A VICTORY FOR ACCOUNTANTS AND FINANCIAL PLANNERS: NSW SUPREME COURT FINDS EXPERIENCED INVESTOR SHOULD HAVE KNOWN BETTER

In Tomasetti v Brailey [2011] NSWSC 1446, the New South Wales Supreme Court dismissed a claim by an investor to recover more than $4 million for past losses. 

Background

The plaintiff, Peter Tomasetti, was an experienced barrister who specialised in environmental law.  He also had experience in property, equity and commercial law.  The defendant, Edmund Brailey, was Tomasetti’s accountant, and an authorised representative of TJC Financial Planning Pty Ltd.  Brailey advised Tomasetti to invest in agri-business products, including Great Southern, Timbercorp and Gunns.  Over the period 2000 to 2005, 11 investments were made totalling more than $1.3 million.  Each investment was debt financed, ranging from 75% to 100% of the initial investment.

Tomasetti was earning substantial professional fees, which were increasing each year.  In the 1998 and 1999 financial years, Tomasetti used Commonwealth infrastructure bonds to obtain significant tax deductions.  As these were not available to him in subsequent financial years, Tomasetti used the agri-business products to reduce his taxable income considerably.  During the period in which the relevant investments were made, Tomasetti earned an average of $954,000 per annum, but paid only an average of $91,000 per annum in tax.  The payment of substantial costs in relation to the agri-business products was the main reason why Tomasetti’s tax liability was so relatively low.

Tomasetti first met Brailey in December 1998.  At the date of the initial meeting, Tomasetti:

Although Brailey took some notes during the initial meeting, he did not ask Tomasetti to complete a comprehensive client questionnaire.

According to Brailey, a constant theme in his discussions with Tomasetti was that Tomasetti wanted to reduce the amount of tax he was paying.

Tomasetti argued that Brailey:

Tomasetti failed on all 5 causes of action.

Misleading or deceptive conduct

According to Tomasetti, Brailey represented that the agri-business products were sound, prudent and sensible commercial investments, that they would produce reasonable commercial returns with time, and that they would provide future income.  Tomasetti gave evidence of conversations which he had with Brailey, during which the agri-business products were discussed.  Tomasetti relied on these conversations to establish the misleading or deceptive conduct.

There was evidence that Brailey provided Tomasetti with a prospectus or PDS on most occasions where an investment was made.  Each of the application forms that Tomasetti signed contained either an acknowledgment that the prospectus/PDS had been read, or a direction that the investor should read the document in its entirety before deciding to invest. 

Tomasetti could not recall signing crucial application forms, or the circumstances in which those forms were signed.  According to Hulme J: “if he [Tomasetti] had no reliable recollection of how he came to sign the application forms, and how many, it is difficult to see how reliance could be placed upon his claimed recollection of the substance of conversations with Mr Brailey” (para 256).

There were conflicts between Tomasetti’s evidence and irrefutable documentary evidence.  According to his Honour, Tomasetti’s recollection of conversations “were often unrealistically dressed up to make them sound like a verbatim account to suit the pleadings” (para 387).  Tomasetti’s recollection of significant events, particularly conversations, “appeared to be a reconstruction of what he would like to think occurred, rather than what in fact occurred” (para 388).  His Honour was satisfied that Tomasetti’s evidence had been “coloured” by the catastrophic losses he had sustained following the global financial crisis.  Accordingly, his Honour decided not to accept Tomasetti’s evidence where it was in issue, unless it was independently supported. 

His Honour accepted that the agri-business products were recommended in order to achieve a number of purposes, a significant one of which was to legitimately minimise the amount of tax that Tomasetti was paying.  His Honour described Tomasetti as “an intelligent man who is reasonably well experienced in commercial life in a general sense” (para 380).  He went on to say that Tomasetti was “far from being a person who was unintelligent, naive, poorly educated and inexperienced in investment and financial matters” (para 411). 

Whether or not Brailey informed Tomasetti of the risks verbally, Brailey informed Tomasetti of the risks by providing him with the prospectuses.  Although Brailey admitted to making some of the representations, his Honour held that the admitted representations were made subject to the qualifications and warnings in the prospectuses.  According to his Honour, “if Mr Tomasetti ... never read any prospectus, PDS or application form (which I very much doubt), that was not Mr Brailey’s fault” (para 530).  Tomasetti had the capacity to read the prospectuses and understand the warnings.  In light of the evidence, Brailey was held not to have engaged in misleading or deceptive conduct. 

Breach of duty

Tomasetti argued that Brailey breached his duty of care by making an incorrect assessment about the soundness, prudence and sensibleness of the agri-business products. 

Tomasetti led the expert evidence of Geoffrey Wall (Wall has been used by ASIC in a number of banning hearings).  Wall sought to provide opinions as to the conduct of a reasonably competent financial planner in the circumstances.  The Court was critical of Wall’s evidence, finding most of it to be inadmissible and of limited utility.  Although Wall was critical of Brailey for not conducting a “know your client” exercise, little mention of this was made by the court. 

It was generally accepted by the parties that Tomasetti was able to achieve significant reductions in his taxable income during the 2000 to 2005 financial years by investing in the agri-business products.  If Tomasetti had not invested in the agri-business products, he would have been faced with the prospect of having to pay hundreds of thousands of dollars to the ATO.  According to his Honour, Tomasetti did not have the resources to meet such an obligation.  A diversified portfolio of local and international shares, property, bonds and cash was out of the question.

Tax minimisation was a very attractive proposition to Tomasetti.  By borrowing money to invest in the agri-business products, Tomasetti was able “to deal with his problems with his tax liabilities and to maintain his lifestyle” (para 522).  Although the agri-business products carried elements of risk, “they also bought with them specific advantages that were capable of meeting important needs and desires” (para 528).  His Honour concluded that the agri-business products were not inappropriate for Tomasetti.  Of some significance to this conclusion was that there was no viable and realistic alternative course of action that could have been taken.

Because the negligence claim failed, the breach of contract claim also failed.

Other breaches

Although a total of 11 investments were made, Brailey only provided Tomasetti with 3 Statements of Advice.  When a Statement of Advice was provided, it was only provided after Tomasetti had signed the relevant application forms.  During cross-examination, Tomasetti conceded that if he was provided with a Statement of Advice, it is unlikely he would have read it.  Hulme J acknowledged that Brailey had failed to comply with the statutory requirements, at least in terms of when a Statement of Advice is required to be provided.  However, his Honour held that even if proper Statements of Advice had been provided at the time when they were required to be provided, there is no evidence that this would have led to Tomasetti making a different decision.  That is, Tomasetti was unable to show that Brailey’s failure to provide him with proper Statements of Advice caused his loss.

The breach of fiduciary claim also failed on the basis that Brailey did not have “a significant personal interest” (para 558) in each financial transaction.

Comments

The decision in Tomasetti provides a chink of light for accountants and financial planners in respect of very high end clients.  However, the facts of the case are quite unusual.  There seems little doubt that the very substantial tax benefits obtained by Tomasetti, and his high education and professional standing, were important for the decision.