A decision of the Federal Court provides some useful reminders about misrepresentations by financial brokers and reliance on statements passed on by those brokers.
Dartberg Pty Ltd (as trustee for Pollard Children Trust) v Wealthcare Financial Planning Pty Ltd (No 2) (2009) 74 ACSR 373 involved a dispute between the cross-claimant, Wealthcare, and the cross-respondent, Property Investment Research Pty Ltd (PIR), whereby Wealthcare was seeking damages against P IR in the amount of $350,000 plus the costs incurred in defending the claim in the main proceedings. Those proceedings (which were settled prior to the hearing) concerned claims by Dartberg Pty Ltd (Dartberg) against Wealthcare relating to investments made by Dartberg on the recommendation of Wealthcare in promissory notes issued by two companies within the collapsed Westpoint group of companies.
In 2001, Wealthcare was supplied with two PIR Reports from Westpoint relating to certain promissory notes backed by two related companies. Each was accompanied by an Information Memorandum. Shortly thereafter, those promissory notes were placed on Wealthcare's approved product list. Throughout 2002, Dartberg invested in the promissory notes and in 2005, the two related companies went into liquidation.
At trial, it was alleged by Wealthcare that, in its reports, PIR made representations that were false and misleading as they failed to provide that the offering of the promissory notes was of an interest in a managed investment scheme and so fell within the definition of "securities" under s 92 of the Corporations Act 2001 (Cth) (the Act) and consequently was subject to the registration, prospectus and other requirements set out in the Act. It was alleged that as registration requirements were not followed, the schemes were liable to be wound up.
In his decision, Middleton J characterised the alleged misrepresentations as merely passing on the information in the Information Memoranda, namely, that the issue of the promissory notes was not covered by the Act, and held that it was up to the reader of the P IR report to make enquiries and to be satisfied that the offer met all compliance criteria such as required by the Managed Investments Act 1998 (Cth) or the Act.
He further held that whilst PIR made representations as to the investments being of an "investment grade" quality, it was not suggested that the statement as to "investment grade" quality was not one honestly held. If this was based on the Information Memorandum, it would involve no misleading or deceptive conduct. H e found no misleading conduct on the part of PIR, nor that the statements made by PIR were false or misleading.
As to causation, Middleton J held that even if the statements in the P IR reports were false or misleading and deceptive, the evidence suggested that there was no causal connection between them and the actions of Wealthcare and the damage alleged to have been suffered consequentially.
It was held that the evidence established that Wealthcare did not rely on the representations in the P IR report when making the recommendation and that even if the alleged misrepresentations relied upon by Wealthcare were false, or PIR's conduct was misleading or deceptive, this was not a cause of the loss suffered by Wealthcare. Accordingly, the cross-claim was dismissed.
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