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This article first appeared in the  Discontinued - Australian Litigation and Court Practice Tracker - Intelliconnect Archive (2010-2013)
Tendency evidence (s 97)

In Richards v Macquarie Bank Limited (No 2)[2012] FCA 1403 the applicant, Mrs Richards, to whom, it was said, certain representations had been made by two financial advisers employed by the Storm Financial Services Ltd to her detriment, argued that representations made by other Storm employees to 12 other customers constituted tendency evidence within s 97 of the Evidence Act 1995 (Cth).

The relevant fact in issue in the proceedings was whether the alleged representations had been made to Mrs Richards. Those representations were, briefly:

  • • “provided the applicant had an investment time frame of 5-7 years there was no ‘real risk’ involved in investing in shares”
  • • “Don’t worry, there really is no risk. If anything goes wrong, it is covered by insurance”
  • • “Diversification is the key. There is no risk.”

The requisite notice having been given as required by s 97, the only question was whether, in the terms of the condition set out in s 97(1)(b), the court thought that the evidence of the other 12 customers would have “significant probative value” and thus be admissible under s 97.

Reeves J concluded that the evidence here did not meet that condition.

Background and arguments: Storm had developed an approach to investment which involved it advising its customers to access the capital base they had accumulated (usually, but not always, in the equity in their homes) and to leverage, or gear it, by way of a margin loan so that they could then invest the combined sum in the Australian share market using index funds as the investment vehicle. Counsel for Mrs Richards submitted that the evidence of the other 12 Storm investors was both relevant to, and highly probative of, a tendency of Storm to make representations to its clients, through its employed financial advisers, that there was “no risk” of them losing their capital, ie their equity contribution, if they followed Storm’s investment strategy. He submitted that this tendency made it more likely that a similar statement about risk was made to Mrs Richards by her Storm financial advisers. Counsel further submitted that, on a common sense assessment, the effect of the representations made to the 12 Storm investors and to Mrs Richards revealed “‘striking similarities’, ‘unusual features’, ‘underlying unity’, ‘system’ or ‘pattern’”, as stated in Hoch v The Queen(1988) 165 CLR 292.

However, the respondent, Macquarie, submitted that there were significant differences between the representations made to Mrs Richards and those made to the other investors, being:

  • • a nine-year span during which the various representations were made
  • • Mrs Richards was relying upon representations made to only a small number of other Storm investors in circumstances where there were about 3,000 Storm investors that pursued geared investments in the period concerned
  • • some representations dealt with the extent of risk and others dealt with the nature of the risk.

Reeves J said that there was nothing unusual in a financial adviser discussing risk with a potential investor but that because risk is an ever present factor affecting any investment strategy, it would be unusual for a financial adviser to make an unqualified statement that there was “no risk” associated with following a particular investment strategy. His Honour said that even if it was assumed the statements of the other Storm investors provided evidence that about 19 representations had been made to the effect that there was “no risk” of investing according to the Storm strategy, when that number of incidents was considered against the full nature and extent of Storm’s corporate operations during the relevant period, it was likely to represent such a miniscule fraction of all those occasions that the court should not consider that it could be regarded as being of any significance. It followed that the evidence sought to be adduced did not establish an underlying unity, system or pattern demonstrating the existence of “a company line” or “culture” in Storm as a corporate entity, such that Storm might have had a tendency to make the pleaded representations. Accordingly the evidence could not be adduced calling in aid s 97.

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