CHAPTER 2

NM’S LIABILITY TO THE INVESTORS

introduction

143               In later chapters I conclude, for reasons that apply to all 23 cases,

·      that NM’s claim for contribution fails because Citibank did not incur liability to the Investors;

·      that if Citibank did incur liability to the Investors, NM should recover only 5 per cent of the amount of compensation that NM provided to the Investors;

·      that Citibank is entitled to be indemnified by the Advisers in respect of any liability it has incurred as a result of the conduct of the respective Advisers.

But a treatment of the issues in logical sequence suggests that the first issue to be determined is that of NM’s own liability to the Investors.  For it to succeed on its claim against Citibank for contribution, NM must establish that it and Citibank incurred liability to compensate the Investors in respect of the same loss or damage. 

144               There is, however, a difficulty.  The evidentiary material relating to the 23 Investors is voluminous and detailed. An earlier draft of this chapter, in which I had commenced but not concluded a consideration of the issues of inducement and causation of loss in the cases of the individual 23 Investors, was already approximately twice the present length of this chapter.  I have decided not to pursue those issues in view of my conclusions referred to above.

145               In the result, this chapter serves two purposes only: first, it contains a summary account of the facts of the 23 cases; second, it resolves some, but not all, of the issues that arise in respect of NM’s liability to the Investors in tort (I will not refer to NM’s liability under the TP Act or the SIC/Law, although some of the issues to be discussed are relevant to the causes of action based on those statutes).

146               This chapter is divided into the following sections:

A.                 Summary account of the facts relating to each of the 23 Investors;

B.                 Elements of the Investors' causes of action against the Advisers and NM.

A.        SUMMARY ACCOUNT OF THE FACTS RELATING TO EACH OF THE 23 INVESTORS

147               The evidence in relation to the Investors is to be found in their affidavits and cross-examination, the Citibank and NM documents relating to them, and, to a lesser extent, the affidavits and cross-examination of those few Advisers who were called.

148               I will give a summary account of the facts relevant to each Investor, omitting, or making only passing reference to, certain elements, such as the representations alleged to have been made.  These appear in the copy extracts from Schedules 2 and 4, that constitute Annexure 1.

149               Part of the background to the following accounts is that there was a “Central Sales Unit” (“CSU”) in the Melbourne office of Citibank and a “Central Processing Unit” (“CPU”) in its Sydney office.  Applications for Mortgage Power coming to Citibank through Kelly were processed through the CSU to the CPU which was the national approval centre for Mortgage Power loans.  The CSU in Melbourne had an interest in maximising its sales of Mortgage Power and in having the CPU process them as quickly as possible.  The CPU, on the other hand, was required to ensure that applications conformed to Citibank policy.  Annexure 3 to these Reasons is a “Dramatis Personae – Citibank Officers”.  I will refer to them by surname.

1.         Geoffrey Ian Alder and Susan Patricia Alder
(introduced by Jones and Roberts)

150               In 1991 Mr Alder was a thirty-four year old salesman with Canon. He completed school at Year 10 and had no tertiary qualifications.

151               His taxable income for the year ended 30 June 1991 was approximately $78,000, dropping to around $52,500 for the year ended 30 June 1992.  He and his wife owned their home at Frenchs Forest, New South Wales, which was valued by Citibank at $358,000 and was subject to a mortgage of around $55,000, leaving an "equity" of $303,000.

152               Shortly before meeting Roberts and then Jones as mentioned below, Mr Alder ceased to be employed by Canon on a salary and became a commissioned agent.  He thought it desirable to arrange sickness and accident insurance and life insurance.  Jones was a family acquaintance whom Mr Alder had known for twenty-five years, but the initial introduction came through Roberts, who was the insurance agent of Mr Alder’s brother, Brian.  Roberts was introduced to the Alders through the brother at Jones’ NM office at Manly, where they had gone to arrange sickness and accident and life insurance.  Instead, Jones gave him a whiteboard presentation of the Package.  The Alders had never invested in shares or units and had no knowledge of negative gearing.

153               There was a series of presentations to, or discussions with, Mr Alder, or both Mr and Mrs Alder, by Roberts or Jones between November 1990 and April 1992.  In December 1991, Roberts suggested the NM Equity Imputation Fund, rather than the Property Trust, as the more appropriate form of NM investment for the Alders.

154               It appears that all, or nearly all, of the representations allegedly made to the Alders by Jones and Roberts preceded the change in the recommended investment from the Property Trust to the NM Equity Imputation Fund.

155               The Mortgage Power application form signed by the Alders bears date 27 December 1991.  It identified Mr Alder’s occupation as a salesperson and his wife’s as “home”.  It indicated that they had four dependants (she said four, he said five).  The application was processed on 15 January 1992 by Bill Macrow in Citibank, Sydney who stated on the “TQC – Loan Cover Sheet” that the Alders required the facility to payout existing loans and invest in the “National Mutual Income/Equity Property Trust”.  (By this time, Jones was submitting his clients’ applications directly to Citibank in Sydney rather than through Kelly in Melbourne, following the breakdown in relations between Kelly and Citibank in September/October 1991). 

156               On the Alders' own estimated value of their home of $300,000 and a loan-to-security ratio of 53 per cent, which was lower than its maximum permissible loan-to-security ratio of 65 per cent, Citibank approved a Mortgage Power facility of $160,000.  In fact Citibank had the property valued at $358,000. 

157               The CPU processed and approved the facility of $160,000 on 16 January 1992.  Citibank’s letter of offer was sent on or about 28 January 1992. The CPU did a capacity test on 16 January 1992 based on a salary for Mr Alder of $73,396 per year or $6,116 per month.  One third of this is approximately $2,039 per month (according to other Citibank documents, the capacity test was based on a figure of $2,018 per month).  On the assumption of a drawdown up to the facility limit of $160,000 and an interest rate of 14.75 per cent (the actual rate of 12.75 per cent plus the usual 2 per cent margin), the Alders would need to be able to pay Citibank $1,966 per month.  Accordingly, they “passed” the capacity test (by $52).  If Mr Alder’s taxable income of $52,482 for the year ending 30 June 1992 had been used, they would have failed the test.

158               The Citibank facility was settled on 2 March 1992 when the National Australia Bank was paid $53,203.24 and the following further amounts were drawn on the facility: $570 to Citibank Savings Ltd; $145.50 to the Land Titles Office; and $593 to the New South Wales Department of State Revenue.  The total drawdown on settlement was $54,511.74.  On 17 March 1992 the Alders also drew down $5,000 to pay NMLA for a “Key Person” life policy.  This amount was debited to their Mortgage Power account on 24 March 1992.  On 16 March 1993, the second annual premium of $5,000 was debited to that account.  Mr Alder then borrowed $4,480 against that policy on 7 April 1993. 

159               The Alders’ “Application for units in the National Mutual Sharemarket Trust Funds” was dated 23 April 1993, that is, about a year after the refinancing, and was for 4,500 for units in the “Equity Imputation Fund”. Exceptionally, the investment was financed, not from the Mortgage Power account, but by a borrowing from Permanent (the trustee of the Mortgage Trust) of $4,480.50 against the security of the insurance policy on which two years' premiums of $5,000 each had by then been paid.  This amount of $4,480.50 was deposited into the Alders’ Mortgage Power account on 23 April 1993.  The borrowing accrued interest at 9.5 per cent per annum from 7 April 1993 to 20 September 1993 of $200.56.

160               At the time of entry into the earlier refinancing transaction with Citibank and the discussions about the Package (with which the Alders did not proceed), the Alders did not consult a solicitor.  They claim they were not advised to do so, yet they signed a “Borrower's Acknowledgment” to the effect that they had been so advised but had decided not to employ a solicitor. 

161               The Alders’ solicitor in connection with their claim for compensation, Peter C Thompson, calculated the amount of their loss at $11,510.  He submitted their claims to McDonald of NM by letter dated 25 March 1994.  To this amount were added Mr Thompson’s fees and accounting fees payable to Gleeson & Gordon totalling $1,875relating to the making of the claim.  The total paid to the Alders was $13,385 and this is the amount in respect of which NM claims contribution from Citibank.

162               The Alders’ case presents unusual features.  The initial transaction was, in substance, a refinancing and the taking out of a NMLA “Key Person” life policy for which the drawdown was only $5,000.   The Alders invested the modest sum of only $4,500.  They invested, not in the Property Trust, but in the NM Equity Imputation Fund.  But their complaint did not concern this investment.  In fact, they chose to retain the units rather than have them redeemed as they were entitled to do.  According to their solicitor, Mr Thompson, their complaint was that they were persuaded to invest in what they regarded as an expensive life policy being a Key Person policy involving premiums of over $5,000 per year and to take a Citibank Mortgage Power facility when there seemed to be no need for such a facility.

163               Mr Alder's affidavit testimony under the heading "REALISATION OF LOSS" was as follows:

"52.     I first became aware that the Negative Gearing Investment was a problem when I hadn't seen anything for my $5,000 investment.  I would contact C Roberts but his response was always vague and to the effect of:

            'You won't see anything until the second year.  It will all happen in the later years'.

53.              It was only after I was told in mid 1993 that D Jones was no longer involved in the agency, and was asked to review my investment with Martin Barnes, that I appreciated that perhaps there was something wrong with the investment.  I spoke to C Roberts at that time and asked him where my money had gone.  His words at that time were 'after 12 months you will start seeing it'.  Craig Roberts thereafter went overseas and I have not heard from him since.

54.              I then went to my accountant Mr David Gordon to determine if there was anything wrong with my investment.  He said words to the effect:

                        'I can't enlighten you about it but I know a solicitor, Peter Thompson, who is handling the case'.

            I then contacted Mr Peter Thompson and made an appointment to see him.”

164               Mr Alder claims never to have understood the scheme, and to have been always unsure whether the investment was in “an insurance policy, or the trust funds”.  He also said that Jones told him that there were “no risks” and that if anything went wrong, he (Jones) would “pay the money back”.  This statement related, however, to units in the Property Trust in which, as noted earlier, the Alders did not invest.

165               Mr Alder stated that he believed the initial drawdown of $5,000 on the facility would be invested in the NM Equity Imputation Fund, with a portion being used to pay the insurance premium, when in fact the whole $5,000 was used to pay the premium.  However, in cross-examination he said he understood he was to use the Mortgage Power facility to take out the insurance policy against which, in turn, he would be able to borrow after having paid two years' premiums, in order to buy the shares in the Equity Imputation.  This is consistent with the fact thatthe first payment of a premium of $5,000 was made on 17 March 1992 and the second on 16 March 1993, while the units in the Equity Imputation Fund were not applied for until April 1993.

166               Ultimately, Mr Alder's testimony was most unclear as to what he was told and as to what his understanding was.  He did not complain until April 1993 about the two premiums of $5,000 each or the borrowing of $4,480 and as noted earlier, was content to retain the units in the Equity Imputation Fund.

167               The amount paid by NM to the Alders was made up as follows:

Payment of two years’ premiums @ $5,000 per year	$10,000.00
Less borrowing from NM against policies Interest on that borrowing	(4,480.00) 201.00 ------------- 5,721.00
Establishment and set up costs of Citibank facility calculated at	3,991.00
Interest (on loss of use of money on set up costs) – 10 per cent over two years	798.00
Interest on first $5,000 premium  on policy of insurance (calculated at 10 per cent for two years)	1,000.00 ------------ 11,510.00
Legal and accounting fees on negotiation of settlement	1,875.00 ------------ 13,385.00 =======

 

168               NM seeks contribution from Citibank in the sum of $13,385.

2.         Cornelius ANTHONY Appelman and Martina MARY Appelman
(introduced by Kelly)

169               In 1991 Mr Appelman was a thirty-one year old subcontractor bricklayer who carried on business in partnership with his wife, who was a bookkeeper.  They had two children.  For the year ended 30 June 1992 Mr Appelman’s taxable income was $16,541 and Mrs Appelman’s was $17,196, a total of $33,737 (for the year ended 30 June 1993, their respective incomes were $14,014 and $14,888, a total of $28,902).  The Appelmans owned their own home at Narre Warren North, Victoria, which was valued by Citibank at $285,000 and was subject to a mortgage to the ANZ Bank on which $20,150 was owing, giving them an "equity" in the home of $264,850.  In addition, $13,550 was owing to the ANZ Bank on a personal loanthat had been used to acquire a car.  They had not previously invested in shares or in units in a property trust.

170               Mrs Appelman’s sister, Linda Bond, introduced them to Kelly.  Kelly made whiteboard presentations to Mr and Mrs Appelman in his office at Cheltenham between August 1991 and 10 July 1992.  The pleaded representations were allegedly made by Kelly in his office during that period.  As the Appelmans were about to have their third child, their most immediate concern was the completion of their house.  Accordingly they decided to take out the Mortgage Power loan immediately and to invest in the Trust later.  They applied for the loan in September 1991 and the units in the Trust in June 1992.  In cross-examination, Mr Appelman confirmed that the Citibank facility was initially used only to pay out their indebtedness to the ANZ Bank and to complete the renovation of their house which they could not otherwise have afforded.

171               In the completed application for the Mortgage Power facility, the Appelmans estimated the value of their home at $400,000 and of their motor vehicles at $35,000, and they sought a facility of $120,000.  The form stated the total of the amounts owing to ANZ as $30,000.  The application for Mortgage Power finance indicated that the Appelmans worked in their own business, he as a builder and she as a book-keeper.  Citibank recorded the purpose of the loan as “refinance & investment”.  "Investment" did not accord with the Appelmans' immediate purpose of home renovation but they intended to draw on the facility later for investment purposes. Mr Appelman could not recall whether he signed the form in blank.

172               Citibank’s capacity test recorded Mr Appelman’s income for the 1990 financial year as $24,151 ($2,012 per month) and Mrs Appelman’s as $5,664 for three months ($1,888 per month), a total monthly income of $3,900.  One third of this was shown on the Mortgage Finance Capacity Test form to be$1,287 per month.  The current Mortgage Power interest rate was 13.95 per cent per year and the form of capacity test required a "levy" or "margin" of 2 per cent to be added on.  But 15.95 per cent of $120,000 was $19,140 or $1,595 per month, and so there was a problem to the extent of $308 per month.  According to handwriting on the form, Citibank was prepared to apply 38 per cent rather than 33 per cent to the income figure which gave a monthly figure available of $1,482 rather than $1,287.  Apparently, the low LSR in the case of the Appelmans was regarded as justifying this increase to 38 per cent and giving Citibank some comfort.  But there was still a problem because even $1,482 was less than even $1,595 by $113.  Someone within the CPU wrote on the capacity test form “only fails because of levy (2%)”.  Clearly this was a reference to Citibank’s standard requirement that for the purpose of the capacity test, the interest rate be treated as being 2 per cent higher than it in fact was.  Interest at the actual current rate of only 13.95 per cent on $120,000 was $16,740 per year or $1,395 per month less than $1,482.

173               A facility of $120,000 was only 30 per cent of the Appelmans’ estimated market value of their home of $400,000.  But Citibank’s valuation came in at only $285,000.  A facility of $120,000 was 42 per cent of that figure.  A maximum loan to security ratio of 43 per cent was approved.  As well, approval was given to an exception being made to the standard requirement that the capacity test be passed.  The exception was authorised by Jennifer Boyd who was head of CPU at the time.

174               The application was processed in the CSU between 6 and 10 September 1991 and Citibank’s letter of offer was sent on 16 October 1991.  It was for a credit line of $120,000 at an initial interest rate of 13.95 per cent.  The minimum insurable value of the home was set at $220,000.

175               The Citibank facility was settled on 30 October 1991 when the following amounts were drawn down: $1,220.80 to Citibank’s solicitors, Lander & Rogers, for legal fees for acting for Citibank; $33,711.87 to ANZ Bank to discharge the home loan and car loan; $1,615.00 to LKFM as a reimbursement of Citibank application and valuation fees; $5,000 to NMLA for the premium on a NM Life insurance policy; $545.00 to Van Minnen for her fee for “acting for” the Appelmans; $4,000 to the Appelmans which they used to reimburse Kelly for money he had lent them; and $5.00 for bank charges.  Accordingly, the total amount drawn down was $46,097.67.  According to Mr Appelman’s affidavit, the $4,000 lent by Kelly had been used to prepay interest on the NM loan.  However, in his further affidavit, Mr Appelman claimed that the $4000 was lent to him by Mr Kelly to help him with his home expenses.  Perhaps the home renovations were funded by subsequent drawdowns.  Subsequent drawdowns (other than those documented below) included $2,000 on 13 November, $1,000 each on 26 November, 6 December, 9 December and 13 December, $2,000 on 19 December, and $2,500 worth of drawdowns in January-February 1992, $3,000 worth in February-March, $1,500 on 25 March, $1,000 on 15 May, $1,000 on 22 May, $885 on 25 June and $800 on 8 July. 

176               Van Minnen “acted for” the Appelmans on settlement at the ANZ Bank, the outgoing mortgagee.  According to the Appelmans, they did not instruct her to act as their solicitor and did not receive any advice from her regarding their obligations to Citibank;they understood that she would be doing the conveyancing work and thought that she was a secretary.  The only contact the Appelmans conceded they had with Van Minnen was when Mr Appelman signed forms in front of her.  She signed Citibank forms and was referred to in the forms as a "solicitor".

177               In June 1992, some eight months after the refinancing was settled, the Appelmans signed the application forms for $18,000 worth of initial units (15,402 units) and $42,000 worth of further units (35,936 units) in the Property Trust.  The initial units were funded by a further drawdown of $18,000 on the Citibank facility on 10 July 1992 when $4,830 was also drawn down to pre-pay interest on the NMPS loan.  The Applemans borrowed $42,000 through NMPS from the Mortgage Trust for five years at 11.75 per cent per year to acquire the further units and mortgaged all 60,000 units to secure this advance.  In connection with the acquisition of the units, the Appelmans’ debt level rose as follows:

Borrowed from Citibank for initial units	$18,000
Pre-paid interest	4,830
NMPS	315
Stamp duty	132
Borrowed from NM for further units	42,000
Fee paid to LKFM	2,520
	$67,797 =====

 

178               The Appelmans also took out life insurance with NM for Mr Appelman costing $5,000 for the first year and $5,250 for the second year.  The second premium was drawn down on the Mortgage Power account on 12 January 1993.  The Appelmans appear to have paid only the two annual premiums.

179               Immediately following the acquisition of the units in July 1992, the Appelmans owed approximately $85,000 to Citibank and some $42,000 to NMPS.  Their monthly interest liability was around $1,280 which amounted to approximately 45 per cent of their pre-tax combined monthly income.

180               In his affidavit, Mr Appelman stated:

“I first became aware that the Negative Gearing Investment was a problem when National Mutual dividends were not funding the Citibank interest.  It got so bad that we sold our house to clear the Citibank debt in mid-1993.”

181               After the sale of their house in mid 1993 in order to repay the Citibank loan, the Appelmans moved into rented accommodation.  Still there was an ongoing interest liability on the NM loan.  Mr Appelman claimed in cross-examination that they sold their home because they “lost a lot of money” and found that they had been given bad financial advice from Lance Kelly, which was “to borrow so much money from Citibank and spend it”.  The Appelmans requested redemption of their units in December 1993.  In an undated letter to Peter McNamara of the ASC, Mrs Appelman claimed that Lance Kelly had told them that he was leaving NM and that they should “cash in” their investments.

182               Assessor Peter J Dunn of Moneyplan Australia (MP) Pty Ltd interviewed the Appelmans on 15 February 1995 and assessed their loss on 16 April 1995 at $24,809 to which were added solicitors’ fees on the settlement deed of $50, making a total payment to the Appelmans of $24,859.  The settlement deed is dated 7 May 1995.  The amount of $24,859 was made up as follows:

Capital loss	$5,452.00
Stamp duty	444.00
P W van Minnen	545.00
Lander & Rogers	1,221.00
ANZ Bank discharge	150.00
NMPS – establishment fee and stamp duty	315.00 132.00 ------------
Insurance premiums($5,000 & $5,250)	$10,250.00
Net cost of funding	6,300.00
Solicitors’ fee and release	50.00 -------------- $24,859.00 ========

183               NM seeks contribution from Citibank in this sum of $24,859.

3.         Leigh Charles Bachmann and Christine Anne Bachmann (introduced by buttars and Blee)

184               In 1989 Mr Bachmann was a thirty-six year old structural engineer who practised through his company, Leigh Bachmann (Structural Engineer) Pty Ltd.  He had a postgraduate degree in Civil Engineering.  Mrs Bachmann was a high school teacher employed by the New South Wales Department of Education.  In the financial year ended 30 June 1989, Mr Bachmann’staxable income was $30,563 and Mrs Bachmann’s was $26,158, a total of $56,721.  In the financial year ended 30 June 1990, the respective amounts were$18,438 and $10,433, a total of $28,871.  They owned a house at Mosman in Sydney, which was mortgaged to the State Bank Cooperative Housing Society for about $55,000.  They had four dependent children.

185               The Bachmanns had been neighbours of Erik Buttars since 1983.  After Buttars lost his job and became a NM agent, the Bachmanns decided to support him by switching some of their insurance to NMLA. 

186               In November 1989, Buttars told the Bachmanns about the Package and said that he had invested in it.  He arranged for the Bachmanns to receive a presentation of the Package at Jones’ office in Manly from Blee.  Buttars was present when Blee gave the Bachmanns a “whiteboard presentation”.   The Bachmanns subsequently discussed the matter with Buttars.

187               The Bachmanns’ application for a Mortgage Power facility was dated 15 November 1989.  It stated Mr Bachmann’s occupation as “Civil Engineer” and that of his wife as “High School Teacher”.  The application fee of $975 and valuation fee of $500 (totalling $1,475) were paid through Mr Bachmann’s credit card authorisation given to either Buttars or Blee.  The form of application stated Van Minnen as the Bachmanns’ solicitor, however, Mr Bachmann testified that he had not instructed her to act as hissolicitor on theCitibank loan and that all his dealings were with Buttars and Blee.  The form gave an estimated market value of the Bachmanns’ home of $450,000 and sought a credit line facility of $300,000.

188               Hawkins (Durnan) received the Bachmanns’ application at the CSU in Melbourne and processed it to the CPU in Sydney under cover of a TQC mortgage checklist dated 24 November 1989.  Hawkins recorded the application under LKFM’s agency and noted that “clients require funds for investment purposes with National Mutual Property Trusts and to pay out existing1^st Mortgagee”.  It appears that Citibank was concerned to verify the Bachmanns’ details with their accountant before accepting the application.  After several unsuccessful attempts, Citibank did in fact make inquiries of the accountant.  According to a Citibank “Acceptance and Administration Checklist”, a capacity test was not required.  This was in accordance with Citibank’s policy at that time of not conducting a capacity test (except where the loan exceeded $300,000).

189               By letter dated 11 December 1989, Citibank advised the Bachmanns of conditional approval of a Mortgage Power facility of $300,000.  On 14 December 1989, Sally Meyrick (formerly Garvey) from the CSU forwarded to the CPU in Sydney a valuation of the Bachmanns’ home which came in at $425,000 (as against the Bachmanns’ estimated market value of $450,000).  At the approved maximum LSR of 70 per cent, this gave a facility limit of $297,500.  Citibank’s letter of offer was despatched on 21 December 1989, offering a facility of $297,500 and advising that, the current interest rate was 19.95 per cent per annum.  If a capacity test had been applied at that time, a deemed interest rate of 21.95 per cent (19.95 per cent plus 2 per cent) would have given a yearly interest figure of $65,301.25 which exceeded not merely one third but the whole of the Bachmanns’ annual income.

190               The transaction settled on 27 March 1990.  Maurice Doria of Corrs, Sydney represented Citibank.  On settlement $57,792.17 was transferred from the Mortgage Power account to Citibank Savings Ltd for a bank cheque to Corrs’ Trust Account to pay out the existing mortgagee, State Bank Cooperative Housing Society, and Corrs’ legal fees.  As well there were the following drawdowns: $40,000 for the initial units; $1,200 to NMPS as the application fee on the application for the loan for acquisition of the further units; $604 to the Comptroller of Stamps for stamp duty;  $6,436 to NMLA as premium on an insurance policy; $5,587 to NMLA as premium on another insurance policy; and $295 to Van Minnen for her fee.  These drawdowns totalled $111,914.17.  Thus, by the end of March 1990, the Bachmanns owed about $112,000 to Citibank and owned about $40,000 worth of units, whereas previously they had owed about $55,000 to the outgoing mortgagee. 

191               The application for the further $160,000 worth of units was dated 27 March 1990 (that is, thedate of settlement) and NMPS’s letter of offer of finance of $160,000 was dated 5 April 1990.  The term was five years, interest only, with a balloon repayment at the end of that period.  The interest rate was “18.75% variable in line with fluctuations in market rates generally”.  The initial units (27,765) were issued on 5 April 1990 and the further units (110,947) were issued on 17 May 1990.  The loan of $160,000 was made by NMPS on the latter date.  Accordingly, by that date the Bachmanns owed approximately $113,677 to Citibank and $160,000 to NMPS, a total of $273,677, as against their original debt of some $55,000 to the State Bank Cooperative Housing Society, but of course the Bachmanns had invested $200,000 in units.

192               By early 1992 Mr Bachmann thought that the Package was a problem when he became concerned over the falling value of the units and the amount of the interest liability on the investment.  He met with Jones who told him that the solution was to invest more rather than to seek to extricate himself from the Package.  Mr Bachmann did not invest more and cashed in his insurance policies. 

193               In late 1992, the Bachmanns moved to Hong Kong.  In February 1993, they received a letter from Victor J Hocking of Finance & Estate Planning Corporation Pty Ltd offering to help them out of the investment.  The Bachmanns returned to Australia in December 1994 and gave details to Hocking who negotiated with NM to settle their claim.

194               The history of the transactions on the Citibank and NM loan accounts from 31 May 1990 to 7 January 1994 is somewhat complex.  The Bachmanns’ loss was assessed by David M Bullock, Chartered Accountant, in February 1995.  The settlement deed was entered into on 23 May 1995 and a cheque for $169,633 was sent to the Bachmanns’ solicitors on 15 May 1995.  The Bachmanns paid $50,000 into their Citibank account on 15 June 1995.  The closing monthly balance was then reduced to $7,907.  The units were redeemed on 1 February 1995 and the proceeds were used to extinguish the NMPS loan.

195               NM’s claim in respect of the Bachmanns is of $169,633 made up as follows:

Legal and consulting fees		3,000.00
Interest paid on the NM mortgage		92,308.00
Interest paid on Citibank mortgage		69,169.09 -------------- 236,165.00
Less: Dividends received from Property Trust	56,767.00
Tax savings generated	27,603.00 -------------	84,370.00 -------------- 151,795.00
Saving to NM by action taken by the Bachmanns		6,963.00
Mr Bullock’s fee		4,000.00
Mr Hocking’s fee and disbursements		6,875.00 --------------- $169,633.00

4.         Ian Geoffrey Boulter and Helena Johanna Boulter (introduced by Kelly)

196               In 1990 Mr Boulter was a forty-six year old Administration Officer employed by the City of Springvale and his wife was a secretary.  For the year ended 30 June 1990 his taxable income was around $14,063 and Mrs Boulter’s was about $29,837, a total of $43,900.  For the year ended 30 June 1991 the respective amounts were $24,469 and $20,176, a total of $44,645.  The Boulters owned their home at Frankston North, Victoria which was valued by Citibank at $141,000 and mortgaged to the Bank of Melbourne securing some $45,000.  They had no dependants.

197               In May 1990, a friend of theirs, David Philip recommended that they contact Kelly which they did.  Kelly made whiteboard presentations to the Boulters at least three times between May and August 1990.  The completed Mortgage Power application form was submitted to Citibank on or around 19 July 1990.  The Citibank application fee of $975 and the valuation fees of $200 were paid by Kelly in the first instance.   The form showed Van Minnen as the Boulters’ solicitor; gave an estimated market value of $160,000 for the security property; showed the Boulters as owing $10,000 to Esanda as well as $50,000 to the Bank of Melbourne, and paying $290 per month to Esanda and $880 per month to the Bank of Melbourne and.  By two application forms dated 31 August 1990, the Boulters applied for $14,000 and $40,000 worth of units in the Trust and by a further application form of that date they applied to NM for a loan of $40,000 to buy the further units.

198               Hawkins (Durnan) was the Citibank Area Manager and her name, together with Kelly’s, was shown on the Citibank Mortgage Power “Acceptance Worksheet Revolving Credit” against the item “Salesman/Introducer Name”. 

199               The approval was for a Mortgage Power facility of $105,750 based on a valuation of $141,000 and a maximum LSR of 75 per cent.  No capacity test was carried out.  Citibank sent its letter to the Boulters on 9 August 1990 offering a facility of $105,750 with an initial interest rate of 17.95 per cent. 

200               On the transaction, Van Minnen “represented” Mr and Mrs Boulter, while Lander and Rogers represented Citibank.

201               The transaction settled on 31 August 1990 when the following amounts were drawn down: $1,129 for the costs and disbursements of Citibank’s solicitors, Lander & Rogers; $45,264.66 to discharge the existing mortgage to the Bank of Melbourne; $1,175 to reimburse Kelly for the Citibank application and valuation fees; two cheques for $2,500 each in favour of NMLA for premiums on insurance policies; $14,000 to PTA for the initial units; $300 to NMPS for the application fee on the application for the NMPS loan of $40,000; $124 to the Comptroller of Stamps for stamp duty; $6,800 for the first year’s interest on the NMPS loan; $315 to Van Minnen for her costs and disbursements; and $30 to Citibank for bank charges.  Accordingly, the total amount drawn down on the Citibank facility was $74,137.66, and in addition the Boulters had borrowed $40,000 from NMPS.

202               The applications for the initial and further units and the application for a loan of $40,000 from NMPS were forwarded to NMPS together with the Citibank cheques.  The initial units (10,059) and the further units (28,740) were issued on 14 September 1990 and 14 November 1990 respectively.  All units were mortgaged to Permanent as security for the NMPS loan of $40,000.

203               Mr Boulter first became aware of a difficulty with the scheme “when the dividends were not coming in and [they] had to top up”.

204               By November 1990, the Boulters’ indebtedness had increased from $45,264.66 originally owed to the Bank of Melbourne to debts of some $74,000 to Citibank and $40,000 to NMPS.  Their monthly interest liability was around $1,650 which amounted to approximately 45 per cent of their pre-tax combined monthly income.  By 18 January 1991, the Boulters had drawn down $80,392.58 and had available remaining credit in the Mortgage Power facility of only $25,357.42.  By 18 December 1991, the drawdowns had reached $86,087.61, leaving $19,662.39 in credit available to be drawn on.  By 18 January 1992 the Mortgage Power facility had “blown out” to $94,310.33, and by 18 September 1992 it had reached $98,789.38 leaving only $6,960.62 in credit.

205               Assessor Richard Bouchier assessed the Boulters’ losses on 30 July 1993 and recommended payment of $29,566 together with a refund of insurance policy premiums of $10,000, plus $462 representing the differential between the value of the units and the amount of the loans, making a total of $40,028.

206               Compensation of $40,028 was paid by NM to the Boulters on 12 May 1994 pursuant to a deed of release dated 9 May 1994.  The Boulters paid this amount into their Citibank account on 16 May 1994, reducing the balance of that facility to approximately $49,000.

207               NM’s claim for contribution by Citibank on account of the Boulters is in respect of $40,591, which includes $665 legal fees and $360 accounting expenses, less the $462 redemption paid on behalf of the Boulters. 

5.         Allan Stewart Crawford and Heather Joy Crawford (introduced by Jones)

208               In 1989 Mr Crawford was a thirty seven year old computer operator who had worked in computing in several banking organisations.  His gross income for the year ended 30 June 1989 was about $50,000 but for the year ended 30 June 1990 it fell to $15,500.  He and his wife owned their home at Cromer Heights, Sydney which was valued by Citibank at $340,000 and which was subject to a mortgage on which about $70,000 was still owing.  They had three children.  Mr Crawford had known Jones for more than twenty years and regarded him as a good friend.  Presentations of the Package were made to Mr Crawford in June 1989 by Jones and someone from Melbourne who, Mr Crawford believed, was an employee of Citibank, although he cannot recall the basis of his belief.

209               The Crawfords’ application to Citibank for Mortgage Power finance was submitted through LKFM (in the usual way under LKFM’s “agent’s stamp”) on or a few days before 20 June 1989.  That application identified Mr Crawford’s occupation as “Project Leader” and Mrs Crawford’s occupation as “Home Duties”.  It also identified Van Minnen as their solicitor.  It contained no details of their assets and liabilities.  The application was processed on 20 June 1989 by Mr Stewart in Citibank’s CSU in Melbourne.  The CPU in Sydney processed and initially approved a Mortgage Power facility of $266,000 on 26 June 1989.  It appears that following this approval, the LSR was varied down from 70 to 65 per cent, reducing the maximum loan allowable to $221,000.  On 10 July 1989, Tim Stewart of the CSU noted a telephone request by the Crawfords asking that their application be amended to become one for a “Citi2nd” facility.  This meant that, the Citibank loan was to be secured by a second mortgage rather than be used to pay out the existing first mortgage.  A Citi2nd facility for $151,000 at an initial interest rate of 21 per cent was approved based on an approved limit of $221,000 less an amount supposedly owing to Westpac of $70,000 on the existing first mortgage.  The facility was subsequently varied to $146,000 when Tim Stewart advised the CPU that the amount owing to Westpac was $75,000, rather than $70,000. 

210               The transaction was settled on 25 October 1989 when the drawdowns were: $10,359 to NMLA for insurance premiums; $40,000 to PTA for the initial units; $800 to NMPS for the application fee on the NMPS loan; $604 to the Comptroller of Stamps for stamp duty; $295 to Van Minnen for her fee for “acting for” the Crawfords; $1,416 to Corrs, Citibank’s solicitors, for their costs and disbursements; $15 to Citibank for drawing the bank cheques; and $7,500 to the Crawfords.

211               The application for the $40,000 worth of initial units in the Property Trust was dated 25 October 1989, as was the application for the further $160,000 worth of units and an application for finance from NMPS for $160,000.  The NMPS loan was approved by letter dated 30 November 1989.  By the end of 1989, therefore, the Crawfords owed a total of $60,989 in addition to their outstanding home loan from Westpac of approximately $75,000 and their further NM debt of $160,000.  The Crawfords were issued with 28,480 initial units on 23 November 1989 funded by Citibank and a further 111,121 units on 14 February 1990 funded by the NMPS loan.  Their monthly interest liability to Citibank and NMPS was about $3,660 which amounted to nearly 88 per cent of Mr Crawfords pre-tax monthly income.  To this had to be added the continuing repayments on the loan from Westpac. 

212               Mr Crawford gave evidence that by early 1991, the credit facility had been drawn down to the extent that there was only some $8,000 credit remaining.  Relying on advice from Kelly via Jones, Mr Crawford arranged to have half of his units redeemed and used the proceeds to repay $80,000 off the loan from NMPS, to pre-pay the interest on the remaining $80,000 NMPS loan and to pay $8,000 into the Citibank account to ease his monthly payments.  The redemption of the 70,000 units occurred on 28 March 1991 and resulted in a payment to the Crawfords of $91,634.45 which they applied in the manner stated.  The Citibank facility was near to or above $145,000 for the whole of 1992, notwithstanding the reduction in the Crawfords’ indebtedness from this sale of half their units in March 1991.

213               The Crawfords’ difficulties were compounded when Mr Crawford lost his job in December 1989 with the result that in the year ending 30 June 1990, his taxable income was only $15,459.   At about this time, Jones offered Mr Crawford a job with him with a “guaranteed” income of $50,000 a year.  He took up Jones’ offer.  Mr Crawford said that he became aware of risks in the Package in about December 1992 or January 1993 after investor complaints were being received while he was working in Jones’ office. 

214               Assessor Wall assessed the Crawfords’ loss and on 21 December 1993 recommended that they be $115,374.  Negotiations with Peter Thompson, the Crawfords’ solicitor, resulted in a revised assessment by Mr Wall on 4 March 1994.  Following further submissions by Mr Thompson on 14 June 1994, NM made an interim payment of $25,000 on 15 July 1994.  After Mr Wall completed his review, the amount recommended rose to $137,614 to which were added legal fees and accounting fees totalling $12,066, in addition to earlier legal and accounting fees of $4,873.  A sum of $107,741 ($137,614 less the $25,000 part payment and the legal and accounting fees included in the compensation amount) was paid to the Crawfords on 5 September 1994.  

215               NM claims from Citibank contribution in respect of $155,307.96 on account of the Crawfords, which includes $7,121.96 being the amount forgiven after the redemption of the remaining units.

6.         Ross NEWTON Daniels and Shirley RAE Daniels
(introduced by Naughton and Kelly)

216               In early 1991 Mr Daniels was a forty-five year old public servant.  His taxable income for the year ended 30 June 1991 was approximately $52,000 and his wife’s was about $20,800 per year.  They owned their own home at Minto, Victoria which was unencumbered and was valued by Citibank at $168,000.  They had three dependant children.  In late 1990 Mr Daniels responded to a newspaper advertisement about Mortgage Power loans by filling in a coupon and returning it to Citibank.  In January 1991 he was contacted by Hugh Judd, who identified himself as Kelly’s marketing manager.  Judd, and subsequently Naughton and perhaps Kelly, made three presentations in February and March 1991 to the Daniels. 

217               As usual, Kelly submitted the Mortgage Power application form bearing the LKFM agency stamp.  It identified Mr Daniels’ occupation as “Public Servant” and that of Mrs Daniels as “cleaner”.  The application was processed in the CSU by Hall.  The application was for a facility of $127,000 based on an LSR of 75 per cent and an estimated value of the Daniels’ home of $170,000.

218               The CPU processed and approved a facility of $126,000 on 27 February 1991 and a letter of offer was sent on 5 March 1991, at an initial rate of 15.95 per cent.  The reduction in amount was based on a valuation of the Daniels’ home of $168,000.  A capacity test was performed by Mariano Tecson of the CPU.

219               Two applications for units in the Property  Trust were dated 26 March 1991.  The $50,000 for the initial units was funded from the Citibank facility and the $100,000 for the further units was funded by NMPS loan (approved on 28 March 1991) in that amount.  The Daniels mortgaged all units to (110,030 units) to Permanent as trustee of the Mortgage Trust to secure the NMPS loan.  The Mortgage Power loan was settled on 26 March 1991 when the following drawdowns occurred: $1,163.80 to Lander & Rogers, Solicitors, for their costs for acting for Citibank; $50,000 to PTA for the initial units; $14,500 as a prepayment of the first year’s interest on the NMPS loan (the initial rate of interest was 15.25 per cent and the amount of the NMPS loan was $100,000. I do not know why the amount paid was $14,500 rather than $15,250); $10,000 to National Australia Bank; $1,175 to LKFM as a reimbursement of the Citibank application and valuation fees paid by it; $750 as the application fee on the application for the NMPS loan; $364 to the Comptroller of Stamps for stamp duty; $545 to Van Minnen for her fees for “acting for” the Daniels, and $20 bank fees.  In the result, by the end of March 1991, Mr and Mrs Daniels owed approximately $80,000 to Citibank and a further $100,000 to NMPS.  Their monthly interest liability was about $2,333, which was about 38 per cent of their pre-tax combined monthly income.

220               By March 1992 the Citibank facility was drawn to $85,156.12 and by December 1992, it was drawn to $107,358.11, leaving a balance of only $18,641.89 available for further drawdowns.  By June 1993 the facility was drawn to $111,235.85, leaving only $15,764.15.  In mid 1993 Mr Daniels returned to Naughton who suggested that he request that the units be redeemed and reinvest the proceeds.  Mr Daniels did not accept this advice. 

221               Assessor Dunn assessed the Daniels’ loss on 18 October 1993 and recommended it be quantified at $48,528.  This recommendation was reviewed in negotiations between McDonald of NM and the Daniels’ solicitors, Richmond & Bennison.  The amount finally assessed was $87,862, to which was added $3,600 for legal fees and fees of a financial planner for advice.  By the time of settlement there was additional capital loss of $1,807.76 and further interest on the NMPS loan of $3,056.51. 

222               The total loss crystallised at $96,326.27 which is the amount in respect of which NM claims contribution from Citibank.

7.         Colin John Douglass and Julie Irene Douglass
(introduced by Blee AND JONES)

223               In 1990 Mr Douglass was an employed thirty-four year old software manager.  Mrs Douglass was a “documentor/proof reader” employed by the same software company.  They had two dependent children.  Mr Douglass’s taxable income for the year ending 30 June 1990 was $37,714.  For the year ending 30 June 1991 it was $33,407.  The Douglasses owned their own home at Dundas, Sydney which was subject to a mortgage for about $75,000 to the Advance Bank. 

224               In late 1990, in the presence of Blee, Mr Douglass’s insurance agent recommended that he “come in and talk about” an investment.  In September and October 1990, Blee made at least three whiteboard presentations of the Package to Mr and Mrs Douglass at Blee’s office. 

225               The Mortgage Power application form signed by Mr and Mrs Douglass was dated 25 October 1990.  It stated an estimated market value of the security property of $310,000 and a monthly mortgage commitment of $1,300.  The application did not give any particulars of the Douglasses’ income or their liabilities.  It identified their “solicitor/land broker” as Van Minnen.  Apparently the Douglasses were told initially that the LSR of 70 per cent would give them a facility of $217,000 on the basis of the estimated market value of $310,000.  Their application was processed on 14 November 1990 by Account Manager, Craig Hall of the CSU in Melbourne.  Citibank’s valuation came in at only $270,000.  On the basis of the LSR of 70 per cent, the maximum facility able to be approved was reduced to $189,000.  Within the CPU Sydney, a facility of $189,000 was approved, at an initial interest rate of 16.75 per cent.  The minimum insurable value was set at $185,000.

226               Citibank’s letter of offer to Mr and Mrs Douglass was dated 6 December 1990.  The letter noted Van Minnen as the Douglasses’ solicitor and Corrs Sydney as Citibank’s solicitor.  Van Minnen appears to have “witnessed” an undated Borrower’s Acknowledgment regarding Mortgage Power by the Douglasses reading: “although advised to consult a solicitor, [we] have of our free will decided not to employ a solicitor”.  Mr Douglas testified that he did not sign the document in Van Minnen’s presence.

227               The facility was settled on 22 March 1991.  The initial drawdowns on that date were: $1,445 to Jones for reimbursement of Citibank application and valuation fees which Jones had paid; $5,000 to NMLA for the first premium on a life insurance policy; $30,000 to PTA for the initial units; $525 to NMPS for the application fee on the application for the NMPS loan to enable acquisition of the further units; $244 to the Comptroller of Stamps for stamp duty; $2,000 to Mr and Mrs Douglass; $545 to Van Minnen for her fee for “acting for” Mr and Mrs Douglass; $72,471.06 which was telegraphically transferred to Corrs’ trust account from which $70,377.09 was paid to the Advance Bank to discharge the existing mortgage, $244 was to be paid to Laurence & Laurence, solicitors for that outgoing mortgagee and $1,781 was to be paid to Corrs for their costs and disbursements on acting for Citibank (of which $59.97 was refunded by Corrs to the Douglasses on 9 April for excess moneys held on trust); and $20 to Citibank Savings Ltd for bank cheque fees.  Accordingly, the total amount drawn down was $ $112,250.06 leaving $76,749.94 available for further drawdowns.

228               Apparently the applications for the initial units and the further units were both dated 5 February 1991 and were forwarded with the application for the NMPS loan of $70,000 and the Citibank cheques to NMPS.  The initial units (22,006) and the further units (51,347) were issued on 8 April 1991 and 23 April 1991, respectively.  All were mortgaged to Permanent as security for the NMPS loan. 

229               By April 1991, the Douglasses’ monthly interest liability was approximately $2,400, which amounted to nearly 72 per cent of Mr Douglass’ pre-tax monthly income.  Mrs Douglass’ income is not disclosed by the evidence.

230               By 18 January 1993, Mr and Mrs Douglass had drawn down on the Citibank facility to the extent of approximately $175,000 leaving credit available of only approximately $13,500.  Their monthly interest liability had, because of lower interest rates, decreased slightly to around $2,130.

231               In 1993, Mr Douglass found that he could not afford to pay the premiums on the insurance policies.  In August 1993 he completed a questionnaire on the status of his investment with NM after considering a more affordable insurance policy.

232               Assessor Wall sent his assessment report on the loss of Mr and Mrs Douglass on 23 December 1993 to NM and recommended they be paid $76,294.  This recommendation was the subject of negotiation between Peter Thompson, the solicitor for Mr and Mrs Douglass and Assessor Wall, which resulted in a revised assessment on 24 May 1994 of $87,591.  (The settlement deed dated 16 June 1994 provided for payment of $57,591 on the basis that NMAM would also buy the Douglasses’ units.  NM sent its cheque for $87,591 on 21 June 1994.  NM also paid $1,065 to Peter Thomson for legal fees and $935 to an accounting firm for accounting fees, making a total of $89,591 which was paid to or on behalf of the Douglasses.

233               NM’s claim against Citibank for contribution on account of Mr and Mrs Douglass is in respect of $83,223.19, which NM calculated by excluding $6,387.81 redemption adjustment on the redeemed units from the sum of $89,591 paid out to or on behalf of Mr and Mrs Douglass.

8.         Andrea Martina eberts (formerly “Eberts-Vergura”) (introduced by Kelly)

234               In 1989, Ms Eberts was a thirty-two year old schoolteacher and was married with a nine year old child.  Her annual income was about $34,000.   She and her then husband, a spray painter, owned a home at Murrumbeena, Victoria.  The house was valued by Citibank at $165,000 and was subject to a mortgage of about $75,000.  Ms Eberts was introduced to Kelly by a friend at the school where she taught.  Kelly twice made “whiteboard presentations” of the Package to Ms Eberts.

235               The Mortgage Power application form identified Ms Eberts as a secondary teacher and her husband as a spray painter.  It contained no income details.  Tim Stewart, the Citibank Account Manager in Melbourne handling the transaction, received the application for a Citibank Mortgage Power facility on 15 May 1989 and processed it that day and sent it that evening to the CPU in Sydney by overnight bag.  The CPU processed and approved of a facility of $160,000 on 17 May, on which date Citibank despatched its letter of offer.  There was no capacity test.  When the property valuation of $165,000 was received, the credit limit was revised to $132,000, with a variable interest rate of 18.85per cent.

236               Settlement occurred on 29 June 1989.  The initial drawdowns totalled $123,501.64, when the following amounts were paid: $75,647.84 to RESI Statewide Building Society to discharge the existing first mortgage; $15,000 to PTA for the initial units; $204 to the Comptroller of Stamps for stamp duty; $300 to NMPS as loan application fee; $11,550 for the first year’s interest on the NMPS loan; $1,355 to LKFM for reimbursement of Citibank valuation and application fees; $4,956.80 to NMLA for the premiums on business insurance policies; $270 to Van Minnen for her fees for “acting for” Ms Eberts and Mr Vergura; $1,193 to Lander & Rogers for their fees for acting for Citibank; $25 to Citibank for bank charges; and $13,000 to Ms Eberts herself.  The drawdowns left only $8,499 of the facility of $132,000 remaining. 

237               Ms Eberts and Mr Vergura applied for initial units worth $15,000 (minus a management fee of $900) and a further $60,000 worth of units funded by the Mortgage Trust.  The initial units (10,658) and the further units (42,631) were all issued on 30 June 1989. 

238               Accordingly, as at the time of entering into the Package, instead of owing $75,000 on a first mortgage over their home, Ms Eberts and Mr Vergura owed $123,500 to Citibank on a first mortgage and a further $60,000 to NMPS on the security of a unit mortgage to Permanent over the $75,000 worth of units which, of course, they now owned in addition to their home.  Their total indebtedness had risen to $183,500, an increase of almost $110,000.  Their monthly interest bill was $2,915, about $82 more than Ms Eberts’ gross monthly salary.

239               By December 1992 at the latest the Mortgage Power facility had been fully utilised.  By September 1993 she was late in paying interest to Citibank.  She was separated from her husband and Citibank would not refinance her on her income alone.  At the end of 1993 she had her units redeemed and sold her house, paying out the Citibank debt on 12 January 1994.

240               Assessor Peter Dunn assessed Ms Eberts’ loss on 22 May 1995 at $41,086.00.  McDonald of NM accepted that recommendation and by deed of settlement dated 30 June 1995 NM agreed to pay her that amount. NM did so and its claim for contribution is in respect of that sum. 

9.         Barbara Anna Emery and Edwin Arthur Emery
(introduced by Kelly)

241               In 1989 Barbara Emery was forty years old and was married to Edwin Emery.  They had two children.  They were directors of a family company involved in media production.  They owned their home at Mt Eliza, Victoria which was valued by Citibank at $275,000 and was subject to a mortgage to Westpac of about $24,000.  That loan was a “Defence Services Home Loan” at a concessional interest rate of five per cent per annum.

242               For the year ending 30 June 1989 Mrs Emery’s taxable income was about $35,000 and Mr Emery’s taxable income was about $47,000 – a total of about $82,000 – and for the year ended 30 June 1990, the respective amounts were $24,500 and $28,000 – a total of about $52,000.  The income was in the nature of dividends from the family company.  Mr Emery left the family’s financial arrangements to Mrs Emery.  Mrs Emery was introduced to Kelly by a social acquaintance.  She attended two meetings with Kelly at his office in Cheltenham and she and Mr Emery attended a third meeting with him.  Each time Kelly gave a “whiteboard presentation”.

243               The Mortgage Power application form referred to Mr Emery as a television/film director/producer and gave Mrs Emery’s occupation as “home duties”.  No details of income were on the form.  Hawkins (Durnan) received the form in the CSU on 30 November 1989 and sent it to the CSU in Sydney under cover of a TQC mortgage checklist.

244               The CPU “acceptance and administration checklist” records that James Allen completed a capacity test in respect of the borrowers on 5 December 1989.  The capacity test used an unrealistically high figure of $15,155 per month ($181,860 per year).  A facility of $262,500 was approved within the CPU.  On 3 January 1990 Sally Meyrick (Garvey) forwarded to the CPU in Sydney the Citibank valuation which had come in at $275,000, which meant that a facility of only $206,400 was allowable. Citibank despatched its letter of offer in this amount on 8 January 1990.  The initial interest rate was 19.95per cent.

245               The transaction was settled on 26 February 1990 when the following amounts were drawn down: $23,615.27 to Westpac to pay out the existing mortgage; $47,485.00 to the “ANZ Bank”, $496 to “Kelley Ongarello” and $32,631.35 to “P.E. Garner”, all of which related to settlement of the purchase of a small investment property at 12 Queens Street, Frankston which Mr and Mrs Emery had agreed to purchase in January 1990; $8,000 to LKFM for premiums on NM policies; $350.00 to Van Minnen for her fee for “acting for” Mr and Mrs Emery; $1,664.90 to Lander & Rogers for their fees for acting for Citibank; and $15.00 to Citibank for bank charges.

246               After the Mortgage Power loan and the purchase of the Frankston investment property were settled, Kelly suggested that it was time for Mr and Mrs Emery to acquire the units in the Trust.  On 26 March they signed application forms for $25,000 worth of initial units and $100,000 worth of further units, as well as an application for a NMPS loan of $100,000 from NMPS.  On 4 April 1990 $25,000 was drawn down on the Citibank Mortgage Power account to pay for the initial units.  Mr and Mrs Emery shortly afterwards executed a mortgage in favour of Citibank over the investment property. This security was in addition to the mortgage over their home.  On 18 June 1990, $66,240 was paid into the Mortgage Power account. 

247               From the end of June 1990, Mr and Mrs Emery owed between $50,000 and $60,000 to Citibank in addition to the $100,000 to NMPS.  Their monthly interest liability was around $2,400 which was approximately 55 per cent of their combined pre-tax monthly incomes.

248               In 1991, Mrs Emery became concerned about the declining revenue from the trust.  She contacted Kelly who advised her to keep her investment.  By early 1993, Mrs Emery learned that Kelly was to cease to being an agent for NM.  In September 1993, she surrendered the NMLA policies and requested that the units be redeemed.  Mrs Emery used the proceeds of the policies and of the redemption of the units to reduce the indebtedness to Citibank.  The amount received was not sufficient to discharge the NMPS loan.

249               Assessor Peter Dunn assessed the claim on 19 May 1995 and on 27 May 1995 recommended a payment of $59,502.  That amount was paid on 14 August 1995 following execution of a deed of settlement on 3 August 1995. 

250               NM claims contribution from Citibank on account of Mr and Mrs Emery in respect of a sum of $63,318.90 which includes additional legal and accounting fees.

10.       Daryl John Farrar and Debra Vicki Farrar
(introduced by Kirby)

251               In 1992 Mr Farrar was a thirty-one year old sales representative.  For the year ended 30 June 1992 his taxable income was $29,982 and his wife’s was $6,076 - a total of $36,058. They owned their home at Sunbury, Victoria which was valued by Citibank at $145,000 and was subject to a mortgage on which around $68,000 was still owing. For the year ended 30 June 1993 the comparable figures were, respectively, $31,180 and $12,328 – a total of $43,508. 

252               Kirby gave “whiteboard presentations” to Mr and Mrs Farrar in at least two meetings in the first half of 1992. 

253               The Mortgage Power application form dated 2 June 1992 identified Mr Farrar as a “salesman” and his wife as a “merchandiser”.  The CPU processed and approved a facility of $108,750. The letter of offer to the Farrars was dated 12 June 1992. The CPU carried out capacity tests, the first of which the Farrars failed.  A subsequent capacity test was conducted using a 9.95 per cent interest rate, and the Farrars passed by $4.75 per month.  The stated effective variable interest rate at that time however, was, 11.45 per cent. 

254               The Mortgage Power facility was settled on 14 July 1992 when the following amounts were drawn down: $68,289.56 to ANZ Bank to discharge the existing mortgage; $1,089.20 to Anderson Rice, Citibank’s solicitors, for their fees; $300 to FKB (which was not noted by FKB in its letter dated 16 June 1992 to the Farrars outlining the disbursements made on that day); $250 to NMLA as the premium on a business insurance policy; $24,000 to PTA for the initial units; $420 to NMPS as an application fee on the application for the NMPS loan; $188 to the Comptroller of Stamps for stamp duty; and $15 in bank fees. 

255               By 18 August 1992 the Citibank facility had been drawn down to the extent of $96,078.96, leaving a balance available to be drawn on of only $12,671. 

256               The Farrars owed $56,000 to NMPS.  The Farrars had acquired 68,437 units in the Property Trust on 23 July 1992 for a total of $80,000, of which $24,000 had been drawn out of the Citibank facility and $56,000 had been lent by NMPS.  Their monthly interest liability as at August 1992 was around $1,335 which amounted to approximately 44 per cent of their combined pre-tax incomes.

257               The Farrars became aware that there was a problem in about January 1994 when they had to pay the NM interest out of their own funds and not from the anticipated dividends from the units.

258               The Farrars’ loss was assessed by Assessor Dunn on 1 May 1995 at $13,944 to which were added legal and accounting fees of $485, to produce a total of $14,429.  The Farrars entered into a settlement deed with NM dated 21 August 1995 and received a cheque for $30,946.00 being the total of the assessed loss and the balance of the redemption of the units and the cancelled loan.  It is in respect of the sum of $14,429 that NM claims contribution from Citibank.

11.       Sharn Stuart Fraser-Bell and Jennifer Jane Fraser-Bell (introduced by Jones)

259               In late 1989 Mr Fraser-Bell was a twenty-eight year old police constable.  His then wife was an administrator.  They had two dependent children.  His income for the year ending 30 June 1989 was about $25,000 and his wife’s about $35,000 – a total of about $60,000.  The respective amounts for the year ending 30 June 1990 were about $27,000 and $36,700, totalling about $63,700. 

260               In late 1989 the Fraser-Bells purchased a home at Beacon Hill, New South Wales for about $240,000 which was mortgaged to the Commonwealth Bank for about $60,000.

261               Mr Fraser-Bell had first met Jones in the early 1980’s and had taken out insurance policies through him as a NM agent.  In late 1989, Jones invited Mr Fraser-Bell to attend his office where, in late October or early November, he gave a “whiteboard presentation” of the Package to Mr Fraser-Bell.  Shortly afterwards, Jones made a second presentation to both Mr and Mrs Fraser-Bell.

262               The Mortgage Finance application contained no details of the Fraser-Bells’ income, assets or liabilities.  However, their incomes were checked by Citibank.  Hawkins (Durnan) in the CSU in Melbourne received the Fraser-Bells’ application on 9 November 1989.  Jones paid the valuation and application fees totalling $1,265.  Hawkins forwarded the application under the LKFM agency with the TQC mortgage checklist to the CPU in Sydney. No capacity test was conducted.  Citibank’s letter of offer was dated 27 November 1989 and offered a facility of $176,250 (on a LSR of 75per cent)  at an initial interest rate of 19.95 per cent.

263               The transaction was settled on 12 January 1990.  The first drawdown was $59,079.92  which was the amount paid to discharge the existing mortgage.  The second and third pages of the Citibank account statements are missing.  These recorded whatever transactions occurred between January 1990 and 15 March 1990.  I infer that during this period other drawdowns were made to settle the Mortgage Power facility. In particular, I infer that $30,000 was drawn down to fund the purchase of the initial units in the Property Trust.  The applications for the initial units and further units and the application for a NMPS loan of $120,000 for the further units were all dated 8 February 1990.  The initial units (20,836) were issued on 23 February 1990 and the further units (83,293) were issued on 30 March 1990.

264               Accordingly by April 1990 the Fraser-Bells owed around $112,000 to Citibank and $120,000 to NMPS, totalling $232,000.  Prior to the transaction, they had owed only $60,000 to the Commonwealth Bank.  On the other hand, after the transaction they owned 104,129 units in the Trust as well as their house.  Their monthly interest liability was around $3,600 which amounted to 60 per cent of their combined pre-tax incomes.

265               The Citibank account statements for April 1990 onwards and subsequent statements disclosed drawdowns on the Citibank facility to pay interest to NM.  By the end of 1990, the amount owing to Citibank was about $127,216 and by the end of 1991 it was about $137,528, with only $38,722 left remaining available in the facility.  In March 1992, the Fraser-Bells refinanced with the Government Insurance Office of New South Wales (“GIO”) where the interest rate was lower. 

266               The Fraser-Bells’ claim was assessed by Assessor Greg Pride on 28 October 1993.  The original recommendation on 15 November 1993 was for $76,000.   There was a subsequent assessment by Assessor Pride on 9 February 1994, increasing the amount recommended to $82,600.  Ultimately, the amount of compensation paid, including the Fraser-Bells’ legal and accounting fees, was $87,369. 

267               NM claims contribution from Citibank in respect of $93,053.33, an amount which includes the forgiven unpaid NMPS loan balance of $5,684.33.

12.       Paul Frederick Garden and Denise Valda Garden
(introduced by Jones)

268               In 1989, Mr Garden was a forty-nine year old fork lift driver/labourer employed by Nationwide Rubber in Nowra and Mrs Garden was a packer employed by Franklins.  Their combined income for the financial year ending 30 June 1989 was approximately $31,000, and that for the year ending 30 June 1990 was around $21,000.  They had three dependent children and a home which was initially valued at $120,000 and subject to a mortgage to the State Building Society for around $36,000. 

269               Mrs Garden was a cousin of Jones. Jones had sold the Gardens life insurance policies over many years.  In June 1989, Mrs Garden contacted Jones about a policy she had with NMLA.  Jones invited the Gardens to his office in Manly so that he could explain the Package to them.  Mr and Mrs Garden attended Jones’ office a few weeks later.  A man from Melbourne was there whose name Mr Garden could not recall.  Jones did most of the talking and gave a “whiteboard presentation” of the Package.  Jones gave the Gardens documents to sign.  They included a form of application for Mortgage Power finance, two applications for units in the Trust and an application for NM finance for the units.  Mr Garden said the documents were blank and that Jones said:

“I will organise the paperwork and fix everything up – you just need to sign the papers.”

270               A few weeks later, Jones called on Mrs Garden and gave her a further presentation of the Package, making handwritten notes which are in evidence.

271               Stewart at the CSU received the Gardens’ application for a Mortgage Power facility on 14 June 1989.  The application and valuation fees totalling $1,195 were paid by LKFM. Mr Stewart sent the application by overnight bag to the CPU in Sydney.  The CPU processed and approved a Mortgage Power facility of $96,000 on 16 June 1989 and sent out Citibank’s letter of offer on 19 June.  After the valuation of the Gardens’ home, the credit limit was reduced to $88,000, with an initial interest rate of 18.85 per cent.

272               On 3 July, Citibank Melbourne telephoned the Gardens.  As a result, a note was made that the letter of offer should be sent to Jones in Sydney for forwarding to the Gardens.  On 12 July, Citibank Melbourne contacted Jones’ secretary who said she would chase up where the letter of offer was.  On 14 July, the letter of offer with an acceptance signed by the Gardens was returned to Citibank Melbourne, and the file was forwarded from Citibank Melbourne to Citibank Sydney.  

273               The transaction was settled on 7 September 1989 but was “backdated” to 31 August 1989.  On settlement, $43,000 was transferred to Sydney to be distributed among the outgoing mortgagee, Corrs (who acted for Citibank) and the Gardens.  The following further payments were made on settlement: $1,195 to LKFM; $4,990 to NMLA being two premiums of $2,495 each on insurance policies; $20,000 to PTA for the initial units (anomalously, only $10,000 worth of initial units were applied for); $400 to NMPS as an application fee on the application for the loan for the further units; $284 to the Comptroller of Stamps for stamp duties; $20 to Citibank for bank fees; and $295 to Van Minnen for her fees for “acting for” the Gardens. 

274               The Gardens paid $10,000 for the initial units and $40,000 for the further units.  For the latter, they borrowed $40,000 from NMPS.  By October 1989, the Gardens owed $72,131 to Citibank and had $15,869 remaining in credit in the approved Mortgage Power facility of $88,000.  The borrowing of $40,000 from NMPS took place on 6 December 1989, increasing the Gardens’ indebtedness to some $107,000 as against their pre-transaction indebtedness of around $36,000 to the State Building Society.  By December 1989, their monthly interest bill was around $1,700, which was approximately 66 per cent of their combined pre-tax incomes.  The Gardens’ indebtedness steadily increased as they used the Citibank facility to make the interest payments on both the Mortgage Power loan and the NMPS loan.  By 15 December 1990 the Gardens had drawn down $86,909, leaving only $1,091 available. To compound their problems, their combined incomes for the year ending 30 June 1990 fell to less than $21,000.   The Gardens became aware of a problem when Mr Garden saw from statements forwarded to him by Jones that the value of the Citibank reserve was falling and the monthly amounts of interest payable to Citibank were nearly double what they were originally.

275               On 5 December 1990, the Gardens wrote to NMAM requesting that their units be redeemed in full.  In late 1990 they sold off all their units in the Property Trust and repaid the NMPS loan of $40,000 in January 1991.  The Gardens refinanced the Citibank loan with HomeFund in 1991. 

276               After a referral by an accountant and a financial adviser, the Gardens retained Morton & Harris, Solicitors, to make a claim on their behalf.  Morton & Harris corresponded with NM in 1991 and 1992.  The Gardens commenced a Supreme Court proceeding against Jones, Hacopian, NMLA and Citibank.  On 27 July 1994, Morton & Harris made an offer to NM to settle for $83,981. Eventually, on 20 December 1994, the parties agreed on $74,504 and a settlement deed was executed in early 1995.

277               NM claims contribution from Citibank in respect of an amount of $75,610 which includes $1106 for legal expenses paid on behalf of the Gardens.

13.       Gregory Alan Jorgensen and Anne Maree Jorgensen (introduced by Bahr)

278               In 1992 Mr Jorgensen was a forty-year old schoolteacher.  Mrs Jorgensen was also a school teacher.  For the year ending 30 June 1992, Mr Jorgensen’s taxable income was $39,770 and Mrs Jorgensen’s was $29,710 - a total of $69,480.  For the year ending 30 June 1993, the respective amounts were $39,238 and $15,212 – a total of $54,450.  The Jorgensens owned their home at Mount Dandenong and an investment property at Ringwood, Victoria.  Their home was mortgaged to the Commonwealth Bank and about $20,000 was owing under that security.  Their investment property, which was valued by Citibank at $128,000, was subject to a mortgage to the ANZ Bank on which around $28,000 was still owing.

279               Mr Jorgensen met Bahr through Bahr’s son who worked at the same school as Mr Jorgensen.  Bahr gave Mr Jorgensen presentations in at least two meetings between August and November 1992, using a whiteboard for the purpose.

280               The Mortgage Power application form identified Mr Jorgensen’s occupation as “teacher/book designer”. 

281               The CPU processed the application then approved a facility of $96,000 on 25 November 1992 and forwarded its letter of offer to the Jorgensens the same day.  The CPU carried out a capacity test.  Upon entering into the Package, the Jorgensens’ debt level increased from some $48,000 owed under the mortgages to the Commonwealth Bank and ANZ Bank, to $71,888.20 owed to Citibank and $70,000 owed to NMPS (the Jorgensens also remained indebted to the Commonwealth Bank for some $20,000 which they did not pay on settlement of the Mortgage Power facility).  Their monthly interest liability comprised $612.50 payable to NM and $506 payable to Citibank, a total of $1,118.50, which amounted to approximately 21 per cent of their combined pre-tax monthly incomes.

282               Mr Jorgensen was alerted to the existence of a problem by articles in the press in January 1993, less than a month after the Jorgensens had entered into the Package.  Mr Jorgensen testified that Bahr told them it was a “ ‘good time’ to enter the plan, because it could only improve with time as the market had bottomed out”.

283               The Jorgensens’ losses were assessed by Assessor Bouchier on 17 September 1993 who recommended payment of $6,620.  The amount was comparatively low because the Jorgensens had entered into the Package late (December 1992) and were compensated after only ten months (October 1993).  To the sum of $6,620 was added an initial capital loss of $1,898 from a further fall in the unit price up to the date of settlement, and $160 for the Jorgensens’ legal fees for obtaining advice on the deed of release, making a total of $8,678, which is the amount in respect of which NM claims contribution from Citibank.  (There is evidence suggesting different amounts but I need not concern myself with this problem).

14.       Frank Lorenz and Ann Gudrun Lorenz
(introduced by Jones and kelly)

284               In 1990 Frank Lorenz was a thirty-seven year old builder. He and his wife had a family company of which both were directors.  They owned their home at Collaroy Plateau, Sydney, which was originally valued by Citibank at $450,000 and was mortgaged to the Commonwealth Bank for about $50,000.  They also owned an investment property the value of which the Lorenzes estimated at $300,000 and which was mortgaged for about $50,000.  For the year ended 30 June 1990 Mr Lorenz’s taxable income was about $56,500 and Mrs Lorenz’s taxable income was about $38,000 – a total of $94,500. 

285               Since 1975, Jones had sold Mr and Mrs Lorenz insurance as an agent, first for AMP and subsequently for NMLA.  He introduced them to the Package in November or December of 1989 at their home.  In February 1990, he invited them to his office at Manly to discuss the Package.  At that meeting Kelly, and less prominently, Jones, made a whiteboard presentation of the Package.  The Lorenzes attended a further meeting at Jones’ office in about March or April 1990 when Jones made a similar whiteboard presentation of the Package.  Hacopian was also present.  There was a third presentation by Jones at his office in June 1990. 

286               The Mortgage Power application form was processed by Hawkins (Durnan) in the CSU under the LKFM agency.  A facility of $299,000 was approved within the CPU on 30 March 1990.  On 2 April 1990, Mr and Mrs Lorenz were advised that a facility in this sum had been approved and that the initial interest rate was 19.3 per cent per annum.  On 4 May 1990, Kathy Eisenhofer of Citibank, Melbourne returned the file to the CPU in Sydney recording that the valuation had come in at $380,000 and requesting that the limit be reduced to $250,800 accordingly ( the maximum LSR was 66 per cent).  No formal or detailed capacity testing was carried out.  On 11 May 1990, the reduction from $299,000 to $250,800 as the limit of the facility was approved in the CPU.  Citibank’s letter of offer of $250,800 was sent on 14 May 1990, the variable interest rate being initially 18.9per cent. On 20 June 1990 the Lorenzes signed two applications for $60,000 worth of units and $240,000 worth of further units, in the Trust.  The same day, they also signed an application form for a NMPS loan of $240,000. 

287               The transaction settled on 27 June 1990 when the following amounts were drawn down: $54,779 which was transferred to Corrs, Sydney, of which $52,593 was to pay out the first mortgage to the Commonwealth Bank and $2,161 was to pay the legal fees of Corrs as Citibank’s solicitors; $8,484 to NMLA for insurance premiums; $9,216 to NMLA as a further premium; $60,000 to PTA for the issue of units; $1,800 to NMPS as the application fee on the application for the NMPS loan; $764 to the Comptroller of Stamps for stamp duty; $42,600 as pre-paid interest for one year on the NMPS loan; and $345 to Van Minnen for her fee for “acting for” the Lorenzes.

288               Accordingly, disregarding the mortgage on the investment property which was not affected, by 27 June 1990, Mr and Mrs Lorenz owed nearly $178,000 to Citibank.  The initial units (41,606) and the further units (166,421) were issued on 29 June 1990.  Pre-paid interest of $42,600 on the borrowing from NMPS was funded through the Citibank facility. Taking into account the borrowing of $240,000 from NMPS the pre-Package debt of Mr and Mrs Lorenz of about $52,000 to the Commonwealth Bank had risen to $418,000 and their monthly interest liability was around $6,450, which, amounted to nearly 81 per cent of their combined pre-tax incomes.  

289               After about eighteen months, Mr and Mrs Lorenz understood that they had a problem.  Mr Lorenz met with Mr Hocking in about April 1993.  At that time NMPS had made margin calls and had issued notices of default in respect of the NMPS loan. 

290               The accountant, Mr Bullock, calculated the Lorenzes’ loss as at 13 June 1994 at $191,793 plus certain refinancing, stamp duty and advisers’ costs.  According to a settlement deed dated 20 July 1994, NM was to pay $157,008 to the Lorenzes.

291               NM claims contribution from Citibank in respect of $179,811.28 on account of Mr and Mrs Lorenz.  That amount includes not only the settlement monies but also the difference between the loan foregone by NMPS and the value of the units redeemed under the settlement.

15.       Phillip Ross Lowe and Deborah Joan Lowe
(introduced by Jones)

292               In 1992 Mr Lowe was a thirty-eight year old schoolteacher.  His taxable income for the year ending 30 June 1992 was $40,157 and his wife’s income as a sales representative was $24,374 – a total of $64,531.  They owned their own home at Harbord in Sydney which was valued by Citibank at $240,000. 

293               The Lowes had taken out a Mortgage Power loan with Citibank in December 1991 for a credit limit of $100,000 after seeing a television advertisement. They had sought the facility to fund extensions to their house.  By mid 1992 the amount they owed to Citibank was some $37,000. 

294               Jones made presentations to Lowe at Jones’ office three times in May and June 1992, using a whiteboard each time.  The Lowes’ applied for an increase in their existing Mortgage Power facility to $180,000 by an application dated 17 June 1992.  A capacity test was performed within the CPU.  Mr Lowe said that after he was advised by Citibank that there would be a fee if the line of credit were extended, he decided not to go ahead.  However, Jones gently persuaded him with words to the effect of:

“You have to trust me.  I’ll fix up the fee … I wouldn’t say this to you if I didn’t care about you.  I only put people into this who I like.”

295               Mr Lowe deposed that:

“The demeanour of [Jones] during this meeting was fairly aggressive and insistent.  Following this meeting with [Jones] my wife and I decided to go ahead with the investment arrangement.”

296               The Lowes had telephoned Citibank on 26 June 1992 advising that they wished to have an increase in the facility of only $20,000 rather than $80,000, but on 2 July 1992 Jones or someone in his office telephoned Citibank to advise that the Lowes wished to proceed with the original increase of $80,000 after all.  The CPU (Louise Sweeney) processed and approved the new facility limit of $180,000 on 3 July 1992. The increased facility limit of $180,000 was the maximum allowed on an LSR of 75 per cent based on Citibank’s valuation of the Lowes’ home of $240,000.

297               The increased facility was settled on 20 July 1992.  The applications for the initial units and the further units were both dated 24 July 1992, as was the application to NMPS for a loan of $58,100 to fund the acquisition of the further units.  On the same day, 24 July, Crawford obtained from Mr Lowe cheques drawn on the Citibank Mortgage Power account as follows: $384 to the Comptroller of Stamps for stamp duty; $787.50 to NMPS as the application fee on the application for the NMPS loan; $20,100 to Permanent for units in the National Mutual Share Market Trust; and $24,900 to PTA for the initial units in the Property Trust. 

298               Assessor Pride assessed the Lowes’ damages on 23 July 1993 at $4,572 then discounted this figure to allow for benefits that the Lowes had derived from the Package.  The amount finally recommended was $2,300, to which was added $220 for legal fees for advice on the settlement deed.  The total compensation for loss was thus $2,520.  The settlement deed dated 10 November 1993 referred to an amount of $56,227 but no doubt this did not give credit for the proceeds of the redemptions of the units in the Property Trust and the NM Share Market Trust.

299               NM’s claim against Citibank for contribution is in respect of the sum of $2,520. 

16.       Giuseppe Guido Minichini and Rosa Minichini
(introduced by Jones)

300               In 1989 Giuseppe Minichini was a thirty-two year old mechanic with an income of around $25,000 per annum.  His wife, Rosa Minichini, was not employed.  They had three dependent children and owned their home at Collaroy Plateau, Sydney, which was valued by Citibank at $236,000 and was subject to a mortgage of about $30,000. 

301               Mr Minichini had known Jones for many years.  Jones had become a close family friend and had attended his wedding.  In early 1989, Jones suggested more than once that Mr Minichini attend his office to learn about an investment proposal.  Mr Minichini received two whiteboard presentations: the first by Jones, and the second by a person who, he was told, had a major role in the scheme in Melbourne.  Mr Minichini acknowledged that the person’s name may have been “Lance Kelly” (he said that the name “rings a bell”) but he could not be sure. 

302               Stewart in the CSU in Melbourne received the Minichinis’ Mortgage Power application on 14 June 1989 and sent it overnight to the CPU in Sydney. It contained no details of the Minichinis’ assets or income.  The CPU processed and approved a facility of $160,000 on 16 June 1989.  Citibank’s letter of offer in that sum was despatched on 23 June 1989.  The credit limit was reduced to $141,600 after Citibank’s valuation was received.  The transaction settled on 2 November 1989.  The amounts drawn down were: $30,758 to pay the outgoing mortgagee and Citibank’s legal fees; $2,744.50 to NMLA as a premium on a policy; $3,934 to NMLA as a premium on another policy; $3,161.50 to NMLA as premium on a third policy; $20,000 to PTA for the initial units; $400 to NMPS as an application fee for the loan for the further units; $284 to the Comptroller of Stamps for stamp duty; $295 to Van Minnen for her fees for “acting for” the Minichinis; $25 to Citibank for bank charges; and $5,000 to Mr Minichini.  Thus, on 2 November 1989, the Minichinis’ debt increased from about $30,758 to $67,121 (based on Citibank’s statement dated 15 November 1989).  

303               Applications for the $20,000 worth of initial units, the $80,000 worth of further units and the $80,000 loan from NMPS were all dated 2 November 1989.  The initial units (14,240) were issued on 13 November 1989 and the further units (56,959) were issued on 7 December 1989.  NMPS’s loan of $80,000 was advanced on 6 December 1989.  At that time, the Minichinis’ monthly interest liability was around $2,450 which was greater than Mr Minichini’s pre-tax income of approximately $2,083. Mr Minichini’s average monthly income for the year ended 30 June 1990 declined to around $1,430.  Interest rates subsequently declined from 19.95 per cent on the Citibank Mortgage Power loan in November 1989 to 10.5 per cent in August 1992, and the NM rates also decreased in the same period to around 11 per cent.

304               At Jones’ suggestion the Minichinis made a further investment in July 1990.  They paid $10,000 for a further 6,955 units on a drawdown from Citibank and a further $40,000 for 28,740 more units using funds borrowed from NMPS.  These units were issued on 16 August and 20 September 1990 respectively.

305               The Minichinis experienced difficulty in maintaining their payments and in August 1992 they requested a redemption of units.  The units were redeemed on 1 March 1993.  The proceeds of $113,637 were paid to NMPS.  The Minichinis drew down a further $6,360 from the Mortgage Power facility to pay out the NMPS debt, leaving $73,250 owing to Citibank.

306                 The Minichinis’ claim was assessed by Mr Bullock, accountant, in a letter dated 30 May 1994 to Mr Hocking in a sum of $83,844. It was later assessed at $93,902.50.  On 20 July 1994 a deed of release was executed on the basis of that amount of $93,902.50. 

307               NM’s claim against Citibank for contribution is in respect of this amount.

17.       Robert Leonard Parsons and Ngaire Carmel Parsons (introduced by Wass, Jones and Kelly)

308               In 1989 Mr Parsons was a forty-one year old Protective Services Officer.  He had completed high school to third year intermediate level.  His wife, Ngaire, was a mail clerk.  They had two children and owned a home at Chatswood, Sydney.  It was valued by Citibank in October 1989 at $330,000 and was mortgaged to the ANZ Bank for approximately $12,700.  For the year ending 30 June 1989, Mr Parsons’ taxable income was about $28,000 and Mrs Parsons’ was about $14,500 – a total of $42,500.  For the year ending 30 June 1990, the respective figures were about $24,000 and $10,000 – a total of $34,000. 

309               Mr Parsons first met Wass in early or mid 1989 when Wass was the NM insurance agent who looked after officers of the Department of Administrative Services.  In mid to late 1989 she contacted Mr Parsons and told him about the Negative Gearing Package.  She came to the Parsons’ home and described the scheme.  A few weeks later she arranged for Mr Parsons to meet Jones at Jones’ office at Manly.  Mr and Mrs Parsons attended Jones’ office and received a whiteboard presentation of the Package by Jones.  Wass maintained contact with Mr Parsons afterwards but Mrs Parsons was not keen on the proposal.  Wass said that there was to be a further presentation the following week by Kelly and the Parsons returned to Jones’ office and received a presentation from Kelly which was generally similar to that which Jones had given.

310               At the end of Kelly’s presentation, the Parsons decided to participate in the Package to the extent of $100,000. Hawkins (Durnan) in the CSU, Melbourne received the Parsons’ application for a Mortgage Power facility with a credit limit of $277,500.  The application form showed Mr Parsons’ employer as the Commonwealth Government but did not identify his occupation. Hawkins sent the application form to the CPU in Sydney on 29 September 1989. On 4 October 1989, the CPU sent a fax to “Lance Kelly/Jane Durnan” in Melbourne advising that the deal was rejected because the capacity to service the borrowing appeared “doubtful”, and requesting “written confirmation of salary and any other source of income” (even though capacity testing had not yet been introduced as a requirement).  After further communications, a facility was approved on 19 October 1989 with a credit limit of $185,000 on an LSR of 56 per cent.

311               Citibank’s letter of offer of a facility of $185,000 with an initial interest rate of 19.75 per cent was sent to the Parsons on 24 October 1989.  The transaction was settled on 6 December 1989 when the following amounts were drawn down: $12,698.48 to the ANZ Bank to discharge the existing mortgage; $1,688 to Corrs for their fees as Citibank’s solicitors; $5,000 to NMLA as premium on a policy; $5,000 to NMLA as premium on a second policy; $5,000 to PTA as payment for the initial units; $100 to NMPS as application fee on the NMPS loan; $44 to the Comptroller of Stamps for stamp duty; $295 to Van Minnen for her fee for “acting for” the Parsons; $24 to Citibank for bank charges; and $1,395 to the Parsons to reimburse them for the Citibank application fees which Mr Parsons had paid by credit card. 

312               The initial drawdowns thus totalled $31,244.48 and the Parsons’ level of indebtedness had increased from $12,698 owed to the ANZ Bank to $31,244.48 owed to Citibank. 

313               The application for the initial units and the further units and the application for a $20,000 loan from NMPS were dated 6 December 1989 (not in Mr Parsons’ hand), although they had been signed by the Parsons prior to that date.  Mr Parsons testified that he thought it unusual to send signed documents to Van Minnen for “witnessing” but that Wass reassured him that this was in order.  The initial units (3,560) were issued on 14 December 1989 and the further units (13,891) were issued on 14 March 1990. By March 1990 the Parsons owed $20,000 to NM in addition to a balance of about $40,000 to Citibank on the Mortgage Power facility.

314               In May 1990, the Parsons made a further investment in the Property Trust.  A drawdown of $15,000 was made on the Citibank facility on 4 June 1990 to fund an application for further “initial” units made on 7 May 1990.  A loan of $60,000 was made by NMPS to fund an application for still further units made on the same day.  This loan from NMPS was made under a separate account number to that relating to the original loan of $20,000.  The Parsons dealt with Wass also in relation to this further investment in the Trust.  The additional initial units (10,402) were issued on 5 June 1990 and the additional further units (41,606) were issued on 22 June 1990.  In mid July 1990, the Parsons made further drawdowns in association with this second investment, for example, $204 for stamp duty on the further unit mortgage.  By August 1990, the Parsons’ monthly interest liability was around $2,283 or around 65 per cent of their combined pre-tax incomes.

315               In December 1990, the Parsons applied for a further $10,000 and yet a further $20,000 worth of units.  There is no record in the NM statements that they were actually issued.  On 12 December 1990, a further $10,000 was drawn down, apparently for a further investment in NM insurance, and on 24 December a further $2,300 was drawn down, apparently to pay interest to Citibank.  Apparently these and other similar subsequent drawdowns were for interest.  By April 1991, the Mortgage Power facility was drawn down to almost $85,000, leaving about $100,000 available for further drawdowns. 

316               By 1993, the Parsons thought that their investment was a problem when the amount of their indebtedness to Citibank was approaching the limit of their account.  The Parsons’ claim was assessed by Assessor Geoffrey Wall in late 1993.  On 17 May 1994, compensation of $127,699 was paid pursuant to a settlement deed dated 9 May 1994.  This sum was paid into the Citibank account on 23 May 1994, reducing the closing balance to $4,181. 

317               As part of the settlement, the Parsons transferred their units to NM, and NMPS forgave their debt.  NM also seeks to recover in respect of the difference between the forgiven loan and the value of the units.  NM’s claim against Citibank for contribution is in respect of an amount of $136,627 (the amount of compensation paid to the Parsons plus the amount of the difference just mentioned).

18.       Gary Allan Pickworth and Tina Jane Pickworth
(introduced by Jones)

318               In 1990 Mr Pickworth was a thirty-seven year old carpenter and was married with two children.  For the year ended 30 June 1990, his income was $24,306 and Mrs Pickworth’s income was $16,312 – a total of $40,618.  The respective amounts for the year ending 30 June 1991 were $19,677 and $11,978 – a total of $31,655.  The Pickworths owned their home at Frenchs Forest, Sydney which was valued by Citibank at $229,000 in December 1990 and subject to a mortgage of about $44,400 to the National Australia Bank. 

319               Mr Pickworth had known Jones for many years and had used him as his insurance agent.  Jones made two “whiteboard presentations” to Mr Pickworth.  Mr Pickworth gave evidence that the first meeting was held in about December 1989 and the second in or about December 1990. 

320               The Pickworths’ Mortgage Power application form was processed in late January 1990.  The facility requested was $195,000, calculated by applying an LSR ratio of 65 per cent to an estimated value of the Pickworths’ house of $300,000.  On 30 January 1990, the CPU approved a facility of $141,700, based on Citibank’s lower valuation of the property of $218,000.  The initial variable interest rate was 16.75 per cent.  There is no evidence that a capacity check was conducted.

321               The application for the initial units was dated 11 December 1990.  That application together with the Pickworths’ application for further units and their application dated 17 December 1990 to NMPS for a loan of $70,000 for the further units were forwarded to NM together with the Citibank cheques.  The Pickworths were informed that the NM loan was approved by letter dated 4 January 1991.

322               The transaction was ultimately settled on Monday 17 December 1990, earlier settlement being delayed because of the necessity of repairs to, and insurance of, the security property.  At settlement the following drawdowns occurred: $46,147.04 was transferred to the trust account of Corrs, Citibank’s solicitors, to pay out the existing mortgage to the National Australia Bank and to meet telegraphic transfer fee, stamp duty, registration fee on the Citibank mortgage and Corrs’ costs; $7,697 to Jones as reimbursement for insurance premiums and application fees which had been paid by him on account of the Pickworths; $30,000 to PTA for the initial units; $525 to NMPS for the application fee on the application for the NMPS loan; $244 to the Comptroller of Stamps for stamp duty; and $595 to Van Minnen for her costs for “acting for” the Pickworths. 

323               As a result, after settlement of the Citibank facility, the Pickworths owed approximately $85,000 to Citibank and $70,000 to NMPS, the former secured by a first mortgage over their home and the latter secured by a mortgage to PTA over all the units.  The initial units funded by Citibank numbered 21,555 and the further units funded by NMPS numbered 50,291.  By February 1991 the Pickworths’ monthly interest liability was around $2,065.75 which amounted to approximately 60 per cent of their combined pre-tax incomes. 

324               By January 1993 the Pickworths had drawn down further on the Mortgage Power facility and owed Citibank over $106,000. The credit remaining in the facility was less than $36,000.  Their monthly interest liability, on the other hand, was now only around $1,530 as a result of lower interest rates.

325               Assessor Wall assessed the Pickworths’ loss on 21 December 1993 and recommended payment of $58,171.  The Pickworths’ solicitor, Peter Thompson, entered negotiations with Assessor Wall and this process resulted in an increase in the amount, by the inclusion of interest since October 1993 and further losses on the insurance policies taken out by the Pickworths.  Also added was $11,301 for legal and accounting fees, producing a total payment of $87,365.  However, this also included $5,323.35, being the difference between the value of the units surrendered to NM and the amount owing under the NMPS loan, which is excluded from the amount in respect of which contribution is claimed. 

326               NM claims from Citibank contribution in respect of $82,041.65 in the Pickworths’ case.

19.              Peter John Quaife and Gail Christine Quaife
(introduced to the Package in early 1989 by Kelly)

327               In 1989, Mr Quaife was a thirty-year old semi-trailer driver whose income in 1989 was about $30,000 per annum.  Mr and Mrs Quaife owned their home at Carrum Downs, Victoria.  They had two dependent children.  The home was valued by Citibank at $113,000 and was subject to a mortgage on which some $55,000 was outstanding. 

328               The Quaifes were introduced to Kelly by a friend in 1988.  Kelly introduced the Quaifes to the Package in at least three meetings in Kelly’s office in early 1989.  Kelly wrote figures on a whiteboard for Mr Quaife to see as he outlined the Package.  At the first meeting he provided Mr Quaife with beer.

329               Kelly’s presentation to the Quaifes preceded the agency of 3 April 1989.  At the time, Kelly’s clients’ applications were being submitted through LJ Hooker, Cheltenham and part of the fee paid by Citibank to LJ Hooker was, to Citibank’s knowledge, being paid to Kelly.  After several meetings at which Kelly made the “whiteboard presentations”, the Quaifes decided to proceed with the Package.

330               The Mortgage Power application form identified Mr Quaife’s occupation as a driver and Mrs Quaife as a clerk.  The CSU (Stewart) in Melbourne processed the application and sent it with a completed TQC checklist to the CPU (of which Jennifer Horsefield was the head at the time) by overnight bag.  The CPU processed and approved a facility of $106,250 on 8 February 1989.  In accordance with the practice at the time, no capacity test was carried out.  A letter of offer from Citibank to the Quaifes dated 9 February 1989 stated the amount of the facility as $100,000, which was later reduced to $90,400.  Citibank’s solicitors, Lander & Rogers, acted for both sides (this was the only instance of this among the twenty-three cases).  Settlement took place on 31 March when $55,746 was paid to discharge the existing first mortgage, $1,066 was paid to Lander & Rogers to cover their costs and disbursements, and $1,870 was paid to National Mutual Royal Bank to discharge the Quaifes’ indebtedness to that bank. 

331               On 26 April, $15,000 was drawn down: $10,000 to acquire the first $10,000 worth of units in the Property Trust and the remaining $5,000, to pay the premiums on two NM policies. 

332               The application for the initial units was subsequently dated 19 May 1989 and it was accompanied by the application for a further $40,000 worth of units.  An application for finance from NMPS was dated 24 April 1989. The Quaifes acquired 7,124 units funded by Citibank and a further 28,420 units funded by NMPS, and had given a unit mortgage to Permanent over all $50,000 worth of units to secure the funding from NMPS.  As some of the returns were reinvested over time, a further 849 units were issued.   

333               By the end of May, the Quaifes owed approximately $75,000 to Citibank and by June 1989, a further $40,000 to NMPS – a total of $115,000.  The monthly interest payments amounted to approximately $1,800, which was approximately 72 per cent of Mr Quaife’s pre-tax income.  There was no evidence of his wife’s income as a clerk.

334               By 15 April 1990, the Mortgage Power loan of $90,400 was drawn to $83,224.00, leaving a balance available of only $7,175.  The interest rate on that loan had risen from 17.90 to 19.3 per cent per annum, giving the Quaifes a monthly interest bill of $1,968.  By mid July 1990, the Mortgage Power facility was drawn to almost $87,000.  On 22 June 1990, 17,772 units were redeemed and the remaining 18,621 units were redeemed in December 1990.  The proceeds were applied to pay the Quaifes’ indebtedness to Citibank and NMPS.  By January 1991, they owed about $73,700 to Citibank – some $18,000 more than they had owed to their former first mortgagee – and had paid off the loan to NMPS.

335               The Quaifes refinanced from Citibank to National Australia Bank in February 1991.  Assessor Raphael assessed their claim and on 22 December 1993 recommended payment of $15,279.  There was then an adjustment for legal and accounting fees and a surrendered superannuation policy.  The deed of release was executed in February 1994 and NM paid the Quaifes $17,279.

336               NM seeks contribution from Citibank in respect of an amount of $17,629, which includes $350 for legal and accounting expenses.

20.       Peter James Richards and Beverley Anne Richards (introduced by kelly and Blee)

337               In 1989, Mr Richards was a forty-nine year old fitter and turner and Mrs Richards was a laboratory assistant.  In 1990 they had two dependent children.  Mr Richards’ income for the year ended 30 June 1988 was about $40,000 but his income for the year ended 30 June 1989 dropped to about $32,000 when he changed jobs (in April 1989) and ceased earning overtime.  Mrs Richards earned about $12,500 and $11,000 respectively in those two years.  The Richards owned their home in South Clayton, Victoria, which was valued by Citibank at $142,000 and was subject to a first mortgage of about $60,000 to RESI Statewide. 

338               In early 1988 Kelly had arranged for the Richards to borrow from RESI Statewide Building Society for the purchase of an investment property and had sold them business insurance policies.

339               Shortly after April 1989, Mr Richards again went to Kelly explaining that his wages had been effectively halved because of the loss of overtime and seeking advice as to how he could fund the insurance policies and the interest payable to RESI Statewide on the investment property.  Kelly referred Mr Richards to Blee in Kelly’s office at Cheltenham and Blee explained the Package on a whiteboard. 

340               The indistinct date on the Mortgage Power application form seems to be 28 April 1989.  It was received in the CSU on 8 May 1989 and forwarded by overnight bag to the CPU in Sydney.  The form recorded the occupations of Mr and Mrs Richards as fitter and turner and laboratory assistant, respectively.  It did not record their incomes.  Citibank’s client record for the Richards and the TQC indicated that Van Minnen was the Richards’ solicitor. No capacity test was conducted.  Citibank’s letter of offer was dated 12 May 1989 and was for a facility of $112,000 at an initial variable interest rate of 18.6 per cent.

341               It is noteworthy that the Mortgage Finance Proposal in respect of the Richards bore in handwriting:

“LANCE KELLY FIN MAN.

266 CHARMAN RD

CHELTENHAM

2524885018.”

This was the Citibank agency number that had just been allocated to LKFM upon its appointment as agent on 3 April 1989. (Apparently Kelly had not yet had LKFM’s agency stamp made.) Of the 23 Investors, only the Quaifes were introduced to Citibank prior to the appointment of LKFM on 3 April 1989. Their Mortgage Finance Proposal bore the “LJ Hooker Cheltenham” name and agency number (2524562018).

342               Settlement took place on 21 June 1989 when $60,633.46 was paid to RESI Statewide to pay out the first mortgage; $20,000 was paid to PTA for the acquisition of the initial units in the Property Trust; $400 was paid to NMPS as the application fee on the application for the funding for the further units; $284 was paid to the Comptroller of Stamps for Stamp Duty; $270 was paid to Van Minnen for her fee for handling the matter for the Richards; and $1,083 was paid to Lander & Rogers, Citibank’s solicitors, for their fees.  Thus, even before the acquisition of the further units, the Richards’ indebtedness had increased from $60,633 to RESI Statewide to about $82,700 to Citibank.  The surplus remaining in the Citibank facility after the initial drawdown was about $28,000.

343               The Richards applied for $80,000 worth of further units and for finance for them on 26 May 1989, and NMPS advanced $80,000 on 29 June 1989.  The initial units (14,211) were issued on 26 June 1989 and the further units (56,841) were issued on 30 June 1989.  By 30 June 1989, the Richards’ indebtedness had risen from $60,633 to around $163,000.  Their monthly interest liability was $2,670 which amounted to about 61 per cent of their combined pre-tax income for the 1987-1988 financial year or nearly 76 per cent of their combined pre-tax income once the salary decreases in 1989 were taken into account. 

344               The Richards used the Citibank facility to make all of their interest payments to NMPS and most of their interest payments to Citibank.  By April 1990, they had drawn down almost $94,000, leaving an unused credit limit of only $18,000.  Their monthly interest repayments were now around $2,800.  The Richards fell behind in the payments required by Citibank and in early May 1990 they caused their units in the Trust to be redeemed and paid out the NMPS loan.  As well, they sold their investment property and refinanced their home with the Bank of Melbourne. 

345               Assessor Dunn assessed the Richards’ claim after an interview on 19 April 1995 at $13,559.   NM paid $13,559 to the Richards pursuant to a settlement deed dated 15 June 1995 and paid $368.52 to the Richards’ legal advisers.

346               NM claims contribution from Citibank in the Richards’ case in respect of an amount of $13,927.52.

21.       Dominic Tavoletti and Melina Tavoletti
(introduced by Jones)

347               In 1989 Mr Tavoletti was a thirty-nine year old labourer and Mrs Tavoletti was a baker/packer.  They had two children.  They owned their own home at Collaroy Plateau, Sydney and by June 1989 had paid it off.  For the year ending 30 June 1989, Mr Tavoletti’s income was around $22,600 and Mrs Tavoletti’s was $7,200 – a total of $29,800.  Their respective incomes for the year ending 30 June 1990 were about $17,700 and $8,000 – a total of $25,700.  Citibank valued the Tavolettis’ home at $268,000. 

348               Jones was a casual friend of theirs and was their insurance agent.  He had attended their wedding and would visit their home socially and on special occasions such as Christmas.  He invited them to come to his office where he presented the Package to them in June 1989 by the use of a whiteboard. 

349               The scheme into which the Tavolettis entered involved the acquisition of $20,000 worth of initial units funded by Citibank and $80,000 worth of further units funded by NMPS.  The application and valuation fees totalling $1,450 were paid by Jones and were to be refunded on settlement to Jones. 

350               Stewart of the CSU in Citibank, Melbourne, received the application for a Mortgage Power loan on 14 June 1989. He forwarded the application by overnight bag to the CPU in Sydney.

351               The CPU processed and approved a facility of $150,000 on 15 and 16 June 1989 on an LSR of 56 per cent.  The worksheet records that a capacity test was not applicable.  A question was raised within Citibank as to how the Tavolettis could service the loan and how they had managed to purchase their home.  Carter replied that Mr Tavoletti’s father had originally bought the property and sold it to the Tavolettis in 1979 for $100,000.  He also noted that the Tavolettis required only $150,000 at an LSR of 56 per cent whereas Lance Kelly “always” advised his clients “to go for 80 per cent LSR.”  In Citibank’s letter of offer dated 19 June 1989 the approved limit remained $150,000 and the initial variable interest rate was 18.85 per cent.

352               The transaction was settled on 14 September 1989.  The drawdowns on settlement were $1,270 to Corrs as their fee for acting as Citibank’s solicitors; $1,450 to Jones as a refund of application and valuation fees; $3,464.50 to NMLA as the initial premium on a policy; $2,635 to NMLA as the initial premium on another policy; $20,000 to PTA for the initial units; $400 to NMPS as the application fee on the loan from NMPS for the further units; $284 to the Comptroller of Stamps for stamp duty; $295 to Van Minnen for her fee for “acting for” the Tavolettis; and $5,000 to the Tavolettis.  The total of the drawdowns was $34,823.50 (the other $25 possibly being payable to Citibank for bank charges). 

353               The two applications for initial units and further units and the application to NMPS for a loan of $80,000 were all dated 14 September 1989.  The loan was approved by letter dated 9 October 1989.  The initial units (14,344) were issued on 10 October 1989 and the further units (56,959) were issued on 31 October 1989. 

354               As a result of the transaction, the Tavolettis’ indebtedness had risen from nil to $114,823.50, of which $34,823.50 was secured by the first mortgage to Citibank and $80,000 was secured by the unit mortgage, to Permanent as trustee of the Mortgage Trust.  The Tavolettis’ monthly interest liability was $1,847 which amounted to about 74 per cent of their combined pre-tax income of $2,483.  The interest to income ratio jumped to about 86 per cent when Mr Tavoletti’s income for the year ended 30 June 1990 declined substantially.

355                In 1993 Mr Tavoletti was assisted by Mr Hocking who assessed the Tavolettis’ loss at $132,861 plus a further $10,598 for professional and advisers’ fees. 

356               McDonald of Citibank assessed the claim at $128,482.  The amount paid by NM under the deed of settlement dated 20 July 1994 was $128,482.  The NMPS loan balance was waived.

357               NM seeks contribution from Citibank in respect of $144,303.06 which is calculated as the settlement amount of $128,482 plus $15,821.06 being the balance of the waived loan and interest ($14,977) plus the difference in the value of the units between the time of the accountant’s calculations and the settlement ($844.06).

22.       David Bruce Weaver (introduced by Kelly and jones)

358               In 1989, Mr Weaver was an unmarried twenty-eight year old marketing manager whose income in the year ending 30 June 1989 was about $37,500.  Mr Weaver owned a unit in Harbord, Sydney, which was valued by Citibank at $125,000 and was mortgaged for about $60,000. 

359               Mr Weaver was introduced to Kelly by a friend who had previously attended one or two of Kelly’s “whiteboard presentations”.  In about June 1989, Mr Weaver twice attended Jones’ office where Kelly made “whiteboard presentations”. 

360               LKFM paid the application and valuation fees for the Mortgage Power loan totalling $1,125 which were refunded to it on settlement.  Mr Weaver’s application was handled by Citibank account manager Stewart at the CSU in Melbourne.  The application was received there on 14 June 1989 and sent by overnight bag to the CPU in Sydney. The CPU processed and approved a facility of $120,000 on 16 June 1989.  No capacity test was conducted.  On 19 June, Citibank’s letter of offer was sent to Mr Weaver. In the light of the valuation, the credit limit was reduced to $100,000.

361               The transaction was settled on 30 August 1989 when the following amounts were drawn down: $61,603.76 was transferred from Citibank Melbourne to Citibank Sydney and paid to the outgoing mortgagee and to Corrs for their fees as Citibank’s solicitors; $1,125 was paid to LKFM as a reimbursement of the application and valuation fees; $5,000 was paid to NMLA as premiums on insurance policies; $10,000 was paid to PTA for the initial units in the Property Trust; $200 for NMPS as the fee on the application for the loan for acquisition of the further units; $124 for the Comptroller of Stamps for stamp duty; $295 for Van Minnen as her fee for “acting for” Mr Weaver; $20 to Citibank for bank charges; and $3,000 as a payment to Mr Weaver.  Accordingly, on settlement Mr Weaver’s indebtedness increased from a pre-transaction amount of about $60,000 to some $82,124, leaving $17,876 available credit in the credit facility. 

362               Both the applications for the $10,000 worth of initial units and $40,000 worth of further units were dated 30 August 1989, as was Mr Weaver’s application for a loan of $40,000 from NMPS.  Mr Weaver testified that the documents were blank when he signed them.  He could not recall the date when he signed.  He said that handwritten dates appearing on the documents were not in his hand.

363               The initial units (7,172) were issued on 8 September 1989.  The further units (28,688) were issued on 29 September 1989, on which date NMPS made the advance of $40,000.  At this time, Mr Weaver’s monthly interest liability (to Citibank and NMPS) was about $1,940, which was approximately 62 per cent of his gross monthly income.  In fact, his income for the year ending 30 June 1990 declined to $30,825, with the result that his interest commitment accounted for nearly 76 per cent of his gross income.

364               The Mortgage Power facility was exhausted by 15 July 1992.  In late 1992, Mr Weaver was referred to Mr Hocking with whom he met twice in February 1993.  He was then referred to Peter Thompson, solicitor.  On 12 June 1993, Mr Weaver cancelled the authority he had given to Westpac Savings Bank to make the monthly interest payments to NM. 

365               Assessor Wall assessed Mr Weaver’s loss on 16 December 1993.  McDonald, on behalf of NM, accepted the recommendation.  Settlement monies ($84,140) were paid to Mr Weaver in May 1994. 

366               NM’s contribution claim against Citibank is for $89,690.24, representing $90,534.50 less $844.26 redemption adjustment being the amount by which the value of the surrendered units exceeded the forgiven NM loan.

23.       Barry Philip West and Jacqueline Anne West
(introduced by Jones)

367               In 1989 Barry West was a thirty-six year old airline service operator employed by Qantas.  He was a plumber by trade.  He and his wife Jacqueline owned a home at Minto, New South Wales which was valued by Citibank at $145,000 and was subject to a mortgage to the Commonwealth Bank for about $22,000.  They had three dependent children.  Mr West’s income for the year ending 30 June 1989 was about $18,000.  According to his affidavit the comparable figure for the year ending 30 June 1990 was $17,919.  Although Mrs West was identified on the Mortgage Power application form as a child care assistant, details of her income did not appear. 

368               Jones made a “whiteboard presentation” to Mr West in about October 1989.  The Mortgage Power application form identified his occupation as “transport officer” and, as noted above, that of Mrs West of “child care assistant”.  

369               Hawkins (Durnan) in the CSU received the Wests’ Mortgage Power application and sent it to the CPU in Sydney. The application contained no information about the Wests’ assets, income or liabilities.  The CPU approved a facility of $120,000 on 19 October 1989.  This amount was reduced to $108,750 at an initial variable interest rate of 19.95 per cent after the valuation of the Wests’ home was received.  A letter of offer was sent to the Wests on 2 November 1989.  No capacity test was conducted. 

370               The transaction was settled on 26 March 1990 when the following amounts were drawn down: $20,000 to PTA for the initial units; $400 to NMPS for the application fee on the application for the NMPS loan; $284 to the Comptroller of Stamps for stamp duty; $5,782.60 to NMLA for a premium on an insurance policy; $4,236.80 to NMLA for a premium on a further insurance policy; $295 to Van Minnen for her fee for “acting for” the Wests; and $23,380.03 to pay the outgoing mortgagee and the legal fees and disbursements of Corrs, Citibank’s solicitors.  The initial drawdowns totalled $54,378.43.

371               The application form for the initial units and that for the further units were both dated 26 March 1990 as was the application to NMPS for a loan of $80,000 for the further units.  The application indicated incomes for Mr and Mrs West of $2,800 and $1,000 net per month respectively (totalling $3,800).  The initial units (13,883) were issued on 6 April 1990 and the further units (55,474) were issued on 7 May 1990.

372               Whereas prior to the transaction the Wests had owed some $22,000 to the Commonwealth Bank on their first mortgage, after the transaction was completed they owed some $135,000 to Citibank and NM.  Their monthly interest liability was around $2,215 which amounted to some 76 per cent of Mr West’s income.  Although the evidence does not establish the level of Mrs West’s income, according to the application for the NM loan the couple’s combined income was $3,800 per month.  The monthly interest liability of $2,215 represents 58.29 per cent of this figure.

373               Later in 1990 the Wests appreciated that they were having difficulty in meeting the payments.  Down to 18 September 1991, they drew on the Citibank account to pay interest to NM and, apparently, to Citibank itself.  By 18 September 1991, the Mortgage Power facility was drawn to the extent of $108,141, leaving available only $608. 

374               By 1992, the Wests felt that they could not afford the interest on both loans.  Mr West consulted Jones who advised him to pay the NM and Citibank interest “up front” in order to obtain a larger tax deduction and to cash in the life policies in order to deposit money into the Citibank Mortgage Power account.  The Wests applied for an increase in the Mortgage Power loan in May 1992 in order to be able to make interest payments “up front”, but the valuation of their home came in too low and the Wests declined the increase in the facility offered by Citibank on the basis of that valuation.

375               Crawford called Mr West in 1993 and referred him to Mr Hocking.  Hocking assessed the Wests’ claim on 27 June 1994 supported by a letter from an accountant, Mr Bullock, dated 14 June 1994.  McDonald of NM assessed the claim at $77,082.50, which was adjusted, to take into account of interest, to $79,002.50 which NM paid on 19 October 1994.  On 9 November 1994 the Wests paid out of the proceeds of the settlement $56,325 into the Citibank account, reducing the debit balance to $51,412.  The loan from NMPS was paid out in March 1995 as a result of the settlement.

376               NM claims from Citibank contribution in respect of $93,806.70 in the Wests’ case.  This includes $14,804.20 unpaid interest and the outstanding loan balance owing to NMPS, both of which were forgiven.

B.        ELEMENTS OF THE INVESTORS' CAUSES OF ACTION AGAINST THE ADVISERS AND NM

377               I will address the issues presented for decision under this heading in the following sequence.

1.                  Did each Investor have a good cause of action in negligence against the relevant Adviser?

(i)                  Did the Advisers owe the Investors a duty of care?

(ii)                If so, did the Advisers breach their duty of care to the Investors?

(iii)               If so, did the Advisers’ breach of their duty of care to the Investors cause the Investors to suffer loss or damage?

2.                  Was NM liable to each Investor, either vicariously through the Adviser or directly in tort?

(i)                  Was NM directly or vicariously liable in respect of the Advisers’ conduct?

(ii)                Did NM itself owe the Investors a personal non-delegable duty of care?

(iii)               If so, did NM breach its personal non-delegable duty of care to the Investors?

(iv)              If so, did NM’s breach of its personal non-delegable duty of care to the Investors cause the Investors to suffer loss or damage?

3.                  Were the Investors guilty of contributory negligence?

1.         Did each Investor have a good cause of action in negligence against the relevant Adviser?

 

(i)         Did the Advisers owe the Investors a duty of care?

378               In Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 (“Esanda”), Brennan CJ said (at 252) that in a case of negligent misstatement said to have caused pure economic loss, a duty of care will arise if:

“¼ the defendant knew or ought reasonably to have known that the information or advice would be communicated to the plaintiff, either individually or as a member of an identified class, that the information or advice would be so communicated for a purpose that would be very likely to lead the plaintiff to enter into a transaction of the kind that the plaintiff does enter into and that it would be very likely that the plaintiff would enter into such a transaction in reliance on the information or advice and thereby risk the incurring of economic loss if the statement should be untrue or the advice should be unsound.”

379               In the same case, Toohey and Gaudron JJ considered that reliance by the plaintiff and an assumption of responsibility by the defendant would establish a duty of care in such cases. They said (at 264):

“reliance is to be understood, in the context of the provision of information or advice, as an expectation, which is reasonable in the circumstances, that due care will be exercised in relation to that provision. Similarly, we consider that, in that same context, assumption of responsibility … should be understood as the assumption of responsibility for providing information or advice in circumstances where it is known, or ought reasonably be known, that it will or may be acted upon for a serious purpose, and loss may be suffered if it proves to be inaccurate.”

380               If the information or advice is not proffered in response to a request from the plaintiff, it will normally be necessary to show that the defendant intended or encouraged the plaintiff to act on the basis of its accuracy or soundness: San Sebastian Properties Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 at 357; Esanda at 265.

381               Many of the Investors were put into contact with their Advisers by a friend or another NM agent who recommended that they obtain advice about the Package from the Adviser.  In those cases, therefore, the Investor approached the Adviser requesting information and advice about the Package. In other cases, the Adviser, who was already known to the Investors, either socially or through earlier purchases of NMLA insurance policies, approached the Investor and initiated discussion about the Package. In yet other cases, Investors approached the Advisers in connection with insurance and the Advisers took the opportunity to present the Package. As noted earlier, one Investor, Daniels, responded to a newspaper advertisement of Mortgage Power, after which, Hugh Judd, who identified himself as Kelly’s marketing manager, contacted him, then introduced him to Naughton who gave the presentation.

382               In all cases, the Advisers intended and encouraged the Investors to act on the basis that the information was correct and the advice given was sound, and that both were therefore safe to be relied on.  The Advisers wished the Investors to invest in NM products in accordance with the Package in reliance on what they said, and they had a financial interest, in the form of commissions from NM (and in the case of LKFM from Citibank as well), in their doing so.

383               Did the Investors reasonably rely on the Advisers to exercise due care in the provision of the information and advice?  Did the Advisers know, or ought they reasonably to have known, that the information and advice would or might be acted upon and lead to loss if incorrect or unsound?

384               All the Investors except Mr and Mrs Farrar testified expressly to the general effect that they invested in reliance on the Advisers' representations and advice.  I accept their evidence.  The following passage from the cross-examination of Mr Alder is illustrative:

“Q. Did you tell [Kelly] that, that you couldn’t understand one hundred per cent of what he was saying [during the presentation of the Negative Gearing Package]?

A. No.

Q. Why not?

A. Because I’m not into high finance, I suppose. That is why I didn’t say much. I just expected, because he works for National Mutual that he did know what he was talking about, that he was looking after my future.”

385               Mr Farrar said that he was not introduced to Kelly but that his sister-in-law, who was a receptionist at FKB’s offices, introduced him to Kirby.  He said that he had no knowledge of “the workings of” an investment in shares or units in a unit trust or the “risks associated with” such an investment, and that he “had no knowledge of negative gearing”.  He said that he “was very interested in proceeding with … Kirby’s proposals” at the end of the first meeting, and that “[a]t the conclusion of the second meeting [he] decided to proceed with … Kirby’s proposals”.  He said he did not seek independent advice because of his relationship with his sister-in-law, Gwen Farrar, who was employed at Kirby’s agency.  I infer that Farrar relied on what Kirby said in deciding to invest.

386               The 23 Investors, all of whom gave evidence, had virtually no investment experience.  Many had none.  None had previously bought units in a trust.  Only one, Ms Emery, had previously invested in shares. Another, Mr Lorenz, had invested in a property on a “negatively geared” basis but had never invested in shares or units.The Investors’ general lack of financial experience and awareness assists me in concluding that they were relying on the Advisers to give correct information and sound advice.

387               Was it reasonable for the Investors to rely on the Advisers and ought the Advisers to have known that they were doing so and would or might suffer loss if the information and advice should prove to be incorrect or unsound?  In order to answer this question I must refer to the course of the meetings between the Advisers and the Investors. The meetings usually followed the same general pattern.  That pattern is proved by the testimony of Kelly and Crawford as well as that of the Investors themselves.  Kelly described his presentation in a memo to NM on 9 November 1992 (this was Kelly’s response to a request for a description of it that was made of him because of a concern developing within NM over his operation).  As well, he testified orally as to the nature of his presentation, sometimes elaborating on the memo.  Crawford testified as to Jones’ form of presentation. 

388               The Adviser would begin by asking the client about his or her current financial position (for example, income, assets, debts, monthly repayments, time to pay out debts). The client would be asked questions with a view to establishing whether he or she was satisfied with his or her existing financial position. The client might reply, by saying, for example, that he or she could “get by” but did not seem to be “getting anywhere [financially]” or that he or she would like to put an extension on the family home but could not afford it.  Kirby asked Farrar, “[W]hat are your financial goals, what do you want most?” to which Farrar replied “By my 36^th birthday I want to have paid off my house and own a share in a houseboat”.  The client would be shown how his or her debts could be consolidated under a “revolving credit facility” such as Citibank’s “Mortgage Power” facility (the Advisers also sometimes referred to facilities offered by the Bank of Melbourne and the GIO). Consolidation may or may not have resulted in the client’s having a monthly interest-only liability to Citibank that was less than the existing monthly principal and interest payments under the home mortgage.  If so, he or she would be told that by maintaining payments at the existing rate, he or she would be able to reduce the principal that would be outstanding under the Mortgage Power facility.

389               The Adviser would discuss with the person how he or she might wish to use the undrawn balance in the proposed credit facility.  The client might be told that he or she would be able to pay for something that had been unaffordable previously, for example, an overseas holiday, a new car or a house extension.  Figures would be written on a whiteboard to demonstrate the effect of the drawdowns on the amount of credit remaining available from time to time.

390               The Adviser would next come to the use of the Mortgage Power facility to fund investment in units in the Trust. The prospective investor would be encouraged to draw down on the facility an amount representing 20 per cent (later 30 per cent) of the total amount to be invested in the units, and to borrow the remaining 80 per cent (later 70 per cent) from NMPS.  As noted earlier, the borrowings from Citibank and NMPS were on “interest only” terms; the interest rate was variable by the lender; the borrowing from NMPS was for a fixed term of five years.  The interest payable would exceed the interest which the person had been paying previously, but this would be offset to some extent by the dividends received from the units. Moreover, as the dividends would be less than the interest payable to Citibank and NM on the money that had been borrowed and invested in the units, the client would be told that the excess of that interest over the dividends received would be tax deductible and that this was the “negative gearing” aspect of the Package.

391               The prospective investor was told that the result would be a tax refund. The Adviser would perform calculations which would show the amount, sometimes called the “break even capital growth”, by which the units needed to increase in value each year so that the client “broke even”, that is, was no worse off, even in the short term, by reason of the investment.  And of course the person would also have the benefit of anything acquired with the money borrowed, such as extensions to the home and the units in the Trust.  According to the Adviser, the units would, increase in value.  The client was told that for little or no cost, he or she would acquire something previously desired but unaffordable as well as have an investment which would leave him or her with no debts but a capital profit at the end of between five and ten years.

392               The Adviser used rates of capital growth and dividend return supplied by NM, when demonstrating that an investment in the units in accordance with the Package would make the client financially better off after a period of years. For some prospective investors the Adviser used a computer formula known as “COBBER” provided by NM (see Chapter 11 later).

393               Finally, the client was told that he or she could purchase a NMLA life insurance policy to protect against the financial risks arising from death. In particular, the person was encouraged to select an investment policy such as a Business Security Policy (“BSP”); to draw on the Mortgage Power facility to pay the first year’s premium; and to borrow against the policy in subsequent years to purchase yet more units, the income and tax savings from which would be used to fund premiums and the interest on the policy loan.

394               If the person purchased units in the Trust or a NMLA policy (or both), the Adviser would earn commission from NMAM or NMLA respectively (or both).

395               Citibank submits that there was no standard presentation such as that set out above.  In support, it refers to a passage in Kelly's memo dated 9 November 1992 in which Kelly said:

“As I have said on several occasions it is extremely difficult to put together a ‘written presentation’ of the concept. … We do not have a standard presentation as such.”

However, the memo went on to give an example of a presentation which contained the elements described above.  A letter sent to Mr Alder by Roberts sets out a scheme which contained the same elements.

396               Obviously the presentations varied somewhat as between the Investors.  Some needed convincing on certain matters which presented no obstacle to others.  However, I accept that all the presentations contained the elements described. The essential point for present purposes is that the Advisers were taking details of the Investors’ individual financial positions and aspirations, then recommending that they rearrange them by refinancing with Citibank through Mortgage Power and drawing on Mortgage Power and borrowing from NM to enable purchase of units in a NM investment product in accordance with the Package.  These were serious recommendations, and in my view, the Investors were entitled to expect that the Advisers would exercise reasonable care in making them. The Package involved the Investors in substantially increasing their indebtedness as part of an arrangement which, for them, was unfamiliar and extraordinary.  They were entitled to expect that an unqualified recommendation to invest in accordance with the Package would not be made if there were associated risks that were not made clear to them, or if their income was or might well prove insufficient to service their borrowings, or if the Package was or was likely to be unsuitable for them.

397               I find that Kelly and the other Advisers were aware of the Investors’ relative inexperience.  They ought reasonably to have known that the Investors were relying on them and might suffer loss if the information and advice provided were inaccurate or unsound.

398               Citibank submits that the Advisers were acting as “salesmen” (or a “saleswoman” in the case of Wass) rather than as financial advisers and that the Advisers are not liable in negligence for “sales representations” as distinct from “advice”.  It submits that NM must show that the Investors regarded the Advisers as “independent” or “disinterested” financial advisers, and has failed to do so.  It therefore submits that while the Advisers’ statements might attract liability under, for example, the TP Act, NM has failed to establish that the Advisers owed the Investors a duty of care at common law.  Citibank suggests, by way of analogy, the case of a car salesman who incorrectly represents that a car is of merchantable quality and suggests that he may be liable under the TP Act but would not be under the general law of negligence.

399               I do not accept the submission. Citibank refers to no authority in support of the general proposition that statements made by a “salesperson” in the promotion and sale of a product cannot be the subject of a duty of care.  The fact that the Advisers were agents for NM and were promoting investment in units in the Property Trust (or in the case of the Alders, in the NM Equity Imputation Fund) does not mean that the Investors could not reasonably have relied upon them not to recommend an investment that involved a risk of financial loss, at least without warning them of that risk.  Nor does it mean that the Advisers could say what they liked with impunity.  I agree that an Investor may have been acting unreasonably in taking at face value an extreme representation which was inherently unbelievable: for example, the statement attributed to Kelly by Mr Quaife that if the investment resulted in the Quaifes’ losing money, Kelly would pay off their mortgage.  However, representations that the Package was “suitable” for an Investor and “risk free” deserved to be taken seriously and I think the Investors were entitled to rely upon them. 

400               While the Advisers were not qualified financial planners, they knew that the Investors were making important investment decisions.  In most cases these decisions were made on the recommendation of the Adviser alone.  As I have said above, the presentation involved the Adviser obtaining detailed financial information from an Investor and showing how the Package would work for him or her.  In those circumstances I think the Advisers held themselves out as having sufficient understanding and experience to be able to advise the Investor whether the Package was suitable according to the particular Investor’s circumstances. 

401               In sum, although the presentation was in part a “sales pitch”, it went beyond that: it was in the nature of serious financial, taxation and investment planning and advice; the Advisers intended the Investors to receive and understand it in that way; and it was obvious that they were going to do so.

402               For the above reasons I conclude that the Advisers owed a duty of care to the Investors.

(ii)        Did the Advisers breach their duty of care to the Investors?

General

403               NM pleads and submits that the Advisers breached their duty of care to the Investors.  Citibank submits that it is not shown that the advice that the Investors should invest in the Package was advice that a financial and investment adviser exercising due care could not reasonably have given. Rather, according to the submission, given the growth projections provided by NM, an Adviser who did not advise investment in the Package would have been “negligent”, because what was presented was a “chance in a century”.

404               In my view, Citibank’s submission focuses somewhat too narrowly upon the nature of the product to be invested in, that is, the units.  Even if it were correct that the Advisers were not negligent in uncritically passing on NM’s income returns and capital growth projections, this would not be the end of the matter.  The reason is that the Advisers did more than this.  After speaking with the Investors, usually at some length and more than once, and at least purporting to listen to them and to take cognisance of their individual circumstances, the Advisers recommended a radical restructuring of their financial affairs that involved substantial borrowings on the security of their homes and of the units purchased.  The borrowings gave rise to heavy interest commitments, which, in many cases, consumed most if not all of the Investors’ income from their employment.  The increased interest liability was supposedly to be met by the returns from the units and the tax savings arising from the “negative gearing” aspect of the investment.  The Package was far more complicated and risky than a simple investment in units in the Trust.   

405               I accept in Chapter 11 below that Kelly’s Negative Gearing Package was simply a particular form of a negative gearing arrangement advised by NMAM and taught by it to its authorised representatives who faithfully promoted it in accordance with that teaching.  But I do not accept that this absolved those representatives from all responsibility for what they said to the Investors.  While I accept that the extent of NM’s responsibility was far greater than theirs, they did, after all, have the opportunity at their presentations of appreciating the Investors’ lack of financial experience and sophistication, and of taking steps directed to ensuring that they adequately understood the implications of the Package for their own particular circumstances.

406               NM submits that the Advisers’ duty of care was breached in various ways.  First, it submits that they were negligent in making various positive representations to the Investors.  Chief among these were the “summary” representations that the Package was (1) "safe and risk free" and (2) "suitable" for the Investor.  These representations are said to have been made expressly in many cases and to have been made impliedly in all other cases.  Schedules 2 and 4 (Annexure 1 to these Reasons) set out the express representations and advice alleged to have been made and given.  In large part they can be seen to support those two summary representations.  Some were simply descriptive of the Package, others involved bold forecasts of its likely profitability, and still others were quite outrageous (for example, Kelly’s statement to Mr Quaife referred to at [399] above, and Jones’ statement to Mr Alder, “I guarantee that if the scheme doesn’t work I’ll give you one million dollars myself”).

407               Although NM also pleaded the solicitor/Van Minnen representations and advice, no submissions were made in this respect and it is hard to see where they lead.  None of the Investors testified that they would not have entered into the Package but for them.  I do not propose to consider this aspect further.

408               Second, NM submits, in conformity with par 21 of the Pleading, that in order to discharge their duty of care, the Advisers were obliged to give the Warnings to the Investors.

409               Third, NM submits that the Advisers were obliged, but failed, to provide the Investors with the Written Explanation so that they would understand the Package.  The Written Explanation would have given the Investors an opportunity to consider the Package more carefully outside the context of the interview with the Adviser, and even to seek independent expert advice about it.  However, no Investor testified that if the Written Explanation had been supplied, he or she would not have invested or would have sought independent expert advice.  Some of the Investors did in fact seek independent advice but still invested, while those who did not seek such advice did not attribute their failure to do so to the fact that they did not receive the Written Explanation. Even if they made that attribution, it would not be possible to know, on the evidence before me, whether the particular advice obtained would have caused them to decide not to invest.  For these reasons, I do not propose to consider further this aspect of the alleged breach of duty.

“Safe and risk free” representation and failure to give the Warnings

410               The representation that the Package was “safe and risk free” and the failure to give the Warnings are linked as both contributed to create the impression that the Investors could not lose. The alleged representation that the Package was “suitable” for the Investor raises the somewhat different question whether the Advisers were negligent in recommending the Package to the particular Investors in the light of their individual circumstances.  I will consider in turn the two different ways in which the case of breach of duty is put.

411               I accept that the Warnings were not given. None of the 23 Investors said they were given any of the Warnings.  As part of the assessment of the Investors’ claims for compensation, a number of the Investors were taken through a standard form of “Claim Assessment Report” which contained the following questions:

“(252) Were the benefits and risks of the Adviser’s recommendations fullyexplained to you?”

“(254)Was the concept of negative gearing explained to you and the potential risk associated with it?”

“(258)What did the Adviser say in respect of the increase in the potential risk of loss as well as the potential for capital gain when negatively gearing an investment?”

“(261)What warnings or concerns did the Adviser give you regarding the likelihood of historical rates of return being achieved in the future?”

412               Sixteen of the present 23 Investors completed the Report.  They were Appelman, Boulter, Crawford, Daniels, Douglass, Eberts, Emery, Farrar, Fraser-Bell, Jorgensen, Lowe, Parsons, Pickworth, Quaife, Richards and Weaver.  All sixteen answered to the effect that the Adviser did not refer to any risks or give any warnings as to the future rates of return from the units.  Douglass answered in the negative to questions 254 and 261 but answered question 258, “Little reference to risk or loss”.  I do not infer, on the basis of this answer and in the absence of testimony from Blee who made the presentation to Douglass, that the risks were sufficiently brought to his attention.  Many of the Investors testified that they were told expressly that there were no risks associated with investing in the Package.  I accept their evidence.

413               The other seven of the present 23 Investors, Alder, Bachmann, Garden, Lorenz, Minichini, Tavoletti and West, did not complete a Claim Assessment Report. However, they all said they were told by Jones or Kelly, and in one case by Blee, that there was no risk of loss, and some said they were told that the Package was “self-funding”. 

414               In substance, the evidence led from the Advisers did not suggest that they gave effective warnings.  Kelly was questioned about the presentation he gave to the Quaifes.  Mr Quaife had testified that Kelly made the following statements to him and his wife:

“This is a sure fire way to make money. You cannot lose.”

“The statistics show that you cannot lose when you invest in property and in particular the property trust. There is no better investment than property.”

“The propert[y] trusts [sic] and the investment scheme is [sic] a complete risk free investment.”

“If this all goes down the tube - I’ll pay your house off.”

415               According to Mr Quaife, far from warning about interest rates, which had climbed from 15.95 per cent in November 1988 to 17.25 per cent early in 1989 when they invested, Kelly said to him “[d]on’t worry about interest rates”.

416               Kelly could not recall making a presentation to the Quaifes at all, but denied that he said any of the things mentioned above to any Investor.  On the other hand, when asked what risks he drew to the attention of Investors, he responded:

“The major risk is that the property would decrease in value and there will be a margin call if you take the short term view. It is like investing in shares, except you expect lower fluctuations or smaller fluctuations, rather.

¼

The investors would have been left with the impression that over time the Property Trust would have been expected to increase in value, and if it had a drop it would have been small and corrected itself down the track.

¼

I didn’t put the general proposition to the clients that they should lay awake at night worrying about a drop. I didn’t guarantee that it would go up. I also didn’t do anything to make them feel there was a huge chance it would fall.”

 

It will be noted that in the first of these paragraphs, Kelly identified “the major risk” in objective terms, and carefully avoided responding to the question to the effect that he did at the time mention to clients the risk of a fall in value and a margin call to the Investors.  According to Kelly’s evidence, the closest he came to giving any of the Warnings was to say:

“If property values stay the same and it has cost you $2,000 after your tax to fund the thing, you are down $2,000 a year. So unless the property goes up each year equal to the amount it has cost you to fund it, you will lose money.

You have to have enough cash left over in your facility in case you run short of cash, in case something goes wrong.”

 

I have no doubt that Kelly did not mention this risk in the manner of a warning that might dissuade the Investors from proceeding.

417               Of the other Advisers, only Bahr, Hacopian, Kirby, Roberts and Crawford gave evidence. Hacopian and Crawford did not promote the Package to any of the present 23 Investors.  Kirby and Roberts were not asked what warnings of risk they gave.  Bahr was asked about Mr Jorgensen's claim that Bahr said to him:

“There will be little or no risk of incurring a loss in this investment.”

Bahr said that he would have said:

“There [will] be little or no risk if you [keep] this going for X amount of time.”

Bahr also denied saying that “the whole investment cannot fail”.  He said that he

“¼ described [the] investment to Mr Jorgensen and other clients as though he were buying the house next door and asked him, ‘Will it fail or won’t it fail? If you buy it and sell it next month, you will probably lose money. If you buy it today and sell it in ten years’ time, you will probably make money. If you can’t do it for 10 years, don’t do it.”

 

On the other hand, Bahr also agreed that he described the Package as “self-funding”.

418               Roberts denied telling any of the Investors that they could not lose and that there was no risk.  Like Bahr, he said he told them that the investment was a “long-term” proposition requiring them to commit for a minimum of ten years.

419               The pattern which emerges from this evidence is that the only warning given related to the overall profitability of the Package.  The Investors may have been told that the value of real estate, and therefore of the units in the Property Trust, might decline in the short term, that is, temporarily.  But the Advisers did not bring home to the Investors the need for them to check their capacity to service their interest payments if, for example, the income returns from the units or their personal exertion income, or both, should fall.  I find that they did represent to the Investors, expressly or impliedly, that the scheme was “risk free”, subject to the possibility of temporary short-term slumps in real estate values.  I also find that the Warnings were not given.

420               I make these findings, even accepting the limited evidence given by the Advisers in relation to this issue.  However, where the evidence of the Advisers and the Investors is in conflict, I prefer that of the Investors for the reasons I give at [139] to [141].

421               In my opinion, the Advisers breached their duty of care by representing that the Package was “risk free” and by failing to give the Warnings. 

422               It can be seen from the summaries given in Section A of this chapter that all the Investors had a substantial equity in their homes. On the other hand, they did not enjoy high levels of income, although some were earning substantially more than others. The loans from Citibank and the Mortgage Trust required sizeable monthly interest payments. In fact, the monthly interest bills of some of the Investors exceeded their monthly after tax income. While the shortfall was supposed to be made up from the dividends from the units and the tax savings generated by the negative gearing aspect of the Package, an upward movement in interest rates or a decline in dividends could have a dramatic effect, putting at risk their equity in their homes. 

Failure to give the particular Warnings

423               Before dealing with the Warnings in turn, I make the following general observation. As stated or implied earlier, the Advisers took on the role of specialist advisers to the Investors. Far from making it clear that they could not accept responsibility for the decision to invest, or that they were merely relaying information supplied by NM for the Investor to take into account, they positively recommended the investment without qualification.

1.      “[T]he risk of the Investor suffering loss if the value of the units in the Property Trust, or the returns from the Property Trust, declined.”

424               If the value of the units declined below their initial value and did not recover before circumstances obliged an Investor to realise the investment, the Investor would suffer a capital loss.  Since the Investor had borrowed 100 per cent of the price of the units, the amount realised would not be sufficient to repay the amounts borrowed.  As noted earlier, the Advisers claimed that they warned the Investors that property prices, and hence the value of the units, might decline in the short term.  However, even some of the Advisers agreed that the Investors would have been left with the impression that at the end of, say, ten years, the value of the units would definitely have increased sufficiently to clear their debts and leave them with a capital profit. 

425               Should the Advisers have warned the Investors that it was possible, albeit remotely possible, that property prices might decline and not recover even over a period of say ten years?  I think they should have done so. Citibank refers to the fact that the figures for projected dividends and capital growth in respect of the units used by the Advisers were based squarely on information provided by NM (see Chapter 11).  However, I do not think that it was consistent with the exercise of reasonable care for the Advisers to say, or to give the impression, that those or similar rates of return and growth would certainly be achieved, even over the long term. The Advisers must have known that there was always a risk that they might not be, and the Investors were entitled to be warned of that fact and told that there was an element of commercial risk taking involved, for which the Investors had to be prepared to take responsibility.

426               Perhaps more importantly, exercise of reasonable care demanded that the Advisers draw the attention of the Investors to the possibility that a change in their circumstances might compel them to realise the units prematurely and suddenly, with consequential capital loss.

427               In Rogers v Whitaker (1992) 175 CLR 479, the High Court considered a medical practitioner’s duty to warn a patient of a risk involved in a surgical procedure.  The Court said that a doctor is obliged to warn of a “material” risk, and added (at 490):

“a risk is material if, in the circumstances of the particular case, a reasonable person in the patient’s position, if warned of the risk, would be likely to attach significance to it or if the medical practitioner is or should reasonably be aware that the particular patient, if warned of the risk, would be likely to attach significance to it.”

428               In my, view, a similar approach is appropriate in this case.  The Investors were borrowing large sums of money against the security of their homes.  The Advisers should have known that they would "attach significance" to a risk that they might be left, at the end of ten years, or a shorter period if circumstances compelled an earlier realisation, with a capital loss.  While the Advisers may have been entitled to advise the Investors that in their opinion the risk was small, the Investors were nonetheless entitled to be made aware of it.

429               More important was the risk of loss if the returns from the units declined.  This stream of income was necessary to enable the Investors to pay interest.  In some cases, as can be seen from the summaries of the circumstances of the 23 Investors outlined in Part A of this chapter, the returns from the units assumed particular importance because the Investors could not meet their interest liabilities from their existing after tax income alone.  In all cases, the interest liability was significant and the returns from the units were important in enabling them to sustain the investment.  All of the Investors were at real risk if those returns declined.  The income from the Trust in fact declined steadily from 3.27 cents per unit in September 1990 to 2.43 cents per unit in March 1992.

430               The Advisers did not refer to this risk in their presentations to the Investors, and I think that by this omission they breached their duty of care.

2. “[F]or those ¼ Investors entering the scheme between June 1988 and September 1990, [that] the risk of the Investor suffering loss as a result of significant increases in debt in an environment where interest rates were for much of the period increasing and in any event at extremely high levels throughout the period; for Citibank Investors entering the scheme after September 1990, that although interest rates were now tending to fall, they remained at significant levels and there was still a risk of loss through a significant increase in debt.”

431               During the period from November 1988 to November 1989, interest rates on Citibank Mortgage Power loans rose steadily from 15.95 per cent to 19.95 per cent.  The rates began to decline in February 1990 and returned to 15.95 per cent in January 1991. By December 1991 they had fallen to 13.5 per cent, and by September 1992 to 10.4 per cent. I accept, as NM submits, that, particularly during a period of rising interest rates, the Investors should have been warned about the potential difficulty of maintaining interest payments and the consequences of default. Even those Investors who invested in the Package during periods of falling interest rates should have been warned of this risk, particularly in the light of the fact that the Advisers were promoting the Package as a long term investment.

432               While the Investors knew that the interest rates on the loans from Citibank and NM were variable and may have known that interest rates were rising during 1988 and 1989 (most of the Investors already had home loans) it was still incumbent on the Advisers to mention this danger.

3. “[T]hat the Negative Gearing Package was best suited to persons with a consistently high income who were paying and were likely to continue to pay into the foreseeable future significant amounts of income tax at the highest marginal rate.”

433               The tax saving from the “negative gearing” aspect of the Package was the other means by which the Investors were supposed to be able to cover their interest liabilities to Citibank and NM.  There is no suggestion that there was a risk that the taxation legislation might be amended to eliminate this tax advantage.

434               The Investors were otherwise likely to see a reduction in the amount of income tax payable by them only if their income or their tax rate dropped.  It was common sense that those who were earning higher incomes and paying tax assessed at higher marginal rates would derive the greater benefit from negative gearing.  However, the question in relation to an individual Investor is not whether the Package would offer greater tax benefits to someone else, but whether the Investor would save sufficient tax to enable him or her, with the disposable income available to the Investor, to support the investment “in the long term”.

435               I do not think that this particular Warning was one that due care required be given to the Investors.

4. “[T]hat the unused limit in the Citibank facility might be exhausted through the funding of the negative element of the scheme, at which point the client might be unable to continue to fund interest commitments from other sources and so go into default on the Citibank mortgage such that the client’s home would be sold up.”

436               This risk was more obvious in some cases than in others. The amount of the Mortgage Power facility remaining available after the drawdowns made on settlement of the facility varied as between Investors. So did the impact of the new interest commitments.  Those Investors whose interest liabilities to NM and to Citibank consumed a large part of their income were faced with the possibility that it might not be long before they would need to draw on the facility.  Once the facility was fully drawn, the Investor would default in paying interest and would lose his or her home pursuant to the mortgage to Citibank, or his or her units pursuant to the unit mortgage to NM, or both.  Even those Investors who had larger incomes or smaller borrowings might find themselves in trouble if interest rates increased, the returns from the units declined, or they suffered a change in their personal circumstances of life which reduced their disposable incomes.

437               Given the gravity of the consequences, I think this risk was a material one in all cases, except that of the Alders, and that the Advisers should have warned of it.  In the case of the Alders, the increase in their borrowings was so small that this risk was not a significant one.

5. “[T]hat should the client lose his or her job, or the marriage split up, he or she might be immediately faced with greatly increased debts and might be unable to service the interest or principal on the Citibank loan without loss of the home.”

438               This risk was a live one in all cases accept that of the Alders.  The level of borrowing was such that a loss of, or significant reduction in, disposable income could lead to the Investors’ indebtedness spiralling out of control.  Having assumed the role of financial, taxation and investment adviser towards the Investors, the Advisers were obliged to give the Investors (except the Alders) this Warning. 

6. “[F]or investors after 23 July 1991, there was a statutory freeze on redemptions for all unlisted property trusts (including the Property Trust) unless 12 months’ notice was given with the result that it may be difficult for the investors to extricate themselves from the negative gearing package should their financial circumstances change.”

439               This Warning should certainly have been given to the Appelmans, the Lowes, the Farrars and the Jorgensens.  Reasonable prospective investors in their positions would have regarded it as a significant risk that they could not require immediate redemption of and payment for their units, in order to discharge or reduce their indebtedness and put a halt to further deterioration of their financial position.

440               I think that by representing that the Package was “risk free” and by failing to give Warnings 1, 2, 4 (except as to the Alders), 5 (except as to the Alders) and (in the four cases mentioned) 6, the Advisers breached the duty of care which they owed to the Investors.

441               My conclusion that the Advisers breached their duty of care is supported by the evidence of Peter Dunn (“Dunn”), a financial planner who was called as an expert witness by NM.  Dunn testified that a prudent financial adviser would

“[n]ot recommend an investment or scheme of investments of a speculative, high risk nature unless the client fully appreciated the risks. That would have involved the adviser explaining each risk, and how it might affect the performance of the investment, especially the possibility of the client suffering a loss and the extent of such loss.”

442               In Dunn’s view, a prudent financial adviser advising about the Negative Gearing Package, would have paid particular attention to the following factors:

“(a)     the investors were, generally, not sophisticated in their understanding of investments or financial planning;

(b)               they were generally wage or salary earners on fixed, moderate incomes with limited disposable income;

(c)                the investment carried a fair degree of risk being, in most cases, an investment in one unlisted property trust;

(d)               the viability of the scheme was generally dependent on the continued availability of the Citibank line of credit;

(e)                there was a likelihood that any adverse movements in interest rates or property values would accelerate the depletion of any available credit;

(f)                 once that credit was depleted the investors would have to sell their units to repay the loans or meet all interest and principal repayments from their own funds which, given their generally modest incomes and lack of other assets, they were unlikely to be able to do;

(g)               although favourable movements in interest rates and property prices might well have meant a good return for the investor, there was a real and substantial risk of loss which was likely to result in financial disaster for many participants.”

443               This evidence of Dunn was not seriously challenged.  Independently of Dunn’s evidence, I would have concluded that persons such as the Advisers, assuming the role of financial adviser to persons who were unsophisticated and inexperienced in financial and investment matters, would have had the duty to which he referred.  The risks referred to by Dunn were not explained to the Investors by any of the Advisers.

Unsuitability

444               The Pleading does not identify any particular respect in which it is said that the Package was not “suitable” for the individual Investors. I proceed on the basis that the Package was “unsuitable” for an Investor if it was reasonably foreseeable that the Investor would, or might well, not be able to sustain the investment in the long term by meeting his or her interest liabilities, and be forced to sell the units at a time when they had decreased in value, leaving the Investor with a capital loss and wasted interest payments and establishment costs.  It was unsuitable also if the risk of loss was otherwise such that no financial adviser would have made an unqualified recommendation to the particular Investor in the form in which it was made, because of the Investor’s circumstances.

445               This is an aspect of the case with which I have had some difficulty.  The evidence does not establish every material aspect of each Investor’s financial position.  In particular, although a key element of the Package was its “negative gearing” aspect, the evidence does not establish the tax consequences of the Package for each Investor or the extent to which “tax savings” would have assisted him or her to meet the interest liabilities to Citibank and NM.

446               The following is an extract from Dunn’s cross-examination relevant to the present question:

“Q. Is it your view, therefore, that this concept which was presented to all the investors was always inherently flawed?

A. It was not without substantial risks. Had the property collapse not occurred, it is reasonable to project that those folk today may be quite well off.

Q. Was it flawed in the sense that it didn't take into account the possibility that the property market would fall?

A. Yes.

Q. And so, in your view, the scheme was never really a financial or a reasonable product to sell to the investors that you spoke to, except for perhaps one or two?

A. That's correct.

Q. So, whatever the agents could say about it, they could never make it into a reasonable product, could they?

A. That is probably a reasonable comment.” (my emphasis)

 

447               The highlighted passages suggest that although Dunn was saying that the advice was inadequate in all 23 cases because it failed to explain and warn of the risks, he was not saying that the Package itself was necessarily unsuitable for all 23 Investors: the individual circumstances of an Investor might have made it suitable for him or her after all.

448               I have decided not to explore the issue of the suitability of the Package in the circumstances of the respective Investors in view of the conclusion that I reach later on other grounds that Citibank is not liable.

(iii)       Did the Advisers’ breach of their duty of care to the Investors cause the Investors to suffer loss or damage?

449               Citibank submits that any losses were caused, not by the conduct of the Advisers, but by reason of “independent, extrinsic and supervening causes, in particular the total collapse of the unlisted property trust industry which occurred between July 1990 and December 1992 and the emergency legislation which was enacted in consequence”.

450               There are two areas of causation to be considered.  The first, usually referred to as “inducement”, is concerned with the relationship between the Advisers’ conduct and the making of the investment.  Did the Advisers’ conduct cause the Investors to invest in accordance with the Package?  The second is concerned with the relationship between investment in accordance with the Package and the loss alleged: was it investment in accordance with the Package that caused the loss asserted?

(a)        Did the Advisers’ conduct cause the Investors to invest in the units in accordance with the Package?

451               In Chappel v Hart (1998) 195 CLR 232 at [9] Gaudron J said:

“Where there is a duty to inform it is, of course, necessary for a plaintiff to give evidence as to what would or would not have happened if the information in question had been provided.”

A statement to the same effect is found in the judgment of McHugh J in the same case at [34].

452               Similarly in Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 293 I said, in a passage with which Lehane J agreed:

“In any case based on an alleged negligent failure to warn or inform it is necessary (i) to identify with certainty the kind of warning or information which the circumstances called for, and (ii) to prove that if the warning or information called for had been given, the loss or injury alleged would not have been suffered.”

453               If the evidence does not establish that it is more probable than not that the Investors would not have invested had the required Warnings been given, an essential element in their causes of action based on the Advisers’ failure to give the Warnings will not have been made out: Qantas Airways Ltd v Cameron, at 293.  Similarly, if the evidence does not establish that the Investors would not have invested in the Package “but for” the representations made that it was “risk free”, causation will not have been proved.  As Gaudron J said in Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 163 ALR 611 at [19]:

“When a person claims to have taken, or refrained from taking, a particular course of action in reliance upon another’s representation, the critical question, assuming the representation is one that might reasonably be relied upon, is whether, but for that representation, he or she would have taken that action.  In that context, ‘but for’ does not signify a sine qua non or causative factor which, although necessary, is not sufficient to produce the result in question.  Rather, it signifies the decisive consideration or one of the decisive considerations for taking the course of action in question.  It was in the former sense that the ‘but for’ test was rejected as the exclusive test of causation in March v Stramare.  In the sense of asking whether a representation is a decisive consideration, ‘but for’ is always the test of reliance.”

454               The Investors did not testify, either on affidavit or orally, as to what he or she would have done if the required Warnings had been given, or if some had been given but not others, or if the Investors had not been told that the Package was “risk free”.  While such testimony would not have been conclusive (it would have been hypothetical and given with the benefit of hindsight), it would have provided the usual evidentiary foundation for resolution of an issue of the present kind.

455               The Investors did testify in general terms that they decided to invest “as a result of” the representations made to them by the Advisers, and would not, but for these representations, have taken out a Mortgage Power loan or purchased units.  But in my view it does not necessarily follow that they would not have invested in the Package if the required Warnings had been given or the “risk free” representation not been made.  The Investors may have been prepared to accept the risk in return for the chance of a substantial profit.  NM would have to point to other evidence from which it is possible to infer what the Investors’ response would have been if the required Warnings had been given or the “risk free” representation had not been made.

456               I have decided not to pursue further the issue of inducement in the individual cases because of my conclusion later on other grounds that Citibank is not liable.

(b)        Was it investment in the units in accordance with the Package that caused the Investors to suffer loss or damage?

457               Citibank refers to Potts v Miller (1940) 64 CLR 282. In that case, the plaintiff bought shares on the basis of what he alleged to be two misrepresentations. These were to the effect that the defendant and friends of his had agreed to underwrite and purchase shares in the same company. The High Court held that one of the alleged misrepresentations was not made out and that the jury had not been properly instructed in relation to the other.  But the Court went on to consider whether the plaintiff had proved that the misrepresentations had caused him loss.  Starke J said (at 289):

“The measure of damage in cases in which a person is induced by fraud to take up shares is the difference between the amount he subscribed or paid for the shares and the real value – not the market value – of the shares on allotment.”

Dixon J stated the principle in similar terms (at 297):

“it appears to be treated as an inflexible rule that wherever the purchase or allotment of shares is the consequence of the deceit, the defendant shall receive credit for the fair or real value of the shares estimated as at the time of allotment or purchase.”

His Honour went on to say (at 298):

“The reason given for the rule is that, if, after the date of purchase, the thing which the plaintiff was induced to buy loses in value owing to accidental or extrinsic causes, that loss is not the reasonable consequence of the inducement.

¼

[It is] necessary to distinguish between the kind of cause occasioning the deterioration or diminution in value. If the cause is inherent in the thing itself, then its existence should be taken into account in arriving at the real value of the shares or other things at the time of the purchase. If the cause be ‘independent,’ ‘extrinsic,’ ‘supervening’ or ‘accidental,’ then the additional loss is not the consequence of the inducement.”

He referred to the following example given by Cockburn CJ in Twycross v Grant (1877) 2 CPD 469 at 544-545:

“If a man buys a horse, as a racehorse, on the false representation that it has won some great race, while in reality it is a horse of very inferior speed, and he pays ten or twenty times as much as the horse is worth, and after the buyer has got the animal home it dies of some latent disease inherent in its system at the time he bought it, he may claim the entire price he gave; the horse was by reason of the latent mischief worthless when he bought; but if it catches some disease and dies, the buyer cannot claim the entire value of the horse, which he is no longer in a condition to restore, but only the difference between the price he gave and the real value at the time he bought.”

458               Dixon J referred (at 299) to two qualifications which he considered “alleviated” the “rigidity of the rule” to some extent.  First, if the market price at the time of purchase was “delusive or fictitious” by reason of some “improper practice” on the part of the defendant or those associated with the defendant, that market price might be disregarded in ascertaining the fair or real value of the shares at the time of purchase. Second, that value might be ascertained by reference to events occurring after the purchase if those events showed, for example, that the company had been truly worthless at the time of the transaction.

459               Potts v Miller was recently applied by the New South Wales Court of Appeal in Morgan Corporate Ltd v GWG Leviny Pty Ltd (1995) ATPR 41-414 (“Morgan”).  In that case the respondents to the appeal were a company (“GWG”) and its two directors. On the advice of the appellant (“Morgan”), GWG invested $666,000 in a property trust. Of that sum it borrowed $500,000 from Barclays (Finance) Ltd (“Barclays”) secured by guarantees given by the directors and the other $166,000 came from GWG’s own funds. At the time of the purchase, the units were valued at 82 cents each. Within three months after the purchase, the units fell in value to three cents each. GWG sold them about two years after the purchase.

460               Barclays sued GWG and its directors.  They counter-claimed against Morgan, alleging that it had misled them as to the nature of the transaction and the need for personal guarantees. Barclays subsequently settled by forgiving the debt. Morgan admitted that the directors did not know that they were executing personal guarantees because they were not properly advised by Morgan and that they would not have executed them, and GWG would not have invested in the units, if Morgan had given proper advice.

461               The question outstanding was whether GWG was entitled to recover from Morgan the difference between the price paid for the units and their value when it sold them two years later. The trial judge held that it was.  On appeal, however, Meagher and Handley JJA (Mahoney JA dissenting) held, that the rule in Potts v Miller applied, with the result that GWG, which had not attempted to show that the units were worth less than 82 cents each at the time of purchase, was not entitled to damages for the misrepresentation.

462               In my view, there is a distinction between Potts v Miller and Morgan on the one hand and the present case on the other. That distinction is one suggested in the following passage from the judgment of Meagher JA in  Morgan (at 40,592):

“After the ‘settlement’ [with Barclays], the present respondents did not pursue any allegation of representation or promise by the appellant other than the allegation concerning the guarantees. In a sense it was a ‘collateral’ representation: the existence or otherwise of guarantees had nothing to do with the inherent value of the units or with their dramatic slump. Although the pleadings initially contained such an allegation, at trial no allegation was persisted with after the ‘settlement’ by the respondents (or any of them) that [the appellant] had ever represented the units as being a good investment, or as having any particularly attractive quality, or as being suitable to retain for two years (or any other period). After the so-called ‘settlement’ no allegation was pursued that [the appellant] had given negligent or improper advice, or that they knew or ought to have known of the fragility of the investment or of the imminent collapse of the market. There was no allegation that [the appellant] represented the investment as ‘safe’. There is, in the way in which the case has been conducted, no reason why [the appellant] should not have believed that [the directors] and their Company would have treated the units the way in which any other investor would have treated any other investment. The only relevant claim was under s52 of the Trade Practices Act. No claim was made in fraud. There was no allegation of a breach of any fiduciary duty.

With all respect to [the trial judge], I cannot resist the conclusion that his reasoning would be appropriate if, and only if, allegations which had been abandoned were persisted with. Whether they should have been persisted with, of course, we cannot tell.”

463               A similar view was expressed by a Full Court of this Court in Kenny & Good Pty Ltd v MGICA (1992) Ltd (1997) 77 FCR 307 at 330:

“•        in a case where something is purchased in consequence of a misrepresentation, the prima facie measure of damages is the difference between the price paid and the true value of the thing. But this is not an inflexible rule and is merely illustrative of a more general proposition, namely, that the purchaser is entitled to recover as damages, a sum representing the prejudice or disadvantage he has suffered in consequence of altering his position under the inducement of the respondent's misrepresentation. That general principle applies to other claims, such as those brought by lenders or mortgage insurers who have entered into transactions in reliance on false or misleading representations;

•          a person induced to enter a transaction by misrepresentations, generally speaking, must show that the losses claimed are related to the misrepresentation. It is not enough simply to show that the transaction was induced by the representation and the losses would not have occurred but for the transaction. The loss must flow directly from the inducement.”

464               This approach is consistent with the rationale for “the rule in Potts v Miller” as stated by Dixon J in that case, namely, that the defendant should be liable only for a loss which is “the reasonable consequence of the inducement”, not for losses which have extraneous causes. To vary the example given by Cockburn CJ, if a person bought a horse on the strength of a representation that the horse had been inoculated against a fatal disease, but the horse had not been inoculated and later contracted that disease, the vendor would, I suggest, be liable for the entire price paid, not just the difference between that price paid and the contemporaneous market value of the uninoculated horse. In such a case, the contracting of the fatal disease would have been sufficiently related to the misrepresentation that it could be said that it flowed “directly from the inducement”.

465               Similarly, in Kenny & Good Pty Ltd v MGICA (1992) Ltd, the appellant negligently provided to the respondent mortgage insurer a valuation which, through the appellant’s negligence, overstated the value of a property. The respondent relied on the valuation in deciding to insure a mortgage over the property. When the mortgagor later defaulted and the insurer was called on to pay, the market value of the property had fallen dramatically. There was an issue as to whether the insurer could recover from the valuer damages in respect of the element of loss represented by the difference between the figure that would have been produced by a valuation made with due care and the lower figure to which the market value had fallen.  The Full Court said (at 331-332):

“The very point of the representations contained in the valuation was to assure MGICA that it enjoyed a sufficient margin [of value in the property as against the amount secured by the insured mortgage] to take account of future eventualities. These included the foreseeable (and foreseen) risk that the Property would decline in value. The representation that MGICA could safety [sic – safely] rely on the valuation induced MGICA to accept a risk that it would not have accepted had the representation not been made. It is true that the valuers made no representation as to the likelihood that [the mortgagor] would default on its loan transaction with [the mortgagee]. But MGICA would not have been exposed to any risk in consequence of that default had it not been induced to insure that transaction by the misrepresentations.

¼

It cannot be said that the losses sustained by MGICA arose from ‘sources supervening upon or extraneous to the ... inducement’:… The valuers represented that it was safe to rely on their valuation, for the purpose of determining whether there was a sufficient margin or cushion to guard against risks, including a decline in the property market generally. The decline in the market which occurred was one of the events contemplated by the representations on which MGICA relied.”

466               An appeal from this decision was dismissed by the High Court after judgment was reserved in the present case: Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 163 ALR 611.  None of the members of the High Court considered that Potts v Miller was determinative.  Kirby and Callinan JJ said (at [123]), in a passage with which Gummow J expressed concurrence:

“Nothing said in Potts v Miller is determinative of this case.  Indeed, as Dixon J's reasons in that case show, different situations may arise in practice in cases of deceit (of which Potts was one).  There can be no rigid rules to govern all cases.  If an example is required of the flexibility with which these questions need to be approached, Gould v Vaggelas provides it.  There the court allowed as damages trading losses incurred some time after the giving of a false inducement.  It did so on the basis that it was reasonable, in the particular circumstances, for the purchasers to continue to carry on business as they did.” (citations omitted)

 

467               One feature which distinguishes the present case from Potts v Miller is that referred to by Meagher JA in the passage from Morgan set out above,that is, that the Investors were advised, not merely to buy the units, but to retain them for a certain period.  The evidence of those Advisers who gave evidence was that they told the Investors that the investment was a long term one (ten years was often mentioned) and that the value of the units might decrease in the short term but would increase over the long term.  This was not a case, such as Potts v Miller or Morgan, where the representation and inducement ceased to have effect when the initial decision to purchase was made. 

468               Similarly, the recommendation was to invest in accordance with the Package.  Accordingly, the advice extended to refer to substantial borrowings to fund the purchase, and it was the inability of many of the Investors to sustain their interest liability, or the risk that if certain events occurred they would be unable to do so, that is said to have made the Package unsuitable for them.  If it is correct to say that the losses were suffered by those Investors because the Package was unsuitable for them, I think that on general principle the Advisers were liable to put the Investors back in the position they would have been in had they not invested.

469               The principle recognised in Potts v Miller applies where all that is proved is that the plaintiff would not have bought but for the misrepresentation.  It does not apply where the loss is suffered specifically because of the falsity of what was represented.  In such a case the chain of causation is not broken by the intervening event because that intervening event is the very thing which the defendant represented would not come to pass.  As Gaudron J said in Chappel v Hart at [13]:

“It is contrary to common sense to treat part of the very risk which called the duty into existence as a supervening event breaking the chain of causation beginning with the breach of that duty.”

470               The same is true in the case of a failure to warn. For example, in Chappel v Hart, a doctor failed to warn of the risk of infection in an operation on the plaintiff’s oesophagus causing paralysis of the laryngeal nerve and consequential damage to the voice.  The doctor argued that a strict application of the “but for” test would lead to an unjust result.  In dealing with this submission, Gummow J said (at [66]):

“It is true that in some cases of a failure to warn by a medical practitioner an application of the ‘but for’ test without qualification could lead to absurd or unjust results. Such would have been the situation if, for example, instead of suffering damage to her laryngeal nerve, Mrs Hart had been injured through the misapplication of anaesthetic. Whilst it would still be open to conclude that, but for Dr Chappel’s failure to warn her of the possibility of damage to her voice, she would not have opted for the operation at that time and would not have been injured by the anaesthetic, the law would not conclude that the failure to warn of the risk of injury to the laryngeal nerve caused the injury resulting from the anaesthetic.

The present appeal is significantly different from the situation described.  In Mrs Hart’s case, the very risk of which she should have been warned materialised.”

471               The question here, then, is whether the respective Investors suffered loss because the Package was not “free of risk”, or was not “suitable” for them on the other hand, or because of some supervening, extraneous cause on the other. I have noted in Chapter 1 such causes identified by Citibank, such as, the collapse of the unlisted property trust industry and the emergency legislation that was enacted.

472               Does the evidence establish that the Investors for whom the Package was not suitable in fact suffered loss for this reason? I have decided not to pursue this issue except, by way of illustration, in relation to one Investor only: the Minichinis.

473               Mr Minichini testified that he

“first became aware that the Negative Gearing Investment was a problem when [he] realised how much money was going out of [his] Citibank account and that [he] was getting deeper and deeper into debt.”

474               He did not say when he gained that appreciation.  He said that when he received loan statements from Citibank he would contact Jones who would tell him not to worry and  would say “[e]verything has got its ups and downs”.

475               On 6 August 1992, the Minichinis signed a request to NM to repurchase all of their units.  Mr Minichini said he made the decision to have the units redeemed “[b]ecause they were going downhill very quickly”.  When asked what the source of this information was, he said he regularly called a telephone service that provided information on the unit price and that the price “just kept on going down”.  He agreed that he appreciated that every time the unit price went down, he was “losing more and more money”.

476               There is in evidence a letter from Jones to the “Manager of Mortgages” of NMPS dated 22 September 1992 which refers to the Minichinis’ request that their units be redeemed and the fact that the redemption would not “be effective” until February 1993.  Jones said that the Minichinis had requested “a transfer of ownership of all units” to himself, on the basis that he take over responsibility for their borrowing from NMPS. He asked NMPS to consider this suggestion.  Handwritten notes on the letter, apparently from someone within NMPS, suggest that Jones was contacted on 13 December 1992 by someone at NM and persuaded not to go ahead with the planned transfer, mainly because of the difficulties and fees associated with preparing new mortgage documentation.  Mr Minichini confirmed in cross-examination that he did not transfer his units to Jones.

477               The units were redeemed on 1 March 1993 when a cheque for $113,637.51 was issued.  The cheque was drawn in favour of NMLA on account of Mr Minichini.  The money was used to pay off the NMPS loan.  Mr Minichini said he paid the remaining principal himself (it will be recalled that the Minichinis in fact borrowed $120,000).  The Minichinis’ statement for March – April 1993 does show a drawdown of $6,360.49 which corresponds roughly to the shortfall.

478               Mr Minichini said that in early 1993 (his affidavit said “early 1994” but he appears clearly to have meant “early 1993”) he received an “anonymous telephone call” from a man who said words to the following effect:

“We are all losing a lot of money in the Negative Gearing Scheme.  Victor Hocking is going to try and help us get out.  If you want to you should phone … and make an appointment to see him.”

479               Mr Minichini claims that the same person later telephoned him again, urging him to see Victor Hocking of Finance & Estate Planning Corporation Pty Limited, who was submitting claims for compensation to NM on behalf of a number of investors.  Mr Minichini said he took the unknown caller’s advice and gave details of his investment and of his dealings with Jones to Hocking.  On 7 April 1993 the Minichinis signed a letter authorising Hocking to proceed with his investigation on their behalf and to make all necessary inquiries concerning their investment in the Package.

480               On 16 July 1993, the Minichinis apparently received a letter from Brian Benger, General Manager of NMAM, which contained a questionnaire relating to the circumstances of their investment.  On 13 August 1993, Mr Minichini wrote to Benger stating that he had been advised by Hocking not to reply to the questionnaire.

481               The Minichinis’ claim was submitted by Hocking to NM on 16 June 1994.  Mr Hocking’s letter began by giving details of units purchased, insurance policies, unit mortgages and the Citibank facility. Mr Minichini stated in his affidavit in this proceeding that his taxable income for the year ended 30 June 1989 was $25,157 and for the year ended 30 June 1990 was $17,144. According to Hocking’s letter, however, Mr Minichini’s gross income for the year ended 30 June 1990 was $37,000.  Moreover, according to Mr Hocking’s letter, for the financial year ended 30 June 1993 his gross income was $42,000 and his wife, who had previously not engaged in paid work, earned $13,000.  This casts a different light on the affordability of the Package for the Minichinis.

482               Hocking’s letter complained about various representations made to the Minichinis, particularly representations that the Package was “self-funding” and involved “no risk whatsoever”, and that the Minichinis “did not have to worry about whether [they] could afford it or not”.  The letter also complained about a number of “non-disclosures” such as non-disclosure of an agency relationship with Citibank, fees or commissions, the optional nature of parts of the plan, and the degree of risk involved in the plan.  The letter contained the following summary:

“The clients ALLEGE that they have been misled, misinformed and ill-advised in the solicitation, presentation, sale and implementation of the Plan; AND it is alleged that the clients failed to receive, and failed to be advised of their rights to receive, proper legal, financial or commercial advice in respect of the investment Plan and in respect of the Citibank documentation and in respect of the Unit Mortgages, AND FURTHER it is alleged that had the clients been properly informed and advised in all such aspects, including in respect of the direct and consequential risks which they now know to have attached to such a plan, then under no circumstances would they have put at risk the family home.”

483               Hocking claimed that the Minichinis’ loss from their investment in the Package was $83,844.  This was supported by a report from David Bullock, a chartered accountant, which summarised the loss as follows:

“Capital Loss on Investment in Property Trust	$36,362
Losses on Insurance policies	9,503
Refinance expenses	4,316
Interest paid – National Mutual Mortgage	51,281
Interest Paid on Citibank Mortgage	37,121
Interest on Citibank Loan from 15 Dec 1993 – 15 July 1994 (212 days)	3,392
	141,975
Less:
Dividends Received from Property Trust      32,158
Tax Savings generated by [Minichinis]         25,973
	58,131

TOTAL LOSS                                                                                         $83,844”

484               This calculation appears to be an attempt to put the Minichinis in the position they would have been in if they had not invested: that is, to repay to them the capital loss on the units, the interest payments on the loans associated with the Package, and the losses on the insurance policies taken out in conjunction with the Package, less amounts received or saved by reason of their entry into the Package.  To the amount calculated by Bullock, Hocking added $10,058.50 for his and Bullock’s fees.  This made a total claim against NM of $93,902.50.

485               Six days later, on 22 June, Ross Alexander McDonald, a senior solicitor employed by NM and Manager of Litigation for its Legal Division, sent to Hocking four copies of a release agreement and said that upon receipt of signed copies, he would forward to the Minichinis a cheque for $93,902.50.  The copies were signed and returned to McDonald under cover of a letter from the Minichinis’ solicitor dated 8 July 1994.  The cheque was sent to the Minichinis on 15 July 1994.

486               Does this evidence support NM’s contention that the Minichinis’ loss was caused by the unsuitability of the Package for them? I think not.  Mr Minichini referred in his affidavit to contacting Jones at some unspecified time and complaining that he was getting deeper and deeper into debt.  But I do not think that the Minichinis sold their units because of increasing debt.  Rather, according to Mr Minichini, they sold them because he was concerned that their value was steadily declining, as he learned from his regular calls to the telephone service that gave him the unit prices.

487               In fact, the Citibank statements for the Minichinis’ Mortgage Power account do not bear out the claim that the Minichinis’ debt level was increasing alarmingly.  The statement issued by Citibank in respect of the Minichinis’ Mortgage Power account for the period 2 November 1989 to 15 November 1989 showed that amounts totalling $67,121 were drawn down, leaving, of the credit limit of $141,600, a balance available of $74,479.  The statements show that for the first two years, amounts of between $1,000 and $1,250 were drawn down in most months.  It may be that these drawdowns were to meet interest payments.  However, there were also large transactions which took the amount owed up to $102,809.91 in September 1990, down to $44,003.93 in June 1991, then back up to $107,221.71 in July 1991.  I do not know what these large transactions related to, except for a $10,000 drawdown in August 1990 which I infer was to purchase further units in the Trust.  What is noteworthy, however, is that the debt level stabilised in about November 1991, after which regular payments were made with few drawdowns.  In fact the amount owed to Citibank decreased from $93,852.16 in November 1991 to $82,078.42 in August 1992 when the application for redemption of the units was signed, and still further down to $69,846.63 in March 1993 when the units were in fact redeemed. 

488               In these circumstances, I do not think it possible to say on the evidence that the reason the Minichinis decided in August 1992 to request redemption of their units was that they could not meet their interest repayments. That is, I am not satisfied that the loss was caused by the fact that there were risks associated with the Package or by the unsuitability of the Package for the Minichinis.  Rather, I think they suffered loss because the unit price had fallen to such an extent that they took a commercial decision not to wait for the price to recover, but rather to crystallise their position against the possibility that the price might drop even further.  I therefore accept Citibank’s submission that in the case of the Minichinis the cause of the loss was the dramatic decline in unit prices and the Minichinis’ commercial decision. The drop in market price would not have been a supervening cause if Jones’ representation had been that no decline would ever occur, even short term, and the evidence had established that the Minichinis would not have invested in the Package but for that representation, but NM has not attempted to make out such a case.

489               In the result, I do not think that NM has established that the Minichinis suffered loss as a result of the supposed breach of duty by their Adviser, Jones. 

2.         Was NM liable to each Investor, either vicariously through the Adviser or directly in tort?

(i)         Was NM directly or vicariously liable in respect of the Advisers’ conduct?

490               NM “concedes” that it is vicariously liable to the Investors in respect of the Advisers’ conduct. Citibank submits, correctly in my view, that NM’s liability is a matter for proof rather than for concession by NM. Citibank concedes that the evidence supports an inference that the Advisers had actual or ostensible authority from NM to make the statements they made as agents or representatives of NM.  In my opinion, this concession was appropriately made.  The representations were made by persons who were agents of NM in the course of and for the purpose of selling the products of NMLA and NMAM and were at least within the general class or scope of statements they were authorised to make.

491               In Chapter 11, I decide that the Advisers sold NM units in accordance with the Package pursuant to, and in accordance with, instructions from NMAM.  I need not discuss individually the very numerous representations set out in Annexure 1.  Although no doubt some particular representations there set out were not actually authorised by NMAM, many were.  In particular, many of the representations as to rate of capital growth, rate of income return, the right to require redemption, negative gearing advantages and the safety of the investment because of the commercial real estate that underlay the Trust, were actually authorised by NMAM.  Accordingly, such representations gave rise to a direct liability, and not merely a vicarious one.  No doubt other particular representations not actually authorised but falling within the general class or scope of statements that were authorised, gave rise to a vicarious liability.

(ii)        Did NM itself owe the Investors a personal non-delegable duty of care?

(iii)       If so, did NM breach its personal non-delegable duty of care to the Investors?

(iv)       If so, did NM’s breach of its personal non-delegable duty of care to the Investors cause the Investors to suffer loss or damage?

I do not find it necessary to answer these questions.

3.         Were the Investors guilty of contributory negligence?

492               Citibank pleads that:

“[e]ach of the Investors was guilty of contributory negligence by:

a)                  failing to obtain a copy of or to read the prospectus for the Property Trust;

b)                  failing to seek any advice independent of that from National Mutual or to make any independent inquiry in respect to their investment decision;

c)                  failing to redeem their Property Trust units, to raise any complaint with National Mutual or to take any other action when the promises and representations made to them by the National Mutual agents were not fulfilled;

d)                  entering into the transactions the subject of the present proceedings without any understanding of the nature of those transactions or any attempt to understand them;

e)                  failing to diversify their investment strategy to include anything other than investments in commercial property and investments in National Mutual products;

f)                   borrowing amounts which were excessive in relation to their personal financial circumstances for the purposes of a speculative income tax minimisation scheme.”

493               Citibank did not cross-examine any of the Investors with a view to proving these matters: nor did it make any submissions in support of them or, refer to any relevant evidence or to any percentage by which it says the Advisers’ liability should be reduced.  NM submits that this is quite unsatisfactory.  I agree.  However, Citibank apparently does not abandon this aspect of its case.

494               The case which the Investors are said to have against the Advisers is one of negligent misrepresentation and negligent failure to warn and to take steps for the protection of the Investors. The particulars of contributory negligence, except par (c), relate to the initial decision to invest.  It was reasonable for the Investors to rely on the advice given to them by the Advisers. In those circumstances, it might be thought impossible for the Investors to have been guilty of contributory negligence of the kind pleaded by Citibank.  In the words of Sir Donald Nicholls V-C in Gran Gelato Ltd v Richcliff (Group) Ltd [1992] Ch 560 at 574:

“In principle, carelessness in not making other inquiries provides no answer to a claim when the plaintiff has done that which the representor intended he should do.”

However, in Astley v Austrust Ltd (1999) 161 ALR 155, Gleeson CJ, McHugh, Gummow and Hayne JJ said (at [29] – [30]):

“There is no rule that apportionment legislation does not operate in respect of the contributory negligence of a plaintiff where the defendant, in breach of its duty, has failed to protect the plaintiff from damage in respect of the very event which gave rise to the defendant’s employment. A plaintiff may be guilty of contributory negligence, therefore, even if the ‘very purpose’ of the duty owed by the defendant is to protect the plaintiff’s property. Thus, a plaintiff who carelessly leaves valuables lying about may be guilty of contributory negligence, calling for apportionment of loss, even if the defendant was employed to protect the plaintiff’s valuables.

A finding of contributory negligence turns on a factual investigation of whether the plaintiff contributed to his or her own loss by failing to take reasonable care of his or her person or property. What is reasonable care depends on the circumstances of the case. In many cases, it may be proper for a plaintiff to rely on the defendant to perform its duty. But there is no absolute rule. The duties and responsibilities of the defendant are a variable factor in determining whether contributory negligence exists and, if so, to what degree. In some cases, the nature of the duty owed may exculpate the plaintiff from a claim of contributory negligence; in other cases the nature of that duty may reduce the plaintiff’s share of responsibility for the damage suffered; and in yet other cases the nature of the duty may not prevent a finding that the plaintiff failed to take reasonable care for the safety of his or her person or property. Contributory negligence focuses on the conduct of the plaintiff. The duty owed by the defendant, although relevant, is one only of the many factors that must be weighed in determining whether the plaintiff has so conducted itself that it failed to take reasonable care for the safety of its person or property.”

495               In that case, Austrust, a trustee company, was contemplating taking over a trading trust.  It sought the advice of Astley, a solicitor, and decided to proceed.  However, the trust lost money and was wound up.  Various creditors who suffered loss successfully sued Austrust.

496               Austrust claimed that it would not have proceeded if it had known of its potential liability, or would at least have insisted on a covenant excluding its liability.  It was held that there were two causes of the loss suffered by Austrust: “(a) the failure to get a covenant against personal liability and (b) the failure to investigate the viability of the venture”.  The second cause was wholly attributable to Austrust. In relation to Austrust’s claim that its officers did not know that Austrust would be personally liable in the event of loss being suffered by creditors, the majority in the High Court said (at [35] – [36]):

“it is immaterial whether or not those officers believed that Austrust was under no personal liability to repay the loans and meet the interest payments. The standard of care required of a plaintiff is determined objectively by reference to what a reasonable person would have done in all the circumstances of the case. As Lord Denning MR pointed out in  Froom v Butcher:

‘In determining responsibility, the law eliminates the personal equation. It takes no notice of the views of the particular individual or of others like him. It requires everyone to exercise all such precautions as a man of ordinary prudence would observe.’

Leaving aside the case of minors, the beliefs or lack of knowledge of the plaintiff cannot prevent a finding of contributory negligence if a reasonable person in the same circumstances would have taken steps to protect the interests of the plaintiff.

In the present case, any reasonable person in Austrust’s position would have taken steps to inquire whether the borrowings and the interest thereon could be repaid either from the sale of the properties, the earnings of the business or contributions from unit holders in the trust. However, as the findings of the learned trial judge show, Austrust did practically nothing to determine the viability of the venture. … One is entitled to be sceptical as to the chance that the lenders would have agreed to lend money to Austrust on the basis that it was to incur no personal liability for the loans. If the solicitors had warned Austrust of its personal liability, however, it may be that Austrust would not have accepted the office of trustee or that it would have been able to obtain satisfactory indemnities from the promoters of the trust. In any event, on the findings of the learned trial judge, Austrust’s loss arose from the solicitors’ failure to advise and Austrust’s lack of investigation. Both factors had to be present before Austrust could suffer any loss. Accordingly, Austrust’s failure to take care to protect its interests contributed to the losses that it suffered. At common law its conduct constituted contributory negligence.”

497               A similar point is made in Balkin and Davis, Law of Torts (2^nd ed, 1996) at 426, where the learned authors state:

“Once it is determined that the statement sued on was made in such circumstances as would have engendered reasonable reliance thereon by a person in the plaintiff’s position, the defendant will be liable if the plaintiff can show, among other things, that the statement was one of the causes of his or her subsequent action.  But the defendant may reduce the amount of damages otherwise payable by showing that another motivating cause of the plaintiff’s loss was some different act or omission by the plaintiff to protect his or her own financial interests.” (my emphasis)

498               In the present case, it was part of the Advisers’ duty of care to ensure that the Investors did not invest in the Package under a misapprehension as to its suitability for them and without knowledge of the risks involved.  This does not preclude a finding of contributory negligence. However, I do not think that any of the matters referred to in pars (a), (b), (d), (e) and (f) in Citibank’s particulars of contributory negligence resembles the failure of Austrust to ensure the financial viability of its proposed undertaking, a matter which was outside the scope of Astley’s retainer.

499               The Advisers must have known that the Investors were uninformed, inexperienced and unsophisticated in matters of investment, taxation and finance, and were relying on them.  I have already said that I think the Investors reasonably relied on the information and advice provided by the Advisers.  The matters referred to in these particulars of contributory negligence are not truly independent acts or omissions, but simply consequences of that reasonable reliance.  I do not think the Advisers can complain that the Investors followed their advice.  In my view it has not been established that reasonable people in the situation of the Investors would have demanded to see a prospectus, obtained independent advice, diversified their investment, or declined to invest in the Package because they did not really understand it or because it required them to borrow too much. 

500               As noted above, par (c) differs from the other paragraphs of the particulars of contributory negligence.  It is addressed to an omission to act at a point in time after the investment. Consideration of this particular would require consideration of the individual circumstances of each of the 23 cases. I have decided, for reasons mentioned earlier, not to embark on this exercise.

CHAPTER 4

PERSONAL (OR DIRECT) LIABILITY OF CITIBANK TO THE INVESTORS THROUGH FAILURE TO PERFORM NON-DELEGABLE DUTY

Introduction

773               NM pleads that Citibank incurred direct liability to the Investors based on:

·        Mortgage Power’s being a “dangerous product” for the Investors in view of their personal and financial circumstances and the context in which it was promoted and sold to them;

·        an assumption of responsibility by Citibank to the Investors;

·        a duty on Citibank to take positive measures in the interests of and for the protection of the Investors; and

·        a failure by Citibank to take those measures.

774               I conclude below that Citibank did not incur direct liability to the Investors.  Before explaining why, I will outline NM’s submissions in support of the opposite result and certain evidence on which it relies.

Outline of NM’s submissions relating to direct liability

775               NM submits that Citibank owed a duty in tort directly to the Investors to take reasonable care to ensure that:

“(a)     the Citibank investors understood the risks associated with the Mortgage Power loan;

(b)               the Citibank investors were able properly to consider whether the Mortgage Power loan was suitable to them;

(c)               proper supervision was conducted over the conduct of Kelly and the other advisers so that they did not make false representations to the Citibank investors, or promote Mortgage Power for purposes inappropriate to the Citibank investors; or promote it without a full explanation of the risks; and

(d)               the investor had the capacity to service interest and principal on the Citibank loan.”

NM characterises this part of its case as one of negligent conduct causing economic loss.

776               According to NM’s submission, a duty of care arose because there was reasonable foreseeability of loss combined with a relationship of proximity between Citibank and the Investors.  NM submits:

“In the present case, the factors which create proximity, or make the relationship so close that a duty of care arises, can be summarised under four heads:

(a)               Citibank made available to these Investors a dangerous product;

(b)               For use in a dangerous scheme;

(c)               Through an unrestrained agent;

(d)               Knowing that the protections stipulated for the Investors were set at naught.”

777               NM makes separate submissions under these four heads in relation to the pre-1 January 1991 Investors and the later ones.  The difference is that capacity testing was introduced on that date.

778               In relation to the pre-1 January 1991 Investors, NM submits in the following terms that Mortgage Power was a “dangerous product”:

“The Mortgage Power product offered by Citibank to these investors was a dangerous product because:

(a)               Citibank was offering its Mortgage Power loan to persons who at the time had usually only a small mortgage debt over their home both absolutely and relative to the value of the home; these persons were well on the way to paying off the loan and were able to service their existing principal plus interest commitments on the home loan;

(b)               the borrowers, by reference to their stated occupations, were not high net worth individuals and were not apparently financially sophisticated investors.  They included drivers, labourers, mechanics, teachers, secretaries, etc;

(c)               the Mortgage Power facility gave these persons the ability to write cheques for up to 80% (or similar figure) of the value of the home without any further approval process by Citibank and for any purpose;

(d)               interest rates at the time were at historically high levels and interest payable on the facility, if drawn to at or near the full level, would be very high;

(e)               Citibank made available Mortgage Power without requiring any information about the income and expenses of the borrowers and did not require information about their assets or liabilities (other than for the security property);

(f)                The Mortgage Power product did not involve any capacity test on the borrowers and thus Citibank had no means of knowing whether the borrowers had the ability to service the loan, either on the initial drawdowns or if the borrower drew down to a level at or near the full extent of the facility;

(g)               In many cases, just the occupations of the borrowers and the limit of the facility and initial interest rate would suggest a probable lack of capacity to service the facility limit offered;

(h)               Mortgage Power allowed the borrower to capitalise interest payments through use of the facility (even if this was done indirectly); by this means the borrower might use up the full limit of the facility and then be unable to meet interest commitments and to [sic] go into default;

(i)                 although Citibank sold the Mortgage Power product on the basis that the facility need never be repaid absent default ( … ), buried in the loan terms was an option to Citibank to reduce the limit at 12 month intervals based on Citibank’s (undefined) credit assessment criteria;

(j)                Citibank held itself out to the public and to the potential borrowers as being a reputable and responsible lender, and as having expert knowledge and expertise in the field of lending to private investors whose only substantial asset was their home;

(k)               the persons within Citibank deciding whether to make the advances (ie the CPU) did not have the benefit of a face to face interview with any of the borrowers and had no way of knowing whether the borrowers understood any of the risks associated with the product.  Nor did the Citibank sales staff in Melbourne ever meet the borrowers.  The only persons with the opportunity of the face to face meeting were Kelly and the other introducers of Citibank, but they were not required to provide any report to the CSU or the CPU on whether the borrowers understood the risks of the product;

(l)                 The Mortgage Power product was also dangerous in the sense that it was a novel product quite different in terms and effect to the existing available home mortgage products.  The ordinary practice of banks at the time was to lend moneys against the security of the home for the purpose of purchase, construction or improvement of the home; on a principal and interest basis with a set programme of repayments; after the bank had obtained detailed financial information from a customer and made an assessment that the customer could afford to meet the repayments which would result in the loan being amortised over a definite period; with the bank manager having the benefit of a face to face interview with the customer allowing an assessment whether a customer understood the loan; and with the customer having the documents explained by, and signing them before, the bank manager. Mortgage Power did not have these restrictions.”

779               NM submits that Mortgage Power was used in a “dangerous scheme” because Citibank knew, through its CSU and CPU, that Mortgage Power was being promoted by the Advisers in conjunction with NM products, including units in the Trust and insurance policies, as part of “a complex and sophisticated, long term negative gearing scheme.”  NM refers to the “working inter-relationship” between Mortgage Power and the NM products, that is, the fact that the returns from the units were to be paid into the Mortgage Power bank account and expenses paid from that account, and the fact that “the negative element of the scheme would or could be met by capitalisation of interest under the Citibank facility.”  According to NM, the inter-relationship carried the following:

“specific risks to the borrower over and above those which would arise under a normal principal and interest home loan, or even under a normal Mortgage Power facility not used for such a scheme:

(a)       The risk that, even if interest rates and income returns from the Property Trust remained the same, the negative element of the scheme would be too great for the borrower to service, causing the borrower to default and lose the home;

(b)               The risk that if the negative element in the scheme was serviced through capitalisation of interest under the Mortgage Power facility, over time the full facility would become exhausted and the borrower unable to pay interest from other sources, thus going into default and losing the home;

(c)               The risk that, if interest rates increased or property returns decreased, the negative element in the scheme would increase even further exacerbating the above risks;

(d)               The risk that, if property values fell, capital returns from the trusts would also decrease, meaning that the negative element of the scheme could not be reversed, over time leading to overall loss;

(e)               The extent of the gearing in the scheme magnified the potential for losses to occur.”

780               NM submits that the danger was exacerbated in an environment in which, as Citibank knew as at about September 1989, “tough economic times” lay ahead; the property market had peaked some time previously in March 1989; the delinquency rate on Mortgage Power loans had risen over a year from about 1.5 per cent to 5.5 per cent; historically high interest rates were likely to continue; and Citibank’s Mortgage Power “book” had more than doubled over the preceding year.

781               In relation to Kelly’s being an “unrestrained agent”, NM submits as follows:

“Citibank knew and encouraged Kelly in the following course of conduct:

(a)               He would assume a role of financial adviser to the client for reward from Citibank and National Mutual in relation to the plan he was putting to the client which involved the use of the Mortgage Power product and National Mutual products as a working negatively geared package;

(b)               He would promote the virtues of the Mortgage Power product and the package as a whole;

(c)               He would not provide any warnings to the customer about the risks involved in using the Mortgage Power product as part of the package;

(d)               He would make predictions about substantial profits that would be made by the customer through the use of the package, which would depend in part upon fixed percentage returns projected from the Property Trust;

(e)               He would promote the package in a way where the customer would be unlikely to understand all of the elements of the working of the plan but would be left with the impression that a very great profit could be assured;

(f)                No attempts would be made to give any directions to Kelly about his sales presentation, to require him to include warnings, to require him to dissociate Citibank from his plan or to require him to inform the customers of knowledge Citibank had about worsening economic conditions.”

782               In relation to the submission that “the protections stipulated for the Investors were set at naught”, NM submits that in a context in which only the introducer, and no one from Citibank, ever met the borrower, the Citibank procedure requiring that a borrower’s acknowledgment be executed assumed particular importance.  Yet the form of borrower’s acknowledgment was not properly executed. It points to testimony that the CPU in Sydney (Horsfield and Moses) would not have approved a loan if it had been known that the borrower did not have a solicitor acting (as distinct from the non-solicitor, Van Minnen).  Moreover, according to the submission, Citibank’s Settlements Department in Melbourne (Herron, Barbour and, NM submits it should be found, Gregorio) would not have allowed the loans to settle if it had known this fact, and its CSU in Melbourne (especially Stewart, Hawkins (Durnan), Dyring and Padgham) knew, but did not reveal, this information to the CPU or to the Settlements Department.

783               As from 1 January 1991, Citibank applied capacity testing: a year's interest at current Citibank interest rates on a Mortgage Power loan fully drawn was not to exceed 30 per cent (later, 33 per cent) of the gross income of the borrower and his or her spouse.  NM submits in relation to the capacity testing:

“This test did not enable Citibank properly to assess whether the borrower could afford the loan because:

(a)               Citibank did not take into account specifically the non-Citibank liabilities of the borrower;

(b)               The 30% (or 33%) figure was arbitrary;

(c)               The test did not take into account the negative element of the scheme.”

784               Accordingly, NM submits that Mortgage Power remained a “dangerous product” for the post-1 January 1991 Investors and it repeats its “dangerous scheme”, “dangerous agent” and “protections set at naught” submissions in relation to those Investors.

785               Passing from the question of the existence of a duty of care, NM submits that breach of duty is “virtually self-evident” from an examination of the facts of the cases of the 23 Investors.  In view of my conclusion that Citibank did not owe the Investors the duty contended for, I am not called upon to address the question of breach.  But it seems appropriate to record that if, contrary to my view, Citibank owed the duty formulated by NM, the evidence established a breach in the case of many, if not all, of the 23 Investors.  In relation to the seventeen pre-1 January 1991 Investors, there was a lack of effective capacity testing.  In relation to the post-1 January 1991 borrowers, NM submits that the 30 per cent “rough and ready” capacity test was inadequate to test a borrower’s capacity to service the loan.  Again, although I need not explore this submission, it seems appropriate to record my impression that NM’s submission has substance in relation to at least some of the six post-1 January 1991 Investors.

786               In relation to causation of loss and damage, NM makes the same submissions as it makes on its case that Citibank incurred vicarious liability.  Again, I need not deal with these submissions. 

Concessions by Citibank officers

787               I am not concerned here with the duty of care which Citibank undoubtedly owed to the Investors not to misrepresent Mortgage Power itself, by, for example, issuing misleading documents in relation to the characteristics of Mortgage Power for distribution to prospective borrowers.  NM does not suggest that Citibank or, indeed any of the Advisers, misrepresented Mortgage Power.

788               It was in the interests of Citibank as well as of its customers that they should be able to service their loans.  It was not in Citibank’s interest that it should have to sell its customers’ homes. 

789               In cross-examination, various Citibank officers made concessions to the general effect that more should have been done by Citibank to ensure that Mortgage Power was suitable for the Investors, having regard to their levels of income and other circumstances.  Similarly, they agreed that they would not have wanted to “lend a customer into trouble”.  There is, in fact, a considerable body of evidence, including expert evidence, tending to show that Citibank did not behave as a prudent banker would be expected to behave in its own interests prior to the introduction of capacity testing on 1 January 1991, and, perhaps, afterwards as well.  Several of the Citibank officers had been employed by other banks where they had been involved in conventional home mortgage lending, which required fixed payments of principal and interest and was therefore of a limited lifetime.  In cross-examination, those officers agreed that there was a practice at those other banks of checking the borrower’s capacity to pay before the loan was made.  The contrast between such home loans and Mortgage Power, particularly before the introduction of capacity testing, is obvious.  At least one of the Citibank officers, Fiedler, expressed concern at the time to his superior in the CPU, Horsfield: he said he thought Mortgage Power loans were being made too readily and in the interests of the earning of commissions by Citibank’s area managers in the Melbourne branch.

790               But Citibank’s and its customers’ respective self interests were at one in relation to the capacity to service the facility.  I do not find acceptance by a Citibank officer that Citibank should have been more prudent or should not have lent clients into trouble, or expert evidence to the same effect, of great assistance on the issue whether Citibank owed the Investors the actionable duty of care propounded by NM.

The expert evidence and my conclusions in relation to it

791               NM relies in part on expert evidence to establish the first two of the four factors, identified above, as contributing to the creation of a relationship of proximity between Citibank and the Investors, that is, that Mortgage Power was a dangerous product which was marketed as part of a dangerous scheme.  The existence of a duty of care is ultimately a matter for the Court.  In my opinion the expert evidence did not establish the two factors mentioned and, with respect, was not particularly helpful.

792               NM led evidence from Geoffrey Brothers, a former manager with Westpac Banking Corporation who had a wealth of experience in loans management, including experience as the “Chief Manager in the Loans Management Division/Head of Group Loans Management, Credit Policy and Control Division” from 1988 to 1991 and as “Chief Manager, Credit and Lending,  Credit Policy and Control Division” from 1991 to 1993.  Mr Brothers agreed that Mortgage Power was not of itselfa “dangerous product”:

“Q. You weren’t suggesting that it [Mortgage Power] is, per se, a dangerous product at all?

A. Absolutely not.

Q. Indeed if it was, it would be quite a lot of people who were offered this dangerous product,…

A. There is nothing wrong with the product.”

 

In fact, the Mortgage Power kind of product (cheque account financial accommodation up to a limit secured by a first mortgage over a home) became generally available from banks from about 1990 onwards. 

793               Mr Brothers stated in his affidavit:

“…the availability of the Mortgage Power facility enabled borrowers to invest in a fashion that allowed them to accumulate debt to the level they could not otherwise have afforded to service or to conveniently repay.  However, when the time came, or the need arose, to liquidate the Property Trust investment there was no certainty that the resulting proceeds would cover the investment-related associated debts.  The potential for substantial loss by the borrower was very real and clearly foreseeable.”

 

In this passage Mr Brothers’ testimony moves from a concern with the Mortgage Power product in general to a concern with the Package.

794               I do not find Mr Brothers’ evidence probative on the issue whether Citibank owed the Investors an actionable duty of care, discharge of which required it to give them the Warnings or the Written Explanation.  Moreover, his testimony is based on a series of assumptions as to Citibank’s knowledge of the details of the Package.  Mr Brothers conceded that the making of inquiries directed to the obtaining of such knowledge was irrelevant to the lending decision itself:

“Q. You wouldn't have been pleased with it, would you, if someone had started to do it [a practice of inquiring into, and advising customers about, the use to which moneys borrowed from the bank were to be put] to your knowledge while you were there in Westpac, would you?

A. I would consider that there would be no particular need for it, given that the credit approver was in possession of adequate information on which to make the credit decision, that is, the given is the fact that the house covers the proposed debt, unless he knows something about the proposed borrower's financial position and his earning power.

Q. I mean, if a lady comes along for an Equity Access [a Westpac credit line facility similar to Mortgage Power] mortgage in Westpac, he [sic – she] can do what he [sic – she] likes with the money, can't he [sic – she]?

A. Yes.

Q. And if he [sic – she] proposes to put it into a particular investment scheme and begins to disclose the whole details of that scheme, show[s] you the prospectus that she was given by the investment adviser and tells you what he [sic – she] was told by the investment adviser about the desirability of the investment, well, that's foreign information, isn't it, to the lending decision?

A. Yes.

Q. And the banker would tend to say, 'I don't want to know that', wouldn't he, the bank officer?

A. True.

Q. And if he didn't, that would be contrary to good banking practice, as you well understand it?

A. Yes.”

(In fact, Mr Brothers was not familiar with “Equity Access”, Westpac’s equivalent to Mortgage Power, and based his evidence on an assumption, the effect of which was that the two were relevantly similar.)  Mr Brothers’ evidence in the above passage accords with the following affidavit testimony of Professor Harper, Professorial Fellow at the Melbourne Business School of the University of Melbourne, an expert witness called by Citibank:

“If a bank is satisfied that a client can meet repayments of principal and interest and that, in extremis, it can recover its debt through sale of assets held as security, then it has no further interest in the purpose for which the funds have been borrowed.”

 

795               Most importantly, NM’s expert evidence on the expected behaviour of a prudent bank focused on the duty it owed to its own shareholders and creditors, not its borrowers, as is shown by the following excerpt from Mr Brothers’ cross-examination: 

“Q. He [the lending officer] wouldn't be necessarily concerned about the wisdom of the investment from the point of view of the customer, but he might be concerned about the implications this had for the ability of the customer, the borrower, to repay the bank?

A. The issue could arise.

 

Q. And, of course, if there were assets and liabilities sought by the lender, then he would want to know about not only the existing liabilities, but the ones that were about to go into place following the making of that advance?

A. Yes.  He would inquire for completeness what it would look like after this transaction, if he approved it.

 

Q. If possessed of this information, he would want to know more than the existing assets and liabilities of the customer.  He would want to know about his future assets and liabilities after this investment was put in place, wouldn't he?

A. Yes.

 

Q. And indeed, his future incomings and outgoings as well?

A. Probably.

 

Q. And that is not for the protection of the customer; that is for the  protection of the banker?

A. Principally the banker's protection.

 

Q. He would be in breach of his duty to his bank if he knew that there was a major new liability coming onto the scene, and he didn't ask about what it was going to cost to service that liability, and so on; isn't that right?

A. If it appeared to be relevant to the servicing, and what have you, yes.

 

Q. The ability to service the very loan that you were then considering making?

A.Yes.” (my emphasis)

 

Mr Brothers agreed that a bank’s prudent lending officer would have sought “completeness of financial information” “for the bank’s purposes only”, but not information as to what the borrower was going to do with the money borrowed, such as the detail of any investment he or she was proposing to make.

796               There was expert evidence as to how a prudent financial adviser should have behaved in relation to the Investors.  For example, Peter Dunn, one of the assessors engaged by NM in relation to settlement with the Investors, and a financial planner and consultant with Moneyplan Australia (MP) Pty Ltd, testified that a prudent adviser would not have recommended Mortgage Power to the Investors: 

“In particular, the use of a line of credit loan, such as the Citibank Mortgage Power loan, to fund the initial expenses (including the initial purchase of units) and the ongoing interest costs of a negative gearing scheme like the present was something a prudent adviser would have recommended against.  This is because[:]

(a)       it allowed the investor to capitalise interest and so substantially increase their debt (which was already high because of the associated borrowing from National Mutual);

(b)       the investors generally had no experience with these types of loans which are fundamentally different from a fixed amount, fixed repayment type loan such as a home loan[;]

 

(c)        as there were are [sic] no set repayment requirements, other than the monthly interest payment, and no restriction on the amount purpose or timing of further drawdowns of the available credit, there was a real risk that such unsophisticated investors would rapidly deplete the available credit limit and place themselves at risk of not being able to meet the ongoing costs of the scheme.” (my emphasis)

 

797               But evidence of this kind is relevant only to the question of a duty owed by “a prudent adviser”.  Mr Dunn’s evidence would be relevant if Citibank itself assumed that role, but I find that it did not do so.  Kelly and other Advisers did, but that is another matter (see below).

798               The expert evidence does not assist me to conclude that Citibank, as a bank providing the Mortgage Power facility, owed to the Investors the non-delegable duty propounded by NM.

 

Reasoning otherwise

General

799               NM and Citibank made detailed submissions in relation to the legal issue whether, generally, a bank owes a duty of care to a customer or prospective customer in respect of an application for financial accommodation.  Citibank referred to numerous textbooks and decided cases in support of the following propositions:

·        that unless the bank has undertaken the role of financial adviser, the banker-customer relationship is ordinarily an arm’s length commercial relationship in and about which the bank is at liberty to serve its own interests;

·        that a bank does not owe a duty of care to protect its borrower against risk-taking;

·        that a bank does not owe a duty of care by analogy with the duty owed in respect of things dangerous in themselves.

800               Citibank referred to the following texts:  Cranston, Principles of Banking Law (1997) at 237, 238; Corpus Juris Secundum, vol 9, “Banks and Banking” paras 248, 459; P E Smart, Chorley & Smart – Leading Cases in the Law of Banking (5^th ed) at 211; J Milnes Holden, The Law and Practice of Banking (4^th ed) para 2-15A; Sir Peter Cresswell et al (eds), Encyclopaedia of Banking Law, (1992) vol 1 at C35; Paget’s Law of Banking (11^th ed) at 129-130; E P Ellinger and E Lomnicka, Modern Banking Law (1994) at 127-129.

801               The chief cases on which Citibank relied (several of them concerned foreign currency loans) were as follows: Williams & Glyn’s Bank Ltd v Barnes [1981] Com LR 205 (Gibson J); David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1 (FCA/FC) esp at 21-23; Kullack v Australia & New Zealand Banking Group Ltd (1988) ATPR 40-861 (FCA/Pincus J) at 49,310; Ralik Pty Ltd v Commonwealth Bank of Australia (Supreme Court of NSW, Cole J, 14 August 1990, unreported at 97-99); Cappers Holdings Pty Ltd v Deutsche Capital Markets Australia Ltd (Supreme Court of NSW, Staff AJ, 12 August 1991, unreported at 5-6); Truebit Pty Ltd v Westpac Banking Corporation (FCA, Branson J, 27 November 1997, unreported at 31-32); Mehta v Commonwealth Bank of Australia (Supreme Court of NSW, Rogers CJ Com Div, 7 June 1990, unreported at 48; and on appeal at (1991) 23 NSWLR 84 (CA)); Australia & New Zealand Banking Group Ltd v Clenae Pty Limited (Supreme Court of Vic, Mandie J, 9 October 1997, unreported at 68-69); ANZ Banking Group Ltd v Dunstan’s Hotel (Supreme Court of Vic, Hedigan J, 17 October 1995, unreported at 19-27); Commonwealth Bank of Australia v Finding (Supreme Court of Qld, De Jersey CJ, 23 April 1998, unreported at 10-12); Potts v Westpac Banking Corporation [1993] 1 Qd R 135 (FC) at 138 (Macrossan CJ, dissenting); Commonwealth Bank of Australia v Gatto (Supreme Court of Vic, Beach J, 9 August 1996, unreported at 23-24).

802               To these cases may be added Banbury v Bank of Montreal [1918] AC 626 (HL) at 654-655 per Lord Finlay; Commonwealth Bank of Australia v Smith (1991) 102 ALR 453 (FCA/FC) at 476; Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256 (CA) at 276G (Meagher JA); and Lenin v Australian Bank Ltd (Supreme Court of NSW, Cole J, 21 June 1991, unreported).

803               NM does not challenge the well established propositions, recognised in the many texts and cases referred to above,  that ordinarily the relationship between a bank and its customer is contractual and that there is no warrant for recognising a general duty of care arising from the relationship: both parties referred to my judgment in Radin v Commonwealth Bank of Australia (FCA, Lindgren J, 23 October 1998, unreported at 34).  But NM also submits, and I accept, that this general position does not preclude the recognition of a duty of care in special circumstances, in particular, where a bank has undertaken the role of financial adviser; cf Commonwealth Bank of Australia v Smith, above at 475-476.  NM submits that in this case Citibank itself, through Kelly, assumed that role.

804               I do not accept the submission.  Kelly was not the mind and will of Citibank.  He was not an officer or employee of Citibank or part of the Citibank structure or organisation.  He did not operate from within a Citibank office.  He operated as a NM agent from his own office.

805               There is no ground for concluding from anything that Kelly, a fortiori the other Advisers, said or did, that Citibank itself assumed the role of financial adviser.  A finding that when Kelly gave financial planning advice he was acting in the course of the execution of his (more accurately LKFM's) agency from Citibank would provide a basis for a finding of vicarious liability, not direct liability. 

806               The Mortgage Power product was not dangerous in itself.  Its features of borrowings by drawdowns, effected by the customer at times, in amounts and for purposes determined by the customer, does not suggest danger.  Nor does the fact that interest was payable on the amounts which the customer might choose to draw down in this way.  Nor is there anything alarming in the possibility that the rate of interest payable from time to time might vary upwards or downwards: the Investors were familiar with this phenomenon by reason of their experience as home loan borrowers.

807               Any danger for the borrower lay outside the inherent nature of Mortgage Power and in one or more of the following elements taken alone or in combination: the borrower’s personal and financial circumstances; the possibility that the NM units would not increase in value sufficiently or quickly enough; the possibility that the borrower might capitalise interest or do so excessively, by drawing on the Mortgage Power facility to service the loan from NM or the loan from Citibank or both.  Ordinarily, one would think that as between Citibank and its customer, the risk would be borne by the customer.

808               Except in the case of the Investors who were caught by the moratorium on redemptions, if a borrower could not afford the interest commitment to NM and Citibank, either from the outset or after that commitment had increased because of the progressive capitalisation of interest, he or she had a choice.  The Investor could have the units redeemed.  On the other hand, he or she could retain them in the hope that they would increase in value sufficiently and rapidly enough to enable any problem to be overcome so that a profit would still result.  The important point for present purposes is that, right from the beginning, every time the borrower drew on the Mortgage Power to fund interest rather than request a redemption, he or she was making a commercial decision which involved risk-taking.  This consideration again supports the view that Mortgage Power was not inherently dangerous for the Investors.

Dorrough v Bank of Melbourne Ltd (1995) 8 ANZ Insurance Cases 76,233

809               Citibank refers to Dorrough v Bank of Melbourne Ltd (1995) 8 ANZ Insurance Cases 76,233.  In that case Cooper J rejected an argument having some similarity to that put by NM.  At issue, however, was not the liability of a bank to investors who borrowed from it but that of an insurer, in fact NMLA, whose role is described below.

810               Mr and Mrs Dorrough sued the Bank of Melbourne for damages for, inter alia, misleading and deceptive conduct in relation to a loan by the Bank and the investment of the loan monies in accordance with a scheme.  The Bank cross-claimed against NMLA as an insurer involved in the scheme and the promoter of the scheme, Byrne, asserting a right to indemnity or contribution.  The relevant issue before Cooper J was whether paragraphs of the Bank’s cross-claim asserting a duty on the part of NMLA to warn the investors of certain risks should be struck out, or the proceeding, in so far as it was based on those paragraphs, stayed.

811               Byrne was an insurance agent and financial adviser.  His scheme involved an investor borrowing $100,000 from the Bank and depositing it in a common pool under Byrne’s management.  Byrne purchased approximately fifty “Pure Endowment Policies of Insurance” issued by NMLA and on-sold them for a profit.  On depositing the $100,000 in the common fund, the investor would receive by way of security an unencumbered insurance policy as security.  The Bank would take a deed of defeasance over the policy as security for its loan of $100,000 to the investor. 

812               The Dorroughs pleaded that the Bank represented that if they accepted its offer of the loan, it would not pay any money to a third party if the security (the insurance policy) was encumbered in any way or any money was outstanding and unpaid in relation to it.  The Dorroughs pleaded that they sought the Bank’s advice as to the commercial risk involved in accepting the loan and investing in the scheme, and that a bank manager told them that he knew all about the investment scheme; that he was happy to accept the policies offered as security for the loan; and that there was no risk as the policies could always be cashed in to recover the money.  The Dorroughs pleaded that in reliance on the representations pleaded they accepted the loan and instructed the Bank to proceed in accordance with the contract of loan.  The pleading alleged that the Bank’s representations were misleading and were negligently made because the manager knew that the investment was unusual, risky and highly speculative, and that there was a real risk that the Dorroughs would lose some or all of their money.

813               Mr and Mrs Dorrough alleged that in breach of the loan contract, the Bank paid more than $200,000 to Byrne’s company when the insurance policies provided as security were registered in that company’s name and not in their own names, and were encumbered by that company to NMLA as security for the company’s indebtedness to NMLA of some $142,000. 

814               The Dorroughs also pleaded inducement and causation of loss.

815               The circumstances pleaded by the Bank as giving rise to a duty on the part of NMLA to warn were as follows:

·      that NMLA was aware that the sales presentations depicted the cash (or surrender) value of the polices and encouraged the short term surrender of policies;

·      that NMLA introduced new terms that required proposals to be accompanied by a copy of the sales illustration signed by the prospective policy owner and a “Letter of Comfort” also signed by him or her, or his or her accountant, acknowledging that the risks associated with the policy had been made clear;

·      that having become aware of the potential of a widespread misuse of sales presentations to depict enhanced or accelerated surrender values, NMLA advised its agents not to accept any further submissions of business;

·      that NMLA had reason to suspect that in marketing the policies, Byrne had represented to prospective policy owners that the policies were self-funding after the second year, relatively risk free and a good investment;

·      that in fact NMLA knew that many of the policies had lapsed or were at risk of lapsing due to non-payment of premiums, that NMLA had made demand for payment on Byrne, and that NMLA knew that Byrne was seeking to raise funds to pay the outstanding premiums;

·      that Byrne was trying to fund the premium payments from assignments of the policies.

The duties said to be owed by NMLA included a duty to disclose facts known by NMLA which a prudent person would take into consideration in deciding whether to enter into the policy.

816               Cooper J struck out the relevant paragraphs of the Bank’s cross-claim against NMLA.  His Honour held that, on the facts pleaded, NMLA did not owe to the Dorroughs the duty of care propounded.

817               With respect, I do not propose to analyse his Honour’s reasons.  They contain many references to “proximity”, a proper treatment of which would now require reference to be made to subsequent discussions of that topic by members of the High Court, notably in Perre v Apand Pty Ltd (1999) 164 ALR 606.

818               It suffices to say that, although the facts of Dorrough are significantly different from those with which I am concerned, the case illustrates the difficulty in cases of pure economic loss arising from a failed investment of establishing the necessary relationship between the investor/loan supplier and a collateral party which will impose on the latter a non-delegable duty of care of the kind pleaded by NM in the present case.  In Dorrough, NMLA’s role was collateral to the dealings between the investors, Byrne and the Bank.  A similar observation is applicable to the present case: Citibank’s role was collateral to the dealings between the Investors, the Advisers and NM.

819               Similarly, in David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1 (FC), a case decided prior to Burnie, the Full Federal Court rejected a submission that a foreign currency loan case fell within the rule in Rylands v Fletcher (1868) LR 3 HL 330 and held that on the facts there was no evidence of “reliance”, “dependence” or “assumption of responsibility” that would establish the relationship of proximity between the borrower and the bank necessary to generate a duty of care on the part of the bank.

820               In my opinion, Citibank did not owe to the Investors a duty of care of the kind pleaded because:

·        the Investors did not reasonably rely on Citibank to protect them from the risk of loss;

·        Citibank did not assume a responsibility to protect them from that risk by, for example, warning them of the risks of using Mortgage Power in conjunction with the NMAM negative gearing arrangement, or the suitability of that use of Mortgage Power for the Investors’ individual circumstances; and

·        the Warnings and the Written Explanation constituted financial advice which the Investors were not entitled reasonably to expect of a bank.

821               I also accept Citibank’s submission that the cause of the Investors’ loss was not the fact that the money was placed at their disposal through Mortgage Power.

 

Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520

822               NM made lengthy submissions based on Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520 (“Burnie”) and seeks to draw an analogy between the non-delegable duty of care which was held to be owed by the Burnie Port Authority (“the Authority”) to an occupant of its premises, and that owed by Citibank to the Investors in relation to the promotion and sale to them of Mortgage Power. 

823               In Burnie a building owned by the Authority was being extended to provide further cold storage facilities.  For this purpose the Authority engaged an independent contractor, Wildridge & Sinclair Pty Ltd (“W&S”).  W&S’s work involved considerable welding and the use of a large quantity of “expanded polystyrene” (“EPS”), marketed under the commercial name “Isolite”, a substance which, once set alight, burned quickly, and with great ferocity.  With the Authority’s knowledge, the Isolite was stored in approximately thirty cardboard containers in a void of the roof of the new development and in the vicinity of where W&S, with the Authority’s knowledge, would be carrying out extensive welding activities.  W&S’s employees negligently carried out the welding work with the result that sparks or molten metal fell on the Isolite containers setting alight the Isolite and creating a conflagration which spread to the original building.  In particular, the fire spread to rooms there where General Jones Pty Ltd (“General”) stored its goods, destroying General’s frozen vegetables.  General occupied the cold storage rooms and an office under an agreement with the Authority.  Except for the area occupied by General, the Authority occupied the original building and the uncompleted extension. 

824               In the High Court, a majority (Mason CJ, Deane, Dawson Toohey and Gaudron JJ) held that “the rule in Rylands v Fletcher” had been absorbed by “the principles of ordinary negligence” and that under those principles (at 556-557):

“…a person who takes advantage of his or her control of premises to introduce a dangerous substance, to carry on a dangerous activity, or to allow another to do one of those things, owes a duty of reasonable care to avoid a reasonably foreseeable risk of injury or damage to the person or property of another.”

825               The first question to be determined is whether a substance or activity is “relevantly dangerous” so as to give rise to a non-delegable duty of care.  Their Honours formulated this question as being whether (at 558-559):

“the combined effect of the magnitude of the foreseeable risk of an accident happening and the magnitude of the foreseeable potential injury or damage if an accident does occur is such that an ordinary person acting reasonably would consider it necessary to exercise special care or to take special precautions in relation to it.”

826               A “dangerous” substance or activity is not confined to that which is “inherently” likely to do serious injury or damage, although a conclusion that a substance or activity is inherently dangerous will ordinarily make its characterisation as “relevantly dangerous” more apparent (at 558). 

827               The fact that the foreseeable danger or injury may arise only if the independent contractor to whom the substance or activity is entrusted engages in “collateral negligence” does not prevent the substance or activity from being relevantly dangerous.  For example (at 559):

“If X engages an independent contractor to separately move two chemicals, which will cause a major explosion if they come into contact with one another, into separate storage areas, there may be no real risk of injury or damage at all if the independent contractor does what he or she is engaged to do.  The activity is, however, obviously fraught with danger unless special precautions are taken to ensure that the independent contractor does not, through ‘collateral’ negligence, transport the two chemicals together and in a way which causes contact between them.”

828               The duty imposed on X in those circumstances is to ensure that reasonable care is taken, which is a personal duty that cannot be discharged by the independent contractor.

829               A critical requirement is that the defendant must have control of the dangerous substance or activity.  The Court’s explanation of this “central element of control” was drawn from cases where the “element in the relationship between the parties which generates [the] special responsibility or duty to see that care is taken” is (citing Mason J in Kondis v State Transport Authority (1984) 154 CLR 672 at 687) that (at 550-551):

“the person on whom [the duty] is imposed has undertaken the care, supervision or control of the person or property of another or is so placed in relation to that person or his property as to assume a particular responsibility for his or its safety, in circumstances where the person affected might reasonably expect that due care will be exercised.”

As a result, a relationship of proximity is created, which is “marked by special dependence or vulnerability on the part of” the person to whom the duty is owed (at 551).

830               Applying these principles to the facts in Burnie, the Court found that Isolite was a dangerous substance in that if one of the containers were accidentally set alight, an uncontrollable conflagration would almost inevitably result, and therefore special precautions needed to be taken.  Correspondingly, carrying out welding within the premises where the containers were stored was a dangerous activity.  That is, the Isolite and the welding were dangerous due to their latent characteristics which the other could unleash.  The Authority engaged and authorised the independent contractors to carry out work on its premises which required the introduction of large quantities of Isolite to, and extensive welding on, the premises.  The overall work was dangerous in that it involved a real and foreseeable risk of a serious conflagration unless special precautions were taken.  Since it was clear that if a serious fire broke out, General’s frozen vegetables would be destroyed, the Authority owed General a non-delegable duty to ensure that the Authority’s independent contractor took reasonable care to prevent the Isolite being set alight.

831               According to the analogy suggested by NM, the present equivalent of the Isolite in Burnie is Mortgage Power, and the present equivalent of the dangerous activity of welding is the promotion of Mortgage Power, the NM units, and the two together in the Negative Gearing Package.

832               In my respectful opinion, Burnie has no relevance to the present case.  It is inappropriate to analogise from physical things which will injure the person or property if they are brought into contact, to Mortgage Power, NM units and the Package.  The facility and the units cannot be “brought into contact”, and it is nonsensical to speak of keeping them apart in order to prevent them from automatically causing financial loss.  Similarly, the Package was not an “activity”, dangerous or otherwise.  The Investors’ own decisions and acts were links in the chain of causation of their financial loss – a situation far removed from the passive role of General in Burnie.  Unlike welding sparks (or molten metal) and Isolite, the conjunction of Mortgage Power and NM units through the Negative Gearing Package would not inevitably cause loss.

833               All these considerations cause me to think that Burnie does not provide a sound analogical basis for concluding that Citibank owed a non-delegable duty of care to the Investors.

 

Conclusion

834               Citibank did not owe the Investors the non-delegable duty of care contended for by NM and therefore did not incur a direct liability to them by reason of breach of such a duty.

CHAPTER 5

APPARENT AUTHORITY

Introduction

835               NM pleads that the Advisers had apparent authority to represent Citibank but has not made submissions in support of that proposition.  Citibank has made lengthy submissions to the effect that the Advisers had apparent authority to represent NM and not to represent Citibank.  In response, NM has stated expressly that it does not rely on apparent authority.  In this state of affairs I must address the issue of the Advisers’ apparent authority to represent NM and Citibank as a result of holdings out by them respectively, because, for example, of its relevance to the question, addressed in Chapter 11, of the extent of responsibility of each of NM and Citibank for the loss or damage suffered by the Investors.

836               As noted in Chapter 3, it is not obvious to me why apparent (or ostensible) authority should have a role to play in the vicarious liability of P for the tortious conduct of A.  The Colonial principle takes as its starting point the presence of some actual authority in A to represent P in soliciting business from TP and is concerned with identifying the “class” or “scope” of the acts which A was authorised to do, that is, the range of statements falling within the course of the execution of A’s agency.  For a statement falling within that class or scope, P is vicariously liable even though the particular statement was not authorised by P.  Colonial itself was not, however, a case in which A (Ridley) sought to induce the plaintiff (Producers) to contract with P (Colonial).  Accordingly, the notion of apparent authority was irrelevant on the facts.

837               The difficulty to which I have referred can be illustrated by reference again to a hypothetical employment situation.  Assume that a driver of a van negligently, in the course of his employment, causes it to strike a car which is owned and driven by the plaintiff.  Assume further that the van, no doubt oddly, bears the signage of a company other than the driver’s employer and that it therefore appears to the plaintiff that it is being driven in the course of the business of that company.  I suggest that the appearance is irrelevant to the question of vicarious liability: the true employer is vicariously liable and the supposed employer is not.  If authority established a general principle of vicarious liability of principals for the conduct of their agents in the course of the execution of the agency, I suggest that the same approach would be appropriate.

838               But in the hypothetical case just mentioned, as in Colonial, the plaintiff did not “deal with” the employee or agent.  Where there are dealings between A and TP in the form of a solicitation by A of business for P, do appearances have a role to play in connection with the vicarious liability of P?  As noted in Chapter 3, in Australasian Brokerage, Thompson v Australian Capital Television Pty Ltd, Hollis v Vabu Pty Ltd (t/a “Crisis Couriers”) and Clayton Robard, there were references to the “apparent” or “ostensible” authority of A in discussions of the vicarious liability of P for A’s statements made tortiously in pre-contract dealings with TP.

839               Where, as is often the case, it is clear that A was representing P, it is easy to refer to A’s having apparent authority without addressing the question whether that appearance is an essential element of vicarious liability.  It is only in a case in which, arguably, A was acting on behalf of no one other than himself, or in which, as in the present case, it is arguable that A was acting only on behalf of a different principal, that the question is likely to arise.  Moreover, appearances can be relevant to the question of actual authority: if P holds out A as authorised in a certain way as agent of P, and A so acts with P’s approval, these facts will support an inference that A was so acting with P’s actual authority.

840               “Apparent authority” or “apparent agency” does not fit comfortably within Professor Atiyah’s notion of “some relationship between the actual tortfeasor and the defendant whom it is sought to be made liable.”  Apparent authority and apparent agency are consistent with the absence of any relationship at all between P and A.  Those concepts are invoked when the question is whether P and TP have become bound contractually - a question with which this case is not concerned.  Moreover, a requirement that P should have made something appear to TP suggests an element of direct or personal liability, whereas vicarious liability is concerned with an absence of involvement of P, except by reason of the existence of a relevant legal relationship between P and A.

841               I do not accept Citibank’s submission that in order for P to be vicariously liable for A’s conduct, A must have appeared to TP to be making pre-contract statements as agent for P: rather, I accept that it suffices that, regardless of appearances to TP, A’s tortious statements fall, as a matter of objective fact, within the general scope or class of acts that A was authorised by P to do on P’s behalf.

842               Notwithstanding this conclusion, I find it convenient to proceed on the basis that there is a second ground of vicarious liability, independent of the existence of any actual authority in A whatever.  This is that P will be vicariously liable to TP if A speaks tortiously within the scope of an apparent authority from P to make statements as representative of or for or on behalf of P in soliciting persons to enter into contracts with P.

843               Apparent authority requires, in the present context of vicarious liability in tort,

·        that A appear to TP to have been authorised by P to represent or act for or on behalf of P in soliciting persons to enter into contracts with P;

·        that P have created or be otherwise responsible for that appearance of authority;

·        that TP deal with A on the faith that the appearance of authority reflects the reality;

·        that the statement or statements of which TP complains fall within the scope or class of statements that A appears to TP to be authorised by P to make on P’s behalf.

844               There may be apparent authority in one respect but not another, or to a certain extent but no further.  In so far as an attempt is made to found vicarious liability on apparent authority, we must define the nature and scope of the apparent authority.  This is in order to know whether A's tortious statement was within the class or scope of statements that A appeared to TP to be authorised by P to make on P’s behalf.

845               Two general observations may be made.  The first is that P can be affected only by an appearance of authority that P has created.  In Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Company Pty Ltd (1975) 133 CLR 72 (“Crabtree-Vickers”), the High Court held (at 80) that:

“a person with no actual, but only ostensible, authority to do an act or to make a representation cannot make a representation which may be relied on as giving a further agent an ostensible authority.”

LKFM had actual authority to promote and sell Mortgage Power by virtue of the written agency agreement of 3 April 1989.  NM submits that LKFM and the other Advisers had actual authority from Citibank arising from many circumstances extraneous to that agreement.  I reject that submission in Chapter 6.  Accordingly, consistently with the passage from Crabtree-Vickers set out above, the only persons whose holdings out could even possibly give rise to an effective apparent authority are Citibank itself and LKFM under its written agreement.

846               The second observation is that I am not concerned in this chapter with anything other than apparent authority.  It is necessary, therefore, to be ever mindful of the fact that Kelly had actual authority from Citibank after 3 April 1989, whether that was apparent to the Investors or not.

847               It is convenient that I state at once my general conclusions (they are stated in more detail and with few exceptions at the end of this chapter):

(1)               the Advisers had operative apparent authority from NM to represent it and to act for it and on its behalf as sellers of NM investment and insurance products to the Investors;

(2)               the Advisers did not have operative apparent authority from Citibank to represent it or to act for it or on its behalf as sellers of Mortgage Power to the Investors.

Holding out by NM of the Advisers as having authority to represent NM and to act for it and on its behalf
in promoting the sale of NM units to the Investors

848               Citibank has not disputed that at all material times the Advisers appeared to the Investors to be NM agents and to be acting in that capacity (as will appear below, I do not think the evidence supports this view in the case of Farrar and, less clearly, Eberts).  The force of the evidence of this appearance itself is relevant to the question whether the Advisers also appeared to be acting as agents of Citibank.

849               There were NM signs, logos, awards and certificates on display in the offices out of which the Advisers worked and where the Investors met with them.  The Advisers sold a range of NM products including NMLA insurance and the units in the Property.

850               Notwithstanding the lack of serious dispute about the present issue, I will refer to certain evidence of general application, generally reserving until later a treatment of the testimony of the individual Investors as to their understandings.

851               In a handwritten memo from Trevor Allen to Lloyd Simpson, a NMAM officer who was, according to Kelly, “attached to National Mutual disabilities, an underwriter”, and who reported directly to Brian Benger, the General Manager of NMAM at the time, Allen stated:

“He [Kelly] has National Mutual logo on his office window.”

and

“We produced business cards for his use.”

 

852               Kelly’s cross-examination included the following:

“Q. Did you have around your wall in your premises awards that you had won framed?

A. I had some of the awards up.  I certainly didn’t have them all up. 

Q. How many did you have?

A. I changed them from time to time.  I don’t really remember.  I had an office.  I had a foyer.  There were two storeys of an office.  Did you say did I have an absolute wall of fame?  I really didn’t.

Q. You really can’t tell us how many you had at any one point in time?  Is that what you are saying? It may have been one, two, 100?

A. It wouldn’t have been 100.  I had the National Mutual dealer’s representative proper authority up.  I had awards, qualifications.  I had a plaque I had from the managing director’s forum up.  I had a business insurance award.  There were probably a few other bits here and there.  I really didn’t pay any attention.  My secretary used to tidy my office up and change things around from time to time.  It wasn’t something I paid a [lot] of attention to.”

853               Several Investors, but not others, recalled seeing the NM logo or other indications that Kelly was a NM agent at his office.  Appelman’s cross-examination included the following:

“Q. And was this right, that the National Mutual logo was prominently displayed in the Cheltenham Road premises?

A. It was displayed, yes.

Q. A big M in red or something?

A. Yes, it was there, yes.

Q. In red.  What was on his walls?  Did you see what was on his walls in those premises, framed –

A. Yes, and he kept saying he was [the] number 1 salesman for National Mutual.

Q. That is what he told you, did he, at the first meeting?

A. Yes.  He was the number 1 guy.

Q. And from that moment on you understood that he was National Mutual’s man?

A. Yes, yes.”

 

854               There was similar evidence in relation to some of the other Advisers.  For example, the cross-examination of Parsons, who dealt mainly with Jones and Wass, included this passage:

“Q. And there were National Mutual signs, were there not, at [the] premises in Manly?

A. Well, the whole building was National Mutual.  It had their logo out the front.  And when you came into the foyer, everything had National Mutual written around it everywhere.

Q And what was clear in your mind was that this was a National Mutual place you were in?

A Yes.”

 

855               Although associated with Jones’ office at Manly, Wass was initially based at NM’s Dee Why office which later moved to Mosman.  Parsons gave the following evidence in relation to her office:

“Q. Where were her [Wass’s] offices?

A. I have seen her at three offices, one at Dee Why, one at Manly and one at Mosman.

Q. And were any of those her own offices, as you understood it?

A. They were National Mutual.

Q. All National Mutual?

A. Yes.

Q. ¼they had National Mutual signs on the premises?

A. Yes.

¼

Q. ¼And may you have seen her first in the Dee Why office, might you?

A. Yes.

Q. So you knew her as a person associated with National Mutual, you thought working for National Mutual?

A. Yes.”

856               Crawford was both an Adviser and an Investor.  In relation to the location of Jones’ office, Crawford gave the following evidence:

“The offices of Dennis Jones & Company Pty Ltd were initially in [the] premises of National Mutual at 2/27 Belgrave Street Manly.  In March 1991 they moved to the premises of National Mutual at level 1, Bridgepoint, Brady Street, Mosman.”

 

857               Adviser Hacopian testified that the building at Manly that housed Jones' office had a sign reading "National Mutual Manly Division" on the ground floor where the lifts were.  He said that the Manly Division of NM occupied a large suite on the first floor of the “Bridgepoint” building in Mosman and that Jones also occupied a suite on that floor.  He said that Jones had NM award plaques on the wall of his office.

858               The cross-examination of Kirby of FKB included the following:

“Q Now, did you not make it clear that you were a National Mutual agent?

A. I think it would have been very difficult not to have known that.  We had signs up all over our doors and whatever.  So –

Q. What signs did you have?

A. We had a National Mutual – we had National Mutual brochures everywhere.  We had ‘Agents for National Mutual’ on our – I’m not sure whether we had it on all of our stationery, probably not, because when we changed to FKB Financial Management, we didn’t have to do that, but initially we used National Mutual stationery.

Q. What was on the door?

A. We changed it.  I’m not sure whether it had ‘Agents for National Mutual and other companies’, but it had certainly National Mutual there somewhere.  We were agents for the assets management [NMAM] area where we could sell other products, so I’m not sure–”

 

859               Kirby said he displayed his framed NMAM “Representative's Authority” on the wall of his office.  (On 17 November 1989 NMAM issued to Kirby a certificate that he was authorised by NMAM as its representative to promote trusts managed by NMAM.)

860               Fitcher, Kirby and Bahr were NM agents working in an office identified as a NM office.  Each of them had a stand in his office holding brochures including Citibank and Bank of Melbourne finance application forms.  They were on the stands to provide convenient access to Fitcher, Kirby and Bahr, rather than for display to clients. Fitcher, Kirby and Bahr would describe to their clients the way in which the Package worked in general, rather than by reference to any specific bank.  The forms would have appeared to a reasonable client of FKB to be present, as I find they in fact were, in order to assist Fitcher, Kirby and Bahr to perform in their role as NM agents.

861               I will refer to further instances of holding out by NM of various Advisers as its agents in the course of the discussion below of the understandings of the individual Investors.

The supply of Citibank stationery

862               Citibank supplied stationery to Kelly.  This comprised or included:

·        Mortgage Finance Proposal forms

·        Mortgage Power account signature cards

·        Privacy Act acknowledgment forms

·        Forms headed:

“AGENT
ACCOUNT OPENING I.D. VERIFICATION”.

863               Citibank knew that the Advisers or one or more of them obtained the signatures of prospective borrowers on documents, or some of the documents, of these kinds.  But in my view, Citibank’s supplying of the forms and its acquiescence in the Advisers’ filling them in or assisting the Investors to do so, and remitting the completed and signed forms to Citibank, did not constitute a holding out by Citibank to prospective borrowers that the Advisers were its agents or representatives with authority to act for it on its behalf in selling Mortgage Power: cf Branwhite; Custom Credit v Lynch (discussed in Chapter 3).  I note that the last class of document mentioned above used the word “agent” in its title and provided on the second page for the agent to sign and to affix his or her Citibank agency stamp.  Accordingly, for the Applemans, Van Minnen, who was employed by LKFM, signed the form and stamped onto it the LKFM name and Citibank agency number 2524885018.  Similarly, for the Daniels, Kelly signed and wrote “A/N^o 2524885018”.  There is nothing remarkable in this: LKFM was exercising an authority no broader than that which it actually had by virtue of its agency agreement.  (The equivalent form for the Jorgensens is also in evidence but did not bear the word “AGENT” in its title, and was signed by Ross of Citibank as “checking officer”.)

864               Other sources of finance supplied their stationery to NM agents.  FKB had Bank of Melbourne forms of application for finance.  On a previous occasion Kelly had produced RESI Statewide Building Society forms on which Investor Richards had applied for finance.  Jones had stationery from GIO in relation to its AAA line of credit.  In my opinion the supply of such stationery by banks and other sources of finance was intended to be, and could only be reasonably understood to be, a means of making it convenient for intending customers to apply for a loan, not as evidence of authority to represent, or to act for or on behalf of, the banks or other sources of finance, for the purpose of promoting and selling their products.  If Citibank was reasonably to be understood as authorising the Advisers to represent it at all, it was to be understood as doing so only for the clerical or administrative purpose of inviting the prospective borrowers to complete the forms and to sign them.  (In fact, we know that after 3 April 1989 LKFM had actual authority to sell Mortgage Power.)

the understandings of the individual investors

865               I turn now to the understandings of the Investors.  As noted earlier, in order to have legal significance, apparent authority must have been relied on.  That is, it is not enough that P held out A to TP as having authority from P to represent or to act for or on behalf of P: TP must have relied on that appearance of authority in dealing with A.  Another way of expressing the same idea is to insist that the only appearance of authority that is “operative” or “effective” is the appearance of authority to a particular TP.  (It is for this reason, for example, that Jones’ “pot of gold” pamphlet described in Chapter 11 is not an instance of apparent authority: there is no evidence that any of the present 23 Investors saw it before they invested (Crawford saw it after investing).)

866               The Investors made affidavits and were cross-examined in relation to their understandings.  I address their evidence individually below.  NM submits that the Advisers appeared to the Investors to be agents of both NM and Citibank.  Generally (Farrar and Eberts are exceptions) their affidavits were to the effect that they believed that their Adviser was an agent of NM, and that when a particular stage in the presentation was reached, they believed him or her to have some kind of relationship with Citibank too.  That stage was variously described as the explanation of the Mortgage Power facility or the production of Citibank’s Mortgage Finance Proposal form.  In some cases the Investors used the word “representative” or “associate” or their derivatives to describe what they understood their Adviser's relationship to Citibank to be.  None of them seemed prepared, even in their affidavits, to characterise their Adviser as an “agent” of Citibank in the unambiguous and straightforward way in which they were prepared to characterise him or her in relation to NM.

867               The cross-examination of the Investors revealed their understanding of their Adviser's relationship with Citibank to be unclear and problematical.  They searched for words to describe it.  Some said that the Citibank facility seemed to be “part” of a “standard” scheme that was described to them.  Some said they assumed there must have been some kind of tripartite “deal” in existence between NM, Citibank and Kelly.

868               I found the almost “standard form” affidavit of the Investors on the present issue of little assistance.  Precisely what an Investor's understanding had been years earlier as to an Adviser's relationship to Citibank is inevitably a difficult matter.  The problem is not only one of the passage of time and fading of recollection: it is also one of language and of characterisation by reference to legal categories.  If an affidavit is to be useful on such a difficult question, it must give an account in some detail of the deponent’s observations, thoughts and impressions at the time.  Unfortunately, in general the Investors’ affidavits did not do so.  Rather, they tended to adhere to a formula.  This may have been difficult to avoid, having regard to the fact that 132 affidavits had to address the same issue, but it had to be avoided if the affidavits were to have substantial probative force.

869               Also unpersuasive on the present issue is a recital in the form of the deed of settlement prepared by NM for execution by the Investors as part of the settlement with them.  This was to the effect that the Investor was maintaining:

·        that the Adviser had acted as agent of Citibank as well as of NM;

·        that Citibank as well as NM was liable to the Investor; and

·        that the Investor was entitled to damages and compensation from NM, Citibank “and/or” the Adviser.

No doubt these recitals seemed to the Investors and their professional advisers harmless and of no particular significance or interest.  They had to sign in order to receive their agreed compensation.

870               There are two areas of the evidence that I have found more persuasive.  One is the Investors’ oral testimony, notably their cross-examination.  The other is the fact that those Investors who complained or sought redress on their own initiative (in some cases, the claims were not spontaneous but were sought by NM or others) addressed themselves to NM, not to Citibank (Garden is an unusual case – see below).

871               I will now address the testimony of the individual Investors in alphabetical order.  It will be noted that Daniels and West, alone of the 23 Investors, had any relevant contact with Citibank directly.

1.         Geoffrey Ian Alder and Susan Patricia Alder

872               Alder had known Jones for some twenty-five years and had seen him say once every year or two.  Alder was introduced to Roberts in Jones’ office in November 1990 by Alder’s brother in connection with sickness and accident insurance.

873               Alder did not state in his affidavit his understanding of the relationship between Jones, Roberts and Citibank.  It seems, however, that he believed that Jones and Roberts would be able to organise the loan without any difficulties as there was no “middleman”.  In his affidavit, he said he viewed the Citibank loan as a major part of the overall plan.  However, apparently, Jones and Roberts initially told Alder that the loan would be arranged through a financial institution other than Citibank, the name of which Alder could not recall.  When Alder agreed to embark on the scheme (which, it will be recalled, involved in the Alders’ case an investment in the NM Equity Imputation Fund rather than the Property Trust) Jones or Roberts allegedly said that that institution had not approved the loan and that Citibank would be used instead.  Alder, however, doubted whether Jones and Roberts had ever approached the other financial institution as he had never signed any other institution’s form of application for finance.

874               In cross-examination, it was put to Alder that Citibank was mentioned by Jones only as late as towards the end of 1991, that is, that Citibank was not put forward as playing a significant role.  This cross-examination drew on the fact that while Alder applied for Mortgage Power in December 1991, an earlier letter from Roberts to Alder dated 20 May 1991 in relation to the Property Trust (the trust in which the Alders did not acquire units) had failed to mention Citibank as a source of funds. (The letter suggested that 80 percent of the funds to be invested in the Property Trust could be borrowed from NMPS or Barclays.)  Alder initially denied that Citibank was mentioned only at a late stage.  Later in cross-examination, however, he agreed that at “different times” the credit provider was not identified, that “at the end” Citibank was identified as the “main contributor”, and that Citibank was not mentioned as the lender in relation to the proposal to which the letter of 20 May 1991 referred.

875               Crawford’s name was given as a referee on the Alders’ Mortgage Finance Proposal form.  Alder explained as follows:

“Alan [sic – Allan] Crawford was the–my understanding–financial consultant for Dennis Jones’s [NM] agency, and I felt that was affiliated with Citibank as well.  He was some sort of commissioned agent, possibly for Citibank.  But that is only me speculating.

…

Q. Did you ever meet anybody from Citibank?

A. I have been in Citibank’s head office to deliver some documentation, but I don’t recall who it was that I spoke to.

Q. Did Mr Roberts ever introduce you to anybody from Citibank?

A. Well, I was of the impression that Ian Crawford [sic-Allan Crawford] was an agent for Citibank as well.” (my emphasis)

 

876               Alder also referred to those working in Jones’ office as “commission[ed] agents”, but he did not expressly identify for whom.

877               Alder retained his Citibank credit facility after settling with NM.

878               Alder stated in his affidavit that he thought Jones and Roberts were NM agents.  Roberts was Alder’s brother’s insurance agent and Alder initially approached him with the aim of obtaining sickness and accident insurance.  In a statement signed on 23 March 1994, Alder wrote:

“I approached National Mutual through its agents to secure a policy of insurance and a sickness & accident policy.”

 

879               Alder was a commissioned agent with Canon and, I infer, was aware that Jones and Roberts would be entitled to commissions, at least in relation to the insurance policy.

880               Alder was not cross-examined on his understanding of the relationship between Jones, Roberts and NM.

881               I find that Alder believed that he was dealing with Jones and Roberts as NM agents and merely speculated as to any relationship that might exist between them and Citibank.  I am not satisfied that it appeared to him that they had authority from Citibank to represent it as its agents to sell Mortgage Power or that he dealt with them on that basis.

2.         Cornelius Anthony Appelman and Martina Mary Appelman

882               Mrs Appelman’s sister and her husband suggested that the Appelmans contact Kelly because he was “really good with finance”.  They made an appointment to see Kelly in his office and met him there.

883               Appelman stated in his affidavit that he believed Kelly “represented Citibank”.  From his cross-examination reproduced below, however, it is clear that he saw Kelly as a NM agent who had a “friend” at Citibank who could ensure the loan was granted:

“Q. He [Kelly] thought you would get $100,000?

A. I think he said to me he had a friend at Citibank and he could get it, no worries.

Q. A friend at Citibank?

A. Mmm.

Q. Did he tell you who this friend was?

A. No.

Q. When he said that to you, I take it you thought he had some sort of in with Citibank which would enable him to get you this loan; would that be right?

A. Yes.

Q. Some sort of friendship that he could call in and get the loan through this friend?

A. Yes, I suppose, yes.

Q. When he said to you, 'I've got a friend at Citibank', you thought 'Well, he is a National Mutual man who has a friend at Citibank'; would that be right?

A. Yes.

 

Q. You didn't think, 'He is a Citibank man who has got a friend at Citibank'.  You thought he was a National Mutual [sic – man] who has a friend at Citibank; is that correct?

A. Yes.

 

Q. You never thought he was in any way from, of, or representing Citibank?

A. No.

Q. You thought he was a person who had a friend there? 

A. That's right.

Q. If you had thought he was from Citibank or representing Citibank, may I take it that you would also have thought that he was being paid in some way by Citibank?

A. I don't know.  I couldn't answer that.

Q. If he had said to you, `I have a contract with Citibank pursuant to which I am paid a commission', that might have made you think, 'Well, this man has got two interests in this transaction, one with Citibank and one with National Mutual'.  Would that be right?  He was getting it both ways, from Citibank and from National Mutual?

A.  I didn't think about it at all.

Q. No, but if he had said that to you, that might have made you wonder how many interests Mr Kelly had in this transaction that he was recommending to you?

A. It is hard for me to answer that question." (my emphasis)

 

884               Appelman hesitatingly agreed that Citibank’s role was merely that of a lender:

“Q. Nor had they, for example, put themselves into the position of being your financial advisers in any way, themselves, Citibank?

A. No.

Q. They [Citibank] were just a lender in this transaction, as you understood it?

A. Sort of.

Q. Just a lender, like the ANZ Bank was a lender in the transaction?

A. Well, yes.”

 

885               Appelman seems to have believed that Citibank had a requirement that a Mortgage Power customer take out NMLA life insurance.  He understood, however, that he could use the Mortgage Power facility for any purpose of his choice.

886               The Appelmans went to Kelly for financial advice.  In the following passages of his cross-examination, Appelman said there were references to NM on display at Kelly’s office at Cheltenham:

"Q  So, you went to see Kelly as a financial adviser?

A. That’s right.

Q. And you went to his premises at Cheltenham, was it?

A. That’s right.

Q. And did you see marked up on those premises references to National Mutual?

A. Yes.

¼

 

Q. Did you regard him as selling these National Mutual units, or recommending them? What did you regard him as doing?

A. Working for National Mutual and selling policies, selling property trust [units], yes.

Q. So, had you appreciated before you went to see him that he was a National Mutual person in some way?

A. No.  I thought he was a financial adviser when I went to see him.

Q. When you got in there, you found that he wasn’t a general financial adviser but a National Mutual person in some way?

A. That’s right.

 

Q. And was this right, that the National Mutual logo was prominently displayed in the Cheltenham Road [sic] premises?

A. It was displayed, yes.

¼

 

A. ¼I just expected, because he works for National Mutual, that he did know what he was talking about, that he was looking after my future.

Q. What, in your belief at the time, was the reputation of National Mutual?

A. Good.

Q. And did you believe that, because he was associated with National Mutual, that you could rely upon what he was telling you?

A. Yes

Q. I was asking you before, and I don’t think I actually got an answer, about whether you read anything that was on his walls of the premises in Cheltenham?

A. I probably didn’t.  I didn’t read them.  I do remember seeing some things, and he showed me once a computer of National Mutual, something to do with, like, just your life insurance and things like that and what their premiums are, or whatever.

Q. Do you remember seeing on the walls any framed documents?

A. I saw something to do with National Mutual, yes.

Q. Do you remember whether they referred to him as well?

A. No, I can’t remember.

Q. I think you told me that he told you that he was their number 1 agent; is that what you remember?

A. That’s right, yeah.

Q Would it be right to say that it was your belief that he had a relationship of some kind with National Mutual; he was working for National Mutual or-

A. He was one of their agents.

 

Q. Did he use that expression ‘agents’?

A. Yes, I think he did.

¼

 

Q. You believed Kelly when he told you he was a National Mutual agent?

A. Yes.

Q. He never said to you, ‘I am an agent for National Mutual amongst other things’, did he?

A. No, he just said he was a National Mutual agent.

Q. He never said he was also an agent for anybody else?

A. No.  I just thought he was a National Mutual agent.

Q. Did you believe that he was either earning a salary or perhaps a commission from National Mutual?

A. Yes.” (my emphasis)

887               Appelman said that one reason why he and his wife entered into the scheme was that Kelly worked for NM which he believed was a good company.

888               I am not satisfied that it appeared to the Applemans that Kelly had any role as an agent or representative in connection with the transaction other than that for NM.  In particular, he did not appear to them to be an agent of Citibank and they did not understand they were dealing with him as such.  I find that prior to meeting Kelly, they understood he was a financial adviser and from their first visit to his office, they understood he was representing NM alone.

3.         Leigh Charles Bachmann and Christine Anne Bachmann

889               Bachmann met Buttars in about 1983 when they became next door neighbours.  When Buttars lost his job and became a NM agent, the Bachmanns “supported him by switching some of [their] insurance policies over to National Mutual to give him some clientele”.

890               Bachmann stated in his affidavit that he believed Blee had a relationship with Citibank that enabled him to introduce the Bachmanns to Citibank as clients of NM.  Blee apparently had brochures of both Citibank and Barclays but told Bachmann that Citibank was the preferred bank to use.  Bachmann said that Citibank contacted his accountant directly, not through Blee, to obtain further information about his creditworthiness.

891               Bachmann’s cross-examination did not address his perception of the relationship between Blee, Buttars and Citibank.  Bachmann stated, however, that he knew Buttars and Blee were NM agents.  Bachmann appears to have viewed Buttars as more of a NM salesman, Blee as a financial adviser, and the Package as a NM initiative:

“Q. And you understood that the gearing scheme was a National Mutual product and not necessarily Mr Blee’s personal scheme?

A. No. My understanding was that it was National Mutual.

Q. And that Mr Blee was just selling and promoting the scheme to you?

A. That’s correct.”

892               I am satisfied that the Bachmans understood Blee and Buttars to be representing NM.  I am not satisfied that they understood them to be representatives of Citibank or dealt with them in that capacity.

4.         Ian Geoffrey Boulter and Helena Johanna Boulter

893               A friend of the Boulters, David Philip, recommended that they contact Kelly, apparently describing him as a “financial adviser”.  They met Kelly in his office at Cheltenham.

894               Boulter stated in his affidavit that he knew Kelly was a NM agent and also believed he represented Citibank because of his explanation of the Package and his having given Boulter the Citibank Mortgage Finance Proposal form.  He deposed that when Kelly explained the Package and handed him the form, he said: “I’ll put my other hat on and get you bank loans”.  In a statement to the ASC annexed to his affidavit, Boulter said he believed he was dealing with “a professional adviser” who was offering a “full service” which would enable the Boulters to achieve their objectives.

895               In the ASC statement, Boulter also said he went back to Kelly’s office two or three times over a period of two or three months, and that he believed NM would be paying some form of remuneration to Kelly for signing people up.  In about March 1993, Boulter contacted NM, not Citibank, to express his dissatisfaction.

896               Boulter was cross-examined about his understanding of the relationship between Kelly and Citibank by reference to Assessor Richard Bouchier’s notes of his interview with Boulter.  The cross-examination included the following:

“Q. The next passage seems to read 'Can't remember what papers' - is it 'I signed'? I think it might be 'I signed'? Is that right, that you could not remember what papers you had signed in the early days without them being shown to you?

A. Yes, I know what you are saying. Yeah, that would be correct, because he [Kelly] sort of took care of all the spadework. When we were discussing which bank, I suggested the Bank of Melbourne that I was working with at the time, and he said, 'Well, you are going to have to see an unknown Mr X who will not understand that sort of thing.' He said, 'You qualify for finance, we can get it through another bank.' And he said, 'Have you heard of Citibank?' I said no, I hadn't. He said, 'We will get that through the Citibank. You will only need to meet the manager of Citibank.' I said, 'Who is that?' He said, 'Me. Just a moment, I will put my other hat on. We will get that all organised and get the paperwork and get the whole thing rolling.' In simplicity, I never moved out of Charman Road to do all this.

Q. What, you took his remark to refer him to being the manager of Citibank as being a jocular remark, did you?

A. Oh, no, he was serious.

 Q. He was the manager of Citibank?

A. (The witness nods).

Q. You are not suggesting you believed he was the manager of Citibank?

A. I believe that he had authority to act on Citibank's behalf, because he had all the forms and he did all the leg work with it.

Q. When you came to bring your complaint forward, however, you didn't write to Citibank, did you, to complain about anything he had done on behalf of Citibank?

A. That's correct, I didn't.

 Q. And why was that?

A. Because all the documentation with the Property Trust and the business insurance was National Mutual.

Q. And you regarded him as performing a function on behalf of Citibank in producing the form to you and sending it off to Citibank, that is, the application for loan?

A. Mmm-hmm.

 

Q. But as doing everything else, he was doing on behalf of National Mutual; is that right?

A. That's correct. The reason I wrote to National Mutual, if I could just put this in, is because I tried to contact Lance Kelly a few times expressing concern that this thing was not going right and, basically, I was not getting any response.

Q. The complaint that you have made concerning Kelly, though, has been consistently and only made to National Mutual; isn't that right?

A. That's correct.

Q. And you have remained on good terms with Citibank yourself, haven't you?

A. Correct.

Q. Indeed, you today have an account with Citibank?

A. Correct.

Q. And have never made any complaint to them about Mr Kelly?

A. Correct.

Q. The function that you regarded him as performing for Citibank was limited, wasn't it, to the organising of this mortgage power loan, as you understood it?

A. My understanding of it was that it was an all-in package because it was all built around refinance and he, to me, had all the jigsaw in place as to the best way to tackle it.

Q. He had put it together?

A. He had put it together.” (my emphasis)

897               Boulter testified that he believed Kelly would have been receiving commissions from other companies as well as from NM, and that on Boulter’s own transaction he would have been receiving commissions from NM and Citibank.

898               Boulter wrote a two-page letter to Simon Wallace of NM on 12 February 1993 complaining about the performance of the Trust on which he was cross-examined as follows: 

“Q. … what was the occasion for you writing that letter? Was there any communication to you first, or was it just your concern about the matter?

A. My concern, the fact that the whole scenario of the package wasn't going to live up to expectation. It was going to cause a blow-out in finances and actually put a damper on the whole intent of the scheme.

Q. At the date of that letter, did you still have your investment?

A. Yes. Yes.

Q. Did you still have your Citibank facility?

A. Yes.

Q. Was there any letter sent to Citibank?

A. No.

¼

Q. You had been aware, had you, that Kelly, Lance Kelly, was a National Mutual agent?

A. Yes.

Q. And was it for that reason that you wrote to National Mutual?

A. The reason I wrote was because the package went through National Mutual. So the answer to that would be yes.”

 

899               It is clear that Boulter understood that Kelly was a NM agent.  Apparently he believed he also acted for other insurance companies:

“Q. He said to you that he wasn’t just a National Mutual agent; is that right?

A.     Correct.

Q. Did he say who else he was an agent for?

A. He said he has [sic – had] authority to act for various other insurance companies, and he has [sic – had] looked at the lot and that was the best package – words to that effect.  This is not verbatim, but in that context, ‘We looked at superannuation and those sorts of things’ – and he virtually dismissed them out of hand for a whole host of reasons.”

 

900               I find that Boulter understood Kelly to be an agent of NM.  I also find that he deduced that Kelly was an agent or representative of Citibank, but for no more reason than that he had the Citibank Mortgage Finance Proposal forms and “did all the leg work” on the transaction.  These facts did not constitute a holding out by Citibank of Kelly as its agent to sell Mortgage Power, and Boulter did not understand that they did.  In fact, however, we know that LKFM had such an actual authority from Citibank under its written agency agreement.

5.         Allan Stewart Crawford and Heather Joy Crawford

901               Crawford met Jones when they were next door neighbours in 1966 and had irregular social contact with him in the intervening years.  In about 1969, Crawford became aware that Jones was an insurance representative of AMP and Crawford took out an insurance policy through Jones.  Crawford became aware that in the early seventies Jones commenced working as an agent for NM.

902               According to his affidavit, Crawford did not believe that Jones was a Citibank agent but believed that NM and Citibank were both “involved” in the Package.  Crawford’s cross-examination included the following:

“Q. In paragraph 22 [of Crawford’s affidavit] you speak of the fact that National Mutual and Citibank were involved?

A. That's correct.

Q. I want to know whether you were ever told that Citibank was involved in the negative gearing investment in any way other than being the lender, providing some of the funds?

A. At that stage, when I was presented by Dennis with the concept, I thought Citibank was part of the calculation, part of the whole deal.  I thought they went together.

Q. Went together in the sense that they lent the money to purchase some of the units?

A. That's correct.

Q. But not more than that?

A. Not more than?

Q. Not more than lending the money for the purchase of the units?

A. No.  Their purpose was to lend the money to enable us to buy the units.

Q. That was their involvement?

A. Correct.”

 

903               At Crawford’s first meeting with Jones in relation to the scheme, Jones was assisted by another man from Melbourne, who Crawford believed was a Citibank agent.  The cross-examination of Crawford on this matter included the following passage:

“Q. Just going back to your affidavit in paragraph 18, in the first sentence you speak of your belief that the man from Melbourne was an agent for Citibank.  You see that?  It is in paragraph 18, first sentence?

A. Yes, I see that.

Q. Did anyone ever say to you anything to the effect at this meeting that the man from Melbourne was an agent for Citibank?

A. I don't know how I came to that belief, but, yes, I believed he in some way worked for Citibank.

Q. You yourself later commenced to carry out some similar functions for Dennis Jones & Company in dealing with the Citibank side of the transaction; is that right?

A. Correct.

Q. You didn't understand yourself to be an agent for Citibank, did you?

A. No." (my emphasis)

 

904               Crawford testified that Jones represented to him and to other investors that NM “guaranteed” the Package and the Property Trust.

905               I find that Crawford believed that when promoting the Package to him, Jones was acting as a NM agent and not as a Citibank agent.  I accept that Crawford believed that the man from Melbourne (not Jones) “in some way worked for” Citibank.  Crawford testified that the man was not Kelly, but a younger man.  I do not know what caused Crawford to understand that the man from Melbourne worked for Citibank but there is no evidence that it was any conduct of Citibank that did so.  The identity of the man from Melbourne is an irrelevancy because Crawford relied on statements made by Jones.  He dealt with Jones as a NM agent, not as a Citibank agent.

6.         Ross Newton Daniels and Shirley Rae Daniels

906               Daniels deposed in his affidavit, according to a common formula, that he believed Naughton was a NM agent, and that when he explained the Package “including the need to obtain a Citibank Mortgage Power [l]oan” and presented the Citibank Mortgage Finance Proposal form, he “believed he also represented Citibank”.  In fact Naughton’s status was that of a NMLA agent and a NMAM authorised representative in his own right, who had an office in Kelly’s premises.  In cross-examination Daniels said that, when Naughton introduced him to Van Minnen, Naughton said that Kelly’s office could provide “one stop shop services”, an expression that was taken up with Daniels in cross-examination:

“Q. The words ‘one stop shop’, are they words which we are to understand you attribute to Mr Naughton?

A. No – my description I think.  But that was the impression conveyed by Jim [Naughton], that all the services necessary, legal, accounting, you know, the products themselves, dealing with National Mutual and Citibank on our behalf, would be done through the one office.”

 

907               Daniels said he assumed that Kelly or Naughton “would be getting something from [NM] and Citibank” (he was correct – they shared equally the NM commission and Kelly would also have received $175 from Citibank) although he was in fact told nothing about payment of commissions.

908               Towards the end of 1990 Daniels had read a newspaper advertisement for Mortgage Power.  It included a “Free Information Enquiry Form” which stated “I am definitely interested in more information regarding Mortgage Power”.  He cut it out, completed it and returned it to Citibank.  In response, a person who announced himself as “Hugh Judd”, telephoned him and arranged to come to the Daniels' home on the evening of 4 February 1991 for a discussion.  Mr Judd introduced himself as Kelly’s marketing manager.  I infer, as Daniels would have done, that Citibank had passed on Daniels’ enquiry to LKFM as its agent for the promotion of Mortgage Power.  According to Daniels, Judd told him he had a number of investment schemes that involved NM and Citibank.  He said Kelly was an insurance agent and an investment adviser.  He referred to use of the equity in the Daniels’ home to borrow from Citibank in order to invest in units in NM property trusts which had long term growth prospects and would provide a “nest egg” for the Daniels’ future and for retirement.  In the light of what Judd had said, Daniels must have gained the impression that Kelly was an agent of NM.

909               The two men arranged to meet again at Kelly’s office at Cheltenham on 13 February 1991.  They did so.  Mrs Daniels also attended.  Judd introduced the Daniels to various people at Kelly’s office, including Naughton and, possibly, Kelly himself.  The Daniels were handed a “flier” on LKFM letterhead which stated “our group offers a wide range of Financial Services through our close links with Citibank and National Mutual”.

910               The Daniels were taken to Naughton’s office in Kelly’s building where Naughton presented the Package to the Daniels on a whiteboard.  Daniels asked for the information in writing but Naughton said “No!  There is nothing in writing.  This investment is too good to share around!”  At Naughton’s request, Mr and Mrs Daniels signed a Citibank Mortgage Finance Proposal form.

911               In the circumstances in which Citibank put Mr Daniels in the hands of Kelly, it seems immaterial that Naughton rather than Kelly dealt with him at Kelly’s office on this first occasion.  It appeared to Daniels that Kelly, through Naughton, was responding to Daniels’ Citibank enquiry form.  I proceed on this basis.  Daniels testified orally that he understood Naughton was part of “the Lance Kelly organisation”.

912               About a week after the meeting on 13 February, Daniels supplied to Naughton details of his passport, of the title to his house and of his salary.  At some time, not made clear by the evidence, Naughton had the Daniels sign a Citibank customer signature card.

913               On 20 March 1991, the Daniels again attended Naughton’s office where Naughton told them that Citibank had approved their application.  Naughton had Mr Daniels sign some NM forms and introduced the Daniels to Van Minnen, telling them that she would “look after all the legal work” for them.  Naughton also handed them a “National Mutual Australian Property Trust No 1 – Thirteenth Prospectus”.  (Daniels applied for $50,000 and $100,000 worth of units in the Trust by two application forms, both dated 26 March 1991.)

914               In a NM “Status of Your Investment Questionnaire”, Daniels referred to LKFM as the “Investment/Adviser/Dealer”.

915               I find that Citibank directly represented to Daniels that it had authorised Kelly to provide him with “more information regarding Mortgage Power.” I find that Daniels understood that Kelly was providing him with that information “through” Naughton, and that both Naughton and Kelly were NM agents to sell NM products.  But the apparent authority of Kelly and Naughton was no wider than LKFM’s actual authority under its written agreement with Citibank of 3 April 1989.  Accordingly, it is sufficient to consider the question whether Naughton’s representations of which the Daniels complain were within the class or scope of statements that Citibank authorised LKFM to make – a matter addressed in Chapter 6.  What distinguishes the Daniels’ case is that Citibank itself put Daniels in contact with Kelly (and Naughton) as a source of information about Mortgage Power.  Equipping Kelly with Citibank forms of a kind that needed to be filled in, signed and forwarded to Citibank, did not, however, itself constitute a holding out of Kelly as a selling agent of Citibank.

916               I find that the Daniels dealt with Naughton and Kelly as agents of NM and as agents of Citibank.

7.         Colin John Douglass and Julie Irene Douglass

917               Douglass said he had “various National Mutual life insurance policies over the years” and that various NM agents had “looked after [his] insurance needs at different times”.  It was a female NM agent whose name he could not recall who invited him to call into the NM offices to talk about “an investment [he] might be interested in”.  In that office, she introduced the Douglasses to Blee.

918               According to his affidavit, Douglass believed that Citibank was “involved because they had a loan package that suited the scheme”.

919               Douglass believed that Blee was a NM representative and advised him in that capacity.  On the other hand, he understood Citibank’s role to be limited to that of a lender providing a credit facility.  The cross-examination of Douglass included the following passages:

“Q And as far as the financial advice you were given, you regarded that as coming from a competent source, did you?

A. Yes.

Q. And that was National Mutual’s representative?

A. It was Mr Blee, yes.

Q. As a National Mutual representative?

A. Yes.

¼

 

Q. As you saw it, the bank’s role in this overall transaction of making available to you a credit line facility was the role of a lender and not the role of someone giving you investment advice?

A. Correct.

Q. And that investment advice came solely from National Mutual and its representatives?

A. Yes.

Q. And the bank’s concern in the transaction was to lend you money and in the bank’s interests to protect itself by ensuring that you repaid or were able to repay that money?

A. Yes.

Q. And for that purpose the bank took its mortgage security over your house; is that right?

A. That’s right.”

 

920               Douglass also identified Blee’s Manly office as a NM office.  Douglass thought Blee had some kind of association with Jones.

921               Douglass understood that Blee had only one representative capacity in connection with the transaction and that was for NM.  Douglass dealt with him in that capacity and not as an agent for Citibank.  (The Citibank loan application and valuation fees were paid by Jones and later reimbursed on settlement of the Mortgage Power aspect of the transaction; apparently Blee was employed by DJC at the time; DJC was paid 50 per cent of the NM commission.)

8.         Andrea Martina Eberts

922               Beth Holmes, a friend of Eberts, who taught at the school where Eberts taught, put Eberts in contact with Kelly.  Ms Holmes recommended Kelly as a financial adviser, saying she was “happy with what he was doing for her”.  Ms Holmes gave Eberts Kelly’s telephone number and in due course Eberts met Kelly in his office at Cheltenham.

923               In her affidavit Eberts stated, generally in accordance with a common formula, that she “knew L Kelly was a [NM] Agent”, and:

“When he [Kelly] explained the Investment Scheme to me … including the need to obtain a Citibank Loan, and gave me the Citibank form [The Citibank Mortgage Finance Proposal form] ¼ [she] believed he also represented Citibank.” (my emphasis)

 

According to Ebert’s affidavit, Kelly said to her, “I can do whatever I like with Citibank.” 

924               In cross-examination, she referred to Kelly’s having a “business relationship” with Citibank as well as with NM, and to the Package as a “very tight scheme” that NM, Citibank and Kelly “knew about”:

“Q. Do you say that you also believed that he had people that he knew or dealt with regularly in Citibank?

A. That’s right.  In fact I believed Citibank knew people at National Mutual.  I actually believed that it was a triangle at one stage, at the beginning.

Q. What do you mean by –

A. I believed it was not just Lance Kelly dealing with these two companies, but that National Mutual and Citibank actually knew about each other.  That’s what I believed.

Q. So we may understand that, did you believe that there was a business relationship –

A. Yes

 

Q. So that, for example, National Mutual wouldn’t sell the Property Trust units to anybody who wasn’t borrowing from Citibank, and Citibank would insist that the moneys that they lent go to National Mutual; is that what you mean?

A. Not quite that far.  Not that strict, because I just believed that- I don’t know how far I believed it, but I believed that everybody knew what everybody was doing.

Q. Did you believe that there was a partnership of some kind between National Mutual and Citibank?

A. Yes, through Lance Kelly.

Q. When you say through Lance Kelly, do you mean Mr Kelly told you that?

A. He basically said that he had invented this- and as we were signing papers he would say, ‘I know them.  I know them.  I’m doing this myself.  This person is doing this.’  You just felt it was a very tight scheme and that all parties knew about it.” (my emphasis)

This passage illustrates the difficulty of attempting to adduce evidence of a perception of a relationship, with a view to establishing that it falls within a particular legal category.  The passage establishes that Eberts understood that there was a three-way “business relationship” based on habitual dealings, according to which each party knew what each other party “was doing”.

925               Eberts’ cross-examination as to her understanding of Kelly’s relationship with NM is contradictory.  While she stated in the passage set out below, as in her affidavit, that she understood that Kelly was a NM “agent”, her evidence as a whole shows she had difficulty in accepting that that term could be applied to Kelly:

“Q. Did you believe that he had any relationship with any insurance company or not when you went there [to Kelly’s Cheltenham office]?

A. When I went in there, no.  I really didn’t know what to expect.  He was the first financial adviser I had ever been to.  I didn’t know what to expect.

Q. And did you at any stage discover that he had a relationship of some kind with National Mutual?

A. In that first meeting.

Q. You did?

A. Yes.

Q. And what led you to discover that?

A. His presentation was made so that you knew he had – it was a scheme that had – it wasn’t a brand new scheme.  It had been tried before.  It was almost put out as a package, the way he presented it.  That’s how I came out feeling that it was all integral to each other. 

Q. But he never said to you, ‘I am a National Mutual agent’ or anything like that?

A.  No.

Q. Is that what you understood?

A. Yes.

Q. Not at the first meeting or –

A. No, I don’t think he ever said it.  He just presented the package, the National Mutual/Citibank package

Q. You didn’t ask him whether he was an agent for anybody , or did you?

A. No.  They are not terms that I was familiar with.  I have never been to a financial planner, so I was …

Q. When you went to see him, did you believe that you were going to see someone who was unaffiliated with any particular financial institution?

A. Well, I hadn’t been given that much information from my girlfriend, and I basically said, ‘I am a teacher.’  I sat and I listened, but before that, I didn’t have many ideas about what it was.  I just thought he was a financial adviser and that’s who you go to to get advice.

Q. Well, for example, if you had been informed by him that he was a National Mutual representative or agent, would that have surprised you?

A. I don’t know.

Q. Was that different from what you believed when you saw him?

A. I don’t think I had a belief when I went and saw him initially, so I don’t know how I would have reacted.

Q. Was it different from the belief you had during the first meeting with him, that he – if he had said to you ‘I am a National Mutual representative’ or ‘I am a National Mutual agent’?

A. I don’t know if I would have acted differently.  I can’t tell you.” (my emphasis)

 

926               Later in her cross-examination, Eberts said that Kelly presented initially simply “as a financial adviser”.  It did not occur to her at her first or even second meeting with Kelly or when she signed the papers that he was a NM “agent” but she knew he was a NM agent “at some stage” of dealing with him.

927               For Eberts the term “agency” connoted an “exclusive” relationship which did not accord with her understanding of the relationship between Kelly and NM or with his role as an independent financial adviser. Therefore, although she stated in a NM “Status of Your Investment Questionnaire” that “Lance Kelly presented himself as an ‘independent adviser’ but on all occasions acted as an agent for NM”, she explained that this merely meant that “he never gave [her] any alternative ¼ or presented any other company”, which she presumably expected that he, as an “independent adviser”, should do.

928               I find that Eberts’ initial state of mind was that she believed that Kelly was an independent financial adviser.  Then she came to understand that there was some business relationship between NM, Citibank and Kelly, based on nothing more than the fact that Kelly described the Package as if it was a “standard” or “regular” arrangement between the three of them.  Notwithstanding what she said in her affidavit, I do not think Eberts understood that Kelly was a selling agent or representative of either NM or Citibank.  Rather, her understanding was that Kelly was an independent financial adviser who regularly involved them both in his plans for his clients, and did business with them according to a regular pattern, but that is as far as her understanding went.

9.         Barbara Anna Emery and Edwin Arthur Emery

929               Emery was introduced to Kelly by a friend, Brian James.  Mr James told her that Kelly was a successful financial adviser.  Mr James took Emery to Kelly’s office where he introduced her to Kelly.

930               Emery stated in her affidavit that she believed Kelly was a NM agent who had a “special relationship with Citibank”.

931               In cross-examination, she initially said that at her first meeting with Kelly, he claimed to be an agent of both NM and Citibank.  She testified that at her first meeting with Kelly, he said to her:

“I’m one of National Mutual’s top earning agents.  These are my awards I’ve won.  I’ve done so well, I’ve been on overseas trips I’ve won from National Mutual”.

932               In her cross-examination Emery said she understood Kelly to be a NM agent who derived remuneration from NM but “felt that he had some arrangement with Citibank, because he was an agent for them as well”.  She said, however, that she had formed this view “in hindsight”.  Later, and at the conclusion of her cross-examination, the following passage appears:

“A. I understood that he was certainly National Mutual.  I understood that he had a special relationship with Citibank, and that is all I can say on that.

Q. That’s what you say in your affidavit.  That is really the extent of your recollection about the matter?

A. That’s right.”

933               I am satisfied that Emery’s understanding was that Kelly was a NM “agent” who had a “special relationship” with Citibank, the nature of which was not something on which she had any understanding at the time.  I am not satisfied that it appeared to her that he was an “agent” or “representative” of Citibank, authorised by it to represent it or to act for it or on its behalf in selling Mortgage Power. 

10.       Daryl John Farrar and Debra Vicki Farrar

934               Farrar’s sister-in-law, Gwen Farrar, introduced him to Kirby, who, she said, had “a fantastic investment opportunity”.  The Farrars met Kirby in FKB’s office at Boronia.  They were never introduced to Kelly.

935               Farrar gave the following evidence in his affidavit:

“I never knew N Kirby was a National Mutual agent nor a Citibank agent.  When he explained the investment to me … I thought he was simply using Citibank because they provided the best deal for us.”

 

936               Farrar reiterated in his cross-examination that he did not believe Kirby was a NM agent, even though he understood that NM was paying Kirby a commission.  The following passages from the cross-examination of Farrar are noteworthy:

“Q. …you say you found that he was getting $300 and you did nothing about it? [Although the evidence is unclear, Farrar’s affidavit suggests that the $300 paid to FKB was a reimbursement of application and discharge fees, rather than commission.]

A. Because he had indicated that he was being paid, obviously, but the question I asked him at the time was, 'What will we be paying you?' as in physically paying out of our account to him.  He indicated that that would be all looked after by National Mutual, whoever, and we would not be paying.

Q. You are talking about commission now, are you; is that right?

A. Yes, for his services in organising the –

¼

Q. Is the evidence that you have just given about that matter that you thought that he was going to get his commission from National Mutual?

A. Correct.

Q. Without getting it directly from you; is that correct?

A. Correct.

¼

Q. You came to Kirby, through your then sister-in-law?

A. Correct.

Q. And did you understand her to be working with FKB Pty Limited?

A. Yes.

Q. Which you understood to be a National Mutual agent?

A. No.

Q. Not an agency–

A. No.

Q. –  of National Mutual?

A. No.

Q. Didn't it have signs up?

A. To my recollection certainly not outside their building.  They shared offices with many other people, so they didn't have signage area, or whatever, outside the building, and I cannot recollect in their offices anything plastered on walls, or anything, to say that they were a National Mutual agent.”

937               Farrar’s conversations with Kirby were all at FKB’s office. 

938               I find that Farrar perceived Kirby’s role to be that of an independent financial adviser, and not that of an agent of either NM or Citibank.  Farrar dealt with Kirby on the assumption he was an independent financial adviser, not an agent of either NM or Citibank.

11.       Sharn Stuart Fraser-Bell and Jennifer Jane Fraser-Bell

939               Fraser-Bell met Jones in the early eighties when he (Fraser-Bell) was living at home with his parents.  He said Jones had been his parents’ “insurance broker” for many years.  Fraser-Bell himself had regular contact with Jones regarding his insurance requirements, and took out life, superannuation and sickness and accident policies through him.  In late 1989 Jones telephoned Fraser-Bell and invited him to call at Jones’ office so that Jones could tell him about something in which he thought Fraser-Bell would be interested.

940               Fraser-Bell stated in his affidavit that he knew Jones was a NM agent and understood that “Citibank was privy to the scheme and knew how it worked [and] … that Citibank was aware of what the Citibank loans were being used for.”

941               In cross-examination, Fraser-Bell spoke of Jones’ relationship with Citibank in terms of his having contacts at Citibank:

“Q. Do you remember whether [Jones] said that the Citibank part of this deal was only available to National Mutual customers?

A. It wasn’t put in those terms.  My understanding was the investment plan was only available through Citibank.  At one stage he did mention that someone was trying to organise some other form of finance, or something slightly different – I can’t remember, of course, but he did say it was causing problems and he didn't think they could do it, that the only way of doing this was through Citibank, because it had been set up and it was already in place.

Q. Did you understand from that that it had been set up by National Mutual with Citibank?

A. My understanding was that Dennis had made contacts with Citibank and those people were au fait with the investment plan, and he was dealing direct with them, and there was no problem with the finance.  It had all been arranged.  They were up to date with what was going on and that was how the finance was all [being] arranged.

Q. So, in other words, do I understand what you are saying to be this: What you understood from Jones was that he personally had taken this arrangement to Citibank? Is that what you are saying?

A. That was my understanding.

Q. Not, in other words, National Mutual through anybody else, but he himself? In other words, he wasn’t suggesting that this was done at top level in Citibank or National Mutual; he was suggesting that he personally had gone to Citibank?

A. That was my understanding, yes.”

 

942               In cross-examination, Fraser-Bell said he had always known Jones to be a NM agent:

“Q. And he was known to you as a National Mutual agent?

A. Yes.

Q. At all times?

A. Yes.

Q. And you believed him to be a National Mutual agent right up till the end of your dealings with him in that capacity; is that right?

A. That’s correct.

Q. That would be some time in the early 1990s?

A. Yes.

Q. And he had an office, did he, in Manly?

A. Yes, he did.

Q. Were there National Mutual insignias in that office, do you remember?

A. Yes, there were.

Q. Did he have on that wall some awards from National Mutual?

A. Yes.

Q. Plenty of them, almost like wallpaper?

A. Numerous.

Q. Numerous awards.  Would it be right to say that in his office, the only company name that was on display was that of National Mutual?

A. To the best of my recollection, yes.”

There was also the following passage:

“Q. May we take it that the impression that you gained from looking around his office was the same as you had before you went to his office, namely, that he was a National Mutual agent?

A. There was no question.

Q. And you believed that was his sole job in life, to be a National Mutual agent?

A. That’s correct.”

943               I find that Fraser-Bell thought that Jones was an agent of NM, but not of Citibank, and understood that he was dealing with Jones accordingly.

12.       Paul Frederick Garden and Denise Valda Garden

944               Garden said Jones was a “nephew of [his] wife’s foster parents” and that Jones had dealt with all the Gardens’ insurance needs since about 1979 and was their only source of “financial advice”.  As at June 1989, the Gardens held five NMLA insurance policies.  When Mrs Garden telephoned Jones on an insurance matter, he suggested the Gardens come to see him about an “idea” that was “great news”.

945               Garden stated in his affidavit that he knew Jones was a NM agent but did not know what his relationship with Citibank was.

946               Garden was cross-examined on his understanding as to whom Jones was representing, at a meeting at Jones’ office, which an unidentified man from Melbourne attended:

“Q. On that occasion, Mr Garden, did you form any belief as to who, if anybody, Mr Jones was representing?

A. As far as we knew from our personal knowledge of Dennis, he only worked for National Mutual.”

947               Although Garden’s evidence is vague on the point, he seemed to think that his solicitors, Morton and Harris, who complained on his behalf to NM in 1990/1991, had also complained on his behalf to Citibank.  In fact a statement of claim filed in the Supreme Court of New South Wales in August 1993 on behalf of the Gardens by those solicitors named Citibank as fourth defendant (it named Jones and Martin William Barnes trading as “Manly Warringah Insurance Agents” as first defendants, Hacopian as second defendant and NMLA as third defendant).  The evidence is too vague, however, to persuade me to conclude that back in 1990/91, the Gardens themselves, as distinct from their solicitors, thought they had cause for grievance against Citibank because Jones had acted as Citibank’s representative.

948               The Gardens believed that Jones represented NM.  I am not satisfied, however, that prior to entering into the transaction they also believed that Jones was authorised by Citibank to represent it or to speak for it or on its behalf in promoting Mortgage Power.  Rather, they thought they were dealing with Jones as a NM agent alone, and that for convenience, he possessed a stock of Citibank Mortgage Finance Proposal forms.

13.       Gregory Alan Jorgensen and Anne Maree Jorgensen

949               Jorgensen met Bahr through Bahr’s son who was on the staff of the school where Jorgensen was also employed.  Bahr gave a presentation about superannuation to the staff and shortly afterwards Jorgensen took out NM superannuation through Bahr.  Subsequently, Bahr telephoned him and invited him and his wife to FKB’s office to discuss “an investment”.

950               Jorgensen’s affidavit does not state his understanding of the relationship between Bahr, NM and Citibank.  Nor does his cross-examination explore this issue.  (The closest it came to doing so was when Jorgensen was asked whether he believed Bahr or NM was the culprit!)

951               Like the other Investors, Jorgensen was not concerned with the detailed terms of the deed of settlement with NM.  He said he had seen it and any dealings between NM and its agents as “NM’s business”.  Jorgensen’s deed of settlement differed from the usual form in that while it contained an assertion that NM was liable for the actions of the agent, it was silent on the liability of Citibank.

952               I am satisfied that the Jorgensens assumed in dealing with Bahr that they were dealing with a NM agent.  I am not satisfied, however, that he appeared to them to be also a Citibank agent or representative or as having authority from Citibank to act for it or on its behalf in selling Mortgage Power.

14.       Frank Lorenz and Ann Gudrun Lorenz

953               Jones telephoned Lorenz and advised him that he (Jones) was replacing Trevor Bailey as Lorenz’s “insurance agent”.  Lorenz said Jones became the Lorenzes’ “insurance broker”.  He said that when Jones moved from AMP to NMLA he persuaded the Lorenzes to transfer their insurances to NMLA.  Lorenz said he had “regular contact with D Jones concerning [his] insurance requirements”.  In November or December 1989, when Jones was at the Lorenzes’ home discussing their insurances, he told them they could make a lot of money, and should call on him in his office to hear more.

954               Lorenz’s affidavit statedthat Lorenz knew Jones was a NM agent and believed “the scheme was a whole package, with Citibank being an integral part of it”.  Lorenz maintained that he met Kelly either at the first or second meeting with Jones.

955               On Lorenz’s behalf, Hocking sent NM a letter outlining details of the Lorenzes’ claim.  The letter contained the usual claim that the agent had failed to disclose any commercial or agency relationship with Citibank.  Lorenz was cross-examined as to his understanding of the relationship between Kelly, Jones and Citibank and about Hocking’s letter as follows:

“Q. [Hocking] is putting forward on your behalf an allegation that National Mutual or Kelly or Jones failed to disclose any commercial or agent relationships, where such existed, with Citibank.  If I can ask you about your meeting with Hocking, and what you thought then.  When you spoke to Hocking about your dealings with Jones and Kelly, did you then believe that those men had been acting for Citibank?

A. No, I didn’t believe that then, no.

 

Q. Because you wouldn’t be complaining about them not disclosing relationships if you had been told of relationships?

A. No.  I don’t understand what you mean.

Q. What the letter is saying is that no relationship is disclosed to you, so you were telling Hocking that you knew of no relationship?

A. Yes.”

956               Lorenz knew, however, that Jones was a NM agent.  I infer that Lorenz also understood Kelly to be a NM agent.  He knew that Kelly had “created the plan”.

957               I find that Lorenz believed that Jones and Kelly were NM agents, but not that he also believed Kelly or Jones or both to be agents or representatives of Citibank.

15.       Phillip Ross Lowe and Deborah Joan Lowe

958               Lowe first met Jones when Lowe was a “nipper” at the Freshwater Surf Club where Jones was an “official” who was actively involved in the “nippers” programme.  In late 1991 or early 1992 Jones approached Mrs Lowe in regard to “an investment arrangement” in which the Lowes might be interested.  I infer that the Lowes already knew that Jones was a NMLA agent.

959               On entering the scheme the Lowes had a pre-existing Mortgage Power facility, the extension of which they feared would involve a fee.  In his affidavit, Lowe said he believed Jones “had some arrangement with Citibank enabling the Negative Gearing Investment to be put in place”.  This belief was reinforced in Lowe’s mind when Jones told Lowe that he (Jones) would take care of any such Citibank fee.  The cross-examination of Lowe included the following:

“Q. You already had your Citibank loan in place?

A. Yes.

Q. Didn't you?  When you had your Citibank loan, you of course appreciated that the money that was available to you was part of the Mortgage Power loan for any purpose you wanted to use it for?

A. Yes.

Q. And the same would be true with the additional moneys to be made available to bring it up to $180,000?

A. Yes.

Q. When you had arranged your Citibank loan in the first place, I take it you had arranged it directly with some officer of Citibank?

A. Yes.

Q. In a branch or –

A. In a branch at North Sydney.

Q. And you didn't think that either Crawford or Jones or any of the National Mutual people you were dealing with were agents or officers of Citibank?

A. No.  I just thought that Dennis Jones knew someone in Citibank that –

 

Q. Was your understanding this, that it was being proposed to you by National Mutual agents that you should increase your indebtedness to Citibank, so that you could obtain some money to be used in a National Mutual investment; is that correct?  That's what you understood?

A. Yes.

Q. You didn't think that you were being approached by Citibank agents or servants or officers for that purpose, did you?

A. No.

Q. And, so, the paragraph that I have just drawn to your attention doesn't mean anything, does it, in that context, that you didn't think Citibank would have been offering to lend you money as part of the negative gearing scheme if [sic – unless] such a loan suited your financial position? That doesn't accord with your understanding of the matter at all, does it?

A. I thought that Citibank wouldn't have wanted to see me go under, so to speak, and lose my house.  So I thought that if they had seen anything wrong with extending the loan, the credit facility, they would have contacted me and let me know that something I was getting into might have been wrong.

Q. But, you see, you didn't have to ring?

A. That was the understanding I had with the bank officer.

Q. You didn't have to ring Citibank and say, 'I'm going to use some of my Mortgage Power money for this purpose or any other purpose', did you?

A. No.  That was the nature of the loan.

Q. The nature of the loan was that you could do what you liked with the money?

A. Yes.

Q. And the people you were dealing with were not Citibank people; they were National Mutual people?

A. Yes.

 

Q. And the only relevance of Citibank Limited was that you had a Mortgage Power loan which you could extend so as to enable you to do what you liked with the additional money; isn't that right?

A. Yes.

Q. Whereas paragraph 31 [of Lowe’s affidavit, which stated: ‘In particular I believed Citibank would only have been offering to lend more money to me as part of the Negative Gearing Package if such a loan suited my financial position.’] reads as if the whole negative gearing scheme was being put to you, not by National Mutual representatives but by Citibank representatives, doesn't it?  You see that?  Just read 31 to yourself.  You see what I mean?

A. Yes.  I see what you mean, but I –

Q. Was that paragraph suggested to you by somebody else?

A. No.

Q. It does appear, I can tell you, in most, not all, but most of the affidavits we have in this case, a paragraph in very similar terms to that, paragraph 31?

A. Uh-huh.

Q. What I want to suggest to you is that it doesn't really represent your state of mind at all.  It is just language that was put to you by whoever prepared this affidavit; is that correct?

A. No, because I think that the people that we originally dealt with at Citibank liked to make you feel that they were very much caring about what we were actually doing with our money and stuff like that.  I  really felt that if - if - they thought that I was doing something wrong, the officer who we contacted and made the loan with originally would have let us know.

Q. Did you ring him up and say, 'Look, do you realise that what I am going to do here is act on a negative gearing scheme which was proposed to me by Mr Crawford or Mr Jones under which I am going to use some of  your money for the first tranche and then National Mutual Property Services are going to lend me four times as much so I can have five times as many units as I could buy using your money?'  Did you do that?

A. No.  I didn't ring her up at all.

Q. No.  Indeed, your only contact with Citibank itself about this matter was to say, 'This is to apply for an increase in the facility from $120,000 to $180,000,' and to be told, 'Yes, you can have that increase'; is that right?

A. Yes.

Q. And there wasn't even a need to revalue your house because it had been revalued for the purposes of the earlier facility within six months?

A. I think there was another drive-by revaluation.” (my emphasis)

 

960               I find that Lowe believed that in dealing with him, Jones was acting as an agent of NM.  I am not satisfied that he appeared to Lowe to be an agent of Citibank or to be acting for or on behalf of Citibank in connection with the transaction.

16.       Giuseppe Guido Minichini and Rosa Minichini

961               Minichini met Jones through Minichini’s brother-in-law some 18 to 20 years prior to swearing his affidavit in 1997.  Jones became “a close family friend” and attended the Minichinis’ wedding in 1981.  When Jones changed jobs (from AMP to NMLA) the Minichinis “transferred” three policies they had from AMP to NMLA.  In early 1989 Jones telephoned Minichini and invited him and his wife to attend Jones’ office to hear about an “investment” in which he thought they would be interested.

962               In his affidavit Minichini stated that he knew Jones was a NM agent, and, in relation to Citibank, only that he believed he had a relationship with Citibank which enabled him to “secure” the loan.

963               Minichini was not cross-examined on his perception of Jones’ relationships with NM and Citibank.  But he was cross-examined on his understanding as to whether the NM “salesmen” would receive commission and said it was “common sense” that they would.

964               Minichini could not say with certainty that the man from Melbourne who was present at the meeting with Jones was Kelly.  He did, however, remember that it was Jones who wrote on the whiteboard, and I have treated Minichini as a Jones Investor.

965               I find that Minichini understood Jones to be a NM agent.  Minichini’s evidence does not, however, establish that he believed Jones was speaking or acting as representative of Citibank or for it or on its behalf.

17.       Robert Leonard Parsons and Ngaire Carmel Parsons

966               Parsons met Wass in early or mid 1989 when she was the insurance agent for the Department of Administrative Services for which Parsons worked.  The Parsons took out “a superannuation policy” for Mrs Parsons and Wass became the Parsons’ “insurance agent”.  In October 1989 Wass telephoned Parsons and said she had a “scheme for investing money in property” which she thought would interest the Parsons.

967               Parsons stated in his affidavit that he believed Wass, Kelly and Jones had “some connection with Citibank”.  He stated that Wass gave him and his wife a form to sign which she told them was for the Citibank loan.  They knew nothing of Citibank and did not know how to contact it.  Wass was their only avenue of communication with Citibank. 

968               In cross-examination Parsons said he could not recall there having been any references to banks in Jones’ Manly office, and that he had believed that Wass, Kelly and Jones were working only for NM.  His cross-examination included the following two passages:

"Q. But while there was [sic – were] plenty of references to National Mutual around the Manly offices, I take it there were no references to any banks?

A. Well –

Q. No references up on the wall?

A. As far as logos and that go, no, not that I can remember.

Q. Did it ever enter your mind that commissions might be payable by any bank to Anna Wass, first of all?

A. No.

Q. To Lance Kelly?

A. No.

Q. To Dennis Jones?

A. No.

Q. And did it ever enter your mind that any of those people were working for any bank in any way, working for those banks?

A. Not at that time, no.

Q. The only company that you thought they were working for, if I understand your evidence, was National Mutual?

A. Yes, that’s correct.

¼

Q. I take it none of them [Kelly, Jones and Wass] ever told you whether they had actually been given any of this information [in relation to the expected growth in their money invested in the Package] from National Mutual or not, as such, but I take it they never told you that, or did they?

A. No, I can’t remember them ever saying that.

Q. But was it your belief that whatever you were being told by these people was company policy of National Mutual?

A. Yes.” (my emphasis)

 

969               Like the other Investors, Parsons had no role in drafting the deed of settlement with NM.  In his case the deed referred only to Wass and Jones, and not to Kelly, although Kelly was in fact involved.  This omission is a particular illustration of the unpersuasiveness of the standard form of deed.

970               Parsons was cross-examined on his understanding of Wass’s relationship with NM as follows:

“Q. Did you understand her [Wass] to be a National Mutual agent?

A. I just thought she worked for National Mutual.

Q. Worked for National Mutual?

A. Yes.

Q. Did she give you a card at any time with National Mutual’s logo on it or name?

A. She has give [sic – given] me a few cards over the time.  It used to have National Mutual up the top, and Anna Wass.

¼

Q. Where were her offices?

A. I have seen her at three offices, one at Dee Why, one at Manly and one at Mosman.

Q. And were any of those her own offices, as you understood it?

A. They were National Mutual.

Q. All National Mutual?

A. Yes.

Q. ¼theyhad National Mutual signs on the premises?

A. Yes.”

 

Parsons understood Jones to be a NM agent also:

“Q. So, Dennis Jones and Anna Wass – did she introduce you to Dennis Jones as a National Mutual agent?

A. I can’t remember now.

Q. Did you understand him to be a National Mutual agent?

A. Yes, I did.

Q. We have heard some other evidence about his Manly office.  Was there anything on the wall about Mr Jones, do you remember any awards on the wall, National Mutual?

A. No, I can’t remember.

Q. Do you remember there being a whole lot of framed pieces of paper on the wall in his office?

A. We went into a room that was just a little bit smaller than this, and it had a big conference table and it just had a whiteboard there.  I really didn’t pay too much attention to what was around the walls or whatever.”

 

As can be seen from Parsons’ cross-examination at [968] above, he also understood Kelly to be a NM agent.

971               It is interesting to note that the assessor’s “Claim Assessment Report” for the Parsons recorded that the reason they had given the assessor for having accepted the Adviser’s recommendation to invest was greed and the fact that they had trusted Wass and NM (they did not mention Citibank).  The report records that the Parsons referred to Wass as “their NMLA agent” (the words of the report) and that they had viewed Wass as their “trusted insurance agent”.

972               I am not satisfied that the Parsons understood Wass, Jones or Kelly to be a Citibank agent or representative or as having any authority from Citibank to sell Mortgage Power for it or on its behalf.  They did however, understand that all three were NM agents and were representing NM in connection with the transaction.

18.       Gary Allan Pickworth and Tina Jane Pickworth

973               Pickworth first met Jones when Pickworth was twelve years old and Jones was his football coach.  Later when Jones was an insurance agent of AMP, Pickworth took out insurance through him, and later still, after Jones had transferred from AMP to NMLA, Pickworth “switched” the policies to NMLA.  In his affidavit, Pickworth stated:

“I regarded D Jones as my insurance agent and left all my insurance needs up to him.”

In about November 1989, Jones contacted Pickworth about “an investment idea” in which he might be interested.”

974               In regard to Jones’ relationship with Citibank, Pickworth merely stated in his affidavit that he believed Jones could “organise the Citibank facility”.

975               Pickworth’s initial cross-examination did not explore his perception of the relationship between Jones and Citibank or Jones and NM.  The closest it came to doing so was in the following passage:

“Q. And did he [Jones] make any statements to you about whether that facility [the Mortgage Power facility] was available from other banks?

A.  No, I do not think there was any other – as far as I knew.

Q. In terms of what he actually said to you, can you recall what he said to you?

A. ¼I got the impression that the whole – Citibank was all tied up, and that is the way we were going to go.”

 

976               Pickworth later testified that he believed that in his dealings with Jones, Jones was acting solely as a NM agent:

“Q.Did Jones tell you anything about commissions?

A. No.

Q. Did you have any information that he was a commissioned agent dealing with you, D. Jones?

A. I never really ¼ thought about it.

Q. You knew him as a National Mutual agent?

A. Yes.

Q. And that is what you believed he was when he was advising you, a National Mutual agent?

A. Yes.

Q. And nothing else? You didn’t believe him to be acting independently for example?

A. To no-one else, no.”

977               I find that Pickworth understood Jones to be an agent of and to represent, NM, but not Citibank, in connection with the transaction.

19.       Peter John Quaife and Gail Christine Quaife

978               Michael Dunn, a friend of Quaife, introduced Quaife to Kelly and about a year later advised Quaife to telephone Kelly about “an investment program¼known as a negative gearing investment”.  Quaife thought Mr Dunn, who worked in Kelly’s office, arranged Quaife’s first appointment at Kelly’s office.

979               In his affidavit Quaife testified that he believed Kelly had represented Citibank and that Kelly had said he was an agent for Citibank.  But his cross-examination on the matter was as follows:

“Q. But you did understand him [Kelly] to be a National Mutual because he told you that he was?

A. Yes.

Q. And you understood him to be working in some way with National Mutual; is that right?

A. Yes.

Q. Either on a salary or on a commission?

A. Either way.  I didn’t know

¼

Q. But the only possible source of income of which you were aware was National Mutual?

A. Okay, yes.

Q. That would be right?

A. Yes.

Q. For example, you didn't think he was working for other insurance companies?

A. No.

Q. Or for any bank?

A. Until Lance said to me about the loan from Citibank –

Q. Yes?

A. I guessed he was working for him [sic – it] then, because he told me there would be no problems in getting a loan.

Q. That is the full extent to which he referred to Citibank, that he thought there would be no problems in getting a loan?

A. He didn't think. He said there would be no problems in getting a loan.

Q. But beyond that, there was nothing he said to you to indicate any relationship he might have with any bank?

A. He said to me, `There will be no problem in getting a loan from Citibank because I am an agent' - I am fairly certain he said `I'm an agent for Citibank' - a loans officer, or something.

Q. Pardon?

A. Or it could have been a loans officer for Citibank.

Q. You have just said, first of all, that he told you that there would be no problem about the loan?

A. That's right.

Q. You can remember him saying that, if I understand you?

A. Yes.

Q. And then you are not sure, is this right, whether he said anything more than that at all, or you're not sure?

A. I'm not sure, no.

Q. But you think he may have said more than that?

A. That’s right.

Q. And then, if he did say more than that, is this right, you are not sure what more he may have said, whether he referred to a loans officer or an agent; is that correct?

A. That's correct.”

 

980               The unsatisfactory nature of Quaife’s testimony on the matter may be explained by the fact that he was in a serious car accident when he was seventeen years old and (he agreed) had a poor memory.

981               Quaife also agreed in cross-examination that he had understood Citibank’s role in the scheme to be merely that of a lender:

“Q. So would it be right to say this, that the role of Citibank as you understood it in this transaction, was as a lender only?

A. Yes.

Q. And it was lending on the security of your house $90,400?

A. Yes.

Q. $55,000 of which would go to the earlier mortgagee and the rest was up to you to do with as you wished?

A. Yes.

Q. And it was not your belief that Citibank was in any way supervising, or even aware of, what you were doing with the rest of the money?

A. That’s correct.”

 

982               Quaife understood Kelly to be a NM agent.  Before entering the scheme Quaife had a mortgage with the National Mutual Royal Bank (not organised by Kelly) and this fact gave rise to the following cross-examination:

“Q. When you decided to go into the Citibank transaction, was it any matter of comment between you and Kelly that the bank that you were leaving in order to go to Citibank was the National Mutual Royal Bank?

A. No.

Q. In other words, did you understand him to be a National Mutual agent?

A. I did then, yes.

Q. And did you understand the National Mutual Royal Bank to have some connection with National Mutual?

A. No.

Q. You didn’t?

A. No.”(my emphasis)

 

983               Quaife could not recall seeing any awards on the walls of Kelly’s office, the details of Kelly’s business card or Kelly’s having mentioned anything about his position in NM.  However, he recalled Kelly stating that he was a NM agent.  I find that Quaife understood Kelly to be a NM agent.

984               Quaife also understood that Kelly was in a position to assure him that there would be no difficulty in his obtaining a loan from Citibank.  I am not satisfied, however, that Kelly said anything about his being an “agent” or “loans officer” of Citibank.  Quaife’s testimony on the issue was unsatisfactory.  At the time of Kelly’s conversation with Quaife, LKFM had not been appointed an agent of Citibank.  It is unlikely that Kelly would have said he was an “agent” or a “loans officer” when he was neither.  Kelly may have said things that gave Quaife to understand that he was in a position to process that application or to know it would be successful.  Even if Kelly said that he was an “agent” or “loans officer” of Citibank and on that basis appeared to Quaife to hold some such position, they were a statement and an appearance for which Citibank was not responsible, since Kelly lacked any actual authority from Citibank at the time: Crabtree-Vickers.

20.       Peter James Richards and Beverley Anne Richards

985               In early 1988, Ken Courtney, a fellow employee at Coca Cola, recommended that Richards go and see Kelly for financial advice.  The Richards went to see Kelly at his home (later they were to meet in Kelly’s office at Cheltenham).  The presentation given by Kelly on that occasion did not concern the Package, but instead, the Richards’ taking out insurance with NMLA and obtaining finance from RESI Statewide Building Society in order to purchase an investment property.  In April 1989 Richards resigned from Coca Cola and commenced work with Leigh-Mardon Pty Ltd where he earned significantly less than he had during his employment with Coca Cola.  Soon after resigning from Coca Cola, Richards organised a meeting with Kelly as he (Richards) was concerned about meeting payments on the insurance policies and RESI loan.  It was on that occasion that the Richards were introduced to Blee and to the Package.

986               Like Eberts, Richards stated in his affidavit that he knew that Kelly and Blee were NM agents and believed that Blee “also represented Citibank”:

“I knew L Kelly and A Blee were National Mutual agents.  When A Blee explained the Negative Gearing Investment to me¼including the need to obtain a Citibank Mortgage Power Loan, and gave me the Citibank form ¼ I believed he also represented Citibank.  I had never previously heard of Citibank.”

 

987               In cross-examination, Richards could not recollect Blee saying anything about his relationship with Citibank and could recall only that his understanding at the time was that the “package was set up”.  Although Richards did not specify the nature of the relationship between Kelly and Citibank that he believed existed, he came to understand as his dealings with Kelly progressed “that Citibank was involved”:

“Q. The only company that you ever believed Mr Kelly represented was ¼ National Mutual; isn’t that right?

A. At the outset yes.

Q. Pardon?

A. At the start, yes.

Q. What do you mean ‘at the start’?

A. Well, it seemed to become clear further down the track that Citibank was involved.

Q. Citibank was involved with what?

A. This other scheme that- what is his name –

Q. Blee?

A. Exactly.

Q. But at the moment I was asking about Mr Kelly, not Mr Blee, you see.  You never knew of any association between Mr Kelly and any other company than National Mutual?

A. That's right.

Q. I think you told us that you had been told even before you met Mr Kelly by your workmate that he was an agent for National Mutual, isn't that right?

A. No.  I think from memory he said he was a financial adviser.

Q. No, but didn't you tell me that you had been told that he was a National Mutual agent even before you met him? You told me that today, didn't you, at the hearing today?

A. That became clear at that first meeting.”

988               In cross-examination, senior counsel for Citibank attempted to have Richards accept that there was a similarity between his perception of Kelly as an “introducer” for the RESI Statewide Building Society in relation to an earlier purchase of property by the Richards, and Kelly's role in promoting his Negative Gearing Package.  His testimony in cross-examination as a whole again suggests that Richards believed there was some relationship, albeit unidentified, between Citibank and Blee:

“Q. What did Mr Kelly have to do with RESI Statewide, as far as you understood it?

A. Purely as an introduction, I would say.

Q. And that was your belief in 1988?

A. Yes.

Q. You didn’t think he was in any way part of the RESI Statewide Building Society, did you?

A. Not to my knowledge.

Q. No.  And the fact that he had a loan application form for you to fill out did not make you think that he had something to do with the RESI Statewide Building Society?

A. No.

Q. Is this right, because the mere fact that somebody might have forms for a financial institution didn’t mean to you that that person was in some way related to that financial institution?

A. Didn’t enter my head.”

The cross-examiner took up the matter again:

“[D]o you remember telling me that, in effect, the fact that Kelly produced to you an application form from RESI Statewide did not suggest to you that Kelly had any particular relationship with RESI Statewide other than that introduction.  You remember telling me that?

A. That's right.

Q. And when, later in 1989, either Penny Van Minnen or Mr Blee produced this form of document, the Citibank Mortgage Finance Proposal, I suggest to you that similarly that would not have suggested to you that there was any particular relationship between Van Minnen and Citibank or Blee and Citibank?

A. I do not know.

Q. You don't know.  You didn't know what their relationship may have been with Citibank?

A. Not really.  I just presumed it was part of their - of the whole business.

Q. You say 'presumed it was part of the whole business'.  That is what you presumed the previous year when you signed the form for the RESI Statewide, isn't it?

A. Well, it is a normal course of events when you are taking a mortgage out.

Q. But it didn't occur to you the previous year that the fact that Kelly had the form for RESI Statewide meant that Kelly was associated with RESI Statewide himself, did it?

A. I do not know this.

Q. No.  And, similarly, in 1989, when Van Minnen or Blee produced this form to you, that didn't satisfy you that there was any particular relationship between Citibank and them, did it?

A. Well, I presumed there was some sort of an agreement.

Q. But you didn't presume it the previous year when Mr Kelly showed you a form from RESI Statewide, did you, or did you?

A. I presumed it was just a normal thing.  Whether he was acting as an agent for RESI Statewide, I do not know.

Q. And similarly, whether Mr Blee or Penny Van Minnen were acting as an agent for Citibank you don't know either?

A. That's right.” (my emphasis)

989               It was Richards’ belief that Kelly and Blee would receive commissions from Citibank in relation to his Mortgage Power application.  When Richards read in the newspaper that Kelly had been banned by the ASC from operating as an investment adviser, it was to NM and not to Citibank that he wrote.

990               Richards’ testimony in cross-examination as to the relationship between Kelly and NM was as follows:

“Q. ¼I suppose you read in the paper that he had been a National Mutual agent; would that be right?

A. I was always led to believe he was a National Mutual agent, even from when I was told about him from the chap at work.

Q. So he told you when you met him that he was a National Mutual agent?

A. Mmm.

Q. The chap at work?

A. [The witness nods]

Q. And you never had any other belief about him?

A. No, no.  He had a business card, from memory, that had National Mutual written on it.

Q. Do you remember seeing that, do you?

A. Yes, I do.”

991               Richards said he was under the impression that Blee was also a NM agentas he (Blee) sat in on Kelly’s initial presentation to the Richards that lasted until about 3 am, in, he thought, 1988: see [985] above.

992               Richards believed Kelly and Blee to be NM agents, but I am not persuaded that he understood either of them to be similarly an agent of Citibank authorised to speak for it or on its behalf in selling Mortgage Power, as distinct from a mere, perhaps regular, introducer of business, and, as such, familiar with Citibank’s forms and requirements.  I am not dissuaded from this view by Richards’ testimony that he assumed that Kelly and Blee would receive commissions from Citibank.

21.       Dominic Tavoletti and Melina Tavoletti

993               Tavoletti met Jones through friends who had bought insurance policies through him.  Jones attended the Tavolettis’ wedding.  Tavoletti stated in his affidavit:

“We regarded [Jones] as our insurance agent as well as a casual friend.  He would visit our home socially on occasions such as Christmas.”

In mid 1989 Jones called on the Tavolettis at their home and told them he had “a really great scheme”.  The Tavolettis called on Jones at his office by arrangement to hear more not long afterwards.

994               Tavoletti stated in his affidavit that he believed Jones was a NM agent who had an arrangement with Citibank to get loans approved.  According to Tavoletti, Jones “presented the Citibank line of credit as part of the scheme” and “there was no option as to whether you took it out or not.”

995               The Tavolettis engaged Hocking to complain on their behalf to NM.  A letter by Hocking to McDonald of NM made the usual allegation that Jones had failed to disclose any “commercial or ‘agent’ relationships [where they existed] with Citibank and/or other parties”.  In cross-examination on this matter, however, Tavoletti stated unequivocally that he had not believed that Jones had a relationship with Citibank, and that at the time of engaging Mr Hocking he had had no knowledge of any relationship between Jones and Citibank.

996               The Tavolettis’ understanding was that Jones was a NM agent, but not an agent of Citibank authorised to speak for it or on its behalf in selling Mortgage Power.

22.       David Bruce Weaver

997               Weaver’s friend, Ian Peterkin, who had already met Kelly and had attended one or two presentations of the Package, suggested Weaver accompany him to a presentation of the Package at Jones’ office at Manly.  Weaver did so.

998               In his affidavit, Weaver said he believed Kelly had “some relationship with Citibank which meant he was in a position to get the loan approved”.  Citibank was the only bank mentioned by Kelly, and Weaver understood Citibank to be the element which instigated the whole scheme.  No doubt Weaver meant by this that it was the borrowing from Citibank which, by enabling acquisition of the initial units, provided the “springboard” for Kelly’s Package as a whole.

999               Weaver was not cross-examined as to his understanding of Kelly’s and Jones’ relationship with Citibank.

1000            Weaver stated in his affidavit that he knew Kelly to be a NM agent and gave oral evidence that he thought Kelly was “working for [NM]”.

1001            Weaver’s Claim Assessment Report records that he acted on Kelly’s and Jones’ recommendations, as:

“Adviser was trusted, because of National Mutual backing, National office, managers of branch, top performers.”

1002            In cross-examination, Weaver elaborated on this evidence as follows:

“Q. This answer of the assessor’s [Geoffrey Wall’s] seem[s] to be that the adviser was trusted because of National Mutual backing National office?

A. True.

Q. Is that Mr Kelly?

A. Mr Kelly and Mr Jones.  I think they were in the round table or something. They were both recognised as top performers.

Q. Did they tell you that? Did one of them tell you that?

A. Yeah.  I remember seeing a certificate or, you know.

Q. You saw a certificate on the wall, did you?

A. Yeah, something like that.

Q. Did that give you some confidence in what you were being told?

A. I think so.”

1003            According to his claim assessment report, Weaver also stated:

“…cannot understand why this was allowed to go on by National Mutual, nor why National Mutual had not stopped the reinvestment of income.”

 

1004            In my view, Weaver believed, when dealing with them, that Jones and Kelly were acting for and on behalf of NM, not Citibank.

23.       Barry Philip West and Jacqueline Anne West

1005            In his affidavit, West stated that a NMLA agent named Blakelock came to Qantas in about 1987 “selling insurance policies/investment plans” to Qantas employees.  As a result, the Wests bought “Flexible Security Plans” for West, his wife and their three children.  Later, Mr Blakelock telephoned West about a “magic plan” he had.  It was arranged that West would meet Mr Blakelock and Jones at Jones’ office in Manly.

1006            West’s affidavit states that West knew Jones was a NM agent and that

“When [Jones] explained the Negative Gearing Investment … including the need to obtain a Citibank Mortgage Power Loan, [and gave him the Mortgage Finance Proposal] [West] believed [Jones] knew people at Citibank who could arrange the finance, and that Citibank was an integral part of the plan.”

West was cross-examined on this testimony as follows:

“Q. There are some other paragraphs in your affidavit I wish to take you to.  Under the heading ‘Citibank’, there is a paragraph 27, page 8 [the reference is to the testimony referred to above]. Would you mind going to that please.  A little earlier today I asked you some more detailed questions about that matter, but, Mr West, the first sentence is:

‘I knew D Jones was a National Mutual agent.’

There is no doubt about that; you did?

A. That's right, that's true.

Q. And he was, in effect, dealing with you throughout, as your understanding, as a National Mutual agent?

A. That's correct.

Q. The second sentence is the basis upon which you have signed an affidavit, including the second sentence, that, first, he explained to you that this Citibank mortgage power mortgage was available only to National Mutual clients who were going into the negative gearing investment, and he was able to arrange that for you because he was a National Mutual agent?

A. That is the impression I got.

Q. That is the impression you got and it was because you believed those things that you were prepared to sign the affidavit saying what the second sentence of paragraph 27 says; is that correct?  That was your basis of being prepared to say what was in paragraph 27?

A. I didn't know it was a mortgage power loan until it was approved.

Q. No?

A. He just said, 'We can get funds from Citibank' - 'we' - that is all he said.

Q. We, National Mutual –

A. He didn't say National Mutual.  He said 'we'.”

1007            In cross-examination, West said Jones told him that he was a NM agent:

“Q. Did Jones tell you that he was a commissioned agent?

A. Only for National Mutual.

Q But did he tell you that he was a commissioned agent or did he just say he was an agent for National Mutual?

A. He just said he was a National Mutual agent.”

1008            A letter from Hocking to McDonald of NM in relation to West’s settlement with NM made the common allegation, previously referred to, of a failure by Jones to disclose “any commercial or ‘agent’ relationships [where such existed] with [NM], Citibank and/or other parties”.  West’s cross-examination in relation to this allegationmerely revealed that he believed there was some relationship between Citibank and Jones, as Jones had given him the impression that only he (Jones) could arrange the Citibank loan and that it was not available to the general public:

“Q … If I understand what you have said, you did understand that he was a National Mutual Agent?

A. I did.

Q. But you did not understand, do I take it, that there was any commercial or agent relationship with Citibank?

A. How he put that was, when I found out it was a mortgage power [facility], anyone can get them.  That wasn’t told to me at all these meetings.  He was the only one who could secure the loan from Citibank.  No mention of Mortgage Power.  He said it was done between Citibank and National Mutual as a special deal, ‘only I can do it’, or words to that effect.”

and:

“Q. The way in which he explained to you that he was able to do that was because of his connection with National Mutual; is that right?

A. That’s correct.

Q. National Mutual he was saying, had this special deal with Citibank, and he as a National Mutual agent was able to introduce you to it?

A. That’s correct.” (my emphasis)

1009            Of course the true position was that anyone could apply for a Mortgage Power facility and that there was no “special deal” between NM and Citibank at all.  In so far as Jones gave West the impression that it was only through him or NM that he (West) could access Mortgage Power, he misled West. 

1010            West agreed he was not aware of having made a claim against Citibank similar to the one he made against NM, and he in fact still retained the Mortgage Power facility after settling with NM.

1011            In West’s case, according to the Pleading, “Citibank rang the Investor and said the loan was approved and to contact Jones”.  West’s affidavit testimony was that shortly after he and his wife received Citibank’s letter of offer dated 2 November 1989, he received a telephone call as follows:

“My name is Cathy.  I’m from Citibank.  Your loan has been approved.  I suggest you contact DennisJones.”

1012            West maintained in cross-examination that he had indeed received a phone call from “Cathy” at Citibank  informing him that his loan had been approved and that a letter was on the way to him, and asking him to let Jones know.  He also maintained he had been directed by Jones to speak only to Cathy if he ever rang Citibank.  In fact, however, West had only the one conversation with Cathy.  It was put to West in cross-examination that Citibank had not been able to identify a “Cathy”, but West adhered to his testimony on the matter.

1013            The first observation to be made is that the conversation in question is one that post-dated any conduct that induced West to apply for the Mortgage Power facility.  Indeed, it occurred after Citibank had decided to grant the facility.  In my view, the evidence is equally consistent with Jones’ being NM’s agent or a non-agent independent introducer, as with his being a representative of Citibank.  (Citibank’s TQC Mortgage Checklist referred to the “Agent” as Kelly, Agent No 2524885018, and to the purpose of the loan as being to pay out an existing mortgage and to invest in NM Property Trusts “with Lance Kelly”, while other documents referred to Kelly as the “introducer” of the Wests.)  I do not think that the telephone call constitutes evidence that Citibank had previously authorised Jones to act as its representative or for it or on its behalf in promoting and selling Mortgage Power.  Citibank understood that Jones was West’s financial adviser and that, as such, Jones had introduced him to Citibank.  In that context a suggestion by Citibank that West contact Jones did not point to Jones’ being an agent of Citibank.

1014            West believed that Jones was a NM agent but I do not think he believed that Jones was authorised by Citibank to represent it or to act for it or on its behalf in selling Mortgage Power to him.  West did believe, on the basis of Jones’ statement, that the Package was a special NM-Citibank arrangement which he could access through NM, but that is a different matter.  He dealt with Jones on the footing that he was an agent of NM, not of Citibank.

Conclusion

1015            My findings based on the evidence to which I have referred in this chapter can be summarised as follows:

Investor	Adviser	Did Investor understand Adviser to be acting as selling agent of NM in transaction?	Did Investor understand Adviser to be acting as selling agent of Citibank in transaction?
Alder	Jones, Roberts	Yes	No
Appelman	Kelly	Yes	No
Bachmann	Buttars, Blee	Yes	No
Boulter	Kelly	Yes	No
Crawford	Jones	Yes	No
Daniels	Naughton, Kelly	Yes	Yes
Douglass	Blee, Jones	Yes	No
Eberts	Kelly	No	No
Emery	Kelly	Yes	No
Farrar	Kirby	No	No
Fraser-Bell	Jones	Yes	No
Garden	Jones	Yes	No
Jorgensen	Bahr	Yes	No
Lorenz	Jones, Kelly	Yes	No
Lowe	Jones	Yes	No
Minichini	Jones	Yes	No
Parsons	Wass, Jones, Kelly	Yes	No
Pickworth	Jones	Yes	No
Quaife	Kelly	Yes	No
Richards	Kelly, Blee	Yes	No
Tavoletti	Jones	Yes	No
Weaver	Kelly, Jones	Yes	No
West	Jones	Yes	No

1016            NM held out all the Advisers as its agents with authority to sell its products, including insurance products, and, more importantly for present purposes, its investment products, such as units in the Property Trust and in the NM Equity Imputation Fund.  All the Investors, except Eberts and Farrar, believed that the Advisers with whom they respectively dealt were NM agents with authority from NM to represent it and to act for it and on its behalf in selling those products, and that they were acting in that capacity when presenting the Package to them.

1017            Except in the case of Daniels, Citibank did not hold out any of the Advisers to the Investors as its agents or representatives with its authority to sell Mortgage Power for it or on its behalf.  None of the Investors except Daniels believed that the Adviser with whom they dealt was a Citibank agent or representative with such authority.  Generally speaking, the Investors thought that the Advisers were in a position in relation to Citibank which enabled them to be confident that their (the Investors’) applications for Mortgage Power finance would be approved.  However, they could only speculate as to what the relationship, if any, between the Advisers and Citibank might be that placed the Advisers in that position.  The confidence to which I referred was consistent with mere familiarity, based on past experience with Citibank’s practices, policies and requirements in relation to Mortgage Power borrowings.  Even if an Adviser did appear to an Investor to be an agent for Citibank, Citibank was not, except in the case of Daniels, responsible for that appearance: in particular, the supply of its stationery was not a relevant holding out of an Adviser as its agent to sell Mortgage Power.

1018            In so far as apparent authority may be relevant in the present context of vicarious liability in tort, there is no scope, except in the case of Daniels, for basing a vicarious liability of Citibank on the Advisers’ having had operative apparent authority from Citibank.  And even as to Daniels, the apparent authority in question is no wider than an apparent authority to promote and sell Mortgage Power, but, as decided elsewhere, the statements complained of lie outside the class or scope of statements authorised by an appointment of an agent to promote and sell Mortgage Power.