McFaddens Securities To Pay $125,000 For Failing to Assess Suitability of Advice

Complaint

Mr and Mrs VZ bring this complaint in their capacity as directors of the corporate trustees of a Self-Managed Superannuation Fund (the SMSF) and of a Family Trust (the Trust).

In October 2016, the complainants were introduced to Mr D, a director of a corporate authorised representative of McFaddens Securities Pty Ltd, by Mr H. At the time, Mr H was an executive of AUS Streaming Limited. As a result of this meeting, the complainants received general advice from Mr D recommending three investments in unlisted securities:

• November 2016: The Trust invested $50,000 in ASAF Critical Metals Limited
• December 2016: The SMSF invested $50,000 in ASAF Critical Metals Limited and
• April 2017: The Trust invested $150,000 into AUS Streaming Limited convertible notes.

The complainants say they were misled into making these investments because McFaddens Securities:

• provided incorrect asset valuations for both companies;
• represented AUS Streaming Limited would be listed on the ASX, but this did not occur; and
• the assets which supported the valuations did not exist.

AUS Streaming Limited entered liquidation in March 2020. The complainants say the securities are worthless and seek total compensation of $916,000, including interest on the convertible notes at the rate of 12% per annum for four years.

McFaddens Securities denies liability and says it only acted as a broker of the securities. In facilitating the investments, it says:

• it had reasonable grounds, on the basis of Mr VZ’s occupation as the principal of a financial planning and advisory service firm, to believe the complainants satisfied the criteria of a sophisticated or professional investor and therefore did not require disclosure
• the complainants were therefore capable of undertaking their own due diligence prior to investing in the relevant securities and
• the investment information (including the asset valuations) was provided by a consultant of ASAF Critical Metals Limited and AUS Streaming Limited, Mr T and it was reasonable for the financial firm to rely on that information.

Issues and key findings

Were The Complainants Properly Classified As Eligible Investors?

No. Neither the SMSF nor the Trust were classified correctly as eligible to accept the offer of securities and should have been prevented from doing so.

Are The Complainants Entitled To Any Compensation?

Yes. Both the SMSF and Trust have suffered direct losses due to the financial firm’s breaches of its obligations.

Why Is The Outcome Fair?

McFaddens Securities could not demonstrate it had properly assessed the complainants’ eligibility to make the investments. However, while not meeting the legal test, the complainants had available to them sufficient expertise through Mr VZ to understand the disclosure normally available to retail clients would not be made available. They decided to go ahead with the investments anyway and so contributed to their loss.

Determination

This determination is partially in favour of the complainants.

Within 28 days of the financial firm being informed the complainants accepted this

determination, it must pay:

• the SMSF $25,000 with interest
• the Family Trust $25,000 with interest equivalent to the change in CPI from 15 November 2016 to the date payment is made
• the Family Trust $75,000 with interest equivalent to the change in CPI from 3 April 2017  to the date payment is made

As a condition of accepting this determination, if McFaddens Securities so requests the complainants must agree to assign their rights and obligations in the unlisted securities listed below to the financial firm:

• ASAF Critical Metals Limited
• AUS Streaming Limited
• TOR Mining Capital Limited
• Frontier Mining Value Limited
• Infrastructure Commodities Limited
• Quantum Investing Management Limited

Getting Financial Help

Contact us if you’re questioning the advice you received from a financial advisor and are thinking about taking steps against them. We are committed to ensuring our clients receive the best possible advice and guidance on their situation, especially in financial matters. You can contact us online, call us at 1300 433 533 or email us at enquiry@fdlegal.com.au.