ASIC on the hunt: surge in criminal prosecutions

Insights11 Sept 2024

Key takeaways

The number of prosecutions undertaken by ASIC has risen over the past year.
When dealing with financial products and providing financial product advice, entities must ensure they hold an Australian financial services licence (AFSL) or appropriate authorisation to provide financial services (for example, as an authorised representative of an entity that holds an AFSL).
Investment funds should only be used for the purposes for which they were invested by investors and should not be used dishonestly or misappropriated to the detriment of investors.
Portfolio performance verification reports must be true, accurate and credible.
Financial reporting by Australian financial service (AFS) licensees is important, as they often manage large values of client funds and any failure to report will reduce ASIC’s ability to determine the true financial position of a licensee, and the value of funds held on behalf of clients.
Serious criminal penalties may apply, including hefty monetary fines and imprisonment for contraventions of the Corporations Act 2001 (Cth) (Corporations Act).

Surge in prosecutions

The number of prosecutions undertaken by ASIC has risen over the past year. The corporate watchdog has seen a 25 per cent increase in investigations, initiating 170 new inquiries. Additionally, there has been a 27 per cent rise in civil proceedings compared to the previous year, with 33 new cases filed in the Federal Court. To date, ASIC’s investigations have resulted in 18 criminal convictions, with an additional 23 individuals charged with criminal offences by the Commonwealth Director of Public Prosecutions. ASIC’s Corporate Plan for the 2024-2025 Financial Year has signalled there is more to come.

ASIC has recently focused on addressing the following types of misconduct in the financial services sector:

providing unlicensed financial services on behalf of another person;
dishonest conduct in carrying out financial services businesses;
failing to exercise powers and discharge duties in good faith in the best interests of a corporation;
fraud and misappropriation of funds invested for trading and investment purposes;
forging portfolio performance verification reports;
failing to lodge financial reports with ASIC;
manipulation of shares listed on the Australian Securities Exchange and illegal dissemination of information relating to the manipulation; and
insider trading.

As is shown by the recent criminal prosecutions undertaken by ASIC detailed below, ASIC is taking a no tolerance approach to what it considers to be egregious, manipulative and exploitative conduct.

You shouldn’t provide financial services without a licence

BitConnect was a financial service business and an online cryptocurrency platform offering investment opportunities through its website, including a financial product known as the Lending Platform. The promoter undertook promotional activities for BitConnect and the Lending Platform on social media, at seminars that he hosted and through in-person meetings with investors.

The promoter provided financial product advice without holding an AFSL or authorisation to provide financial services about the Lending Platform and BCC on six instances at various locations around Australia through seminars and social media posts.

Before the Sydney District Court, a national promoter of BitConnect pleaded guilty to providing unlicensed financial services on behalf of another person contrary to section 911B(1) of the Corporations Act.

A related charge of operating an unregistered managed investment scheme was withdrawn following the promoter pleading guilty to the charge for which he is awaiting sentence.

Dishonesty doesn’t pay

Dishonest use of funds

Recently, the Queensland Court of Appeal dismissed an appeal by Dr Roger Munro against his conviction on three counts of fraud. In May 2022, Dr Munro was sentenced to four-and-a-half years imprisonment with a non-parole period of 15 months, after pleading guilty to the fraud charges. The Commonwealth Director of Public Prosecutions prosecuted this matter.

Between March 2013 and April 2014, Dr Munro received $299,600 from three investors after inviting them to invest in his trading scheme, the TradeStation Futures Trading Fund.

Instead of investing the funds in TradeStation as he had represented to the investors, Dr Munro dishonestly used the funds to cover personal expenses, make cash withdrawals, pay other investors, and transfer funds into a trading account held in his wife’s name.

Dishonest conduct in carrying out financial services business and failing to exercise powers and discharge duties in good faith in the best interests of a corporation

As reported by ASIC, a former director of Secure Investments Pty Ltd and Aquila Group Pty Ltd was sentenced to four years and four months in prison for dishonest conduct and other charges, with a non-parole period of two years and nine months.

The sentence was delivered after the director pleaded guilty to contraventions of the Corporations Act including:

two charges of dishonest conduct in the course of carrying on a financial services business contrary to subsections 1041G(1) and 1311(1) of the Corporations Act; and
two charges of failing to exercise powers and discharge duties in good faith in the best interests of a corporation contrary to subsection 184(1) of the Corporations Act.

The director encouraged investors to transfer their superannuation funds into newly established self-managed superannuation funds (SMSFs) and to subsequently lend those funds to his two companies, Secure Investments Pty Ltd and Aquila Group Pty Ltd, where he served as a director of both entities.

Portfolio verification reports must inherently be verifiable

A director of Metal Alpha Pty Ltd was prosecuted for forging portfolio performance verification reports when acting as the investment manager of AlphaThorn Pty Ltd. The director was initially arrested by NSW police. AlphaThorn now trades under the name Trading Life Services Pty Ltd.

Between April 2019 and October 2019, the director produced four forged portfolio performance verification reports relating to two investment products offered by AlphaThorn. AlphaThorn intended to provide these reports to prospective investors. The forged reports falsely verified or claimed a history of investment returns by AlphaThorn.

The director ultimately pleaded guilty to two offences of making a false document with the intention to obtain a financial advantage and offences in relation to the reports relating to the two investment products offered by AlphaThorn.

The maximum sentence for making a false document to obtain a financial advantage under section 253 of the Crimes Act 1900 (NSW) is 10 years’ imprisonment.

Report or be caught

AFS licensee Odyssey Equity Finance Pty Ltd was sentenced on 24 April 2024 in the Dandenong Magistrates’ Court for failing to lodge financial reports with ASIC for each of the financial years ending 30 June 2020, 2021 and 2022.

Odyssey was charged with contraventions of section 989B of the Corporations Act for failing to lodge a profit and loss statement and balance sheet; and section 988C for failing to lodge an accompanying auditor’s report.

According to ASIC guidance, the maximum penalty for a body corporate for each failure to lodge:

a profit and loss statement and balance sheet (section 989B(2) of the Corporations Act) is $1,332,000;
an auditor’s report with the profit and loss statement and balance sheet (section 989B(3) of the Corporations Act) is $1,332,000.

Please contact the HW Funds team for advice if you have any questions about ASIC’s focus on misconduct in the financial services sector and how these decisions might impact you, your business, or your investments.