Porges v Adcock Private Equity Pty Ltd

1. [1]

   PAYNE JA: I agree with White JA.

2. [2]

   WHITE JA: This is an appeal from orders of the Equity Division (McDougall J) made on 7 September 2018 in which his Honour entered judgment for the respondent, Adcock Private Equity Pty Ltd (“APE”), against the first defendant and appellant, Mr Stephen Porges (“Mr Porges”) in the sum of $1,111,594.23 inclusive of pre-judgment interest. A claim by APE against Mr Porges’ wife, Ms Serena Porges, was abandoned and was dismissed.

3. [3]

   Mr Brook Adcock is the executive chairman of APE. APE invested in developing business opportunities in the manner of a venture capital fund. Mr Adcock’s approval was required before APE could make any investment. One of APE’s investments was in shares in a company called DirectMoney Finance Pty Ltd (“DirectMoney”) which was proposed to be listed on the Australian Stock Exchange. By late 2014 the shareholders of DirectMoney decided to seek the appointment of a well-known and experienced person to take the position of non-executive chairman in the newly-listed company. Mr Porges was identified as a candidate for that position.

4. [4]

   Mr Porges agreed to take up the position of executive chairman. In discussions in early 2015 with Mr Campbell McComb, the Chief Investment Officer of APE, Mr Porges told Mr McComb that if he were to take on the role of chairman of DirectMoney he would need APE to buy 300 of his shares in a company called “SecureOne”, which he was prepared to sell for US$500 per share.

5. [5]

   On 13 March 2015, Mr Porges told Mr Adcock that he was very interested in the role, but if he were to take it on he would be earning less money than he would normally earn and would need to liquidate some of his assets in other investments, including his shares in SecureOne. He asked if Mr Adcock would be willing to buy the shares so that he could take on the role of chairman.

6. [6]

   SecureOne Corporation, Inc (“SecureOne”) was a company incorporated in the British Virgin Islands. In an Information Memorandum of May 2014 prepared for potential investors it described itself as a “pre-revenue development-stage company”. It had formerly been called NFC Data Inc. Its Information Memorandum stated that its intellectual property offered a “data-centric, security-focused, cloud-based mobile payments platform that offers a robust set of recurring revenue streams”. Its Information Memorandum stated that its product would provide a higher level of security than was currently available from other payment platforms whilst using payment methods (a card for transactions and an app for management) with which consumers were familiar. It said that card information was locked deep within the payment network dramatically reducing the risk of fraud.

7. [7]

   APE acquired in total 1,100 shares held by Mr Porges in SecureOne. On 30 March 2015, it paid the Australian dollar equivalent of US$150,000 to purchase 300 shares in SecureOne (Judgment [42] and [82](1). On 3 June 2015, it agreed to purchase a further 1,000 shares at US$700 per share (Judgment [56] and [57]) in two tranches of 280 shares in June and 720 shares in July. The June tranche was paid for by a transfer of the Australian dollar equivalent of US$196,000 on 15 June 2015 (Judgment [60]). The agreement to purchase 780 shares at US$700 per share was varied to the purchase of 520 shares for US$700 per share. Payment for those shares was made on 1 September 2015 (Judgment [69] and [70]).

APE’s pleaded case

1. [8]

   APE alleged that it was induced to purchase Mr Porges’ shares in SecureOne by what it characterised as “Profit Representations” and “Further Profit Representations” made by Mr Porges and by representations allegedly made by him that he was a reluctant seller of the shares (“Reluctant Seller Representation” and “Further Reluctant Seller Representation”). APE alleged that by making the “Profit Representations” and “Reluctant Seller Representation” Mr Porges engaged in misleading and deceptive conduct or conduct likely to mislead or deceive (“misleading conduct”) and that APE relied on the representations in entering into the first agreement to buy 300 shares in SecureOne for which payment was made on or about 30 March 2015. APE alleged that by making the Further Profit Representations and the Further Reluctant Seller Representation Mr Porges engaged in “Further Misleading Conduct” and that it relied on both the “Misleading Conduct” and the “Further Misleading Conduct” in agreeing to buy the 280 shares paid for in June 2015 and the 520 shares paid for in September 2015.

2. [9]

   The “Profit Representations” alleged were:

3. [10]

   The Profit Representations were said to be implied from the Information Memorandum provided by Mr Porges to Mr McComb, an email from Mr Porges to Mr McComb of 29 January 2015 and two emails from Mr Porges to Mr McComb on 22 February 2015.

4. [11]

   With one exception, the Further Profit Representations were pleaded in the same terms as the Profit Representations. The exception is that the last representation (lettered f) was that purchasing shares in SecureOne at US$700 per share would be a good and profitable investment for APE. The Further Profit Representations were alleged to be implied from documents provided by Mr Porges on 9 April 2015 and emails sent by him to Mr Adcock on 9 and 30 April 2015, as well as from the documents said to have given rise to the Profit Representations.

5. [12]

   APE did not press the second of the Profit Representations or Further Profit Representations, namely that SecureOne was trading profitably.

6. [13]

   For both the Reluctant Seller Representation and the Further Reluctant Seller Representation, APE simply alleged that Mr Porges represented that he was a reluctant seller of the shares. The Reluctant Seller Representation was alleged to be implied from emails from Mr Porges to Mr McComb of 21 February and 26 March 2015. The Further Reluctant Seller Representation was alleged to be implied from an email from Mr Porges to Mr Adcock of 9 April 2015 and Mr Porges’ telling Mr Adcock on 9 April 2015 that he wanted to sell more shares to keep his wife happy.

7. [14]

   APE pleaded:

8. [15]

   APE’s case as pleaded was one of express and implied representations rendered misleading or deceptive by reason of the existence of facts that made the representations untrue. APE did not plead that Mr Porges engaged in misleading or deceptive conduct by not disclosing to APE the matters quoted at [14] above.

9. [16]

   The primary judge, however, found:

10. [17]

    The notice of appeal did not include a ground that the primary judge erred in finding that the case run at trial and implicitly pleaded was that Mr Porges engaged in misleading and deceptive conduct by not disclosing to APE the matters that APE alleged made the profit representations and the reluctant seller representations misleading or deceptive. Nor was any such case advanced in Mr Porges’ written submissions on appeal.

11. [18]

    APE pleaded that the Reluctant Seller Representation and the Further Reluctant Seller Representations were misleading or deceptive because it could be inferred from the matters set out at [14] above that Mr Porges was not reluctant to sell. APE did not plead that the reasons given by Mr Porges to APE for wanting to sell were not his true reasons, or not his only reasons. Mr Porges says that it was clear that he wanted to sell and he did not expressly or impliedly represent that he was a reluctant seller.

12. [19]

    Mr Porges did not dispute that the Profit Representations lettered c, d, e and f quoted at [9] above were made. He disputed that the first alleged representation was conveyed, namely that he was involved in the day-to-day business of SecureOne and had reliable information about its performance.

13. [20]

    APE also pleaded:

14. [21]

    The effect of ss 27-32 of the Fair Trading Act 1987 (NSW) is to make the text of the Australian Consumer Law that is Schedule 2 to the Competition and Consumer Act 2010 (Cth) applicable as a law of New South Wales that applies to, and in relation to, persons ordinarily resident in New South Wales or otherwise connected with New South Wales.

15. [22]

    It is unnecessary to decide whether s 18 of the Australian Consumer Law or s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) applied to Mr Porges’ conduct.

16. [23]

    Section 1041H(1) of the Corporations Act 2001 (Cth) was applicable. It provides:

17. [24]

    The shares in SecureOne were a “financial product” within the meaning of s 1041H(1) (s 764A(1)(a) and definition of “security” in s 761A and definition of “body” in s 9).

18. [25]

    Section 769C of the Corporations Act relevantly provides:

19. [26]

    In his Commercial List Response, Mr Porges pleaded in response to paragraph 36 of the Commercial List Statement that “... no positive matters are alleged as to the absence of reasonable grounds for the making of any representation of a future matter and the Plaintiff will be held to the [pleading]”. He did not aver that he did have reasonable grounds for the making of any of the representations.

20. [27]

    Curiously, in its Commercial List Reply, APE contended that the Profit Representations as well as the Reluctant Seller Representation were representations of fact and asserted that it was not required to allege or prove the absence of reasonable grounds.

21. [28]

    As noted above Mr Porges accepted on appeal that the Profit Representations lettered c, d, e and f were impliedly conveyed. The representations d, e and f were statements of opinion. They would be misleading or deceptive if APE established that Mr Porges did not hold the opinions conveyed, or that there was not a basis (or perhaps a reasonable basis) for them. The representations d, e and f were also representations as to future matters and would be misleading if Mr Porges did not have reasonable grounds for making them.

22. [29]

    The onus was on APE to establish the absence of reasonable grounds.

23. [30]

    This issue need not be pursued any further. Notwithstanding its pleading, APE’s case that was upheld by the primary judge was not that the matters pleaded in paragraph 35 of its Commercial List Statement falsified any of the Profit Representations or Further Profit Representations. APE did not file a Notice of Contention that such a finding should have been made.

24. [31]

    Rather, the primary judge held that when the whole of Mr Porges’ conduct was taken into account, including what was not said as well as what was said, his conduct was misleading for failing to disclose facts that he must have known would be material to APE’s decision to buy the shares.

25. [32]

    For the reasons which follow I have concluded that the primary judge was correct in finding that APE was induced to enter into the contracts for the purchase of shares in SecureOne from Mr Porges by Mr Porges’ misleading and deceptive conduct, namely his not disclosing to APE his knowledge of a claim by Play LA and that he had become disenchanted with the management of SecureOne. The appeal should be dismissed.

The representations made to APE

1. [33]

   It is not clear when discussions began between Mr McComb and Mr Porges about Mr Porges’ taking up a position of chairman of DirectMoney. As early as 16 July 2014 Mr McComb had forwarded information to Mr Porges about DirectMoney. On 31 October 2014, Mr Porges wrote to Mr McComb advising that another deal was dead and that he was starting to contemplate what to do next. He asked Mr McComb how the DirectMoney venture was going and said he had some time to look at it. Mr McComb replied on 31 October 2014 saying that the Adcock Group was planning a backdoor listing for DirectMoney and was looking to fill a non-executive director or non-executive chair role with DirectMoney that might be suited to Mr Porges.

2. [34]

   Neither Mr Porges nor Mr McComb gave evidence. APE had sought to rely on an affidavit of Mr McComb, but Mr McComb, who had left APE’s employment, was unavailable for cross-examination, although efforts had been made to procure his attendance. Because he could not be made available for cross-examination, APE did not seek leave to rely on his affidavit.

3. [35]

   APE tendered some parts of an affidavit made by Mr Porges on 28 August 2017, including paragraphs 32 and 33 in which Mr Porges deposed to discussions with Mr McComb as follows:

4. [36]

   Mr Porges described SecureOne as a start-up company based in the United States and Australia. He said that he understood that it:

5. [37]

   On 23 December 2014, Mr Porges sent to Mr McComb a copy of an Information Memorandum for SecureOne explaining that it was “very old but gives you some idea of where the company was six months ago”. This was the document referred to at [6] above. The Information Memorandum stated that it had “been prepared for sophisticated and professional investors for the purpose of making an offer which did not need disclosure within the meaning of s 708 of the Corporations Law [sic].” It was prepared by Nectar Partners who were advisers to SecureOne. It described SecureOne’s product and its plans and market potential. It stated that a two-stage funding program had been drafted. The first stage involved the raising of US$5 million of funds to provide working capital to SecureOne’s “first proof of concept customers in Australia and the US”. Funds would be raised by issuing shares at $500 per share. The Information Memorandum described a proposed second-stage of funding to raise up to an additional US$40 million.

6. [38]

   APE alleged that the Profit Representations were implied by an email from Mr Porges to Mr McComb dated 29 January 2015 (amongst other documents). All that Mr Porges said about SecureOne in that email was that he had a lot more than a 5 per cent shareholding.

7. [39]

   On 21 February 2015 Mr Porges sent an email to Mr McComb in which he said:

8. [40]

   The primary judge said, plainly correctly, that in the second sentence of the second paragraph the word “not” was omitted, so that Mr Porges was saying that his wife did not like the LJH role at all.

9. [41]

   Mr Porges replied on 22 February 2015. He said:

10. [42]

    On 22 February 2015 Mr McComb sent an email to Mr Porges which included the following:

11. [43]

    Also on 22 February 2015, in a separate and longer email, Mr Porges wrote to Mr McComb:

12. [44]

    Kitasi was another start-up venture in which Mr Porges proposed to invest. He was also to receive shares or options in DirectMoney if he took up the role of chairman.

13. [45]

    The primary judge found that the first Profit Representation (that Mr Porges was involved in the day-to-day performance of SecureOne and had reliable information about its performance) was conveyed by the longer email of 22 February 2015 (Judgment [92]-[93]).

14. [46]

    On 25 March 2015 Mr McComb forwarded the SecureOne Information Memorandum to a Mr Richard Cansick of APE and to Mr Adcock. Mr McComb also repeated to Mr Cansick and to Mr Adcock what Mr Porges had written to him in the first paragraph of his email of 22 February 2015 (quoted at [43] above, but without attributing those statements to Mr Porges. Mr McComb added:

15. [47]

    On 25 and 26 March 2015 Mr McComb and Mr Porges exchanged emails in relation to the remuneration for Mr Porges for his role as chairman of DirectMoney. In his email of 25 March 2015 Mr McComb proposed certain terms. In reply, Mr Porges wrote on 26 March 2015 as follows:

16. [48]

    APE pleaded that the representation by Mr Porges that he was a reluctant seller of the shares in SecureOne was implied by reason of his email of 21 February 2015 (quoted at [39] above) and his email of 26 March 2016 quoted above. Mr Porges submits that the emails do not convey that representation. Rather, they show that Mr Porges was a willing and insistent seller of his shares if he were to take up the position of chairman of DirectMoney.

17. [49]

    On 9 April 2015 Mr Porges wrote an email to Mr Adcock to which he attached a “nine-pager” document in relation to SecureOne, as well as in relation to another investment in the company called Kitasi. In relation to SecureOne Mr Porges wrote:

18. [50]

    The “nine-pager” document was similar to the Information Memorandum. It stated that it was an Investor Brief prepared by SecureOne for sophisticated and professional investors for “the purpose of making an offer which does not need disclosure within the meaning of s 708 of the Corporations Law [sic]” and had been prepared by Nectar Partners. It described SecureOne’s technology and product and anticipated revenue streams. It stated that it was issued in relation to SecureOne’s raising of up to US$2 million as a “pre-Series A equity offer, at US$750 per share, to capitalize on available market opportunities and to cashflow the business through the near term.” It made no reference to any threats of litigation.

19. [51]

    On 30 April 2015, Mr Porges wrote to Mr Adcock in relation to four topics. The fourth topic was SecureOne. Mr Porges said:

Facts about SecureOne known to Mr Porges that were not disclosed

1. [52]

   On 26 June 2014 Mr Porges received an email from a Mr Miles Sterrick of Nectar Partners to which was attached a letter from a firm of lawyers in the British Virgin Islands enclosing by way of service a copy of what was called a Notice of Direct Claim served in accordance with Article 9 of a Share Purchase Agreement. Also attached to the email was a copy of a letter from that firm serving the Notice of Direct Claim on 11 shareholders (not including Mr Porges) in SecureOne whom it was alleged held 91.4925 per cent of the issued share capital of SecureOne.

2. [53]

   The Notice of Direct Claim asserted that those shareholders (called the “Vendors”) had agreed to sell their shares in SecureOne to the claimant, Play LA Inc (“Play LA”). The Notice of Direct Claim alleged that Article 9.3 of the Sale and Purchase Agreement required a notice of claim to be given to the indemnifying party (the Vendors) and that in the case of a Direct Claim (which the claim of Play LA’s was) the Indemnifying Party should have 60 days to investigate the claim and if after the expiration of that period or any mutually agreed extension thereof, the amount of the claim was unpaid, then the matter should be referred to binding arbitration or to determination by a court of competent jurisdiction.

3. [54]

   Play LA alleged that the Vendors and SecureOne were in breach of and had repudiated the Share Purchase Agreement by failing to transfer shares, by misrepresentations and breach of warranties as to SecureOne’s beneficial ownership of intellectual property and the absence of pending proceedings, by SecureOne’s entering into an agreement without Play LA’s consent and by the Vendors’ or SecureOne’s entering into and failing to complete certain alleged side agreements, and failing to raise alleged agreed funding.

4. [55]

   The Notice of Direct Claim asserted that Play LA was entitled to damages or indemnity in a sum of US$10,798,500 being what was said to be the 91.4925 per cent of the market value of SecureOne’s shares plus costs in the sum of US$89,405.82 and accruing thereafter and interest.

5. [56]

   On 26 June 2014, Mr Sterrick of Nectar Partners sent to Mr Porges a draft of a proposed press release in response to Play LA’s notice of claim. The proposed press release stated that:

6. [57]

   On 3 July 2014, Mr Sterrick sent an email to Mr Porges attaching an explanatory note regarding the proceedings between Play LA and SecureOne. Mr Sterrick’s email stated that the note had been cleared for distribution by SecureOne’s legal team. The explanatory note was from Mr Geoff Cairns, a director and chief executive officer of SecureOne. He stated:

7. [58]

   Mr Porges notes that the primary judge did not refer to this email.

8. [59]

   The primary judge found that by 4 July 2014 Mr Porges had decided to sell at least some of his shares in SecureOne (Judgment [118]). On 4 July 2014 Mr Cairns sent an email to a Ms Maribel Jordan, whom the primary judge inferred was the secretary of SecureOne, asking what the bylaws said about current shareholders selling shares privately and whether they needed the company’s permission. Ms Jordan responded to that request and said:

9. [60]

   The primary judge inferred that Mr Porges’ inquiry about selling may have been made initially to Mr Sterrick because on 5 July 2014 Mr Cairns forwarded Ms Jordan’s advice to Mr Sterrick, adding his own comment:

10. [61]

    This correspondence was forwarded by Mr Sterrick to Mr Porges. He responded to Mr Sterrick on 7 July 2014 as follows:

11. [62]

    Play LA commenced proceedings against the Vendors and SecureOne in the Eastern Caribbean Supreme Court in the British Virgin Islands on 26 August 2014. Mr Porges denied that he was aware of that fact (see [88] below) and there is no evidence that he was aware of it.

12. [63]

    On 3 September 2014, Mr Cairns sent a letter to shareholders stating that SecureOne Corporation was continuing its march towards commercialisation. He said that the last few months since his previous update had been very exciting and that pilot initiatives with ME Bank and Discover continued to make progress. He said that the company was concurrently framing an initial launch plan, commercials and investment options for approval by ME Bank’s board of directors and that in the United States SecureOne had passed an “initial deep technical screening” with Discover. He said the company was actively planning the internal trial (with Discover). He said that SecureOne was working with First Data Corporation to form a partnership agreement in which the SecureOne card system would be implemented at its main processing facility. He said that First Data processed 50 per cent of all transactions in North America. There were other positive statements made as to SecureOne’s prospects. He said that the initial capital raising that Nectar Partners had been managing was all but complete and that the company was moving quickly to ready the series “A” round. In relation to Play LA, Mr Cairns said:

13. [64]

    On 8 September 2014 Mr Sterrick forwarded this document to Mr Porges and said:

14. [65]

    Mr Porges responded to Mr Sterrick on 8 September 2014 as follows:

15. [66]

    The primary judge said (Judgment [127]) that he understood the expression “clusterfuck” whether written elliptically or in full, to denote a perilous state of affairs, referring in this respect to Australian Securities and Investments Commission v Westpac Banking Corporation (No. 2) [2018] FCA 751 at [937]. Some sources suggest that the term is of military origin, indicating a chaotic situation where everything goes wrong. This is the second sense given to the word in the Oxford English Dictionary. Likewise, the Macquarie Dictionary describes the word as meaning “... an operation in which a number of things go wrong at the same time, or contributing to a disastrous situation.”

16. [67]

    The principal significance of this email is to demonstrate that Mr Porges was concerned to sell some of his stock in SecureOne for reasons unrelated to his taking up a position as chairman of DirectMoney. It is principally relevant to APE’s pleading of the “Reluctant Seller Representation”.

17. [68]

    In a similar vein, Mr Porges wrote to Mr Cairns (copied to Mr Mages and Mr Sterrick) on 5 November 2014. The subject of his email was “Disgraceful”. He wrote:

18. [69]

    On 11 November 2014, there was an exchange of emails between Mr Porges and Mr Mages (Chief Technology Officer and director of SecureOne) in relation to Mr Porges’ attempt to obtain confirmation from SecureOne that it would approve a transfer of a portion of Mr Porges’ shares. Mr Porges wrote:

19. [70]

    Mr Mages replied:

20. [71]

    Mr Porges responded:

21. [72]

    Mr Mages then said that Geoff (Cairns) was “... working like a dog to buy your shares under favourable circumstances to both you and the company.” Mr Porges then wrote:

22. [73]

    Mr Mages then wrote to say he had not understood that all that Mr Porges wanted was to transfer his shares and he would vote to allow him to sell.

23. [74]

    Mr Porges replied:

24. [75]

    As the primary judge found, Mr Porges’ statement to Mr Mages that the Australian Taxation Office had threatened to do a complete audit of the company, its advisers and its shareholders evidently ruffled feathers. On 14 November 2014, Mr Sterrick asked Mr Porges to provide details of his assertion that the Australian Tax Office had a claim over SecureOne and its shareholders that would subject them to an audit. Mr Sterrick said that the company had had no communication from the ATO. Mr Porges did not respond to that query. His threat of an ATO audit appears to have been bluster to attempt to obtain board clearance for his wish to sell some of his shares.

25. [76]

    On 14 and 17 November, Mr Cairns and a Mr James Mollison, a director of Nectar Partners, advised Mr Porges that SecureOne was willing to consider a partial sale of his holding in the company and requested that he forward his sale request and any concerns in writing to the company. SecureOne offered to buy back up to $500,000 worth of his shares at a price of $125 per share on condition that sufficient funds were raised to enable the purchase. Mr Cairns and Mr Mollison said that the board would approve a private party sale if a buyer identified by Mr Porges were not currently in dialogue with Nectar and if the buyer confirmed in writing that the sale price would be paid to Mr Porges and it was not funding company operations, or for any other purpose. They advised that the buyer would need to sign an investment disclosure document and a general release of the company.

26. [77]

    On 22 November 2014, Mr Porges wrote to Mr Sterrick. The heading of the email was “Falling apart”. Mr Porges said:

27. [78]

    The obvious inference is that Mr Porges believed that SecureOne and its advisers were fiddling whilst the business burned. There was no evidence about the role of KPMG or how that firm, in Mr Porges’ opinion, was being misled. There was no evidence as to the significance of disengagement of Mr Clare.

28. [79]

    Mr Adcock deposed:

Collapse of SecureOne

1. [80]

   SecureOne was successful in having Play LA’s action dismissed. But the costs of the proceedings resulted in SecureOne’s demise.

2. [81]

   On 5 January 2016, Mr Porges received a shareholder update from the management of SecureOne. It stated that “there were many watershed events last year that put the company on a great footing to finally break out in 2016.” These were described. The shareholder update concluded as follows:

3. [82]

   However, by a shareholder update dated 3 March 2016, received by Mr Porges on 7 March 2016, shareholders were advised that SecureOne had attempted to settle the proceedings brought by Play LA Inc on numerous occasions, but with no success. Mr Cairns advised that on or around 13 November 2015 SecureOne and some of the shareholders entered into a deed with its law firm in the British Virgin Islands, Ogier, in order to continue to be represented by that firm. The deed was described as:

4. [83]

   In the message to shareholders the Company stated that it needed an immediate infusion of $2 million in bridge financing “... to remove the Ogier deed, give it time to raise further funds, and to close a first commercial deal.”

5. [84]

   That funding was not forthcoming.

6. [85]

   The deed that Ogier entered into with SecureOne and the other defendants to Play LA’s claim included a charge given by SecureOne of all of its patent rights.

7. [86]

   On 31 May 2016 Ogier assigned its debt to a company called Transworld Holdings PCC Limited together with its security for the debt. Transworld Holdings brought proceedings in the British Virgin Islands claiming judgment for the assigned debt and orders that, amongst other things, SecureOne execute a deed of assignment of the patent interests in favour of Transworld Holdings. It does not appear from the appeal books whether or not the orders sought were made. But on 20 July 2018 Mr Porges admitted that the SecureOne shares sold to APE then had no value.

Mr Porges’ evidence

1. [87]

   Mr Porges made at least two affidavits in the proceedings. At the conclusion of the cross-examination of Mr Adcock, Mr Crutchfield QC, senior counsel for APE, said that the conclusion of Mr Adcock’s evidence concluded APE’s case subject to the tender of the court book or parts of it. Ms K Morgan SC, senior counsel for Mr Porges, sought an adjournment to obtain instructions as to whether or not Mr Porges would be called. She said that that was a matter that had been raised with Mr Crutchfield that morning as a possibility. She confirmed that the question of the contents of the court book that might be tendered would not influence that decision. After a short adjournment Ms Morgan indicated that she would not be calling any witnesses for the defendant, but that Mr Crutchfield had indicated he would like to tender paragraphs in Mr Porges’ affidavit. She had not been given a list of those paragraphs at that time. Mr Crutchfield then indicated the paragraphs of Mr Porges’ first affidavit that he tendered as admissions in the plaintiff’s case. Mr Crutchfield said that there was no issue about documents that Mr Porges had exhibited to his affidavit, which were in the court book which was being tendered. Mr Crutchfield then tendered paragraphs from Mr Porges’ first and second affidavits.

2. [88]

   Amongst the paragraphs tendered by APE was paragraph 110 of Mr Porges’ first affidavit in which he deposed as follows:

3. [89]

   It is unclear why APE tendered this paragraph, but it did. Before the primary judge Mr Crutchfield submitted that the picture presented in paragraph 110 that Mr Porges did not have any understanding there were ongoing issues concerning SecureOne on the one hand and Play LA on the other during 2014 could not possibly sit with documents that Mr Porges had in 2014. Whatever the motive behind APE’s forensic decision to tender paragraph 110, it was part of the evidence that needed to be considered. The primary judge did not refer to it.

Primary judge’s reasons

1. [90]

   As noted above, the primary judge concluded that the following representations were conveyed:

2. [91]

   The primary judge held that Mr Porges engaged in conduct that was misleading or deceptive by not disclosing the matters summarised in paragraph 35 of the Commercial List Statement quoted at [14] above. His Honour said:

3. [92]

   The primary judge also found that the Reluctant Seller Representation was misleading because Mr Porges was not reluctant, but wanted to sell irrespective of his stated reason that he needed to sell to raise funds to enable his wife to be satisfied that her standard of living would not be adversely affected if he took up the position of chairman of DirectMoney, and for cashflow (Judgment [107] and [153]).

4. [93]

   The primary judge found that Mr Porges’ misleading or deceptive conduct in respect of the Profit and Reluctant Seller Representations was a cause of APE’s decision to buy the shares in SecureOne from Mr Porges (Judgment [192]). In reaching that conclusion the primary judge rejected Mr Porges’ submission that APE had failed to prove actual reliance because Mr Adcock gave no evidence of reliance on any representation, that APE would have proceeded in the same way as it did had it known the true position because its sole motivation was to secure Mr Porges as chairman of DirectMoney, that its failure to make enquiries or carry out due diligence broke the chain of causation, but it was obvious that any predictions as to the future of SecureOne were highly uncertain and it was committed to buying the first instalment of shares by 4 February 2015, well before much of the conduct relied upon to establish the representations occurred (Judgment [161] and [162]).

5. [94]

   The primary judge accepted that Mr Adcock’s evidence as to express reliance was scanty (Judgment [171]). This was true in respect of APE’s pleaded case of reliance on the Profit Representations, but Mr Adcock’s evidence of reliance on material information being disclosed was not scanty. The primary judge posited the question of what would have happened had Mr McComb or Mr Adcock been told that:

6. [95]

   The primary judge reasoned that had any of the above matters been disclosed it was unlikely that Mr McComb would have recommended the investment without further inquiry, nor concealed the information from Mr Adcock and, a fortiori, if several of those matters or all of those matters had been disclosed. The same answers would be given if those matters had been disclosed to Mr Adcock (Judgment [174]-[178]).

7. [96]

   The primary judge rejected Mr Porges’ submission that APE would have bought the shares regardless of what was disclosed or not disclosed to secure Mr Porges’ agreement to being appointed chairman of DirectMoney (Judgment [179]-[183]). This conclusion was not challenged on appeal.

Grounds of appeal

1. [97]

   There were 14 grounds of appeal. They can be grouped as follows. Grounds 1 and 2 challenged the primary judge’s finding that Mr Porges represented to APE that he was involved in the day-to-day business of SecureOne and had reliable information about its performance. Grounds 3 and 4 challenged the primary judge’s finding that Mr Porges represented to APE that he was a reluctant seller of the shares in SecureOne and that that representation continued before the second contract was negotiated and in part transacted on 3 June 2015. Grounds 5-8 asserted that the primary judge should have found that for the purposes of s 4 of the Australian Consumer Law (sic) evidence had been adduced of Mr Porges’ having reasonable grounds for making the Profit Representations and Further Profit Representations and should have found that Mr Porges had reasonable grounds for making those representations. Grounds 9 and 10 asserted that the primary judge erred in finding that the Profit Representations and Further Profit Representations were misleading or deceptive or likely to mislead or deceive. Grounds 11 and 12 asserted that the primary judge erred in finding that APE relied upon a representation that Mr Porges was involved in the day-to-day business of SecureOne and had reliable information about its performance. Grounds 13 and 14 asserted that the primary judge erred in finding that APE relied upon the Reluctant Seller Representation and Further Reluctant Seller Representation.

2. [98]

   As noted above, the notice of appeal did not include as a ground that the primary judge erred in finding that APE had run a case based on misleading or deceptive conduct by silence in Mr Porges’ knowing of the matters pleaded in paragraph 35 of the Commercial List Statement (set out at para [14] above) and not disclosing those matters to APE. Contrary to Mr Porges’ submission, that contention was not impliedly raised in grounds 5-8. No application was made to amend the grounds of appeal. Nor is there reason to doubt the correctness of the primary judge’s findings at [113]-[114] of his judgment quoted at [16] above. Mr Adcock’s evidence (quoted at [79] above) amply supports the primary judge’s finding at [113]. The transcript of submissions supports the primary judge’s finding at [114] quoted above at [16].

Disposition

1. [99]

   The first representation the primary judge found had been conveyed, namely that Mr Porges was involved in the day-to-day business of SecureOne and had reliable information about its performance, was not itself causative of loss. APE did not allege that this representation was false. That is, APE did not allege that Mr Porges was not involved in the day-to-day business of SecureOne and did not have reliable information about its performance. Rather, it was Mr Porges who asserted that he did not have reliable information as to SecureOn’s performance, as a partial answer to APE’s contention that he had failed to disclose material matters about SecureOne’s performance and risks to its business.

2. [100]

   The effect of what was conveyed would be to add credibility to the Profit Representations alleged, but there was no evidence and the primary judge did not find that APE purchased the shares in SecureOne because of its reliance on this implied representation.

3. [101]

   The representation, if conveyed, would also provide a basis for Mr Adcock and Mr McComb to expect that if there were some material matter that qualified the rosy prospects conveyed by the Profit Representations, that that would be known to Mr Porges and be disclosed by him.

4. [102]

   The primary judge did not err in concluding that the effect of the email communications from Mr Porges to Mr McComb was that it conveyed by implication that Mr Porges had reliable information about SecureOne’s performance. I do not think that the documents conveyed that Mr Porges was involved in the day-to-day business of SecureOne, but that is not the pith of the pleaded representation. As the primary judge found, the representation was conveyed by Mr Porges’ email of 23 December 2014 to Mr McComb stating that the Information Memorandum was very old but gave some idea of where SecureOne was six months previously. As the primary judge found, this conveyed by inference that Mr Porges knew enough of the affairs of SecureOne that he could attest to the substantial historical accuracy of the Information Memorandum as of six months earlier (Judgment [86]).

5. [103]

   The primary judge found that Mr Porges’ longer email of 22 February 2015 (at [43] above) conveyed the very strong impression that Mr Porges was directly involved with SecureOne as he referred to “final discussions” with potential end-users of SecureOne’s product and reported on one of those potential end-user’s (AMP’s) response to the SecureOne product. The primary judge found that the nature of the information conveyed suggested that Mr Porges was closely involved with the company (Judgment [92] and [93]). I agree.

6. [104]

   The primary judge also found that the emails from Mr Porges of 9 and 30 April 2015 (at [49] and [51] above) confirmed the impression that Mr Porges was directly involved in the business affairs of SecureOne. By the time those emails were sent, APE had paid for the first tranche of shares. It had not paid for the second tranche. The primary judge found that the representations conveyed by the emails of 9 and 30 April 2015 effectively confirmed or corroborated the earlier representations made (Judgment [99]-[101]).

7. [105]

   There was no error in that reasoning.

8. [106]

   Mr Porges’ grounds of appeal and submissions failed to grapple with the way in which the primary judge decided the case. He submitted that the primary judge ought to have found that he had reasonable grounds for making the Profit Representations for the reasons outlined in paragraph 110 of his affidavit quoted at [88] above and Mr Sterrick’s email of 3 July 2014 (at [57] above) to which the primary judge did not refer. He also submitted that the 3 September 2014 shareholders’ update did not indicate that the dispute with Play LA was likely to have any material impact on the financial viability of SecureOne, but rather reported on SecureOne’s positive progress in bringing its product to the market.

9. [107]

   But it was the non-disclosure of the matters summarised by the primary judge at judgment [174] (see [94] above) that in all of the circumstances of the case was found to have made Mr Porges’ conduct misleading or deceptive or likely to mislead or deceive (Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 32; Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; [2010] HCA 31 at [16]-[23]).

10. [108]

    Some precision is needed in assessing the misleading and deceptive conduct found as a result of the non-disclosure. The non-disclosure of material matters did not falsify the pleaded Profit Representations. APE did not allege, nor could it have alleged, that Mr Porges had represented that he had given a complete statement of matters from which an assessment of SecureOne’s prospects could be made. The Information Memorandum and the nine-page document provided did not purport to be prospectuses and they contained disclaimers, including a disclaimer that any forward-looking statement was based on numerous assumptions regarding the company’s operations and present and future business and investment strategies in the markets in which it would operate and there could be no assurance that such statements or estimates or projections would be realised. Prospective investors were advised to obtain independent advice and no guarantee of any return was made.

11. [109]

    In Demagogue Pty Ltd v Ramensky, Gummow J said (at 42, referring to French J’s (as his Honour then was) remarks in Kimberley NZI Finance Ltd v Torero Pty Ltd [1989] ATPR (Digest) 53,193 at 53,193) that:

12. [110]

    In Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd, French CJ and Kiefel J observed:

13. [111]

    The primary judge found (at [90]) that:

14. [112]

    Mr Porges did not challenge that finding.

15. [113]

    The matters deposed to by Mr Adcock set out at [79] above as to why he expected that Mr Porges would disclose any knowledge he had about any issues that might affect SecureOne or its performance, prima facie, provided a reasonable basis for the primary judge’s finding. It is unnecessary to explore that issue further because the finding is not challenged.

16. [114]

    Rather, Mr Porges submitted that the judge should have found that he was not aware of information inconsistent with the picture he painted of SecureOne.

17. [115]

    However, Mr Porges was aware of Play LA’s service of the Notice of Direct Claim. It plainly foreshadowed litigation if the claim were not resolved to its satisfaction. He knew that SecureOne had rejected the claim and therefore knew that litigation was on the cards.

18. [116]

    Although Mr Porges had received the “explanatory note” from Mr Cairns on 3 July 2014 (see [57] above) in which Mr Cairns, with the apparent approval of SecureOne’s lawyers, had said in substance that Play LA’s claim had no merit, Mr Porges’ email of 7 July 2014 to Mr Sterrick (at [61] above) shows that he considered that that claim was information he would need to disclose to potential purchasers of his shares if he had to sell his shares.

19. [117]

    In his second affidavit of 19 April 2018 that was not read, but paragraphs of which were tendered by APE, Mr Porges deposed:

20. [118]

    It can be inferred from Mr Porges’ email of 7 July 2014 to Mr Sterrick (at [61] above) that Mr Porges was concerned that he would have to disclose the Play LA claim to a potential purchaser if he were to attempt to sell his shares and that he preferred to leave questions of disclosure to SecureOne. That inference can be more readily drawn because Mr Porges did not give evidence.

21. [119]

    In paragraph 110(d) of Mr Porges’ affidavit, that was tendered by APE, he deposed that on receiving the shareholders’ update from Mr Cairns on 3 September 2014 he did not understand Mr Cairns’ reference to a “commercial notice” as being a reference to a legal document or any originating process. What Mr Cairns said in relation to Play LA is set out at [63] above. The fact that APE tendered paragraph 110 of Mr Porges’ affidavit, apparently because it thought that the paragraph contained admissions, does not mean that APE is taken to have acknowledged the truth of the matters to which Mr Porges deposed. Indeed, it appears that APE’s counsel thought that APE’s case would be advanced by tendering statements in Mr Porges’ affidavit in order to discredit them.

22. [120]

    Although paragraph 110(d) of Mr Porges’ affidavit is part of the evidence in the case, it is not credible that he did not regard the “commercial notice” as being a legal document that foreshadowed litigation. It was not itself an originating process. But it foreshadowed an originating process. Mr Porges deposed that he was not aware until 5 January 2016 that proceedings had been brought by Play LA, and there is no contrary evidence. But the paragraphs of his affidavits that were tendered by APE provide no basis for concluding that Mr Porges believed that Play LA’s claim had been resolved, and at no material cost to SecureOne.

23. [121]

    The primary judge found (at judgment [151] quoted at [91] above) that there was no evidence that Mr Porges believed or, if he did so believe that he did so on reasonable grounds, that Play LA’s lawsuit would fail. The evidence of Mr Porges tendered by APE was that he was unaware that a lawsuit had been filed. He had information from the company that management and the company’s legal advisers considered the claim to be without merit. But at the time of his dealings with APE, so far as appears (Mr Porges’ not having given evidence), Mr Porges was unaware as to whether the threatened lawsuit had been filed or not. If it had been filed and was successful, the result would be devastating to SecureOne. If it had been filed but was unsuccessful, the result might or might not be devastating to SecureOne, depending upon the costs that might have been incurred already and would be incurred in the future in defending the suit, and the recoverability of those costs.

24. [122]

    Mr Porges knew that SecureOne was strapped for cash. In his email of 7 July 2014 to Mr Sterrick (quoted at [61] above) he complained that he “... personally funded salaries, travel, accommodation etc. for years.” The Information Memorandum for the raising of May 2014 for the raising of funds for US$500 per share stated that the funding to be raised was to “... complete a proof of concept with two live trials with major banks. A smaller portion will be allocated to meet the expected working capital needs as the Company executes its commercialisation strategy.” The later nine-page document provided to Mr Porges on 24 March 2015 simply stated that US$2 million was sought to be raised at US$750 per share “... to capitalize on available market opportunities and to cashflow the business through the near term.” Mr Porges gave no evidence that he believed that no significant costs had been or would be incurred in defending Play LA’s claims.

25. [123]

    The fact that Play LA had made its claim, that that claim had not been resolved, and Mr Porges (assumedly) did not know what costs had been and would be incurred in defending the claim were material matters that APE could reasonably expect to be told. The primary judge did not err in concluding that Mr Porges engaged in misleading and deceptive conduct by not disclosing to APE his knowledge of Play LA’s claim.

26. [124]

    The primary judge also found that Mr Porges engaged in misleading and deceptive conduct in not disclosing that he “... had become disenchanted with his investment in SecureOne, had fallen out with the management of (and perhaps other investors in) SecureOne, and, in the vernacular, ‘wanted out’.” (Judgment [151] and [152]).

27. [125]

    I do not accept that the evidence established that Mr Porges “wanted out”. He had a substantial shareholding in SecureOne. He had 7,576 shares registered in his own name amounting to in excess of 14 per cent of the shareholdings. He sold only 1,100 of those shares to APE. His correspondence with Mr Cairns, Mr Sterrick and Mr Mages in 2014 related to his wish to sell an even smaller portion of those shares.

28. [126]

    Nonetheless, Mr Porges’ strident complaints to Mr Sterrick, Mr Cairns and Mr Mages were not wholly attributable to his frustration in not obtaining SecureOne’s assistance or co-operation in his selling shares. His email of 5 November 2014 to Mr Cairns (at [68] above) shows that he was disenchanted with the morality and ethics of management of SecureOne. Mr Porges’ email of 22 November 2014 (at [77] above) at least implies that he did not consider that SecureOne was likely to secure the business of ME and Mystate (“both loose”). He did not give evidence to explain the role of KPMG or how in his opinion KPMG had been misled, nor the significance of Mr Peter Clare’s being disengaged. As noted at [78] above, it can be inferred that he believed that SecureOne and its advisers were fiddling whilst its business burned.

29. [127]

    There was no error in the primary judge’s finding that Mr Porges had become disenchanted with his investment in SecureOne and had fallen out with its management. He did not disclose that to APE. The primary judge did not err in concluding that for this reason also he engaged in conduct that was misleading or deceptive or likely to mislead or deceive APE.

30. [128]

    The primary judge also found that these matters falsified the Reluctant Seller Representation. He said that Mr Porges was not reluctant, but wanted to sell.

31. [129]

    It is clear that Mr Porges did want to sell. He did not say otherwise to APE. The reason he gave to APE for wanting to sell was to satisfy the need for cash to satisfy his wife’s lifestyle and to take up another investment opportunity. Those were not his only reasons. But APE did not plead that Mr Porges engaged in misleading or deceptive conduct by not disclosing his full reasons for wanting to sell shares in SecureOne to APE.

32. [130]

    I do not consider that Mr Porges made the Reluctant Seller Representation. Otherwise I am of the opinion that the primary judge did not err in concluding that Mr Porges engaged in misleading and deceptive conduct or conduct that was likely to mislead or deceive APE in its purchase of shares in SecureOne from Mr Porges by reason of his not disclosing to APE his knowledge of Play LA’s claim and his disenchantment with the management of SecureOne.

33. [131]

    There was no challenge to the primary judge’s finding that that misleading and deceptive conduct was causative of APE’s loss. There was no challenge to his Honour’s finding that damages should not be reduced on account of contributory negligence.

34. [132]

    For these reasons I would order that the appeal be dismissed with costs.

35. [133]

    SACKVILLE AJA: I agree with White JA.