FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Ostrava Equities Pty Ltd [2015] FCA 425

THE COURT ORDERS THAT:

1.    Orders 10 and 11 of the Orders made on 17 April 2015 and extended on 21 April 2015 and 4 May 2015 be discharged.

2.    The Plaintiff have leave to file and serve a Further Amended Originating Process to include an application for an order made under section 1323(1)(h) of the Corporations Act 2001 (Cth).

3.    Any further affidavits upon which the Plaintiff seeks to rely to be filed and served at by 18 May 2015 at 12.00pm.

4.    Any further affidavits upon which the Defendants seek to rely to be filed served by 25 May 2015 at 10.00am.

5.    The proceeding be adjourned for further hearing on 26 May 2015 at 10.15am.

6.    Costs be reserved.

7.    The parties have liberty to apply at any time to vary or discharge this order or so much of it as affects the party.

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

IF YOU:

(A)    REFUSE OR NEGLECT TO DO ANY ACT WITHIN THE TIME SPECIFIED IN THIS ORDER FOR THE DOING OF THE ACT; OR

(B)    DISOBEY THE ORDER BY DOING AN ACT WHICH THE ORDER REQUIRES YOU TO ABSTAIN FROM DOING,

YOU WILL BE LIABLE TO IMPRISONMENT, SEQUESTRATION OF PROPERTY OR OTHER PUNISHMENT.

ANY OTHER PERSON WHO KNOWS OF THIS ORDER AND DOES ANYTHING WHICH HELPS OR PERMITS YOU TO BREACH THE TERMS OF THIS ORDER MAY BE SIMILARLY PUNISHED.

THE COURT ORDERS THAT:

1.    Subject to the next paragraph, this order has effect up to and including Tuesday 26 May 2015 at 5.00pm or until further order.

2.    Anyone served with or notified of this order may apply to the Court at any time to vary or discharge this order or so much of it as affects the person served or notified.

Travel restriction

3.    The fourth defendant, Vanessa Maria Ash, be restrained from leaving Australia without the consent of the Court until 26 May 2015 at 5.00pm or until further order.

4.    The fifth defendant, Bradley John Grimm, be restrained from leaving Australia without the consent of the Court until 26 May 2015 at 5.00pm or until further order.

5.    Neither the Fourth or Fifth Defendant may apply for the issue of any passport.

Notification order

6.    The Plaintiff have leave to give to The Australian Customs and Border Protection Service notice of the making of this order by giving a copy of the order to a person apparently in the employ of that entity or person.

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

REASONS FOR JUDGMENT

1    The first, second and third defendants are part of the Ostrava group of companies which was established by the fifth defendant (“Mr Grimm”). The first defendant (“Ostrava Equities”) is a corporate authorised representative of Marigold Falconer International Ltd, which is the holder of an Australian financial services licence. Ostrava Equities provides financial services in relation to self-managed superannuation funds established by its clients. The third defendant (“Ostrava Securities”) holds an Australian financial services licence and is authorised to provide retail and wholesale clients with general product advice for, and to deal in a financial products by applying for, acquiring, varying or disposing of the financial products on behalf of another person in respect of the following classes of products: deposit and payment products limited to basic deposit products, and interests in managed investments schemes including investor directed portfolio services and securities. Ostrava Securities has three authorised representatives, being the fourth defendant (“Ms Ash”), Mr Grimm and Ostrava Equities.

2    In 2014, the Australian Securities and Investments Commission (“ASIC”) undertook surveillance activities in relation to Ostrava Equities. On 9 April 2015, ASIC commenced a formal investigation (“the investigation”) pursuant to s 13 of the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act”) into:

(a)    suspected unauthorised withdrawal and misappropriation of funds from bank accounts of clients of Ostrava Equities in contravention of the Corporations Act 2001 (Cth) (“the Corporations Act”): s 1041G (dishonest conduct) and s 1041H (misleading and deceptive conduct); the ASIC Act: s 12DA (misleading and deceptive conduct) and s 12DB (false and misleading representations); and/or the Crimes Act 1958 (Vic): s 74 (theft), s 82(1) (obtaining financial advantage by deception), and s 84(1) (liability of company officers for certain offences by a company); and

(b)    advice given by Mr Grimm to clients of Ostrava Equities in suspected contravention of the Corporations Act: s 946A (the obligation to give clients a statement of advice); s 961B (failure to act in the best interests of clients); s 945A (requirement to have a reasonable basis for advice) (before its repeal); s 961G (requirement that advice must be appropriate to the client); and s 961J (requirement to give priority to clients' interests) of the Corporations Act.

3    On 17 April 2015, ASIC made an ex parte application to the Court for orders under s 1323 of the Corporations Act requiring Mr Grimm and Ms Ash to deliver up their passports to the Court, prohibiting Ms Ash and Mr Grimm from leaving Australia without the consent of the Court and orders restraining the defendants from dealing with their assets. Elaine Anne Wilson (“Ms Wilson”), the project manager at ASIC with the day-to-day carriage of the investigation, swore an affidavit in which she deposed that the need for the orders was ASIC’s concern that:

(a)    Ms Ash and/or Mr Grimm may have, in the course of carrying on a financial services business, engaged in dishonest conduct by using client monies for unauthorised purposes and by charging fictitious or excessive fees to their clients and providing false justifications for the imposition of those fees;

(b)    by using funds for improper purposes, Ms Ash and/or Mr Grimm may have failed to discharge their duties and act in the best interest of their clients, or improperly used their position to gain an advantage for themselves or others;

(c)    Ostrava Equities may have breached its obligations as a corporate authorised representative and failed to act in the best interests of its clients;

(d)    client monies which may have already been removed from client accounts have been, and may continue to be, dissipated by Ms Ash and/or Mr Grimm;

(e)    Ms Ash’s sister (who is involved in various disputes with Ms Ash) had recently alleged that there is a risk of Ms Ash and Mr Grimm leaving Australia; and

(f)    due to Ms Ash being a previous longstanding employee of ASIC, she considered that Ms Ash would have an intimate knowledge and understanding of ASIC’s investigatory process and was concerned that Ms Ash and Mr Grimm may not remain in Australia once they learnt of ASIC’s investigation.

4    Ms Wilson’s affidavit set out the basis upon which those concerns were said to be based. The evidence included the transfer between 1 July and 10 September 2014 of nearly $2 million offshore from the bank account of a company called Bitcoin Pty Ltd (“Bitcoin”), with which Ms Ash and Ostrava Securities are associated, to a company called Bitstamp Ltd. The historical ASIC company extract for Bitcoin dated 15 April 2015 showed that Ms Ash was a director of Bitcoin between 12 March 2014 and 25 March 2015, and that Bitcoin’s registered office and principle place of business was c/- Ostrava Asset Management Pty Ltd. The extract also records that Ostrava Securities holds 10% of the shares in Bitcoin.

5    The Court made the orders sought on an interim basis pursuant to s 1323 (3) of the Corporations Act and the further hearing of the application was made returnable on 21 April 2015. On 21 April 2015 the defendants appeared represented by counsel. On that day, the orders were further extended to 4 May 2015 and orders were made for the filing of affidavits by the parties. Pursuant to the orders made, several affidavits were filed by and on behalf of the defendants on 29 and 30 April 2015 and on 1 May 2015. On 1 May 2015, ASIC sought the consent of the defendants to an adjournment of the hearing of the application for a period of two weeks and for an extension of the orders for another two weeks to enable opportunity to respond to the defendants’ affidavits. The defendants did not give their consent and indicated that they would oppose any adjournment. When the matter came on for hearing on 4 May 2015, ASIC applied for a two week adjournment and the extension of the orders for that period, supporting that application by a further affidavit sworn by Ms Wilson. The defendants opposed the adjournment of the hearing and the extension of the orders, contending that the orders should be discharged. The defendants also objected to the admission of Ms Wilson’s further affidavit on the basis that it is oppressive, prejudicial, argumentative and contains statements of Ms Wilson’s belief that are matters for expert opinion which she is not qualified to express. I rejected the objection to the admission of the affidavit and also rejected the objections to two specific paragraphs in the affidavit, stating that I would give my reasons later due to time constraints with the hearing of the application.

6    In short compass, it was contended for the defendants that the orders restraining the defendants from dealing with their assets were made without power or, if made within power, that the orders should be discharged for discretionary reasons. It was also contended that the evidence showed that Ms Ash and Mr Grimm were not a flight risk and that the travel restriction orders should also be discharged.

SECTION 1323 OF THE CORPORATIONS ACT

7    Section 1323(1) of the Corporations Act relevantly provides as follows:

(1) Where:

(a)    an investigation is being carried out under the ASIC Act or this Act in relation to an act or omission by a person, being an act or omission that constitutes or may constitute a contravention of this Act; or

(b)    a prosecution has been begun against a person for a contravention of this Act; or

(c)    a civil proceeding has been begun against a person under this Act;

and the Court considers it necessary or desirable to do so for the purpose of protecting the interests of a person (in this section called an aggrieved person) to whom the person referred to in paragraph (a), (b) or (c), as the case may be, (in this section called the relevant person ), is liable, or may be or become liable, to pay money, whether in respect of a debt, by way of damages or compensation or otherwise, or to account for financial products or other property, the Court may, on application by ASIC or by an aggrieved person, make one or more of the following orders:

(d)        …

(e)    an order prohibiting a person holding money, financial products or other property, on behalf of the relevant person, or on behalf of an associate of the relevant person, from paying all or any of the money, or transferring, or otherwise parting with possession of, the financial products or other property, to, or to another person at the direction or request of, the person on whose behalf the money, financial products or other property, is or are held;

(f)        …

(g)    an order prohibiting the taking, sending or transfer by a person of financial products or other property of the relevant person, or of an associate of the relevant person;

i.    from a place in this jurisdiction to a place outside this jurisdiction (including the transfer of financial products from a register in this jurisdiction to a register outside this jurisdiction); or

ii.    from a place in Australia to a place outside Australia (including the transfer of financial products from a register in Australia to a register outside Australia);

(h)        an order appointing:

i.    if the relevant person is a natural person – a receiver or trustee, having such powers as the Court orders, of the property or of part of the property of that person; or

ii.    if the relevant person is a body corporate – a receiver or receiver and manager, having such powers as the Court orders, of the property or of part of the property of that person;

(i)    …

(j)    if the person is a natural person – an order requiring that person to deliver up to the Court his or her passport and such other documents as the Court thinks fit;

(k)    if the relevant person is a natural person – an order prohibiting that person from leaving this jurisdiction, or Australia, without the consent of the Court.

8    Section 1323(3) makes provision for the granting of interim orders before considering an application. The section provides as follows:

(3)    Where an application is made to the Court for an order under subsection (1), the Court may, if in the opinion of the Court it is desirable to do so, before considering the application, grant an interim order, being an order of the kind applied for that is expressed to have effect pending the determination of the application.

PRINCIPLES GOVERNING THE APPLICATION OF SECTION 1323

9    The section has been the subject of considerable judicial examination. The applicable principles were helpfully set out in Australian Securities and Investments Commission v Carey (No 3) (2006) 232 ALR 577; [2006] FCA 433. At [25]-[27], French J (as His Honour then was) stated as follows:

The orders that can be made under the section are directed, inter alia, to the preservation of assets against which recovery may be sought in the event that liability to an 'aggrieved person' is established on the part of a 'relevant person'. The orders are made in circumstances where 'an investigation is being carried out', 'a prosecution has been begun' or 'a civil proceeding has been begun'. That is to say the orders can be made before liability is established and indeed before the evidence necessary to establish liability has been collected. While an application under the section is not interlocutory in an existing criminal or civil proceeding, it is interlocutory in a wider sense. It preserves the status quo and the assets of the relevant person pending the outcome of the investigation, prosecution or civil proceedings which are on foot - CAC v Lone Star Exploration NL( No 2) (1988) 14 ACLR 499 at 504. At the stage an order is sought the Court may not be in a position to identify with precision any particular liability owed by the person the subject of the proposed order. This consideration applies to final orders made under the section as well as to interim orders for which it expressly provides in s 1323(3). The final orders made under the section are necessarily of a temporary or holding character rather than finally disposing of the rights and liabilities of the relevant persons affected by them.

The circumstances in which the Court may make orders under s 1323(1) are wide as indicated by the words 'necessary or desirable ... for the purpose of protecting the interests of a person ...'. There is an element of risk assessment and risk management in the judgment the Court is called on to make. It follows, and has been accepted, that there is no requirement on the part of ASIC to demonstrate a prima facie case of liability on the part of the relevant person or that the person's assets have been or are about to be dissipated - Corporate Affairs Commission v ASC Timber Pty Ltd (1989) 7 ACLC 467 at 476 (Powell J); Australian Securities and Investments Commission v Adler (2001) 38 ACSR 266 at [7] (Santow J).

The nature and duration of orders made under s 1323(1) can be fashioned by the Court to reflect its assessment of any risk of dissipation of the assets of a person under investigation. But their legitimate purposes can go further. The interests of aggrieved persons may be protected not only by orders designed to protect dissipation of assets, but also by orders which create an opportunity for the assets of the person under investigation to be ascertained.

One or more of the preconditions in s 1323(1)(a)-(c) must be met before any order can be made and, additionally, the Court must consider that one or more of the specified orders is “necessary or desirable” to protect the interests of “aggrieved persons” to whom the “relevant person” is liable, or may become liable, to pay money. As Santow J in Australian Securities and Investments Commission v Adler (2001) 38 ACSR 266; [2001] NSWSC 451 cautioned at [7], any order the Court makes must “operate in a matter [sic] that is proportionate and not more intrusive than is necessary in the circumstances, recognising that it is inevitable that such orders will intrude upon private rights”.

THE ORDERS RESTRAINING THE DEALING IN ASSETS

10    It is convenient to start with these orders made on an interim basis in view of the defendants’ contention that the Court did not have the power to make those orders. The orders made on the application of ASIC are akin to freezing orders in that they restrain any dealings in the assets of the defendants. In seeking those orders, ASIC relied on the Court’s power under ss 1323(1)(e), (g), (j) and (k) and s 1323(3) but no order was sought under s 1323(1)(h) for the appointment of a receiver to the property of the defendants. The defendants contended that there is no power under s 1323 for the Court to make general freezing orders separate from the power to appoint receivers under s 1323(1)(h). ASIC contended that the Court has the power to make general freezing orders on an interim basis under s 1323(3) but, in case it did not, made application to amend the originating process to include an order under s 1323(1)(h). That application was opposed by the defendants who contended that they would be severely prejudiced as they have not put on affidavit material directed at the potential impact on the Ostrava group of companies and upon Ms Ash and Mr Grimm, if a receiver were to be appointed.

11    For the reasons that follow, I reject ASIC’s contention that the Court had the power to make the freezing orders under s 1323(3) of the Corporations Act. On a consideration of the authorities to which I was directed by counsel for the defendants, I accept the submission for the defendants that the freezing orders were made without power. The cases support the proposition that orders in the nature of freezing orders can only be made once the Court is satisfied that it is necessary or desirable that receivers be appointed to the property of the relevant person with the purpose of protecting the interests of aggrieved persons against the property of the company or individual to which the receivers are to be appointed. In other words, the grounds for the appointment of receivers must be made out and, only if made out, then freezing orders restricting or prohibiting dealings with the relevant property may be made instead of the appointment of a receiver: Australian Securities and Investments Commission v Carey (No 14) (2007) 158 FCR 92 at [33]; Australian Securities and Investments Commission v Burnard (2007) 64 ACSR 360; [2007] NSWSC 1217 at [99]-[100]; Australian Securities and Investments Commission v Krecichwost (2007) 64 ACSR 411; [2007] NSWSC 948 at [34]-[37]; Australian Securities and Investments Commission v Banovec (No 2) (2007) 214 FLR 33; [2007] NSWSC 961. As French J in Australian Securities and Investments Commission v Carey (No 14) (2007) 158 FCR 92 explained at [29]-[33], the jurisdiction that the Court exercises when it entertains an application under s 1323 is a jurisdiction defined in part by the remedies available under that section so that the Court does not, under that section, have the power to make freezing orders against the relevant person in respect of property held by that person. His Honour stated at [33]:

While s 1323 sets out the specific orders which may be made on an application brought under it, it does not, in my opinion, provide an exhaustive code of remedies to the extent that the power to appoint receivers excludes the lesser alternative of orders restricting or prohibiting dealings with the subject property.

Section 23 of the Federal Court of Australia Act does give the Court the power to make a freezing order in lieu of appointing a receiver but the making the freezing order in lieu of appointing a receiver would be an exercise of power under s 23 of the Federal Court of Australia Act 1976 (Cth) in the exercise of the Court’s jurisdiction under s 1323(1)(h): Australian Securities and Investments Commission v Carey (No 14) (2007) 158 FCR 92; ASIC v Oliver Banovec (No 2) (2007) 214 FLR 33.

12    In the present case no order was sought under s 1323(1)(h) and so s 23 of the Federal Court of Australia Act did not confer jurisdiction as an alternative form of order to the appointment of a receiver under s 1323(1)(h). I would therefore discharge the freezing orders which I have concluded were made without power. I do not accept the submission for ASIC that the freezing orders are capable of being made under s 1323(3) as interim orders without the exercise of jurisdiction under s 1323(1)(h), which did not occur here.

application to amend the originating process to include an order under section 1323(1)(h)

13    The next question is whether I should grant leave to ASIC to amend its originating application to include an application for an order under s 1323(1)(h). I do not accept the defendants’ argument that they would be severely prejudiced by the grant of leave. Although the defendants have not had an opportunity to put material before the court in opposition to the appointment of a receiver, I consider that ASIC should have leave to amend its originating application to seek an order under s 1323(1)(h) for the reason that ASIC made it clear that if the Court was satisfied that an order under s 1323(1)(h) should be made, it would contend that the freezing orders should be maintained in lieu of the appointment of a receiver. It is well supported by authority that if the Court is satisfied that an order should be made under s 1323(1)(h) the Court may, in lieu of appointing a receiver, make orders akin to freezing orders: Australian Securities and Investments Commission v Carey (No 14) (2007) 158 FCR 92 at [33]; Australian Securities and Investments Commission v Krecichwost (2007) 64 ACSR 411 at [34]-[37].

the ADJOURNMENT application

14    The next issue is whether I should grant ASIC the two week adjournment of the hearing that it seeks and make fresh freezing orders in the same terms on an interim basis. ASIC seeks the adjournment to enable it to file more detailed and comprehensive affidavits in response to the defendants’ material which was filed late and to have the substantive hearing for s 1323(1)(h) determined on the basis of the further material to be filed.

15    ASIC advanced four primary reasons why it should have a two week adjournment. The first reason is perhaps now otiose as ASIC sought to have the opportunity to put on further material concerning the complaints made by two clients of Ostrava to the Financial Ombudsman Service (“FOS”) about the overcharging of fees and/or withdrawal of fees without authorisation. That material, it appears, has now been set out by Ms Wilson in her second affidavit. Secondly, Ostrava has not produced its client lists or client records which ASIC contends are central to ASIC’s investigations. Ms Wilson gave evidence that a preliminary examination of Mr Grimm under s 19 of the Corporations Act was conducted on 23 April 2015 principally for the purpose of ascertaining where Ostrava’s relevant books and records are located and that Mr Grimm, when asked how he recorded client instructions for investment of their funds, stated that the information is entered electronically and recorded in the IRIS software package used by Ostrava. In consequence, ASIC gave a notice under s 33 of the ASIC Act to Ostrava Equities requiring Ostrava Equities to produce “a forensic image or forensic container of the data contained on the IRIS and/or IRIS IOS system on Ostrava's computer network”. That notice however did not result in the production of the client records and it is necessary for ASIC to give another s 33 notice to obtain the data stored in the remote servers. Thirdly, ASIC referred to a number of inconsistencies in the statements made by Mr Grimm and Ms Ash during their s 19 examinations or with other information that ASIC has obtained about their records and other aspects of their business. Fourthly, Ms Wilson deposed that the further investigations conducted have indicated breaches of s 942B(6A), 942C(6A) and s 946A of the Corporations Act and that ASIC’s basis for suspecting serious contraventions has been strengthened in the light of that material.

16    I consider that it is appropriate to grant an adjournment of the substantive hearing to enable ASIC to file more detailed and comprehensive affidavits in response to the defendants’ evidence before the hearing of the substantive application. The investigation is in the very early stages and concerns very serious suspected contraventions by the defendants. It is to be borne in mind that the application under s 1323(1) is in aid of protecting the interests of potential claimants to whom the defendants may be liable for such contraventions and the orders that can be made under s 1323(1) are directed to the preservation of assets in the event that liability to an “aggrieved person” is established on the part of the defendants. The timetable for the provision of evidence by both parties was short, recognising the impact on the defendants of the orders made. However, ASIC, for the reasons that it has given, requires more time to collate and review the material that it will rely upon in support of its application and in view of the public interest nature of the application, I consider that it should have that additional time.

should new interim freezing ORDERS be made?

17    ASIC sought an extension of the existing orders for two weeks pending the hearing of the substantive application, if an adjournment be granted. As the extant orders were made without power, they must be discharged. The question is whether new interim freezing orders should be made. The seriousness of the matters under investigation provides some cogent support for such orders to be made but ultimately I have concluded, having regard to the state of the evidence that such orders should not presently be made on an interim basis pending hearing on the substantive application as to whether such orders should be made going forward. The justification for such orders on an interim short term basis is a risk of dissipation of assets: Australian Securities and Investments Commission v Adler (2001) 38 ACSR 266 at 268 [7(e)]. In making the ex parte orders there was some evidence before the Court to indicate a risk of dissipation of assets but Ms Ash has since sworn an affidavit in which she has explained the nature of her association with Bitcoin, and set out that the monies transferred by Bitcoin were not monies of the clients of the Ostrava group and that Ostrava did not transfer any of its own money to Bitcoin. Senior Counsel for ASIC accepted that ASIC does not have any evidence to refute Ms Ash’s evidence. The evidence as it presently stands otherwise does not indicate that there is any immediate risk of dissipation of assets within the next two weeks.

TRAVEL RESTRICTION ORDERS

18    I consider that the travel restriction orders should remain in place on an interim basis. Although the evidence does not indicate that either Ms Ash or Mr Grimm might try to leave the country within the next two weeks, ASIC requires the assistance of Ms Ash and Mr Grimm in relation to its continued investigations and it is appropriate that they be available for that purpose.

ADMISSIBILITY OF THE WILSON AFFIDAVIT

19    I indicated during the course of the hearing that I would state my reasons for admitting the Wilson affidavit. As French J in Australian Securities and Investments Commission v Carey (No 3) 232 (2006) 232 ALR 577 observed at [30]-[31], a consideration relevant to the admissibility of affidavit evidence is that s 1323 does not require concluded findings of fact about liability or whether assets have been dissipated. Rather in making orders under s 1323 the Court engages in a risk assessment and management process. His Honour stated:

The logic of the section assumes that the Court will not always have before it evidence of the kind that would be necessary and admissible in proceedings to establish definitively the nature and extent of the assets of the persons under investigation and their liability to aggrieved persons. Nor will it necessarily have before it evidence of the kind that would establish definitively the dissipation of assets has occurred or is likely to occur or that flight is imminent.

The logic of s 1323 requires the Court to be able to act on evidence which might not be admissible in civil or criminal proceedings leading to a definitive determination of the rights and liabilities of the parties. Hearsay evidence may therefore be received and acted upon, not as proof of the truth of its content but as evidence of the existence of the risk or possibility that gives rise to the necessity for or desirability of a protective order ... evidence may be received at the opinion of a suitably qualified person who has had the opportunity to review extensive documentation collected in the course of an investigation and to offer an overview of it for the benefit of the Court. In such a case the opinion or overview should be supported by reference to the relevant documentation and factual material. The opinion is received not for the determination of any ultimate issue of liability but as probative of the risk which the Court must assess in determining whether to make an order under the section.

20    These considerations also apply to Ms Wilson's second affidavit. It does contain evidence in a form that is hearsay and argumentative but in substantial part, the contents of the affidavit are supported by relevant documentation. Paragraph 64, which was specifically objected to, contains a statement of belief by Ms Wilson, which might be regarded as the expression of opinion on a matter requiring expert evidence. However Ms Wilson sets out the basis for her belief in some detail and her belief is “probative of the risk which the Court must assess in determining whether to make an order under the section”. Paragraph 57 was also specifically objected to on the ground that it is prejudicial but the paragraph is not objectionable in form.

Associate:

Dated:    7 May 2015