Westpac tangled in "unregistered investment scheme"

The alleged involvement of Westpac's St George division in a so far little scrutinised "unregistered managed investment scheme" has been ventilated in a case heard by the Supreme Court of New South Wales.

According to a judgment published this week relating to demands that the bank produce documents under discovery, "it was submitted that evidence indicated that St George may well have known of, and assisted in, the operation of the scheme."

Justice Nicholas ruled that the investment scheme "had been explained to, and developed with, St George."

In 2012 the Australian Securities and Investments Commission provided some insight into the affair when it banned Athol Halvorsen, a Sydney-based mortgage broker, from engaging in credit activities and from providing financial services for six years.

At the time, ASIC said its investigation found that from 2005 to 2008, while working for Sydney Mortgage Market, Halvorsen acted as a broker for people seeking loans to invest in a financial scheme. Halvorsen, ASIC said, submitted nine loan applications to either Perpetual or to St George Bank that "contained information that was false and misleading about the income and employment of the borrowers."
 
In the Supreme Court NSW case this week Justice Nicholas ruled that "for the defendant [Westpac] it was put that the evidence was incapable of supporting an entitlement to a claim based on St George's knowledge of the operation of a fraudulent and dishonest design or of an unregistered managed investment scheme.

"In short, it was put that the evidence did not link SGB to any relevant transaction other than as a lender in the normal course."

But the judge "rejected the defendant's submissions."

The court heard the investment scheme was "designed and operated by Tony Famularo and entities controlled by him."

The judge observed that "the funds of many of the 150 investors … were channelled into the same entities .. and, in some cases their funds were transferred from one Famularo entity to another."

"From May 2005, Famularo represented that the operation of the scheme had been developed in conjunction with St George… [while] in May 2005 at Famularo's behest the plaintiff executed a power of attorney and appointed St George and Value Nominees Pty Ltd as its attorneys in respect of certain property.

"In 2008 the plaintiff's borrowings which were invested in the scheme were refinanced with a loan from St George brokered by Halvorsen at Famularo's behest [while] about 20 other investors borrowed funds from St George brokered by Halvorsen at the behest of Famularo during 2008."

The judge said that "the present question is whether there is enough to incline the mind to acceptance of the proposition that St George has in any way been involved in a contravention, by act or omission, directly or indirectly, knowingly concerned in, or party, to a contravention by reason of the failure to register the managed investment scheme.

"As to the issue of St George's knowledge, I would regard it as a matter of common sense, or of reasonable inference, to conclude that St George analysed each loan application received both from investors and Famularo entities.

"It is reasonable to infer that, in the approval process, St George made enquiries before advancing a margin loan to satisfy itself that the third party security, if provided, would be sufficient.

"It appears that St George provided loans to the plaintiff, to investors, and to the Famularo entities, over many years for a common purpose namely, investment in share trading controlled by Famularo. That it did so, in my opinion, appears to be consistent with representations made by Famularo to Mr Preston and Halvorsen to the effect that his investment scheme had been explained to, and developed with, SGB."