FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Cassimatis (No 8)

[2016] FCA 1023

ORDERS

THE COURT ORDERS THAT:

1.    The matter be listed for directions for a hearing on penalties and other relief.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

EDELMAN J:

TABLE OF ABBREVIATIONS

INTRODUCTION AND BRIEF SUMMARY OF REASONS

1    This litigation was brought by ASIC against Mr and Mrs Cassimatis for alleged breaches of their duties of care and diligence as directors of Storm Financial Limited (Storm). Shortly before the intense period of the Global Financial Crisis in the second half of 2008, Storm was a highly profitable company with $77 million of annual revenue and $120 million of consolidated gross assets.

2    Mr and Mrs Cassimatis submitted that this case is unique in Australian corporate history. As far as I am aware, it is unique in its combination of three factors. First, the allegations of breach against the directors rely upon a single provision of the Corporations Act 2001 (Cth). That provision is s 180(1), which imposes a duty (in broad shorthand) to exercise their powers and discharge their duties with “care and diligence”. Secondly, the directors’ breaches of care and diligence are alleged to have occurred while Storm was a solvent company and while Mr and Mrs Cassimatis, as directors, were also the only shareholders. Thirdly, there is no dispute that Mr and Mrs Cassimatis managed Storm in good faith and in accordance with the informed wishes of all the shareholders (themselves).

3    Mr and Mrs Cassimatis submitted that a director who is the sole shareholder of a solvent corporation could not breach s 180(1) by a course of conduct which was highly likely to contravene provisions of the Corporations Act, or even if he or she intentionally acted in contravention of the Corporations Act. Mr and Mrs Cassimatis relied upon the principle that “where the directors and the shareholders are one and the same, ratification is implicit”. For the reasons set out later in this judgment, I do not accept that this principle will always preclude a finding of contravention of s 180(1) by a director.

4    In one respect, ASIC set a high bar for itself to establish liability. ASIC’s case included an allegation that Mr and Mrs Cassimatis were in breach because they had acted unreasonably within the meaning of s 180(1), and placed Storm in a situation in which it had actually breached the Corporations Act. Part of ASIC’s case therefore required it to prove that Storm had actually breached the Corporations Act. To borrow the expression of Keane CJ in Australian Securities and Investments Commission v Fortescue Metals Group Ltd [2011] FCAFC 19; (2011) 190 FCR 364, 370 [10], ASIC relied upon an actual breach by Storm as a “stepping stone” for a finding that Mr and Mrs Cassimatis contravened the Corporations Act.

5    I have serious doubt whether an actual breach by a corporation is a necessary requirement for breach of s 180(1) by an officer. For instance, suppose a director unreasonably (within the terms of s 180(1)) and intentionally commits acts which are extremely likely to involve a serious breach of the Corporations Act perhaps even threatening the very existence of the corporation. As I explain later in these reasons, it might be seriously doubted whether the director could escape liability simply because, by some good fortune, no actual breach eventuates. Loss is not a required element of an action for contravention of s 180(1) of the Corporations Act.

6    Although it may not have been necessary for ASIC to establish any actual breach by Storm, ASIC’s case was presented in that way. For that reason, and because the parties conducted their case and called evidence on this basis, I have proceeded on the basis that actual breach must also be established.

7    On the other hand, I do not accept ASIC’s submission that an actual breach by Storm is sufficient to establish liability under s 180(1) of the Corporations Act. ASIC submitted that directors could be liable for a contravention of s 180(1) where the directors had failed to ensure that the corporation was not in breach of its duties under the Corporations Act. In very broad summary, I do not accept this submission because a duty to “ensure” is a duty of strict liability. Section 180(1) is not a duty of strict liability.

8    The remainder of this introduction summarises, in broad outline, the reasons why Mr and Mrs Cassimatis contravened s 180(1) of the Corporations Act. The reasons in this outline are discussed in far greater detail later in these reasons. It suffices in this outline to provide a broad sketch of the essential features of this case and the Storm model. These essential features of the Storm model are relevant because one of the most significant matters in dispute between the parties was the foreseeability, and likelihood, of the breaches of the Corporations Act which occurred.

9    The Storm model generally involved investors being initiated into Storm by a preliminary appointment or “primer” meeting followed by an “education workshop”. After the workshop there were meetings with an adviser. Storm would centrally produce a cash flow for the investor based on information provided by the investor to the adviser. Storm would also centrally produce a Statement of Advice (SOA). Much of the SOA was in standard, or template, form although particular amounts and ratios were tailored to the investor and some other sentences and paragraphs would be included for that particular investor. Almost 90% of Storm’s clients were advised to adopt a strategy described by one witness (Mr Cashel) as “double gearing”. This advice involved (i) borrowing against the security of their homes; (ii) obtaining a margin loan; and (iii) using the funds from these loans to invest in index funds, establishing a cash reserve, and paying Storm’s fees.

10    The investment by a Storm client did not usually conclude after this first occasion of investment. Consistently with the Storm model, Storm would send Statements of Additional Advice (SOAAs) to advisers for investors, or sometimes directly to investors, to make additional “step” investments if the market rose or fell by a certain amount, or if the client’s circumstances changed significantly. One of the non-executive directors (Mr Nelson) observed that in one month in 2007 Storm automatically generated a record 1600 SOAAs for clients.

11    The investors upon whom ASIC focused as typical examples of its case were Mr and Mrs Dodson. Like other investors, Mr and Mrs Dodson attended an education workshop run by Storm. The education workshop generally emphasised the reliability and low risk involved in the Storm model and the need for people to take on debt. One of the typical slides shown at that presentation said that volatility or “manageable risk” is “investing in an asset whose value can rise and fall but in such a way that over a longer time frame there is certainty that the value will rise”. A hypothetical question was asked of the attendees about which person of several persons they would want to be. The “correct answer” was that the prospective client should “want to be” the person who owes $2 billion.

12    In November 2007, Mr and Mrs Dodson obtained financial advice from a representative of Storm. Storm understood that the Dodsons were “preparing for retirement in a few years”. At the time that Mr and Mrs Dodson approached Storm, Mr Dodson was 60 years old. His wife was 55 years old. They had a combined total income before tax of $58,996 per annum. They were the guardians of a girl whose parents had died. They owned their own home. They had superannuation savings and around $10,000 surplus income each year. Mr Dodson was working night shifts. He had a heart condition.

13    Storm provided Mr and Mrs Dodson with a 138-page SOA. The SOA followed the Storm model of advice. Mr and Mrs Dodson took Storm’s advice. They borrowed funds against the security of a mortgage over the unencumbered home in which they had lived for 27 years. They used the borrowed money to invest in index funds. They borrowed again for a margin loan from Colonial Margin Lending. Some of the remaining borrowings were used to create a “cash dam” to pay for expenses including interest. Mr and Mrs Dodson also had to use the borrowed money to pay $26,960 to Storm for its fees.

14    After the GFC in 2008, Mr and Mrs Dodson liquidated their investments. They now have a home loan on their house of $287,000 (with an offset of $197,000) and line of credit drawn to $32,000. A $65,000 investment that they had prior to investing with Storm has been lost. Neither has been able to retire.

15    A similar pattern occurred for a number of other investors pleaded by ASIC. Some of them, such as Mr and Mrs Higgs, were advised to make up to seven additional “step” investments, increasing their borrowing and investment in the index funds on all those occasions. Mr and Mrs Higgs were retired with $79,000 collectively in income before tax (including a disability pension for Mr Higgs). They had few assets other than their home. They commenced investing with Storm by borrowing against their home and investing around $300,000. They accepted Storm’s advice on each of the seven subsequent occasions, borrowing additional amounts and investing those amounts of between $20,000 and $100,000. Their last investment was in January 2008 shortly before the GFC. They lost around $420,450. Mr Higgs has been forced back to work despite his disability.

16    Although ASIC’s case involved detailed pleading and evidence concerning nine investors, and a pleaded schedule involving many others, the case was not proved in relation to many of the pleaded investors. This is because (i) some of the pleaded investors were not “retail investors”; (ii) there was no evidence that some of the pleaded investors were retired or approaching retirement; and (iii) ASIC did not prove a breach of s 1041E of the Corporations Act.

17    Following sensible admissions that were made concerning the Schedule investors, there was little evidence or submissions led in relation to them. The submissions concerning the Part E investors were also, quite properly and economically, focused upon Mr and Mrs Dodson as a paradigm case. Ultimately, I have concluded that ASIC established civil contraventions by Storm of s 945A(1)(b) and s 945A(1)(c) of the Corporations Act in relation to Mr and Mrs Dodson as well as nine other investors. In total, the contraventions concerned 11 investors or six instances if couples, who were jointly advised, are treated jointly. My reasons generally focus upon these investors to whom I refer to as the “relevant investors”.

18    Each of these relevant investors had five matters in common. These five matters were as follows: (i) they were over 50 years old; (ii) they were retired or approaching and planning for retirement; (iii) they had little or limited income; (iv) they had few assets, generally comprised of their home, limited superannuation, and limited savings; and (v) they had little or no prospect of rebuilding their financial position in the event of suffering significant loss. In these reasons I will often refer to these matters in summary form as investors who were retired or near retirement with few assets and limited income. Although there were other investors who had these five pleaded characteristics, ASIC’s case has only been proved in relation to the relevant 11 investors.

19    Mr and Mrs Cassimatis’ case was heavily based upon submissions that the Storm model was viable and that contraventions were not reasonably foreseeable. The many submissions that they made on this point included that Storm had advised many professionals including lawyers and financial planners. They submitted that Storm had been reviewed by compliance professionals, by ASIC, and by its non-executive directors. They argued that there was no evidence of any concern about the Storm model by any of these people. Mr and Mrs Cassimatis also relied on evidence that the share market index had not fallen during any ten year period in history. They submitted that the only reason the Storm model failed was because of a “Black Swan” event, namely the GFC.

20    It is essential to observe at the outset that the viability of the Storm model was not in dispute in this case. In opening submissions (at [16]), and closing submissions (at [32]), ASIC iterated and reiterated that although Storm’s strategy might have been considered aggressive, ASIC did not allege that the Storm model was flawed or inappropriate for all investors. The allegations of contravention were concerned with the Storm model only to the extent to which it involved investors who fell within a particular class. As I have explained at [18] above, that class covered all pleaded investors who had the five characteristics which I have described in shorthand as retired (or near retired) investors with few assets and limited income.

21    Mr and Mrs Cassimatis had an extraordinary degree of control over Storm. They used their powers as directors to create an environment in which (as they were aware) it was almost inevitable that the Storm model would be applied to people with a high degree of financial vulnerability within this class. There is no magic in the manner in which ASIC defined the class. The characteristics illustrate, however, a class of people who were, or were amongst, the most vulnerable of Storm’s clients. Mr and Mrs Cassimatis would reasonably have been aware that the Storm model was applied to financially vulnerable clients including those in the class pleaded by ASIC.

22    For the reasons explained in detail later, a reasonable director with Mr and Mrs Cassimatis’ responsibilities, and in Storm’s circumstances, would have realised that the application of the model to people in the pleaded circumstances was likely to involve inappropriate advice. The reasonable director would have taken some alleviating precautions to prevent the giving of that advice. I reach this conclusion for the detailed reasons given later, but with a strong awareness that it is made in the context that a director’s powers to act are, of the very nature of corporations, ones which often require risks to be taken.

23    Mr and Mrs Cassimatis should have been reasonably aware that the application of the Storm model would be likely to (and did) cause contraventions of s 945A(1)(b) and s 945A(1)(c). The contraventions of s 945A(1)(b) occurred because Storm did not give such consideration to the subject matter of the advice and did not conduct such investigation of the subject matter of the advice as was reasonable in the circumstances. The contraventions of s 945A(1)(c) occurred because Storm provided financial advice which was not appropriate to the investors having regard to the consideration and investigation of the subject matter of the advice that ought to have been undertaken. Those contraventions were not merely likely to occur. They were contraventions which could have (and did have) devastating consequences for many investors in that class and the discovery of those breaches would have threatened the continuation of Storm’s Australian Financial Services Licence (AFSL) licence and Storm’s very existence.

24    Although I conclude that Mr and Mrs Cassimatis breached their duties as directors, their breaches involved only one contravention each. This was conceded by ASIC in closing submissions. ASIC’s concession should be accepted. If a security guard at a storage facility carelessly failed to notice that the lock on the back door was broken, he would commit a single breach. The breach would not be multiplied even if it turned out that his conduct had contributed to the loss of the belongings of a different customer for every day of the month during which the guard was responsible for the facility.

25    The pleaded conduct by ASIC was that Mr and Mrs Cassimatis created a scenario which caused or permitted advice to be given to particular investors to invest in accordance with the Storm model. That involved a single contravention of their duties. It did not involve a separate breach in relation to each of the 45 investors upon whom ASIC relied. For instance, apart from a letter of thanks from Mr and Mrs Sondergeld, it was never alleged, and it was not proved, that Mr or Mrs Cassimatis had met, spoken to, or had any dealings with any of those 45 investors. It was not alleged that Mr or Mrs Cassimatis had prepared or read any cash flow or any advice that was provided to any of the 45 investors. It was not alleged that Mr or Mrs Cassimatis knew that any particular advice was provided to any of those 45 investors, as opposed to advice of that general nature being given to persons within the same class as many of the 45 investors.

THE ALLEGED BREACHES AND THE RELIEF SOUGHT

The alleged contraventions by Storm

26    ASIC’s case against Mr and Mrs Cassimatis begins with allegations of contraventions by Storm. The case against Mr and Mrs Cassimatis is dependent upon proof of one or more of these contraventions.

27    The primary contraventions allegedly committed by Storm are as follows:

(1)    s 945A(1)(b) of the Corporations Act because it did not give such consideration to the subject matter of the advice and did not conduct such investigation of the subject matter of the advice as was reasonable in the circumstances;

(2)    s 945A(1)(c) of the Corporations Act because it provided financial advice which was not appropriate to the investors having regard to the consideration and investigation that Storm ought to have undertaken, but did not undertake, of the subject matter of the advice; and, or alternatively

(3)    s 1041E(1) of the Corporations Act by making statements to the investor about the consideration which had been given to the investor’s personal circumstances in creating the advice, which statements were misleading and deceptive.

28    These three breaches are also relied upon to establish further breaches of (i) s 912A(1)(a) of the Corporations Act by providing the financial advice to the investor and failing to do all things necessary to ensure that the financial services covered by the licence were provided efficiently, honestly and fairly; and (ii) s 912A(1)(c) of the Corporations Act by failing to comply with the financial services laws in providing the financial advice to the investor.

The alleged contraventions by Mr and Mrs Cassimatis

29    ASIC alleged that Mr and Mrs Cassimatis contravened s 180(1) of the Corporations Act in two different ways.

30    First, ASIC pleaded at [2301] of its statement of claim that Mr and Mrs Cassimatis breached their duties of care and diligence by “causing and/or permitting Storm to provide advice to the Investors in accordance with the Storm Model in a manner which caused Storm to contravene [ss 912A(1)(a), 912A(1)(c), 945A(1)(b), 945A(1)(c) and 1041E(1) of the Corporations Act]”.

31    The particulars of the alleged failure to exercise their powers with the required degree of care and diligence were that a reasonable person would not have caused or permitted Storm to give advice to clients or prospective clients who were: (i) over 50 years old; (ii) retired or approaching and planning for retirement; (iii) had little or limited income; (iv) had few assets, generally comprised of their home, limited superannuation, and limited savings; and (v) had little or no prospect of rebuilding their financial position in the event of suffering significant loss.

32    It is important to emphasise that there is no magic in the precise definition of this class of investor relied upon by ASIC or the precise definition of the five characteristics of the class pleaded by ASIC. For instance, it might be strongly arguable that the class would include persons such as a 45 year old with the same additional characteristics (although not over 50 years old), who had retired or who was near retirement because of permanent injury or illness. The fundamentals of the pleaded class were that it involved those persons who were retired, or approaching retirement, and who were particularly vulnerable to losses. Some of the expert evidence focused upon the characteristic of the pleaded investors as retired or approaching retirement but it was implicit (and sometimes explicit) in that expert evidence that the Storm model might not be inappropriate for retirees who were wealthy and therefore not financially vulnerable (ts 276).

33    Secondly, ASIC pleaded at [2301A] that in causing or permitting that advice to be provided in a manner which caused Storm to contravene the Corporations Act, Mr and Mrs Cassimatis exposed Storm to a foreseeable risk of harm of: (i) being found guilty of an offence under s 1311 of the Corporations Act; (ii) cancellation or suspension of Storm’s AFSL by action under s 915C(1)(a) of the Corporations Act; (iii) a banning order by action under s 920A of the Corporations Act; (iv) court orders under s 1101B(1)(a)(i) of the Corporations Act; and (v) civil proceedings by the Investors. ASIC says that this degree of exposure to risk was greater than that to which a director, acting with the required degree of care and diligence, would permit Storm to be exposed.

34    As I explain later in these reasons, it is notable that neither of these pleaded manners of contravention involved any allegation that Mr and Mrs Cassimatis acted in any particular way which was directed toward any particular investor. ASIC properly conceded that the conduct of Mr and Mrs Cassimatis which founds their liability under s 180(1) consisted of a single, continuing course of conduct and (if proved) amounted to a single contravention of s 180(1) by each of them (ASIC closing, [37]).

35    Following various concessions, there were 45 individuals, or 27 individuals or couples, upon whom ASIC relied in closing submissions. The reference to Part E investors is a reference to those investors where the facts are pleaded in detail in Part E of the statement of claim. The Schedule investors are those investors whose details are pleaded in a very summary form in a schedule to the statement of claim:

(1)    Mr and Mrs Dodson (Part E investors);

(2)    Mr and Mrs Herd (Part E investors);

(3)    Ms Longmore (Part E investor);

(4)    Mr and Mrs Sondergeld (Part E investors);

(5)    Mr and Mrs Higgs (Part E investors);

(6)    Ms Allom (Schedule investor);

(7)    Mr and Mrs Harvey (Schedule investors);

(8)    Ms Somossy (Schedule investor);

(9)    Mr and Mrs Betts (Schedule investors);

(10)    Mr Bleakley (Schedule investor);

(11)    Mr and Mrs Dillon (Schedule investors);

(12)    Mr and Mrs Galley (Schedule investors);

(13)    Mr and Mrs Gordon (Schedule investors);

(14)    Mr and Mrs Hainsworth (Schedule investors);

(15)    Mr and Mrs Harper (Schedule investors);

(16)    Mr and Mrs Johnson (Schedule investors);

(17)    Mr Kilgallon and Ms Harman (Schedule investors);

(18)    Ms Knight (Schedule investor);

(19)    Mr and Mrs Madden (Schedule investors);

(20)    Mr Perkins (Schedule investor);

(21)    Ms Quinton (Schedule investor);

(22)    Ms Roberts (Schedule investor);

(23)    Mr and Mrs Schuler (Schedule investors);

(24)    Ms Tulloch (Schedule investor);

(25)    Mr and Mrs Walker (Schedule investors);

(26)    Mr and Mrs Williams (Schedule investors); and

(27)    Mr and Mrs Wilson (Schedule investors).

The relief sought

36    ASIC seeks the following primary relief:

(1)    by s 1317E(1) of the Corporations Act, declarations that Mr and Mrs Cassimatis each contravened their obligations as directors of Storm under s 180(1) of the Corporations Act;

(2)    by s 1317G of the Corporations Act, civil penalties in respect of each of those contraventions;

(3)    by s 206C or alternatively s 206E(1)(a)(i) of the Corporations Act, orders that Mr and Mrs Cassimatis each be disqualified from managing corporations; and

(4)    by s 1324(1) and s 1324(6) of the Corporations Act, orders that Mr and Mrs Cassimatis each be restrained from holding an AFSL or from providing financial services under any AFSL.

37    By consent of the parties, and on the basis of the assumption upon which they had proceeded for several years, the trial of liability was held separately from questions of appropriate remedies. With one exception, all of the orders sought by ASIC are dependent upon proof that Mr or Mrs Cassimatis contravened s 180(1) of the Corporations Act. The exception is in relation to the orders sought under s 206E(1)(a)(i). Under that subsection, the orders sought by ASIC require proof of contraventions by Storm and failure by Mr or Mrs Cassimatis to take reasonable steps to prevent each contravention.

The nature of the allegations

38    Section 140(1) of the Evidence Act 1995 (Cth) provides that in a civil proceeding, the court must find the case of a party proved if it is satisfied that the case has been proved on the balance of probabilities. Section 140(2) then provides that:

Without limiting the matters that the court may take into account in deciding whether it is so satisfied, it is to take into account:

(a) the nature of the cause of action or defence; and

(b) the nature of the subject-matter of the proceeding; and

(c) the gravity of the matters alleged.

39    This provision includes the common law approach, from Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336. Part of that principle is the consideration of the ordinary experience of people that the more grave the allegation, the less likely it might be expected to be (all other things being equal) that a respondent would, on the balance of probabilities, have committed the act. An assessment of the gravity of the allegations will include consideration of the likely consequences if the allegations are made out. As Mansfield and Gilmour JJ said in Ashby v Slipper [2015] FCAFC 15; (2014) 219 FCR 322, 345 [69], the more grave the allegations and their potential consequences, “the stronger is the evidence required to conclude that the allegations have been established which will give rise to those consequences”.

40    In this case, the allegations against Mr and Mrs Cassimatis involve a weighty subject matter and allegations of substantial gravity, including conduct which is the subject of potential penalties and potential banning orders. My findings in this case are made in light of these considerations in s 140 of the Evidence Act 1995 including the gravity of the allegations.

THE STORM MODEL

41    Before I turn to discuss the evidence of the witnesses, it is necessary to explain the operation of the Storm model which sets the scene for their evidence. The evidence of the operation of the Storm model was given in the most comprehensive detail in Mr McCulloch’s evidence. It is necessary to say something about Mr McCulloch’s evidence because of its importance. Apart from Mr and Mrs Cassimatis, he was one of the people who were the most familiar with Storm’s operations.

42    Mr McCulloch was an impressive and careful witness with great knowledge of Storm’s activities. His affidavit evidence was comprehensive. In his oral evidence he answered questions directly with careful consideration. On many occasions he considered a question at length before responding sometimes with a simple “yes”. His recollection was very good. But it was not perfect. For instance, he was mistaken about the year when he started providing financial advice. He frankly admitted that the documentary evidence related to this was likely to be more reliable than his memory.

43    Mr McCulloch had great familiarity with the Storm model. For more than a decade before 1998 his role as an employee of the Commonwealth Bank was to manage the bank’s relationship with Mr and Mrs Cassimatis. In late 1998, he began working for Storm in the Townsville office with 10 to 12 other people. Mr McCulloch was Storm’s group accountant (a senior management position). He prepared monthly and quarterly reports, and liaised with the banks. In 2002 he also took on the role of a senior adviser (ts 167). By 2007 his predominant role was an adviser although sometimes he also prepared loan application requests, Confidential Financial Profiles, and presented cash flows.

44    Mr McCulloch participated in staff, client and Storm Executive Committee meetings. He attended numerous client education workshops and briefings to financial institutions. From 2005 to 2008, he presented many of Storm’s education workshops. He learned directly from, and reported to, Mr and Mrs Cassimatis. Mr McCulloch explained that although Storm’s business grew and was refined over time, the underlying elements of the business did not change.

The stages of the Storm investment process

45    Mr McCulloch had a comprehensive understanding of the process usually adopted by Storm when advising clients. As he explained, that process had various stages. The stages were as follows:

(1)    a preliminary appointment or “primer” meeting;

(2)    an education workshop;

(3)    a Confidential Financial Profile meeting and preparation of cash flow;

(4)    a review or reviews of the recommended cash flow with the prospective client and subsequent steps including the preparation of the SOA;

(5)    a presentation of the SOA;

(6)    the signing by the client of the loan documents and investment documentation, and the investment processing;

(7)    further investment “steps”; and

(8)    no exit plan.

46    The investment process rarely took fewer than three months to complete.

1. Preliminary appointment or “primer” meeting

47    The first meeting with a prospective client generally went for half an hour to an hour. Mr McCulloch said that during these meetings, prospective clients were told words to the effect that Storm had a unique style of advice and was not a traditional financial planner. They were told that Storm was a specialist organisation that used “debt as a cornerstone” of its advice. There would be a preliminary conversation with prospective clients about their current financial situation and their reasons for seeking financial advice. Prospective clients who were still interested after the preliminary appointment were invited to attend an education workshop.

2. Education workshop

48    Storm’s education workshops were generally presented by Mr Cassimatis or employees who were chosen by Mr Cassimatis. Mr McCulloch and Mr Benson said that Storm had a strict rule that every client was required to attend an education workshop before they were given any advice. Storm’s Procedural and Compliance Manuals described it as part of the “Client Process”.

49    The education workshops typically lasted between several hours and one day. They were held approximately every fortnight at Storm’s offices and by videoconference if necessary for remote clients. There were usually between 20 and 25 people in attendance, and up to 50 people watching by videoconference.

50    Mr McCulloch said that he recalled Mr Cassimatis saying to him words to the effect that the purposes of the education seminars were to “outline the Storm style of investment advice and to weed out people who would be unlikely to invest with Storm because they only wanted to invest in real estate” or were “complete nervous Nellys who would not want to mortgage their home”. Mr McCulloch recalled Mr Cassimatis saying words to the effect that he did not want to “waste Storm’s resources on prospective clients who were never going to invest”.

51    Mr McCulloch said that during the education workshops, the presenter would explain:

(1)    the types of assets that could be invested in;

(2)    that Storm recommended clients build wealth by using home loans and margin loans to borrow funds to invest in index funds;

(3)    that Storm was not a traditional financial planner and specialised in one area of client advice, that being advice about investing in indexed share funds; and

(4)    that volatility in the share market was used to trigger further investments. Mr McCulloch said that attendees were told that Storm’s philosophy was that if the share market fell in value by 10% or more from the date of the initial investment, a further investment should be made using cash reserves to fund the further investment and lower the average cost of the investment; and if the share market rose in value by 10% or more from the date of the initial investment, a further investment should be made by increasing the margin loan and returning the LVR to its level at the time of the initial investment.

52    The same PowerPoint presentation was used during each education workshop as a visual aid, although Mr and Mrs Cassimatis expanded and modified the presentation over time. The PowerPoint presentation initially involved 20 to 30 slides. Over time it increased to approximately 350 slides, although not all of the slides were presented at each workshop. The content of the workshop could be changed only after approval by the compliance team (ts 178).

53    The format of the workshop was standardised by the slides and the phrases which were used. Mr McCulloch learned from Mr Cassimatis to say particular phrases when particular slides from the PowerPoint presentation were displayed and he used those phrases when presenting (ts 179).

54    A central theme of the workshop, whoever presented it, was that clients should embrace debt rather than be scared of debt. For instance, one slide of the PowerPoint presentation depicted three people, owing $2 billion, $200,000 and $0 respectively. The audience was invited to choose which person they would rather be. If their answer was the person owing no money, Mr McCulloch would explain that this was a “herd” mentality, and that the audience had to think differently about the concept of wealth. If the audience’s answer was $200,000, Mr McCulloch was trained to say that this was the “worst position to be in”, and that it was indicative of “Mum and Dad, growing up in the suburbs, trying to put their kids through school, paying off the mortgage, living life stressed out.” The “correct” answer was the person owing $2 billion. Mr McCulloch would say, “If you owe nothing in retirement, that means you own nothing. If you owe $2 billion in retirement, what does that mean you own? It means you must own at least $4 billion to $5 billion”.

55    When Mr McCulloch presented the workshop, he would compare two types of investors. Both investors had a surplus income of $500 per month. The first, “Tom”, invested that $500. The second, “Helen”, approached Storm for advice, and, following that advice, bought a debt of $500 per month, and then bought an expensive asset. Mr McCulloch was trained to explain how Helen would end up with a capital base worth $2.12 million, which was considerably better than Tom’s investment. Using this example, Mr McCulloch would explain that “the more you borrow, the higher the return on your equity”. Graphs would be shown to the audience, and Mr McCulloch would explain that a 10% debt ratio was too low to be effective for the purpose of creating wealth, and that the debt ratio “optimum range” was between 40-60%.

56    The workshop also compared different types of investments. With reference to comparative tables, Mr McCulloch would explain that, historically, shares performed better than both cash and property. He said that Mr Cassimatis trained him to talk about a unit in an index fund as a “supershare”, because it is a “truly diversified fund”, and “actually owns every share available on the ASX”. Mr McCulloch said that he was trained to say words to the effect of:

So what Storm recommends is that you guarantee yourself the big stacks of coins by investing your money in one of these supershares. So how do you buy one of these supershares. You do it by pooling your money with hundreds or thousands of other investors’ money and putting it in a unit trust. That unit trust in turn will buy shares in every company that makes up the All Ords in the same proportion that its held within the All Ords… This is how we guarantee you the big stacks of coins, which is the average return….

3. Confidential Financial Profile meeting and preparation of cash flow

Confidential Financial Profile meeting

57    After the education workshop, prospective clients who still wished to invest would generally have a one-on-one meeting with an adviser or adviser’s assistant. This was known as the Confidential Financial Profile meeting. At this meeting, the prospective client would be given a Financial Services Guide, and would be asked to complete a Confidential Financial Profile.

58    The Confidential Financial Profile meeting involved obtaining from the prospective client a significant amount of financial information and documentation (including pay slips, bank statements, loan statements, superannuation statements and insurance documentation). Mr McCulloch would spend up to two hours completing a Confidential Financial Profile which recorded the client’s personal details, employment details, income, living and other expenses, and assets and liabilities.

59    Mr McCulloch said that he was trained to say at the start of the meeting words to the effect of:

Remember Storm isn’t here for everybody. The type of advice we’re going to give may make you feel uncomfortable, and we need to talk about what we talked about during the workshop. During the workshop, we showed you certain slides to deal with change, and remember we’re trying to get you to think logically, not emotionally. If you think emotionally, you’ll never put up with volatility. If you think logically, you’ll realise that people who make more money tend to put up with assets that can increase and decrease in value over time. In relation to risk and volatility, we talked about risk during the workshop and we talked about the fact that there are different types of risks, one being default risk, one being asset selection risk….

You may still think that to get a high return you need to take a higher risk. That’s not Storm’s point of view. Storm’s point of view is that you need a higher volatile asset that gives you high returns without the risk of default.

60    Prospective clients were asked to read and put their initials on the “volatility and risk statements” in the Confidential Financial Profile. That statement repeated the information provided to the client during the education workshop by drawing a distinction between two types of risk:

(1)    “real risk” was described as the possibility of irrecoverably losing some or all of the client’s capital; and

(2)    “manageable risk” was described as investing in an asset that has value which can rise and fall (volatility) but in such a way that there is certainty that over a longer time frame the value will rise.

61    Prospective clients were then asked to sign the box that applied to them. There were four boxes:

(1)    “I am prepared to entertain speculative ventures of a risky nature and am prepared to lose my asset totally if necessary in an attempt to make high profits”;

(2)    “I am prepared to accept short to medium term volatility and am also prepared to accept a level of real risk where some of my asset may be irrecoverably lost”;

(3)    “I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated”; and

(4)    “I am not prepared to accept any level of volatility and realise that this selection will result in low growth and substantial exposure to inflation risk”.

62    Mr McCulloch said that before prospective clients ticked a box, he was trained to say words to the following effect:

[Storm is] going to recommend that you invest in a volatile asset, but a safe volatile asset, and that’s why we invest in ‘supershares’.

And that’s what this third statement is all about. We’re asking you to take on the risk of a volatile asset but a safe volatile asset. And that’s the risk we’re asking you to accept.

The first box isn’t a Storm client. That’s a person who is prepared to take on extreme risk and put all their money in one stock. And we all know what happened to HIH, OneTel and Alan Bond.

The last box means that you’re part of the herd. You are going to be one of those 88 people reliant upon the pension in retirement.

If you tick either the first box or the last box you won’t be a Storm client. You are either too risky or too conservative. Both will result in poor financial outcomes.

So take your time, read the statements and then initial the box that applies to you.

63    Mr McCulloch said that he was told by Mr and Mrs Cassimatis that if the prospective client did not sign the risk level in the Confidential Financial Profile described as “I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated”, Storm would not provide financial advice to the person. Similar evidence was given by Mr Benson. Mr McCulloch also said that he recalled Mrs Cassimatis saying that there was no point giving the Confidential Financial Profile to her cash flow team unless that box was ticked because she would not process it. However, despite the apparent rigidity in Storm’s expressed position, Mr McCulloch said that Storm would sometimes provide advice to a client who ticked the second box.

64    Apart from those people who ticked the first or fourth boxes, there were other prospective clients to whom Storm did not provide advice. These were people who had no ability to borrow, and therefore could not engage in the Storm model (ts 207) or people who indicated an investment time horizon of fewer than five years. As Mr Benson explained, clients were required to tick, or agree to, an investment time horizon box in their Confidential Financial Profile of five to seven years or longer. The clients would not be advised if the box of “Up to 1 year” or “1 to 4 years” was ticked.

65    It was, however, rare for a Storm client not to accept the “condition” of undertaking investment for at least five to seven years. This condition was emphasised in the Storm workshops and would have been reiterated by advisers when clients “educated” in the Storm model sought to invest using that model.

Preparation of the cash flows

66    Once the Confidential Financial Profile was complete and verified, the Storm data entry team or “input cell” would enter that information into the cash flow spreadsheet. Later, probably in late 2007 once the Phormula database had been developed, the information would be entered into that database. Mr Turvey’s evidence was that it would take a member of the cash flow team approximately four hours to prepare a cash flow and to have it approved.

67    Initially, only Mr and Mrs Cassimatis had the authority to prepare a cash flow. However, by 2006, cash flows began to be prepared by the cash flow cell (also described as the “cash flow committee”, the “compliance cell” or “SWAT” (Supervision, Workflow, Analysis and Training)). Although the preparation of cash flows had expanded from Mr and Mrs Cassimatis to include a few others in the cash flow cell, the preparation of cash flows was still tightly controlled. As Storm’s Procedural and Compliance Manual explained, no one in Storm was permitted to change a cash flow until the revised cash flow had been resubmitted to the cash flow cell and approved. When the cash flow cell prepared the cash flows, all relevant versions of the cash flows were saved (ts 433).

68    The cash flow was prepared in an Excel spreadsheet which had been created by Mr Cassimatis with the assistance of one of Storm’s Authorised Representatives, Mr Notaras. It included an input of all of the client’s income and expenditure upon which Storm’s recommendations were based. And the formulas in the spreadsheet modelled a suggested investment plan. Every plan was done over a 17 year period, irrespective of the age of the client. The cash flow also showed how much the client could borrow secured by a home loan and a margin loan, and the amount the client would need to contribute in order to fund the investment.

69    The cash flows involved many standardised formulas but they did not merely involve inserting a client’s figures into a spreadsheet. Sometimes more information about the client was requested (such as more precise tax calculations: ts 207-208). Different clients also had different provisions made for contributions and cash reserves (ts 198). Different approaches were also taken for different classes of client. As Ms Bock and Mr Turvey said, if a client was not retired an overall debt ratio of 60% or less (with a home loan of 80%) would be used and capital growth was not generally the sole source of funding for the recommended borrowings. However, for a client who was retired or nearing retirement age, the overall debt ratio was 50% or less (assuming a home loan of 60%).

70    A critical component of the cash flow was a client’s “cash reserves”, sometimes referred to as a “cash dam”. These cash reserves were held in a Cash Management Trust. The cash flow showed these reserves of cash over a 17 year period having regard to: (i) the client’s revenue and expenses flowing from the recommendations; (ii) the client’s contributions and distributions; and (iii) an assumed rate of return. Ms Bock explained that Storm’s practice was to leave a minimum of 12 months of interest servicing in the cash reserves (ts 132).

71    As Mr McCulloch explained, cash flows would not be approved if the clients’ cash reserves were not predicted by the cash flow to increase over time. If the cash reserves were not shown as increasing with the assumption of no growth then the parameters were changed to allow growth in the investment, such as after a period of between two and five years for retirees. However, these “cash flows” did not factor in any period of negative growth (ie any decline in the value of the index funds). In the extreme case, where “cash reserves”, even after adjusting the parameters, still did not show an increase over time (potentially because the client did not have sufficient capacity to borrow), then the prospective client would not receive a recommendation to invest in accordance with the Storm model.

72    It will be apparent from this discussion that, as Mr McMaster explained, the “cash flow” was not really a cash flow and that “cash reserves” were not actually cash reserves. The formulas calculated “cash reserves” as a combination of cash and growth in the index funds (ts 306). The index funds were relatively liquid so that clients could generally sell them when they wanted to (at least prior to the GFC) (ts 186) but they were not actually cash. Not only did the spreadsheet treat the growth in index funds together with cash, but it also assumed that the growth would not be liquidated because it was assumed that there would be dividends and further growth; the cash rate would only be applied to the actual cash balance of the cash reserves unless cash reserves became “negative” (because the cash had all been used and the growth had been liquidated) (ts 156).

The three types of cash flows

73    For many clients, the cash flow cell would prepare three cash flows.

74    First, a “viability cash flow” or “recommended cash flow” was prepared. That was the cash flow discussed above. It generally formed the basis for the SOA to the client. This cash flow showed the lowest investment returns of the three cash flows prepared. Mr Cassimatis taught Mr McCulloch to say that this type of cash flow showed that a plan could survive under adverse conditions but that the other cash flows were more realistic. Mr McCulloch said that the other cash flows assisted clients to invest by showing the extra wealth that could be generated.

75    Secondly, a “reality check cash flow” was prepared which was based on the viability cash flow but (i) used the current interest rates rather than the higher interest rates of the viability cash flow, and (ii) used historical average share market growth rather than no growth or a low rate of growth after two to five years.

76    Thirdly, a “maximum capacity cash flow” was prepared which increased the amount of the margin loan to the maximum allowable under the margin lender’s LVR requirement.

4. Review of the cash flow with the prospective client and subsequent steps including preparation of the SOA

77    Once the cash flow was prepared and approved, it would be sent to the relevant adviser to be presented to the prospective client. Advisers could, and often did, query the recommendations or make suggestions on any aspect of a proposed cash flow to the cash flow committee. But the final decision lay with the cash flow cell (ts 177). As I explain later in these reasons, Employee Representatives were given spreadsheets without formulae so that they could not amend the cash flows. Authorised Representatives had the formulae but they were unlikely to do any more than insert the client’s provided figures so that the client could see the operation of the spreadsheet.

78    The cash flows were generally presented to the client in a one-on-one meeting between the client and the Storm adviser. The meetings lasted two to four hours. The adviser would explain the cash flow, the assumptions underlying it, the home loan or margin loan borrowings required, and the amount the prospective client was required to contribute to the plan (although usually this contribution was only where the client was not retired). Mr McCulloch said that at these meetings he was trained to (i) repeat topics from the education workshop; (ii) show clients a projected cash reserve levels graph to “prove” the “viability” of the plan; and (iii) conduct the meeting in a way which would not shock the client by the level of debt.

79    Mr McCulloch said that if the client wished to modify information previously provided, or if the client was dissatisfied with part of the cash flow, the adviser would send the cash flow back to the cash flow cell which retained control over the cash flow. Once a new cash flow was prepared, another meeting would be held with the prospective client to discuss the revision. That process could be repeated a number of times until the client was satisfied (ts 186).

80    Once the prospective client was satisfied with the viability cash flow, the following process would take place:

(1)    the client would sign various bank application and privacy consent forms which enabled Storm to approach home lenders on the prospective client’s behalf;

(2)    the SOA cell commenced preparation of the SOA;

(3)    the banking cell issued requests for quotes to various home lenders and, if the client had requested a specific bank, to that bank;

(4)    the SOA cell would select a bank and a margin lender;

(5)    the cash flow cell would confirm the accuracy of the final viability cash flow, taking into account the amount of funding offered by the bank; and

(6)    once the SOA was complete, the cash flow cell checked and approved it. A hard copy was then delivered to the adviser for the adviser to present to the client.

The SOA and cash reserve advice

81    Each SOA was based on a template document. A substantial part of the template contained generic advice. Over the years, the template evolved from a 20 to 30 page document to a document of 150 pages or more.

82    For almost 90% of the clients, Storm’s advice was to obtain a loan secured by the client’s home, as well as a margin loan, and to use the funds from these loans to invest in index funds based on the ASX 300. The remaining 10% were generally young people who did not have an asset base such as a family home. Storm’s advice to them was to obtain a margin loan or a personal loan to invest in indexed share funds.

83    Although the SOA contained much template advice, and was often based upon the same model of borrowing against the home with a margin loan, it also considered some of a client’s particular circumstances. Within the standardised parameters of Storm’s advice, there were variables that changed between clients, such as the LVR, overall debt ratio, the level of cash reserves, and the amount of contributions to the plan (ts 198).

84    All clients who were advised to invest in the Storm model would have money in the cash reserve based upon an initial starting balance recommended by Storm. There would be additions of cash from the client’s income or tax refunds. The cash reserve (to the extent that it genuinely contained cash) would be used to: (i) finance the client’s debts or living expenses if the index funds did not provide any returns for a period of time; (ii) provide protection against margin calls (by financing them if necessary (ts 177)); (iii) provide a source of funds to allow the client to take further investment “steps”; and (iv) meet expenses of the plan and fund any extraordinary expenses (ts 188).

85    Storm sometimes suggested action to increase cash reserves. For instance, an investment “step” for a retiree might have meant that the retiree’s cash dam became inadequate to service his or her debt for a two year period if there was no growth in the share market. This was because the “cash” reserve would often include growth as “cash” for retirees, so that a need for real cash required the retiree to sell units to increase real cash reserves. On other occasions, measures were suggested which did not increase cash reserves. For instance, Storm generally recommended dividends be reinvested, rather than placed in the cash dam, and Storm almost always recommended that interest on a margin loan be pre-paid and capitalised to the loan (a practice that was relatively common in the banking and taxation industry: ts 188-189).

5. Presentation of the SOA

86    Once an SOA had been prepared, an adviser would meet with the prospective client for two to three hours to explain the recommendations contained within it. A hard copy of the SOA would be given to the client together with all relevant Product Disclosure Statements.

87    Mr McCulloch described how he was trained to reassure prospective clients at this meeting that Storm’s plan implemented measures designed to ensure that the client had no risk of getting a margin call. He would also ask whether the clients’ personal circumstances had changed (ts 196). The typical process also involved insisting that the client take the SOA home to read it, to flag pages that he or she did not understand, and to raise any questions.

6. Client signs loan documents and investment documentation, and investment is processed

88    Once the prospective client was happy with the SOA, the client would sign the SOA and an Authority to Proceed. Storm advised the client of the selected bank, obtained the documentation, and gave it to the adviser to have it signed by the client.

89    When the documents were signed, Storm sent them to the lenders. Home loan funds would be provided to Storm. Storm’s fees were typically paid from the home loan borrowings. Storm also sent (i) the margin loan security funds and the documents to the margin lender which funded the margin loan, and (ii) a request to purchase units in the relevant index funds to the responsible entities of those funds.

7. Further investment “steps”

90    Storm encouraged each client to act on various volatility movements in the share market, described as “trigger points”. A trigger point would trigger a review of whether the client should be advised to make a further investment. When a client acted on a trigger point or increased his or her investment this was described as a “step”. An updated cash flow was prepared and approved by the cash flow cell, an SOAA was prepared by the SOA cell, and the cash flow cell confirmed the SOAA. Clients might see their advisers to discuss the SOAA.

91    The trigger points were the same for all clients. They applied whether the client was working or retired, young or old. However, the client’s LVR, cash reserves and any large pending expenditure might affect whether Storm recommended the client take a step. A step would generally be recommended when there was a change in the financial market, or a change to the client’s personal circumstances (either where the value of one of their assets increased, or where the client received additional funds like through an inheritance).

92    There were two types of steps recommended by Storm when there was a change in the financial market. First, there was a “build step”, which encouraged further borrowing and further investment as the markets rose. Secondly, there was a “recovery step”, which encouraged further investment if the market had fallen. A rise or a fall in the market of 10% or more from when the client invested would often trigger a recommendation for a further step investment.

“Bulk steps”

93    In May 2007, at the request of Mr Cassimatis, a program was written to identify the additional borrowings and investment to take any particular client to a particular LVR. The program could automatically generate “personalised” SOAAs for a large number of clients. Mr and Mrs Cassimatis initially set the LVR at 56%. This figure was subsequently increased to 58%. Then, in January 2008, it was increased again to about 62%. Mr McCulloch said that no one else had, or was invited to have, any input into that LVR figure.

94    An example of the use of this program to generate “bulk steps” occurred in July 2007. On that occasion a large number of SOAAs (around 1,600) were sent to the advisers to be presented to their clients. If an adviser did not consider that the SOAA should be sent to the client, he or she was required to record in a spreadsheet the reasons for that decision. Mr and Mrs Cassimatis would then decide whether they would send the SOAA directly to the client.

95    Mr McCulloch said that for bulk steps after July 2007 the SOAAs were sent directly to clients by Storm’s head office. Mr McCulloch said that Mrs Cassimatis explained to him that the reason for this change of method was to prevent advisers inappropriately deciding to withhold SOAAs. The evidence of a practice by Storm of sending SOAAs directly to clients even before 2007 was also supported by evidence from Mr Benson from an earlier period. Mr Benson recalled being on holidays in Noosa in December 2006 and being telephoned by about six of his clients who told him that they had received an SOAA directly from Storm’s head office.

96    Mr and Mrs Cassimatis disputed this evidence. They relied upon what was said to be a contradictory response by Mr McCulloch in cross-examination. In cross-examination it had been suggested to Mr McCulloch that he had described “two procedures” for bulk steps in his (very lengthy) affidavit. He was not shown his affidavit, but the two procedures were described to him by cross-examining senior counsel as (i) “where the statements of advice was signed by the advisors individually and given to clients” and (ii) “where the statements of advice were assigned at the head office and given to clients”. Mr McCulloch then replied “Sorry, signed by advisors of their office, and then given to the advisors to give to clients”. He agreed with the proposition that “on both occasions the statements of advice went to the advisors before they went to the clients” (ts 190).

97    I do not consider that Mr McCulloch’s answers to these questions were intended to be absolute. The question did not discriminate between bulk steps before July 2007 and those after 2007. If the whole period were involved then the accurate position is that subsequent bulk steps were sometimes sent by Storm straight to a client, bypassing the adviser. But this did not always occur. An example of when it did occur can be seen in a letter sent from Ms Bock to all advisers asking for information about “clients who should not be included in this mail out” and saying that “we intend to post all recommendation letters from the Townsville office and have them returned directly to Townsville for processing”. Mr McCulloch explained that this type of communication did not happen for every bulk step but rather it occurred because of the Christmas period (ts 190). After 2007 many of the bulk steps were sent directly to the client. Even the 6 November 2007 prospectus offered by Storm provides an example of the common use of bulk steps being sent directly to clients. One passage in the prospectus, pleaded in Mr and Mrs Cassimatis’ defence at [311]-[312] as accurate, and which passage was admitted by ASIC, said that:

Phormula identifies clients with Step Investment opportunities and automatically generates Statements of Additional Advice (“SOAAs”), which are sent to clients to be authorised. Storm efficiently implements this process and is able to generate significant new FLUA [Funds and Liabilities Under Advice] volumes in short periods of time. For example, during the ASX market volatility experienced in July and August 2007, Storm despatched 2,094 SOAAs, of which 1,292 or 62% were authorised by the end of September 2007… (emphasis added).

8. No exit plan

98    The Storm model had no exit strategy for clients. Mr McCulloch said that he heard Mr Cassimatis tell clients that the clients should not aim to redeem their investments but should aim to pass the portfolios and loans onto their beneficiaries, and should consider succession planning for that purpose. Mr Benson said that during his due diligence, Mr Cassimatis told him that a Storm investment was perpetual, without a defined exit point, and the strategy was for the client to draw income from the “cash” reserve for the rest of his or her life.

THE WITNESSES

99    Mr and Mrs Cassimatis did not give evidence. They called no witnesses other than Professor Valentine who gave expert evidence jointly with Mr McMaster.

100    The witnesses for ASIC can be conveniently divided into eight groups as follows:

(1)    the Storm advisers and employees;

(2)    the Part E investors;

(3)    the experts;

(4)    the employees of ASIC;

(5)    Storm’s non-executive directors;

(6)    Storm’s compliance auditors;

(7)    Storm’s IPO advisers; and

(8)    the Aon employees.

101    The evidence of the witnesses in each of those groups (including the pleading concerning the relevant Schedule investors) is summarised below.

(1) The Storm advisers and employees

102    There were six witnesses in this group: Mr Barrett, Ms Davies, Mr Benson, Mr McCulloch, Mr Turvey, and Ms Bock. There were a number of relevant themes in their evidence. Those themes are:

(1)    the control that Mr and Mrs Cassimatis had over Storm;

(2)    the operation of the cash flow worksheets;

(3)    the limited circumstances in which clients were not directed to the Storm model;

(4)    the retention of clients and increase in client investments; and

(5)    the operation of the Storm model.

103    The last of these themes, the operation of the Storm model, has been discussed in detail in the previous section of these reasons. This section briefly summarises the evidence of the witnesses, and then focuses upon the remaining four themes.

A summary of the Storm adviser and employee witnesses

104    Mr Barrett is an accountant who was employed by Storm from April 2007 until January 2009. He was brought in to Storm when Storm was preparing to list on the stock market. His role was to assist in preparing for the IPO and to support the Chief Financial Officer. In 2008, he became the joint Chief Financial Officer.

105    Ms Davies is an accountant who worked for PriceWaterhouseCoopers when Storm was a client. She dealt with Mr and Mrs Cassimatis and Ms Frawley. From the end of 2004, Ms Davies was employed by Storm. She worked in the Townsville office from January 2005 until January 2009. Her roles included Storm’s internal accounting, day to day financial operations, and Mr and Mrs Cassimatis’ personal accounting. Ms Davies was also a member of the Executive Committee from the end of 2004 until July 2006, and then again from March 2007.

106    In 2008, Mr Barrett and Ms Davies became joint Chief Financial Officers of Storm. Mr Barrett focused upon financial accounting and Ms Davies focused upon business management and upon Mr and Mrs Cassimatis’ personal finances. Mr Barrett supervised others in Storm’s finance team, maintained Storm’s financial accounting records and prepared statutory accounts, prepared monthly management accounts and monthly board reports (together with Ms Davies), served on Storm’s Executive Committee, and dealt with the Commonwealth Bank in relation to day to day financial operations. In October or November 2008, after a drop in the market, he and Ms Davies began regularly preparing and providing Mr and Mrs Cassimatis with cash flows for Storm in light of anticipated receipts and expenditures.

107    Mr Benson has been a financial planner since 1990. In late 2004 or early 2005, Mr Benson met with Mr Cassimatis to discuss the prospect of his company (Trevor Benson Investments) becoming an Authorised Representative of Storm. Mr Cassimatis explained the Storm model to Mr Benson. Mr Benson undertook 18 months of due diligence before he agreed. At this time, Trevor Benson Investments had around 2000 clients, all of whom became clients advised under Storm’s AFSL after Trevor Benson Investments became an Authorised Representative.

108    Mr McCulloch is a financial planner. I have already made reference to his background and his impressive evidence in the section of these reasons which considered the Storm model. As I explained, he began working for Storm in 1998 as Storm’s group accountant and took on roles as a senior adviser. After Mr and Mrs Cassimatis, he was a person who was one of the most familiar with the Storm model and operations.

109    Mr Turvey has degrees in business and finance. He worked as an adviser assistant to two of Storm’s Authorised Representatives (Ms Seymour and then Mr Notaras) from July 2004 until April 2007. From April 2007 until early 2008, he was employed by Storm as an adviser assistant. He filed documents, telephoned clients to make appointments, printed documents, and attended meetings. He attended Storm training sessions for advisers and assistants conducted by Mr Cassimatis as well as staff workshops. In 2008, Mr Turvey became the junior member of the cash flow team. He usually prepared his part of the cash flows from the Brisbane office.

110    Ms Bock was employed at Storm’s head office in Townsville from January 2006 until January 2009. She was a most impressive witness. She had an excellent understanding and recall of her work at Storm. Initially Ms Bock worked as a receptionist. But she received general training in Storm’s operations. In February 2006 Ms Bock transferred to Storm’s back office where she processed client paperwork.

111    As Storm grew, the back office was divided into teams which dealt with paperwork for: (i) confirmations; (ii) investment processing; (iii) bank processing/funding; (iv) cash flow input; (v) SOAs; (vi) SOAAs; and (vii) superannuation. Consistently with Storm’s rotation policy, Ms Bock rotated between different areas as she became proficient in each area. Over time, Ms Bock worked in: (i) confirmations; (ii) investment processing; (iii) cash flow input; (iv) SOAAs; and (v) superannuation. After Ms Bock moved into the cash flow cell in early 2007, she prepared thousands of cash flows.

The themes in the evidence of the Storm advisers and employees

112    As I have explained above, there were five key themes in the evidence of the Storm advisers and employees. My conclusions on the remaining four of those themes are set out below.

(1) The control that Mr and Mrs Cassimatis had over Storm

113    In closing submissions, Mr and Mrs Cassimatis said that “[t]he notion that the respondents were responsible for Storm’s operations at a high level is not contested.” Nevertheless, it is necessary to illustrate the extent of their control and the degree to which it permeated through Storm from the highest levels of executive management to even mundane day to day activities. The evidence establishes that Mr and Mrs Cassimatis had knowledge of and an extraordinary degree of control over every aspect of the Storm model and Storm’s operations including the day to day business of Storm even after the company had acquired more than 2,000 clients. This is not said as a criticism. They were managers, directors, and the sole shareholders and it might be thought unsurprising that they exercised a very high degree of control. But it is an important context to understand my conclusions later in these reasons that Mr and Mrs Cassimatis breached their duties including by an assessment of the actions of a reasonable director with their responsibilities. Although there was some evidence of a desire by Mr and Mrs Cassimatis to encourage suggestions, communication, or new ideas, the control that they asserted was extensive to the point that it substantially stifled much possibility of dissent or contradiction, as they would have been aware.

114    First, Mr and Mrs Cassimatis controlled the Executive Committee and the board of Storm.

115    The Executive Committee was established in late 2003. The original members were initially a small group of Storm employees, although in mid-2007 it was expanded to include all Authorised Representatives. Mr McCulloch, Mrs Davies and Mr Barrett all explained that the purpose of the Executive Committee meetings was to work out how to implement the ideas and decisions that Mr and Mrs Cassimatis presented. The meetings typically ran for several hours (ts 173).

116    Mr Barrett and Mr McCulloch described how the meetings, held every few months, were controlled by Mr and Mrs Cassimatis. Mr Cassimatis usually chaired the meetings. If he was away then Mrs Cassimatis was the chair. Executive Committee members did not propose resolutions or vote on issues. Mr and Mrs Cassimatis would inform the Executive Committee of decisions that they had made. They would convey information to members of the Executive Committee, and allocate tasks. There was rarely, if ever, any dissent from committee members. The Executive Committee could make suggestions about how best to implement Mr and Mrs Cassimatis’ decisions but there was rarely any different view expressed. A contrary view never prevailed.

117    In cross-examination, Mr McCulloch was shown the minutes of a meeting on 15 February 2005. The minutes show that on that occasion, the members of the committee were each given a task to set a policy and to prepare an explanation of the policy they wanted Storm to implement. Mr McCulloch explained that the task was set after Mr and Mrs Cassimatis said that everything was being left up to them, and that “there need to be other people in the organisation also making decisions about certain parts of the business” (ts 173). But despite their expressed desire for other people to take on a greater role in making decisions affecting Storm’s business, this did not translate into any significant decision affecting Storm being made without the approval of Mr or Mrs Cassimatis.

118    From 2007, after all Authorised Representatives became members of the committee, Ms Davies observed that many issues such as buying new equipment or appointing new Authorised Representatives were removed from the Executive Committee to the board. Meetings of the Executive Committee became more irregular.

119    As for board meetings, Mrs Cassimatis approved all draft agendas, board papers, and minutes. The minutes were prepared by Ms Davies and presented to Mrs Cassimatis before they were distributed. Mr Benson also could not distribute board papers until Mrs Cassimatis approved them. At board meetings Mr Cassimatis was the chairperson. Issues were raised by Mr and Mrs Cassimatis. The non-executive directors discussed the issues but did not raise new issues. Mr Barrett described those meetings as “information sessions” conducted by Mr and Mrs Cassimatis involving consistently positive information for the independent non-executive directors concerning Storm business and decisions that Mr and Mrs Cassimatis had made. Mr Barrett’s impression, which I accept to be the case, was that the independent non-executive directors were passive at these meetings.

120    Secondly, even apart from management level decisions, Mr and Mrs Cassimatis asserted a high level of control over all aspects of Storm’s finances from the most serious to the most mundane. Mr and Mrs Cassimatis explained to Ms Davies that no one was allowed into the accounting team’s room in the head office without their authority. Although Mr Barrett was the Chief Financial Officer, he could not make any payment, no matter how small, without the approval of Mrs Cassimatis when she was available. And Ms Davies explained that after she joined Storm she became aware that only Mr and Mrs Cassimatis had authority to sign cheques for Storm. At a later stage, other persons were authorised to sign cheques but only when (i) Mr and Mrs Cassimatis were unavailable, and (ii) the cheque could not await their return. When they were out of the office, they usually approved the payment by email or phone. If they were away for a lengthy period of time then Ms Davies was required to provide Mrs Cassimatis with a list of payments that were made. Mr Barrett also gave examples of situations where a credit card was running low and flights needed to be paid. He needed to ask Mrs Cassimatis for a payment of $22,000. Ms Davies described how she prepared a two page cash flow document for Mrs Cassimatis on a weekly basis with information such as current bank balances and compliance issues concerning Storm’s financial services licence.

121    Thirdly, Mr and Mrs Cassimatis had considerable control over the financial advisers and the process for giving advice concerning the Storm model. I have already explained how the SOAs and cash flows were prepared centrally by Storm in a process over which Mr and Mrs Cassimatis had control. As Mr Cassimatis told Mr Benson, the role of an Authorised Representative of Storm was to collect data from clients and to present to them the advice that had been prepared by Storm. Indeed, during Mr Benson’s period of due diligence, Mr and Mrs Cassimatis each said to him that Storm advisers made no decisions but that “our specialists” or “our financial engineers” formulated the content of and prepared all advice to clients, obtained quotes from lenders, and executed recommendations. Further, as Ms Bock said, Mr and Mrs Cassimatis insisted upon approving any advice to a client who did not meet Storm’s mandated investment parameters.

122    Mr Benson gave evidence, which I accept, of one occasion in early 2007 when he thought some of the clients should not take a step. Because of this, he did not send to the clients the SOAAs that had been sent to him from Storm. A few weeks after he had received the SOAAs by email, he was told by someone at Storm Headquarters that not all of the clients who he advised had signed the SOAA. He explained that he did not think some clients should receive the SOAA. Mr Cassimatis subsequently said to him that he should not “assume the advice is not appropriate for the clients, we are the specialists and you should present it as it is sent to you”.

123    Mr and Mrs Cassimatis also set sales targets for Storm. In a number of meetings prior to June 2008, Mr Cassimatis told advisers to consider the ability of their clients to make additional “step” investments so that Storm could achieve its financial targets. In the lead up to the attempted IPO, each of Storm’s offices was also given particular targets to meet, and the company as a whole had a global target. Even after the proposed float in 2007 failed, Mr and Mrs Cassimatis said that they intended to seek to float the company again in 2008 and that it would be necessary to continue to improve on previous financial results. So, as Mr McCulloch said, in 2008 the pressure to achieve sales was even more intense.

124    Fourthly, Mr and Mrs Cassimatis asserted significant control over the education workshops. As Mr McCulloch explained, all changes to the slides had to be approved by Mr and Mrs Cassimatis. And, as I have explained, Mr McCulloch was trained by Mr Cassimatis in what he could say at the education workshops. The same was true of Mr Benson. On the rare occasion when a client of Mr Benson’s could not attend a workshop, Mr Cassimatis allowed Mr Benson to present the workshop content to that client on a one-on-one basis. But Mr Cassimatis made it clear that strict adherence to the slides was necessary and Mr Benson was not authorised to make any changes to the presentation.

125    Fifthly, as I have already explained, Mr and Mrs Cassimatis asserted significant control over the preparation of the cash flows. Mr Cassimatis was the main designer of the spreadsheet and formulae. And, as Mr McCulloch said, Mr and Mrs Cassimatis set the parameters used in the preparation of cash flows and for a number of years nobody other than Mr Cassimatis tested the cash flow modelling (ts 207). Even when some control over the cash flows was relinquished and authority was delegated to Ms Richards, and to a lesser extent Ms Bock and Ms Geissman, Mr and Mrs Cassimatis still approved the cash flows.

126    Delegated authority was closely controlled. Mrs Cassimatis was the head of the cash flow team and had the ultimate authority to sign off on all the documents. Ms Richards reported directly to Mrs Cassimatis. Below Ms Richards was Ms Bock. Ms Richards could sign off on a broader range of documents than Ms Bock, however if a matter fell outside the authority of Ms Richards, Mr or Mrs Cassimatis were the only persons who could authorise the matter. Ms Bock was trained by Mrs Cassimatis. If Ms Bock needed to clarify something on a file she was working on or needed approval, she would report to Ms Richards but occasionally she went directly to Mrs Cassimatis such as when a client or proposed client did not meet required investment parameters.

127    Advisers also had little influence on the content of a new client cash flow. They could make recommendations or suggestions in Phormula (which sometimes occurred) but the cash flow was prepared by the cash flow team and any change to the cash flow needed to be approved by the cash flow team.

128    One matter relied upon by Mr and Mrs Cassimatis was evidence from Mr McCulloch that in a discussion about testing, Mr Cassimatis had suggested that he and Mr George Cassimatis should test “logic” and three others should test the “application” of the model. The distinction was made in the context of the proposed new Phormula system but the distinction was not explained. It might be doubted whether this separate testing occurred but, in any event, I do not accept that the testing by any person apart from Mr Cassimatis extended to testing the operation of the model (and its “logic”) in relation to any investor with characteristics, or similar characteristics, to the class pleaded by ASIC. Mr McCulloch also emphasised that the discussion concerned testing that other parties “should” conduct.

129    Sixthly, as Ms Davies observed, Mr Cassimatis led the presentations to external parties often in the presence of Mrs Cassimatis. Mrs Cassimatis would contribute to the presentations. The presentations given by Mr Cassimatis to external parties, as well as to clients, included the following: (i) education seminars; (ii) update meetings for groups of clients; (iii) meetings where the content of the proposed advice was presented by Mr Cassimatis to the client; (iv) presentations on the Storm model to high profile prospective clients; (v) meetings with external parties such as Macquarie Bank in mid-2006 and the Commonwealth Bank in 2008; (vi) at least one presentation that Ms Davies attended which was to a person who became an Authorised Representative; and (vii) “roadshow” presentations in the lead up to the IPO.

130    Ms Davies also described the content of some of these presentations which followed the standard pattern. She said that Mr Cassimatis explained that he was the person, or architect, who developed Storm’s model. Ms Davies also said that Mr Cassimatis explained how Storm recommended clients to take “steps” when the market had risen or fallen. He used the slides which he told Ms Davies that he had developed over a long period of time. He would explain how clients should embrace debt and not be scared of it.

131    Seventhly, the process of giving advice in an SOA was tightly controlled by Mr and Mrs Cassimatis. Mr McCulloch observed that until 2006 or 2007, every Authorised Representative of Storm was primarily trained by Mr Cassimatis, with Mrs Cassimatis also providing some training in relation to compliance issues. As a general rule, the new Authorised Representative and Mr Cassimatis would present cash flows and SOAs jointly for the first three months.

132    The advisers would not prepare the SOAs that they presented. As I have explained, they were prepared by Storm centrally based upon a template. Mrs Cassimatis was responsible for the changes to the SOA template. Until about 2006, Mr Cassimatis or Mrs Cassimatis approved every SOA. After that, some authority was delegated to a select number of employees. But advisers were not permitted to create or amend an SOA. Mr McCulloch said that whenever he communicated a client’s concern with an aspect of an SOA, Mrs Cassimatis would either reject any change to the advice or would arrange for Mr Cassimatis to present the recommendation to the client.

133    Mr McCulloch also said, and I accept, that Mr and Mrs Cassimatis frequently said words to the effect that the giving of any advice to Storm clients that was inconsistent with the Storm system of advice would not be countenanced. One passage in Storm’s 6 November 2007 prospectus (as pleaded in Mr and Mrs Cassimatis’ defence at [311], and admitted by ASIC) said as follows:

Storm’s client grouping, commoditised advice and centralised administration model enables ERs and ARs to focus on acquiring new clients and building client relationships, allowing them to manage more clients and greater FLUA [Funds and Liabilities Under Advice] volumes.

134    Eighthly, Mr and Mrs Cassimatis developed Storm’s relationship with external bodies. Mr and Mrs Cassimatis issued proposals to the Bank of Queensland to raise capital for the purpose of expanding Storm’s business operations. Mr Cassimatis met with the banks (up to one every month) and would negotiate with the banks about LVRs and the use of investment growth and dividends in assessing loan applications. Mr Cassimatis also had a relationship with entities which were responsible for the index funds into which Storm typically recommended investment, badged as “Storm” funds (ts 165) as well as margin lenders. Indeed, one margin lender agreed to lend 100% value against cash securities, when most margin lenders would only lend 95% (ts 205). Storm was also able to negotiate with the banks a longer period for meeting a margin call and higher buffers (ie the level at which the line to value ratio was allowed to rise above the notional margin call trigger before it actually triggered a margin call) (ts 186). At least in relation to one product, the margin call period was five business days (ts 186).

135    In summary, Mr and Mrs Cassimatis were intimately familiar with, and exerted control over, nearly every aspect of Storm’s operations. Nevertheless, the control was not absolute and there were some, usually less consequential, decisions that were taken by others. This was mainly out of necessity. In cross-examination, Mr McCulloch said that by 2007 to 2008, Storm had offices in a number of different States in Australia, and had over 100 employees. And he said that Mr and Mrs Cassimatis sometimes took holidays (ts 175). For example, in mid-2007 a number of Storm employees including Mr and Mrs Cassimatis went on a trip to the Mediterranean (ts 175). Prior to this trip, Mr McCulloch sent Mr and Mrs Cassimatis a long email explaining the ways in which he could assist to keep the office running smoothly in their absence, including assisting to process pay cheques, hosting workshops and organising for someone to be able to sign Storm’s cheques on a temporary basis. Mr Barrett also accepted that he made some decisions without referring to Mr and Mrs Cassimatis, such as the decision to cancel software training and make a complaint to the training provider, and the decision about the type of credit card obtained for Mrs Cassimatis (ts 78-79).

136    Despite the extraordinary control that Mr and Mrs Cassimatis had over Storm, and despite the lack of dissent about which they were aware, to a limited extent they did encourage some approachability and transparency, and on some occasions they raised the possibility that others might take responsibility for “some” issues. As I have explained, these broad statements did not have much effect. The instances of these statements included in an executive meeting in 2003 when either Mr or Mrs Cassimatis explained that a key goal of Strom was to “retain approachability and transparency across all people within the group”. There was also evidence that, in 2005, Mr and Mrs Cassimatis gave members of the Executive Committee an opportunity to present a “spiel” concerning policy that they would like to see set, including LVR policy. At that meeting Mr or Mrs Cassimatis observed that everything was being left up to them and that other people in the organisation might need to make decisions about “certain parts” of the business.

(2) The operation of the cash flow worksheets

137    In my discussion of the Storm model, I have already explained the operation of cash flow worksheets generally. However, one matter upon which potentially contradictory evidence was given concerned the access which Storm advisers (both Authorised Representatives and Employee Representatives) had to cash flow worksheets.

138    Mr Turvey explained in cross-examination that when he was a member of the cash flow team, he would email Excel spreadsheets to advisers containing a cash flow for the client. However, although the adviser could make changes to the cash flow document, the formulas were removed (ts 439-440). Mr Turvey believed that the reason why the formulas had been removed was so that advisers did not change the cash flow without approval from the cash flow team, especially in front of the client (ts 440).

139    The effect of the removal of the formulae was that if the adviser inputted any information into the cash flow excel worksheet, then the cash flow would not be affected. Only the cell into which the information was inputted would change. It would not be possible from the spreadsheet to consider or investigate the effects of the change upon the rest of the cash flow.

140    Although Mr Turvey said that it was “common knowledge” that most advisers had access to a copy of a cash flow with formulas (ts 440), it is unlikely that the Authorised Representatives would have transposed client information from the client cash flow to the illicit worksheet with the formulas. One reason why this would have been unlikely is that they would have been aware of the tight control asserted by Mr and Mrs Cassimatis over the operations of Storm and they would likely have been aware that formulas had been removed to ensure that control. Another reason is that they were dependent upon the support of Mr and Mrs Cassimatis. It was clear that Mr and Mrs Cassimatis did not want them to have formulas that could result in changed scenarios being presented to clients in the cash flow worksheet. Indeed, in an exhibit to Mr McCulloch’s affidavit he annexed “cash flow notes” from a training session saying:

Cashflow is company IP and must be protected.

Never email cashflows with formulas to clients or [Authorised Representatives].

Cashflows may be emailed when the formulas have been removed from the document (always ask how this is done and have someone check prior to sending).

141    Mr McCulloch, however, gave evidence (which I accept) that although Authorised Representatives could not manipulate the excel spreadsheets, it was possible for Employee Representatives to do so because they were provided with spreadsheets with the formulae. Ms Bock gave the same evidence in her affidavit. Nevertheless, on one occasion when Mr McCulloch amended a cash flow worksheet, he was reprimanded by Mrs Cassimatis. And Mr McCulloch was an employee who had a great deal more trust reposed in him by Mr and Mrs Cassimatis than was reposed in many other employees or Authorised Representatives.

142    An ambiguous part of Mr McCulloch’s evidence was when he said that, at one stage, Mr Cassimatis thought clients would have more faith in the Storm model if they could see the numbers being inputted and manipulated to come up with the cash flow plan (ts 174). Mr McCulloch did not explain which “numbers” an Employee Representative would input and manipulate in front of the client to “come up with a cash flow plan”. What I take Mr McCulloch to mean is that the inputting of numbers would be the same numbers that had been initially contained in the cash flow. This would show the calculations being made.

143    It is possible, but unlikely, that in some cases an Employee Representative might have shown a client how a cash flow might be different based on an additional input which had not been included by the cash flow team in the spreadsheet (such as including expenditure for travel). But an Employee Representative would have avoided this scenario because (i) such an additional input, if confirmed by the client, would have to be sent back for alteration to the cash flow team; (ii) the detail of the cash flows and the control exerted over them by the cash flow team made it clear that Employee Representatives should not experiment in front of the client with scenarios other than those provided in the worksheet (including the viability cash flow which was described in Phormula notes for Mr and Mrs Dodson as the “worst case” scenario); and (iii) the Employee Representatives would likely have been aware that the Strom model encouraged uniformity as much as possible and that the Authorised Representatives were not entitled to have access to spreadsheets with formulae included.

144    To put this another way, an Employee Representative might show the client how the “inputting” of the same numbers provided to the cash flow team into the boxes in the cash flow would cause the cash flow to generate results. But the Employee Representative would not experiment in front of the client with different scenarios (such as inputting new information into the spreadsheet which had not been provided by the cash flow team). As Mr McCulloch explained, both Authorised Representatives and Employee Representatives could suggest to the cash flow team that changes be made to a cash flow arising from information provided by a client or as requested by a client, but they were not permitted to make changes to the cash flow.

(3) The limited circumstances in which clients were not directed to invest using the Storm model

145    There were very few circumstances when clients of Storm were not advised to invest using the Storm model. In some circumstances clients were given additional advice, such as superannuation or insurance advice, but very rarely were clients not advised to invest using the Storm model, on Storm’s conditions. Provided a client accepted Storm’s conditions (the most significant of which were agreeing that the investment was intended for a period of five years or longer and agreeing to one or two of four risk categories), those few circumstances were almost exclusively limited to cases where the client simply had no capacity to borrow necessary funds or where the capacity to borrow was too limited given their need for income. There are numerous reasons why I draw this inference.

146    First, although in cross-examination Mr McCulloch was referred to examples of clients who were not advised to invest in the Storm model, these were people who had no capacity to take any further debt (ts 207). Even if prospective clients had very little ability to obtain sufficient debt, all possible ways were considered to obtain additional debt.

147    A specific example is Mr and Mrs Harvey. Mrs Harvey did not have a job. Although Mr Harvey was working, the Phormula note said that he was expecting to retire immediately. It was observed in their Phormula notes that Mr and Mrs Harvey’s overall income was $46,844 per annum, and their expenses were $44,118 per annum (with 10% margin included). They had a mortgage of $57,000 and a credit card debt of $12,396. Despite Mr Harvey being about to retire and Mr and Mrs Harvey already using almost all their income for expenses, the first note in Phormula was to “look at possibility of using equity from their house along with margin lending” and “see what income they can produce from the plan with $0 contributions”. Ms Geissmann (a member of the cash flow team) then observed in response:

Unfortunately there is little we can do to give these clients a decent income into retirement. They have very little super and no other assets we can leverage off apart from their home but because they are looking to pull an income immediately any investment will not have a growth period in which to consolidate.

148    Nevertheless, Mr and Mrs Harvey were ultimately advised to invest in the Storm model. The Phormula notes said that Macquarie Bank was prepared to lend money to them, but only after they obtained a letter from an independent legal adviser.

149    Secondly, Mr McCulloch explained that he was taught by Mr Cassimatis that one purpose of the education workshops was to introduce potential investors to the concept of borrowing to invest more than they would otherwise be prepared to do. In the workshops Mr Cassimatis would explain that the correct answer to a question about the person who the prospective client should “want to be” was the person who owes $2 billion. These are just two instances which illustrate how Mr and Mrs Cassimatis believed, and the premise of the application of the Storm model was, that clients who could borrow sufficient funds would make money and should invest using the Storm model.

150    Thirdly, as Mr McCulloch explained, Mr Cassimatis was asked by people at institutions on a few occasions why Storm gave all its clients the same advice. Mr McCulloch observed that Mr Cassimatis had a standard response to that question which was to say words to the following effect:

Because essentially everybody has the same need, and that is that they don’t want to be reliant on the pension in retirement. The only way to avoid this is to have a shit- load of capital, and to get that capital they all need debt because there is no other way to acquire shit-loads of capital without debt. That is why debt is an integral part of the Storm model and why we always recommend debt.

151    Fourthly, in a presentation to research analysts dated 11 October 2007, Storm described one of the steps in “client education” as optimising the client’s balance sheet. The slide that explained this described the use of leverage to increase investment capacity and build wealth over time. The first step was to ascertain debt capacity including by refinancing existing property and other assets. The second step was to determine the optimal loan to value ratio. The powerful emphasis was upon determining the extent to which the client had capacity to borrow to invest according to the Storm model rather than to determine whether a client, who might be retired or nearly retired, had sufficient other assets or income for the Storm model to be appropriate.

152    Fifthly, I have already described the evidence of Mr Benson that when he suggested that some Storm clients he was advising should not take a step, Mr Cassimatis subsequently said to him that he should not “assume the advice is not appropriate for the clients, we are the specialists and you should present it as it is sent to you”. This is an illustration of the control that was asserted over advisers and also of the focus of Storm upon applying the Storm model to all those who met Storm’s criteria and who had sufficient capacity to borrow to invest according to the Storm model.

(4) The retention of clients and increase in client investments

153    The final theme in the evidence of the Storm advisers and employees was the manner in which Storm retained clients and increased their investments. As I have explained, there was no exit plan from Storm.

154    As Mr McCulloch explained, Storm had a high rate of retention of clients and its clients were encouraged not to sell their investments as the market fell. Once an investor decided to become involved with the Storm model, there was a powerful emphasis on control remaining with Storm. For instance, as Mr McCulloch explained, one of the education workshop slides (slide 24) referred to “financial subcontractors” of Storm including accountants, real estate agents, fund managers, lenders, solicitors, valuers and insurance providers. In relation to each “subcontractor” on the list, Mr McCulloch learned to say words to the effect of:

If an accountant is needed to be spoken to in relation to the structure of a plan, whether it goes in the personal names, a trust or a company, we will do that negotiation for you. If a valuation is needed, we’ll organise the valuation for you.

155    Mr McCulloch was also taught by Mr Cassimatis to say:

You can deal directly and invest the money directly yourself with a fund manager, but you won’t have the pulling power and the purchasing power that Storm has in obtaining lower fees and terms and conditions for those funds.

156    As I have explained, investors were often encouraged to increase their investment when the market fell more than 10%. I have already referred to the operation of “steps”, including the extraordinary extent to which bulk steps were sometimes taken. The investors were introduced to this process early in the education workshop. Mr McCulloch would reiterate, as he was trained to do, that:

it is very important that you do not be spooked into selling when assets are low or going against what we determine is the long-term trend. That’s why you should listen to the advice of a professional financial planner, who will guide you on a path to making wealth in the long run.

(2) The relevant Part E investors and the relevant Schedule investors

Which investors were proved to be planning for retirement?

157    As I have explained, part of ASIC’s pleaded case was that Mr and Mrs Cassimatis breached their duties as directors in circumstances in which they caused or permitted Storm to provide advice to investors who satisfied five criteria. One of those criteria, which assumed significant importance in the expert evidence, was that the investors were “retired or approaching and planning for retirement”. ASIC pleaded that each of the Part E investors and the Schedule investors satisfied this criterion.

158    Mr and Mrs Cassimatis admitted that the nine Part E investors were retired or approaching and planning for retirement (Defence [246(i)]).

159    Mr and Mrs Cassimatis also admitted that the following Schedule investors were retired at the date of the SOA (Defence [247(c)]):

(1)    Mr Bleakley;

(2)    Ms Knight;

(3)    Mr and Mrs Walker;

(4)    Mr Jones;

(5)    Mr and Mrs Madden;

(6)    Mr McConnell; and

(7)    Mr Schuler (but not Mrs Schuler whom ASIC pleaded was in full time employment).

160    Mr and Mrs Cassimatis then admitted that seventeen other investors were “planning for their retirement at the date of their first SOA”. However, they did not admit that any of the Schedule investors “were retired or approaching and planning for retirement” (Defence [247(d)], [247(e)]). The admission in relation to the seventeen other Schedule investors was only that they were “planning for their retirement” and not that they were approaching retirement. Senior counsel for Mr and Mrs Cassimatis submitted that the admission that Schedule investors were planning for retirement was an admission that this was an objective that they had when they approached Storm, rather than an admission about the imminence of retirement. Hence, he agreed with the example that the admission would encompass a 35-year-old professional who wants to make plans for, say, retirement at 60 (ts 598). This is the plain meaning of Mr and Mrs Cassimatis’ pleading.

161    The plea by Mr and Mrs Cassimatis, objectively construed, involved no admission that the seventeen investors were approaching retirement. Senior counsel for ASIC relied upon expert evidence of Mr McMaster that a person is planning for retirement when there is a short period to plan for retirement, and when changes in the market could affect that person’s situation (ts 560). In his report he consistently referred to “when someone is close to retirement and planning for that event”: [112] (page 36; Mr and Mrs Dodson); [36] (page 126; Ms Longmore); [35] (page 167; Mr and Mrs Sondergeld); and [35] (page 212; Mr and Mrs Higgs) (emphasis added). In cross-examination, Professor Valentine also said that he and Mr McMaster had agreed on “five years as the cut-off” for the period in which a more conservative approach needed to be taken for persons who were close to retirement (ts 385). They had agreed that negative gearing was high risk within a period of five years to retirement (ts 355). I accept these matters, but I do not accept that Mr McMaster’s opinion about when a person is planning for retirement is (i) the only circumstance when people plan for retirement (such as the 35 year old professional), or (ii) relevant to construe the scope of the admission by Mr and Mrs Cassimatis.

162    The conclusion, therefore, must be that ASIC has failed to prove that the seventeen investors who Mr and Mrs Cassimatis admitted were planning for retirement were persons who were also approaching retirement in the sense that retirement was imminent. I treat Mr Schuler in this group because, although he was retired, his wife was not retired and the advice from Storm was given to Mr and Mrs Schuler as a couple. Although Mrs Schuler’s full time income was only $29,000, ASIC’s case was presented by a general focus upon the list of characteristics (including retirement or approaching retirement, and low income) rather than by examination of circumstances which might be closely analogous to those who met all the characteristics.

163    When I raised the issue during closing submissions about the lack of proof that many Schedule investors were retired or approaching retirement, senior counsel for ASIC expressed some understandable exasperation that ASIC’s attempts to confine what would otherwise have been large volumes of evidence might have been thwarted as a consequence of an understanding which evolved during directions hearings that there was little in dispute about the key features of the Schedule investors. However, my conclusion in relation to the seventeen Schedule investors must be understood by reference to two important matters of context.

164    First, the primary case against Mr and Mrs Cassimatis alleged only one breach each. The precise number of breaches by Storm only ever added colour to ASIC’s case. As I ultimately conclude in this case, it does not affect the result as to liability, especially in circumstances in which I do not accept that the Storm model was applied to retirees or near-retirees without the knowledge of Mr and Mrs Cassimatis. The forensic decision by ASIC to plead the details of all of the Schedule investors in very brief form was therefore entirely proper even with the risk, which eventuated, that some aspect might turn out to be disputed.

165    Secondly, as senior counsel for Mr and Mrs Cassimatis submitted, the dispute about “approaching retirement” really only crystallised after the experts met and agreed that negative gearing was a high risk strategy for persons within five years of retirement.

The evidence of the relevant Part E investors and the pleading concerning the relevant Schedule investors

166    None of the Schedule investors gave evidence; their position was summarised in the pleadings and admitted in the respects mentioned above. None of the Part E investors was required for cross-examination. It is sufficient for these reasons, therefore, to consider only those relevant investors who were retail investors and approaching (or at) retirement because they are the relevant investors in relation to whom Storm might have breached its duties.

Mr and Mrs Dodson

167    When Mr and Mrs Dodson were advised by a Storm representative their circumstances were as follows. Mr Dodson was 60 years old. His wife was 55 years old. They had a combined total income before tax of $58,996 per annum which included a double orphan pension of $3,640 per annum. They were the guardians of a girl whose parents had died.

168    In 2003, Mr and Mrs Dodson sold the cake shop that they ran for 18 years. Mr Dodson started night shift work in a job doing security and traffic control. Mrs Dodson worked in aged care. They had saved superannuation, and had an investment with a Colonial managed fund, with a combined total of just over $300,000. After expenses plus 10%, they had $9,410 surplus funds each year. They owned their own home which was worth around $460,000. They had lived there for 27 years. Mr Dodson had a heart condition. They wanted to travel in retirement. Storm understood that he and his wife were “preparing for retirement in a few years”.

169    Mr and Mrs Dodson had limited investment experience. They had owned residential property and had units in the Colonial fund but they had never owned shares or investment property and had never had a margin loan.

170    In 2003, Mr and Mrs Dodson met the fund manager for the girl for whom they were guardians, Mr Fullerton-Smith. He had managed the girl’s funds following the death of her father. In the second half of 2007, Mr and Mrs Dodson discussed with Mr Fullerton-Smith the prospect of investing in the Storm model. Mr Fullerton-Smith became their Storm adviser.

171    Mr and Mrs Dodson attended the education workshop. After that, Mr Fullerton-Smith prepared a Confidential Financial Profile which Mr and Mrs Dodson signed. Their Confidential Financial Profile described their objectives as:

To live self-sufficiently and be happy until the day you die.

Travel in retirement.

172    Mrs Dodson also initialled the option on page 22 under the heading “Personal Profile” which said:

I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated.

173    In November 2007, Mr and Mrs Dodson received advice from Storm in an SOA. In internal communications on Phormula, Storm officers had considered advising Mr and Mrs Dodson to take an 80% mortgage over their home but had concluded that:

I am not sure if they will get an 80% lend so have assumed 60% against the home (this can be adjusted if need be) plus some margin lending for an investment of $315K.

174    Mr and Mrs Dodson were advised: (i) to borrow $276,000 from the Bank of Queensland to invest in indexed funds; (ii) to borrow $90,000 against that investment as a margin loan from Colonial Margin Lending, using their existing Colonial managed funds worth approximately $65,000 as security for their margin loan; and (iii) with the debt of $386,000 to obtain an investment of $315,000 in indexed funds, and reserves of approximately $21,000 in the Macquarie Investment Management Limited Cash Management Trust. The remainder, $26,960, was to be paid to Storm for its fees.

175    The investment by the Dodsons in indexed funds was ultimately as follows:

(1)    $222,000 in the Storm Australian Industrials Indexed Trust;

(2)    $105,000 in the Storm Australian Resources Indexed Trust; and

(3)    $18,000 in the Storm Australian Technology Indexed Trust.

176    Mr and Mrs Dodson accepted Storm’s recommendation. They deposited $500 per month into the Macquarie Cash Management Account. All of the interest payments from the loans were paid out of the Macquarie Cash Management Account or the interest was capitalised.

177    On 18 April 2008, Mr and Mrs Dodson received an SOAA from Storm. The SOAA recommended that they borrow an additional $53,994 from their existing margin loan with Colonial Margin Lending and use the borrowed funds to:

(1)    invest $2,000 in the Storm Australian Technology Indexed Trust;

(2)    invest $36,000 in the Storm Australian Industrials Indexed Trust;

(3)    invest $12,000 in the Storm Australian Resources Indexed Trust; and

(4)    pay Storm’s fees of $3,994.

178    They accepted that recommendation and signed the documents provided by Storm.

179    On 5 September 2008, shortly before the full impact of the GFC, Mr and Mrs Dodson received another SOAA from Storm which recommended that they borrow an additional $10,000 from their existing Colonial Margin Loan and deposit the additional borrowed funds into their Macquarie Cash Management Trust Account to build cash reserves. They accepted Storm’s recommendation.

180    On 8 October 2008 and 21 October 2008, Storm wrote to Mr and Mrs Dodson in relation to what Storm described on 21 October 2008 as “what is proving to be unprecedented world events”, namely the GFC. Storm advised them switch up to 100% of their portfolios out of shares and into cash. They accepted Storm’s recommendation.

181    In January 2009 Storm went into voluntary administration.

182    Prior to investing with Storm, Mr and Mrs Dodson owned their own home. They had a Colonial investment and superannuation totalling $300,000. They had no substantial debt. Mr and Mrs Dodson now have a home loan on their house of $287,000 (with an offset of $197,000), a line of credit drawn to $32,000, and no Colonial investment. Neither has been able to retire. Mr Dodson continues to work as a casual security officer and Mrs Dodson continues to work as an aged care worker.

Mr and Mrs Herd (Part E investors)

183    Mr and Mrs Herd were married for 54 years. Until they retired in 1992, Mr Herd was a school principal, and Mrs Herd was a teacher. For the decade after they retired, Mr and Mrs Herd relied solely on their superannuation funds and part pension as a source of income.

184    Immediately before investing with Storm, Mr and Mrs Herd had a combined income of approximately $39,000 which was their aged pension, investments and dividends. They were debt free. Mr and Mrs Herd had concerns about their declining financial base.

185    In August 2007, Mr and Mrs Herd invested with Storm. In their Confidential Financial Profile, Storm estimated their assets to be $689,879. They had no liabilities.

186    Mr and Mrs Herd had limited borrowing or investment experience prior to becoming clients of Storm. They had owned a residential and investment property (for which they had borrowed money), but had never owned shares or units in a managed fund and had never had a margin loan.

187    In mid-2006, Mr and Mrs Herd were contacted by Mr O’Brien, a Storm representative who invited them to attend a Storm workshop in the Redcliffe area. Mr Herd recalled that the presentation was about how investors could make money from borrowing funds against their assets. Mrs Herd remembered how the speakers had talked about “good debt and bad debt”, about “using money to make money” and that a good way of achieving success was to use the equity in the home to borrow funds. Mrs Herd also remembered being shown lots of facts, figures and graphs.

188    Between mid-2006 and November 2006, Mr and Mrs Herd attended at least two further meetings with Mr O’Brien. They provided him with information for their Confidential Financial Profile which described their objectives as:

To increase my retirement income.

189    They described their risk profile as:

I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated.

190    Mr and Mrs Herd accepted Storm’s SOA recommendations. They signed each of the documents provided by Storm. Storm recommended that Mr and Mrs Herd:

(1)    borrow $222,000 from the ANZ Bank and $240,000 as margin loan from Macquarie;

(2)    cash out $152,000 from existing allocated pension polices;

(3)    use these funds to invest $525,000 in the Storm index funds and to pay Storm’s fees of $41,793; and

(4)    use their home, valued at approximately $480,000, as security for the loan from the ANZ bank and the margin loan from Macquarie Margin Lending.

191    On 20 March 2007, Mr and Mrs Herd were given an SOAA which recommended that they (i) borrow an additional $53,719 from Macquarie, and (ii) use the borrowings to invest $50,000 in the Storm index/trust funds and to pay Storm’s fees of $3,719. They accepted the recommendations.

192    On 16 July 2007, Storm sent Mr and Mrs Herd a second SOAA making the same recommendations again to borrow an additional $53,719 from Macquarie, and to use the borrowings to invest $50,000 in the Storm index/trust funds and to pay Storm’s fees of $3,719. Again, they accepted the recommendations.

193    On 17 August 2007, Storm sent Mr and Mrs Herd a third SOAA which recommended that they (i) borrow an additional $74,009 from Macquarie; (ii) use $69,000 of the borrowings to invest into existing investment funds; and (iii) use the remainder to pay Storm’s fees of $5,009. Again, they accepted the recommendations.

194    On 20 October 2007, Storm sent Mr and Mrs Herd a fourth SOAA which recommended that they:

(1)    redeem $20,000 of their investment in Storm index/trust funds;

(2)    deposit the funds into their cash reserve; and

(3)    replace the withdrawn funds by borrowing an additional $20,000 from their existing margin loan with Macquarie to invest in Storm index/trust funds.

195    In late 2007, Storm also recommended that Mr and Mrs Herd refinance their home loan from ANZ to NAB and increase the amount of their home loan from the $220,000 to $304,000. They accepted this recommendation.

196    On 29 July 2008, Storm advised Mr and Mrs Herd that their margin loan was in buffer at 81.66%. Storm recommended that they link $25,000 of the funds from their cash reserve to their margin loan. Mr and Mrs Herd accepted Storm’s recommendation.

197    On 8 October 2008, following the GFC, Storm recommended that Mr and Mrs Herd switch up to 100% of their portfolio out of equities and into cash, and obtain a refund of pre-paid interest. In a second letter on the same date, Storm recommended that Mr and Mrs Herd switch up to 50% out of equities and into cash. Mr and Mrs Herd did not speak to anyone from Storm about the letters. They accepted Storm’s recommendations by signing the letters. At no time did Mr Herd receive any advice about a margin call.

198    Mr and Mrs Herd had no specific recollection of closing out their investments in the Storm index funds. Initially they were unaware that most of their Storm index funds were redeemed to cash and deposited in their cash reserve account. In December 2009, they redeemed their remaining investments and deposited the funds in their bank account. They received less than $10,000 for the redemption. When they closed their margin loan account they were charged a break fee of approximately $10,000.

199    Mr and Mrs Herd were unable to meet repayment obligations on their home. They sold their home in around July 2009 for $483,000. The proceeds of the sale went to paying off their NAB home loan debt. The remaining proceeds were deposited in their bank account.

200    Before Mr and Mrs Herd invested with Storm, they had a comfortable life. Subsequently, they relied on the charity of their family, and had had to give away or sell their possessions at well below cost. They moved in to a house in Caboolture which they purchased with their remaining savings. They used their full age pension for day to day living expenses.

201    On 31 October 2014, Mr Herd died from a heart attack. He was 77 years old.

Mr and Mrs Higgs (Part E investors)

202    Mr and Mrs Higgs have been married for 41 years. Mr Higgs is 65 years old and Mrs Higgs is 61 years old. On 1 April 2004, Mr Higgs retired from paid employment because of disability. He was receiving an income protection insurance payment for this disability.

203    In April 2006, Mr and Mrs Higgs first invested with Storm. Storm estimated their assets at $655,268 and their liabilities at $84,350. They had a combined income of approximately $79,000 per annum.

204    Mr and Mrs Higgs had limited borrowing and investing experience prior to becoming clients of Storm. They had owned residential properties (for which they had borrowed money), but had never owned an investment property, had never owned shares, and had never owned units in a managed fund or an indexed fund.

205    After becoming acquainted with Storm, in early 2006 Mr and Mrs Higgs attended a Storm workshop, which they described as an “information evening”. Subsequently they met with a Storm representative, Ms Frawley. They provided her with information from which their Confidential Financial Profile was produced. It described their objectives as:

Work a plan given Ray is now on IP benefits.

To derive an income and not be dependent on work.

To live self-sufficiently and be happy until the day you die.

To be tax effective.

Retirement planning.

Holiday to Tasmania.

Build a small blacksmith play room shop.

206    Although I am satisfied that they did tick the box on the page they initialled, they did not recall ticking that box, which said:

I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated.

207    On 31 March 2006, Storm provided Mr and Mrs Higgs with an SOA which recommended that they:

(1)    extinguish private debt;

(2)    borrow $320,000 from Bank of Queensland;

(3)    borrow $20,000 from Macquarie Margin Lending;

(4)    use the borrowed funds to:

(a)    invest $300,000 in the three Storm Australian Indexed Trusts;

(b)    pay $17,000 into a cash reserve account; and

(c)    pay Storm’s fees of $22,789.

208    Mr and Mrs Higgs instructed Storm to proceed with the recommendation. However, before the investment was implemented, on 5 May 2006 Storm amended the SOA. The amendment was made because their property was valued lower than expected and their amended bank loan was for $304,000 rather than $320,000. So the amended recommendation was that they:

(1)    borrow $304,000 from Bank of Queensland;

(2)    borrow $35,000 from Macquarie Margin Lending;

(3)    use the borrowed funds to:

(a)    invest $15,000 in the Storm Australian Technology Indexed Trust;

(b)    invest $200,000 in the Storm Australian Industrials Indexed Trust;

(c)    invest $85,000 in the Storm Australian Resources Indexed Trust; and

(d)    pay approximately $13,000 into a Macquarie Cash Management Account.

209    Mr and Mrs Higgs accepted the recommendation and signed the documents for Storm. They did not receive any other financial or legal advice other than the advice from Storm. Storm made all of the arrangements.

210    All of the interest payments from the loans which Storm arranged and which related to investment in the Storm indexed funds were paid out of the cash reserve account or capitalised.

211    On 29 November 2006, Storm sent Mr and Mrs Higgs an SOAA which recommended that they borrow an additional $107,437 from their margin lender to invest $100,000 in the Storm index funds and pay Storm’s fees of $7,437. Mr and Mrs Higgs accepted the recommendation.

212    On 5 March 2007, Storm sent Mr and Mrs Higgs a second SOAA. Storm recommended that they borrow an additional $53,719 from their margin lender to invest another $50,000 in the Storm Australian Indexes and pay Storm’s fees of $3,719. Again, Mr and Mrs Higgs accepted Storm’s recommendation.

213    On 8 May 2007, Storm sent Mr and Mrs Higgs a third SOAA. This time Storm recommended that they borrow an additional $31,815 from their margin lender to invest another $30,000 in the Storm Australian Indexes and pay Storm’s fees of $1,815. Storm also recommended that they capitalise interest payments on their margin loan and redeem $5,000 from one of the Storm indexes (the Australian Industrials Indexed Trust) to deposit in their cash reserve account. Shortly afterwards, Storm also advised Mr and Mrs Higgs to capitalise their prepaid interest. Again, Mr and Mrs Higgs accepted Storm’s recommendation.

214    On 30 July 2007, Storm sent Mr and Mrs Higgs a fourth SOAA. Storm recommended that Mr and Mrs Higgs borrow an additional $48,267 from their margin lender to invest $45,000 in the Storm Australian Indexes and pay Storm’s fees of $3,267. Yet again, Mr and Mrs Higgs accepted Storm’s recommendation.

215    On 17 August 2007, Storm sent Mr and Mrs Higgs a fifth SOAA recommending that they borrow an additional $56,848 from their margin lender to invest $53,000 in the Storm Australian Indexes and pay Storm’s fees of $3,848. Once again, Mr and Mrs Higgs signed the documents and Storm’s recommendation was implemented.

216    On 19 December 2007, Storm sent a sixth SOAA to Mr and Mrs Higgs recommending that they borrow an additional $37,599 from their margin lender to invest $35,000 in the Storm Australian Indexes and pay Storm’s fees of $2,599. Again, Storm’s recommendation was accepted.

217    On 22 January 2008, Storm sent a seventh SOAA to Mr and Mrs Higgs recommending that they borrow an additional $21,485 from their margin lender to invest $20,000 in the Storm Australian Indexes and pay Storm’s fees of $1,485. Shortly afterwards, Storm also advised Mr and Mrs Higgs to capitalise their prepaid interest. Storm’s recommendations were accepted.

218    On 28 July 2008, as the GFC hit, Storm wrote to Mr and Mrs Higgs recommending that they redeem $45,000 from the Storm Resources index and deposit it into their cash reserve account with $15,000 linked as security for the margin loan. Mr and Mrs Higgs signed the letter and authorised this change.

219    On 8 October 2008, Storm then advised Mr and Mr Higgs to switch up to 100% of their portfolio out of equities and into cash and obtain a refund of any remaining interest prepaid. As usual they accepted the recommendation.

220    On 19 January 2009, after Storm had gone into administration, Mr and Mrs Higgs received a letter from Macquarie Bank Limited demanding their margin loan be repaid by 31 March 2009. Mr and Mrs Higgs paid out the margin loan using funds from their cash reserve account.

221    Ultimately, Mr and Mrs Higgs lost $420,450 as a consequence of investing in Storm:

(1)    lost superannuation of approximately $80,500;

(2)    lost monthly contribution amounts which were deposited into the Macquarie Cash Management Trust account of approximately $37,950; and

(3)    owing the Bank of Queensland approximately $302,000.

222    In order to meet repayments on their Bank of Queensland investment home loan of $302,000 (which they pre-pay approximately $20,000 of interest per year), Mr Higgs has returned to paid work despite his health problems.

223    Mr and Mrs Higgs put their home on the market but they have been unable to sell it. Despite his disability, Mr Higgs commenced working as a self-employed environmental inspector. He is unsure how long he will be able to maintain employment. But without his income Mr and Mrs Higgs will be unable to meet their loan repayments.

Ms Knight, Mr and Mrs Madden, and Mr and Mrs Walker (Schedule investors)

224    ASIC made the sensible forensic decision not to call evidence or plead all of the circumstances of each of Ms Knight, Mr and Mrs Madden, and Mr and Mrs Walker. Their circumstances were pleaded in a Schedule to the statement of claim which was the subject of some admissions.

225    Mr and Mrs Cassimatis admitted that each of these five Schedule investors:

(1)    were clients of Storm;

(2)    were retired;

(3)    had little or limited income (as described below);

(4)    had few assets (as described below); and

(5)    had little or no prospect of rebuilding their financial position in the event of suffering significant loss.

226    As for Ms Knight, she was 64 years old and had an annual income of $18,520 at the date of the initial SOA. There was a dispute between the parties about the amount of her initial SOA and investment but, on any view, it was less than $70,000. There was also dispute about the final amount of her investment and borrowings but, again, it was common ground that those amounts were between $250,000 and $300,000.

227    As for Mr and Mrs Madden, Mr Madden was 61 years old and Mrs Madden was 60 years old at the date of the initial SOA. They had an income of $43,348. The final value of their investment, which was also the amount they were advised to invest in their SOA, was $467,000, with borrowings of $349,000. Mr and Mrs Madden were never advised to take step investments ([19] Defence; [8(a)] Reply).

228    Although Mr and Mrs Cassimatis admitted that Mr and Mrs Madden were clients of Storm, in their closing submissions Mr and Mrs Cassimatis said that the Maddens were “not a client of Storm, but a client of Victorian Families Pty Ltd, which operated under a different ASFL”. No evidence was tendered by Mr and Mrs Cassimatis in support of this submission. No application was made by Mr and Mrs Cassimatis for leave to withdraw their admission that Mr and Mrs Madden were clients of Storm: see Turner & Townsend Pty Ltd v Berry [2012] FCA 111 [14] (Jagot J). ASIC relied on this admission, together with others in relation to the Schedule generally, in its forensic decision not to call masses of evidence in relation to the many Schedule investors. ASIC also referred to some matters which might have supported Mr and Mrs Madden being clients of Storm, including their authorisation for the dispersal of funds in accordance with the advice they had received, including a payment to Storm of the fees for that advice, and a letter signed by Mr Cassimatis to Mr and Mrs Madden on 8 October 2008 advising them to switch their investment to cash. However, none of these matters was the subject of evidence, presumably because Mr and Mrs Cassimatis did not seek leave to withdraw their admission.

229    As for Mr and Mrs Walker, Mr Walker was 70 years old and Mrs Walker was 68 years old. They had an income of $39,385. The final value of their investment was $1,039,000, and the final value of their borrowings was $929,110.

(3) The experts

The expertise of the two experts

230    The two experts who gave evidence were Mr McMaster and Professor Valentine. Mr McMaster’s position as Adjunct Professor at the College of Business at Victoria University concluded recently. Professor Valentine is currently the Visiting Professor of Finance at Macquarie University. It is unnecessary to delve into the considerable detail of the curricula vitäe of the two experts. It suffices to say that both have been involved in the teaching and practice of applied finance at a number of universities. Both are prolific authors. Both have consulted with industry. The two experts expressed their opinions on matters during the relevant period of 31 March 2006 until 5 September 2008.

The credibility and reliability of the two experts

231    Mr McMaster was an extremely impressive expert. He was thoughtful and his views were generally crystal clear. He conceded points and, on the few occasions he had made minor errors, he immediately acknowledged those errors. On occasion, however, Mr McMaster’s even-handed, independent, and impartial approach caused him to agree that a proposition was reasonable even though there was ambiguity in the proposition. For instance, he was taken to a statement in a report by the Productivity Commission that housing could be viewed as an investment good (ts 268-269). The report was the December 2015 Productivity Commission Research Paper entitled Housing Decisions of Older Australians. At page 44 of the report the Productivity Commission explained that there are several mechanisms for drawing on housing wealth in old age. These include: (i) selling the house in whole or in part; (ii) renting out the home; and (iii) drawing down equity using a financial equity release product. Mr McMaster then agreed with the proposition of Professor Valentine that housing could be viewed as an investment asset. But there is ambiguity in this agreement and it should not be taken as agreement that the family home could appropriately be used as a source for borrowing in retirement (or near-retirement) for investment in the share market. Nor was Mr McMaster’s evidence a concession that it was appropriate to include the family home as an asset in an investment portfolio. Even Professor Valentine conceded that there was no suggestion in the report that a mechanism involved “borrowing and gearing against their home to invest in the share market” (ts 366).

232    In contrast with Mr McMaster, Professor Valentine was not an impressive expert witness. I have no doubt that he is extremely knowledgeable in the area of finance. There were also areas where his evidence explained points that had not previously been clear. Although each issue in dispute must be assessed on its merits and in light of all the evidence, in general I am not prepared to accept Professor Valentine’s evidence on matters in dispute without great caution. This is for six reasons.

233    First, Professor Valentine’s preparation for his written report was less than thorough. This is not said by way of criticism although it does diminish Professor Valentine’s reliability. As Professor Valentine said, his report was prepared “in a very short period of time” (ts 388). He said that he did not see the documents which contained each investor’s risk profiles (ts 374). Those documents were the Confidential Financial Profiles of the investors. They were exhibited to the affidavits sworn by the Part E investors.

234    Secondly, Professor Valentine’s oral evidence oscillated, sometimes on important details. This was, perhaps, due to the little time that he was given to prepare for the hearing. An example to which ASIC referred was the switch by Professor Valentine, within only two pages of transcript, from describing the Part E investors as “loss averse” to describing them as “Balanced investors” (ts 372-374).

235    Thirdly, Professor Valentine had previously been involved with the issues about which the proceeding was concerned and was committed to the Storm model in a manner which impaired his ability to assess it independently. Professor Valentine said that he actively promoted the Storm model as long ago as 1999 and was in court “actively promoting it” (ts 412).

236    This approach was evident from the defensive and sometimes remarkable positions that he took in giving oral evidence. An example was when Professor Valentine was confronted in cross-examination with evidence that Mr and Mrs Dodson intended to retire in a few years. He queried what was meant by a “few” and suggested that it was “obvious” that Mrs Dodson had ten years before retirement. He said that the adviser should have said “three” if that was what he or she was thinking (ts 376-377).

237    Fourthly, Professor Valentine was not impartial in relation to the issues with which the litigation was concerned, nor in relation to the respondents themselves. He had previously allowed Mr and Mrs Cassimatis to use his name in promotional material for Storm (ts 413). He had spoken to investors who were considering the Storm model (ts 413). He had accepted an invitation to become a non-executive director of Storm, although that invitation was later withdrawn when the IPO did not proceed (ts 417). And he had provided training to Storm staff (ts 414).

238    Fifthly, there were concerning matters about Professor Valentine’s evidence which involved his willingness to support the position of Mr and Mrs Cassimatis, without necessarily assessing all of the evidence.

239    One example of this was a report that Professor Valentine prepared for Storm concerning a complaint made by a client. Mrs Cassimatis had told Professor Valentine that the “client is deceased and his estate’s solicitor is trying it on, we feel”. Professor Valentine had not seen the advice upon which the complaint was based. But nevertheless he concluded that the solicitors were at fault by deciding to liquidate the portfolio (ts 416). Whether or not his conclusion was correct, it is surprising that it was expressed in strong terms (“There is no merit in this complaint”) without having seen the advice given by Storm to the client.

240    Another example that is of some concern in light of all of the matters I have discussed was that Professor Valentine chose to send a draft copy of the joint report to the solicitors who instructed him before he signed the report. He said that he thought that solicitors wanted to see the joint report because “solicitors do tend to attempt to fiddle with things like that” and “[b]ecause they may feel that it’s not as favourable to their client as they would like it to be” (ts 420). He described the solicitors for Mr and Mrs Cassimatis as “my solicitors” (ts 420).

241    Sixthly, at points in Professor Valentine’s report he selectively quoted from material. One example of this was his choice of quotations from a report by the Productivity Commission. He quoted from passages including the following:

In recent years, much has been written about the improved wellbeing and benefits for older Australians if they made greater use of the equity in their family home to supplement their retirement incomes. While there are several ways of drawing on housing wealth, proponents of this argument often advocate using financial equity release products (page 23).

A house is also a durable good and home ownership can be a significant investment decision and ultimately a major source of a household’s wealth. (Page 40)

Housing can be viewed as an investment good: a store of wealth that can be used as a source of income to fund retirement or leave bequests for future generations (page 51).

242    Professor Valentine then went on to say that “given that equity in the family home can be a source of retirement income, why not begin to access it before retirement?”

243    However, although he quoted from page 23 of the Productivity Commission report, Professor Valentine did not refer to all of the relevant passages on page 23. On the same page the Commission said this (emphasis added):

Setting aside the potentially valid precautionary and bequest motives for not drawing on housing wealth, there is some basis to those claims. However, there are limits to the scope for using home wealth to supplement incomes in old age, and financial products to facilitate such home equity withdrawal are not necessarily attractive for their intended demographic.

244    For these six reasons, as well as my overall assessment of Professor Valentine and Mr McMaster, I am not generally prepared to accept Professor Valentine’s evidence on matters where he and Mr McMaster were in dispute without extreme caution.

The two essential issues upon which expert evidence was given

245    Although the experts canvassed a wide range of sub-topics, my discussion below considers their evidence in the context of the two primary matters in dispute to which the expert evidence was directed. These related to s 945A of the Corporations Act which is considered later in these reasons.

246    The first issue was whether, having regard to information obtained from the relevant client about his or her personal circumstances, Storm gave such consideration to, and conducted such investigation of, the subject matter of the advice as was reasonable in all of the circumstances. The second issue was whether the advice was appropriate to the client, having regard to that reasonable consideration and investigation.

(1) Consideration and investigation of the subject matter of Storm’s advice

247    Mr McMaster gave up to 12 reasons for different investors, explaining why Storm did not give consideration to, or conduct such investigation of, the subject matter of the advice as was reasonable in the circumstances. ASIC relied upon his evidence but only asserted six categories of unreasonableness (some of which combined matters which Mr McMaster had separated).

248    One of ASIC’s six categories of reason was that Storm had incorrectly classified the Part E investors as “Balanced” investors rather than “Conservative” investors. I consider that matter in the context of the subsequent issue which is whether Storm’s advice was appropriate. Although I conclude that the investors were manifestly Conservative investors, this conclusion of clear error does not necessarily mean that there had been a failure to give reasonable consideration and investigation of the circumstances. I am not satisfied that ASIC has proved that Storm was unreasonable in relation to its investigation of, and consideration given to, the investors’ risk profiles. In particular, I do not consider that the investigation was unreasonable. As to whether the consideration was unreasonable, ASIC did not submit that an inference of unreasonable lack of consideration (rather than merely an error) could be drawn simply from the erroneous conclusion that was reached in each case that the investor was a “Balanced” investor.

249    Another of the categories upon which ASIC relied for its claim of lack of reasonable consideration and investigation of the subject matter of the advice was Storm’s inclusion of the family home as an asset in the investor’s portfolio. As I explain in the subsequent section of these reasons, the use of the family home in this way made the advice “inappropriate”. But there is a difference between an unreasonable assumption (which leads to inappropriate advice) and a lack of reasonable consideration and investigation of the subject matter of the advice. The use of the family home as an asset in the investors’ portfolios was the former, not the latter.

250    As for the other four categories of reason relied upon by ASIC, for the reasons below I accept each category as an independent basis which would have been sufficient by itself for the conclusion of unreasonableness within the terms of s 945A(1)(b). Those categories are considered below in relation to Mr and Mrs Dodson. However, as I explain at the conclusion of this section, they apply equally to the other Part E investors as well as to the Schedule investors who met the five ASIC criteria, including that they had limited income and that they were approaching retirement.

251    First, Storm did not give reasonable consideration to, or conduct reasonable investigation of, alternative investment strategies for those Part E and relevant Schedule investors who were retired or who were approaching retirement. Although investors were often advised to see other financial advisers who might have advised on other financial possibilities, Storm was still required to give reasonable consideration to, and conduct reasonable investigation of, alternative investment strategies for those investors who had limited income. Their circumstances required additional consideration of options beyond the generalised Storm model. In relation to Mr and Mrs Dodson, as Mr McMaster said (footnotes omitted):

Mr & Mrs Dodson were relying on a relatively small amount of capital to provide them with income for the rest of their lives. They could not afford to take high risk but the strategy of borrowing to invest and concentrating their leveraged investments in the share market was a high risk strategy.

252    As Mr McMaster explained, the high risk arose because the inherent volatility of the share market created a risk of negative returns in early years which was magnified by the use of debt. In contrast, there were a number of alternative strategies that should reasonably have been considered and investigated by Storm. One of those was taking a small loan for any travel (ts 339). Another possibility was investing their excess income into superannuation. A third possibility was taking out a reverse mortgage over their residence (ts 397). Indeed, on a number of occasions Professor Valentine referred to this third strategy of releasing the equity in a home by a home equity loan or a reverse mortgage.

253    The inference I draw from the evidence is that none of these options was reasonably considered or investigated. One reason for this inference is the absence of any mention of any of these alternatives in the SOA. Mr Cashel’s evidence, which I accept was the industry view, was that there had always been an obligation on an adviser to advise on alternative strategies. He said that it was not uncommon for an adviser to say in the SOA what the alternatives were and why one alternative was not advised (ts 488). At the very least this should be done in working papers. However, as Mr and Mrs Cassimatis had been informed, and as I explain later in these reasons, from 2005 (and certainly not later than 2007) any alternative strategies considered should have been contained in the SOA. An SOA should also have contained the “pros and cons” of each alternative.

254    Another reason for this inference is the powerful emphasis upon, and ubiquity of, the Storm model for clients. Mr McCulloch, who was an impressive witness and whose evidence I accept, explained that Mr and Mrs Cassimatis frequently said words to the effect that the giving of any advice to Storm clients that was inconsistent with the Storm system of advice would not be countenanced. Mr McCulloch, with his vast exposure to Storm and its clients, was also unaware of any investment client who was not advised to purchase units in index share funds. Mr McCulloch explained how he was taught by Mr Cassimatis to say things to prospective clients at education workshops including that Storm was not a traditional financial planner and specialised in one area of client advice, that being advice about investing in indexed share funds.

255    The only limited consideration that was occasionally given to other alternatives for the relevant investors concerned superannuation products. But although Storm also gave advice on occasion on insurance and gave generic tax advice, that consideration and recommendation was not usual. And it was not sufficient for the discharge of Storm’s s 945A obligations in relation to the relevant investors.

256    Mr and Mrs Cassimatis pointed to a number of matters to support a submission that such advice was not rare. They pointed to superannuation and insurance experts that Storm hired (such as Ms Millar: ts 444); the evidence of Ms Bock and Mr McCulloch that Storm gave superannuation advice; and advice given to Mr and Mrs Sondergeld. It is necessary to understand these matters in the context of all of the evidence.

257    Evidence was given by Mr Turvey of a statement he made to an adviser:

…I note that clients have chosen 1-4 year investment time horizon in the [Confidential Financial Profile]. As you know, 5-7 year time horizon is the minimum term we’re willing to look at recommend any type of geared strategy for. Please discuss with client and let me know the outcome. I will need that page of the [Confidential Financial Profile] altered & re-initialled. If you can’t get them to agree, we can treat them as a “classic” client, and I will pass this onto Kerry Millar.

258    In other words, the exceptional circumstance was to treat a client as a “classic client” and not to apply the Storm model. This exceptional circumstance might have arisen if the client would not agree to a different time horizon. However, Mr Turvey said that he was never involved with a client who was referred to Ms Millar (ts 445). And, as I have said, Mr McCulloch was not aware of any investment client who was not advised to purchase units in index funds.

259    As for Mr McCulloch, when he was asked whether Storm gave advice on superannuation he appeared to be surprised. He agreed that advice was given on a variety of issues but he did not say what the variety was, nor did he say whether that variety departed from the template type of advice given in the SOAs based on the Storm model. Nor did he expressly agree that superannuation was one of those issues (ts 164).

260    The evidence of Ms Bock was that although “there were exceptions” to advice being given to invest in a geared fund, generally Storm gave that recommendation (ts 137). Ms Bock did not say what the exceptions were, but she said that the general advice from the superannuation team when a matter was referred to them for consideration was to invest in a Storm backed (internally) geared superannuation fund (ts 137). It is very unlikely that serious consideration was given by advisers to recommend investment in these superannuation products in the case of the retired or near-retired Part E or Schedule investors instead of a Storm model investment. For instance, although Mr and Mrs Sondergeld were given advice on 21 June 2004 to roll over their superannuation into a superannuation fund which had 100% exposure to shares, this was (i) when they had specifically sought advice about superannuation, and (ii) when their goal was to organise their superannuation and grow it over 4 to 9 years. Even then, Storm did not merely provide superannuation advice. Mr and Mrs Sondergeld were recommended to attend the Storm workshop. After they decided to retire in 2006, and after having attended several Storm workshops, they agreed to invest using the Storm model.

261    Secondly, Storm did not adequately determine the objective of its advice, which required measurement and, where possible, quantification. At [1992(h)] of the statement of claim, ASIC pleaded that Storm “did not determine or quantify the objective of the advice and, accordingly, there were no parameters for the extent of the gearing and the amount of risk that the [i]nvestors should take”.

262    As Mr McMaster explained in his evidence, an objective can be precise (ie pay off a student loan in 5 years) (ts 247). Or it might be less precise (such as an objective to “increase net asset position”) which is measurable but not quantified (ts 248).

263    Mr McMaster also explained that if the objective is not quantified then the focus should be on repositioning the client’s assets to use assets efficiently. Where there are quantifiable financial objectives then they should be quantified so that they can be measured by a timeframe and a quantum. He explained that by quantifying an objective a financial adviser can determine what financial resources and how much risk needs to be applied to achieve the objective. Even Professor Valentine accepted the accuracy of a statement in an article annexed to his report which had this effect (ts 381-382):

The time horizon and investment objectives

Investment advice should be tailored to the client’s situation. This means that a ‘one-size-fits–all’ approach is unlikely to be the correct approach. It is unlikely that there are any two individuals who have exactly the same characteristics in the areas mentioned in the previous section of the paper. Also, people who have different objectives and preferences with respect to their investment choices. For example, they have different target retirement dates, different expectations for the level of their retirement income and different levels of wealth that they wish to pass onto their families. Advice should take account of these differences; that is, it should be tailored to each individual.

264    To take Mr and Mrs Dodson as an example, Storm ascertained that their relevant personal circumstances included desires to live self-sufficiently and travel in retirement. The desire to live self-sufficiently required consideration of the detail of their usual living expenses including how those expenses might change over time. Would there be likely increased costs for health expenses? Would there be decreased costs when their dependent ward became independent? As for travel, to which places did Mr and Mrs Dodson wish to travel? How often did they wish to travel? In what manner would they travel? And, underlying all of these points, what would be the cost of their travel? Were there years when they might not wish to travel (and could save that expenditure)? Were there likely to be years when they could not travel, such as for health reasons (including Mr Dodson’s heart condition)?

265    The inference I draw is that, like the instance of Mr and Mrs Dodson, Storm generally did not give reasonable consideration or investigation to these matters to determine or quantify the objective of its advice in relation to the other relevant investors. The inference is based on a number of reasons.

266    A primary reason for the inference is the rarity in the SOAs for any detail of these expenses or changes. The same absence of consideration can be seen in the SOAs for other relevant investors (to whom I conclude Storm contravened s 945A): Mr and Mrs Herd, and Mr and Mrs Higgs.

267    A second reason, which independently would justify this inference, is that there is a lack of any of this detail in the cash flows for Mr and Mrs Dodson, Mr and Mrs Herd (other than living expenditure), and Mr and Mrs Higgs. Mr Turvey gave evidence, which I accept, that all relevant versions of the cash flows that were prepared were saved (ts 433).

268    Mr and Mrs Dodson’s cash flow, produced in November 2007 at around the time of the SOA, had $0 as the entry for extraordinary expenses and yearly living expenditure. The cash flows did not even include the extent of expenditure for future years such as when Mr Dodson was well into his 70s (a conclusion which even Professor Valentine thought was “certainly not” reasonable: ts 406).

269    The adviser for each Part E and Schedule investor, as relevant to those investors for whom Storm might be liable, was as follows:

(1)    Mr and Mrs Dodson’s adviser was Mr Fullerton-Smith, an Employee Representative;

(2)    Mr and Mrs Herd’s advisers were Mr O’Brien and Mr Jelich, who were both Authorised Representatives;

(3)    Mr and Mrs Higgs’ adviser was Ms Frawley, an Employee Representative;

(4)    Ms Knight’s adviser was Ms Fraser, an Employee Representative;

(5)    Mr and Mrs Madden’s adviser was Mr Thompson, an Authorised Representative; and

(6)    Mr and Mrs Schuler’s adviser was Mr Dalle Cort, an Authorised Representative.

270    As I have explained, the cash flow worksheet was sent to Storm’s Authorised Representatives with the formulas removed so it was unlikely that they would have been able to use the cash flow worksheet by entering data for these expenses and living expenditure. Although the Employee Representatives (advisers for Mr and Mrs Dodson, Mr and Mrs Higgs, and Ms Knight) had access to cash flow worksheets with formulas, I do not consider that it is likely that Employee Representatives would have considered and investigated, and hence advised clients, in a different way from Authorised Representatives by entering new scenarios into the cash flow which had not been tested by Storm’s cash flow team. The desired approach to the Storm model was known to the advisers, particularly with its emphasis on uniformity at every stage. The control which the cash flow team asserted was significant, and that control was also known to the Employee Representatives. The Employee Representatives were not involved with any changes made by the cash flow team during the viability phase. All advisers were required to report any change to the clients’ circumstances or potential circumstances to the cash flow team. For these reasons, I consider that the only change that Employee Representatives might have made when they showed clients an adjusted cash flow spreadsheet would have been, to use the words of the Phormula description of the process undertaken by Mr and Mrs Dodson’s Employee Adviser, to go “through the cashflow and [deliver] the figures”.

271    A third reason for the inference is that subsequent to the SOA, and to the investment, some foreseeable incidents occurred about which Storm had not given reasonable consideration in the cash flows or SOAs. One example was that only four months after the SOA for Mr and Mrs Dodson, the following entry was made in Phormula:

Paul and Val have phoned the office and are in need of $20K to purchase a new car as Pauls car has died. can we withdraw the funds and Margin up the $20K as their LVR on their margin loan is very low. Cashflow required as soon as possible as clients need funds ASAP.

272    Ultimately, Mr and Mrs Dodson decided to use “holiday money” to pay for the purchase of their new car.

273    In summary, having ascertained the personal circumstances of the Part E investors, including their objectives such as to live self-sufficiently and their desires such as to travel in retirement, Storm was required to consider the information and conduct such investigation of it as was reasonable in the circumstances. This included quantifying their objectives wherever reasonably possible. It did not do so.

274    Thirdly, Storm did not conduct an adequate sensitivity analysis before advising the Part E investors. Although Mr McMaster did not say that a sensitivity analysis was a universal practice in the industry, he described how he had seen many financial planners conduct sensitivity analyses (ts 300). In cross-examination he explained the role and importance of a proper sensitivity analysis (ts 301):

Sensitivity analysis is designed to see how the client is affected if different outcomes occurred – good outcomes as well as poor outcomes – and it’s designed to show the change in equity that would occur in the event that these various outcomes came to pass, and it can be put in front of a client and shown to them,

“Look, the average return of this type of investment over the last 10 years has been X and if we had that average investment return over the [next] year, this is the outcome you would expect.

If, on the other hand, we had a negative return of the same amount, this is the outcome you would expect. If, on the other hand, we had, you know, a significant downturn, this is the outcome you could expect and if we had a significant upturn, this is the outcome you could expect,”

and by doing that, the client very clearly understands the type of risk they’re taking if any of these outcomes occur.

275    Given the significance of the investment for the Part E and Schedule investors in their circumstances of limited income and limited means, a proper sensitivity analysis was necessary so that the investors could determine how they would be affected if the expected benefits were not delivered. They would reasonably have needed to see how their equity (net assets) would be affected by downturns in the market. As Mr McMaster explained, “that’s all they’re really interested in” (ts 302). In their circumstances, the defects in the sensitivity analysis by Storm involved a failure to give reasonable consideration to, and conduct reasonable investigation of, the subject matter of the advice.

276    There were two defects in the sensitivity analysis performed by Storm. The first, although less significant defect, was that the graphs and cash flows prepared for the investors did not clearly show their net equity position. The net equity position was not clearly shown because the graph marked “cash reserves” was actually a graph of the movement in combined cash and index fund values but not the value of the family home. Not only was this inaccurately labelled as a “cash” reserve but it also did not show the net asset position (ts 306). This was because on Storm’s model the family home should have been included to obtain a net asset position (although I explain later that the family home ought not to have been treated as an investment asset in the first place).

277    The second and more fundamental defect was that the cash flows prepared by Storm did not properly reveal to the client the effect of different scenarios, particularly movements in the market. Storm’s typical cash flows for each client, which followed a template model, were of three varieties, although sometimes there were multiple cash flows within one of these varieties. None of the cash flows provided for any negative growth from the index funds. As I have explained, the first type of cash flow was the “viability cash flow”. The second was the “reality check cash flow” which was prepared using higher interest rates for the loans and lower growth rates. The third was the “maximum capacity cash flow” which used a higher interest rate again for the margin loan. However, even the maximum capacity cash flow was not, as Mr McMaster said in re-examination, an appropriate sensitivity analysis in relation to the circumstances where the investments performed badly. This was because negative investment returns were never tested (ts 335).

278    As I have explained above, it is possible, but unlikely, that an Employee Adviser who had legitimate access to the cash flow worksheets with the formulae could have experimented in front of the client with different scenarios of negative investment returns. But I do not consider that any of them would have done so. In closing submissions, Mr and Mrs Cassimatis properly did not suggest the contrary. Indeed, a Phormula note for Mr and Mrs Dodson described one of the cash flows prepared by the cash flow team as the “worst case scenario”.

279    In reply submissions Mr and Mrs Cassimatis’ answer to this second defect was to submit that Storm and its clients were well aware that the share market could fall. Hence, they submitted that by taking a longer term view and using conservative averages, Storm sought to model the behaviour of a proposed portfolio over that period. Mr and Mrs Cassimatis submitted that Storm’s assumption of no growth over a three year period was “very conservative” given the average three year growth of 14%.

280    Mr and Mrs Cassimatis’ submission misses the point and does not accurately represent the evidence. The figure of 14% was from Professor Valentine’s evidence that the share market grew by 14% over “a very long period of time” (ts 401). More fundamentally, the experts agreed in their report that there was a probability of a negative return from the share market every four years (including dividends) and that a financial adviser should look at how the client would be affected if a negative return occurred, and advise the client with regard to that risk (answer to questions 15a and 16). This point is self-evident. Simply because an investor has an investment time horizon of, say, ten years does not mean that there will never be circumstances in which the investor might wish to, or need to, sell the investments earlier. Nor does it mean that the investor will be uninterested in the performance of the investment over the course of that ten year period. As the investment timeline is shortened from ten years the point becomes even more cogent.

281    To give a concrete example used by Mr McMaster, one very pessimistic scenario that Storm could have shown to clients in a sensitivity analysis based on the recommendations in the SOA might have involved using the average of the lowest 12 month return from the ASX/S&P 200 between 1980 and 2007 which was -22%. As Mr McMaster accepted, in loose terms this was the average worst case scenario over that period (ts 408). Two possibilities Mr McMaster considered in his report were an adverse movement of around half of this amount (-10.24%) or an adverse movement of slightly more than this at -25.95%. Those amounts would have generated losses of equity for that year of, respectively, approximately $55,000 and $120,000. Negative returns like this would not achieve Mr and Mrs Dodson’s objectives. In his understated way, Mr McMaster explained in his oral evidence that the cash flow to which Mr and Mrs Dodson were taken (which did not account for any negative returns) was not the worst case scenario that they might have been told about (ts 333).

282    Some of the assumptions used by Mr McMaster to obtain the losses of $55,000 and $120,000 were contested in cross-examination. As I explain later in these reasons, Mr McMaster made some assumptions which were questionable and he generally acknowledged this in cross-examination. But the short point is that with the interest rates used in the SOA, losses in a single year would be suffered by investors such as Mr and Mrs Dodson unless the capital growth plus dividends exceeded a particular amount (estimated by Mr McMaster to be around 7.29% and rounded in Mr and Mrs Cassimatis’ submissions to be 8%). As Professor Valentine said in cross-examination, and as is common sense, if a loss occurred in a short period of time before retirement there may not be time for it to be recouped (ts 384).

283    Mr and Mrs Cassimatis also relied upon the margin call test that Storm performed when preparing its viability cash flow. However, as Mr McMaster explained in re-examination, the consequence of a margin call test only formed a “very minor” part of testing the sensitivity of different share market consequences (ts 335). Investors would be interested in knowing not merely the circumstances in which a margin call would occur but other different adverse market circumstances.

284    Mr and Mrs Cassimatis also submitted that it was not “rocket science” to conclude that borrowing to invest at 8% requires a return above 8% to be profitable. That can be immediately accepted. But the precise point at which losses would be suffered, and the calculation (and amount) of different possible losses, is not so simple. The extent to which the return might need to exceed 8% would depend upon other costs, including Storm’s fees.

285    Fourthly, and closely related to the third point, Storm did not give reasonable consideration to the income of the Part E and Schedule investors in all their circumstances. I have reached this conclusion less easily than the first three conclusions particularly due to the absence of any information about how the cash flow team considered and applied the income of the investors in each different cash flow that might have been experimented with by the cash flow team or that was provided to the adviser. Further, although the clients’ income and expenditure was not considered by Storm as part of the cash flow, I am not satisfied that those matters were not considered at all. Storm prepared a detailed Confidential Financial Profile for each investor which dealt with issues of income and expenditure. As Mr McMaster said, the omission was not one which involved a failure to consider income and expenditure at all.

286    However, there is one important respect in which Storm’s consideration was not reasonable. Storm did not conduct an analysis of the clients’ actual cash flow independently of the proposed investment to determine whether the client had capacity to fund the costs associated with the borrowings and any margin calls to the extent not covered by income from the investments. No cash flow was prepared which considered this possibility. Indeed many of the relevant investors had little independent capacity to fund such costs. Although Storm did consider the probability of a margin call, Storm omitted to go further to consider the extent to which the relevant Part E or Schedule investors could fund borrowing costs from their own income or resources. The likely conclusion would have been that they could not fund borrowings or margin calls from their own income or resources. I agree with the conclusion of Mr McMaster that this omission was unreasonable in the circumstances. A margin call was not impossible, nor was it something which was only likely to occur with a “Black Swan” event. In cross-examination, Mr McCulloch explained that after the share market downturn following the September 11, 2001 attacks there were approximately eight to 15 of Storm’s clients, from several hundred, who received margin calls (ts 191).

287    To take Mr and Mrs Dodson again as an example, a properly conducted sensitivity analysis would have revealed that the Storm model could result in losses which might eventually have combined to require Mr and Mrs Dodson to make payments to fund their borrowing costs once their cash reserves were exhausted. Mr McMaster analysed the position of Mr and Mrs Dodson at the time of their SOA, and he concluded that (i) their cash flows provided for increasing cash flow deficits; (ii) the deficits would exhaust the cash reserves within a relatively short period of time; and (iii) the cash reserves were not sufficient to cover any margin calls if they arose.

288    In cross-examination, senior counsel for Mr and Mrs Cassimatis subjected Mr McMaster’s analysis to a searching examination. Mr McMaster made some assumptions that might be questioned. For instance, he assumed that the double orphan pension received by Mr and Mrs Dodson was taxable income for which no rebate was available (ts 287). It is likely that the pension was received for the care of the child for whom Mr and Mrs Dodson were guardians, but no evidence was given about its origin, about how long it would be received, or about its tax treatment. Another potentially questionable assumption was that a weekly $300 payment that Mrs Dodson received should be excluded from income. Mr McMaster excluded the payment only because Storm had excluded it and there was no evidence explaining why it had been excluded by Storm (ts 285). On the other hand, there may have been good reasons why it had been excluded by Storm, such as if the payment were only temporary.

289    Other assumptions attacked by senior counsel for Mr and Mrs Cassimatis were properly made by Mr McMaster. One of those, upon which there was lengthy cross-examination, was whether it was legitimate for him to treat Mr and Mrs Dodson’s annual cash contribution to the plan of $6,000 as a cash outflow. As Mr McMaster explained, that was an outflow from Mr and Mrs Dodson. It was properly reflected as a cash outflow. If, as senior counsel hypothesised (but upon which there was no evidence), the $6,000 was actually used to defray interest expenses, then (and only then) the result (rather than the cash flow) would be that there was an additional $6,000 of funds available to Mr and Mrs Dodson (ts 332). So too, dividends that had been reinvested might be able to be sold to meet expenses as required but this is not a predicted cash flow.

290    Ultimately, I am satisfied that the analysis performed by Mr McMaster was a reasonable one. But the basic point is that Storm gave no reasonable consideration to the extent to which any of the relevant Part E or Schedule investors could fund interest payments from their own resources in a scenario where their cash reserves were exhausted. A reasonable consideration and investigation into a client’s capacity to fund the borrowing costs required Storm to consider scenarios in which the client would have been required to pay those costs without access to investment income. The analysis that Storm did of the probability of margin calls being made demonstrated that this scenario was not a likely possibility. But in the circumstances of the Part E and Schedule investors, and the extreme consequences for them of default, this exercise should reasonably have been performed. It was not performed.

(2) The inappropriateness of the advice to the relevant Part E investors and Schedule investors

291    In this section I consider the appropriateness of the advice in relation to each of the relevant Part E investors and each of the Schedule investors who was retired or approaching retirement and was of limited means and had limited ability to rebuild his or her financial position. I conclude that the advice was inappropriate for three independent reasons. It is notable that even Professor Valentine, who was utterly devoted to the Storm model, conceded in cross-examination that if retirement is imminent then advice to borrow significantly against the home to invest is unreasonable (ts 377).

292    The three independent reasons why the advice was inappropriate are as follows. First, Storm inappropriately classified the relevant Part E investors as “Balanced investors” and advised them as such. The same reasoning applies to the relevant Schedule investors. Secondly, Storm included the Part E and Schedule investors’ family home in their asset portfolio for investment purposes. Thirdly, and independently of the other two matters, in all the circumstances, the advice to the relevant investors to utilise the Storm model was generally inappropriate.

The investors’ risk profiles

293    Mr McMaster explained that a reasonably competent financial adviser should determine a client’s tolerance to investment risk, which is called the client’s “risk profile”. He explained that the risk profile given to an investor initially determines the asset allocation which is appropriate for the investor. He described the general approach to identifying a risk profile of an investor as typically including seven risk profiles:

(1)    Conservative – low risk, bias towards secure income producing investments;

(2)    Moderately Conservative – bias towards income producing but with more growth investments than Conservative;

(3)    Moderate – this portfolio will produce slightly more income than growth;

(4)    Balanced – balance of returns between income producing and growth investments;

(5)    Moderate Growth – will produce more growth than income;

(6)    Growth (also referred to as Moderately Aggressive) – bias towards growth with a small component of income producing investments; and

(7)    High Growth (also referred to as Aggressive) – high risk, all growth and some speculative investments.

294    Mr McMaster accepted that some financial planners use fewer sources than these seven categories. An example which he said was not uncommon was the use of four categories in some ASIC publications: “Cash”, “Conservative”, “Balanced”, and “Growth”.

295    Storm concluded that the Part E investors were “Balanced investors” rather than “Conservative investors”.

296    Mr McMaster explained that a typical ratio of growth assets (shares and property) to defensive assets (fixed interest and cash) for a Balanced investor was 60% growth and 40% defensive. But for a Conservative investor the typical ratio was 20% growth and 80% defensive. Professor Valentine agreed with this assessment of a typical conservative portfolio. However, there is some flexibility in the proportions. The precise percentages and the precise content of a balanced or conservative portfolio is one upon which reasonable minds might differ (ts 261). For instance, a reasonable example of a balanced portfolio was given by a textbook from which Mr McMaster taught, involving 65% growth and 35% defensive:

(1)    Cash    5%;

(2)    Bonds    30%;

(3)    Global equities    20%; and

(4)    Australian equities    45%.

297    The process of risk profiling involves some subjectivity and evaluation. But conclusions are not at large. In their joint expert report, Mr McMaster and Professor Valentine agreed that the most common method of establishing a person’s risk profile was to have the person complete a questionnaire that points to an asset allocation model and then to discuss the implications of that with the person.

298    Mr McMaster concluded, and on the evidence before the Court I accept, that each of the Part E investors was likely to be a Conservative investor. I have explained the inconsistent nature of Professor Valentine’s evidence on this point. However, the aspect of his evidence which I accept was where, in the joint expert report, Professor Valentine described the Part E investors as “loss averse” (11 [32]). This description was apt in the sense that it conveys that the Part E investors were inexperienced investors who wanted low risk investments with secure income. But I do not accept the further evidence of Professor Valentine that “Advisors should attempt to educate investors so that they abandon this view” (11 [32]). There is a difference between (inappropriately) trying to educate investors to abandon an appropriately Conservative view involving low risk as Professor Valentine was suggesting, and (appropriately) advising clients clearly to identify choices and to make decisions on how best to fulfil their financial and lifestyle objectives (ts 250).

299    Although I conclude that each investor was likely to be a Conservative investor, I accept that there are elements of uncertainty surrounding this conclusion. One reason for the uncertainty is that risk profiling involves subjective elements and, as Mr McMaster accepted, a person’s risk profile can change over time and might be affected by recent investment experiences (ts 240). Another reason for the uncertainty is that, as Mr McMaster also accepted, it can be difficult to determine the risk profiles of the individual investors without interviewing them.

300    Despite the uncertainty, there are four reasons why I am satisfied that an adviser could not reasonably have reached the conclusion that the relevant Part E investors were Balanced investors (ie Mr and Mrs Dodson, Mr and Mrs Herd, and Mr and Mrs Higgs).

301    First, the relevant Part E investors who were approaching retirement or retired were persons for whom the potential loss of their home would be catastrophic. This is particularly so because those investors had few assets and had little or no prospect of rebuilding their financial position in the event of suffering significant loss.

302    It is true that each of the investors was told in the SOAs that there was a possibility of losing their home:

Apply the same caution if you are thinking of using your home as security – borrow conservatively as a default on the loan could mean loss of the security for the loan. If you have used your home as security, this means you could lose your house.

303    The investors were also told in the SOAs about some of the risks of borrowing to invest. Although the investors signed each page of the SOA, some SOAs were more than 100 pages long. I do not consider it likely that any of the investors would have read all of the statements in the SOAs in careful detail. The SOAs contained statements including the following to which Mr and Mrs Cassimatis extracted from the lengthy documents:

Share prices are highly volatile, moving through wide ranges in relatively short periods of time.

…

Volatility is the risk that most share investors are particularly wary of, as falling asset prices reduce the value of a portfolio, perhaps at a time when the realisation of the assets is planned. This can be particularly dangerous when borrowing is involved, as interest payments and other commitments must still be met, and the lender may recall some of the debt – this is known as a ‘margin call’.

…

Gearing … can dramatically change the level of risk in an investment strategy.

…

Generally, the higher the level of risk you are prepared to accept when investing the higher the potential return will be. At the same time, the potential loss may also be higher. This is called the risk/reward trade-off.

304    These statements cannot be read in isolation. Other statements in the SOA would reasonably have alleviated concern about risk (emphasis in original):

We have included many conservative estimates of incomings, and have overstated many of the outgoings. The result is that the material that follows will in most cases be more pessimistic than any actual results achieved by the investment plan. We emphasise again that the purpose of this Cashflow is to test in rigorous conditions that the Plan is viable.

…

Variability of investment returns is the main risk posed by this kind of investment. Provided you have the appropriate time frame, your plan contains strategies to safeguard you, and to allow you to profit from this volatility.

305    Secondly, the relevant Part E investors were placated substantially about any of the risk involved in the Storm model. I do not consider that the statements above warning about risk, even if viewed in isolation, meant that these investors had a higher appetite for risk (in other words, that they were willing to accept risk despite warnings). More powerful than those statements in a long document were the oral presentations, with slides, which were shown at the Storm workshops and encouraged the investors to adopt the view that any risk involved in the Storm model was minimal and that debt should not be feared.

306    The PowerPoint slides shown at the workshops emphasised the “need for debt” (slide 114), and the notion that “Fear of debt [is] a costly error” (slide 123). In the slides dealing with risk, after setting out three types of risk, slide 278 said (emphasis added):

So how can you handle Real Risk?

Using the Index Approach to buy shares means that you have guarded against:

•    Default Risk

•    Asset Selection Risk

•    Share Selection Risk

307    The next slide, entitled “VOLATILITY (Manageable Risk)” said that this risk is “investing in an asset whose value can rise and fall but in such a way that over a longer time frame there is certainty that the value will rise” (emphasis added). And slide 289, titled “The role of the cash reserves dam” explained that it would permit the client to “live stress free”. This was followed by another slide entitled “So how can you handle Real Risk?” It explained that “adequate Cash Reserves will ensure that you can handle the variability of returns delivered by the market” (emphasis in original). Mr McCulloch explained how he was trained by Mr Cassimatis to say that the “real risk” is “not having your assets in the best asset class, which is shares” and that:

We say to you it doesn’t matter whether the market goes up or goes down, you can still make money… This is the way that Storm can make you the big stacks of coins. We use volatility to enhance your returns in a compressed timeframe. So it doesn’t matter whether the market goes up or goes down, returns can be enhanced whatever the market does.

308    Another example of the relevant Part E investors being placated about possible risk is the evidence Mr McCulloch gave of things he said in the education workshops which he had been taught to say by Mr Cassimatis. He drew an analogy between building a house, and building a financial plan. Mr McCulloch would explain that, similar to a house in North Queensland having to withstand the stress of a cyclone, with financial planning you need to withstand the stress of inflation or a share market correction. And that similar to engaging a builder to build a house, you need to engage a financial planner to build a financial plan. Mr McCulloch said that he would acknowledge that clients can do their own financial planning, but:

… you should not go down that path. Let somebody who has the expertise, the industry experience and the purchasing power construct your financial plan for you, and that’s where Storm come into play. We will step in on your behalf and deal with all the subcontractors that are needed to build a financial plan.

309    Mr McCulloch was also taught to say that “Storm has a different point of view to other traditional financial planners out there in the industry, and that is we believe that you should never, ever destroy your capital base”. He would say “When we talk about risk, we’re not talking about losing your home. We are talking about the risk of being financially poor going into retirement”, and:

Most of you sitting here in this room are aware that too much debt is dangerous. However, what most of you may not realise is that not having any debt is just as financially dangerous. No debt means you’ve got no assets. Therefore, you have no income to be able to do the things that you want to do in retirement. There is, however, a level of debt that is appropriate for your needs to acquire a decent capital base yet remain relatively safe, and we call that the sweet spot of debt.

310    Mr McCulloch explained that at one stage in the education workshop presentation, prospective clients would be shown a 1990 newspaper article written by Noel Whittaker, titled “You can’t lose on index funds”. Mr McCulloch described how Mr Whittaker was a very well-known and respected financial planner in Queensland in the period 2006 to 2008 (ts 181). Mr McCulloch would also reassure the attendees at the workshop that Storm had “a system of advice which has worked over many years for many different clients all of whom have achieved good outcomes”. As I have explained, he was trained by Mr Cassimatis to explain that the use of index funds was how Storm would “guarantee you the big stacks of coins, which is the average return”.

311    Mr McCulloch was also taught to show a series of slides warning the prospective clients of scammers and bad financial advisers, and to advise the audience that Storm had “no complaints. We have not been penalised by ASIC and our reputation is impeccable. But, you can only form your own judgement by meeting with us over the next 3 to 6 months”. Mr McCulloch would also explain select provisions of the Corporations Act and say words to the effect that:

Unlike the old Corporations Law which imposed financial fines on financial advisers, the new Corporations Act could result in a jail term for advisers giving inappropriate financial advice. There is no way that I or my advisers will be going to jail to make or lose you money.

312    The reassurance that clients received about the low level of risk was not limited to the education workshop. Although none of the relevant Part E investors was advised by Mr McCulloch, it is likely that they would have been given advice similar to the advice that Mr McCulloch was trained (by Mr and Mrs Cassimatis) to give clients. At early meetings, Mr McCulloch told clients that “Storm’s point of view is that you need a higher volatile asset that gives you high returns without the risk of default” (emphasis added). He was also trained to say at the meeting where the SOA was presented that Storm’s plan implemented measures designed to ensure that the client had no risk of getting a margin call.

313    Thirdly, and reinforcing the evidence of the relevant Part E investors and their circumstances, the profile chosen by the Part E investors was consistent with a Conservative profile; not with a Balanced profile. In their Confidential Financial Profile, Mr and Mrs Dodson said that they were “…prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated” (emphasis added). Their investment term was 10 years. The only profile that was more conservative was one which was akin to requiring a fixed interest investment. And they had specifically not chosen the box which said that “I am prepared to accept short to medium term volatility and am also prepared to accept a level of real risk where some of my asset may be irrecoverably lost”.

314    Fourthly, even if the relevant Part E investors had an unusual appetite for risk, it was appropriate that they be treated, and advised, as Conservative investors. They might choose to reject that advice but it was the appropriate basis for the advice that should have been given. Even Professor Valentine accepted that since housing is a good which provides shelter and accommodates people’s physical, emotional and social familial needs (which change as they age) as a general proposition the closer one gets to the time for retirement, the less attractive borrowing against the house becomes (ts 367). He therefore accepted that generally a more conservative approach has to be adopted for persons who are at or near retirement (ts 385). This general proposition might be subject to exceptions such as where the client has considerable wealth or where there is a prospect of some other money coming into the equation, like an inheritance (ts 391). But none of the relevant investors fell within that category. All of them were persons for whom there was little or no prospect of rebuilding their financial position in the event of suffering significant loss.

315    As ASIC submitted, the conclusion that the relevant Part E investors were Conservative investors does not necessarily mean that the existing asset allocations of each of the investors was a conservative allocation. For instance, as Mr McMaster accepted, the asset allocation of Mr and Mrs Dodson was skewed towards growth assets, particularly shares that they held. Prior to their investment with Storm, their assets had evolved to a portfolio that was already inconsistent with their status as Conservative investors. Advice consistent with their status as Conservative investors should have recommended smaller exposure to the share market, not greater exposure. The recommendation by Storm did not involve a typical 20% growth and 80% defensive proportion for a Conservative investor. Instead, it inappropriately involved the following balanced portfolio (62% growth, 38% defensive):

(1)    shares    48%;

(2)    property    14%; and

(3)    cash    38%.

The family home was inappropriately treated as an asset in the investment portfolio

316    A second reason why Storm’s advice to the relevant Part E and Schedule investors was inappropriate was because it inappropriately treated their family home as an asset which formed part of their investment portfolio. If the value of the residence was removed from the portfolio of investment assets then it is apparent that these investors were advised to adopt a higher LVR than even Storm considered to be prudent for them as (on Storm’s view) Balanced investors. The effect of the advice was to concentrate their investments in shares and take a higher risk than Storm considered was appropriate for either a Balanced investor or a Conservative investor.

317    As Mr McMaster explained at the start of the concurrent expert evidence, the treatment of the family home in the Storm model was one of the two main issues in dispute between him and Professor Valentine (the other being the reasons why the Storm strategy failed in the GFC) (ts 219). The treatment of the family home by Storm was described by Mr McMaster as “central” to his criticism of the Storm model (ts 319) although Mr McMaster said (and I accept) that even if the house were properly included in the investment portfolio he would still have concluded that the advice was unreasonable based on the risk allocation for a Conservative investor (ts 338). Professor Valentine said that it was appropriate to include the family home in an investment portfolio.

318    Professor Valentine said that even though the home was not intended to be sold, including it in the asset allocation of the investment portfolio gave a more appropriate representation of the risk that the client was taking. He gave four reasons for this:

(1)    economists and public policymakers regard a home as an asset. Homes are included in official data on personal wealth, available in bankruptcy cases and are included in deceased estates;

(2)    the risk of a portfolio must be measured for all assets in it. A family with a share portfolio and which does not own a home is in a very different position to another family with the same share portfolio but which also owns a home;

(3)    advisers should give advice which prevents large losses over the relevant time horizon so the advice should not require sale anyway; and

(4)    the standard method of reducing the risk of a portfolio (ie the volatility of the return on it) relative to the average return on it is to properly diversify the holdings in it. A portfolio which combines property and shares will be well diversified. But many investors in Australia hold an undiversified portfolio because their largest asset is a house. Hence, much of Australians savings is not available to fund productive investment.

319    As the concurrent expert evidence developed, it became clear that the disagreement between the experts about the use of the family home as part of the investment portfolio was because the experts were asking different questions. Professor Valentine was asking the question “what is the risk of all assets considered as a whole (independently of whether the family home might have to be sold)?” But Mr McMaster was asking “what is the risk that my investment portfolio might lead me to have to sell my home?” The experts agreed that the former question, by definition, required the inclusion of the family home because they both accepted, and as is plain, that the family home is an asset. But the second question requires the exclusion of the family home from the assessment of the risk of the investment portfolio because it is an asset about which the investor has a very different risk profile. Again, almost by definition, the home must be excluded from an analysis of the risk of an investment portfolio when one asks “what is the risk of an investment portfolio failing to such an extent that the home might have to be sold?” The experts acknowledged that they were asking these different questions (ts 320).

320    There might be circumstances in which it may be useful to ask the first question. For some investors the risk of selling their home might not be substantially different from the risk of selling other assets in the investment portfolio or using other available assets to meet repayment demands or margin calls. An example given by Mr McMaster would be an investor who lives in a leased property and also leases out the only home that he owns (ts 223). As Mr McMaster accepted, a client who was willing and prepared to sell his or her home for an investment portfolio would be a situation where it might be appropriate to include the home in the investment portfolio (ts 266). But he had never come across a client in that situation (ts 266).

321    In the circumstances of this case, the answer to the second question was part of the essential information which the relevant Part E and Schedule investors needed. As Mr McMaster explained, the second question is asked so that the investor “can isolate that risk and understand it” (ts 320). The relevant Part E and Schedule investors were over 50 years old and were retired or approaching retirement. They had little or limited income, few assets apart from their home and little or no prospect of rebuilding their financial position in the event of suffering significant loss. They were persons for whom the second question was the appropriate question in assessing the risk of their investment portfolio. In other words, their circumstances were such that it could not possibly be appropriate to treat their home as an investment asset, because they could not reasonably tolerate any risk of selling it.

322    Mr McMaster said in the joint report, and I accept, that he had supervised, managed and analysed the advice of hundreds of financial planners, and has been a practising financial planner from 1982 to the present day. He said that the only instance that he has ever seen of a financial planner including a residence in the asset allocation of an investment portfolio is in the SOAs produced by Storm. I accept this evidence. It applies with even greater force to the relevant investors in this case.

323    Mr McMaster said, and again I accept particularly in relation to the relevant investors, that the principal reasons why financial planners do not include the residence in the investment portfolio asset allocation are:

(1)    the family home is always a personal use and lifestyle asset even though equity in it can be accessed for gearing of investments, so the family home should only be included as an investment property if the clients expressly agree that they are prepared to sell it and employ the funds in the investment portfolio;

(2)    a portfolio needs to be rebalanced over time as asset values within it change, but the family home would be an asset in the portfolio that cannot be sold or rebalanced; and

(3)    the Storm strategy was designed so that eventually investments would be sold to repay the debt, leaving profit remaining. But since the home cannot be sold, a financial planner should examine the asset allocation of the investment strategy alone. To include the home is to present a misleading view of the risk and the expected return of the strategy.

324    In cross-examination, Mr McMaster was asked what factors he would take into account in determining whether or not a particular investor should borrow against the house to invest. He replied as follows (ts 276, emphasis added):

Well, age can be a factor, but it’s not a necessary factor. For example, you might have a person who is very wealthy, of advanced age, and because of their particular circumstances it might be appropriate to gear them. But, generally, if you were a person approaching retirement, you know, close to retirement, or in retirement, it’s my opinion that you would generally choose not to take that risk, and the reason for that is that, generally, people in that – those circumstances don’t have the capacity to – to fund – to replace any capital that might be lost through poor investment judgment, for example.

325    Hence, the experts agreed (although Professor Valentine’s views oscillated at other times), and I accept, that generally the closer a person gets to retirement the less attractive it will be to borrow against the family home. The qualification “generally” was expressed by Professor Valentine (just as it had been by Mr McMaster) because there are some persons who have the wealth or income to be able to manage that borrowing (ts 366-367). In this case, however, all of the relevant investors had limited wealth and limited income.

326    My conclusion therefore is that the use of the family home in the investment portfolio for the relevant investors was inappropriate. As even Professor Valentine accepted, if the home were excluded then the clients would be in a high risk position.

327    This conclusion does not mean that the family home is irrelevant to the consideration of the financial planner. An investor’s home should be included in the relevant personal circumstances of the investor and in the consideration in giving an investor advice about attaining his or her objectives. But without an analysis of the risk of the investment portfolio independently of the risk of the family home, it would be inappropriate to advise the client by using the family home as part of an investment portfolio (ts 224-225).

The advice was inappropriate in any event

328    Even if Mr and Mrs Cassimatis were correct that (i) the relevant investors were Balanced investors, and (ii) the home should be included as part of their investment portfolio, I would still conclude that the advice was inappropriate because the circumstances of the relevant investors meant that a double geared investment which was concentrated in the share market was not appropriate for them as it involved high risk.

329    Mr McMaster’s ultimate conclusion was that the reason why the Part E investors suffered so badly during the GFC was for three reasons:

(1)    the concentration of investment assets in share market investments;

(2)    the high level of debt relative to investment assets; and

(3)    the absence of financial capacity to maintain their position during a downturn in markets.

330    To these reasons must be added the possibility of a significant market fall. The extent of the GFC was not a matter which Storm could reasonably have foreseen at the time of the advice given in the SOAs to investors, although the experts agreed that a fall of up to 10% could have been predicted (ts 223). Nevertheless, even without the benefit of hindsight, the three matters to which Mr McMaster referred left the investors exposed to significant downturns in the market. A significant downturn, potentially exceeding 10% by a considerable margin, such as 22% (see above [281]), was a possibility.

331    The experts agreed in their report that “a financial planner should generally not advise a retired person or a person nearing retirement to invest in high risk investments” (10 [21]). They also agreed that generally negative gearing is “high risk within a period of approximately 5 years to retirement” (10 [23]). Mr McMaster expressed similar sentiments in relation to Mr and Mrs Dodson (54 [217]), Mr and Mrs Herd (at 100 [153]), Ms Longmore (143 [139]), Mr and Mrs Sondergeld (189 [172]), and Mr and Mrs Higgs (at 235 [196]). Mr McMaster reiterated this point in his oral evidence (ts 355, 357).

332    This point applies to all the relevant investors. To take Mr and Mrs Herd as an example, they were aged pensioners and were relying on a relatively small amount of capital to provide them with income for the rest of their lives. As Mr McMaster said, “[t]hey could not afford to take high risk but the strategy of borrowing to invest and concentrating their leveraged investments in the share market was a high risk strategy” (101 [161], footnotes omitted; see also in relation to Mr and Mrs Dodson (at 55 [226]), Ms Longmore (144 [148]), Mr and Mrs Sondergeld (190 [181]), and Mr and Mrs Higgs (at 236 [206])).

333    Although Mr McMaster accepted that his reference to negative gearing was to an investment strategy which was only viable if the investor relies on the tax deductions arising from the difference between expenses and income (ts 355), his point about the risk of negative gearing was broader than that. In his report Mr McMaster referred to negative gearing more generally as a strategy which involved borrowing to invest (31 [84], 42 [155]). He also explained that negative gearing was high risk because the borrowing leverages risk as well as return (ts 355). In his report he explained the reasons why negative gearing within five years of retirement is generally high risk (27 [60]):

Regardless of a client’s objectives and risk profile, a financial adviser has a primary obligation to give advice that will not place a client in a position where the risk of their strategy could significantly affect their financial capacity to maintain their present financial position (based on the reasonable judgement of the financial adviser). For example:

In my opinion a retired couple who owned their home, had no debt and had a small amount invested would not be suited to the risk of negative gearing. The reason for this view is that if their geared investments declined in value they would generally not have the cash reserves nor surplus income to replace those investments or meet any margin calls. Additionally they generally would not have the surplus income to pay the net investment costs (after allowing for investment income). In my opinion a negative gearing strategy for people in this position has the risk that it could significantly affect their financial capacity to maintain their present (before gearing) financial position. In my opinion a reasonably competent financial adviser would not advise clients in this position to take high risk or to leverage risk by negative gearing.

334    In the joint expert report Mr McMaster said, in relation to Mr and Mrs Dodson (35-36):

(101) In my experience a reasonably competent financial adviser would have identified the income required in retirement and the date that the income was required.

(102) In planning for retirement the objective is to accumulate a particular amount of capital by the date of retirement so that it can produce a particular amount of income.

(103) A reasonably competent financial adviser will identify the amount of income required by the client and the date when that income will commence (the date of retirement). With this information the adviser can calculate the amount of capital that will be required at retirement.

(104) This is an essential pre-requisite to formulating a retirement planning strategy for a client. A reasonably competent financial adviser will design the financial strategy to achieve the capital objective at retirement. If this is not possible the adviser will discuss a modified strategy with the client.

….

(111) By definition, once a person has retired they have lost the capacity to replace capital that may be lost through poor investment judgement. Consequently it is generally inappropriate for a retired person to introduce high risk investments or strategies into their investment portfolio.

(112) Similarly when someone is close to retirement and planning for that event, it is inappropriate to risk their capital with high risk investments or strategies.

335    Mr McMaster expressed the same sentiments in relation to Mr and Mrs Higgs (at 211-212), Ms Longmore (125-126), Mr and Mrs Sondergeld (166-167), and similar sentiments in relation to Mr and Mrs Herd (at 77-78). I accept those conclusions. They apply equally to all the relevant investors.

The irrelevance of whether the client accepts the advice

336    During oral evidence, there was some discussion about the need for an adviser to accept the ultimate view of the client. Mr McMaster agreed, and I find, that an instruction from a client will almost always override advice which is given (ts 224). However, it is not to the point that the relevant investors ultimately agreed with the advice and gave instructions to proceed. Section 945A is a prohibition upon giving advice that is inappropriate. As ASIC submitted, there is no prohibition upon implementing an inappropriate instruction.

(4) The employees of ASIC

The witnesses

337    Six employees of ASIC gave evidence. They were Ms Koromilas, Ms Korpi, Ms Jong, and Messrs Anderson, Armstrong, and Holiday. The evidence of the ASIC witnesses was particularly important in relation to the claims by Mr and Mrs Cassimatis that serious breaches of the Corporations Act by Storm were not foreseeable, or were very remote. Mr and Mrs Cassimatis relied on the absence of any identified warning by any of the ASIC witnesses, despite their familiarity with Storm in different capacities.

338    Ms Koromilas has qualifications in law and economics. From October 2007 to June 2010 she was employed by ASIC as Assistant Director in the Compliance - Financial Advisors team. She oversaw all aspects of compliance in financial services, provided by financial services licensees based in New South Wales. In October 2008 she became the Senior Executive Leader in Financial Advisers stakeholders team.

339    Ms Korpi also has qualifications in law and economics. In October 2005 she commenced employment with ASIC as an analyst in ASIC’s Compliance Directorate, Capital Markets team. This role mainly involved analysing prospectuses and related party documentation. From August 2007 her role was as a lawyer in ASIC’s Capital Markets team.

340    Ms Jong has qualifications in accounting. She worked for ASIC from 1998 until 2008. During this time she held a range of positions, including the role of Manager of the Capital Markets team in Sydney. She was involved with the review of Storm’s prospectus. But she had little or no recollection of the events of a decade earlier. Her recollection in her affidavit evidence was very much constructed from the documentary record. She was able to add little in oral evidence which was understandable given the lapse in time.

341    Mr Anderson was employed by ASIC in June 2007. In 2007 and 2008 he was an analyst in the Compliance Financial Services Large Entities team in Sydney. Around September 2007, ASIC had a compliance project called the “High Growth Project”. It involved the compliance teams nationally examining financial services licensees who had experienced significant growth in a short period of time and considering whether they had sufficient resources for their growth rates. Mr Anderson reviewed the accounts of various entities including Storm.