Australian Securities and Investments Commission v Mayfair Wealth Partners Pty Ltd: what is misleading?

This week we review the recent Federal Court decision in ASIC and Mayfair Wealth Partners[1], explain why a not-at-all-recent anecdote about ducks is important for corporate fundraising; and take another look at the law around forecasts and other forward looking statements.

In Mayfair, ASIC successfully pursued the Mayfair group for misleading or deceptive conduct in connection with fundraising undertaken by it.   The group marketed its promissory notes through the websites and newspaper advertisements. It suggested that its promissory notes were comparable to term deposits and overall were very low risk investments.

The notes were offered only to wholesale investors, that is investors that had sufficient income or assets to be regarded as sophisticated under the Corporations Act.  A wholesale offer generally does not need to be accompanied by a prospectus or another sort of regulated disclosure document.

Despite this, the Court found that statements made to the investor group were still misleading and deceptive, in breach of the general securities laws.

This case is important for companies and others looking to raise funds, because it shows wholesale capital raising is not a ‘regulation free’ zone.  This is particularly important (as here) where these investors are in fact unsophisticated, even if considered to be ‘wholesale’ under the law.   Companies and promoters need to ensure that wholesale fundraising documents are pitched at the right level for the investor base, regardless of how investors are categorized under the Act.

Background

The litigation was in line with ASIC’s “True-to Label’ campaign, to protect an expanding cohort of investors who comply with the arbitrary definition of wholesale investors, but lack the financial savviness and resources to assess offers independently.

Mayfair marketed its notes as comparable to bank term deposits, but offering higher returns, while reassuring investors of high certainty and security.

As we have discussed previously, the financial services regulation states that a person must not engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.[2]

ASIC successfully argued that Mayfair made four (4) representations that comprised misleading or deceptive conduct:

1. The products were comparable to bank term deposits, and carried a similar risk profile (Bank term deposit representation);
2. There was no risk of default (No risk of Default representation);
3. On maturity, principal would be repaid in full (Repayment representation). In fact Mayfair had a contractual right to extend repayment for an indefinite period of time, including when Mayfair lacked sufficient funds to repay, and Mayfair had exercised this right;
4. The promissory notes were fully secured financial products (Security representation).

First, assess the Target audience: “Could it be a duck?”

To show a statement is misleading, the law will first assess the target audience.  The test is: would the ordinary, reasonable member of that target audience be misled or deceived, or be likely to be misled or deceived, by the statements?

ASIC submitted that the target investor base was a subtype of wholesale investors.  Mayfair configured search terms (for the online search engines) to ensure its products were seen by investors seeking a low-risk investments, akin to bank term deposits.  During the promotional period, a Google search for ‘term deposit’ yielded links to Mayfair websites as the first and second listed search results.[3]  (As an aside: the Mayfair group provided more than a million keywords in various combinations to the internet platforms it used, with great success.  Mayfair’s promotional websites appeared in searches more than 13 million times.[4])

There’s an old anecdote amongst doctors…

A GP, physician and surgeon are out hunting.  A duck flies by.

The GP calls out, “Look at that duck!”

The physician responds, “Well, it looks like a duck, quacks like a duck and flies like a duck.  But we need more tests to prove it’s a duck.”

Without a word, the surgeon shoots the duck.  “Send it to pathology to check if it’s a duck,“ she says to her caddy, as she walks off.

While we do not suggest that Mayfair is a funny story, the analogy is helpful.  This is because:

• A truly sophisticated investor is unlikely to accept at face value the promise of a low risk, high return investment.  Sophisticated investors usually know that something that sounds too good to be true, usually is. However, in this case as noted in the Provisional Liquidator’s Report, although the investors “typically met the legal definition of a ‘sophisticated investor’, their characteristics frequently were more reflective of a retail investor.”[5]

The Court observed that to a risk-averse class of investors, the words “confidence” and “certainty” would be taken to mean that the investments would be repaid in full.[6]  The ordinary reasonable member of the target audience would therefore be likely to be misled or deceived by the statements on the websites.

Future Representations and reasonable grounds[7]

All four of the representations were considered to relate to a future matter.  The Bank Deposit representation was considered to relate to a future matter because it inherently implied a future return and risk profile.

When a person makes a statement as to a future matter, it must be based on reasonable grounds at the time it is made.  The Court accepted here that a future representation legally is presumed to be misleading if no evidence of reasonable grounds is adduced in the hearing.[8]

No evidence of reasonable grounds was produced for the Bank Deposit, Default and Repayment representations.  An Expert Report was used to assess whether Mayfair had reasonable grounds to claim that the products were fully secured.  Partial security was not sufficient grounds for the statement. In each case, the Court considered there were not reasonable grounds, and thus the representations were misleading.

Takeaways from this case

• Adequacy of disclosure: a qualitative not quantitative test: Corporate fundraising to the retail market normally requires a high level of disclosure, for example a prospectus. This is not required for wholesale investors, which was the target market for the Mayfair group. However, this did not prevent a finding of misleading and deceptive conduct.  The case shows a Court will examine the specific attributes of a target audience, rather than presuming wholesale investors to be a generally sophisticated target audience.  The legal test for truthful disclosure is qualitative, not quantitative.
• Statement of future matters must have reasonable grounds: as we have previously discussed, any forecast or other forward-looking statements must be based on reasonable grounds at the time. These should be recorded and retained as part of the pre-fundraising due diligence process.
• General disclosure of risks not sufficient: Mayfair issued brochures that included a general disclosure of risks: “general investment, lending, liquidity, interest rate, cyber, related party transactions and currency risks”. Such risks are commonly listed in a wholesale fundraising document.  However, as the Court noted, the brochure said “nothing of the material risks which, for example, are set out in the Expert Report and the Provisional Liquidators’ Report”.  Courts will consider general disclaimers in the context of each case, and frequently conclude that a general disclaimer is inadequate.[9]
• Is the law out of date? This case exemplifies how the thresholds to define wholesale investors are out-of-date. The thresholds (net assets of >$2.5 million, or gross income of >$250,000 p.a.) have not changed in 20 years: they were defined in the Corporations Act in 2001, and at that time were based on earning data from 1991!

[1] Australian Securities and Investments Commission v Mayfair Wealth Partners Pty Ltd (No 2) [2021] FCA 247

[2] Corporations Act 2001 (Cth) s 1041H.

[3] [106].

[4] [107].

[5] [143].

[6] [60] and [156].

[7] [42].

[8] [40] to [44].  “These provisions raise the presumption that a representation with respect to any future matter without reasonable grounds is misleading (and that evidence must be adduced to establish reasonable grounds).”

[9] See our case note commentary on Westpac v ASIC for another example of the Court rejecting a general disclaimer, in that case distinguishing between personal and general financial services advice.

 http://www.keypointlaw.com.au/keynotes/westpac-securities-administration-ltd-v-australian-sec

urities-and-investments-commission/