Court finds MIS officers breached duties

Yasmine Raso

Senior Journalist, Financial Newswire

4 April 2023

The Federal Court has determined four current and former directors of a responsible entity of two managed investment schemes (MISs) breached their duties and failed to act in the best interests of members.

The Court found that directors of Endeavour Securities, Peter Daly and Paul Raftery, unlawfully used their positions to received unsecured loans worth $170,000 for personal use from the unregistered MIS Investport Income Opportunity Fund run by parent company, Linchpin Capital Group.

Between 2015 and 2018, Daly, Raftery, Ian Williams and Paul Nielsen were found by the Court to have failed to:

• “Take all reasonable steps to ensure that Endeavour complied with its compliance plan, obtain member approval for related party loans and issue Product Disclosure Statements that complied with the law;
• Exercise care and diligence;
• Act in the best interests of members of the Investport Income Opportunity Fund.”

“These individuals were officers of an investment scheme that raised $17 million. They were responsible for large sums of money but did not take the proper steps to ensure they complied with the law,” Australian Securities and Investments Commission (ASIC) Deputy Chair, Sarah Court, said.

“Disclosure statements did not reflect the true position and two of the directors were found by the Court to have made improper use of their positions to gain advantage for themselves.

“Investors expected a level of compliance that was not delivered. For ASIC, it was critical that these officers were held accountable.”

Linchpin operated an unregistered MIS which was also called the Investport Income Opportunity Fund, with it joining Endeavour’s MIS in liquidation in 2019. ASIC also banned Williams, Nielsen, Daly and Raftery from providing any financial services for five years each in 2019.

“The circumstances in which and the way in which Endeavour transferred the funds to Linchpin, markedly departed from the standard that one would expect between unrelated parties, each acting in their own best interests. In short, the Endeavour transfers were uncertain, uncommercial and improvident,” Justice Cheeseman said.

“I am satisfied that a clear conflict existed between the interests of unit holders in the Registered Scheme and the interests of Linchpin and the borrowers under the Unregistered Scheme Loans. That conflict was not recognised and was not mitigated by the respondents in their respective roles as officers of Endeavour.

“The conduct of Mr Daly and Mr Raftery respectively in entering into the Daly Loans and the Raftery Loan (as varied) fell short of the standards of conduct that would be expected of individuals in their position by reasonable persons with knowledge of the duties, powers and authority of officers of responsible entities of a registered managed investment schemes.”

ASIC is seeking Orders from the Court imposing pecuniary penalties and disqualification for the directors.