On Friday last week the Federal Court found Julie and Emmanuel Cassimatis breached their duties as directors of the failed financial planning firm Storm Financial. The court also found that Storm Financial provided inappropriate advice to clients.
The Australian Securities and Investments Commission (ASIC) commenced civil proceedings against the Cassimatises (pictured) in late 2010, alleging that that the advice provided to a sample of Storm clients was inappropriate for the clients’ ages and financial positions.
The trial took place between May 30 and June 30 this year and in late June the Federal Court dismissed an application by the Cassimatises seeking summary dismissal of ASIC’s case against them.
Little prospect of recovery
In a statement released on Friday, the corporate regulator said the investors in the sample were aged over 50, were retired or approaching and planning for retirement, had little or limited income, few assets and had little or no prospect of rebuilding their financial position in the event of suffering significant loss.
ASIC said that since about 1994 Storm Financial applied a one-size-fits-all financial planning process and clients subject to this approach were said to have been “Stormified”. ASIC said the advice process “recommended that clients invest substantial amounts in index funds, using ‘double gearing’”.
“This approach involved taking out both a home loan as well as a margin loan in order to purchase units in index funds, create a ‘cash dam’ and pay Storm’s fees. Once initial investments took place, Stormified clients would be encouraged to take ‘step’ investments over time,” ASIC said.
Storm collapsed in early 2009 as the global financial crisis wrought havoc on the world’s equity markets. By then, an estimated 3000 of Storm’s total of 14,000 clients had been Stormifed, and by late 2008 many of its clients were “in negative equity positions [and were] sustaining significant losses”.
Storm ‘failed to investigate’ advice
In its statement ASIC said it had alleged in its case against Storm that the firm “failed to properly investigate the subject matter of the advice given to those investors”.
“As such, ASIC also alleged that Storm failed to do all things necessary to ensure that the financial services covered by its licence were provided efficiently, honestly and fairly,” it said.
“ASIC further alleged that because the Cassimatises were responsible for the day-to-day significant decisions in relation to the provision of financial services to Storm’s clients and exercised a high degree of control over its systems and processes, they had caused Storm to contravene its obligations under the Corporations Act and did not exercise their powers as directors of Storm with the degree of care and diligence that a reasonable person would have exercised in that situation.”
In a 217-page judgment, Justice Edelman found that “a reasonable director with the responsibilities of Mr and Mrs Cassimatis would have known that the Storm model was being applied to clients such as those who fell within this class and that its application was likely to lead to inappropriate advice”.
‘Catastrophic’ consequences
“The consequences of that inappropriate advice would be catastrophic for Storm (the entity to whom the directors owed their duties). It would have been simple to take precautionary measures to attempt to avoid the application of the Storm model to this class of persons,” Justice Edelman wrote.
ASIC commissioner Greg Tanzer said the Federal Court findings were important decisions which emphasise “the importance of directors’ duties to ensure that they do not cause the companies that they control, to breach the law”.
“The decision also highlights the significant obligation on financial services licensees to provide financial advice that is appropriate to the persons to whom it is given,” Tanzer said.
ASIC said the the matter will be listed for a further hearing at a later date to determine what civil penalties and disqualification orders should be imposed on the Cassimatises as a result of the breach of their director duties.
