ASSIGNMENT QUESTION:

Boris and Ana migrated to Australia about 25 years ago and settled down in North Perth. They have a son who is married and lives on his own. Boris worked as a builder until he had an accident two years ago and is now unemployed. Ana works part-time as a shop assistant with a local supermarket. Boris is 50 years old, while Ana is five years younger. They jointly own two properties which they claim are worth around $1.3 million. They live in one and rent the other. Apart from the properties, they have $300,000 (which was the amount of compensation Boris received when he was injured at work) in their savings account. The rental income from their investment property is $26,000 a year. Ana earns around $12,000 a year working in the supermarket. They need $52,000 a year for their everyday living expenses. The shortfall between their income and expenses is $14,000, which would have to be met from their savings.

The couple have very little knowledge about investments and approach David, whom they met at a friend’s house, for financial advice. David is the authorised representative of Wealth Guru Pty Ltd (WG), a financial services company. WG holds an Australian Financial Services Licence and David is authorised to provide financial advice and deal in specified classes of financial products (including securities) on behalf of WG. Boris told David that he and his wife would like to explore investment opportunities that could provide them with a regular income. More specifically, they wanted a safe investment with potential for reasonable capital growth and able to offer a regular income to cover their everyday living expenses.

David provided them with a ‘Financial Services Guide’ (FSG) which stated, among other things, the following:

‘We will only recommend an investment to you after considering its suitability for your individual needs, objectives and circumstances.

We will explain to you any significant risks of financial products and strategies that we recommend to you in the financial report.’

At David’s request, they acknowledged receipt of the FSG by signing on the space provided.

David then asked Boris and Ana to complete a financial analysis questionnaire to establish their financial position, objectives and risk preferences. With some help from David, they completed the form. It was clear to David that the couple lacked financial literacy and had little business experience.

Based on the information provided, David recommended that they invest $500,000 in redeemable preference shares in WA Property Ltd. David told them that the shares offered a return of  up to 20% per annum. He also gave them a prospectus, which neither Boris nor Ana read. As they could not afford to invest more than $250,000, David suggested that they take a loan for the remaining $250,000. The interest-only loan which David could arrange for

them carried an interest rate of 8.5% per annum. David told them the shares were a safe investment as he and WG had extensively researched the product. He also told them that after paying the interest on the loan, they would have sufficient income from the dividends to cover their daily expenses and in the event that they want to repay the loan, they can redeem their shares.

Boris and Ana were subsequently given a Statement of Advice (SOA) which, among other things, documented David’s recommendations. The SOA mentioned that WG would be receiving a volume-based commission from WA Property. However, it failed to mention that payments of the dividends on the shares were discretionary and that while the shares could be redeemed after 12 months, redemption was at the discretion of the board of directors. As the shares were preference shares, they were unlikely to offer any capital growth, but this was not disclosed in the SOA. Acting on David’s recommendations, Boris and Ana applied for the bank loan. They then used the proceeds of the loan and their own savings to buy $500,000 worth of shares in WA Property. They were under the impression that the investment was secure and would give them a 20% rate of return annually.

Boris and Ana did not receive any dividends, as WA Property Ltd fell into insolvency several months later. The prospectus contained a number of misleading statements about the company’s financial position. It turned out that the company was running a ‘Ponzi scheme’ and it collapsed when the company was unable to attract new investors. It was clear that David and WG had not properly researched the product and had not warned Boris and Ana about the risks of investing in the shares of the company. When WA Property went into liquidation, the preference shareholders lost their investments. Boris and Ana have approached you for advice as to how they can recover their losses from David and WG.

Advise Boris and Ana as to the legal claims, if any, they are entitled to make against David and WG under the general law, the Corporations Act 2001 (Cth) and the Australian Securities and Investments Act 2001 (Cth).