TGIF 17 May 2019: Goldsky Update – Contraventions found due to failure to hold AFSL

This week’s TGIF considers the recent decision of the Queensland Supreme Court in relation to action taken by ASIC against entities connected with the failed Goldsky Global Access Fund. 

Background

ASIC commenced proceedings seeking declarations that three entities connected with the Goldsky Global Access Fund had contravened s.911A of the Corporations Act 2001 (Cth) (the Act) by carrying on a financial services business without holding an Australian Financial Services Licence (AFSL). 

It was not in dispute that the three entities did not hold an AFSL. The question for the Court was whether the three entities were carrying on a financial services business and, if so, whether any of the entities were exempt from the requirement to hold an AFSL due to an associated company Goldsky Asset Management LLC (Goldsky LLC) being registered as an “investment advisor” by the US Securities and Exchange Commission (SEC). 

Were the Goldsky entities carrying on a financial services business? 

The Goldsky entities operated separate bank accounts at different points in time. As part of its investigations, ASIC identified multiple deposits into, and withdrawals from, these bank accounts, which ASIC believed to be investment deposits and returns to investors. 

ASIC investigations revealed that there were 56 investors who had made deposits into the Goldsky bank accounts. A receiver appointed by the Court identified investor deposits totalling approximately $23M. 

A review of the Goldsky bank accounts revealed numerous suspicious transactions, including transfers of large sums of money to unknown accounts as well as payments to family members of the sole director (Mr Grace) and expenditure on a range of personal items, including cosmetic procedures and beauty treatments. There was also evidence that investor funds had been used to acquire real property and motor vehicles, and that funds in the Goldsky bank accounts had been comingled with funds in Mr Grace’s personal accounts. 

Having regard to amounts already returned to investors and the relatively small amounts in the personal accounts of Mr Grace, the shortfall for investors was estimated to be approximately $12M. 

ASIC submitted that the three Goldsky entities were carrying on a financial services business within Australia, thereby triggering the requirement to hold an AFSL, on the basis that the three entities had provided “a custodial or depository service” within the meaning of the definition of “financial service” by holding investor funds. Under the Act, a custodial or depository service is an arrangement where a financial product, or a beneficial interest in a financial product, is held by the provider in trust for, or on behalf of, the client. 

The Court accepted ASIC’s submission. It held that the large amounts of money that had been deposited into the Goldsky accounts were held on behalf of the investors in proportion to their contributions. The investors had deposited the funds with the expectation of a financial return. A financial investment had been made regardless of whether a return was in fact generated.  

Were the Goldsky entities exempt from the requirement to hold an AFSL?

The Court then turned to consider whether the Goldsky entities were exempt from the requirement to hold an AFSL on the basis that Goldsky LLC had been registered as an “investment advisor” by the SEC. In reliance upon this registration, the lawyers for Goldsky LLC had applied for relief from the requirement to hold an AFSL under ASIC Class Order 03/1100 (Class Order), which had been acknowledged by ASIC.  

Although the Court considered that Goldsky LLC was exempt for a certain period of time following ASIC’s acknowledgement, the three Goldsky entities could only rely upon that exemption themselves if they could establish that:

1. the exemption applied during the time that they were carrying on a financial services business; and
2. during that same period, they were providing the custodial / depository services as representatives of Goldsky LLC.

The Court found against the three Goldsky entities in relation to both of these points.

As to paragraph (a), the Court concluded that the three Goldsky entities had carried on a financial services business outside of the period of the exemption in favour of Goldsky LLC. Under the Class Order, Goldsky LLC was obliged to notify ASIC of any “significant investigation” undertaken by the SEC within 15 days of becoming aware of any such investigation. By failing to notify ASIC that it had been subpoenaed to provide documents in connection with an investigation being undertaken by the SEC, the Court concluded that Goldsky had breached the conditions of the Class Order which, in turn, meant that the exemption had come to an end. This was fatal as the Goldsky entities had carried on their respective financial services business outside of the exemption period.

As to paragraph (b), there was no evidentiary basis to support the contention that the three Goldsky entities were acting on behalf of Goldsky LLC (for example, Goldsky LLC having given any instruction or authorisation to the three Goldsky entities in relation to the receipt and investment of investor funds).

Conclusion

The Court granted the declaratory relief sought by ASIC. In doing so, it noted that the declaratory relief was in the public interest and that it was also important to mark the Court’s disapproval of the three Goldsky entities engaging in such conduct without holding an AFSL. 

This decision may not be the last we hear about the Goldsky Global Access Fund. Stay tuned for future developments.