Australian Securities & Investments Commission, in the matter of Giann & Giann Pty Ltd [2005] FCA 81

FEDERAL COURT OF AUSTRALIA

Australian Securities & Investments Commission, in the matter of Giann & Giann Pty Ltd [2005] FCA 81 CORPORATIONS – financial services business – advise regarding exchange traded options and exchange traded index options – whether options are "derivatives" – misleading statements concerning profitability of trading WORDS AND PHRASES "derivatives" "exchange traded options" "exchange traded index options"

Australian Securities and Investments Commission Act 2001 (Cth) s 12DA Corporations Act 2001 (Cth) 911A(1) Parliamentary Joint Statutory Committee on Corporations and Securities, Report on the Financial Services Reform Bill, 2001 IN THE MATTER OF GIANN & GIANN PTY LTD AUSTRALIAN SECURITIES & INVESTMENT COMMISSION v GIANN & GIANN PTY LTD, JOHN GIANNOPOULOS, CTC PROFESSIONAL SERVICES PTY LTD, CARLO CASTELLANO and JTC GROUP PTY LTD V 479 of 2004 FINKELSTEIN J 15 FEBRUARY 2005 MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY V 479 of 2004

IN THE MATTER OF GIANN & GIANN PTY LTD & OTHERS

BETWEEN: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

Plaintiff

AND: GIANN & GIANN PTY LTD,

JOHN GIANNOPOULOS,

CTC PROFESSIONAL SERVICES PTY LTD, CARLO CASTELLANO and

JTC GROUP PTY LTD

Defendants

JUDGE: FINKELSTEIN J

DATE: 15 FEBRUARY 2005

PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 Following an investigation, the Australian Securities & Investment Commission instituted this proceeding in which it alleged that in contravention of s 911A of the Corporations Act 2001 (Cth) the first, third and fourth defendants each carried on a financial services business for the provision of financial services without an Australian financial services licence, that contrary to s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (the "ASIC Act") the first, second and fifth defendant each made representations in relation to financial services (exchange traded options and exchange traded index options) that were misleading or deceptive; and that the second and fourth defendants were knowingly concerned in the contraventions of respectively the first and third defendants. Declarations of contraventions, injunctions restraining future contraventions and costs were sought. 2 When the matter was called on for hearing the defendants indicated that they would not oppose the relief sought by ASIC. Accordingly the trial proceeded as an undefended action and at the conclusion I made those orders. I informed the parties that I would publish my reasons in due course. What follows are those reasons. 3 The defendants, either as principals or as employees, conducted, or were involved in, seminars at which members of the public were invited to attend and where advice was given concerning the manner in which a person could successfully trade in exchange traded options and exchange traded index options. Central to ASIC's case then is the assertion that a person who for reward conducts seminars of that kind carries on a "financial services business" within the meaning of s 911A. 4 There is a definition of "financial services business" in s 761A: the expression is defined to include the "business of providing financial services". Section 766A(1) relevantly provides that: "For the purposes of this Chapter [the chapter in which s 911A is found] subject to paragraph (2)(b), a person provides a 'financial service' if they: (a) provide financial product advice (see section 766B) …". "Financial product advice" is defined in s 766B to mean "a recommendation or a statement of opinion, or a report of either of those things, that: (a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or (b) could reasonably be regarded as being intended to have such an influence." When one turns to s 764(1) "financial products" are defined to include (a) a "security" (see 764(1)(a)); and (b) a "derivative" (see 764(1)(c)). The definition of "derivative" is found in s 761D(1) and reg 7.1.04 and it is: "[A]n arrangement in relation to which the following conditions are satisfied: (a) under the arrangement, a party to the arrangement must, or may be required to, provide at some future time consideration of a particular kind or kinds to someone; and (b) that future time is not [less than one business day] … after the day on which the arrangement is entered into; … (c) the amount of the consideration, or the value of the arrangement, is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else (of any nature whatsoever and whether or not deliverable), including, for example, one or more of the following: (i) an asset; (ii) a rate (including an interest rate or exchange rate); (iii) an index; (iv) a commodity". 5 ASIC says that exchange traded options and exchange traded index options are "derivatives" within this definition. I agree and will now explain why. A call-option in relation to an ASX listed share is a contract between two parties (buyer and seller) which gives the buyer the right, but not the obligation, to buy a particular quantity of underlying ASX listed shares at an agreed price at or before a pre-determined date in the future. Conversely, the seller of a call-option accepts the obligation to sell the agreed quantity of the ASX listed shares at the agreed price on or before the pre-determined expiry date. A put-option on the other hand is a contract between two parties (buyer and seller) which gives the buyer the right, but not the obligation, to sell a particular quantity of an underlying ASX listed share at a set price at or before a particular day. Likewise, the seller of a put option accepts the obligation to buy a particular quantity of the shares at or before the expiry date. So far I have only stated the obvious. 6 Both call options and put options are traded on the Derivatives Trading Facility operated by the ASX and are referred to as exchange traded options (ETO's). ETO's are traded over approximately fifty-five different ASX listed shares. The market determines the price of an ETO. The factors that might influence the price of an ETO include: the price of the underlying listed security; the agreed price at which the shares are to be brought and sold under the option; the number of days until the expiry of the option; any dividends to be paid on the underlying security; and the future volatility of the underlying share price. When an ETO buyer or seller sells an ETO contract it effectively cancels the initial transaction. This means that the call or put option buyer or seller has no further obligations to buy or sell the shares before or at the expiry date. 7 Another type of option is an exchange traded index option (ETIO). A share market index is an indicator which represents the value of the underlying listed shares which constitute it. For example, the ASX 200 represents the underlying value of the largest 200 companies on the Australian Stock Exchange. ETIO's work in a similar way to share options. When a buyer purchases an ETIO call option, he is purchasing the right, but not the obligation, to buy a particular quantity of an underlying index at an agreed price at or before a pre-determined future date. Similarly, a buyer of an ETIO put option purchases the right, but not the obligation, to sell a particular quantity of an underlying index at an agreed price at or before a pre-determined day in the future. 8 ETIO's can be traded on a Share Price Index on the Sydney Future Exchange Limited. ETIO's can also be traded on overseas share market indices such as the DAX (which is the share market index comprising the largest 30 German companies) or the DOW Jones STOXX 50 (which comprises the largest 50 European companies). Market forces determine the premium paid for ETIO's; the same factors are relevant for determining the value of ETIO's as I have outlined for ETO's. 9 Exchange traded options and exchange traded index options fall within the definition of a "derivative". Under a call option and put option contract, the buyer may be required to pay for the shares "at or before a pre-determined date in the future" which satisfies the requirements in s 761D(1)(a) that a party to a derivative contract "provide at some future time consideration" and s 761D(1)(b) and reg 7.1.04 which provide that the future be "not less than one day" after the day on which the arrangement was entered into. The requirement in s 761D(1)(c), that the consideration for the arrangement be "determined, derived from or varies by reference to (wholly or in part) the value of something else", is satisfied because among the factors that may influence the price of an option is the price of the underlying security. 10 I now come to the facts. The first defendant, Giann & Giann Pty Ltd, trades as Break Free Events (BFE). The second defendant, Mr Giannopoulos, is the company's sole director and secretary. Between March 2002 and March 2004, BFE arranged, promoted and conducted investment seminars in relation to various "financial products". The "financial products" included exchange traded options and exchange trade index options. As part of its business BFE organised seminars that were conducted by the third defendant, CTC Professional Services Pty Ltd, in exchange for 90% of the gross fees. The fourth defendant, Mr Castellano, presented the seminars on its behalf. BFE also arranged seminars on behalf of the fifth defendant, JTC Group Pty Ltd, for a fee less than that paid by CTC. The seminars were conducted by its sole director, Mr Cox. 11 BFE advertised the seminars through the print media. Mr Giannopoulos drafted the advertisements. In 2003 BFE published an advertisement which claimed that those who attended its seminars would learn the secrets of trading options and could then "make anywhere between $2,500 and $7,000 a week, working less than 10 hours". The same advertisement went on to detail how by trading options one could "make an unbelievable 150% return in 5 days (and put $2,000 in your pocket on the Friday, that you didn't have on the Monday prior)". In an advertisement published to promote a seminar conducted by CTC it was said that it would become "virtually impossible NOT to make money". Several advertisements promoting JTC's seminars suggested that returns of between "5% to 15% a month" and "60% - 180% annually" could "easily and consistently be achieved". 12 It is not necessary to spend time analysing these statements to determine whether they are false or misleading. The notion that a trader can easily earn this kind of money by trading in options is simply absurd. Only the gullible or those who are completely ignorant of the market would accept the accuracy of those statements. Unfortunately there are many such people. It is no wonder that neither BFE nor Mr Giannopoulos sought to defend the assertion that they had attempted to mislead their clients. 13 Turning to the case against CTC, Mr Castellano has been presenting seminars on its behalf since early 2001. There were introductory seminars for which there was no charge. In the introductory seminars, Mr Castellano explained the nature of options. He briefly outlined a trading strategy. In one introductory seminar this is what he said: "Okay. Let's get into it. What is an option? An option is simply a contract. That's what it is. It's a contract that gives someone the right to buy or sell an asset or security, and what we're talking about at the moment is shares. So an option is a contract, nothing more, nothing less. It gives you the right to buy or sell shares, but not the obligation; only the right. ... Now, there are two type of exchange-traded options. There's call options and put options, okay? … Now, why trade options? Well, simply because options can give us leverage, all right? … Let's say ABC share was trading at $10. Now, I wanted to buy the right to buy this share. Well, actually before I do that, let's say I bought the share for $10 each and I bought 1000 of them. How much would that cost me? $10,000. Not a trick question. Let's say the next day they went up to $11, and I was to sell them, how much profit have I made? $1000, haven't I. I've made $1000. … Now, let's say over here, I decide on those ABC shares that are trading at $10 – I don't want to buy the shares over here, I want to buy the options. I want to buy the options that will give me the right to buy the shares, and I'm going to buy the options that give me the right to buy the shares at $10. … Now, let's say the next day the shares actually do go up to $11, like over there. Now the difference between 11 and 10 is $1, yeah? Now they've gone up the next day. Now, I can add – I paid for the options $1. Now if they go up $1 the next day, I can add $1 to that price. My options are now worth $2. … Now I'm not going to – what I'm going to do, I've got the right to buy these shares at $10, but I'm not going to buy the shares. As an options trader, I never want to buy the shares, as a trader. I've no ambition to buy the shares. So what I do, I sell my options. I sell my options at $2, and I've got 1000 of them. $2 times 1000. How much profit have I made? I've made $1000. Does that excite anyone? It doesn't me. Do you want to know what excites me? I've made $1000 over here. What's $1000 to the amount of money I outlaid, what percentage? That's 10 per cent, isn't it. But over here, I've made $1000. What percentage is that to my outlay? 100. That's what excites me. It's the percentage return. That's what's possible with options. It's the percentage return. That's what excites me. Because if I just put more money on that, I'll make more money. Does that make sense? That's what leverage is. Leverage is using a small amount of money but get a high percentage return. That's what I mean by leverage. When you know how to trade options, you can make money when the market goes up, down and sideways." 14 At the conclusion of the introductory seminar, attendees were invited to enrol for the "Options Trading Mastery" program the cost of $3,995. This fee entitled a participant to attend a three-day "Options Trading Mastery" seminar; receive six month tutorial support; receive computer trading software; and obtain advice on the implementation of an options trading strategy. The tutorial support was conducted by two BFE employees. Neither of them held any formal qualifications; nor where they licensed by ASIC. 15 There was a written course guide for the "Options Trading Mastery" program. In the section headed "Why Trade Shares" the following statements were made: "• It doesn't matter which way the share price moves, with options trading there is always a strategy for every direction of share price movement. • You can profit from correctly anticipating a raising or falling market. • It doesn't matter which way the share price moves, with options trading there is always a strategy for every direction of share price movement." 16 The substance of what Mr Castellano told the participants is that by adopting an appropriate options trading strategy (a strategy that Mr Castellano could teach them) it was not difficult to make substantial profits by dealings in options. Of course the participants were being hoodwinked. Options trading is a high risk activity and any honest person would have told the audience that. 17 As to JTC, the case arises in the following way. Mr Cox' seminars were about option trading techniques. The seminars covered exchange traded index options for European Share Indices which are traded in Australia. The first seminar was free. The seminar participants were then invited to enrol in a program which cost $1,995. They were also invited to subscribe to the JTC daily report service for $195 per month. In March 2003, the arrangements were changed to be similar to those that BFE had with CTC. At the conclusion of the introductory seminar attendees were invited to enrol in JTC's program and receive training in options trading for a fee of $3,995. 18 JTC provided course material to attendees at the introductory seminar. This material informed attendees that they should trade European options because they offer "greater value for money". They were informed that because European options involved "overnight trading" there was "reduce[d] emotion". Under the heading "Index Trading Strategy" (sic) participants were advised to adopt the following exit strategy: "If the index reaches 100 points from the strike price or higher … (no later than the strike) … • Buy back calls or puts. Will get you safely out of market but take a loss. • Sell another call or Put. In the following month at the same point price as that of the buy back option. This is known as rolling. • Sell another call or put. At an appropriate/safe point at either a higher strike or further out (following month at same premium) or both = recoup some loss from purchase back of calls. You will still assume risk if market continues to go against you. • Buy an 'at the money' call or put for following month. Will provide you equal protection to compensate for your premium price cost plus the possibility of a price gain to help offset the loss. • Buy another call or Put. In the following month at 50% of the point price as that of the buy back option (this time you do not buy back – you hold your original sold call or put". The implication behind these statements is much the same as in the other cases. Attendees were being advised that it is easy to make a profit in options trading, which is plainly false. 19 One of the reasons for requiring financial service providers to be licenced is to promote "consumer protection in [the] financial services [industry]": Parliamentary Joint Statutory Committee on Corporations and Securities, Report on the Financial Servives Reform Bill 2001 (at [4.12]). The purpose for the prohibition against misleading conduct is too obvious to mention. The injunctions which I imposed upon the first to fourth defendants were to further these objects. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.