Episode 63: ASIC enforcement update July to December 2020
16 April 2021
In this episode, we discuss ASIC’s enforcement update for July to December 2020. ASIC Commissioner Sean Hughes joins Media Officer Alexander Longmire to take us through ASIC’s response to the COVID-19 pandemic and its major enforcement outcomes in 2020.
Podcast length: 10 minutes 36 seconds
Speaker notes (may vary slightly from podcast recording)
Alexander Longmire: Hello and welcome to the official podcast of the Australian Securities and Investments Commission. Every six months, ASIC releases an overview of its enforcement outcomes priorities for the year ahead.
I’m Alexander Longmire and today I’m joined by ASIC Commissioner Sean Hughes who is going to take me through the highlights of ASIC’s Enforcement Update, July to December 2020. Welcome Sean.
Sean Hughes: Hi Alex.
Alex: Sean, let’s get straight to it. How did ASIC respond to the COVID-19 pandemic?
Sean: Thanks Alex. When it came to our enforcement work, we focused on conduct that looked to exploit the economic environment resulting from the pandemic.
Some examples of these are lending or providing credit to people who are unlikely to be in a position to pay it back, or even mis-selling a financial product, such as where a consumer thinks they are signing up to something that is entirely different to how it is sold or advertised.
Alex: There was also a focus on opportunistic conduct, like scams, and we saw reports of scams to ASIC increase in 2020 and continue to increase into 2021.
Sean: ASIC identified a number of trends and worked to inform the community about financial and investment scams that were on the rise. We focused on companies which failed to disclose materially negative information to the market as well as other market announcements which may have been misleading.
Between July and December 2020, ASIC commenced five court proceedings resulting from investigations we undertook during the COVID pandemic. We also took administrative action to prevent two companies from relying on reduced disclosure rules during this period, all as part of our response to the pandemic.
Alex: ASIC also recorded two of its largest ever civil penalties. Tell us more about these cases.
Sean: ASIC had a significant win against AGM Markets and two of its corporate authorised representatives, who offered over-the-counter derivatives and other financial products. The Court found they had engaged in unconscionable conduct, with trading losses of $32 million. Many of the AGM Markets account managers encouraged investors to trade far more than they could afford. The Court ordered a $75 million penalty, which was the largest cumulative penalty in ASIC’s history. This was an important win for ASIC as AGM was targeting retail investors and many were being convinced by account managers to trade far more than they could afford.
The second case resulted in a $57.5 million penalty against NAB’s wealth management division. The Court found that these NAB companies made false and misleading representations to superannuation fund members about their entitlement to charge fees. This was another significant win for ASIC as it sends a strong message to the industry about the need for transparency and openness when they are charging fees to customers.
Alex: You speak to the message of deterrence here. Is this one of the reasons ASIC takes on these cases?
Sean: ASIC’s mandate, central to everything we do, is to help create a fair, strong and efficient financial system for all Australians. Enforcement work and deterrence within the financial services industry aims to deliver better outcomes for consumers. Essentially, we want Australians to be able to trust our financial system.
We hope that all our enforcement work, as evidenced by these two penalties, $75 million and $57.5 million, demonstrate to companies that the consumer needs to come first and that companies need to work in the customer’s best interest. Otherwise they could be looking at ASIC action against them.
Alex: Sean, the $57.5 million penalty against NAB’s wealth management division was a matter referred to ASIC by the Financial Services Royal Commission. The Enforcement Update discusses Royal Commission matters. Take us through that.
Sean: Since the completion of the Royal Commission, ASIC has been able to increase our resources and therefore fast-track some of these Royal Commission investigations. As at 31 December 2020, seven Royal Commission cases resulted in litigation which are now completed, with over $77 million in penalties. A further 11 are before the Court and another 11 remain under investigation.
Alex: It has been two years since the Financial Services Royal Commission. How do you feel ASIC is tracking when it comes to enforcement work in this area?
Sean: With seven matters resulting in litigation that are now complete and a further 11 matters currently before the Courts, indicates that we have continued to move forward, even during the disruptions caused by the pandemic.
I know we are just as eager as members of the public to see those remaining 11 investigations finalised, but these can be complex and take time. We need to build our evidence to ensure we have a strong case and, in criminal matters, this includes referring our investigation briefs to the Commonwealth Director of Public Prosecutions to bring charges before the Court.
The Enforcement Update shows an increase in court proceedings and we are using our additional funding to undertake more investigations and bring them to the Court.
Alex: Thanks Sean. Moving on, one of the cases detailed in the Enforcement Update is ASIC’s case against Harold Mitchell.
ASIC took action against Mr Mitchell for a 2013 decision by Tennis Australia’s board to award domestic television broadcast rights for the Australian Open to the Seven Network. The Court found Mr Mitchell contravened the Corporations Act on three occasions when he sent emails to Seven Network’s commercial director. In those emails, Mr Mitchell disclosed, among other things, Tennis Australia’s internal deliberations about the sale of rights.
Sean, this case was closely followed by media organisations, not just because Mr Mitchell is a well-known businessman but also because of interest to see ASIC enforce directors’ duties laws. Tell me about the outcome in this one.
Sean: The Court found Mr Mitchell contravened the Corporations Act on three occasions, and he was ordered to pay a $90,000 penalty. However, ASIC’s additional allegations against Mr Mitchell, and ASIC’s case against another director of Tennis Australia, Mr Healy, were dismissed. So, although we obtained a penalty, we were not successful in the majority of what we put before the Court.
We took on this matter because we felt it was in the public interest to pursue allegations involving a potential breach of director’s duties. ASIC has long had a mandate to enforce the law relating to company officers discharging their duties.
Alex: Arguably, this case showed that ASIC is prepared to take on difficult cases and expects not to win every case it litigates.
Sean: The Commission believes there is a deterrence impact that arose from the pursuit of this case against Mr Mitchell, even though we were unsuccessful in some aspects. As you say, we cannot expect to win every case we take on, nor should we shy away from investigations and litigation which pose difficult issues of evidence and law. We will continue, however, as appropriate, to channel our resources regarding the conduct of directors and officers where there is harm, or foreseeable harm, to the company.
Alex: The Enforcement Update also goes into a case against Mr Andrew Kunz, who dishonestly transferred more than $2 million of assets belonging to Total Hoarding Supplies, a failed company of which he was a director, to a company called Sybab, of which Mr Kunz was also a director.
Sean: This is what is commonly referred to as illegal phoenix activity. The key difference between a legitimate business rescue and illegal phoenix activity is the director’s intentions. It becomes a problem if it is done to remove assets or other financial obligations from the reach of creditors when winding up — and when directors benefit from it. If a new company is getting the assets for free or at “mate’s rates”, for instance, that may constitute illegal phoenix activity.
At the time of the asset transfer, Total Hoarding Supplies was being pursued by Bendigo and Adelaide Bank for loans of over $1.6 million, so we alleged that moving $2 million of assets into another company is illegal. Mr Kunz was convicted and ordered to pay a $2000 fine, serve 200 hours of community service as well as being disqualified from managing corporations for five years.
ASIC, the ATO and other Phoenix Taskforce members work together to detect and disrupt illegal phoenix activity. ASIC will continue to distinguish those who engage in illegal phoenix activity from legitimate and regrettable failures and restructures. We only target those who do the wrong thing.
Note, in the first half of 2021 alone, ASIC is targeting 40 investigations of high-risk company directors and of illegal phoenixing.
Alex: Finally, Sean, the Enforcement Update also looked at one of ASIC’s enforcement priorities and that is to address serious market misconduct. Mr Michael Ming Jinn Ho, prosecuted by the CDPP, was sentenced to three years imprisonment. Tell us more.
Sean: Mr Ho pleaded guilty to five counts of insider trading and one count of communicating inside information in respect of Big Un Limited shares and options. Mr Ho invested $1.6 million in Big Un securities while in possession of inside information communicated to him by Big Un’s CEO Richard Evertz.
When delivering the sentence, the Judge considered Mr Ho’s cooperation with ASIC and earlier guilty plea. Mr Ho is serving his sentence via an intensive correction order and this demonstrates that reductions in sentences and other punitive outcomes may be available to those who cooperate with ASIC.
ASIC does encourage individuals to get in contact with us if they are involved in misconduct such as insider trading. Listeners to this podcast may be aware that ASIC published our first Immunity Policy on this in February 2021 and more information can be found on our website.
Alex: Sean, thank you for speaking with me today and taking me through the Enforcement Update, July to December 2020. View the full report on the ASIC website.
You can keep up to date with our enforcement work by subscribing to our media releases on the ASIC website.
If you have any feedback on this podcast, send us a tweet to @ASICmedia. We’d love to hear from you.