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Court of Criminal Appeal 14 December 2012

Joffe v R; Stromer v R

[2012] NSWCCA 277

Fraud & dishonesty
CRIMINAL LAW CORPORATIONS FINANCIAL SERVICES AND MARKETS DEFINITION OF "FINANCIAL PRODUCT" DEFINITION OF "CREDIT FACILITY" DEFINITION OF "DERIVATIVE"

Citation: Joffe v R; Stromer v R [2012] NSWCCA 277
Court: Court of Criminal Appeal (NSW)
Date: 14 December 2012
Judge(s): Bathurst CJ, Allsop P, Barrett JA

Background

Two applicants faced charges of insider trading under s 1043A of the Corporations Act 2001 (Cth). The charges arose from their entry into contracts for difference (CFDs), a type of financial instrument that synthetically replicates the economic outcomes of buying or selling underlying assets without those assets actually changing hands. The CFDs in question were conceded, for the purpose of the appeal, to satisfy the general definition of "derivatives" under s 761D(1) of the Act, subject to certain exemptions.

The applicants applied to have the relevant counts in the indictment quashed. They argued that the CFDs were not "Division 3 Financial Products" within s 1042A of the Act, and therefore could not ground insider trading offences under s 1043A. This argument rested on two distinct but related propositions about how the Act's definitional architecture operates.

The primary judge rejected both arguments. The applicants sought leave to appeal under s 5F of the Criminal Appeal Act 1912 (NSW), and the Court of Criminal Appeal granted leave on the basis that the questions raised were of general importance to the operation of the market regulation provisions in Chapter 7 of the Act.

  • Whether the general exemptions in s 765A of the Corporations Act (including the exclusion of "credit facilities") apply when determining what constitutes a "Division 3 Financial Product" under s 1042A, so as to remove certain contracts from the scope of the insider trading prohibition in s 1043A.
  • Whether the CFDs in question constituted "credit facilities" within the meaning of s 765A(1)(h) and the Corporations Regulations 2001 (Cth), such that they fell outside the definition of financial product.
  • Whether the CFDs were "contracts for the future provision of services" under s 761D(3)(b), and therefore excluded from the definition of "derivatives."

Decision

First issue: Application of s 765A exemptions to Division 3 Financial Products

The Court held that the general exemptions in s 765A do apply when identifying what constitutes a Division 3 Financial Product for the purposes of s 1042A. Bathurst CJ reasoned that the term "financial products" appearing in s 1042A incorporates the full definition of that term as it operates throughout Chapter 7, including all exemptions. Section 761A states that "financial products" has the meaning given by Division 3 of that Chapter, and that definition applies chapter-wide. Since s 765A is expressed to operate "despite anything" in the relevant subdivisions, it forms part of the complete picture. This construction was found to produce a harmonious and internally consistent reading of the insider trading provisions.

Second issue: Whether the CFDs were credit facilities

Despite accepting that s 765A could in principle apply, the Court rejected the applicants' contention that the CFDs were "credit facilities" within the meaning of regulation 7.1.06 of the Corporations Regulations 2001. The Court undertook a detailed analysis of what constitutes a credit facility and concluded that CFDs, in their structure and operation, did not answer that description. Accordingly, the credit facility exemption provided no assistance to the applicants.

Third issue: Whether the CFDs were contracts for the future provision of services

The Court also rejected the argument that the CFDs fell within the exclusion in s 761D(3)(b) for "contracts for the future provision of services." Applying a "substance of the contract" approach drawn from cases concerning the characterisation of contracts, Barrett JA concluded that while the counterparty (CMC) did undertake various facilitating acts, those acts were ancillary or incidental to the primary purpose of the contracts. The substance of each CFD was the creation of a synthetic financial relationship, producing money-based outcomes tied to the market performance of underlying instruments, not the provision of services. The service elements were not the contractual core.

Orders Made

• The orders proposed by the Chief Justice and the President should be made.

Key Takeaways

  • The Court of Criminal Appeal confirmed that the general exemptions in s 765A of the Corporations Act form part of the complete definition of "financial products" throughout Chapter 7, including for the purposes of determining whether something is a "Division 3 Financial Product" under s 1042A.
  • Statutory construction of Chapter 7 required that the word "financial products" in s 1042A be read with its full chapter-wide meaning, incorporating both product-specific exclusions (such as those in s 761D(3)) and general exclusions (such as those in s 765A).
  • Contracts for difference were held not to be "credit facilities" under the Corporations Regulations 2001, meaning the s 765A(1)(h) exemption did not remove them from the financial product definition.
  • Under s 761D(3)(b), characterising a contract as one "for the future provision of services" requires that services constitute the substance of the contractual relationship, not merely incidental or ancillary elements. Where service-like obligations are ancillary to a primary financial purpose, the exclusion does not apply.
  • In dismissing both grounds of appeal, the Court left intact the application of the insider trading prohibition in s 1043A to CFDs of the type in question.

Legislation and Cases Referenced

Legislation
- Corporations Act 2001 (Cth), ss 761A, 761D, 763A, 764A, 765A, 1042A, 1043A, 1043H–1043J, Pt 7.1, Pt 7.10
- Corporations Regulations 2001 (Cth), r 7.1.06
- Criminal Appeal Act 1912 (NSW), s 5F

Cases
- Alcan (NT) Alumina Pty Limited v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27
- Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167
- Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55
- International Litigation Partners Pte Ltd v Chameleon Mining NL [2012] HCA 45
- International Litigation Partners Pte Ltd v Chameleon Mining NL [2011] NSWCA 50; (2011) 276 ALR 138
- Lee v Griffin (1861) 1 B & S 272; 121 ER 716
- Pacific Film Laboratories Pty Ltd v Federal Commissioner of Taxation [1970] HCA 36; (1970) 121 CLR 154
- Robinson v Graves [1935] 1 KB 579