In the matter of Macquarie Investment Management Limited

BARRETT AJA: These are civil penalty proceedings brought by Australian Securities and Investments Commission (ASIC) against Macquarie Investment Management Limited (MIML), a subsidiary of both Macquarie Group Ltd and Macquarie Bank Ltd.

MIML is engaged in funds management activities. The proceedings arise from MIML's role as the responsible entity of a registered managed investment scheme known as the van Eyk Blueprint International Shares Fund (VBI Fund). The fund was devised by van Eyk Research Pty Ltd. That company arranged for MIML to become the responsible entity on the basis that van Eyk itself would act as investment manager. MIML was contractually bound to implement investment recommendations of van Eyk, subject to complying with its legal obligations.

Three contraventions of the Corporations Act 2001 (Cth) were alleged against MIML by ASIC in relation to the operation of the VBI Fund. Two involved contravention of s 601FC(1)(b) of the Corporations Act; and the third, contravention of both that provision and s 601FC(1)(k). There were thus allegations of failure to exercise the degree of care and diligence that a reasonable person would exercise, if in the responsible entity's position, and failure to ensure that payments were made in accordance with the scheme's constitution and the Corporations Act. These s 601FC(1) elements led to an allegation of contravention of s 601FC(5).

The first of the three areas of alleged contravention involved what was, in effect, unwarranted reliance on van Eyk in the selection of investments and failure to bring adequate independent judgment to bear. The second area of alleged contravention concerned allowing withdrawals when the fund was not liquid. As events came to show, investments selected by van Eyk, on the occasion in question, took more than six months to produce cash when a need for cash should have been met within 30 days. The third shortcoming leading to an allegation of contravention was failure to monitor investments and the activities of van Eyk such that the liquidity issue arose.

MIML accepts that it committed the statutory contraventions alleged against it by ASIC. MIML also accepts ASIC's assessment that the contraventions are serious, and that a civil penalty commensurate with the seriousness of the contraventions should be imposed.

ASIC and MIML have cooperated to produce both a statement of agreed facts and a comprehensive joint document containing agreed submissions on the questions of relief and penalty. I shall refer to the latter document as "the joint submissions document."

The propriety of the court's receiving an agreed position of the parties in matters of this kind is well established. The joint submissions refer to recent High Court authority on that matter (Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate [2015] HCA 46; 90 ALJR 113). But, as has long been recognised, the court must still exercise its own judgment. It was said more than a decade ago by Bryson J in Australian Securities & Investments Commission v Rich [2003] NSWSC 186; 44 ACSR 682 and by White J in Australian Securities & Investments Commission v Rich [2004] NSWSC 836; 50 ACSR 500, that a declaration of contravention under s 1317E of the Corporations Act, being a declaration on a matter relating to public or analogous rights, should not be made by the consent of ASIC and the person against whom ASIC has proceeded unless the court has a basis for being satisfied by evidence, including agreed facts, that the statutory conditions for the making of the declarations have been fulfilled.

In this case, a full catalogue of agreed facts is before the court and provides a foundation upon which the court may be satisfied as to all relevant matters. Mr Clarke SC, who appeared for ASIC, has taken me specifically to a number of pertinent parts of the agreed facts.

Because of the comprehensive nature of the joint submissions document and the close attention it gives to both the facts as reflected by the statement of agreed facts and legal principles, I take the unusual step of incorporating that document as an appendix to these reasons.

As the joint submissions document shows, MIML was insufficiently attentive to what should have been warning signs concerning relevant investments. MIML did not adequately scrutinise and question recommendations received from van Eyk, the investment manager – recommendations which were not always based on dispassionate arm's-length considerations. MIML did not adequately assess risks and was not sufficiently alert to the possibly adverse consequences of matters coming to its attention. And it did not take action to address potentially adverse information coming into its possession. Some warning signs were recognised, but not further considered. Nor was MIML vigilant on the matter of fund liquidity and the monitoring of investments.

Specific instances of these shortcomings are established, but I do not suggest that the failures were in any sense endemic. There were merely particular instances where systems broke down. Full particulars of MIML's admissions on these matters appear from the joint submissions document.

The case for the making of the declarations of contravention that ASIC seeks by reference to s 1317E has been made out. There is then the question of consequences.

ASIC maintains that a pecuniary penalty should be imposed. MIML does not seek to resist that outcome. It is relevant to note in that connection that, although MIML does not admit any liability for loss suffered by the VBI Fund, it has caused arrangements to be made which have made good that loss. MIML has, from Macquarie's funds, made appropriate payments to make good loss including an interest element. ASIC acknowledges that MIML has thus made good, but does not agree MIML had no responsibility in that respect. In view of the outcome, there is no need for me to pursue that question.

The joint submissions document identifies and discusses considerations relevant to the fixing of a pecuniary penalty. The discussion there supports the agreed position of the parties, which is that there should be a pecuniary penalty of $400,000 in all for the several contraventions. There is also agreement that MIML should make a contribution of $200,000 to ASIC's costs of the proceedings. Both these orders will be made, in addition to the declarations of contravention.

This case highlights the need to emphasise again the basic duty of the responsible entity of a registered managed investment scheme to exercise the care and diligence that a reasonable person would exercise in the same position. Such a responsible entity holds scheme property on trust for scheme members. Section 601FC(2) so provides. Like every trustee, a responsible entity is, as Lord Blackburn pointed out over a century ago in Speight v Gaunt (1883) 9 App Cas 1 at 19, bound to take "all those precautions which an ordinary prudent man of business would take in managing similar affairs of his own.”

The 1993 joint report of the Australian Law Reform Commission and the Companies and Securities Advisory Committee on which the present regulatory regime is based was entitled simply Other People's Money. These are three words that all operators in this field must bear constantly in mind.

I make declarations and orders as follows: