Court decision in respect of diversification of investments, with interesting comments about client use of discount brokers

 

In Jackson & Anor v Abram & Anor [2015] SASCFC 175, the Full Court of the Supreme Court of South Australia, provided judicial guidance in respect of diversification of investments and classes of investments.  The case involved a situation where a client, who was a systems engineering contractor sued his accountant, who was an authorised representative of the Great Southern Group.  Since it is a decision of the full bench of a Superior Court, the case has strong persuasive authority in other States and Territories.  In broad terms, the client Mr Jackson alleged that he made the following investments based on advice given by his accountant, Mr Abram.

The investments and the judgement made by the Court in respect of those investments is shown below:

Mr Jackson alleged that he suffered damages in the vicinity of $3.9 million.

The primary reason that the Court found Mr Abram liable in respect of the 2006 and 2007 investments was that the Court found that Mr Jackson’s investments were insufficiently diversified.  The Court held that in 2005, the investment of $15,000 in a tax effective investment, represented a relatively small proportion of the funds which Mr Jackson proposed to invest in superannuation, and accordingly, Mr Abram was not negligent and not liable in respect of that investment. 

The Court held in 2006, a competent and prudent financial adviser, whose interests were not conflicted, would not reasonably have advised Mr Jackson to invest any more than $21,000 in one investment (by which the Court seemed to mean the Great Southern Group as a whole).  By 2007, Mr Jackson had collectively invested a little over 36% of his total wealth in agribusiness investments with the Great Southern Group.  The Court found that any further investment (i.e. after the 2005 investment of $15,000 and $21,000 in 2006), let alone investment of $140,000 in the Great Southern Group, represented an unreasonable and imprudent concentration of risk.

By 2008, Mr Jackson had determined that he could save a substantial amount of money by acquiring his interest in the 2008 wine grape project through an unrelated third party who would rebate the commission to him.  Nevertheless, Mr Jackson attempted to blame Mr Abram for the losses he suffered in respect of the 2008 investment.  Mr Jackson put forward as evidence a general marketing letter sent by Mr Abram in February 2008, which said “forestry and non-forestry managed investment scheme investments… May open significant opportunities for tax planning”.  The letter enclosed summaries of two of those projects including the wine grape project, and suggested that the client make contact with Mr Abram at the earliest opportunity, so he could review the client’s situation and make appropriate recommendations and referrals.  The Court held that Mr Abram was not liable for Mr Jackson’s loss in respect of the 2008 project.

The Court on appeal entered judgement for Mr Jackson in the sum of $412, 242.  This was substantially less than the amount alleged by Mr Jackson (i.e. $3.9 million).

Practical use of this case

We expect that this case will be used by plaintiffs as a benchmark for arguing insufficient diversification.