justify an unqualified promise to repay the premium in full within the space of a few months. It 1s significant that cross- examination of Wright on this point was largely directed to the proposition that he must have known that the statement had to be qualified by reference to the actual performance of the venture in producing gold. In the circumstances the statement was misleading or deceptive as to the degree of confidence that could be reposed in relation to the future of Carbon Gold. Counsel for the Wrights laid considerable stress on the statements made by Wheeler, Grace and Pierucci at the board meeting held on 3 April as to their lack of understanding of the position of Carbon Gold and the progress of the Lindsay's Reward Mine. Collins was not at that meeting and, in any event, it cannot be assumed that the view taken by his fellow directors of the company's prospects had not become more optimistic with the passing of time and the influence of people like Couche and Guest. However, whatever their optimism and the progression of the views, the comment made at the meeting of 26 April is quite inconsistent with the existence of facts which would have justified an unqualified promise to repay premiums in full in the short term. It does not follow from this finding that Collins was guilty of fraud in making the statement he did. His approach is, I think, explained by an excessive enthusiasm for the project clouding the judgment which he ought to have exercised as an 35. investment adviser and financial consultant. It was an enthusiasm perhaps inspired by Guest's very optimistic approach, reflected both in his Background Information memorandum of 29 April and the oral presentation given at the meeting held on 8 May. On the basis of Collins' statement about return of the premiums, the Wrights have established that WGP engaged in conduct in trade or commerce that was misleading or deceptive in contravention of s.52. In the circumstances, it is unnecessary for me to consider whether the company would be liable for negligent mis-statement. The question that next arises is whether the Wrights were induced by the statement to take up the special units. In my opinion the virtual guarantee of a return of the premium in full was a significant and operative factor in Mr Wright's decision and I accept, indirectly, so far as his wife was concerned. The fact that he did his own rough calculations to satisfy himself that there was some basis for the statement, does not break that causal nexus. For the statement was unequivoca? and unqualified. The rough calculations at best gave him an indication that repayment of the premiums within the specified period was possible. The possibility of such repayment falls short of the certainty embodied in the representation and it is that certainty which was emphasised by Collins and, in my opinion, operated upon Wright's mind in coming to the decision that he did. 36. The Case Against Collins So far as Collins is concerned the only cause of action set up against him rests upon the basis that he was involved in the contravention by WGP of s.52 of the Trade Practices Act. Section 75B(1) explains the concept of being "involved ina contravention" as follows:- "(1) A reference in this Part to a person involved ina contravention of a provision of Part IV or V shall be read as a reference to a person who - (a) has aided, abetted, counselled or procured the contravention; (b) has induced, whether by threats or promises or otherwise, the contravention; (c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention." This raises a question whether a natural person can be accessory to a corporate principal whose liability arises from the act of that person. There could be a case where a natural person engages in preliminary conduct of an accessorial character followed by distinct conduct attributable to a corporation as principal. But where the conduct upon which liability is founded is the only relevant conduct, it is difficult to see how it can also bear that accessorial character. This difficulty was recognised by the High Court in Yorke v Lucas (1985) 61 ALR 307. The point in issue there related to the requirement that a person 37. involved in a contravention by reason of s.75B have knowledge of the essential matters making up the contravention. However, at 313, in the joint judgment of Mason ACJ, Wilson, Deane and Dawson JJ. the following observation is found:- "It follows from what we have said that both the trial judge and the Full Court were, in our view, correct in concluding that, upon the facts as found, Lucas was not a person involved in the contravention of s.52 constituted by the false representations and that he was, therefore, not liable in damages under s.82. We would only add, lest it be thought that it has escaped our attention, that the appellants may, even if knowledge were not necessary to involvement under para.(a) or under para. (c) as "party to", have encountered difficulty in establishing that Lucas was involved within the meaning of s.75B in the contravention constituted by the making of the false representations, having regard to the fact that the representations, albeit made on behalf of the Lucas company, were made by Lucas himself. As Dixon J. observed in Mallan v Lee (1949) 80 CLR 198 at 216: "It would be an inversion of the conceptions on which the degrees of offending are founded to make the person actually committing the forbidden acts an accessory to the offence consisting in the vicarious responsibility for his acts"". In the end the problem reduces to one of construction, and, as a matter of language, the conduct contemplated by the words of sub-s.75B(1) is conduct distinct from that which constitutes the contravention. There is no evidence of any relevant distinct conduct on the part of Collins and none is set up in the pleading. The conduct constituting the contravention being the only basis for the case against him, that case must fail. 38. The Case Against Wheeler, Grace and Pierucci This aspect of the application can be dealt with quite shortly. There is simply no evidence to connect these individuals with the representation made by Collins at the meeting of 8 May. Indeed the absence of any real logical connection between the particulars and the pleading in this regard foreshadowed the paucity of evidence which emerged at the hearing. I would be prepared to infer that Messrs. Wheeler, Grace and Pierucci had authorised Collins to promote the sale of special units and to convene a meeting of investors and to use WGP premises for that purpose. It does not follow that they authorised the unequivocal representation as to the return of premium which has been found to be misleading and deceptive conduct attributable to WGP. Nor can they be held liable for negligence by reason of Collin's statement, albeit it may have constituted carelessness on his part and thereby negligence on the part of the company. In the circumstances the case against the individual directors fails. The Measure of Damages Against WGP The measure of damages to which the Wrights are entitled is the difference between what they paid for the special units and what the units yielded after realisation. Each special unit has realised to its holder $289.00 together with 200 shares and 40 options in Finders Gold N.L., a company shortly to be floated on the Perth Stock Exchange. The applicants called evidence from a 39. Perth stockbroker as to the likely market value of the Finders' shares. That evidence was of doubtful value given the comparative inexperience of the witness and the less than penetrating analysis upon which he based his forecast. Nevertheless, it was the only evidence touching the value of the shares and must at least fix a ceiling for the loss sustained. I accept, therefore, that for the purpose of calculating the loss suffered by the Wrights, the assumed value of the Finders' shares on the open market should be 9 cents each. I am unable to place any value on the options and value them at nil. On this basis the loss sustained by Mr and Mrs Wright was $1,930 each. Section 51A of the Federal Court of Australia Act authorises the award of interest for the whole or any part of the period from the date when a cause of action arose to the date upon which judgment is entered. Without attempting to define when the cause of action arose, 1t seems to me that interest should run from the latest date shown in the Carbon Gold documents as that at which the premium would be repaid. This reflects my view that the vice of the misrepresentation as to repayment lay not so much in the specification of a particular date as in the represented certainty of repayment. On this basis I am prepared to award to each of the applicants interest at the rate of 14% per annum from 1 January 1986. The interest therefore payable to each of the applicants as at 22 April 1988 is $624.05. 40. CONCLUSION This is not a case of fraud and it should not have been pleaded as such. It is a case in which entrepreneurial enthusiasm has clouded the adviser's judgment and objectivity and resulted in misleading advice. The prohibition against misleading or deceptive conduct applies as much to the entrepreneur as it does to the adviser. But the latter may find that his statements to those who seek his counsel are more readily seen to carry the implication of objectivity and independence. The avoidance of any confusion as to his role requires sensitivity to that risk and care in ensuring that statements made in support of a proposed investment are justifiable on the facts and qualified where necessary by explicit reference to the speculative character of it. There will be judgment for each of the applicants against the first respondent in the sum of $2,554.05. The application will be dismissed as against the second, third, fourth and fifth respondents and I will hear from the parties as to costs. I certify that this and the preceding thirty nine (39) pages are a true copy of the Reasons for Judgment of his Honour Justice French. 32K. Associate: Deisgrak VW Date: Qo Propet (Tes de 4l. Counsel for the Applicants: Mr J.P.T. Olivier Solicitors for the Applicants: Talbot & Olivier Counsel for the Respondents: Mr M. McCusker Q.C. with Mr A.T. Macknay Solicitors for the Respondents: Warren Harrison Dates of Hearing: 8, 9, 10, 11, 15 and 16 March 1988 Date of Judgment: 22 April 1988