Hull v Brailey [2012] NSWSC 980

Supreme Court New South Wales

Medium Neutral Citation: Hull v Brailey [2012] NSWSC 980 Hearing dates: 2-6, 9, 10, 12 and13 July 2012 Decision date: 04 September 2012 Jurisdiction: Common Law Before: Grove AJ Decision: Judgment for the defendants. Catchwords: FINANCIAL ADVISOR - investments by clients - alleged negligence and breach of statutory duty Legislation Cited: Australian Securities and Investments Commission Act 2001 Corporations Act 2001 Category: Principal judgment Parties: Richard Kenneth Hull (First plaintiff) Richard Kenneth Hull and Lainie Hull ATF the R&L Superannuation Fund (Second plaintiff) Lainie Hull (Third plaintiff) Edmund Francis Brailey (First defendant) TJC Financial Planning Pty Ltd (Second defendant) Representation: Counsel: Mr MS White of counsel with Mr PM Afshar of counsel (Plaintiffs) Mr TGR Parker SC with Mr CG Carroll of counsel (Defendants) Solicitors: McCabe Terrill Lawyers (Plaintiffs) Holman Webb Lawyers (Defendants) File Number(s): 2009/00297894

Judgment 1The plaintiffs in this action are Mr Richard and Mrs Lainie Hull in their personal capacities and as trustees for the R&L Hull Superannuation Fund ("the Super Fund"). The defendants are Mr Edmund Brailey and TJC Financial Planning Pty Ltd ("TJC"). Mr Brailey was an accountant in a practice styled Brailey Fenton Lane and Co. In about June 2003, TJC, then and at times relevant to this action titled BFL Financial Planning Pty Ltd ("BFL"), obtained an Australian Financial Services Licence and, for the purposes of ss 716A and 916A of the Corporations Act, Mr Brailey was its authorised representative in the exercise of that licence. 2Richard Hull was, and is, the Managing Director of Ateco Pty Ltd, which I understand to be in effect a wholesale importer of various makes of motor vehicles which will ultimately be sold to the public through retail distributors. Lainie Hull did not engage in paid employment and I shall later refer to her activities as a share trader and investor. 3For some years, Mr Fenton, a partner in the accounting practice, had attended to their income tax returns and a social relationship between them had also developed. Toward the end of 2003, the Hulls were unhappy with the administration of the Super Fund and were also aware of the likelihood of a very large future payment to Richard Hull from a profit sharing arrangement with his employer. This arrangement was described in evidence from time to time as a bonus. The matters were raised with Mr Fenton, who referred them to Mr Brailey. 4The causes of action are focussed upon investments in managed investments schemes ("MIS") in agricultural ventures made on the advice of BFL. The Hulls dealt with Mr Brailey or with employees of BFL who acted at his direction. In May 2004, Mr Hull and the Super Fund invested in Timbercorp 2004 Almond and Table Grape projects and Mr Hull invested in the Gunns' Wine Grape project. In April 2005, Mr Hull invested in the Timbercorp 2005 Almond project and he and the Super Fund invested in the Timbercorp 2005 Table Grape project. 5It is not presently necessary to detail every aspect of the way the investments operated but, broadly, an investor paid an amount for which he became a sublessee of a defined portion of a hectare of an almond orchard or a vineyard and thereafter he was committed to payments for the nurture of the crop and the anticipated harvesting of the crop costs. They were long-term projects and returns were not anticipated until after the effluxion of years. 6Of critical significance, however, was the issue of an Australian Tax Office ruling enabling a taxpayer to make a deduction of the upfront investment in an MIS in calculating assessable income in a given year. Also, if borrowings were made for the purpose of investment, interest paid would ordinarily be deductible. The potential advantage, therefore, of such investment to a person such as Mr Hull who, in addition to a substantial salary, was going to receive a very large distribution of profit share, becomes self-evident. 7Neither Mr nor Mrs Hull had any farming experience but no adult could be ignorant of the existence of risks attaching to agriculture, particularly in Australia which was notoriously, and accurately, described by the poetess as a "land of droughts and flooding rains". As well, any crop anywhere could fall victim to plant disease, blight, insect attack or the like although, of course, steps to guard against such matters can be taken, but it could not be imagined by anyone that an agricultural crop could be rendered absolutely invulnerable. 8I infer that this basic general knowledge must have been possessed by the Hulls. An expert financial advisor called by the plaintiffs, Mr Wall, sought to convey a condemnation of managed agricultural schemes and I could not fail to observe what I can only describe as a sneer as he uttered the word "scheme" when using the expression "managed investment scheme". However, he acknowledged that the tax ruling, in particular, had made such investment very popular. In context, this must mean that it was popular with advisors of reasonable competence. The evidence manifests some figures to confirm this popularity. There are reports published by the Australian Agribusiness Group which reveal elevating total investments amounting in financial year ending 2003 to $345 million, 2004 to $665 million and 2005 to $1,024 million. 9Assuming that the tax ruling is likely to have been a large factor in this seemingly remarkable rise, I would nevertheless reject the inference apparently sought to be conveyed by Mr Wall that a financial advisor would be imprudent to recommend such investment. In saying this I do not overlook his minor concession that in a spread of investments a small proportion of such might be acceptable. Of course, I cannot know whether all investors in MIS relied upon financial planning advice but I would not conclude that the investors who contributed were all doing so without it. 10The central complaint of the plaintiffs is that losses were incurred upon these investments and that, had they been advised prudently by BFL and Mr Brailey, they would not have concentrated on investing in agribusinesses and would have received advice spreading their investments with consequent amelioration of the losses which they claim to have suffered. That general observation should be understood with the qualification that an issue exists between the parties as to whether advice was sought primarily concerning taxation liability or for overall financial planning. To deal with the pleaded causes of action, it is necessary to consider the claimed inexperience as investors put forward by Mr and Mrs Hull. 11As is revealed in the foregoing, Mr Hull is a highly paid executive and I have no reason to doubt that this reflects his abilities in the motor industry in which he has been involved both in Australia and overseas for most of his working life. In an affidavit, Lainie Hull deposed that Mr Brailey had commented to her on several occasions that he had "not seen anyone so disinterested in their own finances as Ric". 12The evidence shows that he was not entirely uninterested in the processes. Product disclosure statements were supplied and he assessed the sections that he considered significant and read them. In a conversation in 2005 he spoke to Mr Marksteiner, an employee of BFL, about a proposed investment and described it as not suiting his strategy. He, and Mrs Hull, were obviously aware that BFL had not been retained to manage their investments as distinct from providing advice. They gave instructions for each investment and, as later events showed, they knew they had the authority to decline tendered advice and in fact did so. 13Although, as I have said, I do not conclude that Richard Hull excluded himself from participation in relevant decision-making, the evidence demonstrates that Mrs Hull was far more active in gaining experience and knowledge about financial matters. She deposed that her response to a comment of Mr Brailey was along the lines of saying to him "That's why we have you" and in her evidence she responded frequently to questions by what became a mantra of repeating "We relied on Mr Brailey". 14Some investigation in particular of Mrs Hull's experience in financial matters is necessary as the plaintiffs' arguments involve assertions that they "were naïve and inexperienced enough to trust Mr Brailey and rely on his advice". 15Advice was not sought in regard to all the plaintiffs' financial activity. It was not suggested that advice was sought concerning the purchase of a flat at Port Douglas which was intended to be the subject of holiday letting and negative gearing for tax purposes. There is an indication of the alertness of Mrs Hull to taxation implications in an undated letter from her to St George Private Bank which, although undated, must have been before settlement of the purchase. It reads in part: Enclosed is the application for the unit at Port Douglas, my accountant says that as we have already paid the deposit that can't be borrowed for tax deductions. So that means we need $445,950 plus stamp duty and costs which I think you said to allow $25,000 for. The paperwork you sent doesn't allow for complicated investments like primary produce, on page 4 there is a loan we have from Timbercorp for grapes and almonds which because of the tax deductions allowed are cash flow positive for three years and then go into production and hopefully we earn money from them. 16Neither was advice sought from the defendants concerning share trading and investment undertaken by Mrs Hull which, after 2000, was done by Mr and Mrs Hull as trustees for R&L Hull Investment Trust. It was not suggested that Richard Hull participated actively in the day-to-day operations of the Trust. 17In her affidavit, Mrs Hull recounted that in 1999 she took some courses in share trading and charting. This was a considerable understatement. Some detail of the breadth of her activity demonstrates the capacities of the person with whom Mr Brailey was dealing and her likely ability to assess advice. Between 1999 and 2004, Mrs Hull paid for over fifty publications or attendance fees for seminars relating to share trading or investment. Some of this expenditure was not trivial, for example, in October 2000 she was billed $2,992 for an "analyst package" by a stock market service called Sharefinder, which she used. In that year she also purchased a pocket pager which kept her abreast of movements in price of shares listed on the Australian Stock Exchange. Through the trust, trading turnover exceeded $1million in 2003-4, $1.8million in 2004-5 and $3million in 2005-6. This activity was concurrent with investments that are the subject of the action being made. Segregated also from the advice concerning those investments, Mrs Hull traded in financial products which she conceded were highly risky and that she knew this. These included options and futures through a broker, CDM Trading Pty Ltd and contracts for difference (CFD's) through a United Kingdom company (CMC Group plc) which held an Australian Financial Services licence. 18Despite the extent of this experience, she made an extraordinary claim of ingenuousness about a matter of taxation. In her affidavit she asserted that because of the tax ruling of which she was told she thought the almond growing scheme was "officially approved". In cross-examination, she adhered to the proposition that in some way the tax office was sanctioning the investment. I do not accept that Mrs Hull believed that the tax office was so doing and I find that the evidence that she gave in this regard was invented in order to fortify the proposition that they acted in reliance upon whatever Mr Brailey said. 19In the ordinary sense, not by reference to s 761GA of the Corporations Act, Mrs Hull must be categorised as a very sophisticated investor. It was, I consider, intentionally deceptive of the plaintiffs to describe themselves as naïve and inexperienced even accepting, as I do, that Richard Hull was personally less intensely interested. 20I have already mentioned an issue concerning the principal focus of the retainer of the defendants upon taxation or more general planning. The exclusion of the unit investment, but more significantly the multifaceted operations of the Investment Trust, undermines the usefulness of an opinion by Mr Wall as to a spread of investment which he hypothesised would be recommended by a prudent investment advisor. His spread contains, to a large degree, share investments that were expressly not the subject of seeking advice from the defendants. Upon BFL being approached by the plaintiffs, a request was made to provide information by completion of a document titled "Fact Find". Part of the document sought an expression of the degree of importance attached to various factors by the clients by circling a figure in a scale of 1 to 10. Curiously, in grading security, volatility and liquidity a scale figure of 1 represented "most important" and 10 the other extreme of "least important" but the scale is reversed in respect of inflation, taxation and performance where 1 represents "least important" and 10 represents "most important". 21Except for liquidity, where figure 7 was circled, all others had figure 5 circled, which I accept was intended to mark the centre of the range. It is said that the indication concerning liquidity was an error and it was actually intended to record a tendency toward most important rather than, as it does, a tendency towards least important. It is possible that the alteration in scaling led to error but what was represented to the defendants was that liquidity tended toward being of least importance. 22Completions of other sections of the document indicated a desire for long-term (seven and greater years) investment, maximum income and active involvement of the clients. A general comment was endorsed "No income needed at the moment just grow superannuation fund". 23The Fact Find document contained a reminder that "1" is considered a conservative investor and "10" an aggressive investor, but note what I have observed above about grading. 24A debate emerged about a description of the plaintiffs as "moderately aggressive investors". In different language, the plaintiffs asserted that they were "middle of the road" investors. Omitting indication concerning liquidity, I consider that selection at the centre of the 1 to 10 scale would make it equally accurate to describe the clients as either moderately conservative or moderately aggressive. I reject the proposition advanced by the plaintiffs that by describing them as moderately aggressive, the defendant had in some way breached a duty of care by wrongly classifying them. 25The argument about this was essentially semantic but the conclusion is fortified by making the expression of desire for maximum income and active involvement. There was no dispute that seeking to maximise income would inevitably mean some raising of the level of risk in any investment and thus would lean towards aggressive rather than conservative as an applicable description. 26I put into some chronology matters of relationship between the parties. The defendants made submissions concerning the desirability of reliance, when fact-finding, more on contemporary records or objective material than on purported recollections particularly the content of conversations, recounted in affidavit testimony years after the events. In a dispute of the current nature, I consider that is a sound approach. There were limited acknowledgments of reconstruction by the witnesses but, those apart, I am also satisfied that it was inevitable that, whether consciously or not, reconstruction coloured the assertions and counter assertions of all of Mr and Mrs Hull and Mr Brailey. 27Keeping that in mind, I trace some significant events and encounters. On 28 November 2003, there was a conversation between Mr Brailey and Lainie Hull and one of the matters communicated was an anticipated bonus of $300,000 (in addition to Richard Hull's presumed substantial salary). As I have observed, Mrs Hull was by no means insensitive to the potential for taxation levy to be lawfully reduced. 28On 4 December 2003, there followed a meeting between Mr Brailey and Mr and Mrs Hull. Again, the anticipated $300,000 bonus was file noted as being mentioned. Mr Hull testified that he told Mr Brailey that he anticipated a profit share (bonus) in the coming year of the order of $1 million. Paradoxically, if this was communicated, contrary to Mr Brailey's memory that it was not so communicated, it would add force towards an inference that taxation as such, and upon such a large sum, was the likely reason for the consultation, rather than the seeking of general financial advice. The Hulls at this time revealed their purchase of a unit being constructed in Port Douglas. This purchase was to be financed by borrowings and, similar to some other matters, was quarantined from any advice that was being sought from Mr Brailey. 29Subsequently, on 15 December 2003, a letter signed by an employee of BFL, Justin Clynes, was sent to the Hulls forwarding a financial services guide and a Fact Find document for completion by them. Mrs Hull had deposed that the latter was given to them at the meeting and the inconsistency is relevant only in fortifying the view, above stated, that available records are more likely to be correct than assertions recovered from unassisted memory. The content of the guide speaks for itself and to the extent that it canvasses what is available from BFL as to costs, terms and conditions and the like, it does not assist to define what were the parameters of what it was that the Hulls were seeking. It did, however, contain this response to a question posed concerning risks attaching to any recommended investment strategies: I will explain to you any significant risks of investments and strategies which I recommend to you. If I do not do so, or if you do not understand our explanation, you should ask me to explain those risks to you. 30There has been no complaint that Mr Brailey failed to respond to any express request for advice about particular risk. 31Several things happened in January 2004. Dated the 12th is a partially completed Fact Find document. I have referred elsewhere to some of its content. It appears to have been given to Mr Clynes at BFL on the 22nd. His file note refers to the need to have a letter authorising transfer from previous advisers about whom it appears that Lainie Hull had complained that they had lost $100,000 over 12 months. 32In the meantime, dated the 15th, Richard Hull contracted to purchase the Port Douglas property for $495,500. His signature on the purchase contract was witnessed by Lainie Hull. 33On 6 February 2004, Mr Clynes sent a letter to the Hulls with various documents concerning the transfer from the previous advisers. The letter contains a recommendation to use ABN AMRO Morgans as stockbrokers and it is clear that Mrs Hull's assertion that BFL retained them (as opposed to doing so on the Hulls' instructions) was incorrect. 34It can be noted that there had been no direct contact between the Hulls and Mr Brailey since the December meeting. It was not suggested that the contact with Mr Clynes amounted to the tender of financial advice to them. 35On 3 March 2004, the Hulls applied to the St George Bank for a loan of $1 million and in due course they were granted a line of credit to that amount. The application declared that the loan was for business purposes and no doubt was required by the Bank, which would have been alert to consumer credit laws that become applicable to non-business loans. There was some forensic skirmish about these funds. The available line of credit was to be used to discharge an existing mortgage of about $300,000 on the Hulls' residence and the balance, after 10 per cent deposit already paid, on the Port Douglas purchase. This would leave about $200,000 available. The defendants argued that this represented cash for intended investment and the plaintiffs denied such intention. Whichever contention is correct, the transaction manifested another financial activity which the Hulls engaged in and which they quarantined from any advice that they were seeking from Mr Brailey or BFL. 36Participation by Mr Brailey resumed in May 2004. There are contrasting recollections of whether there were one or two face-to-face meetings at about this time, however, file notes by Mr Brailey of a meeting of 18 May are available. It is no novelty that file notes can be cryptic when looked at by others, nevertheless the first note simply reads "1.5m fall due 30/6/04". Having regard to the evidence of the anticipated $1 million bonus, this figure may or may not have been mentioned or may represent cumulation of salary and bonus anticipated by Mr Hull. Whatever figure was discussed, it was such that I am abundantly satisfied that both Mr and Mrs Hull were conscious of the approximate size of the potential taxation liability which would arise if such a sum were to be directly received by Mr Hull. 37Again, whatever the situation or anticipation, figures were specified on a following letter of 20 May 2004 from Mr Brailey to the Hulls. Pointedly, the bold type heading of the letter reads "2004 TAX PLANNING YEAR" and the letter commences, "Further to our discussions on Tuesday night, I propose we take the following decisions regarding tax planning for this year." The emphasis has been added. Attached to the letter were proposals for investment, which I have already described as the May 2004 investments in Timbercorp Almond and Table Grape projects and the Gunns' Wine Grape project. As stated, those investments were duly made. There was also a recommendation, acted upon by the Hulls, to invest in a then unlisted commercial property trust (Cromwell). 38So far as personal contact was concerned, the next chronicled record is a file note of a conversation between Mr Brailey and Mrs Hull on 26 October 2004. It was knowledge common to all concerned that payments needed to be serviced during that month in connection with the agribusiness investments. Inter alia, a note appears "1,000,000 came in for bonus". Obviously not seeking his advice, Mrs Hull also informed Mr Brailey that settlement of Port Douglas was scheduled for the next February and that they were borrowing from St George and she also mentioned that they were buying a boat. The file note also records "Bonus should be staying at 1.0m." 39In January and March 2005, there are file notes of communications between Mr Brailey and Mrs Hull which I do not need to summarise for present purposes. A culminating event is evidenced by a letter dated 21 April 2005 from Mr Brailey addressed to Mr Hull. This letter recommends the purchase of further almond lots, which were available to BFL clients even though there had been a complete sell out by Timbercorp of these lots. I find nothing sinister in the existence of some arrangement whereby lots could be retained to be made available to clients. 40At about this time, the Hulls spent a week at Port Douglas. The letter also forwarded the relevant product disclosure statement and observed: It was our intention to advise you in relation to this product after our Timbercorp seminar being held on 27 April as part of your tax planning strategy. Again, the emphasis has been added. 41On 29 April 2005, there was the telephone contact between Mr Marksteiner and Mr Hull, already mentioned in another context, concerning further investment in table grapes. In the event, investment was made in both almonds and table grapes as previously noted. 42On 18 May 2005, statements of advice concerning these investments were forwarded to the plaintiffs. The causes of action are founded upon the investments made up to this time, historically, however, the plaintiffs declined advice to further invest in MIS. 43Of course, the foregoing does not refer to every one of the contacts between the plaintiffs and the defendants. The plaintiffs' tender bundle appears to seek totality but much of the material is not germane to disputed issues which require determination, for example, correspondence about sharing of commission and other incidental contacts.