FEDERAL COURT OF AUSTRALIA

Rikys v Bongiorno Financial Advisers (Aust) Pty Ltd [2009] FCA 1603

CORPORATIONS – representative action – whether the proposed settlement of the proceedings is fair and reasonable

Australian Securities and Investments Commission Act 2001 (Cth), ss 12DA, 50

Corporations Act 2001 (Cth), ss 766B, 917F(5), 945A, 1012A

Federal Court of Australia 1976 (Cth), s 33V

PETER CYRIL RIKYS and NGAIRE GRACE RIKYS v BONGIORNO FINANCIAL ADVISERS (AUST) LTD, YORK STREET MEZZANINE PTY LTD (IN LIQUIDATION) and WESTPOINT CORPORATION PTY LTD (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED)   

VID 1208 of 2007

FRANK BOSNJAK and LEONIE BOSNJAK v BONGIORNO FINANCIAL ADVISERS PTY LTD, YORK STREET MEZZANINE PTY LTD (IN LIQUIDATION) and WESTPOINT CORPORATION PTY LTD (IN LIQUIDATION)

VID 114 of 2008

FINKELSTEIN J

15 DECEMBER 2009

MELBOURNE

UPON the First Respondent and Bongiorno Financial Advisers Pty Ltd ACN

058 918 595 (collectively “Bongiorno”), by their counsel, jointly

undertaking:

1.         To pay the Trustee of The Bacchetto Family Super Fund the sum of $107.00;

2.         To pay Ms Gabrielle Ferguson of PO Box 1490, Strawberry Hills NSW 2012 the sum of $5,000.00, subject to Ms Ferguson agreeing to

THE COURT ORDERS THAT:

1.                  Pursuant to section 50 of the Federal Court of Australia Act 1976 (Cth) (' Act'), the Affidavit of Anna Nadine Skreiner sworn 14 December 2009 ('the Affidavit') and the exhibit to the Affidavit marked “Confidential Exhibit ANS-1” (the Confidential Exhibit), not be published to any person without further order of the Court.

2.                  The Affidavit and the Confidential Exhibit be sealed on the Court file and not be disclosed to any person without further order of the Court.

3.                  The Amended Application dated 22 February 2008 (the 'Amended Application') be further amended to provide that the group members to whom the proceeding relates within the meaning of s 33H of the Act be persons whose name appears in 'Confidential Exhibit MJS3' to the Affidavit of Martin James Stockfeld sworn 23 November 2009 ('Confidential Exhibit MJS-3').

4.                  Pursuant to s 33V of the Act, the Court hereby approves the settlement of this Proceeding in accordance with the terms of the Deed of Settlement dated 23 November 2009.

5.                  ASIC cause a notice in the form of Annexure ‘A’ to these Orders to be sent by pre-paid post to the last known address of each person referred to in the Confidential Exhibit MJS-3 by no later than 22 December 2009.

6.                  The cost of complying with Order 5 be paid by ASIC and then be part of the Applicants' costs in the cause.

7.                  Pursuant to section 33ZF of the Act or otherwise, the Court authorises the Applicant nunc pro tunc on behalf of the group members described in Order 3 to enter into and to give effect to the Deed of Settlement and the transactions thereby contemplated for and on behalf of those group members.

8.                  Pursuant to section 33ZB(a) of the Act, the Court declares that the persons affected and bound by these orders are the Applicant, the Respondent, and the group members who are defined in the Amended Application, as further amended by Order 3.

9.                  The Applicants file an affidavit upon the receipt of the Settlement Sum in accordance with the Deed of Settlement.  Upon the filing of that affidavit:

a.       the Amended Application be dismissed.

b.      all costs orders made to date in the Proceeding be vacated.

c.       there otherwise be no order as to the costs of the Proceeding.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

Annexure 'A' to the Order made [] December 2009

Letter to be sent to group members

«Title»«Given_Name»«Surname»

«Address_Line_1»

«Address_Line_2»

«Street»

«Locality»«State»«PostCode»

Private & Confidential

Dear «Title»«Surname»

WESTPOINT COLLAPSE: The Australian Securities & Investments Commission’s (“ASIC”) class action against Bongiorno Financial Advisers Pty Ltd and Bongiorno Financial Advisers (Aust) Ltd (collectively, "Bongiorno")

Federal Court Proceeding Nos VID 1208 of 2007 and VID 114 of 2008 (the "Proceedings")

1.      This notice relates to two class actions (defined above as the Proceedings), arising out of the Westpoint collapse. This notice is sent to you by order of the Hon Justice Finkelstein made on[] December 2009.

2.      This notice is important and contains information which concerns your legal rights and money that may be paid to you. You should read it carefully. If you do not understand any part of it, please seek independent legal advice in relation to its contents.

3.      On 15 December 2009 the Federal Court of Australia approved the settlement of the Bongiorno Proceedings. The settlement is now binding upon you. Bongiorno has until [INSERT DATE] to pay the Settlement Sum of $2,559,760.

4.      Pursuant to the Settlement, the Settlement Sum is to be distributed to Group Members. The amount you stand to receive pursuant to the Settlement remains unchanged/has changed] since our letter of 27 November 2009. Under the Settlement, as approved by the Court, you will receive [insert amount].

5.      ASIC cannot distribute the Settlement Sum until the expiration of the appeal periods or the finalisation of any appeal that may be filed. ASIC intends to distribute the Settlement Sum in the form of a cheque which will be sent to you by Registered Post. Assuming that no appeal is filed, ASIC intends to distribute the Settlement Sum on [insert date]. If, for any reason, ASIC is unable to distribute the Settlement Sum on [insert date ASIC will inform you in writing as to the delay.

6.      It is advisable that you seek legal advice about this Notice, particularly if you do not understand any part of this document. ASIC is not able to give you legal advice.

7.      If you have any questions regarding the contents of this letter or the settlement generally, please contact Martin Stockfeld (martin.stockeld@asic.gov.au) at ASIC on (03) 9280 3548 or Christina Klemis (christina.klemis@asic.gov.au) on (03) 9280 3575.

UPON the First Respondent and Bongiorno Financial Advisers (Aust ) Ltd ACN 097 861 740  (collectively “Bongiorno”), by their counsel, jointly undertaking:

1.         To pay the Trustee of The Bacchetto Family Super Fund the sum of $107.00;

2.         To pay Ms Gabrielle Ferguson of PO Box 1490, Strawberry Hills NSW 2012 the sum of $5,000.00, subject to Ms Ferguson agreeing to:

a.       assign to Bongiorno any rights she may have against Mr Timothy Harrison (“Assigned Rights”); and

b.      provide such assistance as Bongiorno may reasonably require to enforce the Assigned Rights

THE COURT ORDERS THAT:

1.         Pursuant to section 50 of the Federal Court of Australia Act 1976 (Cth) ('Act'), the Affidavit of Anna Nadine Skreiner sworn 14 December 2009 ('the Affidavit') and the exhibit to the Affidavit marked “Confidential Exhibit ANS-1” (the Confidential Exhibit), not be published to any person without further order of the Court.

2.         The Affidavit and the Confidential Exhibit be sealed on the Court file and not be disclosed to any person without further order of the Court.

3.         The Application dated 25 February 2008 (the Application) be amended to provide that the group members to whom the proceeding relates within the meaning of s 33H of the Act be persons whose name appears in 'Confidential Exhibit MJS3' to the Affidavit of Martin James Stockfeld sworn 23 November 2009 ('Confidential Exhibit MJS-3').

4.         Pursuant to s 33V of the Act, the Court hereby approves the settlement of this Proceeding in accordance with the terms of the Deed of Settlement dated 23 November 2009.

5.         ASIC cause a notice in the form of Annexure ‘A’ to these Orders to be sent by pre-paid post to the last known address of each person referred to in the Confidential Exhibit MJS-3 by no later than 22 December 2009.

6.         The cost of complying with Order 5 be paid by ASIC and then be part of the Applicants' costs in the cause.

7.         Pursuant to section 33ZF of the Act or otherwise, the Court authorises the Applicant nunc pro tunc on behalf of the group members described in Order 3 to enter into and to give effect to the Deed of Settlement and the transactions thereby contemplated for and on behalf of those group members.

8.         Pursuant to section 33ZB(a) of the Act, the Court declares that the persons affected and bound by these orders are the Applicant, the Respondent, and the group members who are defined in the Application, as amended by Order 3

9.         The Applicants file an affidavit upon the receipt of the Settlement Sum in accordance with the Deed of Settlement. Upon the filing of that affidavit:

a.        the Application be dismissed.

b.      all costs orders made to date in the Proceeding be vacated.

c.       there otherwise be no order as to the costs of the Proceeding.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

Annexure 'A' to the Order made [] December 2009

Letter to be sent to group members

«Title»«Given_Name»«Surname»

«Address_Line_1»

«Address_Line_2»

«Street»

«Locality»«State»«PostCode»

Private & Confidential

Dear «Title»«Surname»

WESTPOINT COLLAPSE: The Australian Securities & Investments Commission’s (“ASIC”) class action against Bongiorno Financial Advisers Pty Ltd and Bongiorno Financial Advisers (Aust) Ltd (collectively, "Bongiorno")

Federal Court Proceeding Nos VID 1208 of 2007 and VID 114 of 2008 (the "Proceedings")

1.      This notice relates to two class actions (defined above as the Proceedings), arising out of the Westpoint collapse. This notice is sent to you by order of the Hon Justice Finkelstein made on[] December 2009.

2.      This notice is important and contains information which concerns your legal rights and money that may be paid to you. You should read it carefully. If you do not understand any part of it, please seek independent legal advice in relation to its contents.

3.      On 15 December 2009 the Federal Court of Australia approved the settlement of the Bongiorno Proceedings. The settlement is now binding upon you. Bongiorno has until [INSERT DATE] to pay the Settlement Sum of $2,559,760.

4.      Pursuant to the Settlement, the Settlement Sum is to be distributed to Group Members. The amount you stand to receive pursuant to the Settlement remains unchanged/has changed] since our letter of 27 November 2009. Under the Settlement, as approved by the Court, you will receive [insert amount].

5.      ASIC cannot distribute the Settlement Sum until the expiration of the appeal periods or the finalisation of any appeal that may be filed. ASIC intends to distribute the Settlement Sum in the form of a cheque which will be sent to you by Registered Post. Assuming that no appeal is filed, ASIC intends to distribute the Settlement Sum on [insert date]. If, for any reason, ASIC is unable to distribute the Settlement Sum on [insert date ASIC will inform you in writing as to the delay.

6.      It is advisable that you seek legal advice about this Notice, particularly if you do not understand any part of this document. ASIC is not able to give you legal advice.

If you have any questions regarding the contents of this letter or the settlement generally, please contact Martin Stockfeld (martin.stockeld@asic.gov.au) at ASIC on (03) 9280 3548 or Christina Klemis (christina.klemis@asic.gov.au) on (03) 9280 3575.

REASONS FOR JUDGMENT

1                     Following an investigation into the collapse of the Westpoint group, the Australian Securities and Investments Commission (ASIC), with the consent of the named applicants, commenced two proceedings pursuant to its powers under s 50 of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).  Section 50 permits ASIC to bring proceedings in a person’s name to recover damages caused by misconduct committed in connection with a matter to which an ASIC examination relates.  In the action brought by Peter and Ngaire Rikys, the first respondent is Bongiorno Financial Advisers (Aust) Ltd.  In the other action, which is brought in the name of Frank and Leonie Bosnjak, the first respondent is Bongiorno Financial Advisers Pty Ltd.  The Bongiorno companies had advised clients to invest money in the purchase of promissory notes issued by York Street Mezzanine Pty Ltd (in liq), a company in the failed Westpoint group.  The actions allege that the Bongiorno companies had misconducted themselves in and about the giving of the advice to invest to their clients.  In the event, the investments proved valueless and the actions are maintained to recover the resultant damages.

2                     Each action is a representative action brought under Part IVA of the Federal Court of Australia Act 1976 (Cth).  The named applicants, as well as the members of the group represented in each action, were clients of a Bongiorno company and invested in the promissory notes.  Following protracted negotiations at a mediation conducted by the Honourable Ian Callinan AC QC, these actions, and a number of others that had been instituted following the Westpoint collapse, have been settled.  Being  representative actions, neither can be compromised without court approval by reason of s 33V of the Federal Court of Australia Act.  The parties seek that approval.

3                     The nature of the settlement is complicated and must be explained.  The reason for the complication is that while, in common with the others, each investor purchased a promissory note in York Street Mezzanine and suffered loss when it turned out the promissory notes were worthless, the investors fall into four discrete groups.  This results from events that occurred subsequent to the investments being made. 

4                     Category 1 comprises group members who entered into a deed of release with a Bongiorno company and received a payment directly in relation to their York Street Mezzanine investment in exchange for releasing Bongiorno from liability.  Category 2 are group members who reinvested in York Street Mezzanine on the advice of an unrelated third party and did not enter into a deed of release with a Bongiorno company.  Category 3 are group members who entered into a deed of release with Bongiorno and received a payment in relation to their investment in another syndicate, the Paragon Commercial Syndicate, and not their investment in York Street Mezzanine.  Category 4 are group members who did not enter into a deed of release with a Bongiorno company or an authorised representative of Bongiorno and did not reinvest in York Street Mezzanine under the advice of an unrelated third party.

5                     Turning to the actions themselves, there is considerable overlap in the claims made.  It is sufficient for present purposes to give a brief summary of those claims.  The principal claim is in negligence.  The allegation is that the relevant Bongiorno company failed to properly investigate the risks involved in purchasing the promissory notes and in any case failed to warn that the investment was highly risky.  Having regard to the structure of the schemes established by the Westpoint group, an investment was necessarily a hazardous venture.  Evidence obtained on discovery indicates that the Bongiorno companies were aware of some of the risks involved but nonetheless recommended the product to their clients.  An expert opinion, sought by ASIC, confirms that there was negligence on the part of the Bongiorno companies in many respects.

6                     There is also a claim under s 12DA of the ASIC Act that the Borgionro companies engaged in misleading conduct in advising their clients to invest in York Street Mezzanine notes.  Particulars are given of the allegedly misleading statements made to the group members.  They turn on the appropriateness of the investment and the likely rate of return an investor was entitled to expect.  The problem with this type of claim in a class action is the difficulty of establishing that the representations were in fact made to each group member.  It is particularly difficult when the misleading conduct is based on oral statements. 

7                     There are several other statutory claims.  One is based on s 945A of the Corporations Act 2001 (Cth) which, in effect, provides that an adviser should only provide advice to a client after obtaining information about the client’s personal circumstances and determining that those circumstances make the advice appropriate.

8                     Another statutory claim is that the investment was in an unregistered managed investment scheme which, by reason of s 766B, required a product disclosure statement to be given to investors.  Here the allegation is that the Borgiorno companies, in breach of s 1012A, failed to provide product disclosure statements to their investors. 

9                     The facts that underlie the statutory claim are not in dispute.  The question that arises is whether the contraventions have caused any loss and damage.  That is a difficult issue.

10                  Apart from the usual defences (for the most part denials of wrongdoing) the Bongiorno companies assert that each claim is an apportionable claim and they seek to limit their liability accordingly.  It seems that only the statutory claims  are apportionable. 

11                  Now, an important feature of the claim in relation to group members is, as the categories indicate, that many members have previously settled their claim.  The terms of the compromise were recorded in deeds of release.  There is an issue in those cases whether the deeds are binding.  The applicants allege that by entering into the deeds the Bongiorno companies breached s 917F(5) of the Corporations Act and that, therefore, the deeds are liable to be set aside.  If set aside, any benefits received by an investor pursuant to the settlement may need to be restored.

12                  In view of the potential for harm to a group member if the deeds of release were to be set aside, orders were made to ensure that each group member was given detailed information about the nature of the claims brought on their behalf.  The number of investors is not great and most of them were able to be contacted.  They were also given detailed information about the settlement.  It is likely that each group member has a good understanding of what is proposed and how their rights will be affected.

13                  The proposed settlement involves the establishment of a fund of $2,559,760 which is to be split disproportionately between the categories of investors.  The amount attributed to each category is to be distributed pro rata to the members in that category.  There is a differential distribution of the settlement sum between the four categories because the prospects of success of the members in each category differ,.  The distribution is intended to reflect the different risks faced by members of different categories.

14                  Ms Skreiner, Litigation Counsel in the Chief Legal Office of ASIC, describes how the settlement sum is to be divided: 

15                  In support of the application to approve the settlement Ms Skreiner’s affidavit also explained the background to the litigation and the reasons it is thought that the settlement sum is regarded as a fair and reasonable compromise of the group claims.  Exhibited to her affidavit is advice from senior and junior counsel.  The advice deals with the prospects of success in respect of each head of claim.  Counsel is of the view that the settlement sum is fair and reasonable in the circumstances, having regard to the merits of the claims.

16                  So far I have not mentioned costs.  To this point the actions have been funded by ASIC, no doubt because they have been brought under s 50 of the ASIC Act.  As regards the settlement sum, ASIC has indicated it will forego any right to recover its costs out of that fund.  The result is that group members will recover more, perhaps considerably more, than they otherwise would have out of the settlement sum. 

17                  The principles that govern approval applications under s 33V are so well known they need not be repeated.  The principal factors that warrant the grant of approval of the proposed settlement of these actions, to my mind, are as follows.  First, group members’ claims are not, in aggregate, in a significant sum when compared with the costs of running the cases to judgment.  Second, the amount each group member will recover is a substantial proportion of his loss.  Third, no group member will be required to bear any costs.  Finally, I am influenced by the advice given by counsel explaining the difficulties faced by group members in pursuing their claims. 

18                  For these reasons there will be orders approving the settlement in accordance with the terms of the Deed of Settlement dated 23 November 2009 and ancillary orders as discussed with the parties. 

Associate:

Dated:         15 February 2010