Responsible entity Theta Asset Management Ltd (in liq) and managing director penalised for defective PDS

On November 19, 2020, the Federal Court in Western Australia held that Theta Asset Management Ltd (In Liquidation) (Theta) as well as its managing director breached the Corporations Act on numerous occasions by issuing five defective Product Disclosure Statements (PDSs) for the Sterling Income Trust (Trust). This decision has broad ramifications for capital raising and issuers of defective disclosure documents (beyond the managed funds space) as well as for directors and other officers of issuers.

The background concerns fundraising by the Trust whereby of the 101 consumers who entered into Sterling New Life Leases, 63 of those lessees invested in the Trust to generate funds to cover their rental expenses under those leases. The remaining 38 lessees did not invest in the Trust; instead, they invested in preference shares offered by companies within the Sterling Group of Companies.

In this judgment, Justice McKerracher held that both Theta and its managing director, Mr Robert Marie, issued defective PDSs on the basis that they contained misleading and deceptive statements and that generally there was no clear, concise and effective disclosure. The issues associated with the disclosure included variously those relating to:

• Certain conflicts of interests.
• Risks attached to different classes of investment units in the Trust.
• The provision and extent of the Sterling income support as well as the financial position of the Sterling Group.
• The Sterling New Life Lease allocation policy to determine the investment mix of units in the Trust.
• The risks relating to the underlying investment.
• The assumptions and contingencies used for the targeted distributions.
• The terms of and attrition rates for the rental management agreements.
• The inherent risks for any investment in the Trust where relied on for a stable income stream and capital preservation.

Furthermore, his Honour held that Theta engaged in conduct that was misleading or deceptive, or likely to mislead or deceive investors, that it failed to comply with the Trust’s compliance plan, and that Mr Marie failed to exercise the degree of care and diligence a reasonable person would exercise if they were in his position as managing director.

The Court ordered Theta to pay a penalty of $2 million with respect to the contraventions and Mr Marie to pay a $100,000 penalty, however ASIC noted it would not recover Theta’s penalty as it would decrease the availability of funds to distribute to Theta’s creditors.

This decision serves as a timely reminder for responsible entities and their officers to ensure they are complying with their obligations under the Corporations Act, including accurate, timely and robust disclosure to investors, as well as acting with due care and diligence and in the best interests of members. The judgement has broader implications not just for responsible entities or Australian financial services licensees but also for corporations and their officers more generally, reinforcing the importance of appropriate disclosure to the market and good governance.

Overall, a key takeaway from the judgment highlights the growing trend for ASIC to successfully pursue officers for personal liability as well as breach of their fiduciary and statutory duties in the event a company breaches its obligations with respect to appropriate disclosure and engages in misleading and deceptive conduct.

ASIC’s Media Release and the Court Orders can be found here.