This is another of the Dennis King Law cases from New Plymouth. Karen Towt of Dennis King Law and barrister Susan Hughes were acting for Charles Luscombe, Dorothy Turner and Kathleen Whyte, being the executors named in the will of their mother, Winifred Luscombe.

BACKGROUND

The case was brought against Dillon O’Sullivan, Kelvin Syms, Simon Purvis, Andre Gaylard, Bret Jackson, Kenneth Swain, Donal Curtin and John Perris.

Dillon O’Sullivan was general manager of Westplan, 40% owned by Northplan, and an investment advisor at Westplan’s Hawera branch.

Kelvin Syms, Simon Purvis, Andre Gaylard, Bret Jackson and Kenneth Swain were directors of Northplan.

Donal Curtin and John Perris were members of Northplan’s investment committee.

Charles Luscombe, Dorothy Turner and Kathleen Whyte engaged Dillon O’Sullivan to manage the investment of their mother’s estate. Their mother, Winifred Luscombe, was elderly, frail and unable to conduct her affairs independently.

At the start of 2007 their mother’s portfolio, of which 82% had been placed in finance companies, was worth about $500,000. By the end of that year it had lost two-thirds of its value and was worth about $167,000.

Bret Jackson and Kenneth Swain applied for summary judgement/strike out of the claims against them, claiming that none of the claims against them could succeed.

Considerations

As a director, Bret Jackson attended monthly board meetings of Northplan in Albany. The board meetings usually included an update from Westplan, prepared by Westplan’s general manager, Dillon O’Sullivan.

Northplan’s board kept an overview of the general allocation of all investment funds, in keeping with its governance role. Reviewing specific investment advice is a management activity and therefore outside the scope of the board in its governance role. The board’s concern was simply to ensure there was a ‘process’ followed by the investment committee and that the investment committee was staffed appropriately.

Jackson said it was not the board’s role to interfere with decisions about the recommended investment portfolios or specific client advice. He was not a financial planner and had no involvement with clients or the investment portfolios of clients.

Jackson never met Mrs Luscombe or her children. In fact, he had never heard of them until served with their claim against him, and had no knowledge of their particular investment needs or requirements.

Kenneth Swain’s background is life insurance. He established Swain Investment Services Ltd in 1997 and first became involved with Northplan in 2002 when they were appointed to provide expert advice “as to the asset allocation of product selection”. From that time Swain Investments had the benefit of the model portfolios recommended by Northplan’s investment committee.

In 2004 Swain sold a 20% shareholding in Swain Investments to Northplan, which appointed a director to Swain’s board. MFS purchased Northplan in December 2006 and the remaining shares in Swain Investments in March 2007. Swain was appointed to Northplan’s board in July 2007.

In relation to Jackson and Swain, the case was brought on the basis that as directors of Northplan they knew, or ought to have known, or were in a position to control matters in order to prevent any of Mrs Luscombe’s losses from occurring.

They were sued simply because they, along with the other named defendants, were board directors at the time when Mrs Luscombe’s losses of $330,000 were incurred.

DECISION

The judge described the case as being about whether or not there was an assumption by Jackson and Swain of personal responsibility to Mrs Luscombe and her children.

He said the case does not identify any decision [in relation to Mrs Luscombe] for which Jackson and Swain are responsible.

He described the statement of claim as being replete with allegations of negligence that Jackson and Swain, as directors, had caused $333,000 of losses when there was nothing connecting them to Mrs Luscombe or her children specifically.

The judge also said there was no evidence the board enforced the investment committee’s recommendations.

Although directors can be liable for failing to discharge their duties to manage the company, those duties are owed to the company and not to third persons ordinarily. The judge stated that “directors do not in the ordinary course owe duties to anyone other than their company.”

The judge agreed with Jackson & Swain’s lawyer “that to impose personal liability upon directors on the basis that they should have known about the quality of investment advice being given by one of its advisors, is a charter for indeterminate liability.”

If a director is simply discharging his or her responsibilities as a director, making decisions in board meetings and supervising the management of the company, he/she cannot be liable to the outside world.

The judge could find no evidence “to found a case for personal responsibility to the plaintiffs.”

Result

There was no arguable case to sustain the claims against Jackson and Swain and their applications for summary judgment were therefore granted.

Costs

The court ordered the plaintiffs (Mrs Luscombe’s children, as executors of Mrs Luscombe’s will), to pay Jackson’s and Swain’s costs.

VOV SUMMARY

Jackson and Swain were found innocent but the case against the other defendants continues. It may even succeed, but at what cost?

The judge in this case found that directors are not liable to investors if they are simply carrying out their responsibilities as a director. Being a board member per se is not enough. The director has to be involved in management or operating decisions that directly affect the investor in order for such liability to arise.

There was evidence that the investment committee developed model portfolios for different kinds of investors, that it was then up to the investment advisors to present those options to clients, and that they had a discretion about recommendations given to clients.

Advisors had a discretion to vary the recommended model portfolios within limits; greater variation being allowed with higher management level approvals.

It is clear that directors who stick to their governance role are in the clear. It also appears to VoV that members of the investment committee will most likely attempt to argue that it is the investment advisors who are liable to individual investors, not the investment committee.

Any case would have to provide evidence of the investment committee’s model portfolios being enforced, or advisors having insufficient discretion to vary the model portfolios enough, for anyone other than individual advisors to be held liable.

It is a curious but entirely predictable situation in that senior management are pointing the finger at the advisors saying they had discretion to vary the portfolios to suit individual investors, and the advisors are pointing the finger at senior management saying they had no choice but to enforce the model portfolios.

In this case, though, the discovery phase has been completed and the judge is satisfied that all the evidence is before the Court. There appears to be no evidence that investment advisors were compelled to enforce the model portfolios.

VoV therefore has grave reservations about the probability of this case succeeding.

If it fails, Mrs Luscombe will not only have lost $333,000 but she will face direct costs of perhaps $150,000 or more plus face having to pay some or all of the defendants’ costs, which could be in the vicinity of $350,000.

Given that her portfolio is now only worth $167,000 one wonders if there will not only be nothing left, but Mrs Luscombe and the children will have to mortgage their homes to pay the bill.

It is a sobering thought.

And if they win, the Armitage v Church precedent I wrote about in my last article suggests compensation would be for less than 50%, in which case they, like Mr Armitage, are likely to be worse off than if they had not taken the case at all.

Stay tuned for instalment number three next week.

Tags: Andre Gaylard, Bret Jackson, Charles Luscombe, Dennis King Law, Dillon O'Sullivan, Donal Curtin, Dorothy Turner, John Perris, Karen Towt, Kathleen Whyte, Kelvin Syms, Kenneth Swain, Luscombe v O'Sullivan Syms Purvis Gaylard Jackson Swain Curtin and Perris, MFS, Northplan, Simon Purvis, Susan Hughes, Swain Investment Services Ltd, Swain Investments, Westplan, Winifred Luscombe

This entry was posted on Friday 25th November 2011 and is filed under Vestar Legal Action. Both comments and pings are currently closed.