FEDERAL COURT OF AUSTRALIA Capricorn Financial Planners Pty Ltd v Australian Securities & Investments Commission [1999] FCA 558 CORPORATIONS – appeal from AAT re decision to apply, to compensate for loss to a client, a security lodged under s 786 by a securities dealer – discussion of dealers licence as covering business of investment adviser – fraud of authorized representative – whether security should be applied in compensation on the basis that an agent of the licensee failed to carry on business under the licence adequately and properly – whether transaction involving the agent's own companies was outside the principal's business – whether the agent acted "in connection with [the] securities business" when advising a change of investments from authorized investments to investments in his own companies -–whether he was acting as agent of the dealer, though for his own fraudulent purposes – whether the loss was caused by a failure of supervision. Corporations Law, ss 88, 94(2), 94(3) & (4), 780, 781, 782, 786(2)(d), 786(9), 806 Corporations Regulations, regs 7.3.02, 7.3.04(1) Capricorn Financial Planners Pty Ltd v Australian Securities commission (1998) 16 ACLC 1005 cited Daly v The Sydney Stock Exchange Limited (1986) 160 CLR 371 applied Lloyd v Grace, Smith & Co [1912] AC 716 applied Polkinghorne v Holland (1934) 51 CLR 143 applied Mann v Hulme (1961) 106 CLR 136 cited Morris v C.W. Martin & Sons Ltd [1966] 1 QB 716 applied Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 cited Clayton Robard Management Ltd v Siu (1988) 6 ACLC 57 cited CAPRICORN FINANCIAL PLANNERS PTY LIMITED v AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION NG 405 of 1998 Burchett J 5 May 1999 Sydney IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 405 of 1998 BETWEEN: CAPRICORN FINANCIAL PLANNERS PTY LIMITED Applicant AND: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION First Respondent BRIONY WILLIAMS Second Respondent JUDGE: BURCHETT J DATE OF ORDER: 5 May 1999 WHERE MADE: SYDNEY THE COURT ORDERS THAT: The application be dismissed with costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 405 of 1998 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: CAPRICORN FINANCIAL PLANNERS PTY LIMITED Applicant AND: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION First Respondent BRIONY WILLIAMS Second Respondent JUDGE: BURCHETT J DATE: 5 MAY 1999 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This is an application under s 44 of the Administrative Appeals Tribunal Act 1975. It is called an appeal, but it is in the original jurisdiction of the Court which, when hearing it, is confined to questions of law. 2 The applicant, Capricorn Financial Planners Pty Limited (Capricorn), the principal of which is a Mr Pittard, holds, and held at material times, a dealers licence under s 782 of the Corporations Law. This licence entitles Capricorn, under s 780, to "carry on a securities business". By a somewhat tortuous concatenation of sections, it also entitles Capricorn to "carry on an investment advice business". The chain goes like this: it is implicit in s 781 that "a licensee" may carry on such a business; a licensee, for the limited purposes of s 781 and also s 879(1), means "a securities licensee" (s 9); a securities licensee "means a person who holds a securities licence" (s 9); and a securities licence "means a dealers licence or an investment advisers licence" (s 9). Thus, Capricorn's dealers licence entitled it also to carry on the business of an investment adviser. 3 Next among the dramatis personae with whom this case is concerned is a Mr White. He was appointed, on or about 15 May 1992, as an authorized representative of Capricorn. This appointment, by s 806, required the appointee to be a person who held "a proper authority from the dealer", that is, Capricorn. Such an authority, by s 88, involves "a copy of the licence [of the securities licensee] on which [is] endorsed: "(a) a statement: (i) certifying the copy to be a true copy of the licence; (ii) stating that the representative is employed by, or acts for or by arrangement with, the principal; and (iii) signed by the principal; …" By s 94(2), except for presently irrelevant purposes, "a person who holds a proper authority from a securities licensee is a securities representative of the licensee"; and by s 94(3) and (4): "(3) Subject to subsection (4), a person does an act, or engages in conduct, as a securities representative of another person if, and only if, the first-mentioned person does the act, or engages in the conduct: (a) in connection with a securities business or investment advice business carried on by the other person; (b) while the first-mentioned person is a securities representative of the other person; (c) as employee or agent of, or otherwise on behalf of, on account of, or for the benefit of, the other person; and (d) otherwise than in the course of work of a kind ordinarily done by accountants, clerks or cashiers. (4) Except for the purposes of Division 4 of Part 7.3, a person who holds himself, herself or itself out to be a securities representative of another person does an act as a securities representative of the other person." A form of proper authority was duly completed by Capricorn in respect of Mr White. 4 The final person to come on the scene was the second respondent, Briony Williams. She first met Mr White nearly three months after his appointment as a representative of Capricorn, when he told her: "I am an investment adviser with Capricorn Financial Planners Pty Limited". He prepared a financial plan for her, which was to include an investment portfolio. This was in itself unexceptionable. However, over the next three months, he advised her to vary the financial plan, without discussion with her own accountant, by investing $40,000-00 in a company named Australian Capital Securities Pty Limited and $20,000-00 in a company named Handset Help Pty Limited, both being companies in which Mr White himself was financially involved. When the cheques were paid to him in November, Mr White said: "This is a good investment and will return 20% interest and I promise the principal and interest will be paid back by 19 May 1993." 5 The changes thus made to the financial plan were not known to Mr Pittard. On 15 February 1993, he wrote a letter addressed "Miss B. Williams", in which, after referring to Mr White as her "Authorized Representative", he stated: "As principal and senior financial adviser of Capricorn Financial Planners Pty Ltd, I am responsible for the monitoring of your investment portfolio lodged via our company. Queries to do with your Asgard Rollover Service and Legal & General policy should be directed to me at the above telephone number or to your adviser, Mr Peter White at North Sydney." But within a few months, the investments were revealed as disastrous. On 5 July 1993, John R. Quinn & Co, Solicitors, wrote to Capricorn as follows: "Re: MISS BRIONY WILLIAMS We wish to advise that we act for Miss Briony Williams of Canungra Place Elanora Heights. We enclose herewith a letter which we have on our client's instructions written to Mr Peter White … because our client has not received repayment of the principal and interest promised to her by Mr White. Whilst the letter to Mr White, we believe is self-explanatory, we write to you because Miss Williams initially contacted your office as a result of her answering an advertisement which you placed in the press concerning an Investment Seminar. …" The letter to Mr White asserted he had represented himself as "a Licensed Investment Adviser", and that he appeared to have a conflict of interest in the matter, being a director of each of the two companies to which moneys of Miss Williams were lent. It was made clear that both he and Capricorn would be held liable. 6 When Capricorn had obtained its licence, a condition had been imposed, pursuant to s 786(2)(d) of the Corporations Law, requiring Capricorn to lodge and maintain with the Australian Securities and Investments Commission (then known as the Corporate Affairs Commission) a security for the sum of $20,000-00. By s 786(9) it is provided: "Where a security is lodged with the Commission pursuant to a condition to which a licence is subject in accordance with paragraph (2)(d), the security may be applied by the Commission in such circumstances, for such purposes and in such manner as is prescribed." What is prescribed is to be found in regulation 7.3.04(1) of the Corporations Regulations: "For the purpose of subsection 786(9) of the Corporations Law, a security lodged with the Commission in relation to a licence may be applied by the Commission in accordance with this regulation to compensate a person who has suffered pecuniary loss due to the failure of the licensee, or an agent or employee of the licensee, to carry on business under the licence adequately and properly." Pursuant to this regulation, a claim for compensation was lodged, and the Commission (by a delegate) made a decision in favour of Miss Williams. It was this decision which the Administrative Appeals Tribunal affirmed, giving reasons that are now reported: Capricorn Financial Planners Pty Ltd v Australian Securities Commission (1998) 16 ACLC 1005. The question before me is whether, as Capricorn claims, the Tribunal erred in law when it did so. 7 The argument raised on behalf of Capricorn is that Mr White's persuasion of Miss Williams to lend moneys to his own companies was not something done in "carry[ing] on business under the licence". It was a fraudulent "frolic" of his own. Therefore, it is said, the Tribunal erred in law when it decided that the delegate of the Commission had correctly determined to apply a portion of the deposit towards compensating Miss Williams. 8 In my opinion, this contention takes too narrow a view of the circumstances. The Tribunal was entitled to look at the whole of what occurred, and to refuse to characterize the matter as simply the making of two loans to two companies controlled by Mr White. Those loans were made by way of variation of a financial plan prepared by Capricorn, and they were made in the office of Capricorn's authorized agent, where its name was displayed, and on his advice, in the course of a transaction in which Miss Williams had sought Capricorn's investment advice. That he stepped outside his proper role is immaterial. It cannot be denied that Miss Williams' loss was occasioned by "the failure of … [Capricorn's] agent … to carry on business under the licence adequately and properly". It seems to me that, in this regulation, the word "adequately" at least embraces the meaning of "competently", and the word "properly" at least embraces compliance with the law governing the duties of fiduciaries, including the obligation not to act in a way involving a conflict of interest and duty. 9 As I have shown, a literal construction of regulation 7.3.04(1) would make it applicable to cases such as the present on the straightforward basis that it embraces a situation where a loss is due to the failure of an agent of the licensee to carry on business under the licence adequately and properly. To divert a customer from the making of an appropriate investment to the making of an ill-advised one, outside the range of investments approved by Capricorn, and in disregard of a conflict of interest, plainly involved such a failure. But if, as Capricorn maintained, it was necessary to go further, and to relate the particular transaction more directly to Capricorn's business, even so there was no error in the Tribunal's decision. By s 94(3), Mr White was acting as a securities representative of Capricorn when he acted "in connection with [the] securities business", while being a securities representative, and "as … agent of" Capricorn. That his activity fell within the words "in connection with [the] securities business" is confirmed by the judgment of Gibbs CJ (with whom Wilson and Dawson JJ agreed) in Daly v The Sydney Stock Exchange Limited (1986) 160 CLR 371 at 376. Gibbs CJ referred to s 97 of the Securities Industry Act 1975 which made provision in respect of persons who had suffered loss by reason, among other things, of fraudulent misuse of securities received by an employee of a firm "in the course of or in connection with the firm's business of dealing in securities". Gibbs CJ considered this condition satisfied in the particular case. He said: "The money was received in connexion with the firm's business of dealing in securities. The connexion lay in the fact that Dr. Daly went to the firm for the purpose of investing in securities and was instead persuaded to advance the money to the firm." It is plain that this reasoning is applicable here. But that the situation is also one where Mr White was acting "as … agent of" Capricorn requires a somewhat more elaborate demonstration, to which I shall now turn. 10 The leading case is Lloyd v Grace, Smith & Co [1912] AC 716. There, a client sought advice from a firm of solicitors with a view to the augmentation of the return she was getting from some houses she owned. The managing clerk with whom she dealt persuaded her to bring in the deeds and to sign some documents, the nature of which she did not understand, which were in fact a transfer of a mortgage and a conveyance. Thereby, he defrauded her for his own benefit. Lord Macnaghten said (at 731): "[I]n the opinion of the Court a principal must be liable for the fraud of his agent committed in the course of his agent's employment and not beyond the scope of his agency, whether the fraud be committed for the principal's benefit or not." His Lordship refuted (at 733) the argument that the business in which the agent was engaged could not be the defrauding of clients, by quoting some words of Willes J: "In all these cases it may be said, as it was said here, that the master had not authorized the act. It is true he has not authorized the particular act, but he has put the agent in his place to do that class of acts, and he must be answerable for the manner in which that agent has conducted himself in doing the business which it was the act of his master to place him in." The application of this proposition to the present case is obvious; for the giving of advice about loans to companies was certainly within the class of acts that formed part of the business of Capricorn, as a dealer in securities. Lord Macnaghten made it clear (at 736) that the expressions "acting within his authority," "acting in the course of his employment," and "acting within the scope of his agency" are expressions which "must be construed liberally". In this, his Lordship was supported by Lord Shaw of Dunfermline, who said (at 740): "But when the authority does ostensibly include within its scope transactions of a particular character, then quoad a third party dealing in good faith with such an agent, the apparent authority is, as is well settled, equivalent to a real authority and binds the principal." 11 Lloyd v Grace, Smith & Co was followed by the High Court of Australia in Polkinghorne v Holland (1934) 51 CLR 143 at 156, where the joint judgment of Rich, Dixon, Evatt and McTiernan JJ stated, in the context of fraudulent advice about investments given by a partner in a firm of solicitors: "By associating themselves in a partnership with Harold Holland, the respondents made themselves responsible, as principals are for an agent, for all his acts done in the course of his authority as a partner. That authority was to do on behalf of the firm all things that it is part of the business of a solicitor to do. If, in assuming to do what is within the course of that business, he is guilty of a wrongful act or default, his partners are responsible, notwithstanding that it is done fraudulently and for his own benefit (Lloyd v Grace, Smith & Co)." As to the fraudulent partner's authority, their Honours added (at 157): "In judging whether he acted in the course of his authority, the part taken by him in the transactions must be regarded as upon the surface it appeared to her [ie, the client]." And their Honours emphasized (at 159-160) that the advice given did not cease to be in the course of the business because it was given, not honestly in the client's interests, but in the interests of the adviser himself: "The fact that, from motives antagonistic to her interests, he took the course of concealing his actual knowledge of the menace to which her money was exposed, is not enough to take the duty he assumed to perform outside the scope of his authority, although it amounted to a malfeasance in its pretended performance." Starke J was equally forthright (at 169): "It was his duty to inform and warn Mrs Polkinghorne of the facts within his knowledge and of the danger of the situation, and it was a duty which he owed to her in the ordinary course of the business of the firm of solicitors of which he was a member. … It may be that G.H. Holland set out to and did defraud Mrs. Polkinghorne, but all the partners are liable for the fraud of one of their number, acting in the ordinary course of the business of the firm, though the fraud was committed for his own benefit and not for the benefit of the firm (Lloyd v. Grace, Smith & Co)." See also Mann v Hulme (1961) 106 CLR 136. 12 The principal's liability was explained by Lord Denning MR, in Morris v C.W. Martin & Sons Ltd [1966] 1 QB 716 at 727, as depending on the scope of the agent's apparent authority. Referring to Lloyd v Grace, Smith & Co, his Lordship said: "When [the clerk] accepted [Mrs Lloyd's] instructions, he intended to misappropriate the deeds for his own benefit, and he did so. His principals were held liable. The essence of that case …was that the clerk was acting within his apparent authority in receiving the deeds and thus his principals had them in their charge. …. In consequence of this apparent authority, the firm of solicitors were clearly under a duty to deal honestly and faithfully with Mrs Lloyd's property: and they could not escape that duty by delegating it to their agent. They were responsible for the way he conducted himself therein, even though he did it dishonestly for his own benefit." (Emphasis original.) Once an agent comes into a transaction in the ordinary course of his principal's business, as Diplock LJ (at 733) and Salmon LJ (at 739-740) made clear, even outright theft may be ineffectual to deny that he was acting in the course of his agency. See also Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 503-504, per Diplock LJ; Clayton Robard Management Ltd v Siu (1988) 6 ACLC 57. 13 These principles apply to the present case. The Tribunal found that in fact Mr White - "had ostensible authority, from Capricorn under the common law, to carry on Capricorn's securities business or investment advice business. Mr White was appointed as a representative and this fact was made known by Capricorn to [Miss Williams]. [Miss Williams was not] given notice of the limited authority which Capricorn's representative had. [She] had an ongoing relationship with this authorised financial planner concerning the investment of [her] funds. If a person in this situation seeks advice … as to … monies designed to fulfil her financial plans (as Ms Williams did) how can it not be said that [she] sought advice from Mr White in his capacity as a dealer's representative for Capricorn? He appeared to have authority from Capricorn to do what he did. That authority was, perhaps unwittingly, communicated to [her] in such a way that although Capricorn may not have known the details of Mr White's day to day activities, it freely acknowledged to clients of the business that, in general, Mr White was to be regarded as the client's adviser, appointed to look after the client by Capricorn." (In the last sentence, of course, the Tribunal has in mind the letter of 15 February 1993 to Miss Williams mentioned earlier in these reasons, in which Mr White was referred to as "your adviser".) 14 In my opinion, it was open to the Tribunal to make these findings; and once it had made them, its ultimate conclusion followed as a matter of law. The application must therefore be dismissed with costs. That result is in accordance with a rule of justice which was first stated by Holt CJ in Hern v Nicholas (1700) 1 Salk. 289; 91 ER 256, and was restated in Lloyd v Grace, Smith & Co at 738 by Lord Macnaghten, when he said: "Who is to suffer for this man's fraud? The person who relied on Mr. Smith's accredited representative, or Mr. Smith, who put this rogue in his own place and clothed him with his own authority?" 15 Before parting with this case, however, there is one matter to which I should make reference. The Tribunal put forward an alternative justification for its decision that the security should be applied towards compensating Miss Williams. This was that Capricorn, through Mr Pittard, had failed to supervise Mr White appropriately, so as to be guilty of a failure on its own part, as the licensee, "to carry on business under the licence adequately and properly". I should be very loath to say anything to detract from the importance of supervision on the part of a licensee over the activities of a representative. I note that the explanatory memorandum issued in respect of the Corporations Bill 1988 included the statement (in paragraph 2388): "Dealers and investment advisers will be required, through the imposition of conditions on their licences, to properly supervise representatives and to give them adequate training and education. The protection that licensing of representatives affords the investor will be replaced with a system where the dealers and investment advisers will be made fully liable for the conduct of a person who is their representative (see Division 4)." The intention thus expressed was implemented by regulation 7.3.02. However, the Tribunal did not indicate just what Capricorn should have done. It said that was "not for the Tribunal [to say]." It contented itself with the broad proposition that "[t]he very fact that Mr Pittard did not become aware [of the transactions involving Miss Williams and one other investor defrauded by Mr White at almost exactly the same time] indicates that the system was not effective." The solicitor for the Commission was unable to explain to me at the hearing any practical way in which supervision by Mr Pittard could have averted what occurred. I do not think it follows that, whenever a dishonest agent causes someone loss, the principal must have failed, other than vicariously, in his own obligation "to carry on business under the licence adequately and properly". Accordingly, if this were the sole point in the case, I would uphold Capricorn's application. But on the grounds earlier discussed, that application must, as I have said, be dismissed with costs. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Burchett. Associate: Dated: 5 May 1999 Counsel for the Applicant: Mr S R Donaldson Solicitors for the Applicant: Tress Cocks & Maddox Solicitor for the Respondent: Mr D Jordan of Australian Securities & Investments Commission Date of Hearing: 24 September 1998 Date of Judgment: 5 May 1999