LAW 2422

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This is talking the about the LAW 2422 at RMIT

LAW OF INVESTMENTS AND FINANCIAL MARKETS Tutorial Questions Tutorial 1 Revision / Introduction to Basic Legal Concepts 1. 2. 3. 4. 5. 6. What is law? What is criminal law? What is civil law? What are the similiarities and differences between law making through parliament and courts? And concept What is the doctrine of precedent? What is the role of subordinate bodies, such as ASIC? Jackson v Yeoh Court of Appeal [1955] NSW The defendant, a zookeeper owned a dangerous dingo which was kept secured in a cage at all times. The Plaintiff, an employee, entered the cage in an attempt to catch the dingo. The dingo attacked at him causing severe injuries. As a result the plaintiff sued the zookeeper. McDonald, CJ ... The court has to consider the liability of a zookeeper towards the people he/she employs to look after a dingo. It is the zookeeper's duty to keep the dingo under control so that it should do no harm. The zookeeper must take reasonable care not to subject employees to unnecessary risk. In the case of Farmer v Sydney City County Council [1934] an animal escaped its cage and ran wild hurting two people. The court concluded \"it is not unlawful to keep such an animal, the wrong is allowing it to escape from the keeper's control with the result that it does damage\". 1 Considering this principle, it is clear that the plaintiff cannot succeed for the simple reason that the dingo never escaped at all. The plaintiff in fact entered the cage and placed his own life in danger. (a) Is this a criminal or civil case? Explain your answer. (b) What do you consider to be the ratio decidendi (reason for decision) of this case? ( c)Would the decision of Jackson v Yeoh be binding or persuasive on the Victorian Court of Appeal? (d )Was the decision of Farmer v Sydney City Council followed, distinguished, overruled or reversed? (e) Consider the following dispute in relation to the decision in Jackson v Yeoh and answer the question which follows. Jack runs a private zoo and exhibits many native animals, including a wild Kangaroo, which is quite vicious. Whilst Jack was cleaning the Kangaroo's cage one afternoon, the Kangaroo managed to slip out. Before the Kangaroo could be recaptured it attacked and bit Sandy, who works for Jack as a part-time seller. Advise Jack, giving reason of his legal position in relation to Sandy. 2 Tutorial 2 : Investing in a Company 1. The most common type of companies in Australia are Companies limited by shares. Company limited by shares is defined as \" a co formed on the principle of having the liability of its members limited to the amount, if any, unpaid on the shares respectively held by them\" (s.9, Corporations Act). In your own words, explain this definition. 2. Do investors in sole traders and partnerships have limited liability? 3. What other characteristics of a company flow from the fact that it is a separate legal entity? 4. What is meant by \"lifting the corporate veil\"? 5. Explain how section 588G of the Corporations Act impacts on the legal principle established in the Saloman's case. 6. What are the roles of the board of directors and the shareholders? To what extent can the shareholders influence the board? 7. Discuss the distinction between ordinary shares and preference shares. 8. A Pty. Ltd. has an issued capital of 100 $1.00 shares paid to 50 cents. B and C each hold 50 shares and are the directors of A Pty. Ltd. B borrows $50,000 from his bank on behalf of the company. Some time later, the business activities of A Pty. Ltd. fail and it becomes apparent that the company cannot repay the loan to the bank. B is known to own substantial assets and the bank wishes to recover the amounts outstanding on the loan from B. (a) Advise B as to his liability. 3 (b) What steps could the bank have taken in order to recover the full amount from B? 9. Ace Pty. Ltd., is a company engaged in the business of retailing domestic electronic equipment. Its directors are Ruff and Reddy who also are the directors of Bland Pty. Ltd., a company which carries o n the business of selling commercial electronic equipment mainly to offices. Both Ace Pty. Ltd., and Bland Pty. Ltd., have experienced difficulties in paying their debts. A secured creditor of Ace Pty. Ltd., demanded payment or threatened the company with bringing about its winding up. Ruff and Reddy transferred some funds from Bland Pty. Ltd., to Ace Pty. Ltd., in order to enable the secured creditor to be paid and to allow Ace Pty. Ltd., to trade out of trouble. Rodgers is a creditor of Bland Pty. Ltd., which soon after goes into liquidation. Can Rodgers recover his debt from (a) Ace Pty. Ltd.? (b) Ruff and Reddy? A: separate entity. Salmon 119 The two company don't have relationship company. B: 588G 1. incurs a debt 2. The definition of insolvent 10. Discuss the legal issues in the following article: Rio savaged by shareholders at local AGM Matt Chambers From: The Australian April 21, 2009 12:00AM 4 New Rio chairman Jan du PLessis with CEO Tom Albanese at the AGM Source: The Australian RIO Tinto's local shareholders yesterday served the board a barrage of criticism over its $US19.5 billion ($27.5 billion) Chinalco deal and delivered Rod Eddington, one of two locally based directors, the second-biggest vote on record against a board reappointment. The effects of Rio's 2007 decision to pay $US38 billion for Alcan and last year's dismissal of BHP Billiton's $135 billion takeover offer, moves that led it to the Chinalco deal, were targeted at a fiery annual general meeting in Sydney attended by about 400 shareholders. But despite the hostile reaction to Rio's current predicament, with no sign it will waver from the contentious Chinalco deal under new chairman Jan du Plessis, all of Rio's directors up for re-election were voted back in. Sir Rod, who is also a director at News Corporation, publisher of The Australian, suffered a 35 per cent vote against his return. The result is seen as a protest vote against his involvement on the board of the collapsed Allco Finance Group. 5 The highest vote to date against returning a director to a top 100 Australian company board was for fellow former Allco director Barbara Ward, who received a 42 per cent vote against her re-appointment to the Qantas board in November. Other directors up for re-election who approved the ill-fated Alcan acquisition were returned with votes of between 12 and 15 per cent against, while only 4 per cent of shares were voted were against Mr du Plessis' appointment. Departing chairman Paul Skinner confirmed Chinese aluminium giant Chinalco had voted its 9 per cent stake in the company in favour of returning the directors. The spray from shareholders covered the full gamut of grievances already aired publicly and privately by institutional investors. Small investors pasted Rio over purchasing Alcan at the top of the market, a takeover that saddled it with its growth-crippling $US39 billion debt. They also criticised the board's refusal to engage with BHP, given the collapse in Rio's share price since BHP walked away in November. And they spoke against the subsequent inking of the deal with state-owned Chinalco to sell convertible bonds and stakes in Rio's best iron ore, aluminium and copper assets. Giving the board a good sense of retail investors' feelings towards the deal with the Beijing aluminium giant, concerns were raised that Rio was selling its best assets to a customer and that terms for the bond issue were unfavourable. Mr Skinner repeated claims the Alcan deal would eventually turn out to be worthwhile and that its timing was due to a bidding war. He also said BHP could not be engaged because its offer was pre-conditional on regulatory approvals that had not been gained and that teaming up with China still offered the best option for Rio. "The Chinalco opportunity offered us ... top-of-the-market prices at bottom-of-the-market conditions," he said. Mr du Plessis, in his first press conference as head of Rio, gave no sign of any impending changes under his watch. He dismissed entertaining a Plan B, unless the Chinalco deal was blocked, and backed the current board. 6 "The reality is very simple, we continue to be committed to pursuing the Chinalco transaction," he said. He said there was no prospect of terms of the $US7.2 billion convertible bond issue being altered, despite a boost in Rio's share price and debt markets recently opening up. There were also no existing plans to offer capital raising opportunities to shareholders, the main bugbear for the company's London institutional shareholders. Mr du Plessis dismissed speculation he met BHP chairman Don Argus at the weekend and said he had never met BHP chief executive Marius Kloppers. Rio shareholders are due to vote on the Chinalco deal mid-year, if it gets Foreign Investment Review Board approval. The Australian explain what is legal rights here? S250N- public Compulsory obligation 203D election/ Result of this relation Result --- redacted Happened : most of shareholder against this. Institution investors Retail investors Tutorial 3 Members Rights 7 1. Discuss the process of paying dividends to shareholders. 2. The shareholders of the ABC Ltd., a company formed to operate a large hotel, are concerned that although the company has been making a profit of 15% on shareholders funds, they have not yet been paid a dividend. The directors contend that the profits are required to build up working capital. Can the shareholders take legal action to force the directors to pay a dividend? If the directors were paying all profits out as dividends, could the shareholders do anything to reduce or prevent the payment of these dividends? S 254U 3. When are general meetings held for a company? What are the typical matters put to the shareholders for their vote? AGM extraordinary GM 4. Go to the Telstra website, Listen to or watch the webcast of the Telstra AGM, what matters were discussed and voted on? 5. Go to the Telstra website, read the latest Annual Report, what kinds of information are contained in the annual report? Why do you think the law requires public companies to provide the above information to shareholders? 6. Brick Pty. Ltd. has the following provisions contained in its Constitution : 1. 2. Where a new issue of shares is made, they shall first be offered to existing members in proportion to the shares they presently hold. In the event of any member not accepting some or all of the shares to which he is entitled, those shares shall be offered to the remaining members in proportion to the shares they presently hold. The sales manager of the company shall be A. Harris for a period of ten years at a salary of $75,000 to be increased by 10% per annum in each successive year for the term of his employment. 8 a. b. The directors purport to issue shares to an associate of theirs who is not presently a member of the company. X, a member of the company, claims that the shares must first be offered to existing members in accordance with article 1. Can he enforce this claim? Harris is dismissed from his position after two years. Can he sue the company for breach of contract? Would it make any difference if Harris was a member of the company? A. SECT 140-1-A b. Eley member right in the capacity not in the employee capacity 7. What is oppressive conduct? What remedies are available for oppressive conduct? Section 233 explain and give a example Section 232 Tutorial 4 Funding Company Operations 1. Distinguish debt financing from equity financing. 1. Shareholders are internal members, lenders are not. 2. Dividend payment depends on profit, Interest payment does not. 3. Maintenance of share capital does not apply to debt capital. 2. What is the lawmaker's purpose in requiring the issue of a prospectus? investors and advisors. Purpose: protect invest interest. (maintenance) Information vulnerable 2. What are the rules in relation to the information contained in a prospectus? S710 and 711 S728 and 729 4. On the internet, find a prospectus of an upcoming float. ( You can start by going to www.asx.com.au, then follow links to \"upcoming floats\"). Read the prospectus. Does this prospectus satisfy the legal requirements? 9 Frontier company 5. Metal Search N.L. sought to raise capital by the issue of 2 million fully paid shares with the initial price of 50 cents each. A prospectus was issued and came into the possession of Wilham, who filled in the attached application form for 5,000 shares, which he was all allotted in due course. When the shares were first listed on the Stock Exchange they traded at between $3.00 and $3.50, but some two weeks later the price suddenly fell to 20 cents. It soon became apparent that the optimistic report of the consultant geologist contained in the prospectus had no basis in fact, and subsequent drilling had revealed the particular claims to be worthless. In addition, the claim by the directors in the prospectus that Metal Search N.L. was about to acquire an interest in leases in a sought after area, turned out to be false. Wilham now wishes to know what legal rights (if any) he may have against: a. the company; b. the geologist; c. the directors. Advise Wilham, giving reasons for your answer. You need explain the natural of those two document S728- consultant S729 - geologist number 5 Number 1 -company And number 2 S733 geologist? Reasonable Reliance? -explain What is possible qualified? Reputation? Industry practice? Those three is for reasonable. Then we should discuss the remedies ---compensation S728(3) materially advent. 6. Distinguish a non-circulating security interest from a circulating security interest. 10 Grantor as a borrower to lend the security to lender in the ordinary lend of business. Lender's approed 7. What is the meaning of 'perfection' within the Personal Property Securities Act 2009? S.21 Wes should talk about three of the method Registration Possession Control 8. Rank the following in order of priority in a return of capital, at winding up, if there are insufficient funds to return capital to all the following: - A. Ltd has a circulating security interest attached on 1 April 2011 and registered on 1 May 2011; - B. Ltd has an unperfected non-circulating security interest attached on 1 July 2011; - C. Ltd has an unperfected circulating security interest attached on 1 August 2011; - D. Ltd has ordinary shares issued 1st February 2012; - E. Ltd has a circulating security interest attached on 1 May 2011 and registered on 1 June 2011. SECTION 55 A and E are perfected look at perfect date B and C are the unperfected D shareholder is after the all of the priority. (Collateral is other way to say the priority) 11 9. What is the right of subrogation in a guarantee agreement? Default Guarantor paid to lender. 12 13 Tutorial Questions Directors Duties 1. S9 Who may be regarded as an 'officer' of a company? 2. S9 Who may be regarded as a 'director' of a company? 3. What is meant by an executive director, and a non-executive director? 4. Why did the court decide that the directors were not acting in the best interest of the shareholders in Parke v Daily News Ltd? Compare the power of intended (why exercise the power. ) actual of the power. 5. Referring to s 181 Corporations Act: (a) What duties does it impose? Compare the power of intended (why exercise the power. ) actual of the power. (b) Who are these duties owed to? The company has the contract with directors. So the company employee the employees. So we should explain the proper plaintiff. (c) Who must comply with these duties? Not just directors. (d) Is it civil - or criminal liability (see s184)- for failing to comply? Intentionally dishonest Reckless (still on criminal law) 6. Examine the behaviour of Rodney Adler in ASIC v Adler & Ors and explain why Adler's behaviour resulted in the finding that he breached his director's duties. 7. Happy Days Pty Ltd operates child day care centres. In 2000 the directors of the company decide to sell a large block of land in Footscray to Victoria University for $1.5m, without consulting the shareholders. The directors believed the land was surplus to its needs. On advice of its merchant banker the directors decided to invest the money from the sale into high growth biotechnology shares. The company invested $1m in Biotech Ltd. By 2003 the shares in Biotech Ltd were worthless while the land sold to Victoria University was now worth $3.2m. Jill and David become directors of Happy Days in late 2003 and become aware of the transactions. In relation to both transactions: (a) Discuss the duty of care owed by directors to the company and advise what standard is expected of them, discussing s180(1); the standard expectedDaniels v Anderson (b) Discuss whether the 'business judgment rule' defence might apply to the directors, outlining its elements. Refer to s180(2) 8. Discuss two differences between duties imposed on public company directors and proprietary company directors. 9. Explain the rule in s 208 of the Corporations Act, and explain: (a) What is \"financial benefit\"? (b) Who is a \"Related party\"? (c) What are the exceptions to the s 208 prohibition? 10. Simon was the Director of Bluestone Pty. Ltd., a building company. The company had contracted to build a large city building and called for tenders for work proposed for subcontracting. Max, a life time friend of Simon, was the majority shareholder and a director of Max's Plastering Company Pty. Ltd. The company had been going through bad times and urgently needed a big job. Max offered Simon a $5,000 commission if he could arrange for the subcontract to go to his company. Simon was also a shareholder in ABZ Pty. Ltd. which manufactured plaster sheeting and was the sole supplier of this to Max's Plastering Company Pty. Ltd. ABZ Pty. Ltd. followed the habit of paying, in addition to ordinary dividends, a bonus to any shareholder who could demonstrate that he had been successful in procuring substantial sales of its product. When all the tenders for plastering were submitted, Max's Plastering Company was $500 below the next lowest tender. Simon persuaded the board of Bluestone Pty. Ltd. to accept the tender. This it did. Max duly paid Simon the $5,000, and ABZ Pty. Ltd. paid him the sum of $550 as a bonus for stimulating sales. Simon banked these sums and later purchased shares in Pitcher Pty. Ltd., a rival building company of which he became a director. During the course of construction, Bluestone Pty. Ltd. experienced financial difficulties and fell behind the schedule. The building proprietor threatened to repudiate its contract with Bluestone, and tentatively approached Pitcher Pty. Ltd. with a view to having that company complete the project. Simon revealed to the board of Pitcher the various estimates, accounts and schedules of Bluestone Pty. Ltd. Pitcher was thus able to persuade the building proprietor to take advantage of the situation to repudiate its contract by reason of Bluestone's delay and to engage Pitcher. Pitcher made a large profit from the deal and as a gesture of appreciation gave Simon $20,000 and a free trip to Paris. None of Simon's dealings were known to the shareholders of Bluestone or its other directors at the time they occurred. What rights, if any, does Bluestone Pty. Ltd. have against Simon? Corporate Insolvency 1. Who has the power to appoint an administrator? 2. What are the advantages of appointing an administrator? 3. What matters will the creditors vote on at the creditors meeting at the end of voluntary administration? 4. What is a \"moratorium\"? When does a moratorium apply to prevent creditors bringing court actions against the company? 5. NothingsPhree Ltd claims that Murdoch Pty Ltd owes it $5000 for services provided. The debt is well overdue and NothingsPhree Ltd considers that Murdoch Pty Ltd may be insolvent. Explain the procedure NothingsPhree should follow to seek a winding up of Murdoch Pty Ltd. 6. Computek Pty Ltd is a company which manufactures computers. Jason, Mark and Larry are the directors of Computek. On 30 September 2004, one of Computek's creditors applies to the court have Computek wound up in insolvency. The court makes a winding up order, and appoints a liquidator, on 31 October. It seems that unsecured creditors are only likely to receive about \"10 cents in a dollar\". Are any of the following transactions a \"voidable transaction\"? a) On 30 June 2004, Computek paid Mary the full invoice amount it owed for some consulting services Mary provided to Computek. Mary is Mark's sister. b) On 30 January 2004, Computek sold one of their premises to David. The market value of the premises was $ 360,000. Computek sold it for $100,000. 7. Discuss the legal issues in the following newspaper article: Satellite company NewSat plunges into administration Date April 17, 2015 Be the first to comment Read later Mark Hawthorne and Richard Baker NewSat directors Chuck Ellis and Adrian Ballintine (right). Embattled NewSat, the ASX-listed Australian company attempting to launch its own satellite into space, is on the verge of collapse under hundreds of millions of dollars of debt after being placed into administration. PPB Advisory was appointed administrator of NewSat on Friday after the company breached several banking covenants with its key funders, the US Export-Import Bank and Europe's COFACE . McGrathNicol has been appointed receiver. Earlier this month Fairfax Media reported that NewSat needed to find $US70 million ($91 million) in new funding. The company plans to launch the satellite Jabiru-1, which would be the only Australian-owned commercial satellite in operation. The administrator and receiver will take control of a number of subsidiaries, including Jabiru Satellite, NewSat Space Resources and NSN Holdings. An investigation by BusinessDay earlier this year uncovered further serious problems within NewSat, including alleged conflicts of interest, questionable related party transactions, poor governance and undisclosed lawsuits at the company. NewSat Limited has also filed a petition for Chapter 15 bankruptcy in the US state of Delaware. According to a statement from the receiver, "an emergency motion for a temporary restraining order and a preliminary injunction have been granted under Chapter 15 of the Bankruptcy Code in the United States on a temporary basis". The move is thought to be an attempt to protect the company's US assets. According to Jason Preston of McGrathNicol: "The receivers' immediate priority is to take control of the assets of NewSat, urgently asses its financial position, and progress the capital raising activities recently commenced by the company". NewSat will continue to operate under the control of PPB Advisory and McGrathNicol. On Thursday NewSat announced that William Abbott had quit as company secretary, after less than three weeks in the role. He was replaced by the company's senior vice president of finance, John McDonough. Read more: http://www.smh.com.au/business/satellite-company-newsat-plunges-intoadministration-20150417-1mn1sq.html#ixzz3jEidrKON Follow us: @smh on Twitter | sydneymorningherald on Facebook http://www.smh.com.au/business/satellite-company-newsat-plungesinto-administration-20150417-1mn1sq.html Direct Investment in Real Property 1. What is the meaning of \"indefeasibility of title\"? 2. What is the Torrens System of land registration? 3. What are the functions of a body corporate? 4. What are the differences between commercial leases and residential leases? 5. Theresa signed a contract to purchase an investment property. In the backyard there is a fishpond four metre wide. A hole had been dug and the pond placed into the hole. Theresa thought that the pond would stay. After settlement Theresa discovered the pond has been removed, leaving a hole in the backyard. Theresa wants to get the fish pond back. Advise Theresa about her legal rights. 6. After months of searching, your best friend Ben has finally found the house of his dreams in the suburb of Hawthorn. He is keen to buy the house. He knows you have been studying 'law of investments' and seeks your advice about the legal matters he should consider before entering into a contract of sale. Advise Ben. 7. On the ASIC \"Money smart\" website, the following information is provided. Do you think a real estate agent selling a property should be legally obligated to warn potential buyers about the pitfalls of property investment? Why or Why not? Pros and cons of property investment The benefits Property can be less volatile than shares or other investments You can earn rental income and benefit from capital growth (if your property increases in value over time) If you take out a loan to purchase an investment property, interest on the loan and most property expenses can be offset against rental income, for tax purposes You are investing in something you can see and touch The pitfalls Rental income may not cover your mortgage payments or other expenses so you may have to use other money to cover these costs An increase in interest rates will increase your repayments and decrease your disposable income There may be periods of time where you don't have a tenant and will have to cover all costs yourself You can't sell off a bedroom if you need to access some cash in a hurry If property investment is your major investment you may have little or no diversification If the value of the property goes down you could end up owing more than the property is worth, this is known as negative equity There are very high entry and exit costs such as stamp duty, legal fees and real estate agent's fees ASIC 8.Read the following ASIC article about investment seminars. What are the main legal risks for consumers attending these investment seminars? Investment seminars Psst! Want to be a millionaire? You've received an 'exclusive' invitation through the mail to attend a 'premier wealth event'. There will be motivational speakers. Their financial secrets have the power to turn you into a millionaire within a few years. Sounds great but such claims are almost always over-hyped or misleading. The recommended investments can be expensive, highly risky and lose you money. Here are some warning signs to help you recognise dodgy investment seminars and avoid being ripped off. Unlicensed speakers Big promises equal big risks High fees Get independent advice before you invest Report suspicious activities Unlicensed speakers Seminars often promise a motivational speaker who claims to be a self-made millionaire, and who will share their secrets to financial success. One seminar featured 'Four of Australia's greatest financial superstars'. When ASIC checked them out, none of the presenters had an Australian Financial Services (AFS) licence. In fact, three of the four speakers were found to live and work in the USA. Who knows if they were 'financial superstars' or just slick salesmen? Big promises equal big risks Here are some promises typically made by dodgy investment seminars: Risk-free investments Be a millionaire in a few years Above average returns at little or no risk Government-approved investments Check out the claims Look carefully at the strategies suggested by the seminar to achieve these results. Shares typically return around 10% a year, year after year, and property 6%. If you're offered returns of 1-2% more than these typical returns, get a second opinion and ask for a detailed written explanation. Property deals offered at these seminars might include 'rent guarantees' or 'discounts' for buying off the plan. They can involve hidden fees and commissions. The properties can also be over-valued. Other seminars promote schemes that involve you lending money with little or no security. Another twist is to get you to invest in offshore schemes where you lose the protection of Australian laws. You may never see your money again. High fees Seminars often don't deliver any concrete investment opportunities. The first event may be free. When you attend you will be pressured to buy reports or books and 'sign up' for more expensive seminars or educational courses. The only person making any money will be the seminar organiser through the fees you pay. Get independent advice before you invest Check that it's legal Check ASIC Connect and search within 'banned and disqualified' or the ACCC's Undertakings Register to see if they have taken any action against the promoters. It is also worth checking whether your state or territory consumer affairs agency has taken any action against them. Even if the seminar providers appear to have a clean slate, that doesn't mean the scheme is safe or legal. Get financial advice from someone not linked to the seminar If you attend a seminar, never make any decisions about money or investments on the spot. Always give yourself time to consider things calmly and seek independent financial advice. The atmosphere at these events can be quite exciting but not the right environment for making rational decisions. If you want to attend seminars, consider reputable providers like the Australian Securities Exchange and Department of Human Service's Financial Information Service. If you change your mind If the promotional material does not clearly state that further training or other services will be sold at the seminar, under the Australian Consumer Law you have 10 business days to change your mind if you sign up. This applies if, for example, you agree to join an investment club or enrol in a training course after being cold-called by a property spruiker. If the seller doesn't tell you about this cooling-off period, you are entitled to a longer cooling-off period. To find out more, including details for relevant state and territory agencies, visit the Australian Consumer Law website. Report suspicious activities If you've been invited to a seminar that doesn't seem right or if you're worried you have invested in a scam you should report the scam. Also warn family and friends so they don't fall for the same deal. The promises made by some investment seminars sound enticing, but the reality often doesn't stack up. Always watch out for claims that sound too good to be true and make sure you get independent advice before you invest. ASIC Investing in Financial Products: Introduction and Common Law Framework 1. What are the differences between the role of ASIC and APRA? 2. Must a plaintiff prove he/she is a paying client in order to succeed in a legal action for negligent misstatement? 3. Why did the court find that the defendant was not liable for negligence in the Hedley Byrne case? 4. Why did the court find the defendant was liable for negligence in the Ali case? 5. What are the legal differences between a fiduciary relationship and a nonfiduciary relationship? 6. A is an agent of C. If A enters a contract with B on behalf of C, does B have a contractual relationship with A or C? Explain. 7. Mike, an inexperienced investor, asks an acquaintance Sarah for some investment advice. Sarah has often boasted to Mike how she has made a fortune because she makes smart decisions about buying and selling the right shares at the right time. Sarah told Mike that a company called \"Success Guaranteed\" is floating its shares and the share price is bound to triple within a year. Mike was very excited by this prospect and invested $100,000 into \"Success Guaranteed\". A year later, the company has gone into liquidation. Mike asks you if he has any general law (non-statutory) rights to sue Sarah. Regulation of the Financial Corporations Act 2001 Services Industry: Chapter 7 1. What are the main objectives of Chapter 7 of the Corp Act? 2. (a) What is a \"financial product\" within the meaning of Chapter 7? (b)Provide two examples of a financial product. 3. (a) What is a \"financial service\" within the meaning of Chapter 7? (b)Provide two examples of a financial service. 4. (a) What are the differences between a retail client and a wholesale client? (b) Provide one example of a legal obligation applicable when advising retail clients but not applicable when advising wholesale clients. 5. When must a person hold an AFSL or be an authorized representative of AFSL holder? 6. JingJing is an insurance broker. She advises her clients in the purchase of insurance products. She also handles any insurance claims that her clients have. Should Jing Jing hold an AFSL or be an authorised representative? Explain. 7. Explain the concept of an \"Authorized Representative\". 8. Len runs a financial planning business and has an office on Collins Street. Kathy saw Len's street signage, and approached Len for investment advice. Kathy assumed that Len held a AFSL. Upon receiving Len's advice, Kathy invests $200,000 with a managed investment fund. Two months later, Kathy's friend Jenny, who is an ex-client of Len, told Kathy that Len is not licensed and has been banned from holding an AFSL by ASIC due to serious misconduct. Kathy is now very worried about her investment and asks you for legal advice. Conduct and Disclosure In the Investment Advisory Process 1. When is an FSG required? What must be contained in an FSG? 2. When is an SOA required? What must be contained in an SOA? 3. Anita is a financial planner who advertises in the local newspaper. As a result of seeing the advertisement Cameron arranges a 1-hour appointment with Anita. Cameron has a fixed sum of money to invest and is seeking a safe but profitable investment. Much of the interview is taken up with discussing the Financial Services Guide (FSG) and only a minimum of Cameron's personal details is obtained. At this meeting Anita handed Cameron her business card, which described her as an \"Independent Financial Planner\". Cameron was particularly impressed with the fact that Anita received a fee for service; he regarded this as a sign of independence. However, what Cameron didn't know and wasn't told, was: that the company whose products Anita mainly recommended had an on-going \"soft dollar\" arrangement with her. She would receive free advertising in their monthly publication sent out to all clients and free access to the research database used by that company that Anita is an authorised representative of Financial Mismanagement Australasia Pty Ltd Cameron is handed 4 Product Disclosure Statements and over the next few weeks makes several telephone calls to Anita requesting clarification of some aspects. Cameron then calls at Anita's office with the applications and cheques completed. Anita at this stage realises that he has not completed her disclosure requirements and attempts to rectify the situation by forwarding a Statement of Advice. Discuss all the legal issues raised in this problem, including statutory and common law issues. 3. Discuss the legal issues arising from the following newspaper article Widow kicks up a storm Ben Butler September 6, 2011 Eileen Miller, who lost her life savings after investing with Storm Financial, is fighting back in the courts. Photo: John Woudstra Eileen Miller is in danger of losing the only substantial thing she has left after investing in products offered by ill-fated finance group Storm Financial. EILEEN Miller is in danger of losing the only substantial thing she has left, her house, after investing in products offered by ill-fated finance group Storm Financial. After her husband died in 2005, she inherited the house, two-thirds of a boat and $300,000 in cash. The cash is gone, swallowed by Storm, and so is the boat, sold to pay living expenses. Now the financier that backed her disastrous investment in Storm wants to take the house, a comfortable weatherboard cottage in Williamstown renovated and extended by her husband, a builder. But Ms Miller is fighting back, launching a counter-claim against three finance groups and the adviser who tipped her into Storm, Paul Florence. ''I know it sounds stupid, but I put my trust in him to look after me and that's what I thought was happening,'' Ms Miller said. ''Looking back I think I would have been a better financial adviser myself.'' Ms Miller is just one of thousands of victims to be ''Stormified'' - tipped into highly leveraged financial products sold by Storm and its founders, Queensland couple Emmanuel and Julie Cassimatis, by financial planners paid generous commissions. Because it relied on customers borrowing heavily against their family homes to fund their investment, the Storm model could not survive a market crash. When the global financial crisis hit in 2008, an estimated $3 billion that investors, many of them elderly, had trusted to Storm was wiped out. The collapse prompted lawsuits by the corporate regulator and planned reforms of the financial advice system by Assistant Treasurer Bill Shorten, who has proposed new laws to wipe out commissions paid to advisers. In Ms Miller's case, Perpetual Trustees holds the mortgage over her home and has sued her for possession of the property in the Victorian Supreme Court. But in a counter-claim filed with the court, Ms Miller alleges Perpetual made no attempt to determine whether the loan was suitable for her. She makes similar allegations against two other finance companies involved in the loan, Challenger and Australian First Mortgage, and financial adviser Paul Florence. The case raises questions about what financiers should know about their ultimate customer when they may be several steps removed from the eventual transaction. Ms Miller's claim builds on a Victorian Supreme Court judgment in May last year in which Justice Jack Forrest set aside a mortgage because the lender, Violet Home Loans, had engaged in unconscionable conduct. Although Perpetual merely provided the funds, Justice Forrest found that it was liable for Violet's conduct because Violet was acting as its agent. In Ms Miller's case, she alleges Perpetual knew or ought to have known that she lacked financial literacy, was grieving the loss of her husband, who financially supported her, was in poor health and had trusted Mr Florence as her financial adviser. Ms Miller alleges she and her daughter, Jacquelyn, visited Mr Florence's office in Werribee in 2006, hoping to invest the nest egg she had been left by her husband. ''Jacquelyn emphasised that the house was not to be at risk under any circumstances,'' Ms Miller alleges in her statement of claim. In August the next year, Mr Florence allegedly visited Ms Miller's home at Williamstown, putting documents in front of her to sign. ''He pointed and asked her to sign where indicated, but provided no explanation to her as to what she was signing,'' the statement of claim alleges. As a result, Ms Miller allegedly borrowed $750,000 from Perpetual, secured against the house, tipping most of it into a margin loan with Macquarie. Storm allegedly received almost $120,000 in cash, with Mr Florence paid an unknown portion as a commission. But once the financial crisis struck in 2008, the value of the investments secured against the Macquarie loan ''declined severely'' and Macquarie sold off the portfolio, Ms Miller alleges. A Perpetual spokesman said that although Perpetual held the loan in its name, Challenger was the entity that had advanced the money. He declined to comment further. BusinessDay was unsuccessful in attempts to contact Challenger spokesman Stuart Barton. Australian First Mortgage director of sales and marketing Iain Forbes declined to comment. Mr Florence could not be located. Source: http://www.theage.com.au/money/investing/widow-kicks-up-a-storm20110906-1juvm.html#ixzz1pndAwxDs Investor Protection and Dispute Resolution in Financial Services 1. What is the legal test for unconscionable conduct, as decided by the High Court in the Amadio case? 2. For a court to find a person in breach of the \"misleading and deceptive conduct\" prohibition, does it require evidence of the defendant subjectively believing their behaviour was misleading or deceptive or likely to mislead or deceive? 3. What does Alternative Dispute Resolution mean in the context of financial services? Why does the Corporations Act require AFSL holders to provide Alternative dispute resolution for their clients. 4. Read the Westpac FSG on the Westpac website (www.westpac.com.au), is the internal dispute resolution provisions in compliance with the Corporations Act? Explain by referring to relevant parts of the Westpac FSG and relevant section in the Corporations Act. 5. Explain the role of the Financial Ombudsman Service. 6. Read the following two case studies from the Financial Ombudsman's website. Discuss the legal issues. (a) Superannuation and how far the obligation to advise extends Overview Mr and Mrs D made contributions to a superannuation fund on the recommendation of the member's employee, a superannuation consultant. Mr and Mrs D were both in their early forties and still working, so the fund was in its accumulation phase. The superannuation rules at the time permitted them to withdraw their contributions without taxation provided they met a condition of release. For this reason, Mr and Mrs D were treating the fund as a short term investment vehicle rather than strictly for retirement income purposes. Eight years later, changes to superannuation rules meant that a component of Mr and Mrs D's superannuation contributions would be taxed substantially if it were withdrawn. Mr and Mrs D complained that the member breached its contractual obligation to warn them of such changes ahead of their operation, and claimed compensation. The issue in dispute Mr D alleged that the consultant agreed to advise the consumers into the future and for an indefinite period of changes to the superannuation rules which would prevent them withdrawing their contributions without incurring tax or other penalties. He alleged that the agreement arose by reason of his facsimile to the consultant containing a request to that effect and the consultant's email reply the same day. Key findings The consultant's reply addressed Mr D's individual queries of which the request was one and yet was silent as to the undertaking sought. Mr D also alleged that the member's consultant provided the requested undertaking verbally during a telephone conversation around the time Mr D's facsimile was sent. However, there was no written confirmation by the member. The Financial Ombudsman Service found that no agreement to advise arose as a result of the exchange of facsimiles and or the alleged verbal undertaking. It observed that the member's silence in its email reply was neither indicative of its acceptance or rejection of Mr and Mrs D's request, and that no legal obligation will be attributed to a person who has not clearly given their assent . The Financial Ombudsman Service found that there was no ongoing retainer to provide financial advice, Mr and Mrs had not paid any fees for advice, and that there had been no contact between Mr and Mrs and the member during the eight years. (b) Stockbroking Overview This dispute arose when a retired husband and wife alleged that a stockbroking firm inappropriately advised them to invest a disproportionately large amount of their assets in options trades without disclosing to them the risk associated with such trades. The options trading subsequently resulted in losses to the couple. At the time of the advice, the Applicants were retirees in their eighties. They had previously dealt with the adviser when he was acting as a representative of a different stockbroker. Prior to becoming clients of the financial services provider, the adviser had recommended the Applicants sell two investment properties and obtain a $125,000 bank loan in order to fund the investments, and that the investments would generate an income of $20,000 per year. Key findings The Panel found that the financial services provider had engaged in risky options trades on the Applicants' behalf, including the use of high risk uncovered calls. The Panel found that although the financial services provider had provided requisite documents to the consumers explaining the risks of options, such as an ASX explanatory booklet and a Product Disclosure Statement, in the circumstances the financial services provider's duty of care meant it was required to do more to explain the risks to the Applicants. These circumstances included the inexperience of the Applicants; the relatively complicated nature of options and the fact the trades extended to writing options and the use of uncovered calls; the fact that the financial services provider was engaged in discretionary trading; and the fact that the consumers were funding the trades through a loan. In addition, the Panel found that the options trades were inappropriate for the Applicants' needs and circumstances. The Panel also found that the financial services provider had failed to provide the Applicants with a Statement of Advice. Further, the financial services provider had failed to seek the Applicants' instructions prior to each trade. The Panel awarded the Applicants approximately $37,000, being the amount of their losses from the options trading, plus interest. In the circumstances of the case, the Panel did not consider it appropriate to compensate the Applicants for interest paid on their bank loan or brokerage charges