Australia calls on big-hitting lawyers for biggest ever crack down on FX company

Global law firm Norton Rose Fulbright has advised the Australian Securities and Investments Commission (ASIC) on its largest penalty ever issued in a single enforcement action.

On 16 October 2020, the Federal Court of Australia ordered that AGM Markets Pty Ltd, OT Markets Pty Ltd and Ozifin Tech Pty Ltd pay a penalty amounting to $75 million in total.

This is the largest penalty for a single enforcement action in ASIC’s history. The penalty comprises $35 million for AGM Markets Pty Ltd and $20 million for each of OT Markets Pty Ltd and Ozifin Tech Pty Ltd. The defendants must also pay refunds to approximately 10,000 former clients.

The penalty follows a Federal Court decision in February 2020 in which Norton Rose Fulbright advised ASIC in successfully obtaining findings of liability for (among other things) misleading and deceptive and systemic unconscionable conduct  while providing OTC derivative products to retail investors in Australia.

The Court found that the companies engaged in thousands of contraventions of the Corporations Act and the ASIC Act that resulted in Australian investors losing over $30 million.

Norton Rose Fulbright regulatory disputes partner Andrew Riordan led a team with support from senior associate Sophie Wade and associate Kelvin Ng.

Andrew Riordan commented today onthe matter saying “With this Federal Court decision, ASIC’s proceeding sends a strong message deterring misconduct in the financial services industry while continuing to protect investors.”

As far as the court proceedings are concerned, the Australian Federal court dealt with the activities of the first defendant (AGM), the third defendant (OT) and the fifth defendant (Ozifin) and the promotion of derivative instruments.

From the latter part of 2017 until the middle of 2018, each of the three defendants operated separate businesses in Australia that offered over-the-counter (OTC) derivative products being contracts for difference (CFDs) including margin FX contracts to retail investors in Australia.
They provided retail investors an online platform on which to invest in those products and also provided financial product advice to them by telephone and email.

That advice was provided by account managers (AMs) who were engaged on behalf of the defendants, but who were based overseas. The AMs engaged on behalf of AGM were based in Israel. The AMs engaged on behalf of OT were based in Cyprus and later the Philippines. And the AMs engaged on behalf of Ozifin were based in Cyprus.

Whilst Norton Rose Fulbright sought to boast about their part in assisting ASIC to gain the largest ever financial penalty against a fraudulent FX brokerage in Australian history, this case goes back some time and a lot of background work has been done.

On 5 November 2018, ASIC made a decision to cancel the AFSL pursuant to s 915C(1) of the Corporations Act, although the cancellation only took effect on 31 December 2018. The stay of the cancellation was intended to allow the continued operation of AGM’s dispute resolution process and any compensation arrangements, and to allow clients with existing positions to close them.

Until 16 April 2018, each of OT and Ozifin was a corporate authorised representative of AGM. OT was a party to a corporate authorised representative agreement (CAR agreement) with AGM dated 18 September 2017. AGM cancelled OT’s authorisation on 16 April 2018. Ozifin was a party to a CAR agreement with AGM dated 13 June 2017. AGM cancelled Ozifin’s authorisation on 16 April 2018.

The defendants provided financial services to retail investors in Australia. In the case of AGM, under the business name “Alpha Trade”; in the case of OT, under the business name “OT Capital”; and in the case of Ozifin, under the business name “TradeFinancial”.

Each of Ozifin, OT and AGM offered their clients “bonuses” in the form of an increase to the balance of the client’s account. The increase in the clients’ account balance effected by the bonuses improved the client’s margin position, and could therefore be used to avoid having to close existing positions that had moved against a client or could be used to open additional and/or larger positions. AMs engaged by Ozifin and/or AGM represented to clients that the AM could arrange for a bonus to be paid to the client’s account. But the terms upon which Ozifin and AGM offered those bonuses meant that clients could not withdraw the bonus funds until they had opened a certain number of positions or a certain period of time had elapsed.

45 AMs engaged by OT and Ozifin were based in overseas call centres. As I have said, in the case of OT the AMs were based in Cyprus and the Philippines. In the case of Ozifin they were based in Cyprus.

46 People working in those overseas call centres contacted retail clients in Australia. In addition to assisting clients to download trading software and to operate that software, call centre staff provided financial product advice to retail clients in Australia in relation to FX contracts and CFDs, including giving personal advice. Further, they encouraged or persuaded retail clients to deposit further funds into the trading accounts that they had established with the relevant company. Further, in some instances, they encouraged the clients to provide remote access to the client’s computer, and asked the client to open their online banking system so that the AM could assess the funds available to retail clients.

According to the court judge, each of the defendants provided to their clients an online trading platform that those clients used to open, monitor and close CFDs and FX contracts, and by which the clients could monitor the balance, equity, margin and free margin in their accounts. AGM clients used the MetaTrader 4 platform, which could be used to open and close CFD or FX contract positions. OT clients also used the MetaTrader 4 platform, which included for each product on the platform a candle chart. Ozifin’s trading platform was on the TradeFinancial website. The TradeFinancial website included a feature whereby Trading Central signals would appear in a message that scrolled across the top of the website.

Second, AGM and OT used software to view and access clients’ computers. Indeed, they instructed clients to download that software during early discussions with them. The software, typically a program called TeamViewer, allowed the defendants’ representatives to view the client’s computer screen remotely, and move a cursor around on each client’s screen. For AGM, it was also used to control clients’ computers.

The defendants used this software not only to view what clients were doing on the trading platforms, but also to:

(a) view the clients’ personal financial information on their online banking accounts and use that information to persuade clients to deposit more funds with the defendant;

(b) direct the client to effect transfers of funds from the client’s online banking system to the client’s trading account; and

(c) direct clients as to what CFD and FX contracts to open, and how to open those positions.

Third, AGM engaged Falcon IC&T Limited (Falcon) to provide financial services to customers of AGM. The AMs who spoke with retail clients of AGM in Australia were engaged by or on behalf of Falcon.

Now AGM has sought to avoid responsibility for any conduct that amounts to a contravention undertaken by an AM engaged by Falcon. It says that its agreement with Falcon prohibited Falcon from giving personal advice or otherwise acting contrary to law. So, according to AGM, if AMs engaged by Falcon did give personal advice or otherwise acted contrary to law when dealing with AGM’s customers, AGM cannot be made liable for that misconduct. But in my view any mere prohibition in the agreement between AGM and Falcon against conduct that may contravene the law does not of itself relieve AGM of responsibility for conduct undertaken on AGM’s behalf by Falcon.

Fourth, on 1 November 2017, OT entered into an agreement with IBD by which IBD agreed to provide “marketing” services to OT. But regardless of the specific services described in that agreement, AMs engaged by IBD provided financial services to clients of OT. Indeed, in my view OT appointed IBD to provide, inter-alia, account management and customer relations services to customers of OT. Moreover, the evidence of the interactions between AMs engaged by IBD in the Philippines and the customers of OT reveals that those AMs provided financial product advice to clients in Australia, including personal advice. Indeed, it would seem from the evidence before me that the conduct of the AMs engaged by IBD, and who contacted clients of OT in Australia, was calculated to increase the quantum of deposits that clients of OT made to their OT trading accounts.

AGM, OT and Ozifin purported to provide financial services to their clients in Australia pursuant to AGM’s AFSL. As the holder of the AFSL, AGM was required to meet the general obligations set out in s 912A of the Corporations Act.

Those obligations included ensuring that the financial services covered by that licence were provided efficiently, honestly and fairly (s 912A(1)(a)), and an obligation on the part of AGM to take reasonable steps to ensure that its representatives complied with the financial services laws (s 912A(1)(ca)). Indeed, it was a condition of the AFSL that AGM establish and maintain compliance measures that ensured, as far as was reasonably practicable, that AGM complied with the provisions of the financial services laws.

Now in what purported to be compliance with that obligation, AGM had in place a written compliance plan, and various associated documents. Further, apart from providing various policy documents to OT and Ozifin, AGM took some steps to discharge its compliance obligations.

Various employees of AGM were tasked with listening to recordings of between 5 and 10 calls each week between AMs engaged by or on behalf of each defendant, and the clients of those defendants.

Further, from January 2018, AGM prepared daily compliance reports, and sent some correspondence to Ozifin regarding a limited number of deficiencies that the compliance officers identified in the calls between the AMs and clients. Further, some of the deficiencies identified by the compliance officers engaged by AGM related to the description provided to clients of the risks associated with investment in the relevant products.

Various conversations were read out in court, including coercive attempts by staff to make clients trade and then have their accounts zeroed by the broker. These are all fully detailed in the Federal Court transcript.

None of these appalling behavioral patterns are unheard of, and most FX industry professionals are aware that such things have certainly not been isolated, especially during the period between 2004 and 2010 during the entry of many small entities using MT4 which had never been in the FX industry before and came from underworld affiliate marketing entities in Israel and some of the CIS region, both of which then spilled over into Cyprus.

Concluding this four year litigation was a $75 million Australian dollar fine imposed on the defendants.