Question 2 - Problem Question (30 marks)

( AUSTRALIAN LAW)

Scarlett has just been promoted to the position of Junior Associate at her firm and has received a raise. Scarlett has decided that she can live comfortably on her old wage and decided to invest the difference in the hope of accumulating enough fund to purchase her first home. She approaches Logan at Pear Financial Ltd and inquires about getting some advice appointment and they set an appointment for the following Tuesday. Logan is an experienced financial provider.

On Tuesday Scarlet explains to Logan her situation and says "I have a bit of money and need to invest it well. I want a house. I have no financial knowledge other than a simple bank account, so I will be relying on you."

Logan is pleased "Beginner investors are my speciality. We will do fine I think, there are a lot of good investment opportunities on the market."

Scarlett indicates to Logan that her main concerns are that the investment grows at a reliable and steady rate, and that she does not want to take any unnecessary risks. Logan recommends that Scarlet invest 80% of her money in JP Morgan.

Logan does not provide Scarlet with a product disclosure statement or any other written information about her investment. Scarlett invests her $25,000 in JP Morgan. Logan has been offered a substantial commission for selling units in a managed investment scheme - JP Morgan is a property trust that invests in high risk, speculative real estate. JP Morgan has been operating for 18 months. It has been extremely profitable and returned high short term profits to investors.

Logan recommends Scarlett invests the remain 20% of her cash in KL Bit Ltd and purchase shared in their latest share issue. He tells Scarlett I've got a great opportunity right now. KL Bit Ltd is fundraising and just did an issue of shares. The price is good and has strong market promise. It can only go up from here."

KL Bit Ltd is a new tech venture selling virtual money, a very young company with a brief history of strong performance on the stock exchange. Scarlett, knowing very little about the virtual money market is hesitant, so Logan says, "These shares are some serious opportunities. My cousin invested in the company from the outset and it has has had so much growth that now he drives a Ferrari. Trust me on this." Logan does not mention that he has no cousins. "In my opinion, you won't regret it."

Logan is very pleased. All the financial brokers at Pear Financial Ltd had been called to a meeting only an hour before Scarlett had walked in for her meeting. In the meeting Logan and his colleagues were informed by managing director Tate that he had just had a meeting with KL Bit Ltd and that company was having a bit of financial trouble. Not only were they experiencing cash flow problems, but their biggest competitor in Victoria, Bitinote Ltd, was preparing to go international and it was expected that this would have a negative impact on KL Bit Ltd. Tate's ex-wife is a director at Bitinote Ltd which is how he knew this information. All the financial brokers at KL Bit Ltd were instructed to try and 'push' shares in KL Bit Ltd in order to give them a bit more capital to work with and hopefully help the company out of a pretty bad position.

Tate finished the meeting by saying, "This is very important to me as I am a silent director and major investor in KL Bit Ltd and if business does not pick up, this could be pretty embarrassing for KL Bit Ltd." Logan knows he will receive a small bonus for being the first one to bring in the business and goes to tell Tate. Tate congratulates him but offer to bonus.

Logan goes back to his office. He is very unhappy and feels he compromised his ethics but got nothing in return. He calls his brother Luke and tells him what happened. Luke asks if he should buy shares in Bitinote Ltd and Logan agrees it would be a good investment. Both Logan and Luke invest in Bitinote Ltd knowing that once they go international, the value of their shares will go up.

It has now been four months since Scarlet visiting Logan. JP Morgan is declared insolvent after losing millions in the Spanish real estate market crash. With a little of her investment in KL Bit Ltd, Scarlett is horrified to see share prices dropping when Bitinote Ltd announces it is going international. Scarleets friend Sam has informed her that Logan is now very wealthy after investing in Bitinote Ltd.

Scarlet has come to to you for advice. Advise Scarlet as to her possible causes of action against Logan. A friend of Luke's has told him that his and Logan's actions weren't exactly legal and Luke has come to you for advice.