01/03/2013

As promised in last month’s Business Law Brief, this month we continue our review of the decision in Wingecarribee Shire Council  v Lehman Brothers  Australia Ltd (In Liq) [2012].  This month we look at whether there are different standards for a financial adviser versus a product salesman and if so when you can tell the difference.

You might recall that Wingecarribee Shire Council 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.

In deciding whether a party is acting as a financial adviser the important issue to focus on is the conduct of the parties, not the paperwork or what each calls the other.  It is the substance of the relationship that determines the issue, not the formal roles assigned to each party by the documents.

In the case, the court held that Lehman was providing financial advice when it offered the investment to the council, recommended certain action by the council and expressed an opinion on matters about which it was apparently an expert.   It didn’t help that Lehman claimed publically to be a provider of financial advice to councils.

The fact that the council was a ‘sophisticated investor’ within the definition in the Corporations Act was not relevant either, again because although that designation might apply for formal regulatory reasons, in fact the council and its officers were not sophisticated enough to understand the product and its risks.  The council placed considerable trust in Lehman and that trust formed the basis of the relationship as an adviser and a fiduciary.

The court also rejected the notion that a council could only have one financial adviser and because others provided financial advice to the council Lehman could not fill that role.  The point was clearly made that a party can be a financial adviser as the result of just one transaction if the conduct meets the requirements and the presence of other advisers in other transactions has no relevance.

The result of being held to be an adviser meant that Lehman had a range of duties to the council as its client – duties that in the circumstances Lehman failed and that gave rise to the judgment against them.

So if you are selling your services on the basis of your client trusting you and your comments, you need to consider whether you are therefore a financial adviser and a fiduciary and if so that you fulfil all the necessary duties.