Annual detailed compliance reviews
Every year Dover engaged external and independent lawyers to review its procedures and processes. Dover used a different consultant each year. The reviews were wide ranging and there was no limit on where the adviser would go.
In 2016 Dover’s compliance processes including the Client Protection Policy was reviewed by Holley Nethercote and iMac Legal. Dover instructed Holley Nethercote and they engaged iMac Legal to complete the review and draft the final report for them. Both firms promote themselves as expert in AFSL law. In 2017 Dover’s compliance processes including the Client Protection Policy was reviewed in detail by Sophie Grace, a Sydney based law firm that claims expertise in AFSL compliance. From August 2016 on each Dover statement of advice was reviewed by McMasters Lo Andrawis, a law firm owned by two former Dover employees, Simon Lo and Mina Andrawis. Terry McMaster is not a direct or indirect owner.
You can learn more about Holley Nethercote, iMac Legal, Sophie Grace Compliance and Legal and MLA Lawyers here:
ASIC was fully informed of these reviews. Dover gave them to ASIC even though they were probably subject to legal professional privilege. ASIC read the 18 March 2016 Holley Nethercote report but dismissed it as incompetent in December 2016, without telling Dover.
O’Bryan J’s thoughts on the Client Protection Policy
The Federal Court heard the matter of ASIC v Dover on Wednesday 12 June 2019 and Thursday 13 June 2019. It was not a long case. One and a half days. It was pretty much limited to a lively discussion of the law on misleading and deceptive conduct, as the facts were (almost) not in dispute.
The judge was Michael O’Bryan. Michael was appointed to the bench in February 2019. His was a special appointment intended to help the Federal Court deal with an expected deluge of Royal Commission cases.
O’Bryan J was not impressed with the CPP. He was also not impressed with the way ASC plead its case, asserting the brief words in the introductory clause were misleading and deceptive, rather than each of the following individual clauses. He also said certain clauses would not be enforceable because they attempted to contract out of the Corporations Act, and to that extent could also be said to be misleading and deceptive.
The case was limited, however, of course, to the way ASIC plead it. The court cannot re-plead the case for the plaintiff. Further, although O’Bryan J clearly thought the CPP was misleading or deceptive, or likely to be so, his analysis was confined to the two handed approach set out in a series of binding High Court precedents and, perhaps, a more recent decision of a single judge of the High Court.
Counsel for Dover continually brought his Honour back to the basic ground rules. In rough summary, these are there are two possible approaches. The first involves conduct directed at the public or a segment of the public. Here the court must isolate a hypothetical reasonable member and ask if, objectively, that person was likely to be misled or deceived by the conduct. The second involves conduct directed at identified individuals. Here ASIC must identify individuals who relied on the CPP, in the sense they would not have proceeded but for the CPP, and suffered damages.
ASIC acknowledged there was no evidence any individual client was misled or suffered damages. This means ASIC must show Dover’s CPP was not conduct aimed at identified individuals, ie must show it was conduct aimed at the public or a segment of the public.
The trial identified a stumbling block, that may or may not be insurmountable. This was the difficulty in isolating a hypothetical reasonable member. The Breast Check case said the patients of a thermo-imaging breast check centre were so diverse that such a person could not be identified. Barker J was influenced by the individuality of the results and testing that preceded the statements on the thermo-imaging science (ie the statements the ACCC alleged were misleading and deceptive). On a parity of reasoning, Dover’s counsel claimed, the individuality of the Dover statements of advice that preceded the client protection policy meant His Honour may not be able to isolate a hypothetical reasonable Dover client. If this was the case His Honour must adopt the identified individual approach and, as no client suffered damages, ASIC’s complaint must fail.
The resolution of this quandary is, of course, the responsibility of O’Bryan J. It’s his call. It’s his decision.
His Honour may find he is bound by the Federal Court decision in Breast Check, or he may not. If he does it is probable ASIC’s case will fail. Otherwise it will not. ASIC will succeed in establishing Dover engaged in misleading and deceptive conduct and the ASIC v Dover contest will proceed to a second hearing to determine what penalty, if any, Dover should pay.
What would the consultant lawyers think?
The four consultant lawyers would not be happy with O’Bryan J’s line of reasoning. In fact they should be quite worried. This is because if ASIC wins its game on for a negligence and breach of contract legal action by Dover Financial Advisers Pty Ltd against each of the four law firms listed above.
Each consultant lawyer was a financial services law specialist
Each of the law firms were engaged because of their experience and expertise in financial services law and because of their knowledge of compliance practices at other AFSLs. Clients expect more of lawyers who promote themselves as experienced experts. So do the courts.
Its common sense: lawyers who possess and/or possess higher skills owe a higher duty. Their bar is raised.
The leading statement comes from the Full Federal Court in Yates Property Corporation v Boland:
“When a firm, whether large or small, has developed a particular expertise in some area of the law it is difficult to see why as a matter of principle the standard of care in accordance with which that a firm should carry out its professional work should be judged by reference to the standard of care of an ordinary practitioner. Indeed there is every reason to think that this should not be the case. Not too long ago a client would utilise the services of one particular firm of solicitors for whatever legal work that client required from time to time. Nowadays that client will look for advice from a firm that is expert in that area of the law that is of concern to the client. He may even use two or three firms in one matter where that matter involves discrete areas of the law and one firm is not expert in all of those areas.
When a client retains a firm that is or professes to be specially experienced in a discrete branch of the law that client is entitled to expect that the standard of care with which his retainer will be performed is consistent with the expertise that the firm has or professes to have. Such a client would no doubt be justifiably dismayed if he was told that the firm that he has retained because of its experience is only required to act in accordance with the standards laid down for a solicitor who has only a general or even only a little knowledge of the law that is to be applied to the facts of the client’s case.
Thus, the content of the standard of care that is to be owed by a solicitor to his client under the general law should not be confined to the standard of care and skill that is possessed by a person of ordinary competence exercising the same calling. The standard should reflect the fact that within any one calling practitioners have or profess to have varying degrees of expertise. The standard of care and skill required of such a person must bear some relationship to that expertise. In the case of a solicitor who is an expert in a particular branch of the law the requirement should be that the solicitor must carry out his retainer as would a reasonably competent solicitor who is an expert in that particular area of the law. That is the manner in which the content of the duty of care that is owed by a specialist medical practitioner has been described. See Rogers v Whitaker (1992) 175 CLR 479 at 483 where the High Court described the standard as “that of the ordinary skilled person exercising and professing to have that special skill, in this case the skill of an ophthalmic surgeon specialising in corneal and anterior segment surgery.” There is no reason in principle why the standard of care of a solicitor having special skill should not be regarded in the same way.”
The possession or profession of special expertise or experience
Thus lawyers who possess or profess expertise in a specialist area are subject to a higher duty of care than other lawyers. In the circumstances it seems each of Sophie Grace, Holley Nethercote, iMac Legal and MLA Lawyers are on the face of it liable to Dover.
The professions and possessions of Imac Legal
The professions and possessions of Sophie Grace
The founders of Holley Nethercote, Grant Holley and Tim Nethercote, profess to possess a particular skill: preventative law, ie the skill of making sure their AFSL clients get things right the first time to avoid conflict and the adverse consequences that follow from conflict.
In their own words:
What did the consultant lawyers get wrong?
In the broadest terms, each consultant lawyer failed to advise Dover that ASIC would believe certain terms of the Client Protection Policy did not comply with the law. Further, they did not advise ASIC would force Dover to close, compel Terry McMaster to enter into an enforceable undertaking and seek (very) large civil penalties in the (very expensive) Federal Court.
How extensive were the breaches?
It’s interesting to note ASIC’s concerns as set out in its letter dated 22 March 2018 and the similar notice served on Dover in May 2018 are much wider and far reaching that the complaint it plead in ASIC v Dover on 12 and 13 June 2019. O’Bryan J was somewhat critical of this. His Honour suggested most of the main clauses in the Client Protection Policy breached the financial services law, not just the introductory clause as plead by ASIC.
This is an important observation: even if ASIC fails in its case against Dover it definitely succeeded in its mission to close Dover, and that is where most of the financial damage was sustained. The consultant lawyers will be in breach of contract and negligent even if Dover successfully defends ASIC’s claims in the Federal Court.
What damages were sustained as a result?
The financial damage was immense.
Obviously there is the lost income and the lost value in Dover’s business. This is a significant amount. Valuations are inherently speculative, but during 2017 two arms-length comparable sales occurred which suggest a larger ASX listed company would pay a multiple of ten times expected future maintainable profits. These precedents predict a value of at least $30,000,000.
Dover also incurred a large amount of extra costs including consultants’ fees and legal fees to assist with the winding down process and the attendant legal costs.
These damages were foreseeable and but for the alleged breach of professional standards would not have been incurred.
But other businesses were damaged too. McMasters’ Accountants and Financial Planners, founded by Terry McMaster in 1992, lost more than $2,000,000 of fee income in the 12 months to April 2019,. And, unsurprisingly almost no new clients. Legal E Dox suffered a 30% loss of business (primarily due to Dover advisers ceasing to use its services). The Dover website business lost 200 clients. McMasters’ Commission Rebate Scheme disappeared as Dover’s Australian Financial Services Licence was cancelled.
It is not clear whether these damages were foreseeable although it is obvious that but for the alleged breach of professional standards they would not have been incurred.
Dover’s advisers suffered damages too. None were unscathed. They all experienced some loss of income and some extra costs connected to the closure of Dover.
Similarly, it is not clear whether these damages were foreseeable although it is obvious that but for the alleged breach of professional standards they would not have been incurred.
Dover’s staff suffered too. Although happily most moved on to green if not greener pastures.
Obviously there was huge reputational damage. Less obviously but just as consequentially there was huge psychological stress and pain connected to the adverse publicity surrounding the closure of Dover and antecedent events including the Royal Commission.
Causation and foreseeability: what are the damages?
It is now self-evident that each of the four law firms has breached its contract with Dover and breached the duty of care each owed Dover and perhaps related persons.
Not all damages are recoverable. Therefore expert advice is needed to determine the quantum of recoverable damages. It’s a unique case, and its complicated by the contribution ASIC played in engineering Dover’s downfall, as detailed in the earlier chapters of this book.
The scope of the damages is not known at this time.
Can we be sure the consultant lawyers addressed the CPP issue?
In Sophie Grace’s case the position is red inked and graphically clear:
In Holley Nethercote and iMac Legal’s case the position is less graphic but just as clear. Their 2016 report sprinkled with paragraphs like this:
It is clear each lawyer addressed the CPP in detail without identifying the sort of concerns ASIC did.
Was it foreseeable that ASIC would force Dover to close?
Daniel Ziffer, the ABC’s Business Reporter, quoted compliance expert Helen Bird as saying so. This is an extract from an article Daniel wrote on Thursday 13 June 2019.
You can view the original interview here: Link to Daniel Ziffer’s interview of Helen Bird
Extract showing Sophie Grace Compliance Lawyers handwritten suggested alterations to the Client Protection Policy. This was part of their June 2017 compliance review
 Reproduced at appendix 15.1.2 below and discussed in detail in chapter X
 1988 85 FCR at 105. (The High Court reversed this decision, but these extracts were not affected)
 See ASIC and Dover enforceable undertaking dated 29 June 2018
 A complete copy of ASIC’s letter dated 22 March 2018 is attached as an appendix
 The full red inked document is reproduced as an appendix in the following pages
 The full document, complete with numerous comments about the CPP is reproduced as an appendix in the following pages