Federal Court of Australia

Australian Securities and Investments Commission v NGS Crypto Pty Ltd [2024] FCA 373

ORDERS

THE COURT NOTES THAT FOR THE PURPOSE OF THESE ORDERS:

Australian Member: includes any person, whether as an individual or a body corporate, based or registered in Australia, who has entered into an agreement (however described) through the Business, to invest in Blockchain Mining.

Books: includes a register, any other record of information, financial reports or financial records however compiled or recorded or stored, a document, papers, records, books of account, ledgers, journals, banking records, computer records, or other documents of any type whatsoever recording or evidencing any dealings of any of the Defendants in relation to the Business.

Blockchain Mining: means the process of verifying or validating blockchain transactions using blockchain technology to secure the network, and includes the following methods:

(a)    ‘Proof of Work’, being a consensus mechanism in which participants on a decentralised network compete by using computational power to solve a mathematical equation on the blockchain; and

(b)    ‘Proof of Stake’, being a consensus mechanism in which participants on a decentralised network lock up or ‘stake’ an amount of their cryptocurrency or crypto-tokens for the ability to validate blockchain transactions..

Business: means all activities and arrangements whereby the First or Second or Third Defendants, whether by themselves or any of them, or by their servants, agents or employees:

(a)    provide recommendations or statements of opinion about superannuation products, cryptocurrency or Blockchain Mining;

(b)    elicit or obtain funds from investors for the actual or ostensible purpose of providing to investors, or arranging for investors to acquire, an interest in a financial product, including:

a.    superannuation products; and

b.    investments in or related to cryptocurrency, including Blockchain Mining.

Dealing: includes:

(a)    Removing, causing, procuring, assisting or permitting any Digital Currency Assets in the possession or under the control of the Defendants, to be removed from Australia or from the jurisdiction of this Court; and/or

(b)    Selling, charging, mortgaging, encumbering, securing, diminishing, disposing of, parting with possession, making any declaration of trust in relation to, exercising any power to vary or modify any trust deed or any interest under any trust over Digital Currency Assets owned by or under the control of the Defendants.

Digital Currency: means property, as defined under section 9 of the Corporations Act, that is a digital currency, virtual currency, cryptocurrency or similar.

Digital Currency Assets: means Digital Currency held or controlled by the Defendants.

Investor Funds: means monies, including in the form of Digital Currency, provided to the First or Second or Third Defendants or any of them, whether directly, or through any of the other Defendants, or any of the Defendants’ authorised agents, servants and/or representatives, for the actual or ostensible purpose of providing to investors, or arranging for investors to acquire, an interest in a financial product, including:

(a)    superannuation products; and

(b)    investments in or related to cryptocurrency, including Blockchain Mining.

THE COURT ORDERS THAT:

Ex Parte/Short Service Orders

1.    The Plaintiff has leave to file the following affidavits in support of the Plaintiff’s application:

(a)    Affidavits of Peter James Connor sworn 9 April 2024 and 10 April 2024;

(b)    Affidavit of Alex James Lynch sworn 9 April 2024;

(c)    Affidavit of Kristina Matia Hiratos sworn 9 April 2024;

(d)    Affidavit of Katie Nicolas Loizou affirmed 4 April 2024;

(e)    Affidavit of Kaan Finney affirmed 5 April 2024; and

(f)    Affidavits of Michael Spencer affirmed 12 February 2024 and 7 March 2024.

collectively the Affidavits.

2.    The Plaintiff has leave to file the witness statements of Andrew Nguyen dated 3 January 2024 in support of the Plaintiff’s application and the consent of the Receiver dated 8 April 2024.

3.    The Plaintiff has leave to file its outlines of written submissions dated 9 April 2024 and 10 April 2024 (Submissions).

4.    Service of this Originating Process is dispensed with and the prayers for relief interim relied at paragraphs 5 to 22 of the Originating Process filed 9 April 2024 in this proceeding be returnable instanter.

5.    The time for service of the Originating Process, the Affidavits and the statements referred to in Order 2 above and the consent of the Receiver on the Defendants be abridged to 5pm on 11 April 2024.

Interim receiver and asset preservation orders

6.    Pursuant to sections 1323(1)(h) and (3) of the Corporations Act, effective on and from 6:00am AEST on Thursday, 11 April 2024, until further order, Anthony Norman Connelly, Katherine Sozou and William James Harris of McGrath Nicol, Level 15, 175 Eagle Street, Brisbane 4000 QLD, are appointed as joint and several receivers and/or receivers managers (Receiver), without security, over the Digital Currency Assets, whether within or without the State of Queensland, for the purpose of identifying and securing the Digital Currency Assets.

7.    The Receiver has the powers set out in sections 420(2)(a), (b), (e), (f), (g), (k), (n), (p), (q), (r) and (t) of the Corporations Act and can exercise these powers with respect to the Digital Currency Assets.

8.    The Receiver has the power to apply to the Court for directions or further orders.

9.    After service of these orders on the Defendants, the Defendants shall immediately deliver up to the Receiver all books, records and things, which relate to the Digital Currency Assets, including, but not limited to:

(a)    all relevant credentials and passwords for access to any cryptocurrency or blockchain technology assets held by the Defendants, including but not limited to, the public and private access keys and/or addresses any hot or cold wallet held or controlled by the Defendants;

(b)    any and all authentication devices required to facilitate access, operation or control of any cryptocurrency held or controlled by the Defendants;

(c)    all relevant credentials and passwords for access to the authentication devices or systems, including emails, SMS or mobile apps, that facilitate access, operation or control of cryptocurrency held or controlled by the Defendants; and

(d)    any hard wallet device containing cryptocurrency held or controlled by the Defendants together with that device’s access code.

10.    The Plaintiff shall, upon request of the Receiver, deliver up to the Receiver copies of all books, records and things concerning the Digital Currency Assets, which have been obtained by the Plaintiff under Part 3, Division 3 and/or Division 3A of the Australian Securities and Investments Act 2001 (Cth) including, but not limited to:

(a)    all relevant credentials and passwords for access to any cryptocurrency or blockchain technology assets held by the Defendants, including but not limited to, the public and private access keys and/or addresses any hot or cold wallet held or controlled by the Defendants;

(b)    any and all authentication devices required to facilitate access, operation or control of any cryptocurrency held or controlled by the Defendants;

(c)    all relevant credentials and passwords for access to the authentication devices or systems, including emails, SMS or mobile apps, that facilitate access, operation or control of cryptocurrency held or controlled by the Defendants; and

(d)    any hard wallet device containing cryptocurrency held or controlled by the Defendants together with that device’s access code.

11.    The Plaintiff shall, upon the request of the Receiver, deliver up to the Receiver copies of the Affidavits and the statements referred to in Order 2 above.

12.    The Receiver’s costs and expenses are payable from the Digital Currency Assets.

Asset Preservation Orders

13.    Subject to Order 14 below, pursuant to sections 1101B and/or 1323 of the Corporations Act, until further order, the Defendants, by themselves and their servants, agents and employees are restrained from:

(a)    removing, or causing or permitting to be removed from Australia all or any of the Digital Currency Assets;

(b)    selling, charging, mortgaging or otherwise dealing with, disposing of and/or diminishing the value of all or any of the Digital Currency Assets;

(c)    causing or permitting to be sold, charged, mortgaged or otherwise dealt with, disposed of, or diminished in value, all or any of the Digital Currency Assets; and

(d)    without limiting the terms of sub-paragraphs (a) to (c) above, withdrawing, transferring or otherwise disposing of Digital Currency Assets available in any account with any bank, building society, cryptocurrency exchange, hot or cold crypto wallet, recorded in any blockchain or other financial institution (in Australia and elsewhere).

14.    Order 13 above does not prevent:

(a)    any bank, building society or financial institution from exercising any right of set-off which it may have in respect of a facility afforded by it to the Defendants prior to the date of this Order;

(b)    the Defendants, from paying of any monies including in the form of Digital Currency, to the account or hot or cold crypto wallet of an Australian Member, representing any returns associated with that person’s investment; and

(c)    upon request by an Australian Member to divest from or cease their investment, the Defendants paying to that person any monies including in the form of Digital Currency, representing the person’s Investor Funds and returns associated with their investment.

15.    Orders 14(b)and 14(c) do not apply where the Australian Member is a past or present servant, agent, employee, or office holder of the First, Second or Third Defendants; or otherwise associated with a past or present servant, agent, employee, or office holder of the First, Second or Third Defendants.

Asset Disclosure Orders

16.    Except to the extent that a claim of privilege against self-incrimination is made, each of the Defendants are to deliver or cause to be delivered to the Plaintiff or any Receiver appointed by the Court, by 4:00pm on 26 April 2024, a full and detailed affidavit sworn or affirmed by themselves or a proper officer as the case may be:

(a)    the name and address of any bank, building society, cryptocurrency exchange, or other financial institution (in Australia and elsewhere) at which there is any account in the name of or under the control of the Defendants, or which the Defendants have any legal or equitable interest, together with the number of such account, the name of such account and the balance of that account;

(b)    a list of the locations (in Australia and elsewhere) of all Digital Currency and blockchain technology assets held or controlled by the Defendants, or which the Defendants have any legal or equitable interest, together with the public or private keys for any cold or hot wallets held or controlled by the Defendants and the nature and amount of the cryptocurrency held in any such wallets; and

(c)    a list of all escrow accounts which hold Digital Currency on behalf of the Defendants.

17.    In the event that the Defendants wish to object that compliance with the order sought in Order 16 above, may tend to incriminate the Defendant, the relevant Defendant must, in accordance with section 128A of the Evidence Act 1995 (Cth):

(a)    prepare, file and serve on the Plaintiff an affidavit disclosing so much of the information required to be disclosed by paragraph 16 above to which no objection is taken;

(b)    prepare an affidavit containing so much of the information required to be disclosed by paragraph 16 above which objection is taken and deliver it to the Court in a sealed envelope; and

(c)    prepare, file and serve on the Plaintiff a separate affidavit setting out the basis of the objection.

Travel Restraint Orders

18.    Pursuant to section 1323(1)(k) of the Corporations Act that, until further order, the Fourth Defendant is prohibited from leaving Australia or attempting to leave Australia.

19.    Pursuant to section 1323(1)(j) of the Corporations Act that, by 4:00pm AEST, on the day which is three business days from the date upon which service is effected, the Fourth Defendant is to deliver up to the Brisbane Registry of this Court all passports in his name which are in his possession, custody or control.

20.    The documents delivered up to the Queensland Registry pursuant to Order 19 above are to be held by the Court in the first instance until further order.

21.    Pursuant to section 23 of the Federal Court of Australia Act 1974 (Cth) that, in the first instance until further order, the Fourth Defendant may not apply for the issue of any passport or other document permitting international travel.

22.    In the event that the Fourth Defendant cannot locate any passport or other document permitting international travel, he must promptly:

(a)    give notification to the Australian Passport Office, or other relevant authorities responsible for the issue and control of Australian passports or travel documents, or, in the case of a foreign passport or travel document, the relevant authority responsible for the issue and control of such passports or travel documents, confirming that he has lost his passport or travel document; and

(b)    file and serve an affidavit stating that fact and exhibiting a copy of the above notification sent.

Service of Orders on Third Parties

23.    To the extent necessary, the Plaintiff has leave to give to:

(a)    any bank, building society, cryptocurrency exchange, or other financial institution through which, to the best of the Plaintiff’s belief, Digital Currency Assets belongs to the Defendants;

(b)    any other person or entity, holding or controlling Digital Currency Assets, which, to the best of the Plaintiff’s belief, belongs to the Defendants;

(c)    the relevant authorities that issue and control of passports;

(d)    the Australian Border Force; and

(e)    the Receiver.

notice of the making of any of the foregoing interim orders by giving a copy of the minute of the orders to a person apparently in the employ of any such entity or person.

Non-Publication Orders

24.    Pursuant to sections 37AF(1)(a) and (b) and 37AG(1)(a) of the Federal Court of Australia Act 1976 (Cth) that, in order to avoid prejudice to the proper administration of justice, the publication or disclosure of the following is prohibited until 5pm on 11 April 2024, except to enable the Plaintiff to serve the Defendants, and provide copies of the orders to the entities set out in Order 23 for the purpose of enforcing the orders:

(a)    any ex-parte orders obtained by the Plaintiff;

(b)    the Originating Process;

(c)    the Affidavits and the statements referred to in Order 2 filed by the Plaintiff in support of the ex-parte orders;

(d)    any written submissions advanced by the Plaintiff in support of the ex-parte orders; and

(e)    the signed consent of the Receiver.

Non-Party Access

25.    Any application made by a non-party pursuant to rule 2.34 of the Federal Court Rules 2011 (Cth) to inspect the following documents:

(a)    any affidavits and statements filed by ASIC; and

(b)    the Submissions,

and for which access is not otherwise permitted under rule 2.32(2) is to be considered only after notice of the application has been given to the parties and they have been given a reasonable time to respond.

General Orders

26.    Costs are reserved.

27.    The parties have liberty to apply on three business days’ notice in writing.

28.    Such further or other orders as the Court considers appropriate.

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

REASONS FOR JUDGMENT

(REVISED FROM TRANSCRIPT)

MEAGHER J

introduction

1    By an originating application filed on 9 April 2024, the plaintiff, Australian Securities and Investments Commission (ASIC) urgently seeks orders ex parte against the defendants pursuant to sections 1323(1)(h) and sections 1323(3) of the Corporations Act 2001(Cth), and section 23 of the Federal Court of Australia Act 1976 (Cth). The orders sought include with respect to the digital currency assets, the appointment of a receiver for asset preservation and to prevent the fourth defendant, Mr Mendham, from leaving Australia.

2    The plaintiff also seeks disclosure orders to assist in locating the relevant digital currency assets.

3    In making the ex parte application, the plaintiff relied upon the following documents:

    the originating application;

    two affidavits of Peter James Connor, Senior Investigator employed by ASIC, sworn on 9 April 2024 and 10 April 2024;

    the affidavit of Alex James Lynch, Data Analyst employed by ASIC, sworn on 9 April 2024;

    the affidavit of Kristina Matia Hiratos, Financial Investigator employed by ASIC, sworn on 8 April 2024;

    the affidavit of Katie Nicholas Loizou, Senior Lawyer employed by ASIC, affirmed on 4 April 2024;

    the affidavit of Kaan Finney, Senior Manager employed by ASIC, affirmed on 5 April 2024;

    affidavits of Michael Patrick Spencer, Acting Australian Border Force Inspector employed by the Australian Border Force, affirmed on 12 February 2024 and 7 March 2024;

    statements of Andrew Nguyen, a Passport Compliance Officer with the Department of Foreign Affairs and Trade, dated 3 January 2024; and

    written submissions dated 9 April 2024 and 10 April 2024, consent of a receiver and a list of materials.

Background

4    On 16 September 2022, the plaintiff commenced an investigation into the first defendant, NGS Crypto Pty Ltd, hereinafter known as Crypto, and the second defendant, NGS Digital Pty Ltd, hereinafter known as Digital. The investigations were then expanded to include the third defendant, NGS Group Limited, hereinafter known as Group, on 16 November 2023. Group is a company which is domiciled in Hong Kong while Crypto and Digital are companies registered in Australia. The fourth defendant, Mr Brett Mendham, is the sole director and secretary of Crypto and, until 13 September 2023, was a director and secretary of NGS Group together with Mr Mark Ten Caten, the fifth defendant. Mr Ten Caten lives in Bali, Indonesia and remains the sole director of Group. Mr Ryan Brown, the sixth defendant, is the sole director and secretary of Digital and the general manager of Crypto.

5    A further company is referred to from time to time during these reasons; it is Zenoz Enterprises Pty Ltd. Mr Ten Caten is now the sole director and secretary of that company. Mr Mendham has, with others held those roles from time to time in the past.

6    It appears that the first, second and third defendants together operate businesses claiming to sell blockchain mining investments. To the extent that that is the business, it seems Group operates the asset mining in Batam Indonesia, Crypto is an authorised reseller of blockchain mining products in Australia and Digital appears to provide staff for Crypto, as well as paying for two premises at the Gold Coast, Queensland and otherwise paying for the day-to-day costs of the businesses. Digital is the only defendant company with bank accounts in Australia.

7    On 19 January 2023, Mr Mendham attended an examination pursuant to section 19 of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). The signed transcript of that examination is annexed to the affidavit of Ms Louizou. Mr Brown also attended a section 19 examination on 16 February 2023, a signed transcript of which is annexed to the affidavit of Mr Finney. From the transcripts, it appears that Mr Mendham and Mr Brown regard Mr Ten Caten as being a pivotal decision-maker with broad oversight of the companies.

Evidence

8    From the evidence it seems that a money-making opportunity is advertised with possible returns of up to 16 per cent. Marketing of the product takes place in a number of ways including through websites and newsletters. Annexed to Mr Connor’s earlier affidavit are a number of documents demonstrating the types of statements made by Crypto, including from a ‘forensic capture’ in February 2024 of the Crypto website as follows:

NGS Crypto is an Authorised Reseller of the NGS Group Blockchain Mining

Packages

…

Simply put, as crypto miners, we help facilitate blockchain transactions around the world every single day. Every time someone wishes to make a transaction (i.e. to buy something or send money), miners like us help to facilitate this transaction and are paid a small ‘service fee’ to do so.

The common analogy we use here, is like that of a bank A TM. We buy, own, and manage the machine, and every time someone uses our machines, we make a small fee from the transaction. Multiplying this analogy by thousands of machines, and millions of transactions, this is the simplest way to understand how we generate returns for our members.

...

…To ensure consistent returns for our members, our mining facilities are setup in Batam, Indonesia where they are constantly monitored, repaired, and run by our team members. This is for our POW (proof of work) style machines, which require computing power to solve complex mathematical algorithms.

…

Earn up to 16% PA through Blockchain Mining

…

SMSF Crypto Mining

Earn up to 16% P.A. through self-managed super fund.

You may have heard of crypto through an SMSF, but did you know you can mine cryptocurrency through on as well? Learn more about how you can utilise blockchain mining through your self-managed super fund with NGS Crypto. Minimum SMSF amount apply.

…

Speak to Us Today about setting up a Crypto Mining SMSF.

Whether you're looking to get started, or just want to ask a. few questions about a smsf crypto investment, we have a team of experts who can help guide you every step of the way. Here’s just some of the ways they can help:

i.    Find out, how much you can potentially earn with a crypto SMSF on a daily, weekly, monthly, or annual basis.

ii.    Receive a ‘numbers-driven’ forecast on your potential returns over the next 3-5 years.

iii.    Get a step-by step breakdown of blockchain mining, NGS Crypto, our business model, packages, SMSF crypto mining investment returns and features.

iv.    Sit down with a blockchain mining & Australia crypto SMSF expert, who can help you better understand the digital asset space.

…To ensure consistent returns for our members, our mining facilities are setup in_ Batam, Indonesia where they are constantly monitored, repaired, and run by our team members. This is for our POW (proof of work) style machines, which require computing power to solve complex mathematical algorithms.

9    As well, a transcript was made of a video contained in the February 2024 ‘capture’. The transcript is referred to in Mr Connor’s earlier affidavit at paragraph 37 and included the following statements:

(a)    “The technology behind blockchain and the security behind that is next to none pretty much in anything in the industry at the moment. So, when it comes to security and knowing that your money is going to be safe that's a huge point.” [emphasis added], see page 451;

(b)    “We want to make sure people are not only, you know, earning good returns but they’re secure, they're happy and then also they, you know, at times maybe we help them think about the things they haven't already had.”[emphasis added], see page 452.

10    The plaintiff raised concerns with Mr Mendham regarding the Crypto website in October 2019. On 30 October 2019, the plaintiff received a letter, which is annexed to Mr Connor’s earlier affidavit from the lawyers then acting for Crypto, which explains the business model in the following terms:

Our client’s business model is as follows:

(1)    the lessee customer buys a mining package from NGS;

(2)    NGS operate a portal and have computers set up offshore;

(3)    the mining package allows the investor to lease one or more machines off NGS for a 36-month term;

(4)    the lessee is paid daily in Bitcoin fees earned from the machine;

(5)    the Bitcoin are paid to the lessee’s wallet through a third-party wallet provider;

(6)    the lessee can transfer their fees to cash if they want to lock in a minimum of 12 per cent per annum;

(7)    at the end of the 36-month period, the lease of the machines end and the initial principal is paid back.

Whilst the lessees are provided with daily “returns” these are in the form of a payment that is made by a third party for the service provided by their leased hardware to that third party. Our client customers are simply service providers, charged as a fee, except in this instance the fee paid by the third party is in the form of Bitcoin. The return provided is no different to making a return on real estate or development or other like projects which are not considered financial products.

11    The Group website has also been captured by the plaintiff in January 2022. That ‘capture’ is annexed to Mr Connor’s earlier affidavit and includes the following statements:

We Offer Aussies a unique and innovative way to invest their cash, equity, or superannuation. With world-beating returns locked to a fixed minimum rate, there’s plenty to like about NGS.

…

NGS Group offer high-return investment options, similar to a term deposit...

…

As Digital Asset Miners, we help facilitate thousands of transactions around the world every day. Every time someone makes a transaction, we take a small ‘service fee ‘-very similar to that of a bank ATM. The big difference is that by doing this at scale, we’re able to make 10 per cent, 15 per cent or up to 17.5 per cent returns, predictably, which is then distributed to our investors.

(emphasis added)

12    A second ‘capture’ was made of the group website in September 2023. It is also annexed to the earlier affidavit of Mr Connor and states the following:

Formed in 2013, our founders discovered the benefits of digital asset mining and set out to educate others and to help them achieve financial freedom through digital asset mining. Recognising and filling that gap in the market, NGS Group has hundreds of customers across the globe, all diversifying their wealth and earning passive returns.

By offering minimum fixed rate returns between 6-16% per annum, our members know ahead of time their minimum earnings and that they will be paid out daily for their entire term. NGS Group is a global business, compliant with all jurisdictions, with registered office in: Australia, Hong Kong, Indonesia, and South Africa.

…

Authorised Reseller in Australia.

NGS crypto is an authorised reseller of NGS Group mining packages.

17/2 Elkhorn Ave, Surfers Paradise, QLD Australia 4217.

…

Terms of Service – NGS Group Limited

Last updated: July 06,2021

…

Interpretation and Definitions

…

•    Company (referred to as either “the Company”, “We”, “Us” or “Our” in this Agreement) refers to NGS Group Limited, Gold Coast.

13    From the evidence before the Court, it appears that interested investors were able to enter contact details and receive a call back from a salesperson. An example of a customer call between a salesperson, Ms Laban, and a customer contained the following statements by Ms Laban:

LABAN: Okay. Well, that’s great. So, look, this is basically gonna to show you how you can potentially three times your super. Okay. Your superannuation. Set up for an early self-funded retirement. Okay. But basically, this will show you how NGS Crypto can help you generate up to 16 per cent per annum, minimum six returns paid daily to you for the next five years, okay.

…

LABAN: They will give you assurance that, you know, rolling over to a self-manage Super fund is quite normal for people to do and potentially invest where you see fit and to get a fantastic return on your investment.

14    This conversation is extracted from a transcript of a sales call annexed to the earlier affidavit of Mr Connor. The recordings of the sales calls were obtained by the plaintiff pursuant to a notice issued by it to Digital under section 33 of the ASIC Act, also annexed to Mr Connor’s earlier affidavit.

15    The process then involves an investor signing a mining agreement with Group, which sets out the terms of the investment, including its purpose. Examples of mining agreements are annexed to the earlier affidavit of Mr Connor. They are broadly similar. Clause 2 typically sets out the key purpose as follows:

We will apply Your Investment towards mining the Specified Coins. We will do this by applying your investment towards the acquisition of mining hardware and related costs.

We will decide how much we apply towards any specified Coin at any given time. You authorise us to use Your Investment in this way...

16    “Specified coins” are usually set out in item 6 of the particulars of the mining agreement. As to the hardware referred to in the mining agreement, it is computer hardware which is deployed to validate transactions over blockchains.

17    As may be seen from clause 7.1 of a sample of the mining agreement, part of the business model of the defendants was to introduce clients to “financial advisors and superannuation professionals” to assist with a transaction to a self-managed super fund in order to participate in the crypto mining activities. In many instances, the plaintiff submitted those advisors and professionals were, in fact, simply “document-makers” or “rubber-stampers”.

18    The plaintiff and the Hong Kong Securities and Futures Commission are signatories to an “Enhanced Multilateral Memorandum of Understanding Concerning Consultation, Cooperation, and the Exchange of Information”. By reference to the Memorandum of Understanding, an officer of the plaintiff requested assistance from the Hong Kong Securities and Futures Commission regarding obtaining information with respect to Group relevant to the plaintiff’s enquiries.

19    Included within documents produced responsive to that request was a spreadsheet entitled “Member Subscription Details” or “NGS Member Subscription List”. From reviewing that list, Mr Connor, in his earlier affidavit, drew the following conclusions at paragraph 123:

The member subscription list appears to contain a list of individuals who have invested with NGS Group or NGS Digital in the period of 27 November 2017 to 28 December 2023. After reviewing the information contained within the NGS Member Subscription List, I concluded in the period between 27 November 2017 to 28 December 2023 the following.

(a)    there were, in total 501 investors, with a combined investment of US$41,433,385.80 or AU$60,447,166.54 using the exchange rate of 28 December 2023 of 1.4589;

(b)    there were 464 investors from Australia who invested a total of US$40,379,819.25 or AU$58,910,118.30 using the exchange rate of 28 December 2023 of 1.4589;

(c)    227 investors were SMSFs, all of which were Australian investors;

(d)    in the period 1 January 2023 to 28 December 2023, 183 Australian residents invested a total of US$14,531,494.15 or AU$21,199,996.81 using the exchange rate of 28 December 2024 of 1.4589;

(e)    the next country with the high number of investors/amount invested was Indonesia with 11 investors, investing a total of US$610,207.95.

20    While the investigation is still at an early stage, Mr Connor deposed to having reviewed the affidavit of Mr Lynch regarding analysis undertaken by him with respect to the known digital assets of the defendants during the relevant period. Mr Lynch deposes to the manner in which he undertook the analysis at [22], including:

On about 21 March 2024, I was further tasked by Goran Veljanoski, Investigator of ASIC, to prepare an affidavit in these proceedings. The purpose of the affidavit is to communicate the results of my analysis of material obtained in the ASIC Investigation as to the following:

(a)    Sum of investor amounts being transferred to identified ‘NGS on-ramp addresses’ as listed on NGS Group client investment agreements.

(b)    Identifying the flow of funds, including in the form of digital assets from the NGS on-ramp addresses.

(c)    Tracing of a sample of investors to identify:

i.    The date and amount of the funds transferred from the relevant DCE to the NGS on-ramp addresses. A list of relevant DCEs is at paragraph below26 [sic];

ii.    The date and balance of the NGS on-ramp addresses at time of the transfer of funds;

iii.    The flow of funds to subsequent addresses including the amount, date, and balance of the receiving address at the time of transfer; and

iv.    The recipient of the funds including the amount, date and if the recipient of the funds is another investor in the Blockchain Product, the identity of that investor.

21    Mr Lynch also deposes to the Blockchain Explorer websites, investigation aid and documentation upon which he relied in conducting the analysis. His evidence was also that he prepared flowcharts reflecting the flow of digital asset transactions, using particular software in relation to a number of investors drawn from a sample of same identified by ASIC.

22    Mr Lynch’s affidavit sets out the process he followed at paragraph 29 as follows:

I conducted an analysis of digital asset transactions made by the NGS companies and related parties. The following process was used to identify relevant transactions.

(a)    A series of addresses to which investors were initially instructed to send their digital assets were identified from investor documents, specifically documents titled ‘Mining Investment Agreement’ or from the document ‘NGS Member Subscription List’. These have been named by the ASIC investigation as ‘on-ramp addresses’.

(b)    An analysis of digital assets received and sent from the NGS on-ramp addresses was conducted using the Blockchain Explorer website.

(c)    This analysis identified a series of further addresses to which digital assets in the NGS on-ramp addresses had been sent to including:

i.    Four account addresses on the Ethereum network, and

ii.    Two public addresses on the Bitcoin network,

(together, NGS operational addresses).

(d)    An analysis of the NGS Operational Addresses was conducted using Blockchain Explorer websites. That analysis identified further account addresses:

i.    from which digital assets were sent to the NGS Operational Addresses; and

ii.    which received digital assets from the NGS Operational Addresses.

(e)    Compulsory ASIC notices were issued to DCEs for the production of books related to the accounts identified in the analysis of the NGS on-ramp addresses and the NGS Operational Addresses.

(f)    The books produced by the DCEs then validated the source account addresses of relevant transactions.

23    In turn, Mr Connor deposes in his earlier affidavit at [139] as to Mr Lynch’s analysis:

From my review of Mr Lynch’s affidavit and documents and information obtained from the consumers referred above at paragraphs 103 and 118 above, I make the following comments regarding the movement of digital assets when a consumer invests in the Blockchain Mining Product:

(a)    consumers are provided in a schedule to their Investment Mining Agreement instructions on where to transfer their digital assets, for example see the Nelson Investment Agreement at paragraph 108 above;

(b)    consumers then exchange their fiat currency to cryptocurrency and transfer said cryptocurrency to the nominated addresses, which has been termed as ‘on-ramp’ addresses. To date ASIC has identified numerous on-ramp addresses. Many of these addresses are also listed in the NGS Member Subscription List as referred to in paragraph 122 above in column S;

(c)    from the on-ramp addresses consumers funds are transferred to an NGS controlled address which the investigation team has termed ‘NGS Operational Address’. To date ASIC has identified 6 main NGS Operational Addresses, which have been labelled NGS Operational Addresses 1 to 6, with additional account [sic] still pending further analysis; and

(d)    From the NGS operational addresses consumer funds are used for the purpose of, among other things, to purchase various ERC20 tokens, stablecoins and pay NGS staff and Investors.

24    Mr Lynch states in his affidavit, at [39] – [41], in respect of the analysis that he has undertaken:

Unlike determining who controls a bank account, it is not a straightforward to attribute who owns or controls a particular account or public address.

Although some account address may appear to be attributed to NGS companies based on documents productions ASIC has received under compulsion, that does not mean that corporate defendants actually own or control those addresses. It is possible that those account addresses are actually controlled by natural defendants, including Mr Ten Caten, Mr Brown, and Mr Mendham.

Further investigation work is required in order to determine exactly which persons the various accounts are attributable to.

25    Mr Connor, in his earlier affidavit, refers to analysis undertaken with respect to several of the investors identified, and notes concerns that their investment funds were not applied, all or in part, for blockchain mining as per the relevant agreements. Further, Mr Connor deposes that funds of one investor were applied to return the investment of another. He also deposes with respect to one of the investors referred to the transcript of the section 19 examination of Mr Bown, annexed to the affidavit of Mr Finney and referred to above, and noted, with respect to one of the bank accounts that:

(a)    Mr Brown was the sole signatory and person authorised to operate the NGS Digital Heritage account, see pages 140 to 141;

(b)    In some cases there were surplus funds and mining equipment was already readily available through NGS Group and the capital didn’t need to be transferred, see pages 143 to 144;

(c)    Mr Ten Caten would give the instructions to Mr Brown by phone call whether to transfer investors’ funds to NGS Group for investment or whether NGS Group ‘did not need it’ due to surplus machines, see page 147.

26    Mr Lynch’s analysis specifically dealt with the investment of an investor in respect of which it would appear that some of his investment could be traced to the National Australia Bank account of Zenoz Enterprises. It also dealt with investments of an investor in respect of which it would appear that some of, the digital assets passed through the account or CoinSpot account of Mr Mendham. Further analysis undertaken by Mr Lynch suggests digital assets passed through Mr Brown’s account and that the investment of one investor was comingled with that of another. The analysis also indicates that investments are not made into the assets as specified in the mining agreements.

27    As to whether the NGS companies require or have an AFS licence, Mr Connor in his earlier affidavit, deposes that he had caused searches to be undertaken and none of the defendants in this matter currently hold an AFS licence. With respect to Crypto, it was an authorised representative of an AFS licence holder between 19 January 2023 and 31 July 2023. Other than that, none of the defendants have been the holders of or authorised representatives of holders of an AFS licence. Mr Connor also deposes that, on 14 February 2024, Mr Ten Caten and Mr Mendham were appointed directors and secretaries of a company which holds an AFS licence. However, there is an application currently before ASIC to limit the licence held which has not been resolved. No notification of a change of ownership of an AFS licensee has been received by ASIC, nor have any of the defendants been sub-authorised by that company to be authorised representatives under its AFS licence.

28    In summary, Mr Connor sets out, at [169] – [170] of his earlier affidavit, the concerns which ASIC has with respect to the defendants:

Based on the documents and information obtained during ASIC’s investigation to date, as listed in paragraphs 25 to 162 above, I am concerned that:

(a)    NGS Group has engaged in unlicenced conduct by:

i.    providing financial product advise; and/or

ii.    dealing in a financial product in issuing the Blockchain Mining Product; and/or

iii.    arranged for the acquisition of a beneficial interest in an SMSF.

(b)    NGS Crypto has engaged in unlicenced conduct by:

i.    providing financial advice; and/or

ii.    dealing in a financial product in issuing the Blockchain Mining Product unlicenced; and/or

iii.    arranged for the acquisition of a beneficial interest in an SMSF.

(c)    NGS Digital, was involved in the above conduct by, amongst other things, operating the Australian bank accounts of the operation costs of NGS Crypto and NGS Group in Australia.

(d)    I am further concerned that NGS Crypto and NGS Group are misrepresenting to consumers that:

i.    NGS Group invests consumers’ funds towards the acquisition of mining hardware and related matters;

ii.    the mining takes place in Batam, Indonesia;

iii.    such investments are ‘safe’, ‘secure’ or ‘like investing in the ownership of an ATM of EFTPOS machine’;

iv.    Profits of up to 16 per cent per annum are generated through the service fees charged through the facilitating of blockchain transactions;

v.    These profits are paid to consumers NGS Group accounts daily; and

vi.    Consumers capital is returned at the end of the investment agreement.

(e)    When in fact:

i.    Upon receipt of consumer funds, at least a portion of investors funds are comingled in the NGS operational addresses and are either being:

A.    transferred to pay operating costs of NGS Crypto and NGS Digital including wages;

B.    are converted into Tokens for the purpose of staking, which has a higher risk factor than blockchain mining;

C.    are transferred to the personal accounts of Mr Mendham and/or Mr Brown, potentially for their own personal use; or

D.    transferred to other consumers to pay for their ‘profit’ on investments or return or capital at the end of their investment agreement.

In light of the withdrawals made from the NGS Digital Heritage Bank Account and the movement of investors funds in the NGS Operational Addresses in the Relevant Period, I am concerned that some or all of the defendants may have dissipated, and may be continuing to dissipate funds invested by consumers for the Blockchain Mining Product.

29    Counsel for the plaintiffs quite properly brought to my attention matters which one or more of the defendants may raise, were they to be present. Those matters include as to the indications that Mr Mendham was withdrawing from the NGS companies, taking only a “backseat role” as he was increasingly focused on Zenoz Enterprises. Furthermore, Mr Lynch’s affidavit evidence is that at least some transactions were being directed to Indonesian digital currency exchanges. There is no evidence in the tracing undertaken of investments ultimately being transferred into accounts associated with Mr Ten Caten. It is acknowledged that tracing digital assets is difficult, and it is difficult to attribute ownership of particular accounts or public addresses. Counsel also pointed to a paragraph at the bottom of page 7 of 29 in a guide entitled “Everything You Need to Know About Digital Asset Mining”, which appears to be available on the Crypto website, a copy of which was annexed to Mr Connor’s earlier affidavit. In that guide, there is a paragraph which says:

As time has gone on, we have also expanded our strategies to include POS (Proof of Stake) validation, liquidity pools and DeFi (Decentralised Finance) – giving us access to 500+ different projects to mine at any given point in time. With our dedicated research and development team always keeping your finger on the pulse, we’re able to mine the most profitable asset at any given time. This helps us to future-proof our operations and ensure profitability for our members for years to come.

30    With respect to those matters brought to my attention, the plaintiff submitted that the difficulty in tracing also supports its case that Mr Mendham is central to its case in better understanding the operation of the NGS companies and to provide access to necessary information, notwithstanding the status of his current role. As to the paragraph contained in the guide, the plaintiff submitted that it is one paragraph buried in a document, is somewhat ambiguous, does not say specifically that investors’ funds will be used in any of those particular ways and is in any event, contrary to the mining agreements.

LEGAL PRINCIPLES

31    ASIC has helpfully set out the well-established legal principles in its written submissions, for which I am most grateful.

32    Section 1323(1) of the Corporations Act confers a broad power on the Court to make a range of different orders where an investigation is being carried out under the ASIC Act or the Corporations Act in relation to an act or omission by the relevant person which constitutes or may constitute a contravention of the Corporations Act and the Court considers it necessary or desirable to make such orders for the purpose of protecting the interests of the aggrieved person to whom the relevant person is liable, or may be or become liable, to pay money, whether in respect of a debt, by way of damages, compensation or otherwise or to account for financial products or other property.

33    The critical question of whether the orders sought are necessary or desirable to protect the interests of an aggrieved person is not concerned with the character of the alleged wrongdoing or the defendants or the ability or willingness of the aggrieved persons to pursue their interests. Rather, it is concerned with the protection of the interests of those persons who may ultimately have claims against the defendants: Australian Securities & Investments Commission v Sino Australia Oil and Gas Limited [2015] FCA 531 at [13].

34    It is well established that in making orders under section 1323 of the Act, the Court is not required to be satisfied that the definitive findings of fact are made in relation to liability, dissipation of assets or that flight is imminent. Given the very nature of an application under section 1323, there is necessarily an element of risk assessment and risk management that the Court is called to make. In Australian Securities & Investments Commission v Carey (No 3) [2006] FCA 433, French J stated at [30] and [31]:

…For the reasons already canvassed, the Court, in making orders under section 1323, engages in a risk assessment and management process. The logic of the section assumes that the Court will not always have before its 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 its evidence of the kind that would establish definitively that dissipation of assets has occurred or is likely to occur or that flight is imminent.

The logic of section 1323 requires the Court to be able to act on evidence that 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 a risk or possibility that gives rise to the necessity for or desirability of a protective order. It is not necessary, in this context, to consider whether the proceedings are interlocutory for the purposes of the exception to the hearsay rule under section 75 of the Evidence Act 1995 (Cth), albeit that that exception is no doubt informed by similar considerations. Evidence may be received of 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. These considerations are relevant to the admissibility of some of the affidavit evidence which has been relied upon in this case.

35    In relation to the making of ex parte orders, while is it not the ordinary course of the Court to make such orders, there are circumstances in which such a course would be justified. In Australian Securities & Investments Commission v Karl Suleman Enterprized Proprietary Limited [2001] NSWSC 1079, Young CJ in Eq noted at [3] that ex parte orders may be justified when:

“…a scam is first discovered and it is necessary to prevent the money that has been received by the defendants being dissipated immediately. There will also be good reasons for doing so when, to alert the defendants that the axe is about to fall, may mean they have time to disperse.”

36    Further, in Australian Securities & Investments Commission v Adler [2001] NSWSC 451 at [7], Santow J comprehensively set out the principles which are relevant to the granting of asset preservation orders. Notably, at [7](e), his Honour stated that justification for urgent ex parte orders will generally depend upon whether there is a significant risk of dissipation of assets. His Honour also acknowledged that there may be instances where evidence of such matters is still being collected, in which case, brief ex parte orders may still be justified.

37    The Court is empowered to appoint a receiver by section 1323(1)(h) of the Act. Consistent with the general approach that the Court is to adopt when exercising its discretion pursuant to section 1323, when making orders for the appointment of receivers, “…the fundamental issue is not the character of the alleged wrongdoing of the defendants, but the overriding concern to protect assets for the benefit of those entitled to them”: Australian Securities & Investments Commission v Burke [2000] NSWSC 694 at [6] per Austin J.

38    While the appointment of a receiver is an intrusive order, there are instances in which it is justified. In Burke, Austin J stated at [8]:

Without wishing to lay down any general rules… where there is real doubt about the existence and location of assets such as investments, and about the number and identity of claimants and the nature of their claims, and additionally the defendants are engaged in business activities which entail that any Mareva Orders must allow assets to be turned over in the course of business. Where these circumstances exist in combination, and especially where there are allegations of serious fraud involved, the Court may conclude, as I do in this case, that the Mareva Orders are not enough to ensure that the assets are preserved and protected, and indeed identified and brought in for the benefit of investors.

39    The prevention of dissipation of assets is particularly pertinent in the context of cryptocurrency. As Derrington J in Australian Securities and Investments Commission v A One Multi Services Pty Ltd [2021] FCA 1297 stated at [19]:

The significant difficulty for ASIC is that, by its nature, cryptocurrency is easily transferred and moved about. Moreover, it can be moved only by persons possessed of particular codes. Presently, such codes appear to be in the possession of Mr Hala and Ms Walters.

40    Where a Court has established that it is necessary or desirable to appoint a receiver pursuant to section 1323(1)(h) of the Act, the Court may impose asset perseveration orders calling in aid section 23 of the Federal Court of Australia Act 1976 (Cth). If the Court is satisfied that it is necessary and desirable to make asset preservation orders or to appoint a receiver under section 1323(1)(h), it may also make disclosure orders requiring a person the subject of those orders to set out their assets and liabilities. Such disclosure orders are justified on the basis that they are ancillary to, and in aid of, the effective implementation of that appointment: Australian Securities and Investments Commission v Krecichwost [2007] NSWSC 948 at [50].

41    As to travel restraint orders pursuant to s 1323 of the Act, it is well-established that caution ought to be exercised when making such orders which interfere with the important right of freedom of movement: Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd [2001] NSWSC 1180 at [4] per Hamilton J; Australian Securities & Investments Commission v Wiggins (1998) 90 FCR 314 at 320 per Finkelstein J; Australian Securities and Investments Commission; Re Richstar Enterprises Pty Ltd v Carey (No 19) (2008) 65 ACSR 421 ; [2008] FCA 38 at [32] per French J. However, there are instances in which the public interest may outweigh the private rights of individuals. There are various factors which should be considered in determining whether the discretion should be exercised in favour of granting travel restraint orders. In Australian Securities and Investments Commission v Johnston [2009] FCA 1276 at [10] to [12], Siopis J identified the following factors:

First, the fact that the investigation being carried out cannot be properly or effectively conducted in the absence of the person.

Secondly, the importance of the person in the ongoing investigation, the character of the potential offences, the fact that the person has a base overseas and the stage at which the investigation is at.

Thirdly, whether there is evidence that by examination of the person (which may be thwarted if the person flees Australia) ASIC is likely to improve the chances of the aggrieved persons retrieving their moneys.

Consideration

42    The plaintiff acknowledged that the orders sought were intrusive and had been described as “extraordinary” or “dramatic”. In light of the evidence, the plaintiff submitted that the broad powers as referred to in Carey (No 3) should be enlivened. All of the defendants are relevant persons for the purposes of section 1323. The investors are aggrieved persons and, as said by Barrett J in Australian Securities and Investments Commission v Burnard [2006] NSWSC 611 at [14], section 1323 is concerned with protecting the interests of aggrieved persons. The plaintiff is not required to demonstrate a prima facie case of liability or that the assets have been or are about to be dissipated.

43    The plaintiff submitted that there are a large number of investors and large amounts of money involved. Investors are being asked to invest their superannuation, which should not be treated lightly. Investments are being made that do not accord with those which the NGS companies represent will be made. For example, the conversion into digital tokens rather than for the stated purpose of digital mining is not in accordance with the mining agreements. Investors funds are being comingled. One investor’s funds have been used to pay out another. The ultimate beneficiary of some of the investments is unclear, but may include Mr Mendham, Mr Brown and Zenoz Enterprises through funds associated with them personally.

44    In the plaintiff’s submission, the above warrants the appointment of a receiver pursuant to section 1323(1)(h) of the Corporations Act. This is particularly so because of the difficulty of tracing the assets. The plaintiff also submitted that the orders sought are limited to the defendants’ cryptocurrency and therefore are no more intrusive than necessary.

45    As to the asset preservation orders, the plaintiff submitted that as the evidence establishes the need to appoint a receiver, so it follows that asset preservation orders are appropriate. In that regard, the plaintiff relied upon Davies J in Australian Securities and Investments Commission v Ostrava Equities Pty Ltd [2015] FCA 425 in which her Honour stated at [11], citing French J in Australian Securities and Investments Commission v Carey (No 14) [2007] FCA 310:

…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 of 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 exercise of the Court’s jurisdiction under section 1323(1)(h). …

46    As to the orders sought with respect to the provision by the plaintiff of relevant material in its possession to the receiver, the submissions were that they could assist the receiver in their appointment task.

47    With respect to the orders regarding travel restraint upon Mr Mendham, the plaintiff acknowledged that such orders should be made with caution, given the importance of the right to freedom of movement and any interferences with that. However, the plaintiff submitted, given Mr Mendham’s role as a former director of Group and as the sole director of Crypto, even despite any present and future diminution of his role, his assistance will be critical in progressing the matter. The plaintiff drew my attention to Johnston and the factors referred to therein and submitted that those factors weighed in this case against Mr Mendham’s right to travel. Further evidence before the Court indicated that Mr Mendham is a frequent traveller, particularly to Indonesia, and as such was, in Mr Connor’s opinion, a flight risk.

48    As to the justification for making the orders urgently and ex parte, the plaintiff relied upon Karl Suleman Enterprized, as referred to above.

49    The plaintiff also submitted that this case was one which was appropriate for the making of urgent ex parte orders, given the great risk of dissipation of assets and desirability of maintaining of the current position.

50    The plaintiff also drew my attention to the decision of Derrington J of this Court in A One Multi Services, which is also referred to above.

51    In these circumstances, I accept the plaintiff’s submissions and make the orders accordingly.

Associate:

Dated:    10 April 2024

SCHEDULE OF PARTIES