FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v iSignthis Limited [2024] FCA 669

ORDERS

THE COURT ORDERS THAT:

1.    On or before 4:00pm on 12 July 2024 the parties file and serve an agreed minute of orders to give effect to these reasons and for the further conduct of this proceeding; or, if there is no agreement, competing minutes of orders and short submissions (limited to 3 pages) as to their respective positions.

2.    The further hearing of this proceeding be adjourned for case management hearing on a date to be fixed.

3.    Costs be reserved.

4.    There be liberty to apply.

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

TABLE OF CONTENTS

REASONS FOR JUDGMENT

MCEVOY J:

INTRODUCTION

1    This proceeding is brought by the Australian Securities and Investments Commission (ASIC) against the first defendant, iSignthis Limited (otherwise known as ISX or the company), and the second defendant, its former chief executive officer and managing director, Mr Nickolas John Karantzis (collectively, the defendants).

2    iSignthis claims that until a demerger of its European operations in October 2021, it was a leading payments, electronic money and identity technology company. It was listed on the Australian Securities Exchange (ASX) and the Frankfurt Stock Exchange. iSignthis was headquartered in Melbourne, had its operations centre in Nicosia, Cyprus, and had sales offices in Australia, Amsterdam, Lithuania, Malta and the United Kingdom. iSignthis was suspended from trading on the ASX on 2 October 2019 and delisted in November 2022.

3    At the times which are the subject of this proceeding, iSignthis, through its subsidiaries, operated a business providing remote identity verification, payment authentication with electronic money issue, transactional banking, and payment processing services. iSignthis’ primary services were achieved by way of patented platforms – a payment processing service known as “ISXPay®”, and a remote identity verification service known as “Paydentity™” which utilised “know your customer” (KYC) data allowing service delivery in the anti-money laundering (AML) regulated sector. iSignthis’ wholly owned subsidiaries included iSignthis eMoney Ltd (iSeM) (incorporated in Cyprus), Authenticate BV (incorporated in the Netherlands) and Authenticate Pty Ltd (incorporated in Australia).

4    The events giving rise to this proceeding arise broadly from two separate periods and sets of circumstances. The first is what the parties have termed the One-off Revenue period. This period has its genesis in March 2015 and extends until 3 August 2018. Predominantly, however, it relates to certain events in 2018 involving the recognition by iSignthis of approximately $3 million in revenue for one-off integration and set up services provided to clients under various integration agreements and the achievement of certain performance milestones at the same time as the company incurred approximately $2.85 million in one-off costs for out-sourcing services it provided under these integration agreements.

5    The second set of circumstances concerns the termination by Visa Inc of its relationship with iSignthis and the disclosure (or non-disclosure) of information about that termination to the Central Bank of Cyprus (CBC), the ASX and the market. This relates to events spanning the period from 4 October 2017 to 17 August 2020, although the focus of attention is on the period from March to August of 2020.

6    The factual background to these sets of circumstances, giving rise to the allegations which ASIC makes, is outlined further below.

7    In the context of these different events, ASIC alleges that iSignthis has contravened:

(a)    the duty not to engage in conduct which is (or is likely to be) misleading or deceptive in relation to a financial product, pursuant to s 1041H of the Corporations Act 2001 (Cth) in the One-off Revenue period; and

(b)    its continuous disclosure obligations under s 674(2) of the Act on two separate occasions (in both the One-off Revenue period and in relation to the Visa termination).

8    Arising out of the same series of events, ASIC alleges that Mr Karantzis has contravened:

(a)    s 180(1) of the Act, being the duty of a director of a corporation to exercise their powers and discharge their duties with due care and diligence, in respect of information he gave to the market during the One-off Revenue period;

(b)    s 674(2A) of the Act by reason of his involvement in iSignthis’ contravention of s 674(2) of the Act during the One-off Revenue period;

(c)    s 180(1) of the Act in relation to the Visa termination by failing to discharge his duties with the due care and diligence insofar as the disclosure of Visa’s termination of its relationship with iSignthis to the market is concerned;

(d)    ss 1309(2) and (12) of the Act, by giving information to the ASX relating to the affairs of iSignthis that was false or misleading in a material particular and, or alternatively, omitted matters that, by their omission, rendered the information misleading in a material respect on two occasions arising in the context of Visa’s termination of its relationship with iSignthis;

(e)    s 182(1)(a) of the Act, being the duty of a director not to use their position as a director improperly to gain an advantage for themselves or someone else, insofar as he caused iSignthis to enter into the integration agreements to achieve certain performance milestones; and

(f)    s 181(1) of the Act, being the duty of a director to exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose, also insofar as iSignthis’ entry into the integration agreements to achieve the performance milestones is concerned.

9    For the reasons that follow, I have reached the following conclusions with regard to ASIC’s allegations against iSignthis and Mr Karantzis.

10    First, that iSignthis has engaged in conduct that was misleading or deceptive in relation to a financial product pursuant to s 1041H of the Act in the One-off Revenue period. I have also concluded that iSignthis breached its continuous disclosure obligations pursuant to s 674(2) of the Act in both the One-off Revenue period and in relation to the Visa termination.

11    Secondly, I have concluded that Mr Karantzis has contravened s 180(1) of the Act in respect of representations he made during the One-off Revenue period and in his conduct during the Visa termination period. I have also concluded that Mr Karantzis contravened s 674(2A) of the Act by reason of his involvement in iSignthis’ contravention of s 674(2) of the Act during the One-off Revenue period. Finally, I have concluded that Mr Karantzis contravened ss 1309(2) and (12) of the Act by giving information to the ASX that was false or misleading and which omitted matters that, by their omission, rendered the information misleading, on one occasion in May 2020 in the context of the Visa termination (but not the second occasion which is the subject of ASIC’s allegations).

12    Insofar as the allegations against Mr Karantzis concerning the achievement of the performance milestones are concerned, that is to say the alleged breaches of ss 182(1)(a) and 181 of the Act, I have concluded that ASIC has not made out its case against Mr Karantzis in relation to these matters.

13    Before turning to the detail of these allegations it is convenient to deal with certain preliminary matters and provide some further information by way of background.

THE CONDUCT OF THE HEARING, THE EVIDENCE AND THE PLEADINGS

14    The hearing of this matter commenced on 28 February 2023 and took place over 15 hearing days: 28 February 2023 to 3 March 2023, 6 March 2023 to 10 March 2023, then 5 June 2023 to 8 June 2023, followed by oral closing submissions on 26 and 27 June 2023. The hearing covered all questions in the proceeding relating to liability, and ASIC seeks declarations against iSignthis and Mr Karantzis in relation to the various contraventions of the Act which it alleges. The amount of any pecuniary penalty to be paid by reason of any contravention of the Act was not considered. ASIC’s position is that it will seek pecuniary penalties against iSignthis and Mr Karantzis and orders disqualifying Mr Karantzis from managing corporations in the event that it succeeds in obtaining declarations of contraventions.

15    As will be apparent, the hearing was conducted in two tranches. The first was ASIC’s opening and the company’s case, together in part with the position of Mr Karantzis in relation to certain of the claims. The claims relating to false or misleading information given to the ASX and breaches of director’s duties by Mr Karantzis were considered in the second tranche of the trial because these were claims only made against Mr Karantzis. In circumstances where ASIC seeks civil penalties against Mr Karantzis he exercised his right to rely on the penalty privilege; that is to say, the privilege from self-exposure to a penalty: see Macdonald v Australian Securities and Investments Commission (2007) 73 NSWLR 612; Anderson v Australian Securities and Investments Commission [2013] 2 Qd R 401. There was a more complete opening of Mr Karantzis’ case in relation to these matters after ASIC had substantially closed its case.

16    For present purposes then ASIC relied upon the following lay evidence:

(a)    affidavits of Mr Adam Boscoscuro, a senior lawyer employed by ASIC, sworn on 7 August 2021 and 18 October 2022;

(b)    an affidavit of Mr Scott Tilden, a program manager employed by ASIC, affirmed on 6 August 2021;

(c)    an affidavit of Ms Shanny Chen, an accountant employed by ASIC, affirmed on 6 August 2021; and

(d)    an affidavit of Mr Richard Plews, head of compliance at Morgans Financial Limited, affirmed 31 May 2023.

17    The affidavits of Mr Boscoscuro, Ms Chen, and Mr Tilden broadly relate to the custody of evidence obtained by ASIC on its investigation, the provenance of a certain audio recording, and in relation to various queries raised by ASIC regarding some accounting matters. The affidavit of Mr Plews relates to off-market share trading. Mr Boscoscuro was cross-examined. Mr Tilden, Ms Chen and Mr Plews were not cross-examined.

18    In addition, ASIC tendered a number of documents.

19    iSignthis relied on the following evidence of lay witnesses:

(a)    an affidavit of Ms Anna Ilina, the Anti-Money Laundering Compliance Officer for iSeM responsible for reporting to the CBC and MOKAS (the Unit for Combating Money Laundering in Cyprus) in relation to AML and counter-terrorism financing laws in Cyprus, sworn on 20 September 2021;

(b)    an affidavit of Mr Timothy Hart, the independent non-executive chairman of iSignthis, and, from December 2021 the executive chairman of iSignthis, sworn on 21 September 2021 (First Hart Affidavit);

(c)    an affidavit of Ms Elizabeth Warrell, the chief financial officer of iSignthis from 2 September 2019 and its joint company secretary from 1 November 2019, and the chief financial officer of iSeM from October 2021 until August 2022 when she resigned from iSignthis to focus on the business of iSeM (which is now known as ISX Financial EU Plc), sworn on 21 September 2021 (Warrell Affidavit);

(d)    an affidavit of Mr Scott William Minehane, a non-executive director of iSignthis since November 2011, sworn on 21 September 2021; and

(e)    an affidavit of Ms Linda Luu, Head of Legal, Australia, New Zealand and South Pacific for Visa AP (Australia) Pty Ltd, sworn on 12 October 2022 and filed by Visa AP in the proceeding in relation to objections to a subpoena issued by the defendants on 8 March 2022 seeking the production of documents and communications broadly relating to the suspension and/or termination of iSignthis and/or iSeM from around 2019-2020.

20    In addition to the lay evidence filed by iSignthis, Mr Karantzis relied on the following further lay evidence:

(a)    affidavits of Mr Anthony Seyfort, a partner of the firm HWL Ebsworth, sworn on 7 March 2023 and 10 May 2023; and

(b)    a second affidavit of Mr Timothy Hart, sworn on 7 March 2023 (Second Hart Affidavit).

21    Ms Ilina and Ms Luu were not cross-examined. Mr Hart, Mr Minehane, Ms Warrell and Mr Seyfort were each cross-examined.

22    The defendants also tendered a number of documents.

23    ASIC called Mr Andrew Sisson as an expert witness on the question of materiality as it arose in relation to various parts of the case. Mr Sisson provided three reports, the first dated 20 October 2021 and the second dated 4 February 2022. He also provided a supplementary expert report dated 24 May 2023, which was in response to a supplementary expert report of the defendants’ expert, Mr Gregory John Houston.

24    ASIC also filed an expert report of Mr Pambos Ioannides dated 2 February 2022 in relation to relevant Cypriot law.

25    Insofar as their expert evidence is concerned, iSignthis and Mr Karantzis rely on:

(a)    affidavits of Mr Houston, sworn 1 December 2021, and 7 March 2023, each an annexing expert report in relation to the question of materiality;

(b)    an affidavit of Mr Polyvios G Polyviou, sworn 29 November 2021, annexing a report relating to relevant Cypriot law; and

(c)    affidavits of Mr Timothy Heughan, a senior manager at Computershare, sworn 19 May 2023 and 5 June 2023, annexing an expert report and a supplementary report relating to off-market trading in iSignthis’ shares.

26    Mr Heughan was cross-examined. Mr Polyviou and Mr Ioannides prepared a joint expert report dated 3 March 2022 (Cypriot Joint Report) and ultimately were not cross-examined. Mr Sisson and Mr Houston also prepared a joint expert report dated 15 March 2022 (Materiality Joint Report). Mr Sisson and Mr Houston gave evidence and were cross-examined concurrently in both tranches of the hearing.

27    I consider and evaluate in some detail the evidence of Messrs Sisson and Houston below. I also consider and evaluate below, as necessary, the evidence of Messrs Polyviou, Ioannides and Heughan, and the relevant evidence of the lay witnesses.

28    The issues to be determined are set out in the parties’ pleadings, but with one minor exception to which I will come in due course, it is unnecessary to linger at this juncture with a description of the parties’ cases as they are put in the pleadings. This will become clear in my consideration below of ASIC’s various allegations, and the defences advanced to them by iSignthis and by Mr Karantzis. My consideration of the various parts of ASIC’s case in these reasons is ordered consistently with the way the parties presented matters in their written closing submissions.

29    I record, however, that the final iteration of ASIC’s pleading is the further amended statement of claim dated 9 March 2023. The final iteration of the first defendant’s defence is that dated 15 December 2021, and the final iteration of the second defendant’s defence is that dated 8 March 2023 (and filed 9 March 2023). ASIC also filed a reply dated 15 March 2021.

FACTUAL BACKGROUND

30    Under cover of this introduction I turn to those background matters which it is necessary to understand in order to grapple with the case which ASIC brings, and the defendants’ responses. As has been mentioned, there are broadly two periods of time relevant to the alleged contraventions. These periods, and the relevant circumstances, are as follows.

The One-off Revenue period

31    The One-off Revenue period begins in March 2015 and runs through until 3 August 2018, but with relevant facts that extend until 15 November 2019. The circumstances relate to:

(a)    iSignthis’ satisfaction, as at 30 June 2018, of a series of contractual conditions related to its revenue performance, the satisfaction of which led to the issuing of shares in iSignthis to other persons and entities; and

(b)    representations made by iSignthis and Mr Karantzis that, ASIC alleges, were false or misleading (at the earliest on 18 June 2018 and at the latest on 3 August 2018) about the proportion of iSignthis’ total revenue for the final quarter of FY2018 that was made up of one-off revenue and/or upfront fees, as opposed to recurring revenue.

The Performance Milestones

32    In March 2015 iSignthis was reverse-listed on the ASX after it acquired 100 per cent of the shares in two entities involved in the provision of online identification and payment authentication services (iSignthis BV and ISX IP Ltd) from iSignthis Limited BVI (the acquisition). iSignthis Limited BVI is a company incorporated in the British Virgin Islands (and also named iSignthis Limited) and controlled by Mr Karantzis, who was both its director and shareholder.

33    The consideration received by iSignthis Limited BVI (as vendor) for the acquisition was the issuing by iSignthis of some 300,000,000 Ordinary Shares and 366,666,667 Performance Shares. The Performance Shares were issued on terms that each class would convert on a one for one basis into Ordinary Shares upon iSignthis meeting certain Performance Milestones by 30 June 2018. The Performance Milestones required iSignthis to achieve revenue of $2.5 million (for Class A), $3.75 million (for Class B), and $5 million (for Class C) over a six-month reporting period.

34    In the event that iSignthis did not achieve the Performance Milestone for a class of Performance Shares before 30 June 2018, all the Performance Shares in that class would convert into a single Ordinary Share. However, as matters controversially transpired, iSignthis was successful in meeting all of the Performance Milestones by 30 June 2018 in the final six-month reporting period before the deadline, being the third and fourth quarters of FY2018, resulting in the issue of the 366,666,667 Ordinary Shares.

35    The Ordinary Shares issued as a result of the achievement of the Performance Milestones were transferred on Mr Karantzis’ direction substantially in accordance with pre-existing share arrangements, including to iSignthis Limited BVI (approximately 149 million shares worth approximately $27 million as at 30 June 2018), and under which other directors and officers of the company, including Mr Karantzis’ brother Andrew, and Mr Karantzis' mother, also benefited through the transfer to them of approximately 187 million Ordinary Shares (worth approximately $34 million as at 30 June 2018).

36    It is relevant to note, on ASIC’s case, that iSignthis had not achieved any of the Performance Milestones in any six-month period to 31 December 2017 following the acquisition. However, in the six-month period ending 30 June 2018, iSignthis reported revenue of approximately $5.5 million. Further detail as to the timing and source of this revenue is outlined below in considering whether Mr Karantzis breached his director’s duties in relation to the Performance Shares.

The integration agreements

37    The significant rise in revenue in the reporting period ending 30 June 2018 was due to iSignthis having entered into a series of what have been referred to as integration agreements in that period. These agreements involved iSignthis contracting with particular client entities to integrate those entities into online trading platforms (such as the “Panda” platform) and/or payment platforms, and to secure the relevant licensing services for the client. iSignthis had previously integrated customers onto trading/payment platforms. The agreements entered into in the first half of 2018, however, involved a new and more remunerative integration structure for the company.

38    At a high level, the structure of these agreements was that iSignthis, through a wholly owned subsidiary (Authenticate BV), would contract with the relevant entity to provide some combination of licensing, software, and integration services and simultaneously enter into a corresponding outsourcing agreement with another company to provide those services. iSignthis, through its subsidiary, would therefore book as revenue upfront the full amount of contracted for fees under the integration agreements (including the licensing and other service fees charged by the end-licensor), which would then be passed onto the corresponding out-sourcing party as costs incurred under the outsourcing agreement, less a project management fee of approximately 7.5 per cent.

39    Integration agreements broadly of this type were concluded by Authenticate BV, with a number of start-up companies. These were Corp Destination Pty Ltd, Fcorp Services Ltd, and IMMO Servis Group s.r.o.. There was later a variation agreement with Corp Destination. Corresponding outsourcing agreements were entered into with Fino Software Technologies Ltd, a Cyprus company outsourcing the licencing and integration services to be provided by Authenticate BV to Corp Destination and to Fcorp. An outsourcing agreement in relation to IMMO was entered into with another company, GibiTech Ltd. The relevant details of these agreements are considered further below.

40    iSignthis also had another commercial opportunity presented to it during the fourth quarter of FY2018 which did not proceed. That was the opportunity to provide an integrated third-party customer relationship management (CRM) system and trading platform to Rodeler Limited, working with BitTech Advanced Technologies Ltd. Reference will also be made to this below.

41    Upon contracting with the relevant clients, and in some instances before the contracts were executed, iSignthis, under Mr Karantzis’ direction, issued invoices for the contracted-for fees. All of the revenue was recorded before 30 June 2018. iSignthis recorded a significant increase in revenue for this period on the back of agreements which were substantively low-margin and concluded on a one-off transactional basis.

42    The provision of these integration services was a well-established part of iSignthis’ business. From around 2017, iSignthis sought to “integrate”, or provide customers with a payment services platform, to enable it to generate recurring transactional revenue by processing funds on behalf of its customers. Transactional revenue was based on and calculated by multiplying a merchant service fee (MSF) of approximately 1 per cent (or 100 basis points (bps)) by gross processed turnover volume (GPTV), the latter of which being the value of client funds which iSignthis had processed and from which it deducted its fees.

43    However, notwithstanding the substantial rise in revenue in the reporting period ending 30 June 2018, in the second half of calendar year 2018 iSignthis recorded revenue of only $1,111,365. iSignthis maintains that this decline was due to a number of issues. Namely, that the National Australia Bank Limited (NAB) ceased to process merchants classified under the merchant category code that included iSignthis’ subsidiary (Authenticate BV); that a change in Apple’s policy of protecting user privacy had restricted transaction volumes to below contracted GPTV maximums; and that iSeM lost access to Kobenhavns Adelkasse Bank (KAB), meaning it could not receive deposits and therefore settlements from card schemes and Worldline (the regulated financial institution for clearing and settling the European card transactions of iSeM).

The One-off Revenue representation timeline

44    As was mentioned at the outset, during the quarter ending 30 June 2018, iSignthis recognised revenue under the integration agreements totalling approximately €1,905,025, or approximately AUD$3 million. This one-off integration and setup services revenue under the integration agreements equated to approximately 75 per cent of the reported total unaudited revenue of AUD$3.95 million, and iSignthis incurred approximately AUD$2.85 million in one-off costs for out-sourcing services under the out-sourcing agreements (this being what has been referred to as the One-off Revenue/Costs Information).

45    iSignthis had earlier published a report to shareholders for the 2018 half year results on 28 February 2018 and a report to shareholders for the third quarter of 2018 ending 31 March 2018 on 26 April 2018 highlighting the increase in revenue in each quarter, as well as the proportion of revenue that was “settlement revenue” or “total operating revenue”.

46    In response to the 28 February 2018 report, in March 2018 Patersons Securities Limited, market analysts, published a research note titled “1H18 Result, Monetisation Ramping up!” which stated that “[i]n 2H18, settlement activity is expected to dominate the revenue and earnings profile, with c.65% of revenues in the 3Q18 to date being settlement related settlement activity”.

47    ASIC contends that iSignthis was aware of the One-off Revenue/Costs Information as early as 18 June 2018 when it issued invoices under the integration agreements for providing services under those agreements and took steps to recognise that revenue within the 30 June 2018 quarter. On 19 June 2018 there was a meeting of the iSignthis board of directors attended by all directors, including Mr Karantzis, where the directors were provided with the draft accounts for May 2018.

48    On 22 June 2018 iSignthis made an announcement titled “Cash Receipts - Performance Rights” which stated that “Cash receipts now in excess of AUD$3.75m for H2 of AUS FY2017/18” and announcing that the Class A and B Performance Milestones would be satisfied. In response to this announcement, on 26 June 2018, Patersons published a research note in relation to iSignthis titled “Moving to Profitability” which considered iSignthis’ revenue from the quarter on an “annualised run-rate basis”.

49    On 31 July 2018, iSignthis published its quarterly report for the period ending 30 June 2018. That report noted that iSignthis would hold an online Analyst Briefing on 3 August 2018. The 31 July 2018 quarterly report attached iSignthis’ Appendix 4C for that quarter, being the quarterly report for entities subject to Listing Rule 4.7B of the ASX Listing Rules (or Listing Rules).

50    After the publication of the report, Mr Martyn Jacobs, an analyst from Patersons, contacted Mr Karantzis via email on 31 July 2018 asking, “[a]re you able to say how much of the revenue was integration based?”. Mr Karantzis responded “[n]o - those other questions are for the annual report post audit - I don’t [sic] have data”.

51    On 1 August 2018, Patersons published a research note in relation to iSignthis entitled “Momentum and opportunity building”. The research note stated “[w]e have also rolled over our model resulting in a c.13% increase in the valuation to $0.45 / share” and noted that the valuation used a “DCF” (discounted cash flow) methodology.

52    Also on 1 August 2018, Mr Jacobs sent a further email to Mr Karantzis which attached a list of questions for the Analyst Briefing on 3 August 2018. Several of these questions were in relation to the breakdown of the proportion of total revenue comprised of one-off revenue versus recurring revenue, including “[p]lease advise the % of revenue in the June qtr that can be considered genuine recurring business activity as opposed to one-off integration type revenue?”. Mr Karantzis responded to Mr Jacobs and stated that “[s]ome of these are just nonsense”, Mr Jacobs then replied “I expected you would say that, but these are my questions to help my understanding, and frankly that of the market in general, who largely rely on me to help them …”. Mr Karantzis responded to this email stating:

You cannot seriously expect us to answer questions that will expose sensitive strategy …

Together, they make your questions appear very amateurish, and detract from the intelligent ones you have asked..

So, we will limit these to what makes sense to us – not to you

53    Mr Jacobs responded to Mr Karantzis at 11.43am attaching the Patersons research note of 1 August 2018.

54    At the Analyst Briefing on 3 August 2018, Mr Karantzis gave a presentation to both market analysts and investors regarding the performance of iSignthis in the fourth quarter of FY2018. The presentation was accompanied by a PowerPoint presentation which has been referred to by the parties as the Analyst Brief.

55    At page 3, the Analyst Brief stated: “[r]evenue in Q418 was in excess of $3.95m”. At page 6, the Analyst Brief stated: “[o]ne off Fees / One off Setups (Integrations) < 15% of revenue (recur on each new agreement) – Invoiced at milestone on 30 day terms”. It will be recalled that the true proportion of one-off revenue for the relevant period was approximately 75 per cent.

56    After he had finished his presentation, Mr Karantzis took questions from attendees including a question from Mr Mark Davies about the percentage of revenue in the previous quarter that was from upfront and one-off fees, to which Mr Karantzis responded that they had “cited a figure in the pack of less than 15 per cent”.

57    An audio recording of the analyst briefing, including Mr Karantzis’ exchange with Mr Davies, was published on the ASX market announcement platform.

58    On 6 August 2018, Patersons published another research note on iSignthis entitled “June Qtr conference call insights” (6 August Patersons research note). This note stated that “[r]ecurring business activity constituted c. 85% of revenues, with the balance being one-off integration related revenues”. That same research note was forwarded to Mr Karantzis by Mr Jacobs on 7 August 2018.

59    On 15 October 2019, the ASX wrote to iSignthis requesting a detailed breakdown of iSignthis’ contracted service fees revenue by services/solutions listed in the March 2018 quarter Appendix 4C for the six months ended 31 December 2017, 30 June 2018 and 31 December 2018. iSignthis responded in writing to the ASX on 25 October 2019, stating that the relevant figure for “Integration / Set up” services for the six-month period ending 30 June 2018 was AUD$26,860. That figure was not accurate.

60    After a further query letter from the ASX on 31 October 2019 with respect to how the IMMO and Fcorp integration agreements had been categorised, iSignthis responded on 15 November 2019. iSignthis stated that the figure provided in the 25 October 2019 response was mistaken and that the true figure for “Integration / Set up” services in the six-month period ending 30 June 2018 was AUD$3,056,187.

61    Further aspects of the One-off Revenue period will be canvassed below, as relevant to the consideration of the alleged contraventions.

The Visa termination period

62    The Visa termination period has its genesis on 4 October 2017 and runs through, relevantly until 17 August 2020. While there is some overlap between this timeframe and the One-off Revenue period, the transactions and other facts giving rise to ASIC’s allegations with respect to Visa’s termination of iSignthis are distinct from the basis for the allegations arising out of the One-off Revenue period.

63    For the sake of simplicity, the multiple entities operating under the umbrella of Visa Inc (except Visa AP) are referred to in these reasons simply as Visa.

Achieving principal membership

64    On 4 October 2017, iSignthis announced that one of its subsidiaries, iSeM, had been granted Visa principal membership status in Europe. The Visa principal membership was highlighted in a number of subsequent iSignthis announcements and was mentioned in the 3 August 2018 Analyst Briefing and the Analyst Brief to which reference has already been made. The Analyst Brief and the Analyst Briefing also highlighted elements of the company’s Paydentity service and its KYC and AML capabilities.

65    iSignthis identified the significance of being granted such status as enabling it to process payments made using Visa products rather than having to rely on a third party (which is itself a principal member) to perform that service on an entity’s behalf. This became of particular value to iSignthis because of the fact that the NAB and Worldline, which had previously processed (as principal members) transactions on iSignthis’ behalf, had indicated that they would no longer process transactions in high-risk markets, such as online gambling, in which iSignthis operated extensively.

66    On 8 August 2019, iSignthis announced, with some fanfare, that it had been granted Visa principal membership status in Australia, along with its own unique bank identification number (BIN).

67    From late 2017 and into 2020, iSignthis consistently highlighted its principal member status with Visa (as well as with other major card providers, such as Mastercard and JCB) to investors and to the market as demonstrative of the successful establishment of its ideal operating business model. Examples of iSignthis drawing attention to this fact include:

(a)    the Analyst Brief (in which Mr Karantzis’s presentation included reference to Visa’s 56 per cent market share in the card market);

(b)    the Annual Report for the year ending 30 June 2018;

(c)    a 27 November 2018 email to investors (attaching a market announcement of the same day), in which it was announced that iSignthis’ own payment processing system, ISXPay, was about to go live with respect to Visa and Mastercard, allowing iSignthis to process Visa and Mastercard transactions directly; and

(d)    the Annual Report for the year ending 31 December 2019.

68    As will be seen, however, before long the relationship with Visa would hit stormy waters and would ultimately founder.

A breakdown of relations

69    Under cover of an email sent on 9 March 2020, Visa sent a letter dated 6 March 2020 to iSignthis and iSeM, addressed to Mr Karantzis, advising of the suspension of the acquiring bank identification numbers for each company in Europe and Australia, and its activities as a registered third party for any other Visa members or clients, effective immediately (the 6 March letter). The 6 March letter raised a number of “serious concerns” that Visa had with regard to compliance and application of the Visa rules by iSignthis and iSeM, namely:

(a)    “AML concerns” regarding:

1.     Unusual transaction activity – Visa’s Financial Intelligence and Analytics (“FIA”) program conducts ongoing monitoring of IsignThis’ activities to alert Visa to any unexpected behaviour which should be investigated further. The FIA program identified an unexpectedly high volume of cross-border transactions at IsignThis merchants by United States cardholders. In addition, the FIA program identified a high number of transactions with merchant category codes (“MCCs”) often found to be associated with miscoded and/or illegal gambling. This indicates a potential violation of the Unlawful Internet Gambling Enforcement Act 2006. Visa contacted IsignThis via e-mail on 31 October 2019 to highlight the unusual transaction activity and requested further information relating to IsignThis’s AML/ATF program, as well as supporting evidence including, amongst others, a copy of the latest AML policy and e-copies of merchant onboarding documents. IsignThis provided responses including supporting evidence on 5 November 2019 but this was not sufficient to satisfy Visa’s AML program thresholds. In particular, the information provided, compared to the activity identified by the FIA program, has shown that (i) there does not appear to be a reasonable explanation for the high volumes of transactions being processed at these merchants; and (ii) there does not appear to be a clear rationale as to why such a large percentage of these transactions are being carried out by United States cardholders.

2.     Suspicious merchant activity – a review of a sample of the websites of merchants processing high volumes with IsignThis has raised suspicion as to the true origin of the transactions. In particular, transactions were not always possible on their websites and some websites were not indexed, therefore were unidentifiable by search engines such as Google. Visa has not been able to identify a reasonable explanation as to how such merchants can be operating at these transaction volumes under such circumstances. A review of a merchant’s website is a fundamental element of an effective merchant due diligence program, and this indicates gaps in the AML program of IsignThis.

3.     Derogatory news regarding IsignThis – Visa’s ongoing monitoring program has identified press coverage which raises concerns about Isignthis’ internal governance as well as its client portfolio. In particular, there are numerous press articles in respect of the step taken by the Australian Securities Exchange to suspend IsignThis from trading in October 2019 for alleged lack of adherence to listing rules. It appears that the stock is currently subject to reviews by the Australian Securities and Investment Commission and the Australian Securities Exchange. Additionally, an article in the Sydney Morning Herald on 18 December 2019 alleges that an IsignThis client, FCorp, has been ordered to stop all trading by the German financial regulator as it is trading without a licence. Given these allegations, the latter article raises further concerns about the effectiveness of the due diligence being performed by IsignThis and warrants explanation.

In relation to these concerns Visa concluded that it considered iSignthis to be in violation of “Visa Rule ID# 0000652;” and

(b)    ongoing “[r]isk concerns” including:

Visa has also identified a number of on-going Risk concerns, leading to an attempted risk review in August 2019 (the “Attempted Review”). IsignThis did not cooperate with the Attempted Review, as required by the Visa Rules, and has repeatedly indicated that it would continue to refuse to provide the required information to complete such a review. In such circumstances, Visa must rely on the information available through the Visa Compliance Programs, and there has been a significant number of cases since April 2019 when IsignThis has been highlighted as a cause for concern on the leading indicators for fraud, dispute and illegal activity. In addition, there has been a sharp increase in gaming transactions (MCC 7994), credit voucher transactions and transactions on MCC 6540 (stored value card purchase / load) following the Attempted Review. IsignThis has also breached the VAMP thresholds for excessive reported fraud in January and February 2020.

In addition, Visa has alerted IsignThis to a significant quantity of suspected cases of transaction laundering (alerts dated 5 November 2019, 9 December 2019 and 23 December 2019). The responses from IsignThis do not provide Visa with confidence that sufficient investigation by IsignThis has taken place. There does not appear to be any evidence of robust investigation into the suspicious cross border activity or further analysis of the concerns this level of activity raises.

The ongoing alerts from the Visa Compliance Programs and the suspected transaction laundering identifications lead Visa to reasonably conclude that IsignThis is introducing excessive risk into the Visa payment system and is not operating in sound and safe manner.

70    Further, the 6 March letter called for iSignthis to make available certain information to Visa by 16 March 2020.

71    As is noted in the 6 March letter, it appears that Visa had previously identified a number of on-going risk concerns with iSignthis resulting in an “attempted risk review” in August 2019. Visa contended that iSignthis did not cooperate with this review.

72    Mr Karantzis, on behalf of iSignthis and iSeM, replied to the 6 March letter on both 9 March 2020 (by email) and 11 March 2020. On 14 March 2020 Visa asked for further information. Mr Karantzis sent emails to Visa on 17, 19 and 25 March 2020 seeking, amongst other things, to “bring services back to an agreed subset of merchants whilst [the] review is undertaken”, citing the impacts of the COVID-19 pandemic and the suspension, and providing updated merchant listings as to deactivated and terminated merchants.

73    Matters came to a head on 17 April 2020 with a letter from Visa to iSignthis and iSeM, communicating that Visa was terminating its relationship with iSignthis and iSeM and those entities’ licences and that they must cease acting as a registered third party agent for any other Visa members or clients (the 17 April letter). The letter advanced a number of reasons for the decision, which are considered further below.

74    Adopting termination introduced by ASIC, this decision will be referred to as the Visa Termination Decision.

75    The following matters were noted by Visa (in the 17 April letter) as the reasons for its having decided to terminate its relationship with, and the licences of, iSignthis and iSeM:

(a)    “Inadequate merchant on-boarding processes”;

(b)    “Inadequate merchant due diligence”;

(c)    “The transaction monitoring program is not fit-for-purpose” that “had failed to identify the unusual transactional behaviour ”;

(d)    “General lack of proactive investigation and management”; and

(e)    “Failure to register and disclose the use of third-party agents”.

76    The 17 April letter set out steps to be taken by both parties “to effect the termination of iSignthis as a Visa client”. The letter stated:

The IST Response has not allayed the concerns outlined in the Suspension Letter, and in fact further evidence has been provided that IsignThis is not operating appropriate programs to manage Anti-Money Laundering and Risk. Therefore, in accordance with the Visa Rules, and to safeguard Visa’s global payment system from the excessive level of risk presented by the IsignThis relationship, Visa has decided to terminate its relationship with IsignThis in Europe and Australia. It must also cease acting as a registered third party for any other Visa members or clients.

77    Mr Karantzis and Mr Hart exchanged a number of emails on 18 April 2020 in which Mr Karantzis’ observed that Visa’s 17 April letter “couldn’t [sic] be worse” and “lets [sic] see what we can do re appeal etc”. Also on 18 April 2020, Mr Hart sent an email to Mr Karantzis providing what appears to be a draft announcement to the market.

78    Mr Seyfort of HWL Ebsworth, the company’s principal external legal adviser, received a telephone call from Mr Karantzis on 18 April 2020 in relation to the 17 April letter. Mr Seyfort asked Mr Karantzis a “large number” of questions about the importance of Visa to iSignthis’ business, and the apparent dispute with Visa. Shortly after the call, Mr Seyfort received emails from Mr Karantzis containing the 17 April letter with some of Mr Karantzis’ commentary and emails Mr Karantzis had sent to Mr Hart, including Mr Hart’s suggested form of a potential announcement. Mr Seyfort deposes that over the weekend of 18 and 19 April 2020 he had conversations with Mr Hart and Mr Karantzis about the 17 April letter, and that Mr Karantzis informed him that iSignthis and iSeM disputed and intended to challenge the contentions in the letter. Mr Seyfort’s evidence is that he informed them that he was inclined to the view that iSignthis did not need to make an announcement on the ASX market platform, but that he would reflect on the matter.

79    On 19 April 2020 Mr Karantzis emailed Mr Hart and Mr Seyfort, with the subject line “Hail Mary”, and set out a draft email he intended to send to Visa. In the email Mr Karantzis stated that “there are two theories at play here” being that:

1.     Visa want us out and this was just the medium used. Could be that we represent far too much brand risk for them, decision made at high level, irrevocable or

2.     Our friend …, who threatened to "shut us down" mid last year, has succeeded in doing so. Given he would have been one of the authors of this letter, and his newfound rise in authority, and also with a brand new … and also a brand new … - it would not be difficult for him to pull wool over and steer this to where it needs to be.

80    On 20 April 2020, Mr Seyfort spoke to Mr Karantzis and advised him that iSignthis did not need to make an announcement at that time on the basis that, in his view, it could rely on the incomplete negotiation exception to Listing Rule 3.1 of the ASX Listing Rules, and that it was doubtful that the Visa relationship was material to the price or value of iSignthis’ shares. On 20 April 2020, Mr Seyfort also emailed Mr Dominic White a colleague or friend of his who was Head of Merchant Sales & Acquiring, UK and Ireland at Visa to seek advice as to the best way to engage productively with Visa. Mr White responded later that day asking who iSignthis had been dealing with at Visa.

81    On 21 and 27 April 2020, Mr Karantzis, on behalf of iSignthis and iSeM, sent emails disputing the basis for the Visa Termination Decision and, therefore, the decision itself, and requesting that Visa withdraw its decision. Mr Karantzis also provided additional documents to Visa with those emails. In the 27 April 2020 email Mr Karantzis stated iSignthis’ position that there were “serious factual errors” in Visa’s 17 April letter, that evidence “for or against matters raised had not been established” and contended that there had been “a failure to afford procedural fairness, natural justice and due process to iSignthis”. Consequently, Mr Karantzis contended that, in iSignthis’ view, “the termination was wrongful and not in accordance with either of Visa’s regulatory or contractual obligations”.

82    Not long afterwards, on 29 April 2020, iSignthis released a business activity report for the first quarter of the 2020 calendar year. Amongst other things this report stated:

Processing to merchants across the Visa network was also suspended for parts of March pending response to Visa re queries on ASX “investigation”, concerns re “derogatory media” and the focus on high risk merchants. The Company is providing Visa with information regarding the ASX “investigation” and other matters. Visa has notified that their response times on this matter have been impacted by COVID-19.

It is noteworthy that this business activity report did not mention either that Visa had notified its response to iSignthis in the 17 April letter, or that Visa had communicated in that letter that the suspension had been escalated to a termination of its agreement with iSignthis and iSeM.

83    On 1 May 2020, Visa responded by way of letter to the two emails which Mr Karantzis had sent (on behalf of iSignthis and iSeM) on 21 and 27 April 2020. This letter stated:

We appreciate that Visa’s decision to terminate iSignThis’ membership is not a welcome one, and it is not one that is taken lightly.

…

As a gesture of goodwill, we have reviewed the documents you sent following the Termination Letter. Unfortunately, this information is not sufficient to impact the decision to terminate.

…

We trust that iSignThis has now had sufficient opportunity to disclose evidence of the IST Risk Programs, and nothing substantive has been omitted. Consequently, Visa will not review any further documentation from iSignThis on Visa’s findings

…

While it is unfortunate that we have had to terminate Visa’s relationship with iSignThis, it is the most appropriate course of action in this case and we are confident that Visa is acting within its rights. We will continue to communicate with you on final matters relating to the process of off-boarding.

84    Mr Karantzis responded to Visa’s letter dated 1 May 2020 on 5 May 2020 on behalf of iSignthis and iSeM. Mr Karantzis sought to address Visa’s concerns as disclosed in the preceding correspondence, providing reasons and evidence which iSignthis and iSeM believed should be sufficient for Visa to reverse its decision, and noting that they wished to avoid “a referral by iSignthis for regulatory intervention and/or judicial review”. Mr Karantzis concluded as follows:

In the interests of avoiding what will be a very public spectacle that will be further damaging to our brand and Visa’s, and noting the above very serious issues with Visa’s current position, we would be pleased to discuss the above with a decision maker of Visa in order to resolve the matter.

85    Mr Karantzis also emailed Visa’s Chief Risk Officer for Australia, New Zealand and the South Pacific (Mr Sam Gianniotis) on 6 May 2020, seeking to set up a call with someone to see if it was possible to “work this out”. Mr Gianniotis responded on 7 May 2020 that he would get some information and revert back to Mr Karantzis.

86    On 12 May 2020, Visa sent a letter in response to iSignthis’ letter of 5 May 2020. This letter stated:

We write in response to your letter dated 5 May 2020 (the “5 May Letter”), following the termination letter from Visa, dated 17 April 2020 (the “Termination Letter”), and subsequent correspondence.

In a gesture of good faith, we have reviewed all of the information provided in the 5 May Letter, however Visa has not altered its decision to terminate the relationship with IsignThis.

We will continue to communicate with you on final matters relating to the process of off-boarding, however please note that we will not review any further information relating to the basis of the decision to terminate, which is final.

Please refer to the Termination Letter for the ‘Next Steps’ for effecting termination, particularly in relation to timeframes.

87    iSignthis accepts that after receiving the letter dated 12 May 2020 from Visa, it recognised that it was no longer possible to negotiate a commercial outcome with Visa. Accordingly, on 13 May 2020, Mr Karantzis, on behalf of iSignthis and iSeM, sent an email to Visa which acknowledged Visa’s termination of the agreement but continued to dispute the basis of the termination.

Communications with the Central Bank of Cyprus

88    On 15 May 2020, an employee of the CBC, Ms Maria Kontou, sent an email to Ms Anna Ilina, the AML Compliance Officer for iSeM who was responsible for reporting to the CBC and The Unit for Combating Money Laundering in Cyprus (MOKAS), requesting information about the Visa suspension.

89    In response, between 15 and 18 May 2020, a written notification to the CBC was prepared by iSignthis.

90    iSeM provided a letter of response to Ms Kontou of the CBC on 18 May 2020.

91    It is to be noted that iSeM’s 18 May 2020 letter in response did not disclose that Visa had, according to the terms of the 17 April letter, terminated its relationship with iSignthis and iSeM, nor that one of its stated reasons for coming to such a decision was a concern regarding iSignthis’ and iSeM’s AML programmes.

92    On 21 May 2020, Ms Ilina spoke with Ms Kontou of the CBC by telephone and Ms Kontou acknowledged receipt of iSignthis’ letter and confirmed that no further clarification was required.

Communications with the ASX and further disclosures

93    A fortnight earlier, on 7 May 2020, the ASX had sent a letter to iSignthis pursuant to Listing Rule 18.7 (the 7 May query letter). Listing Rule 18.7 provides that a listed entity “must give ASX any information, document, or explanation” that the ASX asks for to enable the ASX to be satisfied that the entity “is, and has been, complying with, or will comply with, with the listing rules or any conditions or requirements imposed under the listing rules”. The letter related, inter alia, to queries surrounding the fact that iSeM had been listed, on Visa’s Global Registry of Service Providers, as “SUSPENDED BY AML” and, in that context, sought disclosure of information from iSignthis in answer to a series of questions posed by the ASX.

94    Between 13 May 2020 and 21 May 2020 Mr Karantzis, on behalf of iSignthis, and the ASX exchanged heated correspondence relating to the 7 May query letter. Mr Karantzis provided responses on 13 May 2020 and 20 May 2020 which the ASX deemed to be “not acceptable”.

95    On 24 May 2020, iSignthis sent a letter to its shareholders and to the ASX for release to the market titled “Letter to Shareholders re Visa Relationship & ASX Suspension”. This letter stated that iSignthis would “end its contractual relationship with Visa as a principal member in approximately 90 days”. That letter advised that the reason for the termination was that Visa had amended its rules, and that this amendment led to anti-competitive concerns. The letter is reproduced in full below. The 24 May 2020 letter did not expressly state that Visa had, by the terms of the 17 April letter, terminated its agreement with iSignthis; nor did it state that Visa’s reasons for such termination included concerns about iSignthis’ and iSeM’s AML programmes.

96    On 25 May 2020, Mr Karantzis, on behalf of iSignthis, sent an email to the ASX with attachments that included a copy of the 24 May 2020 letter and a document on iSignthis’ letterhead dated 25 May 2020 purporting to be a response to ASX’s 7 May query letter and the questions therein.

97    The 25 May 2020 response noted that:

(a)    Visa’s audit of iSeM related to compliance and risk review, rather than to AML (or related) concerns;

(b)    iSignthis had not received the results of the Visa audit because it had been referred to a third-party independent auditor;

(c)    Visa’s reasons for suspension of iSeM were founded upon brand risk, including in relation to ASX’s investigation into iSignthis and “derogatory media”; and

(d)    any and all allegations of issues relating to money laundering appeared to have “originated with certain elements of the Australian media” and were not part of Visa’s audit.

98    It will be necessary to return in some detail to the terms of the ASX’s 7 May query letter, and Mr Karantzis’ response in his 25 May 2020 letter.

99    Over approximately the next two months the ASX obtained copies of correspondence which had been exchanged between iSignthis and Visa. This correspondence included the 6 March letter and the 17 April letter.

100    On 5 August 2020, the ASX sent a query letter to iSignthis (the 5 August query letter), pursuant to Listing Rule 18.7, requiring that iSignthis answer a series of further questions, and provide further information to the ASX in relation to the breakdown of iSignthis’ relationship with Visa. For present purposes, the 5 August query letter specifically sought explanations from iSignthis as to why it had not disclosed the fact of the Visa termination, nor the reasons for the termination, to the ASX.

101    Mr Karantzis, on behalf of iSignthis, responded to the 5 August query letter by way of its own letter dated 17 August 2020 (the 17 August 2020 response). The 17 August 2020 response did not answer the specific questions which had been put to iSignthis in the 5 August query letter. It did, however, assert that review of the full series of relevant correspondence between iSignthis and Visa showed the “true position” that iSignthis and Visa “were engaged in robust negotiations for a number of months” because Visa had “expressed concern about doing business with [iSignthis] because of the controversy surrounding [iSignthis]”. The 17 August 2020 response asserted that the “controversy ha[d] been massively fuelled, if not caused, by ASX”.

102    The 17 August 2020 response went on to note that that “[u]ltimately, the relationship was terminated in the context of rule changes by Visa that are inconsistent with the business model of [iSignthis]” alleging, further, that such rule changes were anti-competitive. The letter also stated that Visa’s AML “risk speculation” is not supported by iSignthis’ independent AML audit and the lack of concern by AML regulators.

103    Once again, it will be necessary to return to the terms of the 5 August query letter and the 17 August 2020 response.

104    Against this background I turn to consider each of the sets of allegations made by ASIC against iSignthis and Mr Karantzis. I deal first with what the parties have referred to as the One-off Revenue Representation claims, before moving to the alleged non-disclosure of the One-off Revenue/Costs Information. I then deal with the non-disclosure of the Visa termination information, before addressing the allegations that Mr Karantzis gave false and misleading information to the ASX arising from the Visa termination. Finally, I address the breach of directors’ duties allegations against Mr Karantzis in relation to the achievement of the Performance Milestones.

ONE-OFF REVENUE REPRESENTATION CLAIMS

105    As has been mentioned, ASIC alleges that iSignthis contravened s 1041H of the Act by engaging in conduct, in relation to shares in iSignthis, that was false or misleading.

106    Section 1041H of the Act provides:

(1)     A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.

107    The issue for the court to determine is whether iSignthis’ conduct in presenting the Analyst Briefing on 3 August 2018, and representing that in the fourth quarter to 30 June 2018 revenue from one-off or up-front fees accounted for less than 15 per cent of the total revenue (the One-off Revenue Representation, as defined in paragraph 26 of the further amended statement of claim dated 9 March 2023), was false or misleading.

ASIC’s submissions that iSignthis contravened s 1041H of the Act

108    ASIC submits and I accept that the following matters are not in dispute:

(a)    On 3 August 2018, iSignthis held an online interactive session for market analysts and investors about the company’s financial results and performance in the fourth quarter of the financial year ending 30 June 2018 which has been referred to as the Analyst Briefing. The Analyst Briefing was presented by Mr Karantzis and accompanied by a PowerPoint presentation, which has been referred to as the Analyst Brief.

(b)    The Analyst Brief PowerPoint presentation stated:

(i)    under the heading “Quarterly summary”, that “Revenue in Q418 was in excess of $3.95m”; and

(ii)    under the heading “Discussing the ‘Cash to Revenue Lag’” under “Questions Received”, that “One off Fees / One off Setups (Integrations) < 15% of revenue (recur on each new agreement) - Invoiced at milestone on 30 day terms”.

(c)    During the Analyst Briefing, the following verbal exchange occurred between Mr Karantzis and one of the participants, Mr Davies:

Mr DAVIES:     Thanks, thanks for that. Good presentation. I just wanted to ask you a couple of questions. Look, you've largely covered them but what, what percentage of the revenue last quarter was from one, from upfront and one-off fees? And, and an easy one for you. Are you, are you expecting to continue revenue growth in the next quarter?

Mr KARANTZIS:     We’ve actually cited a figure in the pack of less than 15 per cent on the first question.

(Emphasis added.)

(d)    Following the Analyst Briefing, a link to an audio recording of the presentation was published on the ASX Market Announcement Platform.

109    ASIC alleges that the conduct of iSignthis and Mr Karantzis in making the One-off Revenue Representation in the Analyst Brief and during the Analyst Briefing, and publishing the documents on the ASX Market Announcement Platform, was conduct done in relation to shares in iSignthis. iSignthis admits that the shares were a “financial product” within the meaning of ss763A and 764A of the Act.

110    As has been mentioned, it is not in dispute that in the fourth quarter to 30 June 2018 iSignthis recognised revenue under the integration agreements totalling approximately $3 million, which is approximately 75 per cent of the reported total unaudited revenue of $3.95 million.

111    Consistently with Mr Hart’s evidence, ASIC submits that if, therefore, having regard to the information in the Analyst Brief and the answer given by Mr Karantzis during the Analyst Briefing, iSignthis represented that in the fourth quarter to 30 June 2018 revenue for one-off or up-front fees accounted for less than 15 per cent of total revenue (the One-off Revenue Representation), that information would have been false and misleading and in contravention of s 1041H which ought to have been corrected by iSignthis.

112    Insofar as the broader context in which the representations were made is concerned, ASIC submits that it includes the following surrounding facts and circumstances.

113    First, that the Analyst Briefing was made in circumstances where previous disclosures and reports made by the company had generated a narrative of a startup company building recurring transactional (or “settlement”) revenue through the processing of GPTV from integrated clients.

114    The following iSignthis publications are advanced by ASIC in support of this contention:

(a)    In October 2017, iSignthis published a report to shareholders for the first quarter of FY2018 ending on 30 September 2017. The report stated that cash receipts were up quarter on quarter and transaction growth was continuing. A graph represented that “total recurring transactions” were progressively increasing quarter on quarter from zero in the first quarter of FY2017 to over 600,000 transactions in the first quarter of FY2018.

(b)    In January 2018, iSignthis published a report to shareholders for the second quarter of FY2018 ending 31 December 2017. The note stated:

•    Total recurring transactions (Tx) for the December quarter outperformed expectations, increasing +153% vs the September quarter:

•    This outperformance was driven by stronger than expected platform usage from existing customers and the addition of new customers in November and December 2017

•    The Company expects growth to normalise to more sustainable levels and provides guidance for the March quarter Tx volumes of approximately 30% QoQ

The report contained an updated graph of “total recurring transactions” showing an increase over the first quarter of FY2018 (of over 600,000 transactions) to approximately 1.6 million transactions in the second quarter of FY2018. It also contained a section “revenue from recurring transactions” with a graph “total recurring revenue” showing a progressive increase from zero in the first quarter of FY2017 to over €100,000 in the first quarter of FY2018 and over €300,000 in the second quarter of FY2018.

(c)    On 28 February 2018, iSignthis published a report to shareholders for the FY2018 half year results to 31 December 2017. Under the heading “operational trading outlook”, the report stated that “Settlement revenues now make up over 65% of our revenue by vertical and will be the primary driver of revenues going forward”. Settlement revenue or transaction processing revenue was considered by the company and described in its reports as being recurring.

(d)    On 26 April 2018, iSignthis published a report to shareholders for the third quarter of FY2018 ending 31 March 2018. It said that unaudited revenue for the March quarter was $1.48 million. The report stated that contracted GPTV had increased to more than $500 million, and it included a graph of “Total Operating Revenue” showing a progressive increase from zero in the first quarter of FY2017 to over €300,000 in the second quarter of FY2018 and over €1,000,000 in the third quarter of FY2018.

(e)    On 31 July 2018, as has been mentioned, iSignthis released a report to shareholders for the final quarter of FY2018, ending 30 June 2018. The report presented the unaudited financial results of iSignthis for the final quarter ($3.95 million revenue) and the 6 months to 30 June 2018 ($5.5 million revenue), and stated that the Performance Milestones for each of Class A, B and C would be met. Under the heading “business update”, the report stated:

The Company is pleased with the continual transaction volume growth quarter on quarter and the generation of revenue in excess of 167% when compared with the previous quarter. Whilst we are seeing revenues from a relatively low number of integrated customers, it is pleasing to see that strong numbers are now being delivered across each of our industry verticals (Identity verification, processing and card acquiring settlement services).

115    Secondly, ASIC notes that these announcements were followed and reported on by Mr Jacobs at Patersons as follows:

(a)    In response to the company’s 28 February 2018 announcement, in March 2018 Patersons published a research note titled “1H18 Result, Monetisation Ramping up!”. The note stated: “In 2H18, settlement activity is expected to dominate the revenue and earnings profile, with c.65% of revenues in the 3Q18 to date being settlement related.”

(b)    In response to iSignthis’ 22 June 2018 announcement, on 26 June 2018 Patersons published a research note titled “Moving to Profitability”. The note stated:

Our interpretation is that ISX is close to achieving the $5m revenue target (c.$10.0m annualised). If this is correct, it suggests that ISX has generated c.$3.5m revenue in the June qtr or c.$14.0m on an annualised run-rate basis, as compared with c.$0.7m reported in FY17. Achieving such revenue levels would indicate that ISX has finally hit profitability and should attract a new level of investor interest. It would also suggest an earnings upgrade could be warranted for our FY19 forecasts. The recent transaction banking announcements are a sign of positive progress and we expect this new activity has had some influence in the forthcoming June qtrly.

The note continued:

If ISX hits $5m or goes close to it, it would mean that ISX has generated c.$3.5m in revenue for the June qtr, up from c.$1.5m in the March qtr. Subsequently, ISX would be operating at a run rate of c.$14m revenue pa. This equates to our full-year forecast revenue for FY19 and would imply a future upgrade is warranted.

116    ASIC notes that Mr Sisson gave evidence that Mr Jacobs, who authored the June note, had formed a view that the $3.5 million revenue generated in the June quarter was recurring revenue, from which he anticipated that the company would be generating $14 million on an annualised run-rate. That estimate of $14 million annual revenue is only reliable, ASIC submits if the $3.5 million generated in the June 2018 quarter was recurring.

117    ASIC also notes the evidence that in July 2018 Mr Karantzis confirmed to Mr Jacobs in correspondence that the June quarter revenue could be annualised:

Question - And therefore we can annualise this quarters revs on estimates cost base 6— 8ish meaning company is now cash flow positive and profitable?

Once supply chain issues are solved, yes. …

118    Thirdly, ASIC notes that the 31 July 2018 announcement invited questions about the June quarter results in advance of the Analyst Briefing, and Mr Jacobs asked questions seeking confirmation of what proportion of the revenue was recurring. In this regard ASIC refers specifically to the following:

(a)    As has been mentioned, on 31 July 2018 Mr Jacobs sent an email to Mr Karantzis asking:

… Are you able to say how much of the revenue was integration based?

Are you able to provide some colour around revenue segmentation in the qtr between the functional areas — KYC, Processing, Settlement, Transaction Banking?

(b)    On 1 August 2018, Patersons published the research note to which reference has already been made entitled “Momentum and opportunity building”, which Mr Jacobs sent to Mr Karantzis by email at 11.43am that day. The report stated:

As ISX achieved >$5m revenue for the June half, it subsequently qualified for all three tranches of the c.336m performance shares, which are expected to be issued in the September qtr, subject to final audit. The new shares expand the total share base by c.50% to 1.004bn shares.

Although the result is subject to audit and the revenue target is a simple target, it would be helpful for the market to know what % of the June qtr revenue can be classified as recurring business activity as opposed to one-off in nature. Assuming it is a high portion, understanding this point would assist the market’s understanding of the underlying business momentum being experienced by the company. We hope to have this question answered on Friday’s conference call.

(Emphasis added.)

(c)    Also on 1 August 2018, as has been mentioned, Mr Jacobs sent an email to Mr Karantzis attaching a list of questions for the forthcoming briefing. The following questions in that email related to the breakdown of iSignthis’ revenue in the quarter:

Please segment the revenue by % between KYC, Processing, Settlement and Transaction Banking?

Please advise the % of revenue in the June qtr that can be considered genuine recurring business activity as opposed to one-off integration type revenue?

…

It would be helpful to have an industry breakdown of the revenue for the June half? (CFD, Options etc.)

…

Can you please elaborate on the 2nd dot point on page 5 that refers to an additional low margin revenue stream? Please describe what this service is, how material it can be to overall financial performance and why it is strategic?

(d)    ASIC submits that the reference in Mr Jacobs’ above question to the “2nd dot point on page 5” is to iSignthis’ 31 July 2018 report referred to above which noted:

Additional one off revenues to new merchants enabling direct connection to our core services. These revenues are at low margin and have a direct correlation with an increase in cost of goods sold but they will enable long term, consistent revenues via our core services and creates a stickier relationship with the merchant…

119    Insofar as the immediate context in which the representations were made is concerned, ASIC submits that includes the information communicated in the Analyst Brief and in answer to the questions put to Mr Karantzis during the Analyst Briefing, as follows:

(a)    the Analyst Brief contained slides addressing “Questions Received”, being those questions received following the invitation stated in the company’s report to shareholders for the 30 June 2018 quarter.

(b)    The “Questions Received” section of the Brief included a slide “Discussing the ‘Cash to Revenue Lag’”, which set out an explanation of the revenue-producing products including “One off Fees / One off Setups (Integrations)”.

(c)    This slide, ASIC submits, addresses the first two questions asked by Mr Jacobs set out above — as to the % revenue by segment and % revenue that is recurring as opposed to one-off integration.

(d)    In that context, ASIC submits, the “Discussing the ‘Cash to Revenue Lag’” slide stated that the “One off Fees / One off Setups (Integrations) < 15% of revenue (recur on each new agreement) - Invoiced at milestone on 30 day terms”.

120    ASIC submits that this statement — “One off Fees / One off Setups (Integrations) < 15% of revenue (recur on each new agreement)” — could conceivably be interpreted in one of two ways.

121    The first is that such fees are less than 15 per cent of total revenue received by the company across all segments in the relevant reporting period. On this reading, so ASIC says, about 15 per cent of the company’s business revenue in that period would include revenue received from integrating new customers.

122    The second way ASIC accepts this statement could be interpreted is that such fees are less than 15 per cent of the revenue over the term of a typical client relationship. That is, out of the total revenue received from a single customer – from integration, through transaction processing on a platform, until completion/termination of a client relationship – about 15 per cent is from integration services and about 85 per cent is from processing services. On this reading, ASIC accepts, no information is given about what proportion of the company’s total revenue in the relevant reporting period is from one-off integration fees.

123    ASIC accepts that the words “(recur on each new agreement)” are consistent with both meanings. These words, ASIC says indicate that although these fees are “one off” in the sense of only being paid once per agreement entered into, revenue from this product (integrations) may recur as new clients are integrated. Revenues from one-off integrations would be expected to recur on each new agreement, and in each relevant reporting period.

124    ASIC submits that focusing on the information in the Analyst Brief, it is necessary for the court to characterise the effect of that information on the state of mind of an ordinary and reasonable member of the class of persons to whom the information was directed, judged by reference to the broader and immediate context.

125    ASIC submits that the information was directed to market analysts in attendance at the Analyst Briefing and to the market and investors through publication on the ASX, an invitation to the Analyst Briefing having been included in the company’s 31 July 2018 report to shareholders for the quarter ending 30 June 2018. ASIC submits that an ordinary and reasonable person who attended the Analyst Briefing or listened to the Analyst Briefing after it was published on the ASX (being a reasonable person who ordinarily invests in securities), would be expected at least to have received and read that 31 July 2018 announcement, and would very likely have been following the company’s financial progress including by reading previous announcements and publications made by and in relation to the company.

126    In this regard ASIC notes that Mr Houston’s evidence was that Mr Jacobs’ views can be taken to reflect those of market participants. Thus, ASIC submits Mr Jacobs might reasonably be viewed as representative of the ordinary and reasonable member of the class.

127    ASIC submits further that there are two contextual matters that would likely bear upon the minds of a reasonable member of the class of analysts and investors.

128    The first of these is that the Analyst Brief was prepared in the context of the 30 June 2018 quarterly results and, in part, to answer questions invited from analysts and investors about those results. In that context, ASIC submits a reasonable analyst or investor would likely interpret the information in the Analyst Brief to be directed to explaining the 30 June 2018 quarterly results (that is, the proportion of one-off revenue over that particular reporting period) and not the term of a typical client relationship. ASIC submits that, contrary to iSignthis’ opening submission, there is no contextual reason why a reasonable analyst or investor would read the 15% figure as explaining the 2018 Full Year results in circumstances where the Analyst Brief was focused upon the “Quarterly Summary” for the period just ended, and the full year results would not be known for another six months.

129    The second contextual matter, ASIC submits, is that iSignthis was a start-up company focusing upon integrating and building new client relationships. In previous announcements the company had highlighted new integrations coming on board, which were expected to bring in GPTV over future reporting periods. As at 30 June 2018, GPTV revenue was anticipated by the market to be coming on-line, but the company was in the early phases of its client relationships. In the 31 July 2018 report to shareholders on the 30 June 2018 quarter, the company gave the following business update:

The Company is pleased with the continual transaction volume growth quarter on quarter and the generation of revenue in excess of 167% when compared with the previous quarter. Whilst we are seeing revenues from a relatively low number of integrated customers, it is pleasing to see that strong numbers are now being delivered across each of our industry verticals (Identity verification, processing and card acquiring settlement services).

The ongoing focus is to continue to build on these numbers in order to reach a break even position as quickly as possible. The business development division is looking at completing contracts to new customers whilst at the same time the merchant support team is finalising integration of services to contracted clients. New business, new integrations and growth of existing customers are all factors in the quarter on quarter transaction and revenue growth.

130    ASIC submits that in this context a reasonable analyst or investor would not expect the company to report on the proportions of one-off and recurring transaction revenue over the full term of a typical client relationship. The company would not be expected to have data about a typical client relationship from integration to completion given the stage of development of those relationships. ASIC contends that the company would reasonably be expected, however, to report on how the business was tracking in integrating new customers to achieve “quarter on quarter transaction and revenue growth”, and what proportion of the revenue in the previous quarter was attributable to such transaction revenue and “growth of existing customers”, and what proportion was attributable to “new business, new integrations”.

131    Thus, ASIC submits that in these circumstances the written Analyst Brief itself was misleading or at least likely to mislead. It is said that in the immediate and broader context in which it was made, an ordinary and reasonable analyst or investor would have understood the representation to be referring to the proportions of revenue reported for the 30 June 2018 quarter.

132    As to the oral representation said to have been made at the Analyst Briefing, ASIC submits that it is plain that Mr Karantzis’ response to the question asked during the briefing was misleading or deceptive. Mr Davies’ question during the briefing is submitted to have been unambiguously clear: “what percentage of the revenue last quarter was from one, from upfront and one-off fees”. ASIC submits that Mr Karantzis’ answer to that question: “We’ve actually cited a figure in the pack of less than 15 per cent” clearly represented that the percentage of revenue in the 30 June 2018 quarter from one-off integration fees was less than 15 per cent.

133    This is so, ASIC submits, whatever meaning is attributed to the written statement in the pack. If (as ASIC contends) an ordinary and reasonable analyst or investor would have understood the written statement to mean that one-off integration revenue accounted for less than 15 per cent of revenue in the 30 June 2018 quarter, the oral statement repeated that information and reinforced the false representation.

134    Alternatively, ASIC submits, by reference to Mr Sisson’s evidence, if there was ambiguity in the written statement, the oral statement would very likely have dispelled that ambiguity and indicated that the information in the pack was made in relation to the 30 June 2018 reporting period, and not over the course of a client relationship.

135    In the alternative, ASIC submits, if (on the defendants’ case), the written statement is taken to mean that one-off integration revenue accounts for less than 15 per cent of revenue over a typical client relationship, the oral statement would not have created ambiguity, or “confusion or wonderment” in the mind of a reasonable person. Rather, it would likely have indicated that the 15 per cent figure also applied in the 30 June 2018 quarter. Both statements, ASIC submits, can be true. If one-off integration revenue accounts for less than 15 per cent of total revenue per customer over a typical client relationship, and that proportion recurs on each new agreement, it would not be surprising to be told that one-off integration revenue also accounted for less than 15 per cent of total revenue in a particular reporting period.

136    ASIC also submits that although it is not determinative, it is relevant and significant that the conduct did in fact mislead Mr Jacobs in the manner alleged: see Domain Names Australia Pty Ltd v .au Domain Administration Ltd (2004) 139 FCR 215 at 220 [17] (Wilcox, Heerey and Nicholson JJ). Consistently with Mr Houston’s evidence, Mr Jacobs was a “representative member” of the class of persons to whom the Analyst Briefing was presented and whose views can be taken to reflect those of market participants. ASIC notes that following the Analyst Briefing, Mr Jacobs published a research note on 6 August 2018 which observed that recurring business activity constituted 85 per cent of revenue, with the balance of 15 per cent being one-off integration related revenues. Moreover, ASIC contends, not only did the One-off Revenue Representation cause Mr Jacobs to be misled, but it caused him to pass on his understanding of what was said and presented by Mr Karantzis, and to repeat the One-off Revenue Representation in his own publication to other investors and potential investors in the market.

iSignthis’ response to ASIC’s One-off Revenue Representation claims

One-off Revenue Representation: “in writing”

137    iSignthis’ position is that it cannot be said that the one-off revenue representation was made in writing in the Analyst Brief.

138    iSignthis submits that the plain and natural meaning of the words “One off Fees/One off Setups (Integrations) < 15% of revenue (recur on each new agreement)” is that for each customer the integration fee was 15% of the total contract revenue. In this regard iSignthis notes that Mr Sisson accepted that the written statement “could be interpreted to mean less than 15% of revenue over the full term of a typical client relationship”. Likewise Mr Houston considered that the written material appeared to convey the typical composition of revenue per agreement as opposed to the revenue composition for the fourth quarter of FY2018. iSignthis submits that this is also the way the company’s auditors (Grant Thornton) and the company secretary, Mr Todd Richards, understood the integration revenue. iSignthis proffers the example of Mr Bradley Kraftt of Grant Thornton, in anticipation of the audit, saying to Mr Richards that he appreciated “the integration fees will, relative to billings throughout the remainder of each contract, … be proportionally small…” (emphasis added).

139    iSignthis points also to the third page of the Analyst Brief which is entitled “Quarterly summary”. It is submitted that that page contains statements in relation to the revenue for the fourth quarter of FY2018; in particular, that it exceeded $3.95 million. However, iSignthis submits, there is no statement on that page that 15 per cent of the total revenue for the fourth quarter of FY2018 was for one-off or up-front fees. Had it been intended to convey that the expression “<15% of revenue” related to the quarterly revenue, iSignthis submits that this is the page where the reference should have appeared. In this regard iSignthis contends that the information on this page was given in the context of the quarterly reports and, in particular, the report dated 31 July 2018 which said that in the fourth quarter of FY2018 iSignthis had achieved “[a]dditional one off revenues …” which “have a direct correlation with an increase in cost of goods sold.”

140    In addition, iSignthis points to the fact that the sixth page of the Analyst Brief, which contains the “<15%” reference, is entitled “Discussing the ‘Cash to Revenue Lag’”. This page, it is said, is concerned with the company’s products generally, including “One off Fees/One off Setups”. iSignthis submits that contextually, this page does not contain a statement that 15 per cent of the total revenue for the fourth quarter of FY2018 was for one-off or up-front fees.

141    iSignthis draws attention also to the eighth page of the Analyst Brief which is entitled “Discussing the ‘Recurring Revenue’ & ‘Margins’”. This, it is said, dealt with contributions to recurring revenue, including GPTV being greater than $600 million. iSignthis submits that it does not contain the alleged One-off Revenue Representation or any suggestion that 85 per cent of the total revenue for the fourth quarter of FY2018 was recurring.

142    iSignthis submits finally that the fact that the Analyst Brief does not contain the alleged One-off Revenue Representation can be implied from the fact that the oral question needed to be asked during the Analyst Briefing on 3 August 2018. It is submitted that if the written document contained the alleged representation, then there would have been no need for the question to have been asked during the presentation.

One-off Revenue Representation: “orally”

143    Insofar as the One-off Revenue Representation is alleged to have been made orally, iSignthis contends that the answer given towards the end of the presentation (“[w]e’ve actually cited a figure in the pack of less than 15 per cent…”) referred the audience back to the written document. iSignthis submits that ambiguity immediately arose because that document referred to 15% in a different context, being the composition of revenue over the term of a typical client relationship. ASIC’s case, iSignthis contends, is too simplistic because it focuses all the attention on the question which, it admits, was clear, rather than on the answer, which it accepts was plainly not clear.

144    iSignthis notes that Mr Houston described this feature of the oral response many times in his evidence. His view is that the ambiguity arose from the combination of the question, the oral answer and the material referred to in the written document. Mr Houston explained that the written material on the page of the analyst briefing “appeared to be nothing to do with the June quarter” as he read it to be “ commentary on … the lifecycle of a new merchant.” Mr Houston said that the material “referred to in the answer was not a response to the question because it concerned something different…” and therefore “gives rise to ambiguity… .” And then again: “there’s a question, and there is a response that says, ‘yes, the answer is over there’ and when I look at ‘over there’, and see what’s said to be the answer, it’s not responsive to the question”.

145    In these circumstances iSignthis submits that the oral answer given to the question must have caused the audience confusion because the Analyst Brief did not contain the One-off Revenue Representation - it did not attribute less than 15 per cent of the revenue in the fourth quarter of FY2018 to up-front and one-off fees and instead said something else.

146    In any event, iSignthis submits the intended audience should be understood as being a group of sophisticated institutional investors, members of whom would have read the comprehensive quarterly report to shareholders for the fourth quarter of FY2018 only two days earlier. iSignthis submits that the terms of the quarterly report would have exacerbated the uncertainty arising from Mr Karantzis’ confusing oral remark because the report disclosed “new revenue streams” including “additional one off revenues to new merchants enabling direct connection to our core services”. The report said that “[t]hese revenues are at low margin and have a direct correlation with an increase in cost of goods sold…”. Appendix 4C then disclosed a very large increase in quarterly receipts for the fourth quarter of FY2018, being $2.633, million matched by even larger “product manufacturing and operating costs” of $2.656 million. iSignthis notes that as Mr Hart and other witnesses explained in their evidence, “any competent analyst would have looked at the high cost of goods … and pair that with the revenue … and worked out it was low margin”. Thus, it is contended, the formal quarterly report was quite inconsistent with an interpretation of Mr Karantzis’ words (“we’ve actually cited a figure in the pack of less than 15 per cent on the first question”) as conveying an answer to the question. The quarterly report, iSignthis submits, is not reconcilable with an interpretation that “upfront and one off fees” were less than 15 per cent for the fourth quarter of FY2018.

147    Although iSignthis accepts that Mr Jacobs interpreted Mr Karantzis as conveying that “recurring business activity constituted c.85% of revenues”, it is submitted that ASIC did not call Mr Jacobs and that in consequence his analytical abilities are unknown. In this regard, iSignthis notes that when Mr Jacobs was asking about the percentage of revenue for the fourth quarter of FY2018 that was “one-off integration type revenue”, Mr Karantzis responded that he was “stunned that as an analyst, you havent [sic] worked out the maximum extent of the one offs”. It is said that Mr Karantzis could only have been referring to the quarterly report including Appendix 4C.

Relevant principles

148    The relevant principles for determining the meaning of particular conduct and whether it was misleading or deceptive, or likely to be so, involve in the present circumstances consideration of what meaning the conduct conveyed, and determining whether that conduct in light of that meaning was misleading or deceptive or likely to mislead of deceive: Self Care IP Holdings Pty Ltd v Allergan Australia Pty Ltd (2023) 97 ALJR 388; [2023] HCA 8 at 407 [80]. In Self Care the Court explained at 407-408 [82]-[83]:

82     [These] steps require the court to characterise, as an objective matter, the conduct viewed as a whole and its notional effects, judged by reference to its context, on the state of mind of the relevant person or class of persons. That context includes the immediate context – relevantly, all the words in the document or other communication and the manner in which those words are conveyed, not just a word or phrase in isolation – and the broader context of the relevant surrounding facts and circumstances. It has been said that “[m]uch more often than not, the simpler the description of the conduct that is said to be misleading or deceptive or likely to be so, the easier it will be to focus upon whether that conduct has the requisite character”. That said, the description of the conduct alleged and identified at the first step should be sufficiently comprehensive to expose the complaint, because it is that conduct that will ultimately, as a whole, be determined to be or not to be misleading or deceptive.

83     Where the conduct was directed to the public or part of the public, the third and fourth steps must be undertaken by reference to the effect or likely effect of the conduct on the ordinary and reasonable members of the relevant class of persons. The relevant class of persons may be defined according to the nature of the conduct, by geographical distribution, age or some other common attribute, habit or interest. It is necessary to isolate an ordinary and reasonable “representative member” (or members) of that class, to objectively attribute characteristics and knowledge to that hypothetical person (or persons), and to consider the effect or likely effect of the conduct on their state of mind. This hypothetical construct “avoids using the very ignorant or the very knowledgeable to assess effect or likely effect; it also avoids using those credited with habitual caution or exceptional carelessness; it also avoids considering the assumptions of persons which are extreme or fanciful”. The construct allows for a range of reasonable reactions to the conduct by the ordinary and reasonable member (or members) of the class.

(Footnotes omitted.)

149    The principles as applicable to s 1041H of the Act were distilled by O’Bryan J in Australian Securities and Investments Commission v Dover Financial Advisers Pty Ltd (2019) 140 ACSR 561 at 586-587 [98]-[99] as follows:

98    The applicable principles concerning the statutory prohibition of misleading or deceptive conduct (and closely related prohibitions) in the Australian Consumer Law, the Corporations Act and the ASIC Act are well known. The central question is whether the impugned conduct, viewed as a whole, has a sufficient tendency to lead a person exposed to the conduct into error (that is, to form an erroneous assumption or conclusion about some fact or matter): Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 (Puxu) at 198 per Gibbs CJ; Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 (Taco Bell) at 200; [Campomar Sociedad, Limitada v Nike International Ltd (2000) 202 CLR 45; 169 ALR 677; 46 IPR 481; [2000] HCA 12 (Campomar)] at [98]; ACCC v TPG Internet Pty Ltd (2013) 250 CLR 640 (TPG Internet) at [39] per French CJ, Crennan, Bell and Keane JJ; [Campbell v Backoffıce Investments Pty Ltd (2009) 238 CLR 304; 257 ALR 610; 73 ACSR 1; [2009] HCA 25 (Campbell)] at [25] per French CJ. A number of subsidiary principles, directed to the central question, have been developed:

(a)     First, conduct is likely to mislead or deceive if there is a real or not remote chance or possibility of it doing so: see Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 (Global Sportsman) at 87; Noone (Director of Consumer Affairs Victoria) v Operation Smile (Australia) Inc (2012) 38 VR 569 at [60] per Nettle JA (Warren CJ and Cavanough AJA agreeing at [33]).

(b)     Second, it is not necessary to prove an intention to mislead or deceive: Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 228 per Stephen J (with whom Barwick CJ and Jacobs J agreed) and at 234 per Murphy J; Puxu at 197 per Gibbs CJ.

(c)     Third, it is unnecessary to prove that the conduct in question actually deceived or misled anyone: Puxu at 198 per Gibbs CJ. Evidence that a person has in fact formed an erroneous conclusion is admissible and may be persuasive but is not essential. Such evidence does not itself establish that conduct is misleading or deceptive within the meaning of the statute. The question whether conduct is misleading or deceptive is objective and the Court must determine the question for itself: see Taco Bell at 202 per Deane and Fitzgerald JJ.

(d)     Fourth, it is not sufficient if the conduct merely causes confusion: Puxu at 198 per Gibbs CJ and 209-210 per Mason J; Taco Bell at 202 per Deane and Fitzgerald JJ; Campomar at [106].

99     In assessing whether conduct is likely to mislead or deceive, the courts have distinguished between two broad categories of conduct, being conduct that is directed to the public generally or a section of the public, and conduct that is directed to an identified individual. As explained by the High Court in Campomar, the question whether conduct in the former category is likely to mislead or deceive has to be approached at a level of abstraction, where the Court must consider the likely characteristics of the persons who comprise the relevant class of persons to whom the conduct is directed and consider the likely effect of the conduct on ordinary or reasonable members of the class, disregarding reactions that might be regarded as extreme or fanciful (at [101]-[105]). In Google Inc v ACCC (2013) 249 CLR 435, French CJ and Crennan and Kiefel JJ (as her Honour then was) confirmed that, in assessing the effect of conduct on a class of persons such as consumers who may range from the gullible to the astute, the Court must consider whether the “ordinary” or “reasonable” members of that class would be misled or deceived (at [7]). In the case of conduct directed to an identified individual, it is unnecessary to approach the question at an abstract level; the Court is able to assess whether the conduct is likely to mislead or deceive in light of the objective circumstances, including the known characteristics of the individual concerned. However, in both cases, the relevant question is objective: whether the conduct has a sufficient tendency to induce error. Even in the case of an express representation to an identified individual, it is not necessary (for the purposes of establishing liability) to show that the individual was in fact misled. As observed by French CJ in Campbell at [25]:

Characterisation is a task that generally requires consideration of whether the impugned conduct viewed as a whole has a tendency to lead a person into error. It may be undertaken by reference to the public or a relevant section of the public. In cases of misleading or deceptive conduct analogous to passing off and involving reputational issues, the relevant section of the public may be defined, according to the nature of the conduct, by geographical distribution, age or some other common attribute or interest. On the other hand, characterisation may be undertaken in the context of commercial negotiations between individuals. In either case it involves consideration of a notional cause and effect relationship between the conduct and the state of mind of the relevant person or class of persons. The test is necessarily objective. (citations omitted)

See also Australian Securities and Investments Commission v PE Capital Funds Management Ltd (external admins apptd) (2022) 159 ACSR 1 at 27-28 [125]-[126] (Cheeseman J).

150    In its submissions iSignthis emphasises, both in relation to the written representation and the oral representation, that determining whether or not either representation amounted to misleading or deceptive conduct requires the relevant representation to be viewed in its entire and proper context, referring to Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 199 (Gibbs CJ); Australian Competition and Consumer Commission v Jayco Corp Pty Ltd [2020] FCA 1672 at [595]-[597] (Wheelahan J); State of Escape Accessories v Schwartz & Anor (2020) 156 IPR 199; [2020] FCA 1606 at 236-237 [152] (Davies J); and Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd (2014) 317 ALR 73 at 81 [41] (Allsop CJ).

151    On the subject of assessing whether the relevant conduct fits the description of misleading or deceptive, iSignthis submits and I accept that the court must address the question with reference to the class of persons at which the conduct was directed, referring in this regard to Campomar Sociedad, Limitada v Nike International Ltd (2000) 202 CLR 45 at 84-85 [101]-[102] (Gleeson CJ, Gaudron, McHugh, Gummow, Kirby, Hayne, and Callinan JJ); and State of Escape at 236-237 [152] (Davies J). In this regard it may be accepted that whether a member of the relevant audience is, at least, likely to have been deceived or misled by the relevant conduct, may involve the knowledge which it is to be assumed is possessed by a member of that audience: Campomar at 84-85 [101]-[102]; State of Escape at 236-237 [152] (Davies J).

152    It may also be accepted, as iSignthis submits, that there is a distinction, for the purposes of s 1041H, between conduct which produces mere confusion and wonderment in the relevant audience, and that which is, at least, likely to mislead or deceive: State Street Global Advisors Trust Company v Maurice Blackburn Pty Ltd (No 2) [2021] FCA 137; (2021) 164 IPR 420 at 536 [713] (Beach J); Guy v Crown Melbourne Ltd (No 2) (2018) 355 ALR 420 at 525-526 [432]-[435] (Mortimer J); State of Escape at 236-237 [152]; and Bing! Software v Bing Technologies (2009) 180 FCR 191 at 206-207 [51]-[54] (Kenny J, with Greenwood and Logan JJ agreeing). As was observed by Beach J in State Street at 536 [713]:

… conduct is misleading or deceptive or likely to mislead or deceive if it has the tendency to lead into error. But conduct causing confusion or wonderment is not necessarily co-extensive with misleading or deceptive conduct. Mere confusion or wonderment will not establish misleading or deceptive conduct.

Determination

153    Having regard to these principles, and viewing the relevant conduct of iSignthis in its full context and by reference to the class of persons at whom the conduct was directed, I have concluded that ASIC has made out its case that iSignthis contravened s 1041H of the Act. In particular, by the combination of the Analyst Brief and the statements made by Mr Karantzis during the Analyst Briefing, iSignthis represented that the fourth quarter to 30 June 2018 revenue from one-off or up-front fees accounted for less than 15 per cent of total revenue. In my assessment this representation was misleading and deceptive, or at least likely to mislead or deceive, in contravention of s 1041H of the Act.

154    I have formed the view that iSignthis made the One-off Revenue Representation having regard to the broader context and the more immediate context in which the representation was made, as this context has been set out above. The broader context, in my assessment, speaks for itself and does not appear to be the subject of serious challenge by iSignthis. Although it may be accepted that the immediate context (to use ASIC’s description for the information communicated in the Analyst Brief and in answer to the questions put to Mr Karantzis during the Analyst Briefing) is more nuanced, particularly having regard to the competing interpretations of the Analyst Brief, fairly viewed I consider that Mr Karantzis’ answer to Mr Davies’ question was unambiguously clear and that Mr Karantzis’ answer: “We’ve actually cited a figure in the pack of less than 15 per cent” constituted a clear representation that the percentage of revenue in the fourth quarter to 30 June 2018 from one-off integration fees was less than 15 per cent.

155    As ASIC submits, that is so whatever meaning might be attributed to the written statement in the Analyst Brief. If an ordinary and reasonable analyst or investor would have understood the written statement to mean that one-off integration revenue accounts for less than 15 per cent of revenue in the quarter ended 30 June 2018, Mr Karantzis’ oral statement would have served to confirm that. However, if such a reader considered the Analyst Brief to be ambiguous, Mr Karantzis’ statement would in all likelihood have dispelled that ambiguity and indicated that the information in the pack was made in relation to the 30 June 2018 reporting period and not over the course of a client relationship. And if the Analyst Brief is to be taken as meaning that one-off integration revenue accounts for less than 15 per cent of revenue over a typical client relationship, Mr Karantzis’ answer to the question would not have created ambiguity or confusion or wonderment in the mind of a reasonable person. I accept that it would rather have indicated that the 15 per cent figure also applied in the 30 June 2018 quarter, given that both statements can be true.

156    The fact that Mr Jacobs was in fact misled only serves to buttress this conclusion.

157    It follows, therefore, that I do not accept iSignthis’ submission that Mr Karantzis’ answer to the clear question asked by Mr Davies gave rise to any real ambiguity. To construe the dialogue in the context of the Analyst Brief in the way propounded by iSignthis and supported by Mr Houston is intuitively and linguistically unsatisfying, if not contrived.

158    I do not accept iSignthis’ submission, therefore, that Mr Karantzis’ oral answer to Mr Davies’ question is likely to have caused nothing more than “mere confusion or wonderment” in the mind of the audience, to use the language of Australian Municipal, Administrative, Clerical and Services Union v Commissioner of Taxation [2022] FCA 1225 at [455] (Jagot J); see also Puxu at 198 (Gibbs CJ) and 209-210 (Mason J), Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 at 201-202, Campomar at 87 [106], and State Street at 536 [713]. Mr Karantzis’ answer was, in context, misleading and deceptive or at least likely to mislead and deceive.

159    It is accordingly appropriate to make a declaration in the terms sought by ASIC, namely that by representing on 3 August 2018 that iSignthis’ revenue for one-off integration and set-up fees in the period 1 April 2018 to 30 June 2018 accounted for less than 15 per cent of the total revenue in that period, iSignthis engaged in conduct that was misleading or deceptive, in contravention of s 1041H of the Act.

ASIC’s allegations that Mr Karantzis contravened ss 674(2A) and 180(1) of the Act

160    ASIC also alleges that Mr Karantzis contravened s 180(1) of the Act in relation to the One-off Revenue Representation by failing to discharge his duties with the degree of care and diligence that a reasonable person would exercise if they were the chief executive officer of a company in iSignthis’ circumstances.

161    Section 180(1) of the Act provides:

A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation’s circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

162    ASIC submits that a finding that iSignthis, by Mr Karantzis’ conduct, contravened s 1041H of the Act might be sufficient, but it would not be necessary, to conclude that Mr Karantzis contravened s 180(1) of the Act. Section 180(1), ASIC submits, requires a director to act with care, skill and diligence. It sets out an objective test to measure the reasonableness of a director’s actions, considered against how a reasonable person holding a similar position in the same circumstances would act: Australian Securities and Investments Commission v Mitchell (No 2) (2020) 382 ALR 425 at 668 [1397] (Beach J). Mr Karantzis was the chief executive officer of iSignthis, but as ASIC submits it is also necessary to consider his responsibilities and particular involvement in the operation of the company, and the distribution of responsibilities among him and other directors and employee: see Australian Securities and Investments Commission v Mariner Corporation Ltd (2015) 241 FCR 502 at 582 [440]-[441] (Beach J).

163    In this regard ASIC emphasises that Mr Karantzis does not in his defence address or dispute the following facts:

(a)    That he was involved in preparing, and had knowledge of, previous announcements and reports that the company had released to the market, which described the company’s development as a start-up business, its integration of new customers, and its building of recurring transactional (or processing/settlement) revenue.

(b)    That he directly corresponded with Mr Jacobs who had raised with him his particular interest in what drove the revenue increase in the six months to 30 June 2018, and in the nature or classification of that revenue and the relative proportion of one-off versus recurring revenue in that period.

(c)    That he knew that Mr Jacobs would be seeking answers from him about those issues during the Analyst Briefing, in particular:

(i)    on 31 July 2018, Mr Jacobs sent an email directly to Mr Karantzis asking “Are you able to say how much revenue was integration based?”. Mr Karantzis read that email and considered that question, but evaded giving a response, saying falsely “I dont [sic] have data”. On 31 July 2018, as Mr Hart accepted, he did have that data.

(ii)    on 1 August 2018, Mr Jacobs sent an email directly to Mr Karantzis asking that he advise at the Analyst Briefing “the % of revenue in the June qtr that can be considered genuine recurring business activity as opposed to one-off integration type revenue”. Mr Karantzis read that email and indicated that he would respond to Mr Jacobs’ questions (or some of them) at the meeting. (ASIC submits that although Mr Karantzis described some of Mr Jacobs’ questions as “just nonsense” because answers might “expose sensitive strategy”, there is no suggestion that the question about percentage of recurring as opposed to one-off revenue was in that category. Indeed, when Mr Davies asked the same question at the Analyst Briefing, Mr Karantzis gave an answer without objecting to the question.)

(d)    That he was involved in drafting the written Analyst Brief in preparation for presenting the 30 June 2018 quarterly results, and in answering questions invited from analysts about those results.

(e)    To the extent (as asserted by the defendants) that the written statement in the Analyst Brief conveyed or sought to convey that one-off integration fees constituted less than 15 per cent of the revenue over the term of a typical client relationship, that he knew or ought to have known that such a statement would be non-responsive to the questions that had been asked in advance of the Analyst Briefing. Mr Karantzis knew that Mr Jacobs (at least) would be seeking an answer to what percentage of the revenue in the June quarter was recurring and not one-off revenue. (ASIC submits that a reasonable and diligent person in Mr Karantzis’ position would have appreciated that the written statement at least had the potential to mislead or confuse, and would have sought to ensure that the information was clear and unambiguous.)

(f)    At the Analyst Briefing, Mr Davies directly asked Mr Karantzis “what percentage of the revenue last quarter was from one, from upfront and one-off fees”. Mr Davies’ question was unmistakably clear, and it repeated what Mr Jacobs had earlier asked. (ASIC submits that there could have been no reasonable doubt about what the question asked and how it should have been answered.)

(g)    There is no suggestion that Mr Karantzis misunderstood the question, or misspoke. He knew the question was coming, it was stated clearly and directly, and he knew the answer. The defendants have given no explanation for why Mr Karantzis gave the answer he did. (ASIC submits that Mr Karantzis either intentionally gave a false or misleading response, or he sought to evade the question and give a non-responsive answer - about the proportion over the term of the client relationship - and was reckless about whether or not his response was misleading or likely to mislead. Either way, ASIC submits, his conduct departs from the standard that would be expected of a reasonable and diligent director presenting a report to the market on the previous quarter’s financial results.)

(h)    There is no suggestion that Mr Karantzis did not know the true financial position: that is, that in the fourth quarter to 30 June 2018 the majority (more than 75 per cent) of total unaudited revenue was one-off revenue booked under the integration agreements and not recurring transactional revenue. Mr Karantzis knew the source of the revenue – he was very closely involved in the integration agreements and invoicing. Added to this, Mr Hart gave the following evidence:

[Senior counsel for ASIC] So you agree with me that by the meeting of 9 June 2018, the directors, including you and Mr Karantzis, understood that there were one-off revenues already to that point of in excess of 3 and a half million dollars and one-off costs associated with the back-to-back arrangement in the order of $3 million?---

[Mr Hart] Correct, with a small margin [in] the middle, yes.

(i)    Mr Karantzis failed to correct the One-off Revenue Representation. Mr Hart in his evidence accepted, properly, that had Mr Karantzis told the market on 3 August 2018 that less than 15 per cent of the revenues reported in the quarter ending 30 June 2018 were one-off, then iSignthis ought to have corrected that quite promptly after such a statement was made.

(j)    The failure to correct became more egregious from 7 August 2018. On that date Mr Jacobs forwarded to Mr Karantzis his research note reporting on the “June Qtr conference call insights” writing “Hi John, This was released yesterday”. The first two bullet points of the note stated: