The Legal Services Tribunal of New South Wales CITATION : Richard Charles Mochalski and David Anthony McCarthy [1990] NSWLST 8 PARTIES : Richard Charles Mochalski and David Anthony McCarthy FILE NUMBER(S) : of CORAM: Mr D E Hunt (Presiding Member) - Mr J.I. Einfeld - Dr U. Gault CATCHWORDS: Professional Misconduct - mislead client - Professional Misconduct - fail to keep accounts - Professional Misconduct - misappropriate trust moneys/moneys - Professional Misconduct - prefer own interests to those of others :- LEGISLATION CITED: Companies Act Legal Practitioners' Act 1898 Lee v Evans 112 CLR (1964); Harvey v Law Society of New South Wales (1976); CASES CITED: Law Society of New South Wales v Moulton 1981; Hawkins v Clayton (1988) 164 CLR 539; Waimond Pty. Limited v Byrne (1989-90) 18NSWLR; Kennedy v the Council of the Incorporated Law Institute of New South Wales 13ALJ 563 DATES OF HEARING: 30/04/90 - 06/12/90 DATE OF JUDGMENT: 12/06/1990 LEGAL REPRESENTATIVES: JUDGMENT: The Solicitors' Statutory Committee In the matter of Richard Charles Mochalski and in the matter of David Anthony McCarthy Statement of Findings and Order Before: Messrs D.E. Hunt (Chairman), J.I. Einfeld AM and Dr U. Gault These matters were referred to the Solicitors' Statutory Committee pursuant to the provisions of Section 76 of the Legal Practitioners' Act 1898 ("the Act") by the Council of the Law Society of New South Wales ("the Law Society") at a meeting held on 3rd December 1987 for enquiry and investigation into the matters referred to in the Schedule to each Reference. The References are dated 10th December 1987 and after a number of mentions and interlocutory proceedings they came on for hearing before the Committee on the 30th day of April 1990 and continued until the 2nd day of May 1990 when the Committee admitted into evidence the report of Mr George Palmer QC entitled Balanced Property Trusts Special Investigation - Report ("the Palmer Report"). This report consisted of four volumes, three of which were available and because of this the Law Society tendered only these three. On 4th May 1990 Mr J. McCarthy QC and with him Mr Morahan of Counsel appeared for Mr McCarthy and informed the Committee that it was proposed to challenge the admission into evidence of the Palmer Report and the hearing was adjourned for the purpose of enabling the Solicitor to make the application to the Supreme Court. The Court of Appeal dismissed the application on the basis that the challenge to its admission was premature until it became apparent what use the Committee proposed to make of the Report. At a subsequent mention of the matter on 2nd October 1990 the Law Society outlined by exception those parts of the Palmer Report on which it proposed to rely. Accordingly at the conclusion of the Law Society's case on the 9th day of October 1990 the evidence before the Committee consisted of the Reports of Roderick Hamilton McGeoch in respect of each Solicitor dated 31st August 1987 with their annexures and the Palmer Report. In addition Mr McGeoch gave evidence and was cross-examined by the Solicitors. Because the matters giving rise to the References arose essentially out of the same set of facts, namely the conduct of the Solicitors in relation to the Balanced Property Trusts, both matters were heard together. Neither Solicitor was represented by Counsel except as referred to above and only Mr McCarthy gave evidence. He called in his case Mr John Behm, Solicitor, who had represented him from time to time in these proceedings and was present when he was interviewed by Mr McGeogh. Mr Mochalski was present during most of the hearing and chose not to give evidence. At his request he was excused from attendance during some of the cross-examination of Mr McCarthy. In the circumstances, it is proposed to examine the case against Mr McCarthy first, make the Committee's findings and proposed orders and then deal with the case involving Mr Mochalski. David Anthony McCarthy He was born in 1948, completed a degree in Economics at the University of Sydney in 1969 and worked as a part-time tutor in Economics at the University until 1970. From 1970 until 1973 he studied Law at the University of Sydney and graduated in 1974 and thereafter completed his six months' training course at the College of Law. He was admitted as a Solicitor of the Supreme Court in July 1974. From July 1974 until April 1978 he was employed as a solicitor with the New South Wales Corporate Affairs Commission where his work included the examination of trust deeds and prospectuses and other matters related to the securities industry. In August 1978 he commenced private practice as a solicitor in partnership with Mr Mochalski under the firm name McCarthy Mochalski & Co. and remained in this partnership until August 1980. From August 1980 to April 1981 he practised in partnership with Mr Geoffrey Paul Bartels under the firm name Bartels McCarthy & Co. From April 1981 to February 1982 the firm was known as Bartels McCarthy & Behm; the further partner being John Clyde Behm. From February 1982 to October 1983 the firm was known as Behm & McCarthy, Mr Bartels having then left the partnership. The Solicitor has not practised since and it is not clear what he is now doing. Dealing with the Solicitor's involvement with the companies making up the Balanced Property Group, he was appointed a director of Balanced Property Management Pty. Limited ("BPM") on 3rd January 1980, a director of Balanced Property Holdings Pty. Limited ("BPH") on 16th November 1981, a director of Macmo Pty. Limited ("Macmo") on 21st August 1979, a director and secretary of Toorumba Pty. Limited ("Toorumba") on 13th November 1981 and acted as secretary of BPM between January and March 1980. He held one "A" class share and one "B" class share in BPM, 14,020 $1 shares in BPH, one $1 share in Toorumba and one $1 share in Macmo until that company was dissolved on 22nd May 1984. Prior to the Solicitor Mr McCarthy joining Mr Mochalski he had been an employee of the Corporate Affairs Commission and was closely involved with the investigation of the Telford Property Trust group. At the time of that investigation Donald McDonald was involved in the management of the Telford group. Mr McDonald subsequently worked for the Oceanic Property Trust group and in that capacity began to instruct the firm of McCarthy Mochalski & Co. to undertake legal work for the Oceanic group which was carried out by the Solicitor. By way of background, Donald Henry McDonald was born in Tasmania in 1926, was appointed a director of BPM on 11th March 1980, a director of BPH on 16th November 1981, a director of Toorumba on 13th November 1981 and secretary of BPM on 11th March 1981 and secretary of BPH on 16th November 1981. He had been admitted as a solicitor of the Supreme Court of New South Wales on 13th February 1953 and practised under the firm name of D.H. McDonald & Co. and was struck off the Roll of Solicitors on 4th September 1957. He then was involved in two building and construction companies before their liquidation and was declared bankrupt in April 1962 and remained a bankrupt until May of 1982 when it is said that he paid approximately $60,000.00 into his estate. He had acquired considerable experience with unit trusts between 1966 and the formation of the Balanced Property Trusts in late 1979, having worked as a commission salesman for Universal Flexible Investments Pty. Ltd., for Enterprise Growth Fund Ltd., for Telford Property Fund Ltd. and later became that company's administrative manager. From 1977 he worked in unit trusts with Oceanic Property Management Ltd., first as a salesman selling units in property trusts and then as general manager. Some time after the Solicitor had entered into partnership with Mr Mochalski under the firm name of McCarthy Mochalski & Co., in August 1978, the two solicitors were invited to join Mr McDonald for lunch to discuss the latter's proposal to create a new property trust group. Mr McDonald looked to the Solicitor for the legal experience he had gained both at the Corporate Affairs Commission and in acting for Oceanic Property Trust group and is said to have looked to Mr Mochalski for the real estate experience that he was said to have gained. The Balanced Property group was set up in the latter part of 1979 with the company Balanced Property Management Pty. Limited ("BPM") and Lexane Pty. Limited ("Lexane") being incorporated in November and December 1979. According to Mr McGeoch's Report (11.9) "the Solicitor embarked on the drafting of the proposed Property Trusts deed". In Volume 1 of the Palmer Report at 2.13.3 the following appears: "McCarthy's role in the Balanced Property group was to attend to legal matters arising from the operation of the Balanced Property Trusts. The majority of the legal work undertaken by or on behalf of the management company or the trustee company was done by one or other of the law firms of which he was a partner. He was responsible for drawing up trust deeds for each of the Balanced Property Trusts and contributed certain information regarding the trust deeds to various literature promoting the trusts." In relation to this statement in the Palmer Report Mr McCarthy said in evidence (transcript 249.9) "What the situation was in relation to the deeds and the brochures was that I was obliged as part of my duties as a director of Balanced Property Management to prepare the deeds and to look at the brochures which had been prepared, normally by Mr McDonald." In cross-examination Mr McCarthy agreed (transcript 369A), "Q. Before these prospectuses were made available to members of the association they were passed to you for your checking, were they not? A. I would have been shown them from time to time, I did not see each and every one of them but there was not a formal procedure in existence for that happening. They were never subject to directors' meetings and they were never passed on, but I was from time to time shown these particular documents. Q. And you were shown them before they were distributed, were you not? A. I would agree with that generally but not in all cases. Q. And you were shown them for the purpose of you checking the prospectuses for accuracy prior to distribution, correct? A. For accuracy in respect of legal content, not in the non- legal content. Q. What do you mean by the words 'legal content'? A. The legal content is the provisions of the trust deed were accurately reflected." There can be no doubt on the evidence that Mr McCarthy prepared the trust deeds and was obliged to look at the prospectuses in respect of each of the members of the Balanced Property Trust group although he states that he did not do so in all cases. Mr McCarthy told Mr McGeoch that he and Mr McDonald approached a Mr William Williams, Accountant of Bankstown to act as trustee of the Property Trusts, and that Mr Williams recommended Mr Philip Rubner who agreed to undertake the duties of trustee. The Solicitor stated that Mr Rubner was provided with copies of the deeds and took independent advice from solicitors in regard to this. In August of 1979 a company known as Macmo Pty. Limited ("Macmo") was incorporated with the Solicitor, Mr Mochalski and Mr Neville Isaksen being the first directors of the company. The shareholders of that company were the three directors who each held one share. This company was set up to deal in real estate and to make a profit for the three promoters. According to the diary notes of the bank manager of the Commercial Bank of Australia, St Marys branch dated 24.1.1980; "The directors McCarthy and Mochalski have for the past eighteen months conducted a law practice at Bankstown and now propose to expand their involvement into other areas. Apt. co. was formed for the purpose of purchasing various properties for resale and restoration if needed in view of small working capital they propose to turn over properties quickly. All the properties will be residential type and as one security is released it will be replaced. "Mr Mochalski is for the next six months leaving the existing law practice for the sole purpose of setting up a real estate office. Such an office will be equipped to carry out all functions as any real estate office but will also be the outlet for property purchases/ sales by applicant company. "Directors McCarthy and Mochalski with others intend setting up a public property trust and are in the process of preparing a submission ---. "Director McCarthy with others is going to open up an additional law practice in Sydney together with new partner is confident that after initial setting up period this venture would prove profitable." It is clear from the evidence that Macmo was set up to acquire properties for the express purpose of these being on-sold to Lexane and in the process for the three shareholders to make a profit. BPM Balanced Property Management Pty. Ltd.was incorporated on 11th December 1979 with the three directors being the Solicitor, Mr Mochalski and Mr Isaksen and with these three directors holding one "A" class share each. Later, Mr McDonald and Mr David Lewis Bunton were issued with one "A" class share each and they and Messrs. McCarthy, Mochalski and Isaksen were issued with one "B" class share each. This company was the management company for the Balanced Property group and was a client of the Solicitor. This company charged management fees in respect of properties acquired by the Balanced Property Trust and enabled the shareholders to obtain profits from this source. Lexane Pty. Limited was incorporated on 12th November 1979, it became the trustee of the Balanced Property group and also a client of the Solicitor. On page 16 of his report Mr McGeoch sets out the objectives of the promoters of property trusts as follows: "(a) to create a management company which not only manages the trust but seeks out all investments on sells those investments to the trust and takes a profit to be gained on the sales, receives a management fee in relation to the investment and a fee for the continued management of the trust; (b) to create a unit trust whereby units can be issued for monies subscribed; (c) to form a trustee to hold the subscription monies paid by unit holders and along with mortgage monies to make investments in the authorised investments of the trust." The Balanced Property group was formed in late 1979 and operated through its various trusts until its collapse in late 1983. Each trust was a private property trust as distinct from a public property trust, the distinction being whether an offer had been made to the public for funds to subscribe to the trust. In relation to the affairs of the Balanced Property Trust group, at some stage in its development, an association was formed called the "Taxpayers' Income Retirement Planning Association" (TIRPA) in which each of the subscribers to the group first joined the association. This procedure was adopted to avoid there being an offer to the public generally so that the provisions of the Companies Act did not apply and there was no need to register a trust deed and a prospectus. This device had been upheld by the High Court in the case of Lee v Evans 112 CLR (1964) 276 and by the Supreme Court in the case of David Jones Finance Limited and the Corporate Affairs Commission 1 ACLR 239. Subsequent to 1983 the Companies Code was amended in Section 5 (iv) so that an offer or invitation to the public was to be construed as an offer to any section of the public and as a result there was an effective end to the 'club type' private offerings. The procedure in respect of the Balanced Property Trusts was that Macmo would find property investments which could be secured on contracts with delayed settlement dates so that they could form the first investments of the first trust. The first trust was called The Commercial and Industrial Property Trust No. 3 (Trust 3) and this appears to have been done for the purpose of implying that this had been preceded by earlier trusts. This has significance in relation to Particular A(e) of Question 2 of the Reference, the preface to which enquiries whether the Solicitor made or permitted to be made or concurred in the making of statements which were false and/or misleading, in particular: "There is a strong demand to purchase units in established trusts, therefore your unit should sell without any undue delay". Mr McCarthy stated in evidence that he believed that this statement applied to established trusts in general but the obvious inference is that the statement was meant to refer to established trusts in this group. In addition to the potential profits that the Solicitor was to make in Macmo and the management fees in BPM, the Solicitor received remuneration as set out at page 60 of the annexure to Mr McGeoch's Report headed "Suggested Remuneration and Method for Remuneration for Directors". Under the heading "David McCarthy" is set out: (a) all legal fees (b) $15,000 per year wage (c) one per cent fee of all mortgage funds arranged. Mr McCarthy agrees that the first two items were paid but disputes the fact that he received any fees for arranging mortgage funds although on page 863 of the third volume of the Palmer Report the following appears: "McCarthy admitted that amounts were sometimes credited to his loan account irrespective of whether he raised mortgages or not". At 35.4.1 of Volume 3 of the Palmer Report the following appears: "Remuneration: McCarthy's remuneration was based initially on a wage of $15,000 p.a. plus a fee calculated at one per cent of mortgage funds arranged and negotiated by him in respect of properties purchased by the Trusts. However, McCarthy told the Investigation that he "was not very good' at arranging mortgages and it is uncertain how much mortgage finance he actually did arrange. McCarthy admitted that amounts were sometimes credited to his loan account irrespective of whether he raised mortgages or not. Most of the remuneration McCarthy received was paid to him in cash or by cheque payment to other parties at his direction. The taxation returns for BPM disclose the following payments to McCarthy and the law firms with which he was associated for the years ended 30 June, 1981 and 30 June 1982. No taxation returns were prepared for BPM for the years ended 30 June 1983 and 1984. McCarthy failed to provide personal taxation returns for any of the years 1981 to 1983. Year Ended Bartels McCarthy 30 June McCarthy & Behm (1981) Behm & McCarthy (1982) $ $ 1981 Salary 13,550.00 Directors fees 4,000.00 Commissions 26,452.00 Legal fees 23,825.00 1982 Salary 15,800.00 Directors fees 4,000.00 Commissions 61,188.00 Legal fees 46,522.00 124,990.00 70,347.00" Mr McCarthy was asked this question at transcript 390.9: "Q. That is the fact, is it not, that monies were credited to your loan account irrespective of whether you raised mortgages or not? A. But I do not believe in relation to any of these properties here, no. It was at some later stage, if I may explain this, the remuneration provisions were, as I said, they were fluctuating from time to time. I was receiving no wage in the initial period or directors' fees; in the second period I was, but I was receiving no other remuneration and I think it was agreed or McDonald agreed that I would be paid some sort of money in relation to commissions, although formerly I had not organised the loans or the mortgages. But I cannot tell you in respect of which properties. It was on and off, some occasions it was, some occasions it was not". On page 23 of Mr McGeoch's Report he sets out the Balanced Property Investment Procedures and on page 24 states; "Many transactions proceeded in this way but it is folly to claim that the transactions were at arm's length. There is considerable evidence to suggest that the affairs of the manager and the trustee were not at arm's length." Apart from anything else it is clear that the only properties purchased by the trust were those purchased by Macmo or in respect of which Macmo held options and as Mr McGeoch put it on transcript 116.9 in answer to the following question from Mr McCarthy concerning Mazepa Avenue; "Q. There is no evidence to contradict this, but what if the actual amount received did not cover the property purchase costs? In other words, the $38,000 was less than say the $39,000 which it cost with say painting and stamp duty et cetera? The question is, is that a preferment where there is not an economic benefit being served? A. It may not be but how are you ever going to know or how am I ever going to know that other people could not have found as good a property or better at around about that price that the trust would have subscribed to? I mean, how is it that your properties are ones that go into a trust in which you are acting and no others?" On page 6.2 of his Report Mr McGeoch sets out his opinion of the Solicitor's conduct in the following terms: "I have set out this view of professional misconduct because in my opinion the great body of solicitors in this State would hold the view that the Solicitor's involvement as chronicled in my Report would be regarded as disgraceful, dishonourable and of such gravity as to place his fitness to remain a solicitor into question. I believe the Solicitor set out in 1979/80 along with Isaksen, Mochalski and McDonald to enrich themselves in ways which for the non-solicitors may not have been improper (as to which I have serious doubts in any event) but which for a solicitor was quite incompatible with the wider duties I have outlined. "In coming to this view, one needs to be conscious not to place 1987 standards on conduct committed some five or six years ago. Moreover one needs to be conscious not to overlook the fact that the law permitted then what it does not now permit in the property trust investment area. I have taken account of these real issues but still remain of the view that the conduct evidenced in this report would have been greeted with disdain by the great majority of the profession in this era of the Solicitor's branch of the legal profession in this State. "The Solicitor has with others combined the opportunities to make money from the public by, (a) on-selling properties of his own or those in which he had an interest at a profit; (b) whilst reserving to themselves significant fees by way of lump sum fees in continuing management fees; (c) charging legal fees; (d) making inadequate or no disclosure; (e) not ensuring that independent legal advice was availed of; (f) allowing it to be represented to the investing public that entities were independent when they were not. "The Solicitor participated in the formulation and creation of a device to allow widespread subscription of public money contrary to the spirit of the law and without disclosure of certain interests. "The veneer of propriety, respectability, objectivity and legality were constructed upon propositions such as, (a) if the trust deeds were in a form approved by the Corporate Affairs Commission and (b) if the trustee paid for properties in accordance with the proper valuations then the trustee and the public should have no concern that: (i) properties were acquired by the trustee in which the Solicitor had an interest, (ii) undisclosed profits were made, (iii) those profits were made by a solicitor who was at the same time the solicitor for the trustee (iv) legal fees were charged by that same solicitor (v) upon the trustee acquiring a property substantial fees were also paid to a management company in which the solicitor had an interest. "To suggest in those circumstances that the Solicitor's conduct is not called into question is to misunderstand the basic concepts of honesty, fair dealing and fiduciary duty which attach to all solicitors. The fact that others who are not solicitors were engaged in similar activities or that valuations were always obtained is simply no answer for a solicitor who engages in such conduct. "One is not concerned with comparing solicitors' conduct with others' conduct but rather to equate it with conduct acceptable to solicitors of good repute and on that test the various fitness of the solicitor must be put into serious question." The above statement by Mr McGeoch summarises the Law Society's case against the Solicitor and it is proposed to deal with the questions in the Reference and some of the particulars referred to thereunder as being representative of the conduct of the Solicitor which it is alleged was disgraceful and dishonourable. "In respect of the purchase and sale of the property 1 Mazepa Avenue South Penrith which is representative of the other properties referred to in the Reference, the Solicitor conceded in his evidence that the particulars (b) to (g) are generally accurate, he denied particular (h) on the basis that he did not receive any remuneration, he admitted (i) to (k) and denied (l) which alleges "that the Solicitor knowingly permitted members of the public to invest moneys in the said trust without informing them or causing them to be informed properly of the above details". Mr McCarthy's evidence is that whilst Macmo contracted to purchase this property for $33,750.00 and on-sold it to the trustee for $38,000.00 the company was obliged to expend money for acquisition costs such as stamp duty and repairs such as painting and suggests that Macmo made little or no profit from the transaction. However, it is admitted that the public or those members of TIRPA investing in the trust were not told of the purchase by Macmo but were in fact informed that the trustee was purchasing the property and the interest of the Solicitors in the management company which recommended the purchase was also not disclosed to the public. It is clear from the Summary set out on page 864 of the Palmer Report that the Solicitor received substantial moneys from BPM, the Management Company, for the financial years ending 1981 and 1982 and that the firm of which he was a partner received substantial fees and Mr McCarthy gave the following evidence in cross-examination on transcript 392/392: "Q. Mr Garling: Will you turn to the next page, page 864? You see that Mr Palmer has extracted from the records of Balanced Property Management, from their taxation records, that in the financial years ended 81 and 82 you received the sums of money set out in the first column? A. Yes. Q. And that a firm of which you were a partner in those years received the moneys set out in the second column? A. Yes, I do. Q. You do not dispute that, do you? A. Only to the following extent, if you will permit me to answer that. I know that one of the book-keepers or secretaries for Balanced, a woman called Shirley Siggems, I think it was, kept an exercise book which is somewhere referred to in the Palmer inquiry, which related to payments being made to me for various things, actually withdrawals, and she kept a record of some sort of commissions payable. To the extent that the book that she had contained commissions it was not always the case that those commissions were ever fully paid to me. I cannot dispute either way but what I am saying is that there was at one stage a certain entitlement to commissions which he never paid to me. I do not know how much it was but it had built up for various reasons, but because of changing circumstances, the total amount was not fully paid, and if Mr Palmer had taken those commission figures from that particular book, then it could be inaccurate to that extent. But I did not maintain the book and I have not got a copy of the book. Q. To the extent that he did not take them from that book? A. They would be correct, yes. Q. They would be correct? A. Yes, that is right. Q. If you go back to page 863, last paragraph, Mr McCarthy, what Mr Palmer says is that: 'Taxation returns for Balanced Property Management disclose the following payments.' Do you agree now, would you not, that insofar as Mr Palmer has accurately transcribed the taxation returns, that you received those moneys? A. It was more complicated than that but I cannot say I can disagree specifically with that proposition". The Solicitor's case which is in fact summarised in his Counsel's submissions is that what Mr McCarthy did was not contrary to law and accordingly could not be regarded as disgraceful or dishonourable. The submission further states that a solicitor's duty of disclosure of interest arises from the fiduciary relationship of solicitor and client and "there is no authority curial or statutory which supports or authorises the extension of this relationship (in respect of disclosure) to non-solicitor/client connections." The submission contends that the decision in Harvey v Law Society of New South Wales (1976) 2NSWLR 154 is restricted to a solicitor and client relationship and that this was confirmed by the Court of Appeal in Law Society of New South Wales v Moulton 1981 (2NSWLR 736 at 756) per Hutley JA. Furthermore, the submissions contend that the decision in Kennedy's case which refer to a solicitor's obligation "to the public" has not been extended beyond the solicitor and client relationship and a reference is made to the cases of Hawkins v Clayton (1988) 164 CLR 539 and Waimond Pty. Limited v Byrne (1989-90) 18NSWLR page 642. The Committee is of the opinion that the Solicitor set out to make a profit at the various stages of the transaction before the trustee company acquired the properties. As well as receiving legal fees from his acting as a solicitor, he received a profit in his capacity as a shareholder of Macmo and as a shareholder of BPM. These profits or potential profits were not disclosed to the public and this information should have been disclosed. It is not in point for the Solicitor to say, "What I did as a director has nothing to do with my conduct as a solicitor and that I can only be judged in this capacity and any breaches that are committed are subject to adjudication by law under the Companies Act". The Committee adopts Mr McGeoch's opinion that the Solicitor's conduct in relation to the purchase and on-sale of the properties eventually to the trustee company without disclosure to the investing public of his pecuniary interest, was disgraceful and dishonourable. Toorumba Under Question 1, Particular (g) which is only alleged in relation to Mr McCarthy, the company Toorumba Pty Limited ("Toorumba") of which Mr McCarthy was a shareholder and director with Mr Neville Isaksen and Mr Donald McDonald, was set up in the Solicitor's words to, "do in Queensland what Balanced Property Management Pty. Limited did in New South Wales". The investors took up units in a Unit Trust known as Palm Beach Unit Trust with Lexane as trustee and with the intention that the property at 1093 Gold Coast Highway, Palm Beach would be acquired by the Trust for the benefit of unit holders. Toorumba entered into a contract for the construction of a building consisting of fifteen residential units, two offices and a restaurant. The allegation is that in addition to substantial management fees paid to Toorumba by the trustee, Toorumba only transferred the fifteen residential units to the trustee and retained the two offices and the restaurant for its own use. The Solicitor denies that this was the intention and claims that ultimately a direction was given to Mr Behm to transfer the two offices and the restaurant together with the fifteen units to the trustee. In fact this was never done and at the time of Toorumba's liquidation it still owned the two offices and the restaurant. The documentary evidence, with one exception, clearly points to the intention of Toorumba to only transfer the fifteen units to Lexane. By letter dated 10th August 1983 Messrs. Behm & McCarthy, Solicitors, wrote to Mr D. McDonald, Balanced Property Management Pty. Limited re Toorumba Pty. Limited, re purchase from Idolite Pty. Limited and in the last paragraph stated: "Would you please confirm the ownership of the restaurant as being either Toorumba Pty. Limited or Lexane Pty. Limited so that we can attend to the necessary documentation." On 12th August 1983 Balanced Property Management Pty. Limited wrote to Mr J. Behm: "Please be advised that the restaurant and the shops 1 and 2 are owned by Balanced Property Management Pty. Limited and the fifteen units are owned by Lexane Pty. Limited". It should be pointed out that the contract dated 28th March 1983 from Toorumba to Lexane referred specifically to "fifteen (15) home units being those units contained in the seven upper levels". In a memorandum from Mr McCarthy to Mr McDonald on the letterhead of Balanced Property Management Pty. Limited the following appears:- "The purpose of the trust is to acquire the fifteen home units and following instructions a building contract was issued between Toorumba Pty. Limited as vendor and Lexane Pty. Limited as purchaser for the fifteen home units. --- The effect of the contract is to finalise the requirements under the provisions of the deed which in Clause 54(b) authorises the trustee to enter into with Toorumba Pty. Limited a contract to erect or cause to be erected the fifteen building units the subject of the trust and notwithstanding that there are other units in the building not being acquired. That clause also recognises that Toorumba Pty. Limited has or will enter into a building and development agreement for the construction of a building and the fifteen home units therein to be acquired by the trust." The above documents appear on pages 572, 573 and 594 of the annexures to Mr McGeoch's report. On 14th September 1983 in a letter from Messrs. T.W. Biggs & Biggs, Solicitors of Brisbane to Messrs. Behm & McCarthy, the following appears in part: "We have been unable to contact Mr Cowan on the telephone but by examining the notification of Change of By-Laws it appears that the commercial lots are numbered 1 and 2 on the building units plan. We have amended the Transfer to show that lots 3 to 17 inclusive are the subject of a transfer from Toorumba Pty. Limited to Lexane Pty. Limited. As it is intended that Toorumba Pty. Limited remains registered of lots 1 and 2 we return those Certificate of Title to you." There is also a memorandum dated 7th September 1982 on the letterhead of Balanced Property Management from D.A. McCarthy to D.H. McDonald which in part states: "Further a management agreement is to be drawn up between Lexane Pty. Limited and Toorumba Pty. Limited whereby Toorumba Pty. Limited recognises that it has entered into the building contract for and on behalf of Lexane Pty. Limited and the various unit holders of the Palm Beach Unit Trust and that the remuneration for the manager under this agreement is to be the three shops constituting part of the b.u.p. for the Palm Beach property". These two latter documents appear on 573 and 694 of the annexures to Mr McGeoch's Report. In evidence (transcript 310.5) Mr McCarthy said that instructions were ultimately given to transfer the two offices and the restaurant and that he gave instructions to Mr Behm to reflect this position. The Solicitor called Mr Behm to support this contention and this witness said that whilst it was initially the proposal to transfer the fifteen residential units only from Toorumba to Lexane, subsequently there were changes made in respect of the transfer of the two offices and the restaurant and that he received instructions to transfer the two offices and the restaurant to the trustee. Although Mr Behm says that he made a statement to the Palmer Enquiry to the effect that there were no instructions for the transfer of the two offices and the restaurant, as a result of being shown Exhibit "2" in recent proceedings in the Local Court, he came to the conclusion that he had received instructions to transfer the two offices and the restaurant and that this had not been done because of error. In cross-examination Mr Behm agreed that by September of 1983 he had returned to his possession Certificates of Title for lots 1 and 2, that is the two offices and the restaurant, which showed that Toorumba remained the registered proprietor of those lots and the Committee does not accept that the failure to transfer these to the trustee was an oversight. Mr Behm claimed that the memorandum set out in Exhibit "2" from Mr McCarthy, which is undated, was received by him in approximately August of 1983 and in the light of his evidence to the Palmer Enquiry and his earlier evidence at the Local Court and the fact that the offices and restaurant were not transferred, the Committee is comfortably satisfied that there never was any intention to transfer the offices and the restaurant to the Trust. The memorandum upon which Mr McCarthy relies is undated, it was not recalled by Mr Behm when he previously gave evidence to the Palmer enquiry and in the Local Court and it was not acted upon and in these circumstances the Committee cannot accept that there was an intention to transfer the offices and the restaurant as now asserted by Mr McCarthy. On 15th June 1982 Toorumba rendered an account to Lexane for service fees in respect of the Palm Beach Trust in the sum of $252,000.00 and directed that this amount be paid to Balanced Property Management Pty. Limited. Accordingly BPM obtained the service fee and Toorumba retained ownership in the two offices and restaurant. In view of the above, the Committee finds that the Solicitor is guilty of professional misconduct in failing to disclose to the unit holders the substantial interest which flowed to him as a shareholder of Toorumba Pty. Limited. It is now proposed to deal with Question 2 which is common to both Solicitors and the particulars in the Reference which relate to statements in each of the Prospectuses in Trusts Nos. 3 to 8 inclusive. It is alleged that certain statements in these Prospectuses were false and/or misleading and this, to the knowledge of the Solicitors. As certain of the Prospectuses contain different statements, it is proposed briefly to examine the statements in respect of each Prospectus where they differ. Particular A: Prospectus for the Commercial and Property Trust No.3 (Trust No.3) (a) On page 5 of this Prospectus under the heading "Some Important Advantages to Note" appears the words "the Management Company has developed a reputation as a major buyer of income earning properties enabling purchases to be negotiated in the most economical manner". Copies of this Prospectus are appended to Mr McGeoch's Report. In evidence Mr McCarthy stated that: "The reference to the management company being a major buyer has to be seen in terms of the procedures under the Trust where it was the management company's function to go out and arrange for properties and that it would recommend those properties to the trustee to purchase, so when I read that I had no reason to regard that as being misleading or inaccurate. However, again, quibbling with the words 'being a major buyer' is open but I did not see that as something which was false or misleading." It is clear from the evidence that Balanced Property Management Pty. Limited did not purchase its first property until 1981 or 1982 and that the only properties that the management company had recommended for purchase at the time the Prospectus was distributed were those within Trust No. 3. When asked,"How had it developed its reputation? Amongst whom had the reputation been developed?", Mr McCarthy answered, "Amongst the people it was dealing with". Mr McCarthy agreed that the only vendor with whom the management company had dealt was Macmo or Mr Mochalski and it is clear that the statement in the Prospectus could not be regarded as accurate and indeed was positively misleading. (b) On page 5 of the Prospectus the following appears: "Furthermore our internal organisation for rent collection property management is in the hands of well-trained staff." In evidence Mr McCarthy said that he was not responsible for the making of the statement, he would have known it was in the Prospectus and he had no reason to doubt the contents and didn't believe it was false or misleading. In cross-examination Mr McCarthy agreed that the only rents collected when the Prospectus went out had been for a few weeks in respect of two properties and he thought that the rent may have been collected by either Mr McDonald, Mr Isaksen or Mr Mochalski. The Committee finds that on the evidence this statement was false and/or misleading. (c) On page 5 of the Prospectus the following appears: "An initial service fee of not more than 4% of property cost is paid to the manager. This is a once-only charge and pays for the cost of forming the trust, keeping members: register, advertising in the selection of trust properties". In fact the management fee in respect of this Prospectus was eight per cent. Mr McCarthy gave the following evidence: "Paragraph (c) refers to the initial service fee of not more than four per cent of property cost to be paid to the manager. I was asked this question by the Palmer Enquiry, I think in public examination as to why the management fee referred to in the Prospectus was four per cent and my answer to that was if that was the case then I have made a mistake. "That question was asked of me some six and a half years after the event, and I gave the best answer I could at that stage because I knew the management company's fee was eight per cent. However, with all these various cases having arose and the documentation being before me quite often and also witnesses being brought by the Crown including the Auditor, the explanation for that is as follows. "Mr McDonald regarded the eight per cent management fee as comprising two parts. One was an initial service fee for setting up the trust and the other one was a four per cent marketing fee. "Both of those together add up to eight per cent and I refer you to page 5 of the Prospectus to two parts of that. One is under Capital Funds the second paragraph where it says, 'this total cost includes all legal and acquisition fees, management charges and a four per cent marketing fee'. "If you go across to the next column under Management Fees where it says 'Management Fees' it says, 'An initial service fee of not more than four per cent of property cost is paid to the manager'. "That was the way it was explained to me by Mr McDonald to justify it being put in that format, because I knew it was eight per cent, but what in effect it means is that the total costs which are referred to in that capital funds column included a total amount of eight per cent". In cross-examination Mr McCarthy stated that he thought the marketing fee referred to in the Prospectus was the commission paid to the Councillors operating for TIRPA but conceded that this commission was paid by Balanced Property Management Pty. Limited. The Committee believes that on no reasonable reading of the Prospectus could it be understood that the manager received 8 per cent and the Committee finds that this statement was false and misleading. (d) On page 4 of the Prospectus appear the words, "Your trust investment will be managed by Balanced Property Management Limited (BPM) whose executives have a lifetime of professional financial management behind them." In evidence Mr McCarthy stated; "I was mainly looking in terms of Mr McDonald's and Mr Bunton's experience. Mr Bunton was the marketing man and he had worked, I believe, with Mr McDonald at Oceanic. However in the information I had about McDonald, as I said, he had a reputation of 17 years or so in the industry and had built up Telford from $3,000.00 a month to $6,000,000.00 a year and I regarded that as something which could help justify a statement being made like that. "Mr Bunton had been a successful salesman or sales manager in respect of Oceanic. I had no experience myself in selling, I have never sold a unit in my life, I never attempted to and I was never licensed in respect of these units. "However I knew Mr Mochalski had never been involved in that and also I knew that Mr Isaksen, but I thought that having regard to particularly the experience of Mr McDonald that that was not a false statement. "Again, I didn't make that statement." Dr. Gault: Q. "A lifetime suggests seventy years, would the combined experience of those two people you mentioned be anything like thirty-five years apiece? A. No, I don't think so, no. Q. There is a little hyperbole there, that's all. A. It is, I think that the expression of 'a lifetime experience' has a bit of colloquialism in a sense where it doesn't mean that you have to add up the average age of a person to find out what he is doing." In his public examination by Mr Palmer the Solicitor agreed (Palmer transcript 1148) that he did not check with any of the other directors to ascertain what professional financial management experience they had and gave the following evidence: "Q. You see Mr McCarthy you were the director of BPM responsible for legal matters, were you not? A. Yes, correct. Q. You were the one with corporate affairs experience in the securities industries department, were you not? A. Yes, I was the only one, yes. Q. You knew perfectly well that the other directors did not have your experience in the security industry area of law, did you not? A. That is correct, yes. Q. You knew perfectly well that the other directors were relying upon you for such experience and expertise as you had in that area of law? A. For certain matters, yes. Q. You read the brochure, knowing that the other directors relied upon you to bring to their attention any matters that caused you concern in your area of expertise? A. That is right, yes. Q. You knew that it was your duty to make sure that the brochure did not offend against any legislation as far as you are aware? A. Or was inaccurate, yes. Well, I did bring Don McDonald's attention to one particular matter in relation to the Westinghouse claim and asked him to cease to circulate the thing. Q. Just one moment, you said it was part of your duty to bring to Mr McDonald's attention anything that was inaccurate? A. Well, it was what I regard as being particularly inaccurate, yes. Q. So that you knew that it was your responsibility to make sure to the best of your ability that the brochure complied with the law? A. As I understood it, yes. Q. That is the position, is it not? A. Yes as far as, yes, I would have been looking. If I had have thought anything did not comply with the law or applied my mind to it then - four per cent I would have corrected the mistake in that case". Whilst some of the executives of BPM had some experience with property trusts it could not be said by any stretch of the imagination that either individually or collectively they had a "lifetime of professional financial management" and the Committee finds this statement false and misleading and this to the knowledge of the Solicitors. (e) On page 4 of the Prospectus under the heading "Money Back if Required" there appears the words, "there is a strong demand to purchase units in established trusts, therefore your unit should sell without any undue delay". It is clear and was conceded by Mr McCarthy that this was the first trust and it is obvious that it was called "Trust No. 3" for marketing purposes. In evidence Mr McCarthy stated, "However, I said to the Palmer Enquiry that I did not think it specifically referred to Balanced Property Management but to private trusts generally. If you look at the words 'there is a strong demand to purchase units in established trusts' I don't believe, or I did not believe, that that meant Balanced Property Trusts but it referred to a statement that there was a secondary market mechanism whereby people could buy and sell these particular units". In cross-examination Mr McCarthy denied that the statement implied that there was a strong demand to purchase units in Trusts numbered 1 and 2 and reiterated that he believed the statement referred to established trusts generally. Although Mr McCarthy stated that he was aware that some units had been traded between trusts in the group, it is the conclusion of the Committee that the statement was designed to indicate that there was a ready market for purchase of units in the Balanced Property Trust Group and that the statement was false and misleading. (f) On page 3 of the Prospectus under the Heading "Valuation Determines Purchase Price" appears the words, "The Trust Deed provides that real estate properties cannot be purchased for a price higher than the valuation figure made by qualified and independent valuers. A similar valuation covers the sale of all real estate property". This clause misquoted the Trust Deed which made no reference to independent valuers and this was conceded by Mr McCarthy. His evidence was that this was an oversight on his part, that the Trust Deed did not include the word "independent" and he went on to say, "that statement by including the words 'and independent' is inaccurate, yes, but in effect it couldn't have been false or misleading because all of the valuers were independent in all these cases". It is clear that this statement is false and misleading and it is not in point to suggest as Mr McCarthy did, that the valuers were all independent. In cross-examination by Mr Palmer at transcript 1151 the following appears: "Would you agree with me that the independence of a valuer on whose valuation properties in a property trust are to be acquired would be a matter of great concern to investors? A. It would probably be of concern to investors, yes. Q. It would be of concern to investors, would it not? A. Yes". And further in the cross-examination on transcript 1152 the following appears: "Q. So that statement misdescribes the effect of the trust deed in an important respect, does it not? A. It does, yes". The Committee finds that this statement was false and misleading. Although Mr Mochalski chose not to give evidence before the Committee the Prospectus showed on its face that Balanced Property Management Pty. Limited was the manager and that the Solicitors who were also Directors, were McCarthy & Mochalski and in these circumstances both Solicitors had a responsibility to ensure that the above statements in the Prospectus which may have influenced a prospective investor in purchasing units in the Trust should be accurate. Accordingly, the Solicitors either made or permitted or concurred in the making of the above statements which the Committee has found were false and misleading. Prospectus for the Residential and Commercial Property Trust No.4 (Trust No.4) This Prospectus contained the statements particularised in A (a) to (f) and accordingly the Committee makes the same findings in relation to these particulars so far as they were false or misleading and this finding is made in respect of both Solicitors. (b) The evidence is that the Prospectuses were similar although not identical and that Prospectus No. 4 in addition to the other statements referred to under Particular A (a) to (f) contained the following statement, "Mortgage payments guaranteed by Management Company. The Management Company guarantees the payment of the interest on the mortgage and would be responsible for payment if the income for the Trust was not sufficient". The following appears on page 160 of the Palmer Report: "In fact it appears from the records of BPM and of the mortgagees that BPM did not guarantee mortgage repayments under any mortgage acquired by Trust 4 and there was certainly no obligation under the Trust Deed for BPM to do so. The statement would have undoubtedly had the effect of inducing prospective investors to believe that investments in the Trust would be more secure as a result of BPM underwriting the mortgage obligation. The following is an extract from the public examination of Mochalski: 'Q. Of course a statement that the management company itself had guaranteed mortgages by the Trust would be of some significance to investors would it not? A. Privilege. Yes. Q. Because they would feel, well, if the manager is guaranteeing these mortgages and putting its corporate neck on the line, they must be pretty confident about the investment. Would you not think that would be a reasonable inference for investors to draw? A. Privilege. Yes.' The following extract is from McCarthy's public examination. McCarthy had admitted earlier that, as the director of BPM responsible for legal matters, he had checked the prospectuses: 'Q. And of course it would be a matter of considerable comfort to a prospective investor to be told that the mortgage payment on properties owned by the Trust are guaranteed by the Mortgage Company, would it not? A. Yes, it would have been, yes. Q. You did nothing to check the accuracy of that statement relating to guarantees by BPM, did you? A. Nothing to check but I would have accepted - I would have believed it if I had have left it there. Q. You did not do your job in respect of that statement, did you? A. Obviously not. Q. You were careless in that respect, were you not? A. I do not know whether I would have been careless. Q. How would you describe it? A. I have made a mistake'". In his evidence before the Committee Mr McCarthy said that the directors of BPM had to guarantee these mortgages and he referred to a minute of Balanced Property Management dated 27th March 1980. However in cross-examination he agreed with Mr Garling that the minute to which he referred did not equate with the statement that, "the Management Company guarantees the payment of the interest on the mortgage". Both Solicitors in public examination by Mr Palmer agreed that the statement "the Management Company guarantees the payment of interest on the mortgage" would be a matter of some significance to prospective investors and likely to influence their decision to invest. Mr McCarthy also agreed with this proposition in evidence before the Committee. The Committee finds that the above statement was false and misleading and this to the knowledge of the Solicitors. Prospectus for the Balanced Property Trust No.5 (Trust No.5) The statements particularised in paragraphs A (a) to (f) and B (b) are repeated in this Prospectus and in view of the Committee's findings in respect of these earlier matters, the Committee makes the same finding that the statements in Prospectus No. 5 were equally false and/or misleading. Prospectus for the Balanced Property Trust No.6 The statements particularised in paragraphs A (d) and (f) and B (b) are repeated in this Prospectus and in view of the Committee's findings in respect of the previous matters, the Committee makes the same findings in respect of Prospectus No. 6 that these statements are false and misleading. On page 9 of Prospectus No. 6 appears the statement, "this total cost includes all legal and acquisition fees due on settlement; or borrowing charges or management charges plus a four per cent marketing fee". This statement appears underneath a summary of the Trust properties and the heading "Total Cost $7,940,326.00". It is clear from Mr McCarthy's evidence that the management fee for this Prospectus was eight per cent but this is certainly not spelt out in the Prospectus, there being no specific allocation for management fees and, unlike the other Prospectuses, no attempt at cross-reference. The statement in this Prospectus is clearly false and misleading and this should have been obvious to the Solicitors. (c) On page 7 of the Prospectus for Trust No. 6 appears the following statement: "The properties owned by Balanced Property Trust No. 6 include a Coles shopping centre, home units on the Gold Coast, an industrial complex at Alexandria plus luxurious town houses in the booming area of Tweed Heads and Werrington in the outer western area of Sydney". (d) Again on page 9 of the Prospectus for Trust No. 6 the following appears: "The Trust has signed contracts to purchase a balanced portfolio of income earning properties comprising residential, industrial and commercial buildings. This balanced portfolio is your best way of achieving a safe and high return on your money. The trust properties include: --- three town houses at Werrington - $483,360". The evidence in relation to (c) and (d) is that the town houses at Werrington were not purchased and Mr McCarthy in evidence stated that he could give no explanation for this. Accordingly, the Committee finds that these two statements in the Prospectus were false, and the Solicitors as directors and shareholders of the Management Company responsible for purchasing or recommending properties to the trustee, must have been aware that these statements were false when the Prospectus was issued. Pamphlets Entitled "Balanced Property Trust No. 7 Preliminary Information" On page 205 of the Palmer Report at 9.2.1 and 9.2.2 the following appears: "The sale of units in Trust 7 was promoted by a rather sketchy typed and photocopied pamphlet entitled, 'Balanced Property Trust No. 7 Preliminary Information'. The document was not approved and registered under the Companies Act. It does not appear that any printed Prospectus was distributed by BPM in relation to Trust 7. The pamphlet for Trust 7 contained some of the general statements contained in previous Prospectuses including the false or misleading statements referred to in 5.2.7 and 5.2.9." 5.2.7 and 5.2.9 of the Palmer Report refer to the statements in the Prospectus to Trust No. 3 relating to A (d) and A (f) and these refer to (BPM) whose executives have a lifetime of professional financial management behind them and "Valuation determines purchase price". Although Mr McCarthy stated in evidence that he was not responsible for the pamphlets, it is clear that in this instance they were used in place of a Prospectus and the Committee's findings are the same as previously, that the information specified above contained in this pamphlet was false and misleading and this to the knowledge of the Solicitors. Prospectus for Balanced Property Trust No.8 (Trust No.8) This refers to Particular A(c), (d), (e), (f) and B(b) and the Committee having made findings in respect of all these matters repeat these findings and find that the statements in the Prospectus for Trust No. 8 are false and misleading and this to the knowledge of the Solicitors. Richard Charles Mochalski Mr Mochalski elected not to give evidence and has made some written submissions which the Committee will refer to later. Accordingly, the Committee does not have the benefit of his comments in relation to the Particulars attached to the questions set out in the Schedule to the Reference. It is therefore necessary to make the Committee's findings in respect of Mr Mochalski based on the evidence of Mr McGeoch and the Palmer Report. At page 34 Mr Palmer sets out Mr Mochalski's background which is summarised hereunder. Mr Mochalski was born in Germany in 1948, he was appointed a director of BPM on 3rd January 1980, a director of BPH on 16th November 1981, a director of Macmo on 21st August 1979. He held one "A" class and one "B" class share in BPM until they were transferred to McDonald on 9th August 1982 and 29th November 1982. He held 14,020 shares in BPH until they were transferred to McDonald on 6th July 1982. He held one $1 share in Macmo until that company was dissolved on 22nd May 1984. Mr Mochalski graduated in Law from the University of Sydney in 1972 and was admitted as a Solicitor of the Supreme Court in July of 1974. He worked for a period of time prior to his admission with Mr James Deger, a property consultant, and in the property section of the National Mutual Group. After his admission he was employed as a solicitor with a law firm and in September 1975 commenced practice as a sole practitioner under the firm name "Richard C. Mochalski". In August 1978 he commenced practice in partnership with Mr David McCarthy whom he had met while they were students at the College of Law under the firm name "McCarthy Mochalski & Co.". In August 1980 he left the partnership although he continued working for a short time with the firm in its reconstructed form Bartels, McCarthy & Co. In 1980 he was elected to the New South Wales Parliament as Member for Bankstown whereupon he surrendered his Practising Certificate. In December 1984 he renewed his Practising Certificate and at the date of the Palmer Report in 1986/1987 he was said to be employed by a suburban firm of solicitors. There is no evidence as to what Mr Mochalski is presently doing although he has told the Committee that he is bankrupt. On 5th August 1980 Mr Mochalski advised the Law Society that he remained a consultant to the firm of Bartels McCarthy & Co. In September of 1980 he was elected to Parliament and wrote to the Law Society advising his intention to cease legal practice and of his wish to surrender his Practising Certificate. On 5th November 1982 the Solicitor transferred to the Roll of Barristers and in December of 1984 the Solicitor returned to the Roll of Solicitors. The Solicitor claimed to be a highly experienced real estate investor. In 1975 the Hamlyn Publishing Group published a book by the Solicitor on real estate investment. He had immediately prior to his involvement in the Balanced Property Trusts formed together with Mr McCarthy and Mr Isaksen the company known as Macmo Pty. Limited. Mr Mochalski's role in the Balanced Property Group was to find suitable properties to be acquired by the Trusts and to negotiate satisfactory terms of acquisition. His activities were confined to the Sydney Metropolitan area, Mr McDonald being solely responsible for the acquisition of properties in Queensland and for the purchase of a shopping arcade in Tamworth. So far as the Reference is concerned, the particulars of properties under Question 1 are the same as those referred to in the Reference concerning Mr McCarthy with the exception of the Queensland property at 1093 Gold Coast Highway Palm Beach involving the company Toorumba Pty. Limited in which Mr Mochalski was not involved. According to Mr McCarthy Mr Mochalski was involved in seeking out properties for purchase by Macmo which were then on sold to Lexane and accordingly the findings of the Committee made in respect of these transactions concerning Mr McCarthy apply to Mr Mochalski. By way of illustration under Question 1, Particular A refers to the property 23 Wendy Street Georges Hall. This property was purchased by the Solicitor on behalf of Macmo for $62,000.00 on 29th November 1979 and was on-sold to Lexane on 29th January 1980 for $68,000.00. McCarthy Mochalski & Co. acted for Lexane Pty. Limited and the vendors, that is Macmo is said to be "acting for selves". A valuation was obtained in the sum of $68,000.00 from C.I. Walsh Valuations, headed "Report on Valuation of 23 Wendy Street Georges Hall for R. Mochalski C/- McCarthy Mochalski & Co". On 18th March 1980 BPM wrote to Lexane claiming service fees of 8 per cent in the sum of $5,440.00 and this was paid on 20th March 1980. According to Mr McGeoch, the Solicitor: (a) obtained a profit on the sale of the property to his client, (b) acted in a manner in which he had a personal interest whilst acting for the other party and charged further fees, (c) participated by way of involvement in Balanced Property Management Pty. Limited in a management fee of $5,440.00 upon a property which had been transferred into a trust where the public's money had been subscribed, and (d) no such disclosure of his interest either in the property itself or in the management fee had been made to the investors in the particular trust that acquired the property. Furthermore Mr McGeoch reports that the minutes of the Directors of the Management Company record that the Solicitor participated in board meetings at which it was decided to recommend this property for purchase, to Lexane. As with Mr McCarthy, the Solicitor Mr Mochalski received profits from his interest in Balanced Property Management and Macmo as set out in the third volume of the Palmer Report (see pp 859-861). According to the books of BPM, Mr Mochalski received the following remuneration: 1.7.80 - 30.6.81 $21,915.00 1.7.81 - 30.6.82 $24,450.56 1.7.82 - 30.6.83 $31,340.66 In addition the following profits were made on the sale of the properties to these trusts: Macmo Profit Mochalski profit Mazepa Avenue, South Penrith $1,712.88 $570.96 23 Wendy Street Georges Hall 1,646.89 548.96 44-46 Cox Avenue, Kingswood Nil Nil 26 Cowley Crescent Blacktown 5,914.17 1,971.39 16 Burgess Road, Penrith 4,655.55 1,551.85 Medibank Arcade High Street, Penrith 17,000.00 5,666.66 ---------- ---------- Total: $30,929.49 $10,309.83 ---------- ---------- The Macmo properties were subject to reduction in respect of stamp duty and adjustments on certain of the properties and as there were three shareholders, Mr Mochalski's share was subject to a proportionate reduction. At 35.2.3 of the Palmer Report the following appears: "What Mochalski received for his shares: Mochalski received the following consideration upon the sale of his shares in BPM and BPH to McDonald: Date Amount 3 May 1982 $12,500 11 May 1982 35,000 16 June 1982 52,000 7 July 1982 50,000 $149,500 In addition, Mochalski received the benefit of McDonald taking over his debt to BPM by virtue of his loan account, which stood at $39,719.77. The total consideration Mochalski received for the sale of his shares was thus $189,219.77: see Section 19.3." In the absence of any direct evidence from the Solicitor the Committee proposes to examine the Particulars under Question 1 and make findings thereon as follows: A(a) Yes. (b) Yes. (c) Yes. (d) Yes. (e) Yes. (f) Yes. (g) Yes. On this aspect at page 25 of Mr McGeoch's Report the following appears: "I also note that in the minutes and supporting papers of the Balanced Property Management Pty. Limited that the Solicitor was to receive a 1 per cent finder's fee on each property he introduced into the trust. When I inspected the minutes of Balanced Property Management Pty. Limited I found a document headed 'Suggested Remuneration and Methods for Remuneration for Directors' and at Item 4 in this document the following appears: 'Rick Mochalski (a) $15,000.00 per year wage (b) 1 per cent payment of the purchase price of all properties which he locates and negotiates the terms of sale. If he does not negotiate the terms of sale, commissions to be half percent. From this commission he will pay all Jim Deger's fees including travelling and accommodation'. Mr McGeoch asked the Solicitor was this arrangement in fact agreed to by the board and he confirmed that it was. (h) Yes. (i) Yes. (j) "The Solicitor knowingly permitted members of the public to invest money in the said trust without informing them or causing them to be informed properly of the above details" The Committee finds this in the affirmative. It is not proposed to examine in detail any of the other property transactions but as they were carried out in a similar fashion, the Committee finds in respect of these properties that the particulars have been substantiated and answers the questions in the affirmative. Attached to Mr Mochalski's submissions is a copy of the N.C.S.C. Policy Statement headed Companies Act and Codes Property Trusts effective 29 April 1985. As Mr Garling points out in his submissions in reply this statement is not in evidence and it post-dates the events which are the subject of the Reference. Accordingly the Committee sees no relevance in this document. Mr Mochalski's primary submission is that in the absence of any fiduciary relationship between himself and the unit holders there is no obligation to disclose his interest. At transcript 85.6 Mr Mochalski asked the following questions of Mr McGeoch: "Q. I think it would be true to say, would it not, that you took the view that there was a duty of disclosure to the unit holders, is that correct? A. I wouldn't like to have it put quite as generally as that, Mr Mochalski. I take a view that solicitors who are personally involved directly or indirectly in transactions concerning clients, in the larger scale of things concerning the public in an affair like this, do have onerous duties of disclosure. Yes, that is my view. I believe that disclosure means full disclosure so I regard it as an important sacrosanct duty of any solicitor. Q. And that duty is owed to the unit holders? A. I have a wider view than that Mr Mochalski which I expressed in the report. The unit holders are the people that have invested. Seems to me that part of the modus operandi was to invite - use this word advisedly - the public to become unit holders. The disclosure is important to be made at that stage so I think the disclosure is wider than just the unit holders. That's why in a document that resembles a prospectus style of document which is available for distribution that in my view disclosures ought to be made there and I have a very strong view about that, you are quite right. Q. So far as you are concerned simple disclosure to the trustee would not be sufficient. A. No. Q. Following on from what you have just said, that is why you felt or considered that the duty of disclosure hadn't been complied with, is that correct? A. Mr Mochalski let us get this plain if you wish to go down this track. Disclosure means all the pecuniary interests at least that are involved in this chain of events. If somebody is a solicitor for possibly several parties in this scenario, is directly or indirectly interested in properties that are being sold into the trust there are various disclosures that need to be made in my opinion and to suggest that they could be just made to the trustee in circumstances where, whilst the office bearers of the trustee may have been different, I think that these proceedings have shown the independence of them must be in question - just can't be good enough in my opinion". The Committee adopts Mr McGeoch's opinion and also is of the opinion that there was a duty of disclosure to the public and finds that such a duty was breached by Mr Mochalski. In Kennedy v the Council of the Incorporated Law Institute of New South Wales 13ALJ 563 the following appears: "Rich J said that a charge of misconduct as relating to a solicitor need not fall within any legal definition of wrongdoing. It need not amount to an offence under the law. It was enough that it amounted to grave impropriety affecting his professional character and was indicative of a failure either to understand or to practise the precepts of honesty or fair dealing in relation to the courts, his client or the public. The particular transaction the subject of the charge must be judged as a whole and the conclusion whether it betokened unfitness to be held out by the court as a member of a profession in whom confidence could be placed, or on the other hand, although a lapse from propriety, was not inconsistent with general professional unfitness and habitual adherence to moral standards, was to be reached by a general survey of the whole transaction". Kennedy's case concerned the attempted interference by a solicitor with a witness for the other party to litigation in circumstances where the solicitor had no reasonable anticipation that the witness would support his client's case and the Statutory Committee had removed his name from the Roll of Solicitors on the ground of misconduct and the solicitor appealed unsuccessfully to the Supreme Court and subsequently to the High Court. Mr J. McCarthy of Queen's Counsel in his written submissions filed on behalf of the Solicitor Mr David McCarthy submits that the reference to "public" in Kennedy's case has never been judicially interpreted. He further submits that it must be in circumstances where the relevant relationship to the public is created by a solicitor directly and relates to his actions as a solicitor. In response Mr Garling for the Law Society refers to the decision of the Supreme Court of New South Wales in re Crick (1907) 7SR (NSW) 576 at 590 where the Chief Justice Sir Frederick Darley says: "It was argued that inasmuch as the offence with which the respondent was charged was a criminal offence of a serious nature, that the court could not interfere unless there had been a trial in the criminal court followed by a conviction. I entirely differ from this proposition". Furthermore, at page 591 the Chief Justice said this: "In fact the argument comes to this, that the Court with full knowledge, and being well assured that the attorney is not a fit and proper person to be on the Roll is powerless and the attorney regardless of the public interest and the interest of his profession, and further regardless of the fact that in his honesty the Court can have no reliance, is nevertheless to remain upon the Rolls of the Court and be held out to the public and the profession accredited as a fit and proper person to be on the Roll". This argument was rejected by the Court in Crick's case and at page 596 Mr Justice Simpson states: "Whether the Court should or should not strike a solicitor off before conviction is a matter for the Court to determine on the circumstances of each particular case. It cannot be the law that where an attorney is guilty of a criminal offence but for some reason is not prosecuted, and, therefore, not convicted, this Court could not act." In relation to the further argument by Mr McCarthy that the Statutory Committee has no jurisdiction to act in matters where the solicitor's conduct was carried out in his capacity as a director and not as a solicitor and that only the appropriate court can deal with alleged breaches of the legislative scheme covering the duties of a company director, the Committee was again referred to Crick's case and the extract from the judgment of Mr Justice A.H. Simpson at page 606 which states: "In several cases where the alleged misconduct has been an indictable offence the Court has acted though no prosecution has taken place. In several cases a solicitor has been struck off though the conviction against him had been quashed on some more or less technical ground. The Court does not act by way of punishment, though striking a solicitor off the Rolls or suspending him is in effect a severe penalty, but in performance of its duty towards the profession and the public not to allow a person who is unfit to be a solicitor to remain on the Rolls. We have not to consider or pronounce whether the respondent has been guilty of a crime, but whether we are satisfied that his conduct has been such that he ought not to remain on the Rolls". Although the submission of Mr J. McCarthy of Queen's Counsel made on behalf of the Solicitor Mr David McCarthy was not put as succinctly by Mr Mochalski in his written submissions, the same basic contention was made by Mr Mochalski and accordingly the above case is relevant to both Solicitors. The Committee respectfully adopts the submissions made by Mr Garling on behalf of the Law Society and relies both on Kennedy's case and Crick's case in coming to its decision in respect of both Solicitors. In relation to the conduct of the Solicitors the Statutory Committee is of the opinion that it was disgraceful and dishonourable and would be held so by solicitors of good repute and accordingly amounts to professional misconduct. The involvement of the Solicitors in Macmo, the on-selling of the properties to the trustee with a commission being obtained by BPM, the management company, without making any disclosure to the unit holders of the Solicitors' financial interest and the maintenance of the facade that the trustee was independent, are all matters which, in the opinion of the Committee, was conduct that does not befit a member of this honourable profession. Furthermore, the involvement in the Prospectuses and the making of the false and misleading statements, is again conduct which would not be countenanced by reputable members of the profession and amounts to professional misconduct. Furthermore, so far as Mr McCarthy is concerned, in the matter of Toorumba, the Statutory Committee has come to the conclusion that in addition to the commission charged to the trustee company BPM, Toorumba retained for its own purposes certain of the property which, on the face of it should have been transferred to the trustee, is conduct which must be regarded as disgraceful and dishonourable and amounts to professional misconduct. For all the above reasons, the Committee is of the opinion that both Solicitors are not fit and proper persons to remain on the Roll and proposes to order that their names be removed from the Roll. Orders The Committee therefore orders: (1) That the name of Richard Charles Mochalski be and the same is hereby struck off the Roll of Solicitors of the Supreme Court of New South Wales, (2) That the costs of the Law Society of New South Wales of and incident to the Reference No. 24 of 1987 be taxed by the proper officer of the Supreme Court of New South Wales as between solicitor and client and when so taxed and allowed be paid by the Solicitor Richard Charles Mochalski to the Law Society or its Solicitor, Miss Rosemary MacDougal, such costs to include all costs and disbursements properly incurred and paid by the Law Society of and incident to the investigation and report on the transactions and affairs of the Solicitor by Mr Roderick Hamilton McGeoch, (3) That the name of David Anthony McCarthy be and the same is hereby struck off the Roll of Solicitors of the Supreme Court of New South Wales, (4) That the costs of the Law Society of New South Wales of and incident to the Reference No. 25 of 1987 be taxed by the proper officer of the Supreme Court of New South Wales as between solicitor and client and when so taxed and allowed be paid by the Solicitor David Anthony McCarthy to the Law Society or its Solicitor, Miss Rosemary MacDougal, such costs to include all costs and disbursements properly incurred and paid by the Law Society of and incident to the investigation and report on the transactions and affairs of the Solicitor by Mr Roderick Hamilton McGeoch. Dated the sixth day of December, 1990. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.