The 281 investors who invested $140 million into Mayfair fixed income and promissory notes can take cold comfort from the orders made by the Federal Court of Australia on 22 December 2021 that four Mayfair 101 Group companies pay a total of $30 million for breaches of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act).
This is an analysis of the Penalty Decision – Australian Securities and Investments Commission v Mayfair Wealth Partners Pty Ltd [2021] FCA 1630 (Anderson J).
This decision follows the earlier liability decision – for my analysis see From Dunk to Junk Mayfair 101 promised investors secure income, left them with worthless debentures
The Misleading Representations and the Penalties
These representations were found to be false or misleading in contravention of ss 12DB(1)(a) and (e) of the ASIC Act, being representations made about the notes in newspapers, in the application forms, and on websites via Google search advertising for terms such as ‘bank term deposits’ and ‘best term deposit’:
- the Notes were comparable to, and of similar risk profile to, bank term deposits, when they were of significantly higher risk,
- the Notes carried no risk of default, when in fact there was a risk that investors could lose some, or all, of their principal investment,
- the principal investment would be repaid in full on maturity, when this might not occur because Mayfair could extend the time for repayment for an indefinite period, and/or
- the M Core Notes were fully secured products when they were not.
The Court imposed the following penalties:
- Mayfair Wealth Partners: $10 million
- M101 Holdings: $8 million
- M101 Nominees (in liquidation): $8 million
- Online Investments: $4 million
Reasons and Findings by the Court
It was the online marketing strategy for the unsecured promissory notes – the M+ Fixed Income Notes (the M+ Notes) and the secured promissory notes – the M Core Fixed Income Notes (the Core Notes) that the Court found particularly misleading:
"The Representations … were grossly misleading and calculated to mislead investors … so as to represent [the Mayfair Products] as being low risk, safe, certain or secure and akin to term deposits … The … marketing strategy was to divert people searching online for something equivalent in risk to a bank term deposit, by using sponsored-link advertising and websites with meta-title tags including the words “best term deposit”. I have found that … M101 Nominees [which issued the Core Notes] had been insolvent since inception and … that investor funds were generally not supported by first-ranking unencumbered assets security.” [judgment, paragraph 239]
There was clear evidence of harm:
"The contravening conduct … has caused very significant harm to individual investors who in some cases were investing all their retirement funds … on the basis that their funds were securely invested when in reality their funds were being invested in highly speculative ventures and now are very likely to have been lost.
The Provisional Liquidators’ Report identifies that the M Core Note and the M+ Note holders should expect a nil return.” [judgment, paragraphs 240 & 241] Turning to penalty, the Court said:
"The primary, if not the only object of a pecuniary penalty is deterrence, both general and specific… the cost of complying with a penalty cannot be regarded as an acceptable cost of doing business.” [judgment, paragraphs 250 & 251]
I approach the question of [the amount of] penalty, taking account the deliberate misleading and deceptive conduct, the lack of co-operation in this proceeding, the significant effect that the … conduct has had on a number of investors and the … complete lack of remorse, wrongdoing and regret [by Mr Mawhinney, the sole director and the ‘controlling mind’ of the Mayfair 101 Group] [judgment, paragraph 255].
The judgment is to be appealed, according to Mr Mawhinney.
Was ASIC’s approach found wanting?
A useful way to start is ask what penalties ASIC asked the Court to impose and what the Court actually imposed.
- For Mayfair Wealth Partners, ASIC asked for $4 million, the Court imposed $10 million.
- For each of M101 Holdings and M101 Nominees, ASIC asked for $3 million, the Court imposed $8 million.
- For Online Investments, ASIC asked for $2 million, the Court imposed $4 million.
None of these penalties are likely to be recovered as the companies are insolvent.
Next is to ask James Mawhinney was not added as a party to the proceedings, so that a pecuniary penalty could be ordered against him personally. This is odd. As the Court found:
Mr Mawhinney has shown no remorse for the contravening conduct nor for the loss and harm caused to investors in the Mayfair Products.
ASIC appears to be content with a restraining order it obtained in the Federal Court in April 2021 restraining Mr Mawhinney from advertising and raising funds through financial products for 20 years (against which he is appealing).
Finally, it is to ask why took ASIC over nine months from the time the advertising commenced until it obtained a restraining order from the Court. This was despite the fact that it had warned against making misleading statements in its regulatory guides 234 and 156:
Advertisements for notes should state that the product is not a bank deposit. Further, they should not suggest that:
(a) the note is, or compares favourably to, a bank deposit
In its Media Release, ASIC states “ASIC’s investigation into Mr Mawhinney’s conduct is continuing.” and “ASIC has a dedicated webpage for Mayfair 101 Group investors.”
The webpage contains a full history of the action taken by ASIC.
In terms of a return of funds, this is what ASIC advises M+ Note holders: “Investors can still make a request to Mayfair 101 to exit their investment despite redemptions having been suspended.” For Core Note holders, ASIC advises them to contact the liquidators.
Cold comfort indeed!
See also:
From Dunk to Junk: Mayfair 101 promised investors secure income, left them with worthless debentures