Storm gave inappropriate advice to vulnerable investors
THE directors of Storm Financial contravened the Corporations Act when they allowed vulnerable investors to receive "inappropriate advice".
Justice James Edelman found Storm Financial indiscriminately applied its investment model to clients without considering whether they could rebuild after a significant loss.
He said Emmanuel Cassimatis and his wife Julie, as directors of the company, should have concluded "an appropriately conservative approach to investment" for these clients.
The Australian Securities and Investments Commission took the Cassimatises to court after investors, many retired or about to retire, lost their homes and superannuation in the wake of the Global Financial Crisis.
After the company collapsed in 2008, the corporate watchdog calculated investors lost about $830 million.
While the collapse affected thousands of investors, the contraventions decided in the Federal Court on Friday afternoon concerned 11 investors, or six instances if couples were treated jointly.
Each of the investors was more than 50 years old; was retired or approaching and planning for retirement and had little or limited income.
They had few assets, generally comprising their home, limited superannuation and limited savings.
These investors had little or no prospect of rebuilding their financial position if they suffered significant loss.
In his 215-page judgment, Justice Edelman concluded reasonable directors with Mr or Mrs Cassimatis's responsibilities would have been aware of a strong likelihood of contravening the Corporations Act if they did not prevent or prohibit the Storm model from being applied to clients who were retired or near retirement with few assets and limited income.
"The extent of the adverse consequences that occurred for the investors was undoubtedly a result of the GFC which was an event with a magnitude which could not have reasonably been foreseen by a director in the position of Mr or Mrs Cassimatis," he said.
"... other causes may have included difficulties that the banks had in managing margin loans, margin calls not being received when they should have been received, the timing of the fall of the share market coinciding with the quarterly distribution in the index funds, delays in the banks updating their securities, volatile data from the banks, and mistaken calculations of LVRs (loan to value ratio) by Colonial."
But Justice Edelman said these other possible causes did not detract from Storm's "inappropriate advice".
"If Storm had not inappropriately advised the relevant investors to mortgage their home and invest using the Storm model then they would not have invested in this way (in) the first place and would not have been exposed," he said.
"Although many of the relevant investors suffered significant, life-altering, losses after the GFC, these losses were neither necessary nor sufficient for Storm's breach.
"The simple point is that they omitted to take any action at all to redress the likely breaches of the Corporations Act which they had caused or permitted by the creation and manner of operation of the Storm model."
ASIC commissioner Greg Tanzer said this was an important decision that emphasised the importance of directors' duties not to allow companies in their control to breach the law.
"The decision also highlights the significant obligation on financial services licensees to provide financial advice that is appropriate to the persons to whom it is given," he said.
The matter will be listed for a further hearing at a later date to determine what civil penalties and disqualification orders should be imposed on the Cassimatises.
Palmwoods investor Mark Weir, from the Storm Investors Consumer Action Group, said many investors, including himself, did not know the strategy was one-size-fits-all.
"It's civil, not criminal. There are some who will take the view that ... it's a minor breach," he said.
"However, the consequences of it across the board for Storm investors was catastrophic and it'll be interesting to see what kind of penalty applies."
ASIC also took action against BOQ, CBA and Macquarie in the wake of Storm Financial collapse, alleging the banks supported Storm's unregistered managed investment scheme.
The banks still deny the allegations but all settled before a ruling was handed down.
The long-running case involved hundreds of witnesses and thousands of exhibits.