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Friday 26 May 2017

17-157MR Queensland Supreme Court imposes penalties on dishonest MFS officers and funds manager

The Supreme Court of Queensland has disqualified from managing corporations and imposed financial penalties on four former officers and the funds manager of MFS Investment Management Limited (MFSIM), now known as ACN 101 634 146 (in liquidation), whom the court found did not act honestly in carrying out their duties in managing MFSIM, the responsible entity of the Premium Income Fund (PIF), a managed investment fund holding millions of dollars of investors’ funds. It also ordered them to pay compensation.

The court disqualified the former officers and the funds manager of MFSIM from managing corporations for various periods, ranging from a permanent ban down to five years, and imposed total pecuniary penalties ranging from $90,000 to $650,000. The court also ordered that the former officers pay various amounts up to $205,755,601 in compensation to PIF and the majority of ASIC's costs.

In May 2016, the court found that Michael Christodoulou King, Craig Robert White, David Mark Anderson, Guy Hutchings and Marilyn Anne Watts had collectively committed 217 contraventions of the Corporations Act.

The breaches were committed in relation to their involvement in the misappropriation of $147.5 million of funds that had been held by the managed investment scheme known as the Premium Income Fund (PIF) on behalf of unitholders. The misappropriated funds were used to pay debts owed by other related entities in the MFS Group (which was subsequently known as Octaviar). The MFS Group collapsed in 2008 owing $2.5 billion.

Today the court ordered:

  • Michael Christodoulou King (former Chief Executive Officer (CEO) and Director of MFS Ltd) be disqualified from managing corporations for 20 years, pay a pecuniary penalty of $300,000, pay $177,017,084 compensation to PIF and 60% of ASIC's costs. 
  • Craig Robert White (former Deputy CEO (and for a short period, CEO) and director of MFS Ltd and MFSIM) be permanently disqualified from managing corporations, pay a pecuniary penalty of $650,000, pay $205,755,601 compensation to PIF and 70% of ASIC's costs. 
  • Guy Hutchings (former CEO and director of MFSIM) be disqualified from managing corporations for 25 years, pay a pecuniary penalty of $350,000, pay $28,738,517 compensation to PIF and 70% of ASIC's costs. 
  • David Mark Anderson (former CFO and Company Secretary of MFS Ltd) be disqualified from managing corporations for 25 years, pay a pecuniary penalty of $500,000, pay $205,755,601 compensation to PIF and 80% of ASIC's costs. 
  • Marilyn Anne Watts (former funds manager of MFSIM) be disqualified from managing corporations for five years, pay a pecuniary penalty of $90,000 and 40% of ASIC's costs.

Justice Douglas endorsed ASIC's view that legal requirements 'were flagrantly ignored' and that the penalties 'should reflect the complete disregard which these defendants had to to their duties under the Corporations Act.'

'(ASIC's) submissions were justified. The insouciant attitude of the defendants to this misuse of money intended to be used for PIF's investors beggars belief,' Justice Douglas said.

ASIC Commissioner John Price said, 'The substantial disqualifications from managing corporations and pecuniary penalties imposed by the court reflect the seriousness with which courts view abuses by directors and senior managers of corporations who occupy positions of substantial trust in the investment community - in this case their obligations to protect the assets of the PIF. To say the least, the court's judgment demonstrates that this trust was most seriously abused in this case.'

As the responsible entity for the PIF, MFSIM and its directors and officers, were required to operate the fund with care and diligence and in the best interests of the members of the fund. In breach of their duties, the directors and officers of MFSIM attempted to justify the use of the misappropriated funds by falsifying and backdating company documents during the period between November 2007 and February 2008.

Background

MFS Ltd was a publicly listed company with interests in financial services, travel and leisure and childcare businesses that was based on the Gold Coast.

MFSIM was an unlisted public company and wholly owned subsidiary of MFS Ltd (now in liquidation). MFSIM was the responsible entity for a number of unlisted managed investment schemes, including the PIF.

The PIF was an unlisted managed investment scheme which offered investments to retail and wholesale investors through a product disclosure statement. A significant number of the investors in the PIF were self-managed superannuation funds.

In late 2009, ASIC commenced its civil penalty proceeding against MFSM and the four former officers and a funds manager (refer: 09-214AD)

In the proceedings, ASIC alleged that:

  • In November 2007, officers of MFSIM caused the PIF to transfer $130 million to MFS Administration Pty Ltd (MFS Admin). From those funds, MFS Admin paid a debt of $103 million owed by another MFS Ltd subsidiary to Fortress Credit Corporation (Australia) Pty Ltd.
  • In December 2007, officers of MFSIM caused the PIF to transfer $17.5 Million to MFS Pacific Finance Ltd (Pac Fin), a New Zealand registered company and now known as OPI Pacific Finance Ltd (Receivers and Managers Appointed (Liquidator appointed).
  • After the funds had been transferred, the officers and the fund manager of MFSIM created and used false documents in relation to the use of the funds
  • The funds were used for a purpose that did not benefit the PIF and the PIF suffered loss as a consequence of their actions.

The trial in respect of the liability aspect of the proceedings was concluded on 12 September 2014 after 60 days of hearing, excluding interlocutory hearings and appeals.

On 23 May 2016, the Supreme Court of Queensland found that the four former executives and the funds manager of MFSIM had acted dishonestly in their roles. (refer: 16-158MR)

The hearing on final orders and penalties was heard between 14 and 17 October 2016 and the decision was reserved.

Editor's note:

On 23 June 2017 the four former executives and the funds manager of MFSIM filed Notices of Appeal from the decisions of the Court at first instance.

Editor's note 2:

The appeals have been listed for hearing by the Queensland Court of Appeal. The hearing will commence on 4 June 2018.

Editor's note 3:

The Queensland Court of Appeal heard the appeals of the defendants - Mr King, Mr White, Mr Hutchings and Ms Watts - from the Court's decision at first instance between 4 and 18 June 2018.  The Court's decision has been reserved.

On 29 September 2017 the defendant, Mr Anderson, filed a notice of discontinuance of his appeal and requested that the Court of Appeal make an order dismissing his appeal.

Last updated: 21/06/2018 09:15