30/04/2013

This month we continue our review of the decision in Wingecarribee Shire Council  v Lehman Brothers  Australia Ltd (In Liq) [2012] by looking at the adviser's fiduciary obligations and the two-edged sword they became for the adviser.

Wingecarribee Shire Council (among others) lost a substantial amount of money by investing in so-called “Synthetic Collateralised Debt Obligations” (SCDO’s) and it and many other councils took a class action against their adviser, Grange Securities, who had been taken over by Lehman Brothers Australia.

The Federal Court found that Lehman Brothers was not simply a product seller but had in fact acted to convince the Council to rely on Lehman Brothers’ advice, thereby making Lehman Brothers a financial adviser to the Council.  By so doing, although Lehmans saw this as a great way to sell product to a customer whose loyalty it had cemented, it gave rise to fiduciary obligations owed by Lehmans to the Council.

Through its conduct Lehmans voluntarily took on the fiduciary obligations that a financial adviser and trusted confidante owes to its clients.  Those obligations were essentially two-fold: not to obtain an unauthorized benefit from the relationship and not to put itself in a position where its interests or duties conflicted with those of its client, the Council.

If Lehmans wanted to obtain a benefit it had to make a very full and frank disclosure of that benefit and obtain the client’s fully informed consent. The Federal Court found that Lehmans did not make that disclosure – it simply said that it ‘may’ receive placement fees. This was woefully inadequate and insufficient as a full disclosure.  Lehmans was very selective about what it told the Council, knowing that the Council was “completely at sea with the SCDO’s”. Further Lehmans actually “exploited [Council’s] ignorance for its own benefit”.

There is no precise checklist of, or formula for, what an adviser has to reveal if it is to make a benefit from its relationship as a fiduciary to its client. It is a question to be decided in each case. However the bar is set very high. Generalities, ambiguities, disclaimers and fine print simply won’t work. In order to give informed consent to the benefit clients must be fully aware of the adviser’s interest, not merely the potential for such an interest to arise.

If the adviser wants to ensure the strength of their ties with their client by gaining the client’s trust and confidence, they thereby become a fiduciary with obligations of full and frank disclosure – the two-edged sword.

For more information, please contact Townsends Business & Corporate  Lawyers on (02) 8296 6222.