Background
The plaintiffs, Jianping Qiu and Jingjing Lin, invested a total of $1 million in the Jarrah Capital 2005 Loan Trust. The investment was presented as an opportunity to participate in a loan for a property development project near the future Western Sydney airport, with the investment supposedly secured by a registered mortgage on the property. The plaintiffs were introduced to the investment by their friend, the first defendant, Yuchen (Luke) Chen, who received a referral fee from the trust’s manager.
Unbeknownst to the plaintiffs, the trust’s security had been significantly impaired months earlier when the underlying property was sold and the mortgage discharged. The director of the trustee, Michael Pan (the third defendant), became aware of this and faced pressure from the trust’s initial investors—his “close friends”—who wanted to exit their investment. To raise the necessary funds to pay them out, Mr. Pan engaged Mr. Chen to find new investors.
In June 2022, Mr. Chen pitched the investment to Mr. Qiu. At Mr. Chen’s request, Mr. Pan’s company sent an Information Memorandum (IM) for the trust, which Mr. Chen then forwarded to the plaintiffs. However, this IM was dated July 2021 and falsely represented that the investment was secured by a mortgage on the property, despite that security having been extinguished months prior. The plaintiffs invested their first $500,000 based on these representations, and that money was used to redeem units held by one of Mr. Pan’s friends. The plaintiffs made a second $500,000 investment under similar circumstances in 2023.
The Court’s Holding
The Supreme Court of New South Wales found the defendants liable for misleading and deceptive conduct in contravention of the ASIC Act, as well as for the tort of deceit. The Court held that Mr. Chen made misleading oral representations to the plaintiffs about the nature and security of the investment. More significantly, the Court found that all defendants were liable for providing the outdated and misleading IM, which contained false statements about the existence of mortgage security.
The Court found that Mr. Pan knew the IM was inaccurate and that the investment’s security was gone, yet he authorized it to be sent to the plaintiffs to induce their investment. This allowed him to use the plaintiffs’ funds to facilitate the exit of his original investors. The Court concluded that the plaintiffs had relied on both the oral misrepresentations and the false statements in the IM in making their decision to invest.
Furthermore, the court found that the trustee company (second defendant) had breached its fiduciary duties and the terms of the trust deed, and that Mr. Pan (third defendant) had knowingly assisted in this breach. This related to a later, unauthorized “swap” of the plaintiffs’ units for units in a different, unrelated fund. While the judgment established the defendants’ liability, the final calculation of damages and costs was deferred pending further submissions.
Key Takeaways
- Financial product promoters have a continuing duty to ensure all representations made to potential investors are accurate and current, and cannot rely on outdated Information Memorandums that no longer reflect the investment’s true nature or security.
- Using new investor funds to pay out earlier investors seeking to exit a troubled or impaired investment scheme, particularly when the new investors are recruited using misleading information, is likely to constitute misleading conduct and a breach of trust.
- Intermediaries and referrers who receive a commission can be held personally liable for passing on misleading information, even if it originated from the fund manager, as they are participating in the conduct.
Why It Matters
This decision reinforces the stringent obligations of disclosure and honesty placed on investment scheme promoters and their directors under Australian law. It highlights that providing an investor with an old Information Memorandum containing information known to be false is a clear-cut case of misleading and deceptive conduct. The court demonstrated a willingness to look through the investment structure to uncover the true purpose of the capital raising—in this case, to bail out existing investors—at the expense of new, misinformed participants.
The case serves as a crucial reminder for everyone in the investment supply chain, from fund managers to referrers, that they share responsibility for the accuracy of the information presented to investors. It underscores that liability can follow not just from creating misleading material, but from knowingly using it to secure an investment.