Jungstedt and Australian Securities & Investments Commission [2003] AATA 159 (14 February 2003)

Last Updated: 5 February 2009

CATCHWORDS – CORPORATIONS LAW – banning order – whether applicant breached securities law – whether applicant made securities recommendation – whether recommendation made to a person who may reasonable be expected to rely on that recommendation - whether applicant had reasonable basis for making recommendation - whether reasons to believe that applicant has not performed, or will not perform efficiently, honestly and fairly the duties of an investment adviser or a representative of an investment adviser - whether applicant engaged in discretionary trading and exceeded his authority to act – decision affirmed.

Corporations Law ss. 9, 77, 88, 92, 93, 781, 806, 807, 809, 824, 825, 825A, 826, 827, 828, 829, 830, 831, 832, 833, 836, 837 and 851; Chapter 7; Divisions 1, 2, 3, 4 and 5
Corporations Act 2001 ss. 1371, 1400 and 1401
Freedom of Information Act 1982 ss. 40 and 43
Sales Tax Assessment Act (No 1) 1930 s. 18
Social Security Act 1947 s. 6AD

Hadid v Lenfest Communications Inc [1999] FCA 1798
Stuart v Clemons and Others [1951] Tas S.R. 28
Attorney-General’s Department v Cockcroft (1986) 64 ALR 97
Estee Lauder Pty Ltd v Federal Commissioner of Taxation (1987) 80 ALR 314
Department of Social Security v Copping (1973) 73 ALR 343
Re Buchan and Dairy Adjustment Authority [2002] AATA 644
Taylor v White [1964] HCA 11; (1963) 110 CLR 129
Edgelow v MacElwee [1918] 1 KB 205
Hyde v Sullivan (1956) 56 SR (NSW) 113
Story v National Companies and Securities Commission (1988) 6 ACLC 560
Australian Securities Commission v Kippe and Another (1996) 67 FCR 499
New South Wales Bar Association v Hamman [1999] NSWCA 404
New South Wales Bar Association v Evatt [1968] HCA 20; (1968) 117 CLR 177
Hardcastle v Commissioner of Police [1984] FCA 105; (1984) 53 ALR 593
Pillai v Messiter [No.2] (1989) 16 NSWLR 197
Re Wolstencroft and Companies Auditors and Liquidators Disciplinary Board (1998) 54 ALD 773
Re Donald and Australian Securities and Investment Commission [2001] AATA 366
Australian Securities and Investment Commission v Donald [2002] FCA 1174; (2002) 69 ALD 187
Re Codey and Australian Securities Commission [1995] AATA 249; (1995) 18 ACSR 209

DECISION AND REASONS FOR DECISION [2003] AATA 159

ADMINISTRATIVE APPEALS TRIBUNAL )
) V2000/345
GENERAL ADMINISTRATIVE DIVISION )

Re JAN JUNGSTEDT

Applicant

And AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION
Respondent

DECISION

Tribunal: Miss S A Forgie (Deputy President)
Date: 14 February, 2003
Place: Melbourne

Decision: The Tribunal affirms the decision of the respondent dated 29 February, 2000.

S A FORGIE
Deputy President

REASONS FOR DECISION

On 27 March, 2000, the applicant, Jan Jungstedt, applied for review of a decision of a delegate of the respondent, the Australian Securities and Industries Commission (“Commission”) dated 29 February, 2000 to prohibit him from doing an act as a representative of a securities dealer or of an investment adviser for a period of five years. That decision, known as a “banning order” was made pursuant to ss. 829 and 830 of the Corporations Law (“the Law”) as it was then in force.

2. At the hearing, Mr Jungstedt was represented by Mr Rinaldi of counsel and the Commission by Mr Elliott of counsel. The documents lodged pursuant to s. 37 of the Administrative Appeals Tribunal Act 1975 (“T documents”) were admitted in evidence together with the following:

• affidavits of Ms Eve Mary Corbett, Ms Dorothy Anne Blackwood, Mr Murray John Roberts, Mr John Percy Jones and Mr Colin Boltman;
  
• extracts from a report by Ms Christine Boltman;
  
• terms of settlement between Circle Jay Pty Ltd (“Circle Jay”) and Mr Jones as plaintiffs and Epic Securities Limited (“Epic”) and others as defendants dated 31 May, 1999;
  
• Business Rules of the Australian Stock Exchange (“ASX”) (“ASX Rules”) effective 13 December, 1995 and 2 December, 1996;
  
• brochure issued by the ASX entitled “Understanding Options Trading” and dated November, 1993;
  
• letter dated 10 December, 1999 from the Commission to Mr Jungstedt together with annexure;
  
• bundle of correspondence between Mr Jungstedt and Mr Barry Murray together with notes of meetings between the Commission and Mr Murray;
  
• contract liquidation note for Circle Jay in standard form dated 16 December, 1996;
  
• letter from Mr Boltman to Mr Baring-Gould dated 30 October, 1987;
  
• members’ open position report dated 27 September, 1996
  
• contract liquidation note dated 25 September, 1995;
  
• brochure entitled “Understanding Options Strategies” published in August, 1997;
  
• Extract from a book “Equity Options Valuation, Trading and Practical Strategies” by H. Denning;
  
• statement of Mr Jungstedt dated 24 October, 2000 and supplementary statement dated 4 July, 2001;
  
• lodgement of securities by Mr Jones dated 25 September, 1996 and 20 August, 1997; and
  
• graph of results of options trading of Mr Jones from October, 1995 to 7 October, 1997 prepared by Mr Jungstedt.
  

3. Oral evidence was given by Mr Jungstedt in support of his case. In support of the case presented by the Commission, oral evidence was given by Mr Roberts, Ms Tinny, Ms Corbett, Mr Boltman, Mr Jones, Mr Mullally and Mr Murray.

THE ISSUES

4. There are two main issues in this case. The first, is whether a banning order may be made against Mr Jungstedt. In the context of this case, resolution of that issue requires determination of whether Mr Jungstedt was in breach of a securities law or whether there is reason to believe that Mr Jungstedt has not performed, or will not perform, efficiently, honestly and fairly the duties of a representative of an investment adviser. If the Commission may make a banning order, the next issue is whether a banning order should be made against Mr Jungstedt.

LEGISLATIVE BACKGROUND

Legislative changes

5. Since the Commission’s decision was made and Mr Jungstedt lodged his application for review, the Law has been repealed and the Corporations Act 2001 (“the Act”) enacted. Section 1400 of the Act applies in relation to a right or liability, whether civil or criminal, that was acquired, accrued or incurred under a provision of the Law and that was in existence immediately before the existence of the Act. This is called the “pre-commencement right or liability”. It does not extend to a right or liability made under a court order. On the commencement of the Act, the person acquires, accrues or incurs a right or liability, known as a “substituted right or liability”, equivalent to the pre-commencement right or liability. He or she does so under the corresponding provision of the new Corporations legislation which includes the Act (s. 1371(1)). Where the pre-commencement right or liability was acquired, accrued or incurred under a provision of the Law that has been repealed but the right or liability was in existence immediately before the commencement of the Act, the Act is taken to include the provision of among others, the Law (s. 1401). The referrals in these reasons will, therefore, be to the provisions of the Law as in force at the time the decision was made.

Regulation of participants in the securities industry

6. Chapter 7 of the Law deals with securities. It is divided into various parts, each of which deals with a separate aspect of the securities industry. Part 7.3 deals with the participants in the securities industry. So, for example, it requires that those who carry on a securities business (i.e. a dealer (s. 9)) or an investment advice business (i.e. an investment adviser (s. 9)) must be licensed as such.

7. A “securities business” is defined in s. 93 (s. 9) to mean “... a business dealing in securities”. What is meant by “securities” is defined in s. 92 (s. 9) to mean:

“(a) debentures, stocks or bonds issued or proposed to be issued by a government; or

(b) shares in, or debentures of, a body; or
(c) interests in a managed investment scheme; or

(ca) in Parts 7.3 to 7.6 (inclusive)—interests that would be interests in a managed investment scheme but for paragraph (h) of the definition of managed investment scheme in section 9; or

(d) units of such shares; or

(e) an option contract within the meaning of Chapter 7;

but does not include a futures contract or an excluded security.”

8. An “option contract within the meaning of Chapter 7” means:

“(a) a contract under which a party acquires from another party an option or right, exercisable at or before a specified time, to buy from, or to sell to, that other party a number of specified securities, or of a specified class of securities, being securities of a kind referred to in paragraph 92(1)(a), (b), (c) or (d), at a price specified in, or to be determined in accordance with, the contract; or

(b) a contract entered into on a stock market of a securities exchange or on an exempt stock market, being a contract under which a party to the contract acquires from another party to the contract an option or right, exercisable at or before a specified time:

(i) to buy from, or to sell to, that other party an amount of a specified foreign currency, or a quantity of a specified commodity, at a price specified in, or to be determined in accordance with, the contract; or

(ii) to be paid by that other party an amount of money to be determined by reference to the amount by which a specified number is greater or less than the number of a specified index, being the Australian Stock Exchanges All Ordinaries Price Index or a prescribed index, as at the time when the option or right is exercised.” (s. 9)

The expression, “investment advice business”, when used in relation to a person includes a reference to “a business of advising other persons about securities” (ss. 9 and 77(1)).

9. Chapter 7 sets out the obligations that licensing brings and the rights of those who deal with unlicensed dealers and investment advisers (Part 7.3, Divisions 1 and 2). A dealers licence and an investment advisers licence may both be referred to as a “securities licence” and a “securities licensee” as a person who holds one or other or both of the licences (s. 9).

10. Division 3 regulates representatives of dealers and investment advisers. A body corporate may not act as a representative (s. 809). A person may act as a representative of a dealer but only if the dealer holds a dealer’s licence and the representative holds a proper authority from the dealer (s. 806). He or she may act as a representative of an investment adviser but only if the investment adviser is either a dealer holding a dealer’s licence or holds an investment adviser’s licence and the representative holds a proper authority from the investment adviser (s. 807). A “proper authority” from the dealer or the investment adviser (i.e. the securities licensee) is a reference to a copy of the dealer or investment adviser’s licence on which is endorsed a statement certifying the copy to be a true copy, stating that the representative is employed by, or acts for or by arrangement with, the securities licensee and signed by the securities licensee (s. 88). Division 3 of the Law sets out the obligations of the licensed dealer or investment adviser in relation to those holding his or her proper authority and those of the representative.

11. Division 4 regulates the liability of licensed dealers and investment advisers for the conduct of their representatives while Division 5 provides for the exclusion of persons from the securities industry. Sections 824, 825, 825A and 826 of Division 5 provide for those circumstances in which the Commission may revoke a licence held by a dealer or an investment adviser. Subject to s. 837, the Commission may suspend a licence (s. 827(1)). In certain circumstances, the Commission may also issue a banning order under s. 828 if the dealer or investment adviser is a natural person.

12. Section 829 provides for those circumstances in which the Commission may make a banning order against a natural person who is not a licensed dealer or investment adviser but is a representative of a licensed dealer or of an investment adviser. Subject to s. 837 to which I will return, the Commission may make a banning order if:

“(a) he or she becomes an insolvent under administration;

(b) he or she is convicted of serious fraud;

(c) he or she becomes incapable, through mental or physical incapacity, of managing his or her affairs;

(d) he or she contravenes a securities law;
(e) the Commission has reason to believe that he or she is not of good fame and character;
(f) the Commission has reason to believe that he or she has not performed efficiently, honestly and fairly the duties of:

(i) a representative of a dealer; or

(ii) a representative of an investment adviser; or

(g) the Commission has reason to believe that he or she will not perform efficiently, honestly and fairly the duties of:

(i) a representative of a dealer; or

(ii) a representative of an investment adviser.” (s. 829)

13. In relation to s. 829(d), the word “contravene” is defined in s. 9 to include “... fail to comply with”. The expression “securities law” is defined to mean a provision of, among others, Chapter 7. The securities laws which are in question in this case are ss. 781 and 851 and both come within Chapter 7. At the time the banning order was made, s. 781 provided:

“ A person must not:

(a) carry on an investment advice business; or

(b) hold out that the person is an investment adviser;

unless the person is a licensee or an exempt investment adviser.”

Section 851 provided:

“(1) A securities adviser who:

(a) makes a securities recommendation to a person who may reasonably be expected to rely on it; and

(b) does not have a reasonable basis for making the recommendation to the person;

contravenes this section.

(2) For the purposes of subsection (1), a securities adviser does not have a reasonable basis for making a securities recommendation to a person unless:

(a) in order to ascertain that the recommendation is appropriate having regard to the information the securities adviser has about the person's investment objectives, financial situation and particular needs, the securities adviser has given such consideration to, and conducted such investigation of, the subject matter of the recommendation as is reasonable in all the circumstances; and
(b) the recommendation is based on that consideration and investigation.

(3) A person who contravenes subsection (1) is not guilty of an offence.”

The expression “securities recommendation” is defined in s. 9 to mean “... a recommendation with respect to securities or a class of securities, whether made expressly or by implication”.

14. Where the Commission decides to issue a banning order, it must do so by a written order. It may:

“... prohibit the person:

(a) in any case – permanently; or

(b) except where the Commission is empowered by virtue of paragraph 828(c) or 829(e) to make the order – for a specified period;

from doing an act as:

(c) a representative of a dealer;
(d) a representative of an investment adviser; or
(e) a representative of a dealer or of an investment adviser;

whichever the order specifies.” (s. 830(1))

15. Whether the banning order is made permanently or for a specified period, it may include a provision that:

“... permits the person, subject to such conditions (if any) as are specified, to do, or to do in specified circumstances, specified acts that the order would otherwise prohibit the person from doing.” (s. 831(1))

16. Subject to s. 837, the Commission may, at any time, vary a banning order against a person by, among other matters, adding a provision permitting a person to undertake specified acts as set out in s. 831(1) (s. 831(2)).

17. The only other way in which the Commission may vary or revoke a banning order is in accordance with ss. 832 and 833 (s. 830(2)). It may not grant a dealer’s licence or an investment adviser’s licence to a person if a banning order prohibits that person from doing an act as a representative of a dealer or of an investment adviser (s. 836).

18. Section 837 requires the Commission to comply with certain procedures before it may make orders or take steps specified in s. 837(1). Of relevance in this case is the requirement that:

“The Commission shall not:

...

(e) make, otherwise than by virtue of paragraph ... 829(a), (b) or (c), an order under section 830 against a person;

...

unless the Commission complies with subsection (2) of this section.” (s. 837(1)(e))

Section 837(2) provides that:

“The Commission shall give the applicant, licensee or person, as the case may be, an opportunity:

(a) to appear at a hearing before the Commission that takes place in private; and
(b) to make submissions and give evidence to the Commission in relation to the matter.”

FACTUAL BACKGROUND

19. The findings set out in the following paragraphs are, in the main, drawn from the booklets entitled “Understanding Options Trading” (Exhibit 12) and “Understanding Options Strategies” (Exhibit G) and the extract from the book entitled “Equity Options; Valuation, Trading and Practical Strategies” by Hugh Denning Ph. D (Exhibit H) as well as from the oral evidence of Mr Jungstedt and Mr Murray. They set out a very basic outline of option contracts and option strategies in relation to shares.

Options contracts

20. In general terms, an option is an agreement giving a person (“the optionee”) the right, for a limited time, to accept an offer. That offer may, for example, be to buy or sell property. The optionee gains the right by giving the person giving the option (“the optionor”) some form of consideration. The optionee is not bound to exercise the option.

21. When transposed to the share market, an option is the same. It is a contract giving the optionee the right to buy or sell a parcel of shares for a specified price and within a certain time if he or she chooses to do so. The optionee gives consideration to the optionor. Options are promoted as a form investment available to individuals. They are promoted as providing shareholders with protection for the share portfolio and the opportunity to make a profit and income. At the same time, options involve risk for investors.

22. Trading of options in shares occurs on the Australian Options Market (“AOM”), which is a wholly owned subsidiary of the ASX, and is governed by the ASX Rules. A person wishing to invest in options must abide by those ASX Rules but he or she is not a party to the option contract. Certain members of the ASX have been cleared as Clearing Members under the ASX Rules. Clearing Members enter into option contracts on behalf of their clients and accept responsibilities as principals under the contract as well as to the Options Clearing House Pty Limited (“OCH”), which is a wholly owned subsidiary of the ASX.

23. The ASX Rules have certain requirements that must be met in relation to share options and those engaged in them have developed a language of their own. In the context of share options, for example, the optionee is more generally known as a “taker” in the sense that the optionee is the person taking up the right given by the option contract. The optionor is more generally known as the “writer” because he or she is the person underwriting the obligation that must be fulfilled should the optionee choose to exercise the option i.e. the obligation either to deliver the shares if the option is to purchase shares or to accept shares if the option is to sell. If an option gives the taker the choice of buying shares, it is called a “call option” or a “call”. If it gives the taker the choice of selling shares, it is called a “put option” or a “put”. If an option gives the taker the choice of either buying or selling shares, it is called a “straddle”.

24. An option contract may be entered whether or not the shares are owned by one of the parties to the contract. If they are not owned, then the option is described as either a “naked call option” or a “naked put option”. Where there is a naked call option or a naked put option, the writer in the case of the call option and the taker in the case of the naked put option will be obliged to cover the option with the equivalent amount in cash or another acceptable cover. Cash or cover is known as “margins”. If the underlying shares are owned, the option is described as being “scrip-covered”.

25. Whether a call or a put, an option may be bought or sold. If it is bought, an investor is said to be “long an instrument” and so have either a “long call” or a “long put” depending on whether he or she has sold an option to buy or an option to sell. If it is sold, an investor is said to be “short an instrument” and so has either a “short call” or a “short put” as the case may be.

26. Although shares that are the subject of options contracts must be listed on the ASX and must meet with its reporting requirements, only those shares that are selected by OCH may be the subject of options. The companies issuing shares do not participate in their selection. If shares are to be selected, there must be a large base of ownership in those shares and they must be actively traded. Once selected, they are known as “underlying securities” or “underlying shares”. I will refer to them generically as underlying shares. An options contract must relate to a parcel of shares and, according to the ASX Rules must comprise a minimum of 1,000 shares.

27. The exercise price is also known as the strike price. It is a price pre-determined by the OCH as the buying or selling price for the underlying shares should the taker exercise his or her option. Generally, the OCH sets an exercise price at or about the then prevailing price at which the underlying share is being traded and another two above and another two below that prevailing price. The exercise prices are set at 10, 25 and 50 cent intervals for shares with a prevailing price up to $1.00 and between $1.01 and $5.00 and $5.01 and $10.00 respectively and at $1.00 intervals for those shares priced $10.01 and above. Those persons entering an options contract may choose one of these prices as the exercise price best meeting their expectations of how the share price will move during the term of the option contract. As the OCH sets the exercise price at fixed intervals, it may be adjusted during the life of the option as the underlying share price varies or if there is a bonus or rights issue.

28. Options contracts are for a fixed period of time but the length of that time may vary. The date on which all unexercised options in a particular option expire is known as the “expiry date”. The expiry date for all stock options is the last Friday of the expiry month, provided that it is a business day. That expiry month may occur at the end of a quarterly cycle or, in relation to some stocks, at the end of a three year period. In relation to some stocks, the current month is available. Options must be exercised by 5.00pm on the last trading day but can be exercised at any time from the purchase until the date of the expiry. Trading in each series of stock options ceases at the close of trading on the last business day prior to the expiry date.

29. The standardisation of the size of each parcel of shares, the exercise price and the expiry date all facilitate the trading of options. The only variable in relation to each option contract is the price paid by each taker to each writer in exchange for the right to choose to exercise his or her option and so to choose to buy or sell shares according to whether it is a call option or a put option. The price is known as the “premium”. Its amount is negotiated between the taker and the writer. The taker pays the premium to the writer who keeps it whether the taker decides to exercise his or her option or not. The taker’s maximum risk is the amount of the premium should he or she decide not to exercise the option. The writer’s potential maximum income will be the premium.

30. The amount of the premium is influenced by a range of factors including the price of the underlying share and the time left until the expiration of the option. Consequently, the premium changes during the life of the option as the price of the underlying shares moves and/or as the time remaining in the life of the option reduces. The premium can be regarded as being comprised of what is called its “intrinsic value” and its “time value”. The intrinsic value is the difference between the exercise price of the option and the then prevailing market price of the underlying shares.

31. If, for example, the exercise price of a call option is 25 cents below the prevailing market price of a share, it has an intrinsic value of 25 cents because the taker has the right to purchase shares at a price 25 cents below the price he or she would otherwise have to pay on the market. The option is said to be “in-the-money” because, if the taker were to exercise the option and then sell the shares at the prevailing market price, he or she would make a profit less the premium paid for the option. If the exercise price of a call option is 25 cents above the market price, the option has no intrinsic value and is said to be “out-of-the money”. If the exercise price and the market price are the same, the option is said to be “at-the-money”.

32. A put option works in the opposite way to a call option. If the exercise price of a put option is above the prevailing market price, it is said to be “in-the-money” and has an intrinsic value. That is because the taker of the option may sell the shares for a price higher than that which he or she could obtain on the market at the time. A put option is “out-of-the money” when the exercise price is below the market price as the taker of the option will not choose to exercise the option to sell at the exercise price when he or she could choose to sell for a higher price on the market.

33. The time value represents what a person is prepared to pay for the potential for profit in the future, should the market move in his or her favour. Factors that affect the time value include the share price, the option strike price, the time left until the expiration of the option contract, volatility of the market in relation to the share price, interest rates expected during the life of the option, dividend payments and how the person views the future activity of the market. In so far as time is concerned, the greater the time left until expiry, then the greater will be the chance that the option will become profitable through a favourable move in the share price. That translates into the option’s having a greater time value and so its premium will be greater. As the length of time until the expiration of the option decreases, the opportunities for it to become valuable decrease and so its time value decreases. Time value does not decrease at a constant rate throughout the life of an option as the rate of decrease increases as the expiration date draws closer.

34. In so far as the volatility of the market is concerned, the greater the volatility, the higher will be the premiums. That follows from the fact that the greater the volatility, the greater the probability that the writer will be exposed to incurring a loss and the writer will want to compensate for that greater risk with a higher premium. Interest rates will have a greater effect on long term options than shorter terms. In general terms, if interest rates are higher that factor tends to increase the premium paid for a call option and to decrease that paid for a put option. The payment of dividends tends to lower call option premiums because, once a dividend is paid, the price of shares tend to fall in price. The same reason means that put option premiums are raised once a dividend is paid. Market expectations relate to supply and demand and the stronger the demand, the higher the premium while the weaker the demand the lower the premium.

35. Once a taker and a writer have reached an agreement and entered an option contract, that contract is registered with the OCH, which is responsible for registering all options traded on the AOM. Entering an option contract is known as “opening a position”. A person opens a position by placing an order with a Member Organisation of an Exchange who has been admitted as a Clearing Member in accordance with the ASX’s Stock Option Trading Rules (“a Clearing Member”). The investor who opens a position pays a commission to the Clearing Member and the amount of that commission is subject to negotiation between the two of them. He or she also pays a registration fee to the OCH.

36. If a taker wishes to exercise his or her option, he or she notifies the Clearing Member to that effect. The Clearing Member then informs OCH of the taker’s intention to exercise the option. The OCH selects a writer in the same series of options and does so at random. The writer so selected must meet the obligation.

37. A taker may choose not to exercise the option at all but may choose to let the option lapse. He or she does that by letting the exercise date pass without exercising the option. A taker can “close out the option” by writing an option in the same series of options and instructing the Clearing Member to “close out” the position. So, for example, if a person took a call option as an opening transaction, he or she could close out his or her right to exercise that option by writing an identical call option to another person. That is to say, the taker has matched his or her existing position by opening the opposite position.

38. If an option is not exercised, a writer of an option has no obligation either to sell or buy shares as the option contract may require. A writer may also “close out” an option prior to its being exercised. He or she may do so by taking the identical option contract with another party. The practical effect of closing out is to cancel the open positions.

Documentation

39. When a trade is completed, the Clearing Member provides a contract note to the investor. That contract note sets out details of the transaction, such as the type of trade and whether it is an opening or a closing transaction, and its costs. An investor must pay any amount that is due on his or her transaction to the Clearing Member and must do so within the time limits set by the ASX Rules. Therefore, a cash covered writer must do so within 24 hours and an option taker must do so within 48 hours.

40. Each month, the Clearing Member generally sends each client a document outlining that client’s transactions and other items entered on his or her account during a calendar month. If requested by the client, the Clearing Member sends him or her a monthly report detailing all contracts then open and their market value at that time. If an investor is inactive, the document, known as an “Open Position Statement”, is sent quarterly.

41. Two weeks before the expiry of an option, the Clearing Member sends his or her client a statement setting out that option’s details.

Options strategies

42. There are a number of ways, or strategies, in which options may be used in an attempt to maximise the profit and income that may be derived from trading in options. Those strategies take into account such factors as the time remaining until the expiry of the option, the expected movement, if any, in the share price of the underlying shares, whether that movement is likely to be up or down and the level of risk that is acceptable to the particular investor engaging in the strategy. Each strategy comprises two or more “legs” i.e. either buying or selling a call(s) and/or a put(s). If an investor decides to separate the legs and enter them at different times rather than at the same time in a single trade, he or she is said to “leg into the strategy”. If an investor decides to reverse a strategy, he or she is said to “unwind” it. He or she does that by buying what he or she has previously sold and selling what he or she has previously bought.

43. The following are examples of strategies that are used in options trading:

Long straddle

A long straddle comprises a long call and a long put, both of which have the same strike price. No margins are required to be paid as the investor may only have an obligation to meet if he or she chooses to exercise one or other of the options or both of them.

The strategy is used when an investor expects a sharp movement in the share price of the underlying shares but the direction of that movement is uncertain.

The optimum time to establish the strategy is when the strike price is at or near the prevailing market price.

An investor will break even at expiry if the share price moves to a level either strike price plus the premium paid for the long call and the long put or the strike price less that premium i.e. the “break-even price”. That comes about because the gain that can be made on one leg will cancel out the loss made on the other at that point.

If the share price moves below or above that break-even price, the potential profit that can be made by an investor increases accordingly. If the share price has risen, that profit may be realised by exercising the long call and selling the purchased shares at the higher price. If it has fallen, it may be realised by selling the shares already held at the strike price that is higher than the then market price. If the profit from one leg is realised, the other leg could be held open to expiry date in case the share price should move in the opposite direction.

The potential loss that can be incurred by an investor is limited to the cost of the premium.

Considerations that should be taken into account in purchasing a long straddle or in leaving it in place include:

• the longer that a long straddle is left in place, the greater is the loss due to time delay; and
  
• the cost of the strategy must be balanced against the time needed to give the market the greatest opportunity to move as the investor expects. The more distant the expiry month of the option, the greater will be its purchase price.
  

Short straddle

A short straddle comprises a short call and a short price, both of which have the same strike price. Unless the underlying shares are already held, margins must be paid as an investor will be required to sell the underlying shares should the short call be exercised. They must also be paid in relation to the short put for an investor would be required to purchase shares should short put be exercised.

The strategy is used when an investor expects that there will be little movement in the share price of the underlying shares.

The optimum time to establish the strategy is when the strike price is at or near the prevailing market price.

An investor will break even at the expiry of the strategy if the share price moves to a level equivalent to the strike price plus or minus the amount of the premium received by the investor when selling the call and the put.

The maximum profit that an investor can make from the strategy occurs if the market price remains at the strike price and that profit is the premium he or she received for the sale of the call and the put. The amount of the profit reduces as the market price rises or falls to the strike price plus or minus the premium.

The loss that can be incurred by an investor is potentially unlimited if the share price moves beyond the break even points.

Considerations that should be taken into account in purchasing a short straddle or in leaving it in place include:

• time decay assists the strategy;
  
  • unless the market price remains at the strike price precisely, there is a risk that one or other of the options will be exercised before their expiry. That risk follows from the fact that, if there is any movement from that strike price, one or other of the options will be in-the-money and the person purchasing that option may want to take advantage of it. If, for example, the market price rises above the strike price, the short call will be in-the-money and may be exercised. At the same time, the short put will be out-of-the-money; and
    
  • an investor may choose to limit his or her potential losses by taking a put and call option with out-of-the-money strike prices. If there is an adverse movement in the market price of the underlying shares, an investor may choose to close out one or both legs of the straddle.
    

Short strangle

A short strangle comprises a short call at strike price y and a short put at strike price x where x is lower than y. Margins must be paid.

The strategy is used when an investor expects that there will be little movement in the share price of the underlying shares and the investor considers that options are overpriced.

The optimum time to establish the strategy is when the strike price is between the two strike prices.

An investor will break even at the expiry of the strategy if the share price either moves to a level equivalent to strike price y plus the amount of the premium received by the investor when selling the call or the strike price x minus the amount of the premium received when selling the put.

The maximum profit that an investor can make from the strategy occurs if the market price remains between the two strike prices and that profit is the premium he or she received for the sale of the call and the put. The amount of the profit reduces as the market price rises or falls to the strike price plus or minus the premium.

The loss that can be incurred by an investor is potentially unlimited if the share price moves beyond the break even points.

Considerations that should be taken into account in purchasing a short strangle or in leaving it in place include:

• time decay assists the strategy;
  
• unless the market price remains between the two strike prices, there is a risk that one or other of the options will be exercised before their expiry. That risk follows from the fact that, if there is any movement from that range, one or other of the options will be in-the-money and the person purchasing that option may want to take advantage of it. If, for example, the market price rises above the strike price, the short call will be in-the-money and may be exercised. At the same time, the short put will be out-of-the-money. There is, however, a lower risk of exercise than in the case of a short straddle; and
  
• an investor may choose to limit his or her potential losses by taking a put and call option with strike prices that are further out-of-the-money than the original. If there is an adverse movement in the market price of the underlying shares, an investor may choose to close out one or both legs of the short strangle.
  

Bull spread

A bull spread comprises a long call at one strike price (x) and a short call at another strike price (y). Strike price x is lower than strike price y. No margins are required to be paid.

The strategy is used when an investor expects the share price to rise moderately.

The strategy is undertaken when the market price is in the vicinity of the lower strike price x.

An investor will break even at the expiry of the strategy if the market price is at a point equal to the lower strike price plus the cost of the strategy.

The maximum profit that an investor can make is the difference between the two strike prices less the premium paid for the strategy. That occurs when the market price is at or above the strike price of the sold option at expiry.

If the market price falls to or below the lower strike price, an investor loses the premium he or she paid for the strategy and that represents his or her maximum loss.

Considerations that should be taken into account in purchasing a bull spread or in leaving it in place include:

• if the market price of the underlying share rises quickly and reaches a point above the strike price of the short call, the strategy is often unwound to avoid the risk of an early exercise of that short call; and
  
• the bull spread is a cheaper strategy than buying a call option but the commission costs on entering it are greater than for a call option.
  

Bull put spread

A bull spread may be constructed in the same way as a bull spread but with a long put at the lower strike price (x) and a short put at the higher strike price (y). Margins are required as the potential obligation incurred by an investor if the short put is exercised at the higher strike price y is not covered if he or she were to exercise the long put at the lower strike price x.

The strategy is used when an investor considers that options are overpriced.

The strategy is undertaken when the strike price for the short put is at or near the market price.

The maximum profit is the premium received when the strategy is established.

The maximum loss is the difference between the two strike prices less the premium received.

Considerations that should be taken into account in purchasing a bull put spread or in leaving it in place include:

• the risk of exercise on the short put is great if the market price falls below strike price y.
  

Bear spread

A bear spread comprises a short put at one strike price (x) and a long put at another strike price (y). Strike price x is lower than strike price y. No margins are required to be paid.

The strategy is used when an investor expects a moderate fall in the market but is not prepared to pay to take a put outright.

The strategy is established when the market price is at or near the upper strike price y.

An investor will break even when the share price moves to a level that is equivalent to the upper strike price less the cost of the strategy.

The maximum profit that can be earned is the difference between the two strike prices less the premium paid for the strategy. It is earned when the share price falls to the strike price of the short put or below.

The potential loss is limited to the cost of the strategy. The maximum loss occurs if the market price is at or exceeds the strike price y of the long put.

Considerations that should be taken into account in purchasing a bear spread or in leaving it in place include:

• the strategy costs less than the purchase of a put option but care must be taken to ensure that the cost of the strategy together with the commission paid on entering and exiting it is justified by the potential profit; and
  
• if the stock falls sharply and beyond the lower strike price x, it is advisable to exit it in order to avoid the exercise of short put.
  

Bear call spread

The bear spread may be constructed using calls instead of puts. The strategy is constructed with a short call at the lower strike price (x) and a higher strike price (y). Margins are payable as with a bull put spread.

The strategy is used when options are regarded as overpriced.

The strategy is generally established when the market price is at or near the strike price of the short call. As the long call has a strike price above that of the short call, an investor’s losses are limited to the difference between the two strike prices less the premium he or she received.

Considerations that should be taken into account in purchasing a bear call spread or in leaving it in place include:

• there is an increased risk of exercise as the short call is at the lower strike price and is usually written at the money.
  

Covered write

A covered write is adopted in a situation in which an investor owns the underlying shares and sells a call at a strike price usually around the prevailing market price. No margins are payable as the investor can meet his or her obligation from the shares already owned should the call option be exercised.

The strategy is used when an investor expects that the market price of the underlying shares will remain flat. It is used to generate income while providing some protection should the market price unexpectedly fall.

The break even point occurs if the market price of the underlying shares at the expiry of the option equates to their market price at the time the option is written less the premium earned on the sale of the option.

The maximum profit that can be made is the premium earned on the sale of the call.

The potential to incur a loss is unlimited whether the market price of the underlying share rises above the strike price or below. In the case of the former, a rise in the market price above the strike price would lead to the likely exercise of the option. The investor must fulfil his or her obligation to sell the shares and may not choose to sell them on the market at the prevailing higher market price. His or her loss is a loss of what could potentially have been earned. If the market price falls below the strike price, an investor incurs the same potential loss that he or she would incur regardless of whether or not he or she had sold a call. The loss is not realised unless, like any investor, the investor chooses to sell the underlying shares on a falling market. When he or she has sold a call, the premium he or she received provides some buffer against the loss.

Considerations that should be taken into account in purchasing a bear call spread or in leaving it in place include:

• an investor must remember that the option may be exercised at any time and so must be content to sell the underlying shares at the strike price;
  
• the premium to be received must be balanced against the possibility that the option will be exercised. If the option is in-the-money at the time they are written, the investor will receive a higher premium but will be at a greater risk of the option’s being exercised. The strike price must be chosen carefully taking into account the investor’s assessment of whether the market price of the underlying share is likely to rise, fall or remain stable; and
  
• if the expiry of the option is approaching and there is concern that it will be exercised, an investor who does not want to sell the underlying shares may choose to close out the position and roll it out to the next expiry date.
  

Calendar spread

A calendar spread comprises a short call, which is near expiry, and a long call with a far expiry. Both have the same strike price. Margins are not payable.

The strategy is used when the outlook is neutral both in relation to the market and the price of the underlying share.

The optimum time to establish the strategy is when the market price of the underlying share is around the strike price.

The break even points cannot be determined in advance as it is not possible to value the long option precisely at entry; it may only be estimated.

The maximum profit will be realised if the share price is at the strike price of the options at the first expiry. At that time, the short call will not be exercised against the investor and the long call will have the most time value remaining.

The maximum loss possible is the cost of the strategy and that will be incurred if the long call has very little time value left at expiry i.e. the market price of the underlying share has either risen or fallen greatly.

Considerations that should be taken into account in purchasing a bear call spread or in leaving it in place include:

• if the market price of the underlying shares rises, both legs come into-the-money and this will mean that there is a risk that the short call will be exercised. The long leg acts as a hedge but a decision must be made as to whether it should be used in that way or whether the position should be closed out to avoid exercise;
  
• if an investor expects the market to rise but only after the expiry of the short call, the calendar spread effectively gives an investor a long call but at a cheaper price than if he or she had taken a call outright in the first place; and
  
• if the market price of the underlying shares falls unexpectedly, the investor may choose to close the strategy before the long call loses all time value or to leave it in place in the hope that the market price increases and the long call improves in value.
  

Long butterfly

A long butterfly comprises a long call at strike price (x), two short calls at strike price (y) and a long call at strike price (z). Strike price x is the lowest and strike price z the highest. Margins are payable to meet the investor’s obligations should the short calls be exercised.

The strategy is used when an investor believes that the market is stagnating but does not want to expose him or her self to an unexpected rise or fall in the market.

The optimum time to establish the strategy when the market price of the underlying shares is at or near the central strike price (y).

The break even points occur when the market price of the underlying share equates with the strike price x plus the cost of the strategy and when it equates with the strike price z less the cost of the strategy.

The maximum profit that can be made is the central strike price (y) less the lower strike price (x) and the cost of the strategy.

The loss potential is limited to the cost of the strategy.

Considerations that should be taken into account in purchasing a bear call spread or in leaving it in place include:

• the long butterfly can be difficult to place in all but the most liquid shares. This arises from the fact that the long calls are made at the lowest and highest strike prices and will be out-of-the-money. There will be few on offer and, if available, can be costly. For the same reasons, they may be costly to trade out of;
  
• if the share price remains steady, the strategy may be left open until close to expiry;
  
• if the market price of the underlying share moves sharply up, an investor may consider liquidating the strategy in order to avoid the short calls’ being exercised; and
  
• if the market price of the underlying share moves sharply down, an investor may close out in order to salvage some time value from the taken legs of the strategy.
  

Synthetic strategies

There may be alternate ways to establish any strategy and to achieve the same results. These are known as synthetic strategies.

Factors that must be taken into account include the transaction charges when entering and exiting the strategy, the costs and benefits of share ownership and the availability of options in the series.

The six basic synthetic strategies are:

• long stock, long put = long call;
  
• long stock, short call = short put;
  
• short stock, short put = short call;
  
• short put, long call = long stock;
  
• long call, short stock = long put; and
  
• short call, long put = short stock.
  

Examples of synthetic alternatives to a long butterfly are:

• long put x, short two puts y, long put z;
  
• long put x, short put y, short call y, long call z; and
  
• long call x, short call y, short put y, long put z.
  

Aspects of the ASX Rules

44. The ASX’s Rules cover a range of matters relating to the transaction of business on the ASX and are updated from time to time. They include rules governing aspects of the relationship between a broker and his or her client. Among them is a rule headed “Suitability of transaction for clients”, which relates to trading in options. It has been amended during the period covered by the various transactions under consideration in this case. With effect from 13 February, 1995, the rule was numbered 7.1.19 and read:

“(a) No Clearing Member, officer or employee thereof shall recommend to any client that the Clearing Member should enter into an Exchange Transaction on behalf of the client unless that person has reasonable grounds to believe that the entire recommended transaction is not unsuitable for the client on the basis of information furnished by the client after reasonable inquiry concerning the client’s investment objectives, financial situation and needs, and any other information known by such Clearing Member, officer or employee.

(b) Without limiting the generality of paragraph (a), in forming a belief as to whether an Exchange Transaction is not unsuitable for the client, the Clearing Member shall have regard to whether the client, at the time of the transaction, is capable of evaluating the risks of such transactions and has the financial capability to meet foreseeable margin calls in respect of the Option.”

45. With effect from 2 December, 1996, ASX Rule 7.1.19 was re-numbered as Rule 7.3.1A. and re-written as follows:

“7.3.1A.1 Recommendation about Exchange Transactions

A Participant must not recommend an Exchange Transaction to a person who may reasonably be expected to rely on it if the Participant does not have a reasonable basis for making the recommendation to that person.

7.3.1A.2 Reasonable basis

For the purposes of Rule 7.3.1A.1, a Participant does not have a reasonable basis for recommending an Exchange Transaction to a person unless:

(a) the Participant has given such consideration to, and conducted such investigation of, the subject matter of the recommendation as is reasonable in all the circumstances to ascertain that the recommendation is appropriate having regard to the information the Participant has about the person’s investment objectives, financial situation and particular needs; and

(b) the recommendation is based on that consideration and investigation.”

46. The ASX Rules also deal with discretionary accounts. In the version that came into effect as at 13 February, 1995, the subject is dealt with in Rule 7.1.20 and read:

“(a) Authorisation and Approval

No Clearing Member and no partner, director, officer or employee of a Clearing Member shall exercise any discretionary power with respect to trading in Options in a client’s account, or accept orders for Options for an account from a person other than the client except and until the following conditions have been complied with:

(i) Written authorisation of the client shall specifically authorise options trading in the account;
(ii) The account shall have been accepted by a partner in or a direction of the Member Organisation who is a Registered Options Principal; and
(iii) The person approving all such orders with respect to Exchange Transactions in such account shall be a Registered Options Principal.

In the case of a branch office such discretionary orders may be approved and initialed (sic) on the Trading Day entered by the branch office manager, provided that such approval shall be confirmed within a reasonable time by a partner in or a director of the Clearing Member who is a Registered Options Principal. The provisions of this paragraph shall not apply to discretion as to the price at which or the time when an order given by a client for the taking or writing of a definite number of Options in specified Underlying Securities shall be executed.

(b) Prohibited Transactions

No Clearing Member and no partner, director, officer or employee of a Clearing Member having discretionary power over a client’s account shall, in the exercise of such discretion, execute or cause to be executed therein any transaction which is excessive in size or frequency in view of the financial resources in such account.

(c) Record of Transactions

A record shall be made of every transaction in Options in respect to which a Clearing Member or a partner, director, officer or employee of a Clearing Member has exercised discretionary authority, clearly reflecting such fact and indicating the name of the client, the designation and number of the Options, the premium and the date and time when such transaction was effected.”

47. Discretionary accounts were dealt with in Rule 7.3.4 in the ASX Rules that came into effect from 2 December, 1996. Unlike the earlier version of the rules, the expression “discretionary account” was defined to mean:

“... an account established and maintained by a Participant for a client on instructions authorising the Participant to enter into Exchange Transactions without the prior approval of the client (other than an account in respect of which the Participant has instructions authorising the Participant to enter into Exchange Transaction without the prior approval of that client only as to time when, or the price at which, the Exchange Transactions are to be effected, or both).”

It read:

“7.3.4.1 Authorisation and approval

A Participant may only manage or operate a Discretionary Account for a client if:

(a) the client has given the Participant written authorisation to mange or operate a Discretionary Account setting out the terms and conditions under which the Participant must operate that account; and
(b) a Senior Representative of the Participant approves all orders to enter into Exchange Transactions in the account prior to the execution of those orders.

The Participant must maintain a register which complies with Rule 3.4.4.

7.3.4.2 Excessive transactions in Discretionary Account

A Participant must not enter into Exchange Transactions on a Discretionary Account in a size or frequency, that may be considered excessive having regard to financial resources of the account and the Market.

7.3.4.3 Record of Exchange Transactions

In the register maintained for the purposes of Rule 3.4.4, a Participant must make and retain a record of every Exchange Transaction in respect of which the Participant has exercised discretionary authority. The record must clearly reflect the discretionary nature of the transaction and indicate the name of the Authorised Operator, the name of the client, the number of Options, the Premium and the date and time of the Exchange Transaction.”

Mr Jungstedt

48. A number of facts forming the background to the issues in dispute were not in dispute between the parties. In view of that and on the basis of the evidence, I have made a number of findings of fact that I will set out in the following paragraphs.

49. Mr Jungstedt, who is 43 years of age, has been an options broker in Stockholm (1985-1989), London (1989-1991) and Melbourne (1994-1998). As an options broker in Melbourne, Mr Jungstedt has held proper authorities from:

• McKinley Wilson Pty Ltd from 21 July, 1994 to 3 February, 1995;
• William Noall Limited (“Noalls”) from 6 February, 1995 to 2 July, 1996;
• William Noall Private Asset Management Limited from 26 June, 1995 to 2 July, 1996; and
• Epic, which is a broking firm, from 21 June, 1996 to 15 January, 1999.

(T documents, pages 1403-1404)

50. Mr Jungstedt has not worked as a broker since the end of 1998. After a period of six months when he was unemployed, he worked with the ASX as a Senior Market Development Executive – Derivatives. In that position, he did not effect any trading but worked in areas related to public education and the development of better systems for the industry. After leaving that position and leaving Melbourne, Mr Jungstedt has been employed on a casual basis to undertake bookkeeping and associated duties for a landscaping business in Perth. He works for an average of between 10 and 20 hours each week.

51. While at Noalls, Mr Jungstedt used a strategy that had been developed in that firm and that was known as the Volatility Trading System (“VTS”). VTS was a computer program which calculated potential profits and losses on a sold strangle with protection. Such a strategy is a computer program which calculated potential profits and losses on a sold strangle with protection otherwise known as “a condor”. The two extra legs were bought to contain potential losses from the two sold legs in the event of there being a higher than expected share volatility. The program used data including the current share price and historical share volatility to calculate the potential outcomes based on different possible strike prices and actual premiums for put and call options in the share concerned. Until 1997, the VTS worked very well overall. In the second half of 1997, the stock market experienced increased volatility and the VTS was far less successful in that market.

Epic Securities Limited

52. Epic was a broking firm which ceased trading in options in December, 1998. Mr Dunphy and Mr Jungstedt both worked for Epic before it ceased trading. Mr Dunphy later worked for Colonial Stockbroking Limited (“Colonial”).

Mr Jungstedt’s clients

53. Five of Mr Jungstedt’s clients were at the centre of attention in this case: Ms Tinney, Mr Roberts, Mr Jones, Circle Jay and Ms Corbett. Each first became one of his clients when he was with Noalls and remained with him when he went to Epic. The following is a brief summary of the background of each of them:

Mrs Eve Mary Corbett

At the time of the hearing, Mrs Corbett was 62 years of age. For many years, she and her husband, Mr Maxwell Corbett, farmed a property at Gunnedah.

Mr and Mrs Corbett started a business and together they are directors of Agrahire (Gunnedah) Pty Ltd (“Agrahire”). They have been since 14 August, 1990. Agrahire is managed and operated by their son, Mr Jamie Corbett, who also owns one third of the company. Mrs Corbett keeps a list of Agrahire’s debtors and sends them a monthly account as well as a monthly profit and loss statement. Each month, she prepares and sends a set of accounts to Agrahire’s accountant.

Mrs Corbett seeks professional advice for her financial affairs from Mr Scott Hill of R.W. Waghorn & Sons, which is a firm of chartered accountants in Gunnedah.

In 1992, Mrs Corbett inherited shares and a one half share in a residential house situated in South Yarra from her late mother. She bought the remaining half share in the house from her sister and did so in approximately 1993. She arranged for her husband to become a joint owner of the house with her.

In about 1993 or 1994, Mrs Corbett was introduced to Mr Jungstedt through her daughter who was an old school friend of Mr Jungstedt’s wife, Mrs Madeleine Jungstedt. Mrs Corbett understood from various social conversations with Mr Jungstedt, Mrs Jungstedt and with her daughter that Mr Jungstedt was a stockbroker and that he had worked for a stockbroking firm in London.

In 1996, Mrs Corbett owned the house in South Yarra, property in Gunnedah including the matrimonial home that she owned jointly with her husband and her interest in Agrahire. Agrahire owed a debt of approximately $200,000 to a bank or finance company. In addition, she owned shares in the following companies: CSR Limited (“CSR”) (303 shares); MIM Holdings Limited (“MIM”) (995), WMC (2,543); Broken Hill Proprietary Limited (“BHP”) (1,553); CRA (1,049) and Howard Smith (1,466). At that time, the shares were worth in the order of $45,000 (transcript, page 153).

Mr Murray John Roberts

Mr Roberts was 43 years of age when he signed his statement dated 28 July, 1999 (T documents, pages 1306-1326). He completed Year 11 of secondary education and was employed for 21 years as an engineer with Australian Airlines. He took a redundancy package in May, 1993 and gained employment in July, 1997 as a customer service representative with the National Australia Bank (“NAB”).

In order to enhance his income after May, 1993, Mr Roberts traded in options on the advice of a broker, Mr Alan Balding at Johnson Taylor and then FW Holst & Co Pty Ltd. He owned shares in Fosters Brewing, BHP, Qantas Airways Limited (“QAN”), Gold Mines of Kalgoorlie and Poseidon Gold. He sold call options against his shares and sold put options against his cash funds. For each of three years, he made a profit of approximately $20,000 from his options trading.

Mr Roberts had hoped to gain employment with a stockbroking firm.

In August, 1996 when he began trading with Epic, Mr Roberts and his wife jointly owned their home and Mr Roberts had cash totalling $2,731 and the following shares: BHP (5,500 shares); QAN (8,692), WMC (1,000), Poseidon Gold (7,000), Fosters Brewing (12,600) and CML (10,000). He also had approximately $8,000 invested in open option positions. Mr Roberts and his wife each had their own superannuation schemes and together they owned a 15 year old motor vehicle.

Mr Colin Boltman

At the time of the hearing, Mr Boltman was 78 years of age. He has been admitted to practice as a barrister and solicitor since 1 October, 1953 and still holds the position of Consultant to his former firm.

In the early 1990s, he commenced share trading with Mr Peter Chapman, the managing director of Noalls.

Mr John Percy Jones

Mr Jones, who was 68 years of age at the time of the hearing, left school after completing his Leaving Certificate (i.e. year 11). He has spent his working life as a farmer on a small property in north eastern Victoria. He is married and has a son studying at University. Mr Jones and his wife are directors of a family company, Circle Jay and Mr Jones is now a semi-retired farmer.

Mr Jones has always relied on professional advice in his day to day business affairs. His business affairs are managed by Mr Stuart Stockdale, a chartered accountant. A bookkeeper prepares Mr Jones’ records for Mr Stockdale.

Mrs Dorothy Anne Blackwood Tinney

Mrs Tinney was 49 years of age when she made a statement to the Commission on 20 July, 1999. She had one partly-dependent daughter, Ms Amber Louise Tinney, who was studying at University. Mrs Tinney is an artist who also holds qualifications as a nurse’s aide and as a masseuse. She left school after completing the Leaving Certificate.

Mrs Tinney was given 25 BHP shares for her 16th birthday. In the late 1980s, her father gave her an interest free loan. She invested that sum in fixed interest accounts and the interest she received meant that she had no need to work and could care for her ailing parents. In the early 1990s, falling interest rates saw a reduction in her income and she sought advice from Mr Don Werner, her father’s share broker at Noalls, as to whether shares would give her an alternate source of income. Adopting Mr Werner’s advice, she used the loan to purchase shares. At about the same time, her father gave her some shares on the basis of an interest free loan. In 1993, she inherited half of her father’s estate, which included a share portfolio and a margin equity loan with Bankers Trust.

Mrs Tinney would occasionally sell or purchase shares. With Mr Werner’s advice, she also increased the amount of the margin equity loan in order to purchase additional shares.

THE EVIDENCE

54. In this section, I have summarised the evidence given by each of Mrs Corbett, Mr Roberts, Mr Jones and Mrs Tinney. In doing so, I have put the issues raised by Mr Rinaldi on behalf of Mr Jungstedt to each of them. Although I have not summarised the evidence given by Mr Jungstedt in cross-examination and that given by Mr Mullaly and Mr Murphy, I have had regard to it.

Dealings relating to Mrs Corbett – Mrs Corbett

55. Mrs Corbett said that Mr Jungstedt raised the topic of shares trading and options trading at a social dinner they attended with their spouses. That dinner took place some time in the middle of 1996. While she had not told him of the shares that she had inherited, she said that she assumed that he was probably aware of them from conversations with her daughter. Mrs Corbett said that Mr Jungstedt told her at the dinner that she could use the blue chip shares that she had inherited to make money through options trading.

56. Following the dinner, Mrs Corbett said, she discussed share trading and options trading with her daughter and her husband. She did not discuss it with her accountant and did not seek any other advice regarding this type of trading. In cross-examination, she said that she had not talked to her accountant as she had thought that Mr Jungstedt would know more about options than her accountant “would up in the country” (transcript, page 152). After a month or so, she decided to speak again to Mr Jungstedt about options trading. Consequently, she and her husband travelled to Melbourne and met with Mr Jungstedt at Epic’s offices. That meeting occurred in approximately September, 1996.

57. Mrs Corbett said that she could not recall exactly what was said at the meeting but said that the following were discussed:

• Mr Jungstedt said that options trading was his job and that options trading was a way to make more money than trading shares;
• Mr Jungstedt tried to explain to Mrs Corbett and her husband what options trading was. He gave some examples of options trading but Mrs Corbett said that she did not understand fully what he was saying;
• Mr Jungstedt told her that she would use only shares that she owned for options trading;
• Mr Jungstedt told her that if she were to commence to trade in options, she could use a trust account into which the income would be deposited. Both she and he would be able to use the account. He also told her, she continued, that she should always leave some money in the account as some might be needed in the short term to facilitate options trading;
• Mr Jungstedt gave her a booklet on options trading. It was entitled “Options Trading: Current Practices” (Exhibit 4, EMC 2); and
• In her affidavit, Mrs Corbett said that Mr Jungstedt did not ask her about her financial circumstances and Mrs Corbett said that she did not give him any information about them. In cross-examination, Mrs Corbett confirmed that she did not think that Mr Jungstedt had discussed either the house or the business affairs with her and her husband. When Mr Rinaldi suggested to her that she could be mistaken, she replied that she could be but did not remember it (transcript, page 155).
  

58. The Introduction to the booklet stated that it was designed to explain the practices and procedures for investors dealing in ASX traded options on the Options Market:

“Investors are required to receive an updated copy of this booklet whenever there are significant changes to the way the Options Market operates.

This booklet does not attempt to explain the features and risks involved with exchange traded options, which are explained in the ASX Derivatives booklet Understanding Options Trading. This booklet is designed to be read in conjunction with the Understanding Options Trading booklet.” (Exhibit 4, EMC 1, page 2)

59. Mrs Corbett said that the meeting left her with the understanding that options trading was a way in which she could get a greater return from her shares. She said that she did not really understand how it worked but that she believed from Mr Jungstedt that options trading was safe. In cross-examination, Mrs Corbett said that she did not tell Mr Jungstedt that she either understood or did not understand (transcript, page 155).

60. On or about 30 September, 1996, Mrs Corbett said that she received a letter on Epic’s letterhead and signed by Mr Jungstedt. The letter, dated 29 September, 1996 began with Mr Jungstedt’s stating that he was writing to confirm the basic strategy suggested in their discussion using NAB shares as an example. He continued:

“Income Generation

By selling a call option against your shares you generate income. Stock options are traded on the Australian Option Market in the same way as shares are traded at the Stock Exchange.

A call option is a right but not an obligation to buy the underlying shares at a certain price within a certain time. You sell the right to buy your shares to someone else and for this right you receive a premium.

Here is an example to illustrate how it works:

The NAB share price today is $13.20 and you decide that if it reaches $14.00 by the end of April 1997 you are prepared to sell at that price but not lower.

One option equals 1,000 shares, so if you hold 5,000 shares you can sell contracts with an exercise price of $14.00 and you will receive approximately 30c per share which equals $1,500 ($0.30 * 1,000 shares * 5 contracts).

Remember, the buyer of your option has a right to buy your shares for $14.00, so as long as the share price stays below $14.00 he or she will prefer buying the equivalent amount of shares at the Stock Exchange at a lower price.

If the share price rallies above $14.00 the buyer of the contract will exercise the right to buy your shares at that price. Because you have already received 30c per share premium your breakeven point is really $14.30. It is not until the share price increase above this point that you sacrifice further gains.

If NAB is below $14.00 at the end of April, the call option will expire worthless and you just keep the $1,500 income the sale generated.

If NAB is above $14.00 in April and you would like to keep your shares (i e avoid selling for $14.00) you just buy back your sold call options in April.

Because time will erode the value of the option, you will be able to buy back your call options for less than you sold them for three to six months earlier (thus making a profit) in a clear majority of cases.

...” (Exhibit 4, EMC 2)

61. Mr Jungstedt advised Mrs Corbett that she needed to open an option account by signing page 15 in a booklet called “Trade Practices” that he had given her when they had last met. That page would have been a Client Agreement Form acknowledging that she was bound by the ASX Rules. Mrs Corbett said that she also had to sign a document to convert her shares to the computerised CHESS system and a Bulk Scrip Agreement with the OCH to lodge shares as collateral for options trading. He also advised her to open a cash management account with Austrust where her income from options trading would be “parked” and where it would receive a good rate of interest. Epic would be her agent and would be able to withdraw money from that account and place it in her Option Account if that were necessary.

62. In cross-examination, Mrs Corbett said that she usually tried to read documents before she signed them. In the case of the documents she signed in this instance, she would have read them but she did not suppose that she understood them. Mr Jungstedt wanted them signed so she did. At the time, she thought that options trading was a good idea and she needed to sign them to do that. In signing the Client Agreement Form, Mrs Corbett acknowledged that she had received and read a copy of the Explanatory Booklet issued by the ASX in respect of the Options Market and dealings in Exchange Traded Options (Exhibit 4, EMC 3). She said that she supposed she had read it but it was now a long time ago.

63. In cross-examination, Mrs Corbett said that she recalled Mr Jungstedt’s telling her that, in order to sell an option, generally a round figure was used whereas she held odd numbers of shares. She could not recall Mr Jungstedt’s telling her that her odd number of shares meant that it was better to trade in an option called a strangle or to include two transactions (usually a call and a put) in one transaction. She did, however, recall a broad discussion along those lines although not the terminology and had no idea what a strangle is. Mrs Corbett said that she accepted his general approach as she felt that she could not “... see how we were in a position to tell Jan what to do, that is all” (transcript, page 161). She did not disagree with him or overrule him. Mrs Corbett agreed with Mr Rinaldi that she had told Mr Jungstedt that he did not need to call her with every transaction before he did it provided that approach was taken. He could decide when to trade and which option to trade and which price to pay or accept. In re-examination, Mrs Corbett said that she had no idea what was meant by buying extra legs for options or buying protection.

64. Mrs Corbett said that she traded options from early November, 1996 until late December, 1998 and did so with Mr Jungstedt while he was at Epic. She said that, during this time she “... relied on Epic and on Jungstedt as my adviser and I trusted them totally. At all times I believed that Epic and Jungstedt were acting in my best interests which included trading in [a] manner which would not put at risk my shares” (Exhibit 4, paragraph 23). Mrs Corbett said that she had a number of discussions with Mr Jungstedt over this period. She did not speak with him prior to each trade’s being made as she had understood that he would make all decisions regarding trading. She was satisfied with this arrangement as she did not have any knowledge of, or experience in, share or options trading. She said that she considered Epic and Mr Jungstedt to be experts in the area.

65. Mrs Corbett said that, some time after the first trade, she received a contract note. She was surprised to see that she had traded in Coles Myer Ltd (“CML”) share options for two reasons. The first was that she did not own any CML shares and the second was that she and Mr Jungstedt had agreed that she would only trade in options of shares that she already owned. Mrs Corbett said that she telephoned Mr Jungstedt regarding the trade and that he had told her words to the effect that “that’s alright, it is best if you have a variety of shares” (Exhibit 4, paragraph 27). She said that she was satisfied with this response as she trusted Mr Jungstedt. In cross-examination, Mrs Corbett said that it was her expectation that she would only deal in shares that she owned. She did not discuss that explicitly with Mr Jungstedt (transcript, page 162). In re-examination, Mrs Corbett said that she did not recall Mr Jungstedt’s telling her that he would trade in shares that she did not own. She noticed on the statements that he had traded in CML and NAB shares. She did not think that there had ever been any suggestion that he would trade in options relating to shares other than those she owned. It was her view that Mr Jungstedt had thought that she owned them and told her that he thought she owned NAB shares.

66. Mrs Corbett said that she told her accountant that she had commenced options trading some time early in 1997 when she had been trading for two or three months. Her accountant, she said, told her that she should be careful with options trading because she could lose money and her shares. Shortly after this conversation, she met with Mr Jungstedt whom she told of what the accountant had told her. She recalled Mr Jungstedt’s telling her that she would not lose money and he would ensure that she did not lose the shares. Mrs Corbett said that, on the basis of this advice, she trusted Mr Jungstedt and continued to trade in options.

67. This aspect was examined further in cross-examination when Mrs Corbett agreed that she knew that her shares were lodged as collateral for the options trading. She repeated that Mr Jungstedt had told her that they would not lose their shares. She denied that Mr Jungstedt had said words to the effect that they would do their best not to lose them, did not intend to lose them or that it was unlikely that they would lose them. She thought that it was “a definite, no” because she had gone straight home and told her accountant that (transcript, page 170). If Mr Jungstedt said that he had never said there was no risk of losing her shares, Mrs Corbett said that she would say that was wrong because she and her husband were confident everything would be all right and that Mr Jungstedt would trade his way out of things. When asked whether it was her understanding that, if things went wrong, the OCH would make good any losses from the shares lodged with it as collateral, Mrs Corbett replied: “I never sort of thought about it, but I suppose that is right.” (transcript, page 172

68. Mrs Corbett said that in late May or early June, 1997, Mr Jungstedt recommended that she sell her Howard Smith shares as there were no options for that company. He recommended that she use the proceeds of the sale to purchase shares in companies in respect of which options were traded. Mrs Corbett believed that her options trading was doing well and she accepted his advice. Mr Jungstedt arranged for the sale of the Howard Smith shares and bought the following shares: Santos Limited (“STO”) (1,500 shares); St George Bank Limited (“SGB”) (600); and CSR Limited (“CSR”) (700).

69. Mrs Corbett said that, in July, 1997, she asked Mr Jungstedt whether she could use some of the money in her account, which then held approximately $14,800. Mr Jungstedt told her that she could take some money out but that she should leave between $5,000 and $7,000 in it. As a result of this conversation, she withdrew $5,000 on 16 July, 1997 and $8,000 on 15 August, 1997. Approximately $11,500 remained in the account as there had been further deposits since she had spoken to Mr Jungstedt.

70. Mrs Corbett received a letter dated 29 October, 1997 and signed by Mr Chris Baring-Gould, who was the Victorian State Manager of Epic. He began his letter by stating that the Australian financial markets had experienced very severe volatility over the previous 48 hours. In view of this, Epic had been called upon by the ASX to lodge additional margins on behalf of its options clients. Her outstanding margin/cash deficit, Mr Baring-Gould told Mrs Corbett, was $30,731 as at close of business on 28 October, 1997. He told her that she was required to pay that amount within 24 hours. If that amount was not paid by 4.00pm on 30 October, 1997, Epic would exercise its right to close out such of her open contracts and call upon such security as it held and deemed appropriate in the circumstances. Mrs Corbett would be liable for any deficiency and entitled to any surplus. (Exhibit 4, EMC 5) She then received a second letter dated 30 October, 1997. This letter was signed by the Administration Manager, Ms Cynthia Chan, and advised her that the amount outstanding on her account was $10,683.98. Ms Chan reminded Mrs Corbett that the ASX Rules require all trades between clients and brokers to be settled on the fifth business day after the trade date. She was asked to arrange payment by 10.00am on 4 November, 1997 and told that if she did not, Epic would deal with her shares as it saw fit in accordance with the ASX Rules. (Exhibit 4, ECM 4)

71. Mrs Corbett said in her affidavit that she spoke to Mr Jungstedt immediately about both of these letters as she did not understand what they meant. He told her not to worry, she recalled, and he told her that she did not need to send any money. He gave her “reassurances that he would fix things” (Exhibit 4, paragraph 34). Consequently, she said, she did not concern herself further with the letters and felt confident to continue trading.

72. Mrs Corbett said in cross-examination that she did not recall Mr Jungstedt’s telling her that the sum of $30,731 referred to in the first letter was no longer payable because the market had recovered on 30 October, 1997. She knew that she had telephoned him because she and her husband did not have $30,000 and Mr Jungstedt had told her that he would fix it up. When suggested to her that the market had fixed it up, Mrs Corbett replied that “It probably did. I had forgotten.” (transcript, page 164)

73. A few days after this conversations, Mrs Corbett said, Mr Jungstedt telephoned her and asked her to send $2,000 to top up her account. She did that on 7 November, 1997 and did not feel that Mr Jungstedt gave her any indication that she was losing money. Furthermore, she did not recall being overly concerned about the request for money.

74. Approximately two weeks later, Mrs Corbett said that she sent Mr Jungstedt the sum of $7,500 to purchase shares and, in particular, 500 shares in CML. Mr Jungstedt told her to put the money into the Options Account, she said, and also told her that he might buy CML shares later if they came down in price. She later understood from a conversation that she had with Mr Mullaly of the respondent that an option had been exercised against her in relation to CML shares and she had been required to provide 10,000 CML shares to satisfy her obligation. That caused her a loss of $10,638.98.

75. In cross-examination, Mr Rinaldi suggested to Mrs Corbett that Mr Jungstedt had told her that the CML options had been exercised and that she would have to take money from her Austrust account to pay for it. She said “Did he?” and when told that he had replied “I don’t remember.” When asked if she denied that he had told her, Mrs Corbett replied “No, that’s probably right. If there was money there to take out, he would take it out, wouldn’t he?” She could not recall any discussion with him.

76. At this time, Mrs Corbett became concerned that she might be losing money and became concerned about options trading. When she discussed this with Mr Jungstedt, he told her that everything was all right and that she would not lose her money or her shares. As she trusted Mr Jungstedt, she allowed him to continue trading in options on her behalf.

77. In February, 1998, Mrs Corbett received a contract note from Epic indicating that Mr Jungstedt had traded in NAB share options but Mrs Corbett did not own NAB shares. She called him and advised him that she did not own NAB shares. He replied that he thought that she did and that it did not matter anyway as she needed a good variety of options. While she trusted Mr Jungstedt to look after her affairs and was satisfied with the response, she told him to be careful with the NAB options.

78. In approximately April, 1998, Mrs Corbett received from Epic buy contract notes dated 3 April, 1998 (Exhibit 4, EMC 6) showing that 500 CML shares had been bought for her. She could not recall discussing this purchase with Mr Jungstedt at the time.

79. In approximately the middle of 1998, Mrs Corbett said that Mr Jungstedt told her that he would have to telephone her prior to each trade in order to obtain her approval. Another person from Epic would also listen into the conversation. This resulted from a change in Epic’s policies. Mr Jungstedt was not happy with the change and from that time he telephoned her twice. On the first occasion, he told her the trades he would recommend. In the second conversation when the other Epic officer was present, she would accept the recommendation he had previously made. On one occasion, dated 3 September, 1998, he sent her a facsimile message stating that his manager would like her to confirm his recommendation in rolling her BHP options as follows:

“... We close out September $15.00 calls

$16.50 puts

$14.50 puts

And roll them to March selling 10 BHP $15.50 calls

selling 10 BHP $15.50 puts

buying 10 BHP $13.50 puts

This will be cost neutral. ...” (Exhibit 4, EMC 7)

80. In August, 1998, Mrs Corbett said in her affidavit, she noticed a large increase in the number of trades’ being undertaken on her account. In cross-examination, she was asked whether she was familiar with the concept of buying protection or extra protection for her options or with adding more legs to options to give more protection. She replied that she did not and that she had no recollection of Mr Jungstedt’s discussing that strategy with her and her agreeing with it.

81. In October, 1998, Mrs Corbett’s accountant asked her for details of her options trading in order to complete her income tax return for the year ended 30 June, 1998. She asked Mr Jungstedt to provide her accountant with the details. On receiving a facsimile message from Mr Jungstedt, her accountant advised her that she had lost approximately $15,000 in the financial year ended 30 June, 1998. Mrs Corbett said that this was contrary to her expectation that she was breaking even and that she was not losing money. When she discussed the situation with Mr Jungstedt, she gained the impression that he was not too concerned. He told her that he would be able to make up the loss by continuing to trade. She also had the impression that some of the losses had occurred because Epic would not allow him to do things his own way. Mrs Corbett said that she was a little concerned about the losses but trusted Mr Jungstedt and hoped that everything would be all right.

82. In late November or early December, 1998, Mrs Corbett told Mr Jungstedt that she wished to cease trading in options as she was not making any money. She did so over the telephone and said that Mr Jungstedt told her that he understood. They agreed that Mr Jungstedt would slowly wind down the options trading. She did not expect him to open any new positions after that time. He told her that winding down the options trading would not be a problem and that she should not worry about it. Mr Jungstedt, Mrs Corbett said, did not explain to her that it would cost her a lot of money to stop options trading immediately.

83. In December, 1998, Mr Jungstedt told her that was leaving Epic and that he was looking for another broker for her. He told her that he was leaving as Epic had made it too hard for him to trade options as he wanted. Later in January, 1999, Mrs Corbett said in her affidavit, Mr Jungstedt suggested that she should transfer her account to Colonial. She accepted the suggestion and later received a Client Agreement and a Sponsorship Form from Colonial. Mrs Corbett said in her affidavit that she did not meet with anyone at Colonial. No one spoke with her about her financial circumstances, her knowledge of options trading or her expectations from options trading although she might have spoken to someone about what she should do in relation to the documents. In giving oral evidence, Mrs Corbett said that she did recall having a conversation with someone. She thought that she had told that person that she wanted Mr Jungstedt to look at their affairs and the person told her that he would send all of the paperwork to Mr Jungstedt as well.

84. When asked in cross-examination whether it was agreed that Mr Jungstedt would give instructions to Colonial on her behalf, Mrs Corbett said: “Well, I thought the two of them were going to – the same as he had been doing before.” (transcript, page 166) She did not think that Mr Dunphy had sent her a form to complete to authorise Mr Jungstedt to give instructions to Colonial on her behalf and did not recall signing an authority for him to act on her behalf. A little later, she explained that she had authorised Mr Jungstedt but he was not supposed to operate the account and that she had not known that until the previous day. She still did not recall giving him written authority. She spoke only to Mr Dunphy at the beginning of her time at Colonial and again when it all collapsed.

85. Mrs Corbett said in her affidavit that it was her understanding from her discussions with Mr Jungstedt that he would continue to look after her options trading and that he and Colonial would ensure that her interests were looked after. She believed that Mr Jungstedt was winding down her options trading and that he would not open any new positions. Over the next few months, she continued to receive documents from Colonial and they included contract notes and statements of account. At no time did she speak to anybody at Colonial in relation to options trading. She took little notice of the documents she received in 1999 as she suffered from pneumonia and was hospitalised on three occasions (13 days in March, 1999; 6 days in June, 1999 and 7 days in September, 1999). She said that she believed that Mr Jungstedt was receiving the same documents and trusted him to look after her affairs. Although she had very few conversations with him, when she did speak with him, she felt that he gave her no reason to be concerned about the state of trading.

86. On or about 20 March, 1999, Mrs Corbett said that she received a statement of account from Colonial advising her that she owed $4,111.80 and that she should pay the amount by 24 March, 1999. She telephoned Mr Jungstedt, who told her that he would sort it out and that she did not have to pay the money. She did not take the matter further. The same thing took place when she received a further account in late April or early May, 1999 from Colonial. This time it sought payment of $36,484.23. She heard no more about it from Colonial after she had spoken with Mr Jungstedt.

87. In June, 1999 or thereabouts, Mrs Corbett said, she received a number of documents in the mail from Colonial advising her that HSBC was to become the participating broker for Colonial. She did not “really understand” what the documents were all about but she signed them and returned them to Colonial (Exhibit 4, paragraph 56).

88. During her hospitalisation in September, 1999, Mrs Corbett became concerned about the level of trading on her account. Consequently, on 26 October, 1999, Mrs Corbett telephoned Colonial. In response, Mr Dunphy telephoned her and told her that the losses she had incurred were more than the $5,000 she was expecting. Her margin account was between $30,000 and $50,000 in debt and, in addition, she had incurred trading losses in the order of $55,000. There was yet to be a reconciliation but the total amount she owed was in the order of $140,000. Mrs Corbett said that she asked Mr Dunphy why she had not been told of these losses before this time. Mr Dunphy told her that Colonial had been in close contact with Mr Jungstedt and that he had been given all contract notes and statements. As Mr Jungstedt had an authority from her to operate the account, Mr Dunphy told her, Colonial had not believed that it was necessary to talk with her directly. In a second call from Mr Dunphy, he and Mrs Corbett discussed the shares that had been lodged as collateral and whether they would have to be sold.

89. Mrs Corbett said that she spoke to Mr Jungstedt that night. He told her that he could not understand the figures and was very apologetic. She said that she discussed the debt with Mr Jungstedt and asked him whether she should sell her shares. Mrs Corbett said that she did not authorise him to sell her shares. She believed that Mr Jungstedt would telephone her the following day and discuss which shares she should sell first. At no time, Mrs Corbett said, did Mr Jungstedt suggest that she could pay the debt with money raised in ways other than selling her shares e.g. by taking a mortgage on the South Yarra property.

90. Late in the afternoon on 27 October, 1999, Mr Dunphy telephoned Mrs Corbett to tell her that he had sold all the shares to pay the debt to Colonial. At no time, Mrs Corbett said, had she authorised Mr Jungstedt to sell the shares. Her husband told her after another conversation with Mr Dunphy that she might still owe Colonial $100,000. Mrs Corbett since understands that she has suffered losses totalling approximately $169,000 due to the trading in options. She sold shares to the value of $134,400 towards covering the debt but still owes $34,600.

91. Mrs Corbett said that she tried to get an explanation from Mr Jungstedt as to why there had been such a big loss but she has never been given an explanation. In cross-examination, she agreed with Mr Rinaldi that she had told Mr Jungstedt on the telephone that she did not want to speak with him any more and that he should call her solicitor.

92. During her time in trading options, Mrs Corbett said that she received various documents from Epic, Colonial and HSBC. They included contract notes, statements of account, open position statements, Austrust account statements, buy and sell contract notes, CHESS documents and holding statements. Of the contract notes, Mrs Corbett said that she understood them to be records of the trades undertaken by Mr Jungstedt although no one had ever explained exactly what all the information on them meant. Generally, she only looked to see whether there was a credit at the bottom of the page as she believed that this meant that she had made money.

93. Of the account statements, Mrs Corbett said that she understood them to be a record of trading. She did not attempt to reconcile them with the contract notes to see if they were correct and did not know that this could be done. Generally, she again only looked at the last figure to see whether or not she was in credit. The statements of account that she received from Epic usually showed that her account was in credit at the end of the month. If it was in debit, it was for a small amount only. That, together with Mr Jungstedt’s reassurances gave her the confidence to continue trading.

94. Mrs Corbett said that she found the statements of account from Colonial and HSBC to be very confusing. The statements of account from Colonial indicated that her account was in debit and the statements from HSBC that her account was in credit. At times, she said, she received two accounts from Colonial for the same period of time and each had a different figure on it. She did not attempt to reconcile the statements of account as she was confused, ill, had received assurances from Mr Jungstedt and trusted both him and Colonial to protect her interests. Neither Mr Jungstedt or anyone from Colonial explained the statements of account to her and she believed that one of them would have informed her if there had been a problem with the accounts. The only time that she did speak to Mr Jungstedt about the amounts owing to Colonial, he told her that she did not have to worry and that she did not have to pay.

95. Mrs Corbett said that she understood the Austrust account statements to show the movement of funds to and from the options trading account. At times, she would check the figures and she received an interest cheque from Austrust on each occasion that the account was open.

96. Mrs Corbett said that she understood that the buy and sell contract notes related to the shares that she bought and sold but did not pay much attention as Mr Jungstedt would undertake the transactions and she trusted him. Mrs Corbett said that she understood that the CHESS documents and holding statements recorded which shares she owned and which were used for options trading. She did not pay much attention to those documents and relied on Mr Jungstedt to advise her whether or not she needed to respond to them.

Dealings relating to Mrs Corbett – Mr Jungstedt

97. Mr Jungstedt said that he had been asked what options were all about at a social dinner with the Corbett family. He was informed that Mrs Corbett had a share portfolio and wished to trade options when she went to see him at Epic. He traded on her behalf while he was employed at Epic. Her options trading, Mr Jungstedt said, was always in a credit account balance during her time as a client at Epic.

98. When he left Epic, Mr Jungstedt said, Mrs Corbett took her options business to Colonial. While he did not effect any trades on her behalf after that time, he said that Mrs Corbett authorised him to place instructions with Colonial on her behalf. Colonial effected the trades. It was his understanding, Mr Jungstedt said, that Mrs Corbett’s account with Colonial was a normal options trading account and that he, as well as Mrs Corbett, was authorised to give instructions on its operation. Mr Jungstedt understood that Mrs Corbett had given Mr Frank Dunphy of Colonial a written document authorising him to give instructions to Colonial regarding her account but he never saw that document. He said that he spoke regularly with Mr Dunphy and placed instructions with him or with the operator if he was away. He and Mr Dunphy often debated the merits of particular trades. In relation to Colonial, he said, he was the client or the client’s representative or agent but never an adviser. He had not been aware that Mrs Corbett’s account was a “non-advisory” account. Mr Jungstedt drew a comparison between his position and that of Mrs Corbett’s husband who had placed instructions with him when he was acting as her adviser at Epic.

99. Mr Jungstedt said that he had never received contract notes or statements of account from Colonial but did, on occasion, request copies of open positions. He was given that information. Mr Jungstedt said that he later discovered booking and other errors in Colonial’s account statements. This meant that he had not been able to track the account correctly. He said that “... all of the numbers were wrong once these errors occurred. Some errors were picked up by me and pointed out to Colonial. Of these, some were corrected correctly, while others were not (which I did not always pick up)” (Exhibit J, paragraph 43).

100. In cross-examination, Mr Jungstedt was asked whether a person such as Mrs Corbett was a person for whom options trading was not suitable. He responded that she was not such a person and that she was suitable. He based his view on her wanting to trade to obtain income from her existing share portfolio in a fairly conservative way. He continued to believe that after hearing her evidence.

Dealings relating to Mr Roberts – Mr Roberts

101. Mr Roberts wrote a statement dated 28 July, 1999. In an affidavit sworn on 16 November, 2000, Mr Roberts said that he had read submissions made by Mr Jungstedt on 31 January, 2000 at a hearing held by the Commission. Although he understood that there were material differences between what Mr Jungstedt stated to be the case and what he had stated in his statement, Mr Roberts said in his affidavit that he believed his statement to be an accurate record (Exhibit 6) (T documents, pages 1306-1326)

102. In his statement, Mr Roberts said that he had developed an extensive network of brokers, advisers and other personnel through his options trading. A number of them recommended that he speak to Mr Dunphy at Epic to discuss options trading as he was an expert in it. He did so as he wanted to increase his income and to enhance his future employment opportunities. In May, 1996 when he saw Mr Dunphy, Mr Roberts had a portfolio worth approximately $180,000.

103. In cross-examination, Mr Roberts said that Mr Dunphy’s immediate suggestion was that he had been doing was fairly immature and unsophisticated and that the best way to go was to use spread strategies. In his statement, Mr Roberts said that Mr Dunphy advised him to use spread strategies of puts and calls against selected stocks. He had not heard of spread strategies previously. Mr Dunphy, he said, spoke with confidence and enthusiasm about spread strategies and told him that he had been doing it successfully for some time. He also told Mr Roberts that he was bringing Mr Jungstedt into Epic in the next month or so and that he had used the same spread strategies successfully for some time and was a very experienced options trader of ten years.

104. Mr Dunphy, Mr Roberts said, was very keen to promote calendar spreads. He understood that a calendar spread meant selling a longer dated option, covering it with a sooner dated option and buying another option with a longer date. Mr Dunphy also talked to him about discretionary trading accounts in which the client told Epic how much he or she wanted to make and Mr Dunphy would do the trades accordingly. The brokerage as lowered for more active clients, Mr Roberts understood Mr Dunphy to say.

105. In cross-examination, Mr Rinaldi suggested to Mr Roberts that, when he first consulted Mr Dunphy, he already had some spread strategies in that he had a call and a put. Mr Roberts agreed that he had some puts written in the same or other stocks against the cash position he was holding. When Mr Rinaldi suggested to him that he also had some strangles, Mr Roberts replied that:

“Possibly I was selling the call option against the shares I held and the put option against the cash I held with anticipated that I would agree to take those shares up. So if that was called a strangle, then well be it, but my intention was to buy more of that stock at a lower price with the cash I was holding. So I would sell a put option against it.” (transcript, page 253)

106. Mr Roberts did not agree with Mr Rinaldi that he was quite experienced in options trading when he saw him. He said that on the basis of the vast array of options that are available. He had been selling successfully on a very simple straightforward strategy and only within six or seven stocks of a possible 50 that were listed. In Mr Roberts’ view, he was experienced only in covered calls. It was possible, Mr Roberts said, that Mr Rinaldi was correct in asserting that Mr Jungstedt and Mr Dunphy did not need to explain a covered call to him as he had been selling calls covered by scrip.

107. Mr Roberts said that he met with Mr Dunphy a second time. Mr Dunphy told him that he did not know when Mr Jungstedt would start with Epic as Mr Jungstedt’s previous broking firm had been forced to close some of his client’s positions as large losses had been incurred. Mr Roberts said that he had gained confidence in Mr Dunphy and trusted his professional expertise and judgement. Therefore, the news regarding Mr Jungstedt had not alarmed him.

108. Mr Roberts said that he next met Mr Dunphy on 10 July, 1996 when Mr Jungstedt was also present. Mr Jungstedt showed him a CML put/call spread from a computer spread sheet analysis. Mr Jungstedt explained to him that the strategy was to sell both put and call spreads with a series life of three to six months and then to close them about four weeks before the series expired. At that time, the income would be in the time premium erosion which Mr Roberts understood to be the difference between the opening price and the later price when closed out. Mr Roberts said that he did not fully understand the strategy but had some understanding of it. He was impressed with Mr Jungstedt’s apparent knowledge of the options market and apparent professional expertise. Mr Roberts said that he told both Mr Dunphy and Mr Jungstedt that he was using the capital from his redundancy payment as his investment capital and that it was critical that it not be eroded.

109. Believing in the professional capacity of both Mr Jungstedt and Mr Dunphy, Mr Roberts said, he told Mr Dunphy that he would like to transfer his account to Epic and made an appointment to see him on 1 August, 1996. He signed a Client Agreement Form and a letter to his previous broker to transfer his account to Epic. He was not given a copy of those documents, he said. Mr Roberts said that he outlined his financial situation to Mr Dunphy and Mr Jungstedt as set out in paragraph 102 above. He also told them that his investments in the stock market and his options trading had provided his only source of income and he did not want to put those investments at risk. He intended, he told them, to rely on building the capital base for his and his wife’s future retirement.

110. Mr Roberts said that there were “three ‘levels’ of options trading” undertaken through Epic (T documents, page 1310). The first level was the options trading that he initiated and followed the same principles that he had used over the previous three years (see paragraph 106 above) (“Roberts initiated trading”). The second level comprised the spread strategy trading recommended by Mr Jungstedt (“Epic initiated trading”). With regard to this trading, Mr Roberts said that he placed full reliance on Mr Jungstedt’s apparent experience and expertise and did so due to his lack of knowledge and experience with spread strategy trading. He accepted the various strategies put forward by Mr Jungstedt. The third level comprised spread strategies recommended by Mr Jungstedt but applied to shares that Mr Roberts had researched (“jointly initiated trading”). He said that, while he did not full understand the spread strategies, he would suggest that the strategies be applied to options in those stocks he had researched and felt comfortable with.

111. On 8 August, 1996, Mr Roberts said that he telephoned Mr Dunphy about the transfer of his shares from his previous broker. Later that day, Mr Jungstedt telephoned him and said that he had traded a spread strategy in ANZ shares for another client and asked him whether he would like to participate in the same strategy. It comprised a $0.25 call spread and a put spread $0.50 either side of the current share price. Mr Roberts said that he advised Mr Jungstedt that he would consider it but that in the meantime he was to sell call options against his Fosters Brewing shares. Later in the day, he agreed to undertake the strategy regarding ANZ options.

112. During September and October, 1996, Mr Jungstedt recommended and encouraged him to increase his ANZ positions from 20 contracts to 100 contracts and to take similar positions in relation to NAB and CML options in Epic initiated trading. Prior to his agreeing to them, Mr Roberts said that he telephoned Mr Dunphy as he had no experience in this style of trading. Mr Dunphy indicated to him that he was confident in Mr Jungstedt’s ability as an options trader and his ability with the spread strategy. Mr Dunphy also told him that Mr Jungstedt preferred to trade in 100 contract lots. Mr Roberts said that he accepted Mr Dunphy’s advice and then telephoned Mr Jungstedt to initiate the trades that he had recommended. Mr Roberts said that Mr Jungstedt seemed very keen that he take up a number of positions at this time. He agreed with some of his recommendations. He took similar positions in relation to Westpac and Western Mining in jointly initiated trading. In cross-examination, Mr Roberts agreed with Mr Rinaldi that he had gone back to Mr Jungstedt and increased his trade from 20 contracts to 100.

113. The open position statement dated 30 September, 1996 shows positions opened in relation to NAB options on 6 September, 1996. Jan 97 $13.00 calls were sold @ $0.20, Jan 97 $13.50 calls were bought @ $0.10, Jan 97 $10.00 puts were bought @ $0.02 and Jan 97 $11.00 puts were sold @ $0.12 (T documents, page 1346). One hundred lots of one thousand were bought and sold on each occasion. Mr Roberts rejected Mr Rinaldi’s proposition that these purchases had been made contrary to Mr Jungstedt’s advice. He was clear that Mr Jungstedt had quoted a spread at $10.00 and $11.00 and not at $11.00 and $12.00. Both agreed that the spreads together resulted in a maximum profit of $0.20. There was a maximum loss of $0.80 on the put spread and a maximum loss of $0.30 cents on the call spread.

114. Mr Roberts said that the market price of banks increased when the Reserve Bank reduced official interest rates and it increased further prior to the payment of dividends in January, 1997. Mr Roberts said that he became quite concerned as this meant that his call positions in ANZ, NAB and Westpac were soon in-the-money and he was potentially facing a loss situation. He was concerned that his investment capital would be reduced. In early November, 1996, he said, he met with Mr Dunphy and Mr Jungstedt and asked them for advice as to what he should do. He understood that it would cost him a lot to close out the positions. Both of them advised him, he said, “... that you only crystallise your losses by closing out the position and that you had to trade out of the situation by rolling over the positions.” (T documents, page 1312). He continued:

“Dunphy then asked me if I had any ideas. I said to Dunphy and Jungstedt that if they kept all of these positions open I thought that it would be easier if they were all split and did not fall due at the same date. I thought that it may be best to roll ANZ up from 7.00 Jan 97 to 8.50 April 1997 and roll NAB up from 13.00 Jan 97 to 15.00 Oct 97. They both agreed this was a good move. After I left Epic it occurred to me that neither Dunphy or Jungstedt had contributed much in the way of advice that I had sought but had successfully put the onus back onto me about the Epic initiated trading, being trading with which I was not experienced or familiar.

After a few days I telephoned Jungstedt and I discussed the situation further. As a consequence I accepted his advice not to realise the potential losses and agreed that the positions should be split. In early December 1996 the ANZ call positions were partially rolled out to April 1997 and the NAB positions were called out to October 1997. Later that month, with the situation still deteriorating, I closed out the Westpac positions (a jointly initiated trade) and the ANZ call positions (an Epic initiated trade) and realised losses of approximately $35,400.00.” (T documents, page 1313)

115. In cross-examination, Mr Roberts agreed with Mr Rinaldi that he had himself rolled out positions when he was with a previous broker. He had done that in relation to options in Fosters Brewing shares when the series closed at $0.01 or $0.02 in-the-money and it was better to buy them back at $0.02 and selling in the next series to get perhaps $0.10 premium. That he had done this did not, however, mean that he thought that Mr Jungstedt’s approach not to cystallise losses was a reasonable one. At the time the trades were made, he agreed with what Mr Jungstedt was doing because he had entrusted his financial success to the ability and recommendations of Mr Jungstedt and of Mr Dunphy. At the time, he had no real knowledge of rolling out and, with hindsight, he would say that it is a very dangerous thing to do. There is a very big difference between buying Fosters Brewing options back at $0.02 and selling them in the next series while retaining the shares and the scenario he faced with Mr Jungstedt when the options were so deeply in-the-money. The choice was either to take the losses at the time or to trade out. The advice of both Mr Dunphy and Mr Jungstedt was not to crystallise losses and “Jan was forever optimistic of being able to outrun the market” (transcript, page 270).

116. In re-examination, Mr Roberts explained what he meant by Mr Jungstedt’s being optimistic of outrunning the market:

“... The intention was to - because all these positions we went into the call side of the strategy was in money very quickly because the market - share market in general was rising due to the reduction of the interest rates by the Federal Government. And not to crystallise the losses, which was a philosophy I was following that they had impressed upon me, they said to continue roll out and roll the share spread up in value, in strike price value, because they were forever optimistic that eventually if you did it for long enough you would outrun the market.

The market would have to slow down a bit?---Yes, eventually you would get ahead of it and it would not reach that - - -

Yes, and then people would not be calling on your call options? --- That is right.” (transcript, page 284).

Nothing was ever said to him about the risks attending his continuing to roll out. Mr Jungstedt told him that it was the only way and that the only risk occurred when the losses were crystallised. As part of trying to outrun the market, put spreads were sold to generate income to pay for the call spreads.

117. Also in re-examination, Mr Roberts said that he realised about three weeks after the NAB contracts in September, 1996 that there were problems. He realised that because the market price of NAB shares had risen above the strike prices he had sold at. There was no recommendation made to him by Mr Jungstedt or Mr Dunphy that he should change the strategy but he was told that “you only take the loss when you crystallise, and we can roll out” (transcript, page 286).

118. At the end of December, 1996, Mr Roberts said, he had the following open positions:

“▪ put positions in ANZ which were to expire in January 1997;

• put and call positions in NAB, with the puts to expire in January 1997 and the calls to expire in October 1997;
• call positions in Coles Myer which were to expire in February 1997;
• put positions in WMC which were to expire in March 1997; and
• call positions in Fosters Brewing and BHP which were to expire in January 1997.” (T documents, page 1313)
  

The ANZ, NAB and CML positions were Epic initiated trades, the WMC positions were jointly initiated trades and the Fosters Brewing and BHP positions were Roberts initiated trades.

119. Mr Roberts said that Mr Dunphy left Epic in January, 1997 in order to take up a position at Colonial. Before leaving, Mr Dunphy invited Mr Roberts to contact him at any time to discuss trading issues. Initially, Mr Roberts said, he did keep in touch as CML and NAB shares were continuing to rise above the taken call prices and he needed as much advice as he could get to trade out of the terrible situation he was in and to prevent the loss of his capital. The only recommendation that Mr Jungstedt had given him was to keep trading and not to crystallise losses by closing positions.

120. In March, 1997, Mr Roberts sought Mr Dunphy’s advice as to what he should do about the Epic initiated trades in CML and NAB. He said that:

“... Dunphy was able to quickly turn the conversation back around to me and asked, ‘What ideas do you have?’. I said that I wished to protect my capital and that if I closed these 100 contract spreads I would sell 14 CML call contracts and 8 NAB call contracts as deep in the money, long dated, unprotected positions and then sell some put spreads each month and use the money to gradually buy the call contracts out. Dunphy said to me that he thought that this was a good conservative approach.” (T documents, pages 1314-1315)

Mr Roberts said that he presented the same strategy to Mr Jungstedt some days later but he did not seem interested. Mr Jungstedt told him that it was perhaps worth looking at later but he took no action.

121. In his oral evidence, Mr Roberts related a conversation that he had with Mr Jungstedt in approximately March, 1997:

“... we were going so bad financially that Jan had said, ‘Well, there are others in the same predicament as yourself’, which I didn’t know whether I should take comfort from that or not. And I said, ‘Well, why don’t we workshop the situation on a Saturday when the stock markets are closed and collectively we might be able to come up with some strategies to get out of it – our situation’. And Jan dismissed it and never progressed with it. So that workshopping was never done. So I thought later that I should probe a little bit more deeply here and I said, ‘When you make the suggestions or come up with strategies you use, do you ever compare it to something like a chartist?’

And what is a chartist?---A chartist comes up with – I don’t know how they do it. They come up with charts on all sorts of things - - -

In relation to share trends and the like?---In relation to shares or commodities, whatever, and in fact chartists go back in Japan for 2000 years as rice chart – rice price chartists and they have an amazing ability of being able to predict movements up or down in commodity prices or share prices or whatever. And I said, did he compare his recommendations to the charts? And he said, no. And I said, did he compare it to anything, profit forecast, whatever? And he said, no, he just looked for opportunities.” (transcript, page 249)

122. When Mr Roberts asked him about it in April, 1997, Mr Jungstedt told him that it would be hard to get set in them as they were now deep in-the-money and he did not want to do it. Mr Roberts said that he did not push his views with Mr Jungstedt as he was still not confident with spread strategies. Despite that, he believed that his suggestion would have been a good idea although it would have meant lower brokerage fees.

123. In early May, 1997, Mr Roberts said that Mr Jungstedt had telephoned him and said that they could use low exercise price options (“LEPOs”) to protect the call positions and that he would look into it. During that month and the following, Mr Jungstedt recommended that Mr Roberts take up a number of further positions in CML and NAB and that he roll over NAB October, 1997 call positions.

124. On 2 July, 1997, Mr Roberts said that Epic was concerned about any unprotected call positions and demanded that he buy more July $7.00 calls and sell Aug $6.75 puts in CML options. Mr Roberts said that he accepted his recommendation and was later advised by Mr Jungstedt that he had bought 15 July calls and sold 30 August puts. To Mr Roberts’ mind, this exposed him to further risk as the longer dated puts were already close to the money. Mr Jungstedt told him that the trade was worth doing just to show Epic that they were “working on the situation” (T documents, page 1315).

125. In the second week of July, 1997, Mr Roberts said, he received his Open Position Statement from Epic and noted a margin deficiency of $86,517. This compared with a margin deficiency of $357 in the previous May. He telephoned Mr Jungstedt and asked why this was so. Mr Jungstedt told him that it was due to increased volatility in the market and that the OCH had re-rated options so increasing the margin of risk for the option positions in his account. Mr Roberts said that Mr Jungstedt told him that Epic had met the margin call. When asked how this could be done without prior consultation with him and how much it was costing him, Mr Jungstedt replied that the interest was high and in the order of 18%. Mr Roberts said that they would have to rectify this as soon as possible. At no time, he said, did Mr Jungstedt indicate to him that Epic would close out his account.

126. In late July, 1997, Mr Jungstedt told Mr Roberts that the Malaysian owners of Epic wanted the Australian management to tighten up on any account that might be in a loss situation but did not tell him how this would affect his account. In early August, 1997, Mr Roberts received a letter from Epic advising him that payment of his account was overdue and was being charged a 14% administration charge (T documents, page 1327). Failure to pay it, the letter stated, might result in his positions being closed out. Mr Roberts telephoned Mr Jungstedt and agreed to meet with him and Mr Baring-Gould the next day. Mr Baring-Gould did not attend the meeting. Mr Jungstedt told him that he was happy with the progress being made on his account and that others were in a worse position than his. At that time, Mr Jungstedt had not confirmed that LEPOs could be used to cover option positions.

127. In early September, 1997, Mr Roberts received a further letter from Mr Baring-Gould indicating that he had failed to meet his margins on a continuing basis and that Epic had power to close his positions (T documents, page 1328). He telephoned Mr Jungstedt to ask for further information about Epic’ intentions but Mr Jungstedt was unable to tell him. On 23 September, 1997, Mr Roberts said that he again telephoned Mr Jungstedt to ask if anything had been decided about his account and if they should begin to look at option positions that were about to expire on 25 September, 1997. Mr Jungstedt told him that he did not know what was happening, looked stunned and was unable to give any direction or information.

128. Later on 23 September, 1997, Mr Roberts said, he contacted Ms Rachael Hutchins at the ASX and arranged to meet her and Mr Ian Hastings, also of the ASX. He did so on the same day but they advised him that they could not give strategy assistance, that Epic could close him out and that Epic might have been in breach of the ASX Rules in allowing his account to run into a margin situation.

129. On 23 September, 1997, Mr Roberts also received a letter from Mr Baring-Gould stating that he had not paid his account in the sum of $114,830.37 or provided security for it (T documents, pages 1329-1330). If payment was not made by 4.00pm on 25 September, 1997, Epic would close his positions. As a consequence, Mr Roberts arranged a meeting with Mr Jungstedt and Mr Baring-Gould. He had hoped to discuss strategies that would assist both him and Epic.

130. Mr Baring-Gould asked him about his previous options trading experience and Mr Roberts summarised his experience as set out above, the manner in which he had taken his business to Epic and the strategies recommended by Mr Jungstedt and Mr Dunphy (see paragraphs 103-110). Mr Baring-Gould told him that advisers were encouraged to produce as much brokerage as possible and that they were well rewarded for doing so. Should things go wrong, though, they had to answer for it themselves. To Mr Roberts’ mind, Mr Baring-Gould appeared to have limited knowledge of options trading and did not entertain any discussion of ways to cover his positions using LEPOs or any other derivatives. The meeting proceeded with Mr Baring-Gould’s saying that Epic would close his account the following day if Mr Roberts could not cover the margin immediately. Mr Baring-Gould recommended that Mr Roberts submit a tax variation to assist him in making payments to Epic. Mr Roberts understood him to suggest that he did not want him to seek legal advice. His understanding came from Mr Baring-Gould’s statement that he did not want lawyers involved as nobody wins. Mr Jungstedt asked him if he could return to work for an airline as he said that he understood he had been a pilot. Mr Roberts replied that he had been an engineer and that it would be difficult to get a position as the airlines were still “down sizing”. Mr Roberts’ account was closed by Epic on 26 September, 1997 and in the following two weeks, he received contract notes/liquidation advices from Epic.

131. Mr Roberts contacted Mr Hastings on 6 October, 1997 and was advised that the investigation was continuing. Mr Hastings sent Mr Roberts copies of the Client Agreement Form that he had signed and also a Client Information Checklist that he did not recall having previously seen. It is dated 8 August, 1996, which was a week after his meeting with Mr Dunphy on 1 August, 1996, and was not signed by Mr Roberts (T documents, pages 1332-1333). Mr Roberts recognised the writing on the form as being that of Mr Dunphy.

132. The Client Information Checklist, which was signed by Mr Dunphy, showed Mr Roberts’ name and his occupation as “investor”. His approximate net worth was noted as $350,000 and his investments noted as being in “investment real estate”, cash and securities. Against the heading relating to past experience, was noted “Last 3 years $350K trading portfolio” (T documents, page 1332). Mr Roberts’ trading objectives were marked as income, growth, trading profits and safety of principal. Anticipated types of options transactions were marked as purchasing calls, covered writing and spreading. Cash covered writing, discretionary transactions and other were marked as “No”. At question 14, it was noted that Mr Roberts was approved to purchase options, write covered options and write cash covered options but not approved as a discretionary account. Question 15 was concerned with writing cash covered options. After a question as to why it was believed that the client was capable of evaluating the risks of cash covered writing, Mr Dunphy had written “past experience with FW Holst”. In response to the question whether Mr Roberts had the financial capacity for cash covered writing, Mr Dunphy had written, “To value of investment portfolio ie $350K approx” (T documents, page 1333).

133. In cross-examination, Mr Roberts said that his house would probably have been worth about $170.000 in 1996. He said that the house should never have been used as collateral. It was not mortgaged but it was not available as security for cash covered writing as it had not been offered up for it. He rejected Mr Rinaldi’s proposition that it would have been available if necessary because he had no intention of taking a mortgage against the house for share market investments.

134. On 13 October, 1997, Mr Roberts went with his wife to a meeting with Mr Baring-Gould at Epic. When asked what they could do about the debt of $70,000 to Epic, Mrs Roberts gave Mr Baring-Gould a document she had prepared indicating that they believed that the debt was not payable (T documents, page 1334). It was not payable because Epic had traded beyond the principal advanced by Mr Roberts, the Client Information Checklist was not correct and Epic had not followed his instructions in failing to protect his principal.

135. Mr Roberts said that, while he was aware of the declining nature of his account in general terms, Mr Jungstedt never made any specific comment to him about being in a profit or loss situation until July, 1997 when Mr Jungstedt telephoned him and raised Epic’s concerns. The only advice that he received from Mr Jungstedt were to roll out his positions and not crystallise his losses. At no time did he suggest that he close out his positions to protect his principal.

136. Mr Roberts said that he had analysed all of the Open Position Statements that he had received between 11 July, 1996 and 26 August, 1997 as well as the contract note/liquidation advices. He calculated the profit from Roberts initiated trades where he was able to close the trades to be $28,846.74. The profit on Roberts initiated trades where Epic closed them on 26 September, 1997 was $892.04. Epic initiated trades produced a loss of $299,309.76. Overall and without taking into account interest and administration fees charged by Epic, Mr Roberts estimated that he had lost $269,570.98.

137. Mr Roberts said that he has since been advised by other brokers that the form of spread strategies used by Mr Jungstedt were primarily designed to produce brokerage and provided very little return to the client. He said that, had he fully understood the inherent high risks, he would not have invested in the Epic initiated spread strategy trading programme managed and recommended by Mr Jungstedt. He now believes that this form of options trading was entirely inappropriate to his investment objectives and needs.

138. Epic commenced proceedings against Mr Roberts for the outstanding debt and it was settled at a mediation. He issued a counter claim and the matter was settled with Epic’s paying him $90,000.

139. In cross-examination, Mr Roberts said that Mr Jungstedt’s strategy is fundamentally flawed because:

“... simply all you are doing is trading for a reduced premium against stock you may not hold to limit the amount of losing, and then in huge quantities to hide the brokerage and make it appear that you are actually earning some money.

You might have to go through that a bit more slowly.

MR ELLIOTT: What are we talking about?

MR RINALDI: We are talking about the spread strategies utilising strangles and, I suppose, straddles would be effectively part of it as well.

MR ELLIOTT: I think for this to mean anything, as I understand it from the expert report put forward by Mr Murray there are a number of strategies used at various points in time, and I think my friend needs to identify which strategies we are talking about before we talk about whether it is flawed or not.

MR RINALDI: Deputy President, I might take a moment to get some instructions.

Well I asked you a question about spread strategies and whether you thought there was anything intrinsically wrong with them, and you said you thought they were fundamentally flawed. My learned friend asked me to, I think, identify which spread strategy. Which spread strategy were you answering that question in relation to? What do you understand that I was asking you about?---I would say that every spread strategy was fundamentally flawed.

And the reason you say that again?---Well, unless you are actually selling it against a physical stock or cash you are on a hiding to nothing. You are going to lose money every time.” (transcript, pages 255-256)

In response to Mr Rinaldi’s statement that the trades were made with cover which was usually by way of share collateral, Mr Roberts said:

“Not the actual stock in the same as the strategy. The collateral is all the shares and cash I had given across to Epic, and then we write the spreads in completely different stock. So all it was dong was saying – I was mortgaging the house on a bet at the races, and if I lost I was prepared to lose the house.” (transcript, page 256)

140. In re-examination, Mr Roberts explained further why he considered the spread strategy used by Mr Jungstedt to be fundamentally flawed:

“Well, unless you have got the script [sic] to back up the strike price that you have sold, and one would reasonably expect that you wouldn’t sell a strike price below the price that you purchased the shares at anyway, that unless you actually had the shares to offer up to match the call options you had sold and were doing it purely with cash and you were doing it with a spread situation and the shares had, on the market, had gone dramatically above the positions you had taken, you are locked into a loss situation every time. But if you had the actual physical shares as well, you could simply surrender them at the strike you exercised at or agreed to sell at, and assuming you had bought them below that strike price you had a capital profit and an income premium. But if you didn’t, and you were just doing it purely on speculation and the share market did more dramatically against you, you were locking in realisable losses every time.” (transcript, pages 281-282)

141. Mr Roberts agreed that the main type of trade offered by Mr Jungstedt was a strangle with protection, which is also known as a condor. He explained the risks in the strategy in the following exchange with Mr Rinaldi:

“... you say there are inherent high risks in these spread strategies. Can you say what those risks are, please?---Well, the risks were that I was not selling the call option against the stock I was holding, so if I was exercised I wouldn’t be able to meet the request. We were actually selling enormous volumes and locking in a loss situation if the stock moved very strongly against you and - - -

Can you explain how that is the case; I am afraid I don’t follow that?---For instance, if we look at the National Bank positions that we sold where we sold a $13 call in November – September ’96 and covered it with a $13.50 call basically, as you implied earlier, limiting our risk to just 50 cents.

Yes?---But in the case there, the stock did move very substantially upwards and it had gone well – had gone beyond the $13.50 strike price which was our protection price.

Yes?---Had I had a hundred thousand National Bank shares, I would have been able to give them to the market to acquit the $13 call if I was just selling in my original covered position. But as I didn’t have the stock, we then had to come up with $50,000 which we had lost, less any premium earned initially.

Yes, less the premium. All right. And in that particular scenario, what would the premium have been?---Oh, the 10 cents for the call spread and 10 cents for the put spread, so we earned 20,000 before brokerage.

All right. So you say the risks are – the inherent risk, you like, is that it wasn’t against cover that you held?---That’s right.

And what made it worse, which perhaps can’t be said to be inherent risk, was the quantity?---That is right.

Yes, and as you have already given evidence, in some cases you traded smaller quantities such as ANZ?---Yes.

And others you traded larger quantities?---That’s right.

All right?---But the ANZ was initially 20,000 and then in some telephone conversations with Frank Dunphy, he impressed upon me that Jan only wished to trade in units of a hundred, and some time later I agreed to increase that to a hundred by taking out 80 further contracts.

You called up Mr Jungstedt and asked to take out another 80, didn’t you?---That’s right. Because it was implied by Frank Dunphy to join the program or perhaps not be considered as a client any longer because Jan’s expertise was in contracts of a hundred.” (transcript, pages 272-273)

142. Mr Roberts did not agree that he had not followed the approach recommended by Mr Jungstedt. He could see that Mr Jungstedt had intended to put all four legs in place while the market share price remained static but that was not always possible because an investor has to match need and demand. Mr Roberts did not agree that he had deviated from Mr Jungstedt’s system because he had not rolled out the legs simultaneously and said:

“Well, I really don’t know what the system contained. I thought the system was a lot of ability and experience and that it was some sort of scientific approach to it, not just a fact that we covered the call by limiting the potential loss. I thought the systems were a little bit more advanced than just limiting your losses. I thought it was something that moving forward would be quite beneficial but if it was only a limiting, the loss situation, then I would question why it was recommended as something to go into in the first place.” (transcript, page 277)

143. He agreed that the spreads made a high premium income but did so only because of the high volume involved. Had he only been writing against scrip that he held, he would still have gained a high premium income and, indeed, it would have been higher as he would not have needed to spend some of the initial premium by buying a protected position.

Dealings relating to Mr Roberts – Mr Jungstedt

144. Mr Jungstedt said that he was made aware of Mr Robert’s financial position by Mr Dunphy, with whom he had formerly been a client. He understood from Mr Dunphy that Mr Roberts’ net assets were $350,000. Although he was not sure, he thought that this included a share portfolio worth about $180,000 and a house. He thought that Mr Roberts had three years’ options trading with other brokers and was quite knowledgeable in the area. Mr Roberts seemed to understand all of the options trading and strategies that were used.

145. Mr Jungstedt said that Mr Roberts did most of the work in terms of suggesting trades and, in particular, when to open particular positions. In many cases, his trades were fundamentally similar to those comprising the VTS but, unlike the VTS, the timing of the opening positions of the four legs of the trade was not simultaneous. This resulted, Mr Jungstedt said, in a different trade with different potential outcomes. As Mr Roberts did his own work rather than Mr Jungstedt’s running the figures through the VTS, analysing the figures and refining the proposed trade, he charged Mr Roberts 1.5% brokerage instead of 2%.

146. In relation to call spreads and put spreads shown on the members’ open position report dated 27 September, 1996, one of Mr Jungstedt’s clients other than Mr Roberts had, he said, followed his advice and opened the following positions in relation to NAB options: in relation to NAB options on 6 September, 1996. Jan 97 $13.00 calls were sold @ $0.24, Jan 97 $13.50 calls were bought @ $0.13, Jan 97 $11.00 puts were bought @ $0.12 and Jan 97 $12.00 puts were sold @ $0.42. This gave an $0.11 credit for a 50 cent spread and a $0.30 credit for a $1.00 spread. Taking the two spreads together, there was a maximum credit possible of $0.41 with a maximum loss of $0.59 possible on the put spread and of $0.41 on the call spread. (Exhibit E and T documents page 2056).

147. Mr Jungstedt said that there were a number of occasions on which he recommended strongly against trades that Mr Roberts wanted to undertake. He said that Mr Roberts accepted his advice in some instances but in others he did not and insisted on his, Mr Jungstedt’s, preferred trades. He described them as not being necessarily bad by their nature but as not appropriate for him in the circumstances. In Mr Jungstedt’s view, Mr Roberts’ preferred trades contributed to his worsening overall position over time. The sudden decision by Epic to insist on all accounts being immediately brought out of debit in September, 1997 made matters worse.

Dealings relating to Mr Boltman – Mr Boltman

148. In his affidavit, Mr Boltman said that he was introduced to Mr Jungstedt by Mr Chapman in 1995 and commenced options trading with him shortly afterwards. He had no previous experience trading in options and relied on Mr Jungstedt for recommendations. His arrangements with Mr Jungstedt were that he (Mr Jungstedt) would make recommendations to him regarding trading and that he (Mr Boltman) would approve it if he were satisfied. He never authorised Mr Jungstedt to engage in discretionary trading in any way on his option account.

149. While with Noalls, Mr Boltman said, he knew what Mr Jungstedt was doing before he made his move. Mr Jungstedt was frequently in contact with him and they spoke together two or three times each week. His trading in options while with Noalls was quite profitable and he was happy with the type of trading being undertaken.

150. In cross-examination, Mr Boltman said that he recalled Mr Jungstedt’s explaining the basics of options trading to him but did not recall his explaining some of the different types of options trading. He did not explain a buyer right or a covered call. Mr Boltman did understand from him that his existing portfolio would need to be some form of guarantee with the ASX in the course of Mr Jungstedt’s trading for him and some or all of it was lodged with the OCH. There was never any sort of detailed explanation of any strategy. Mr Boltman said that he did not accept that Mr Jungstedt went into the concepts in great detail and merely told him “... that he could make money for me in option trading full stop.” (transcript, page 213) He acknowledged that Mr Jungstedt might have given him a copy of an ASX booklet.

151. In cross-examination, Mr Boltman denied that he had discussed the nature of the trades that Mr Jungstedt could carry out on his behalf and left it to him to determine the time and price at which he could conduct those trades. Instead, Mr Boltman said that Mr Jungstedt consulted him on practically every trade during the first year. Mr Jungstedt, he said, was not a very busy man at Noalls. Indeed, Mr Boltman understood from both Mr Jungstedt and Mr Chapman that his not being busy was behind his decision to move on to Epic.

152. In July, 1996, Mr Boltman received a letter from Mr Jungstedt advising that he had recently accepted a position as a Senior Options Advisor with Epic. Mr Boltman decided to transfer his account to Epic and signed the various forms that Mr Jungstedt had enclosed in his letter should he wish to take that course. Mr Boltman denied the proposition that he had approached Mr Jungstedt to go with him to Epic rather than Mr Jungstedt’s approaching him in the letter.

153. During the period from July, 1996 to July, 1997, Mr Boltman considered that Mr Jungstedt continued trading as he had done at Noalls. There contact remained the same. That changed in the latter half of 1997 when Mr Boltman said that Mr Jungstedt started trading on his account without first consulting him. That was contrary to their arrangement, he added. Although he was aware of it, Mr Boltman did nothing about it other than to pay the calls that were made on him by Epic. At most Mr Jungstedt would call him once each fortnight and, although he told him about some of the trades he had undertaken, did not disclose the volumes he had traded. Mr Jungstedt told him, Mr Boltman said, that everything was under control but divulged nothing about the losses he was incurring. Mr Boltman calculates that he incurred losses totalling $97,182.18 in this period.

154. In cross-examination, Mr Boltman denied that he had told Mr Jungstedt that he was difficult to contact and that Mr Jungstedt should not worry about contacting him every time. He did speak to Mr Jungstedt at this time but Mr Jungstedt told him that he was unable to talk to him from his office desk. This conversation, and others he had between July and September, 1997, led him to believe that Mr Jungstedt was on the verge of a nervous breakdown because of the pressure that he said he was under to increase the volume of his trades for all of his clients.

155. Also in cross-examination, Mr Boltman said that he had not perused the monthly statements of account in any great detail during the period that Mr Jungstedt was making a profit for him. He began to take notice of them because of a number of events: what Mr Jungstedt said to him over the telephone; what he said outside of the office; the occasions on which Mr Jungstedt told him to telephone him at home and not at the office; the volume of the trades and the losses he was incurring; his not receiving telephone calls from him; and people from Epic making demands on him to make good the losses. Mr Jungstedt never told him, Mr Boltman said, that Epic had introduced a new policy that every trade he conducted had to be approved by a manager or that he was not permitted to trade in the normal way and that he was concerned that his clients’ positions would get worse. Mr Boltman denied that Mr Jungstedt had ever said that there were problems if Mr Baring-Gould was away, as was often the case, in that a trade could not be made on the day on which it should have been made.

156. Mr Boltman said that Mr Jungstedt had not made a suggestion to him about a protection arrangement or a protection policy. He denied that his memory was faulty because he had very few conversations with Mr Jungstedt about the type of trading that he was doing.

157. In late October, 1997, Mr Boltman received a letter dated 29 October, 1997 from Mr Baring-Gould. Mr Baring-Gould asked him for payment of his outstanding margin/cash deficit of $49,392 by 4.00pm on 30 October, 1997. As a result of receiving the letter, Mr Boltman said that he became concerned about the volume of unauthorised trading on his account by Mr Jungstedt and the magnitude of the losses that he was incurring as a result. By “getting rid of a number of contracts”, Mr Boltman was able to reduce his debt to $4,232 which he paid to Epic on 30 October, 1997.

158. By the end of October, 1997, he had transferred his account to Merrill Lynch Private (Australia) Limited (“Merrill Lynch”). On 6 November, 1997, he paid a further sum of $80,000 to Merrill Lynch to clear the outstanding margin/cash deficit which had arisen as a result of what he said was the unauthorised trading by Mr Jungstedt on his option account. Mr Boltman said that he did not know how the figures were calculated.

159. Mr Jungstedt told him, Mr Boltman said in his affidavit, that much of the unauthorised trading had been done on his option account in the latter half of 1997 when the management of Epic had pressured him to increase the trades he was doing.

Dealings relating to Mr Boltman – Mr Jungstedt

160. Mr Jungstedt said that he had been informed of Mr Boltman’s financial position by Mr Andrew Lees, who had been his previous options trader at Noalls. He understood that Mr Boltman had a substantial share portfolio worth at least $250,000 and a house in Brighton.

161. Mr Lees, Mr Jungstedt said, had told him that Mr Boltman did not want to discuss each transaction and was happy for the broker to do them as long as they were in accordance with the general strategy that was in place. Timing and pricing of the trades was up to the broker. Mr Boltman’s initial strategy was to write covered calls but this was later altered to strangles. Mr Jungstedt said that Mr Boltman went to Noalls to chat with Mr Chapman and himself. He denied that Mr Boltman telephoned him two or three times each week. At Epic, he attended the office only about five times in 15 months. Mr Jungstedt thought that Mr Boltman appeared to understand all aspects of his options trading. Mr Boltman had only eight positions open during the period from 23 February to 6 August, 1996.

162. In July, 1997, Mr Jungstedt said, he recommended to Mr Boltman that they bought protection for his positions by adding two more legs to the trade. This would contain the maximum possible loss at each end of the transaction in a volatile market. He described this as the “condor”. Mr Jungstedt said that this strategy was undertaken to protect the clients and not to increase the transactions and so the brokerage payable on the trades.

163. Mr Jungstedt said that the market was at its most volatile on 28 and 29 October, 1997 and that this affected almost all of his clients. It fell sharply on 28 October but recovered strongly on 29 October. This explained why Mr Boltman’s margin or cash deficit of $49,392 fell to $4,232 by 29 October, 1997.

164. Mr Jungstedt said that he told Mr Boltman that he was having great difficulty working at Epic as he could not trade without every trade being approved in writing by Mr Baring-Gould. That meant that he lost opportunities and benefits for his client if Mr Baring-Gould were away. Mr Jungstedt also observed that Epic introduced a number of rules and changed others without consulting the advisers and without understanding that they jeopardised clients. He suggested to Mr Boltman and to other clients that they move to another broker. It was Mr Boltman who suggested that he might have a word with Mr Chapman to sound out the possibility of his working back at Noalls. Mr Jungstedt denied that he ever told Mr Boltman or anyone else that he was under pressure from Epic to undertake more trades.

Dealings relating to Mr Jones – Mr Jones

165. Other than to purchase shares from funds he had inherited, Mr Jones said in his statement dated 25 August, 1999 that he had not taken an active interest in the share market prior to 1995. In approximately August, 1995, Mr Jones’ friend and solicitor, Mr Boltman, suggested that he earn extra income through options trading. Mr Boltman suggested to him that he speak to Mr Jungstedt at Noalls. Mr Jones said that he agreed and met Mr Jungstedt in the company of Mr Boltman and Mr Chapman at Noalls’ office on 7 September, 1995. During the meeting, Mr Jungstedt drew some diagrams showing how options trading works. Mr Jones said that he did not understand the diagrams and this was acknowledged by Mr Jungstedt. Mr Jones said that he asked both Mr Jungstedt and Mr Chapman about the risk involved in options trading and was advised that there was none. In cross-examination, Mr Jones conceded that it “sounds more logical” that Mr Jungstedt said that there was practically no risk rather than no risk (transcript, page 139).

166. In cross-examination, Mr Jones agreed that he had told Mr Jungstedt that he was a farmer and that he had bred cattle. He could not recall that he had told Mr Jungstedt that he traded cattle. He bred cattle and, as a consequence, he sold them. He dealt with livestock but only a small part of his business would have been buying and selling cattle. Mr Jones could not recall drawing an analogy between trading options and trading cattle. He did recall telling Mr Jungstedt that he owned a flat in Melbourne.

167. Mr Jones said that he was sent a letter dated 11 September, 1995 by Mr Jungstedt which read:

“By selling a call option against your shares you generate income. Stock options are traded on the Australian Options Market in the same way as shares are traded at the Stock Exchange.

A call option is a right but not an obligation to buy the underlying shares at a certain price within a certain time. You sell the right to buy your shares to someone else and for this right you will receive a premium.

Here is an example to illustrate how it works:

The NAB share price today is $11.70 and you decide that if it reaches $12.50 by the end of January you are prepared to sell at that price but not lower.

One option contract equals 1,000 shares, so if you hold 20,000 shares you can sell contracts with an exercise price of $12.50 and you will receive approximately 20c per share which equals $4,000 ($0.20 * 1,000 shares * 20 contracts).

Remember, the buyer of your option has a right to buy, your shares for $12.50, so as long as the share price stays below $12.50 he or she will prefer buying the equivalent amount of shares at the Stock Exchange at a lower price rather than from you.

If the share price rallies about $12.50 the buyer of the contract will exercise the right to buy your shares at that price. Because you have already received 20c per share premium your breakeven point is really $12.70. It is not until the share price increase about this point that you sacrifice further gains.

If NAB is below $12.50 at the end of January, the call option will expire worthless and you just keep the $4,000 income the sale generated.

If NAB is above $12.50 in January and you would like to keep your shares (ie avoid selling for $12.50) you just buy back your sold call options in January.

Because time will erode the value of the option, you will be able to buy back your call options for less than you sold them for three to four months earlier (thus making a profit) in a clear majority of cases.” (T documents, pages 1358-9)

168. In an affidavit sworn by Mr Jones, he said of this letter:

“Contrary to Jungstedt’s submissions at paragraph C on page 01788 of the T-documents, I did not rely on reading the ‘understand options booklet’ Jungstedt gave me. Jungstedt expressly stated to me, as set out in paragraph 5 of my statement, that there was no risk involved in options trading to be undertaken by him. Jungstedt also stated at out meeting on 7 September 1995 that I would make a profit in a clear majority of cases. This was again stated by Jungstedt in the penultimate paragraph of his letter to me of 11 September 1995 in which he wrote: ‘Because time will erode the value of the option, you will be able to buy back your call options for less than you sold them for 3 to 4 months earlier (thus making a profit) in a clear majority of cases.’

Contrary to Jungstedt’s submissions at paragraph D on page 01788 of the T-documents, I did not understand the letter of 11 September 1995 to be an example of ‘writing’ options. It states in the opening paragraph that it was ‘...to confirm the basic strategy suggested in out discussion last week...’. Jungstedt told me I would make about 10% to 12% on each trade with little or no risk and it was this feature that I relied upon most of all in deciding to commence option trading with him. Jungstedt had said at the meeting on 7 September 1995 that this was what he was doing for Colin Boltman. I understood Jungstedt to mean that his strategy was almost foolproof. I do not understand the difference between ‘buy rights’ ‘straddles’ or ‘strangles’ or any other terminology used in the options market.” (Exhibit 7, paragraphs 6 and 7)

169. Mr Jones said in his statement that, relying on the representations made by Mr Chapman and Mr Jungstedt orally and by Mr Jungstedt in the letter as well as on Mr Jungstedt’s expertise and experience, he agreed to undertake options trading with Mr Jungstedt and with Noalls. He signed the necessary documents at Noalls’ office on 14 September, 1995. Mr Jones said that he did not recall the specific documents that he signed and was not given a copy of them. In his statement, Mr Jones said that he did not recall discussing discretionary trading and was not aware that, if discretionary trading were to occur, he had to give specific written instructions to that effect. Mr Jungstedt gave him the impression, he said, that it was appropriate that he, Mr Jungstedt, have control of his, Mr Jones’, trading.

170. Mr Jones said in his statement that it had been agreed that his options trading would proceed on the basis that options would be sold against shares that he owned. For this purpose, he provided share certificates for him to use as security for his options trading. Only part of his portfolio was to be lodged as security and this part comprised shares in BHP (5,237 shares), Boral Limited (“BLD”) (21,530), MIM (10,000), NAB (20,066) and Woolworths Limited (“WOW”) (13,350). Mr Jones said that it was also agreed during their discussions that the purpose of his trading was to generate income and that Mr Jungstedt would trade conservatively and with as little risk as possible. At no time, said Mr Jones, did Mr Jungstedt or any person at Noalls request from him full details of his personal assets or ask him for details of his personal investment objectives. He made no mention of Circle Jay or of its financial circumstances.

171. In cross-examination, Mr Jones said that he had not really understood the letter of 11 September, 1995 but did not recall telling Mr Jungstedt that. When asked whether he had wanted Mr Jungstedt to look after everything, Mr Jones replied that he had “... thought this is the way the operation was carried out” (transcript, page 140). Mr Jones’ memory was that Mr Jungstedt would sell calls against his shares and, provided that was done, Mr Jungstedt was to decide on when and at what price to sell. He would not know what to do, Mr Jones said, and still does not. He did agree that Mr Jungstedt had, at the meeting of 14 September, 1995, discussed “Explained the income generation strategy from selling options using your shares as collateral (dynamics, risks, returns, cash mgt, etc) John very interested, wants to start soon” (T documents, page 291).

172. Mr Jungstedt stated that Mr Jones had added more shares that could be used as collateral (T documents, page 1789) but Mr Jones denied that he had done so. Rather, he said, he had provided additional shares to Epic for CHESS registration. The only shares that could be used were those listed in paragraph 170 above. It was not until he had instituted legal proceedings against Epic that he realised that Mr Jungstedt had used all of his shares as security for options trading.

173. On 3 October, 1995 Mr Jones said that he spoke to Mr Jungstedt on the telephone and that Mr Jungstedt advised him that he had traded a WOW March 1996 option. This was the first trade entered on his behalf and Mr Jungstedt had not called him prior to the trade to get his authority. In cross-examination, Mr Jones said that he did not recollect that Mr Jungstedt had discussed with him what he proposed to do in the first trade. In response to Mr Rinaldi’s statement that Mr Jungstedt had told him that the first trade would be a strangle, he said that he did not recall that. He did not remember that Mr Jungstedt had told him that he had used a WOW option because that share was very stable at a low volatility and so it was a conservative trade.

174. Over the months until late May, 1996, Mr Jones spoke to Mr Jungstedt on a number of occasions either by telephone or in person when he visited Noalls. Mr Jungstedt would advise him of some of the trades he had engaged in and indicated that trading was going well. Mr Jones understood Mr Jungstedt to mean that profits were being made. Mr Jungstedt did not ask him to authorise any trades and Mr Jones did not recommend any trades to him. Mr Jones said that he relied on Mr Jungstedt’s apparent expertise and experience. At Mr Jungstedt’s suggestion, Mr Jones referred his two sons to Mr Jungstedt to enter into options trading but, although both engaged in options trading, only one spoke to him.

175. On 31 May, 1996, Mr Jones said that he, his accountant and Mr Boltman had a lunch meeting with Mr Jungstedt. There was a general discussion about options trading. His accountant, Mr Jones said, advised Mr Jungstedt that no risk taking was to be undertaken and that all future trading should be through Circle Jay and not in Mr Jones’ name.

176. On 7 June, 1996, Mr Jungstedt telephoned him and advised him that his profit on the trading was approximately $27,000. Relying on Mr Jungstedt’s advice that his options trading was proceeding successfully, Mr Jones transferred his account to Epic when Mr Jungstedt moved to that firm from Noalls. He did not change the instructions that he had previously given. Mr Jones said that he signed a number of documents that he believed were similar to those he had signed to commence trading at Noalls and that he believed transferred his Austrust Account from Noalls to Epic. Mr Jones signed an Options Market Client Agreement on 26 June, 1996 (T documents, page 1360).

177. An Australian Options Market – Client Information Checklist was signed by Mr Jungstedt on 1 July, 1996 (T documents, pages 1361-1362). That document noted the client as Circle Jay and its approximate net worth as $500,000 in investment real estate, cash and securities. Its past investment experience was one year in options and 15 years in stocks. The investment objectives were noted as income and the boxes marked growth, trading profits and safety of principal were not ticked. The anticipated types of option transactions were noted as purchasing calls, covered writing, spreading and cash covered writing. Discretionary transactions were marked “no” as was “Other”. Question 14 noted that Circle Jay had been approved to purchase options, write covered options and write cash covered options but not approved as a discretionary account. In response to the question why he believed that Circle Jay is capable of evaluating the risks of cash covered writing, Mr Jungstedt had written “daily monotoring (sic) of positions”. He had also written “yes” when asked in question 15 whether the client had the financial capacity for cash covered writing.

178. Mr Jones said that he had no recollection of a discussion encapsulated in the following diary note written by Mr Jungstedt for 10 October, 1996:

“John Jones to buy protection, over time was discussed (in the more volatile stocks: BHP, BIL, CBA, LLC, NAB, WMC) + generate cash the usual way.” (T documents, page 701)

179. Over the following months until late February, 1997, Mr Jones spoke to Mr Jungstedt on a number of occasions either by telephone or in person when he visited Epic. Mr Jungstedt would advise him of some of the trades he had engaged in and indicated that trading was going well. Mr Jones said that he believed what Mr Jungstedt said because he relied on his apparent expertise and experience. He understood the statement that trading was going well to mean that profits were being made. Mr Jungstedt did not ask him to authorise any trades and Mr Jones did not recommend any trades to him. Mr Jones said that he did not have any understanding of what to recommend.

180. In late February, 1997, Mr Jones said, he became worried about the level of trading being carried out by Mr Jungstedt. Consequently, he and his accountant met with Mr Jungstedt and expressed his concerns about the level of trading. His accountant asked Mr Jungstedt to be careful. Mr Jungstedt assured them that he would be careful and that profits were being made. Mr Jones took this to mean that profits were being made. Mr Jungstedt told them that he had insured against any losses but Mr Jones did not know whether he meant that the strategies he used were insurance against losses or whether he had taken out an insurance policy. This aspect of Mr Jones’ evidence was the subject of cross-examination. He agreed with Mr Rinaldi that he had not asked Mr Jungstedt what he meant by insurance and said that he “... just trusted him as to whether he – yes, some way of ...[i]nsuring that I did not know about. ... Well, basically it was all a matter of trust in my book.” (transcript, pages 183- 184) When asked whether he had elected not to enlighten Mr Jungstedt about his lack of understanding, Mr Jones responded:

“Well, he knew we were getting worried and he assured me everything was all right and he said that there was some, you know, sort of insurance or something about it and I said, oh, well, fair enough, I guess. That’s my nature.” (transcript, page 184)

Mr Jones said that he thought that Mr Jungstedt always believed that he, Mr Jones did not really understand and added, “I mean, how could I?” (transcript, page 184)

181. On 27 February, 1997, Mr Jones said, he again spoke with Mr Jungstedt and spoke to him particularly about his NAB options. He expressed his concern and was again assured by Mr Jungstedt that the trading was going well. Mr Jones said that he presumed that Mr Jungstedt would follow his instructions to be careful in his trading. Mr Jones continued to be concerned about the level of trading and spoke to Mr Jungstedt on a number of occasions and, at times, asked him to slow down. Mr Jungstedt continued to assure him that the trading was progressing well. Mr Jones said that he relied on Mr Jungstedt’s apparent experience and expertise and allowed the trading to continue.

182. In cross-examination, Mr Jones said that he did not recall Mr Jungstedt’s discussing the volatility of the market with him or saying that it was “in many respects ... going bad” (transcript, page 131). He said that he could not remember many of his discussions with Mr Jungstedt and that all he could remember was that Mr Jungstedt always assured him that there were no problems. They spoke to each other occasionally when Mr Jones visited Melbourne but that was “just to say hello” (transcript, page 131). Mr Jones did not recall that his account was in debit from about August, 1997 or that Mr Jungstedt had told him that, in accordance with Epic’s policy, he would continue trading and try to trade out of debit. He did not recall Mr Jungstedt’s telling him that he should bring his account into credit. Mr Jones told Mr Rinaldi that he could not recall Mr Jungstedt’s discussing with him that he should buy protection. There was something about insurance but Mr Jones could not say what sort it was or how it would be bought. He could not recall any discussion about buying protection in July or August, 1997.

183. At approximately 11.00pm on or about 26 August, 1997, Mr Jones received a telephone call from Mr Jungstedt saying that things had gone wrong, he was in trouble, did not like where he was working and wanted to leave Epic. Mr Jones said that Mr Jungstedt asked him if he could contact Mr Boltman and ask him to help in returning to Noalls. This was confirmed by his diary note of that day (Exhibit 7, Exhibit JPJ 2). Mr Jungstedt did not give Mr Jones any indication that there were problems with his (Mr Jones’) account. Mr Jones said that he spoke with Mr Boltman and that he had responded that he would speak to Peter Chapman.

184. In early September, 1997, Mr Jones said that he received an undated and unsigned letter from Epic telling him that his account had not been paid and that he was being charged an administration fee. The amount outstanding was shown as $22,420.33 but Mr Jones believed that this was offset by the same amount shown in the closing balance (T documents, pages 1363-1365). He did not believe that he owed any money as Mr Jungstedt had always indicated that his trading was progressing well.

185. On approximately 30 September, 1997, Mr Jungstedt telephoned Mr Jones and told him that there were problems with his account and that he would have to sell NAB shares worth $60,000. Mr Jones said that this was the first indication that he had been given that he had sustained losses. Relying on his advice that by selling the NAB shares the problem would be fixed, Mr Jones said that he advised Mr Jungstedt to sell.

186. In early October, 1997, Mr Jones said that he received another letter in the same terms as the first but this time indicated that his balance was then $118,025.81 (T documents, pages 1366-1369). On 6 October, 1997, Mr Jones met with his accountant, Mr Boltman and Mr Jungstedt after Mr Jungstedt had left a message with his, Mr Jones’, wife to say that there was a problem with his account. Mr Jungstedt indicated to him that the fault lay with Epic’s management as it had not left him with enough time to fix the problem. Mr Jungstedt, Mr Jones said, did not indicate the extent of any losses. Mr Jungstedt denied that Mr Boltman had attended this meeting (T documents, page 1811) but Mr Jones stated that he had done so and referred to his diary note for that day.

187. Mr Jones spoke with Mr Jungstedt again on 7 October, 1998. In accordance with an agreement they reached, Mr Jungstedt sent him a copy of his then current position and the amount outstanding. The total amount required to close out his account was $387,130, the estimate of the total realised losses was $271,884 and there was a cash deficit of $224,915. Prior to receiving this information, Mr Jones said, he had no idea of the extent of his losses and was shocked at the amount that he owed. He immediately contacted his accountant, Mr Stockdale, and Mr Alan Foster of Foster Hart Lawyers and sought their advice. It was agreed that he would pay Epic the amount outstanding in order to prevent its selling his NAB shares and so causing him to be liable for capital gains tax. In addition, it was agreed that his positions would be closed out in a manner that would not lead to his incurring unreasonable losses. That was done between October, 1997 and August, 1998. Mr Jungstedt stated in his response to the Commission that closing out the positions had resulted “... in many lost opportunities and half of the total loss” (T documents, page 1812). Mr Jones responded in his statement to the effect that Mr Jungstedt’s authority to trade on his account had been terminated by Epic on either 7 or 10 October, 1997, or some date thereabouts, and that all trading had been done by other traders in Epic.

188. In his statement, Mr Jones said that, on average, he did not speak with Mr Jungstedt more than twice each month between 3 October, 1995 and 8 October, 1997. He did not believe that it was necessary to talk to him more often. When he did speak with Mr Jungstedt, the purpose of the conversation was usually to confirm that trading was progressing as instructed or to query the large amount of documentation that he was receiving. He did not telephone Mr Jungstedt to authorise the trading that he undertook and Mr Jungstedt did not call him to obtain his authority for the trading prior to his entering into any of the trades.

189. Mr Jungstedt, he said, always reassured him that the options trading was going well. Mr Jones understood him to mean that no losses were being incurred and that trading involved virtually no risk. Mr Jungstedt would often draw his attention to the amount that had been deposited in his Austrust account as an indication of the profits. As he had no previous experience in options trading, he said, he relied on Mr Jungstedt’s apparent expertise and experience and accepted what he said. At no time prior to October, 1997, did he tell him that he had incurred substantial losses or that he was in a position where future substantial losses might be incurred. Mr Jones also said in his statement:

“At no time prior to October 1997 was I aware of the potential for substantial losses in option trading and do not believe that I fully understood the risks involved or that the risks involved were fully explained to me. Had I have been aware of these risks I would not have agreed to enter into option trading.” (T documents, page 1356)

190. Mr Jungstedt had stated in his reply to the Commission that “He got the contract notes, showing profits and losses. Why did we change strategies if everything was going so well?” (T documents, page 1812). Mr Jones responded in cross-examination that the contract notes that he received did not show profits and losses. When his attention was drawn to the contract note dated 16 December, 1996, which shows a credit of $3,257.80, he said:

“... that’s not the whole story ... Yes it did, I mean, yes, I can understand that where it shows a credit on that particular, but it was pointed out to me later on by the experts that we had investigate it, that there is basically a hidden, sort of, you know. I didn’t understand it at the time. So many other documents came along, that when you put them all together it tells a different story.” (transcript, page 195)

191. Mr Jones said that he had received various documents from both Noalls and Epic including open position statements and contract note/liquidation advices and statements of account as well as statements from his Austrust Account. He said that he did not understand the statements and did not undertake a reconciliation to determine the true status of his account as he did not have the time or the expertise to do so. He was relying on the professional expertise of Mr Jungstedt and simply filing the documents for the attention of his bookkeeper and/or accountant.

192. Mr Jones said that the documents provided to him by Noalls and Epic indicate a number of occasions on which Mr Jungstedt did not follow his instructions and traded in shares which were not lodged as security either by him or by Circle Jay. In addition, Mr Jungstedt traded in quantities of shares beyond those lodged as security either by himself of by Circle Jay. In all, he estimated, trading in options had cost him $689,000. After settlement of proceedings in the Supreme Court, Mr Jones received all of the shares that he had lodged with Mr Jungstedt together with $575,000. That substantially covered his losses in trading with Mr Jungstedt. Mr Jones’ sons also recovered the shares that they had lost in proceedings that they had instituted.

193. In his affidavit, Mr Jones rejected Mr Jungstedt’s contention that the trading on his account and that of Circle Jay had to be discretionary (T documents, page 1789) and said:

“I did not have sufficient understanding about options trading to give Jungstedt any instructions on how to trade options. I had no idea of which ‘trades’ to undertake. Each trade was done by Jungstedt and most were not discussed. Initially in the early 1995/1996 period he reported to me, but, as the trading got bigger in 1996 and 1997, he ceased telling me exactly how things were going, only reporting that things were ‘going well’. This is highlighted by an occasion when Jungstedt went on leave and one of the relief options traders called me for instructions. I told that person, whose name I cannot recall, that I had never given instructions and that Jungstedt simply did the trades. I told the options trader who replaced Jungstedt that they should simply do what they thought best.

In his submission at paragraph G on page 01789 of the T-documents, Jungstedt claims that ‘we discussed all new open positions before I traded them.’ This is not true. The account was a full discretionary account and Jungstedt was in control of all trades. He simply told me from time to time what he was doing. Unfortunately he told me at all times that the trading was going well until the losses started to accumulated at the end of the period in or around July, August and September, 1997.” (Exhibit 7, paragraphs 8 and 9)

Dealings relating to Mr Jones – Mr Jungstedt

194. Mr Jungstedt said that he was aware from his initial two meetings with Mr Jones that he had a share portfolio worth approximately $500,000, a farm in north eastern Victoria and a flat in Melbourne and that he generated some income trading in cattle.

195. Mr Jungstedt said that he explained basic options trading at those meetings and also in his letter of 11 September, 1995. He later explained strangles in which Mr Jones and Circle Jay traded. On 30 October, 1995, Mr Jungstedt said, he wanted him to manage his account as he managed Mr Boltman’s account as he, like Mr Boltman, was not always easy to catch on the telephone. It was not practical to call for a specific authorisation for every trade. Instead, as with Boltman, Mr Jungstedt was to determine the best times and prices at which to conduct trades within the parameters they had discussed.

196. Mr Jungstedt said that Mr Jones appeared to him to understand the options strategies and the trades that he did throughout his trading. He said that Mr Jones lodged the parcel of shares that he had used as collateral at Noalls and that he added another parcel.

197. Mr Jungstedt said that the vast majority of Mr Jones’ losses were suffered from July, 1997 onwards when market volatility was high and Epic was not permitting him to trade without written approval for each trade from the State Manager, who was often away from his desk. He explained both of these factors to Mr Jones.

198. Mr Jungstedt said that Mr Jones asked him to fax a copy of all of the open positions on a number of occasions early in his trading. Mr Jones, he continued, suggested buying some back early so as to “leave a little to the next bloke” (Exhibit J, paragraph 22).

Dealings relating to Mrs Tinney – Mrs Tinney

199. A year or eighteen months before she met Mr Jungstedt, Mrs Tinney said, she had bought call options in Fosters Brewing on the suggestion of a friend who had suggested that she could purchase them for a better price if she did that. She lost $1,000 in the transaction. In 1993, she estimated that she had shares worth approximately $300,000. She monitored them on teletext on a weekly or fortnightly basis but did not do so more often as they were just providing her with income. Mr Werner advised her in relation to her investments in shares and she also received some advice from her accountant, Mr Glass.

200. Mrs Tinney said that she was introduced to Mr Jungstedt by Mr Werner as a broker who was very good, very conservative and knowledgeable in the field of options. Mr Werner told her that, by using options, she could increase her income from her dividends by about 10%. She said that she first talked to Mr Jungstedt in April, 1995, when she and her daughter met him at his office. Mr Jungstedt told her what options were. Although she did not fully understand what options were, she left the meeting with the impression that they were safe and a good way of making her shares work harder for her. In cross-examination, Mrs Tinney said that she understood that Mr Werner had spoken to Mr Jungstedt about her and she did not speak to Mr Jungstedt about wanting to increase her dividend income by 10%.

201. In cross-examination, Mrs Tinney said that they talked about covered calls at the meeting i.e. about selling calls over shares that she held. She agreed with Mr Rinaldi that she left the meeting with the impression that options were safe and a good way of making her shares work harder for her. She said that she had been given a pamphlet prepared by the ASX but denied that it was the booklet prepared by the ASX entitled “Understanding Options Trading” reproduced in the T documents at pages 2065 to 2091. The pamphlet, which had been given to her by Mr Werner and possibly another copy by Mr Jungstedt, had only a few pages in it. The booklet in the T documents was much, much better. Mr Jungstedt had also recommended another book to her but she found both the pamphlet and the book difficult to read. She tried to read the pamphlet before she signed the Options Client Agreement.

202. At the first meeting, they arranged to have a further meeting which, with Mr Jungstedt’s consent, Mrs Tinney taped as she was having difficulty absorbing written material. The beginning and end of the meeting, which took place on 24 April, 1995, were not recorded and when the tape was turned. Although lengthy, I will set out the first explanation given by Mr Jungstedt in relation to writing a call option:

“... lets say we buy National Bank at 12, they’re almost there, they’re $11.50 (undecipherable) lets say $11.50. It’s very simple really, you buy the shares and if the stock price goes up, we make money and if the stock price comes down, we lose money. And this is the sort of risk profile you have by just having shares. Now if people buy call options instead of buying shares, sorry buying calls. They’re doing that instead of buying shares you could say, and they want to gain if the market goes up they don’t want to pay as much money as buying the shares or whatever the reason might be, and the beautiful thing with the call options is that you can gain on the upside more or less the same way you can gain with the shares, but, on the down side, your risk is limited to what ever you paid for your call options. And let’s say we bought the National Bank $11.50 calls and we paid 40 cents, and that’s 40 cents per shares, when I say 40 cents times a thousand shares, every option is worth a thousand shares, it’s equal to $400. But it’s still much less than buying a thousand shares for $11.50, which is obviously equal to eleven and a half thousand. So if it goes up from here we gain, and if it goes down we can only lose our $400, that’s the total risk. Now if you have the shares.... Or actually, maybe I should also put in here that if you just sell the calls, the same calls, we don’t have any shares. It’s sort of the mirror image of this profile here because we received the 40 cents, oops, that’s supposed to be a straight line ... 12, 13 ...We received the 40 cents, so that’s our profit when we sell the Calls, but we’re running a risk if the stock continues to go up, we have promised someone to sell our Calls for $11.50 and if we don’t have these calls at all yet, we might have to go back to the market and pay 12 for them. Buy them for 12 and sell them for 11.50. This is again if we pretend we don’t have any shares, and this as you can see represents a potential unlimited risk.

If these shares will go to $20 or $40 or $100 and we have promised to deliver them for 11.50 we are looking at an enormous loss and this is risky business. This is called Naked Selling, because there's no cover in any other position and that is risky. Now if we combine the shares and the call selling, if we call this 'one' and this 'two' and this 'three' and this 'four'. So this is a combination of the shares and the call selling, we get a different scenario. We bought the shares, for say 11.50, so this part is still the same and now that we decide, we think the shares are going to go up, so we want to keep them, but we might say I don't think it's going to go above say 12.50. So I'm going to sell, I buy the shares, buy shares, 11.50, sell call with strike of 12.50 and say we received now I said 40 cents for an 11.50, so it should be less than the 12.50 but ah, just as an example, say we get 30 cents for that one. What we're doing really is we, if that's supposed to be 12.50, I shouldn't have written there, should I. If we didn't have the option the profile is just like the share profile, it just continues to go up here. But now we also sold a call option which is this profile there and if I add it... here, it would look something like this and this now represents 30 cents that we received from the call option. Anything above 12.50, we should gain 1 cent in the shares, but at the same time we will lose 1 cent in the call option so these will always take each other out which basically means that we can draw a line straight here and no matter where the price is above 12.50 you will not lose anything more and you will not gain anything more, providing we do nothing else. And in this case we can say that we bought the shares for 11.50. If the share, say this was, was a October, October um call option. If the shares was anywhere under 12.50 by the end of October when this option expires, no-one is going to come to you and say I like to buy your shares for 12.50 because the stock price is only 12.00 or 12.10 or whatever. They, they're better off buying it in the market which means that the option will expire worthless.

And you will keep the 30 cents that you received and that is all there is to it. You still have your shares, you got an extra 30 cents and that's it The extra 30 cents can also be looked upon as an insurance because you bought the shares for 11.50 but then you got 30 cents back on the option which basically means that the stock can go down to 11.20 before you lose anything. We sort of shift this line 30 cents to the left. And this is the new break-even, 11.30, sorry 11.20. But, this is a very small time insurance in terms of percentage, but it's still an insurance. And the beautiful thing with this insurance is that you didn't pay for it, you actually receive money for it and this is why selling calls against shares is so effective as an investment. You get a small insurance, basically you get lower risk, in this case, 30 cents lower risk, and you get higher returns, it's the same 30 cents, but if the stock goes down you can take a fall of 30 cents and you are still not worse off than if, if ah you'd done ah nothing. If the stock price goes up, you have, well a couple of scenarios. if the stock goes up but it stays below the 12.50, basically you keep your 30 cents on the option with a profit the option is a profit and because you only paid 11.50 for the stock you're also looking at a profit in the stock. So there are situations here, between 11.50 and 12.50 where you actually make money on both ends and there's no loss anywhere. But, if the share price goes above S12.50, this is what most people are a bit nervous about, what happens then Say it goes to $13.00 by the end of October, now you can do two, two choices really, I'm hopeless, two alternatives. Either you're happy to sell your shares at 12.50 and you have already received 30 cents, so you're really selling it at 12.80 (Anne: mmm) But if the stock price is $13.00 at the moment, you will still maybe feel that I'm missing out on that last 20 cents. But the first alternative is you sell, basically you get exercised.

And your shares gives you profit of 12.50 minus what we paid, 11.50 equals $1 and the option gave you an extra 30 cents so you're looking at $1.30 profit and that is not too bad considering you invested $11.50 in the beginning so that represents a return on 11% approximately, and if this is over a period of say 5 months or 6 months, you can pretend you can do it again, which you can. And say it's six months which would be equal roughly 22% in a year. (Anne: mmm) So it's a good return but now you lost your shares and alot of people like to hang on to their shares because it's a long term investment and they prefer the dividend if it's franked and you don't pay taxes on it and so on. So I recommend people to look at the second alternative which is..... the stock price is still 13 and we have promised to sell our shares at 12.50 but we don't want to do that so we buy back the October 12.50 call, and remember we sold it for around 30 cents, the stock price is now 13 so there's immediately a value in the option of 50 cents and if it's, even if it's only a week or so to go, there might be an extra 5 cents in there, or even 10, so lets pretend we have to pay twice as much, 60 cents to buy these options back. That means a loss of 30 cents on the option, but remember now we have no obligation in the option market at all because we sold it for 30, we bought it back for 60, we have neutralised our option position, we have no option position but we still have the shares and the shares show a profit of $1.50, which again equals a profit of $1.20, if you take the whole investment as, you should look at the whole thing and you can obviously just stop here if you want. You bought the shares for 11.50, you sold the option, you took a small loss in the option and you took a big profit on the shares and if you sell the shares now you're looking at $1.20 profits.

But as we said the shares are normally long term investment which means that people want to keep, hang on to shares for the next dividend and whatever so, what we do in this case, we buy the October option back for say 60 cents and then we go and sell another option, say a December option, and because the share price is already as high as 13 we don't really want to sell at 12.50 at this stage, unless we're absolutely convinced that the stock will come down again so we say we sell at $14.00 call option in December and then we will receive some money again and I don't know if it's going to be 60 cents but in ideal position we always try to find a price on another option that is with the highest strike price, with the time further away, with roughly the same price so if I can buy these back for 60, yes it means I'm realising a loss but I'm still ahead. But if I can buy these back at 60 and at the same time sell these ones for around 60 cents as well, it means that you don't realise any (Anne: mmm) outlay of money at this point and this is the ideal position. When we ... this is called 'Rolling Over’, or Roll Over, because basically what we're doing is we have a short position in October we buy that back and roll it over to December, So now we have a short position in December and, and that's all that changed because if I can do that for 60 cents and that for 60 cents, it means there is no outlay of money. Again obviously this is without the costs in brokerage, and umm the clearing house fee of $1 per contract. But ah, it's, ahh.... there will also sometimes be opportunities where that I can buy this back for 60 and I can sell something else, you know, say I go to March '96 $14 and I might get 70 cents for that (Anne: mm) which means I've outlaid the 60 cents to buy these back but I sell something else for 70 cents which means I get another credit into my account (Anne: mmm) and I still have the shares and I still get the dividend. And this is very briefly the whole idea of writing Call options against your shares and you can do this depending on how the share goes and how comfortable you are with choosing the share, the exercise price.” (T documents, pages 1215-1219)

203. When her attention was drawn to the first two pages of this passage and then the final sentence, Mrs Tinney was asked in cross-examination whether this passage encapsulated what writing call options were all about and what her friend had discussed with Fosters Brewing shares, Mrs Tinney replied that she had not put the two together at all. She had not thought that her friend and Mr Jungstedt were talking about the same thing at all. With hindsight, she saw that they were and Mr Rinaldi had clarified it a lot for her. At the end of the meeting, she agreed with Mr Rinaldi, she understood that they were only going to sell calls against shares that she held but added that she did not really fully understand about puts and calls at that stage. She had the feeling that it was very safe and that, because she had the shares, she could do this and make her shares work harder.

204. In cross-examination, Mrs Tinney rejected Mr Rinaldi’s proposition that her previous experience with options trading meant that she was aware that options were a risky type of investment. She had embarked on the purchase of the Fosters Brewing options on her own but, in being introduced to Mr Jungstedt, she was being introduced to a professional person who knew a lot about options trading. The manner in which options trading was presented to her seemed to her to mean that it was safer than the options trading she had engaged in by herself. She knows now that an option can be a good investment or not depending on how the underlying share performs. She did not, at the time that she first spoke to Mr Jungstedt, understand the risks involved in options trading in general. All that she knew was that she had previously lost $1,000.

205. Mrs Tinney said of the second meeting with Mr Jungstedt:

“... he gave me a ‘lesson’ in options. Following this meeting my understanding of options was still very limited. However, I was confident in Jungstedt’s ability. From what Jungstedt had said, there seemed no risk associated with it. Jungstedt also indicated that by using the shares I owned, options would make a small profit on a regular basis which would increase my income. He also explained that any money that was put into my Austrust account was mine to use as I saw fit and that the money would not be required to fund the purchase of positions. Such funds would come from options themselves.” (T documents, page 1130)

Mrs Tinney said that Mr Jungstedt did not ask her about her personal financial affairs or her personal financial objectives.

206. In early June, 1995, Mrs Tinney said in her second statement, she was advised by Bankers Trust that she could pay the interest for the 1995/1996 year on her margin equity loan in advance if she wished. Early payment would be a benefit to her tax position and she would have the advantage of receiving a fixed rate of interest. The amount of interest was $11,000 but she did not have that amount of cash and did not wish to sell shares to cover it as her dividend income would be reduced were she to do that. In approximately the middle of June, 1995, she telephoned Mr Jungstedt to ask him if he could raise that amount of money through options. Mr Jungstedt told her that it would be difficult but that he might be able to raise half in time. He sent her transfer forms to transfer her shares to the OCH and she signed and returned them. On 22 June, 1995, Mrs Tinney continued, she telephoned Mr Jungstedt and asked him if he could start with options so she would have at least some money for Bankers Trust. In a second conversation that day, Mr Jungstedt told her that he had sold some options and obtained some of the money. In a third conversation, he told her that he had made the total amount together with fees and commissions. Mrs Tinney said that they agreed that Mr Jungstedt would forward the money directly to Bankers Trust on her behalf.

207. In cross-examination, Mrs Tinney denied the proposition that Mr Jungstedt had told her that $11,000 could only be raised if she embarked upon a more risky form of options trading than trading buy rights. She did not recall Mr Jungstedt’s saying that he could only raise about half of the amount with buy rights in that time. Her response when asked whether Mr Jungstedt could have said that they could only raise that sort of money if they used a different strategy was that he could have but that she did not remember. The following exchange occurred between Mr Rinaldi and Mrs Tinney:

“His evidence is that he said we would have to change strategy to something with more risk in order to achieve that money in that short period of time. You do not remember whether that is the case? --- I don’t remember the word risk and I don’t remember the word strategy.” (transcript, page 91)

208. Mrs Tinney said that she did not remember Mr Jungstedt’s having discussed with her other strategies that could be used such as strangles. She said that he used the words puts and calls. She denied that he had told her words to the effect that they could try to raise $11,000 and that she had $150,000 worth of cover lodged. She denied that he told her on the telephone that he had been able to carry out the option contracts with margins of only $16,000. In re-examination, Mrs Tinney said that, if he had told her that the margins were only $16,000, she would not have understood what he meant. She would not have understood at the time what was meant by the word “strangles”. She now understood that:

“A strangle is a sold – a sold call and then 50 cents above the strike price of the sold call is a bought call, and then the other side is a sold put and 50 cents below that strike price is a bought put.” (transcript, page 337)

She had learnt that during conversations with Mr Jungstedt but later than 22 June, 1995 and in the last six months of 1996. When asked in re-examination whether she could identify a particular strategy that Mr Jungstedt used, she said that he was selling puts and calls and later on he recommended what she had described with 50 cents above and below. Having received a contract note with trades forming part of a strategy, she did not know how to work out her overall position.

209. Mrs Tinney said in her second statement that she did not give Mr Jungstedt explicit instructions to enter the trades that he had entered and did not know what he had done until he had done it. Despite that, she was satisfied with the situation and trusted Mr Jungstedt’s knowledge and judgement. Mrs Tinney said that it was her understanding that the money that she received from the trades was profit. She did not think that she had any obligations in relation to those trades.

210. Mrs Tinney said in her second statement that she was very excited about the amount of money that she had raised in one afternoon but felt that there must be a “catch”. When she had first asked him about raising the money, she would not have been surprised if he had said he could not do it. She was delighted when he said that he could. Due to her concern about whether there was a “catch”, she thought, she should have another meeting with Mr Jungstedt. She arranged that meeting for early July as she was still confused about options, thought she should find out more and should double check that the $11,000 was profit. Mrs Tinney taped the third meeting held in July, 1995.

211. The transcript of the third meeting begins with Mrs Tinney’s telling Mr Jungstedt that she “... sort of understand[s] the puts and the calls.” (T documents, page 1251) In cross-examination, Mr Rinaldi drew Mrs Tinney’s attention to the following passage of the transcript of the third meeting:

“Anne: Am I right in saying that people like myself with a portfolio can trade in both call and put shares

Jan: yeah

Anne: And then people who are, who don’t have the shares, but just want to buy options, they can buy both call and put options, is that right

Jan: Yeah, That’s right. They can also sell them just like you, but if they don’t have shares as collateral they need to put up cash instead.

Anne: Ah

Jan: And that means, you know, if you sell that option there and you receive $1,200, without knowing exactly, my guess is that, you would have put in margins cash to cover that if you didn’t have any shares. It would be around 2,500. So that means even if you sell contracts, you can’t take the money and do something else with it at the moment, but I mean everybody can’t do everything, but every time we sell we need to cover the risk with something, and when you have the shares, the risk, in a way disappears because you’re already risking your money in the sharemarket and this is the same risk that is related to the option market.” (T documents, page 1253)

212. In cross-examination, the following exchange took place between Mr Rinaldi and Mrs Tinney:

“You understood that the $1200 that you got when you sold this theoretical in this case, call, still had to be covered or accounted for in terms of margins because somebody could exercise you at a later time, depending on how that underlying share went, which is what – well , it is a bit like what happened with your Fosters option? --- No, I am sorry, I did not understand that in that way at all.” (transcript, page 99)

213. Later in the transcript of the third meeting, the following exchange took place between Mr Jungstedt and Mrs Tinney:

“Anne: Now Jan another question that I have got to was closing things down That 12,000 that we made that we made, that's not in my bank account because I've, you know where I did with it (Jan: Yeah) I gave it to B.T. what I'm wondering is whether I should build up a bank account with some funds in it so that sometimes if we like you know you were saying, it was because we needed this at the end of June that we decided to trade (Jan: Yeah), but had we not needed it we could have waited till now, then started the trading, now, surely there will be other times where we just sit and wait for a couple of months before we do another trade. (Jan- Yeah) you know (Jan-. Absolutely) just so..

Jan: But remember our main thing here is, the idea is, we use your shares and we sell options, every time you sell options, you will receive money. If you put it into a certain account or spend it, that's all up to, but..

Anne: Well I just wondered whether I should have a safety account, that what I am asking you.

Jan: You mean for, for buying them back or. Well that could be the case, yes if we strongly believe that say the call option has gone down from, from a high value down to close to zero Let's buy back for a few hundred dollars now and then wait and hope and see if the market goes up again in the next two weeks then we sell it again that sort of thing (Anne: mmm mmm) Yeah, That that oh that might be the case, that that can happen if, if you want to trade them fairly actively, without doing it every day. But the problem is that I never know when that is going to happen (Anne: NO!) Yeah and I had actually exactly that happening with another client that I think I mentioned on the phone.

We sold for him first, we sold National Bank May calls, I think it was, and National Bank went really strongly in April and May so we had to buy them back with a loss, but he didn't want to put any money in, so I bought them back for 60 odd cents, I think he sold them for 20, bought them back for 60, but at the same time I went all the way to January 96 and sold something else for 72 cents so he again (Anne: Ahh I see) had a positive cash flow (Anne: oh good) into his account (Anne: oh good). Last week this particular January call options the market had come off substantially since May had gone from 72 down to 22 and we bought them back and took that profit, but again we bought them back and he still doesn't, doesn't want to pay money into his account so I bought a January back. We were out of January, but we paid 22 cents for it, so I sold another one in October now for 40 cents so he pockets another 18 cents and put it into his account. And this is what I want to do as well with yours. There might be one time an extreme case where you think its been coining off dramatically, I'm sure its going to turn oft Lets buy it today and sell it on Friday that sort of argument. But then we're guessing where the market is going to go. And, and its a trade with sort of guessing and the risk involved with any guessing, but normally when we buy anything back I will sell something else for you and whatever I sell is going to be more expensive than the one I am buying back. So there is always going to be a little bit of money coming into account rather than going out.

Anne: Right mm OK, well so I don't have to worry, Oh that's nice, I can pick up the Brett Whitely

Jan: yes that's right and oh for instance the market now having gone up so dramatically on Friday and Monday is its a very good time, especially yesterday, if you going to try to pin point it.” (T documents, pages 1263-4)

214. Mrs Tinney said that she saw the first part of this conversation as Mr Jungstedt’s talking about rolling over. When asked by Mr Rinaldi whether she thought rolling over into the future as a strategy to contain potential loss, she said that she “... saw the strategy of rolling over as giving more time and therefore I didn’t need to pay money out.” (transcript, page 101) Their exchange continued:

“So you contained a potential loss? --- I didn’t see it in the words you were using and - - -

Putting aside my words, you would agree that paying money out could be a loss?---But Jan was saying that you could sell more trades to bring money in.

Yes, but a moment ago you were talking about to avoid having to pay money out?---Yes, that is the way he said, you could close a trade with some money but you can do another trade at the same time, bringing money in to close out that previous trade.” (transcript, pages 101-102)

215. During the meeting, Mrs Tinney mentioned to Mr Jungstedt that her brother, Arthur, whom Mr Jungstedt knew, had just lost $60,000 on options and, although not stated, it was implicit in their conversation that Mrs Tinney was asking Mr Jungstedt how that could have happened:

“Jan: yeah that’s uh, I may not know the exact number, but uh, the um, he's, he's been facing a loss, in, that's, that's absolutely right, and, uh, that is, err, in a completely different type of trading for a start

Anne: Ahh right

Jan: And Secondly, um, what happened there is, is sort of an, its a long story, but in very short version its um. Everything that could possibly went wrong went wrong and then the decision was taken to take the losses that was incurred and both, I'll, I'll show you in a second,

Anne: But you say this was a different type of trading to what we're doing.

Jan: Yeah yeah Its more advanced way of trading which also probably gives better returns

Anne: What this or his.

Jan: Er his, um, because that is very briefly, and it looks to be the same, and any professional way of trading options, you see is, you try, instead of guessing where the stockmarket is going to go exactly, you try to cover a huge area. Here's the stockprice now, and it means that it could go up or down 20 to 30% its still going to be somewhere in between where I make a profit.

But and this can be achieved by selling calls and selling puts and at the same time you don't want this unlimited risks to happen. So what we do is, we cut it off by buying other contracts so that no matter what happens you can only lose that much. And what happened with Arthur was that his position was put in place and the insurance part of it was not quite there and then we had an extreme move the following day, and the following day yet again, and somewhere up here the decision was taken to realise a loss and that meant that we were looking at this sort of a loss, a big loss down here and both, two things went wrong there, first of all there should have been insurance in place on the same day with that type of stock, but it wasn't. In the future now we making sure that it is. Secondly, The decision to cut the losses here, uh, I mean its uh you can almost say its right because it couldn't just go on and on and on, but what happened after this in time was of course that the stock came back all the way here so if nothing had been done there it would have been a great profit instead of a loss. So we have two major decisions

Anne: What sort of trading is this called

Jan: Uh Well um

Anne: I think that's one of the questions I've got is the different .....

Jan: Its, Its. Its not called anything in particular, its, its uh, we, we sell strategies which are called straddles and strangles, you get to this if you, if you study options, which is basically what I'm covering huge profit areas, either that way or this way and because you give yourselves room to move so much for a share and you still make a profit, that's why its a good way of trading and it makes profits in most cases. Arthur had, without again knowing any numbers, he was looking at great profits the quarter before and the quarter before that.

So, two things went horribly wrong there and the market turned exactly at the wrong times to, to sort of exaggerate this, this effect. The difference for a start here is that we have, or you have the shares which means with the call options you're always covered on the upside no matter what happens. So you are already insured or, or umm yeah that's another way of putting it, because if that stock, stock starts to run really strongly up it-means that your shares runs up even though your option runs down so to speak and it all levels out and you know what a potential its not going to be loss its going to be a profit if we started when the stock is down there. So, So if again to make an example, if the stock was 4.90 and it goes all the way to 5.50 and we sold that option for 12 cents. At 5.50 if we had to buy back that option for say 25 cents by the end of the time, and we only got 12 and sold it, that means we loose 13 cents on the option. If the stock, 5.50, option 25 cents, but you also receive 12 cents when we sold. There is still a loss on the option trade of 13 cents.

Anne: but however because you also put puts

Jan: yeah that's right

Anne: I'm getting 9 cents from the puts

Jan: Yeah

Anne: So really (Jan- that is) the 12 plus 9 and then 13 from that. I'm still not really making a loss

Jan: No, that's right. At the same time you see, the stock was here, 4.90, and the stock is now 5.50 so we already made 60 cents on the stock and then, even if you realise all this, you know you lose your shares down to 5.25 or whatever this is actually, no matter what number you take about 5.25 this will always add up to this case, plus 47. Even if you had, had put $10 here so you lose 4.75 on the option at the same time you would have gained 5.10 or whatever on the stock. You can make examples yourself and see how it works out (Anne: huh huh). That is the first difference and the good part with the, the calls against the shares, because you already have the call, stock that protects you on the upside. On the downside its not that much protection. You receive 12 cents extra so if the stock goes down 12 cents you're still looking at a break even, but if it goes down more, then you start losing the whole thing but again its no different from being a shareholder

Anne: Oh I see this is not being a shareholder, this is, its just using the 12 cents

Jan: yeah

Anne: Uh I think Jan too, sort of in my, my simplistic mind and I'm not meaning simplistic as a derogatory statement I'm meaning that I try to think of things in the simple (Jan: Yeah) of terms. Is that I, I don't want my shares called I don't want to lose my shares (Jan: I know I know) so the profits you talk about with the share rising I almost see that profit as being slightly different from the option profit because I don't intend selling. (Jan: Yeah Yeah no that) Does that make sense?

Jan: That makes sense. And we don't intend to lose any shares at any stage using the options. If you want to sell the shares that's, that's a (Anne: totally different) different decision. So” (T documents, pages 1254-7)

216. In cross-examination, Mrs Tinney summarised her understanding of this passage when asked by Mr Rinaldi whether she agreed that Mr Jungstedt had explained to her the different forms of options trading:

“Yes, he explained puts and calls and when he was answering my question about Arthur he said that Arthur had bad luck, that he had to be in much more complicated strategies and, you know, he pulled out and the market went right and it all would have been all right if he had stuck with it. But they were more sophisticated trades that, you know, Jan is doing with me.” (transcript, page 103)

217. Also in the July, 1995 conversation, Mr Jungstedt and Mrs Tinney discussed BHP options:

“ ... BHP’s today $18.50, but if you look at this again, if they came to you say said they wanted your shares for $18.18 and the share price is really 18.50 they make, they could make an instant profit of 32 cents, but the option was valued as high as 99 cents and if they exercise the option they lose the option value so if instead they bought the options for 35 and they can sell it for 99 they can make a profit there of 64 cents which is actually twice as much as 32. (Anne: mmm) so they are much better off going back to option market and selling their options and taking a profit without getting any shares involved at all. And this is a rule that runs all the way until this contract comes to the end. 99 cents is a lot of time value left because the stock is still only 18.50. So there is 32 cents intrinsic value and, and another 64 cents, 67 cents time value and that is time value that we want to disappear and it will if we just sit and wait, so even, if the stock, by the end of September is as high as 18.50 or even higher, that option will be worth less because the time has disappeared. And again I think I have. Did I have a roll over example.

Anne: Oh so when you, yes you did (Jan: Yeah). So when you talked about the rollover if the time value is not there its cheaper to buy it back.

Jan: Exactly

Anne: Ahh I've twigged, I've twigged.

Jan: So, uh exactly right. So we have sold time between now and September in BHP.

Anne: So a week before or something like that

Jan: yeah or two weeks to make, make made it safe, but when the time value starts to disappear from this option, which will probably not happen until the last couple of days in BHP, in some other stock it may happen quicker, but say when it is two weeks to go, we will go and buy this back and hopefully pay much less than 99 or whatever

Anne: Maybe even less than what we paid for it

Jan: Yeah Exactly.

Anne: What they paid us for it Uh yeah right uh huh

Jan: And uh at the same time when we buy that back, we sell something else say a $19.50 BHP or back or, or December $19.50. So even if we have to pay you receive 35 cents for it, say we have to buy it back even for 50 cents if I can buy it back for 50 cents and at the same time sell a December $19.50 or $20.00 December and get that for, sell that for 70, so you gain another 20 cents. At the same time you kept your shares and your shares has gone up strongly from whatever they were here 17.90 to $18.50 or something. So we sort of pushing it higher up and further away every time we have to roll, but just because the stock has moved strongly now doesn't mean we have to roll it. We can, if we want to, but we don't have to

Anne: Yeah and your saying that really its not sensible?

Jan: No, I would say its a bit early, because we just took the position and um even though it moved strongly against us in the call option

Anne: But not in the put option

Jan: In the put option it is the opposite. It move. We sold that put option for 25 cents and yesterday it was only worth 6 so that has gone the other way and all these puts is balancing the calls so together that put and that call

Anne: Ohh, because the price has gone up

Jan: Yeah

Anne: The puts have actually gone up and the ones that are further away which mine are to this. Am I making myself clear here?

Jan: Yes

Anne: because this put is 4.50, maybe the put in ANZ is now 4.75, is it?

Jan: No the strike price doesn't change. Only the share price change, but remember if the stock price was 4.90 and we gave someone else the right to sell shares to us for 4.50 it was only 40 cents difference there. Which means there was a greater likelihood that share price would come down to 4.50 or below now the stock price is up here at 5.20 its much further away to 4.50

Anne: Yeah and that's why the option has gone down

Jan: That’s why the option is worth much less because the chance of that happening is much less

Amber Louise: As time, the time value disappears, if the shares, like with BHP, how there above what we've got them on the option (Jan: Strike Price) yep There would be more risk of them being exercised, wouldn't there? If the options lose their value and the people are going to make more money to take up the option than to sell it.

Jan: Yeah, Yeah, but I see what you mean Uh but, the option will move with the share, plus the fact that the time value is good. But you're absolutely right. When eventually the time value comes down close to zero, somewhere around here, that's when we have to be careful and we, the calls it basically never comes down to zero until the very last week or the very last few days and that's why in your case we've got to have a rule and say we look at it when there's say four weeks to go, and three weeks to go and at the latest we change it to when there is two weeks to go or we can change it when there is say a month to go, I mean it doesn't really matter, but that time element disappear quick at the end and we want it to disappear, but we don't want to sit and wait so we get exercised because you're right, eventually the time element disappear so that the people who are on the other side who bought these calls, they might say well I can sell the option or I can exercise and its the same to me and we don't want that (Anne: No) because you have a small risk of losing your shares or selling your shares rather, we don't lose them as such. But. The time value is disappearing every day a little bit and that's what we are aiming for, but before it gets too close to zero we close that out and move further away ahead which means much more time value is built up again and then we let that shrink down to close to whatever and then we do it again and again” (pages 1259-1262)

218. Towards the end of the conversation, the following exchange took place between Mr Jungstedt and Mrs Tinney:

“Anne: This is where I still get a bit confused is, is the title of everything. Like you know I thought called shares were just when you had shares and you put them out on the market for somebody else to call them in (Jan: Not) so to speak, but no

Jan: basically we have shares and we have two types of options the call option and the put option and both the call and the put might relate to ANZ, like, like the ones we traded. But because they are different types one is the right to buy the shares and the other one is the right to sell the shares they work sort of um in the completely opposite way and if we sell both we get a balanced sort of position and there's no way on Earth we are going be running the risk of being exercised on both of them

Anne: no can't,

Jan: Cant

Anne: can't possibly

Jan: unless someone really wants to give, give away money, but I don't see that someone traders that'll do that.

Anne: I don't see that sort of thing happening

Amber Louise: Funny that

Anne: that clears it up and I'm even more pleased that you put in the puts then straight away because that, it almost seems even more safe to have both

Amber Louise: Both of them

Jan: It, excuse me, It doesn't add any particular risk as long as you have it all covered which you do. If, no I think its right to say actually, as a total its slightly less risky, even though um again doing it the way we are doing it here is not a risky business at all. Again what. I mean options they have a bad reputation in a lot of peoples minds because they can be really, really dangerous and things can go wrong, you know, because of people making the wrong decision or whatever. There is no such thing as, as 100% guarantees with every investments ever but as long as you know what you are doing and, and you are keeping an eye on these contracts when they get to the expiration There's, There's close to absolute nothing in risk to lose your shares or running a loss on the whole investment and my, I'm absolutely convinced that so many more people will do this if they knew about it or if they understood it and felt comfortable with it and because it takes time to get there a lot of people just give up before they started and they say you know I'll, I suggested sometime and they say no option is not for me its too risky and then I can talk for half an hour and explain that it doesn't have to be risky in connection to your risk. Most people get interested if they listen for half an hour there, but still a lot of people don't

Anne: No They have made up their minds

Jan: Exactly I'm happy just having shares thank you and I'll say fine I cant force them to (Anne: No) to make more money, but um its the way it works

Anne: I just had a little thought, I noticed last night OPSM has gone up in the last. They are sitting around the $2, $2.05 I think, they went up to 2.35, it doesn't seem as nearly as good as AMCOR

Jan: Mm No and its not one of the ones I can use anyway. No AMCOR is, is very good. Westpac, I think is good too and Lend lease is good as well. That should probably be enough.

Anne: And then can I take the money out to the bank that you put in it for me.

Jan: yeah, You can do whatever you want with it, you can send me a cheque. You can buy other paintings (laughter)

Anne: I haven't paid for this one yet” (T documents, pages 1271-4)

219. Following the meeting, Mrs Tinney said in her second statement that, although she was still a little confused about calls and puts, she was assured by Mr Jungstedt that all the money in the Austrust account was hers to spend as she saw fit and that she did not need to keep any money in the account. She said that she was also confident that Mr Jungstedt knew that she did not wish to sell her shares and that he gave her the clear impression that there was virtually no risk in options. Despite her confusion, she added, she was happy to have started trading in options with Mr Jungstedt’s advice. He told her, she said, that she would learn as they went along and would become more familiar with the different terms used.

220. In cross-examination, Mrs Tinney said that she had not gained the impression that there was virtually no risk just because she had underlying shares:

“It was because, when I was saying before, that if we had to buy back a trade he could sell another one at a higher price and so my shares wouldn’t be affected but there would always be money available to counteract that trade and that is what made it feel very safe to me.” (transcript, page 105)

She recalled that some of the companies in which options were sold were not companies in which she held shares. They included MIM and Western Mining.

221. In cross-examination, Mrs Tinney recalled that she wanted to keep adding positions and said that she had become very excited about money going into her account. She telephoned Mr Jungstedt to ask if there was anything that they could do or that he could recommend. She recalled telling him that she would like to buy a second hand car for her daughter and asking whether that was possible. Mrs Tinney did not recall Mr Jungstedt’s saying to her that she would have to be careful and not add too many open positions or otherwise her margins would be too high. She did not recall his saying that she did not want to increase her margins above $150,000. If he had said it, she said in re-examination, she would not have understood what he meant by it.

222. In the period leading up to Christmas 1995, Mrs Tinney said that she and Mr Jungstedt talked frequently. He would suggest particular trades and, relying on his experience and expertise, she would authorise them. She would monitor the prices of the underlying shares on her teletext and began to keep a record on her computer of positions opening and closing by using the same sort of format used on the contract notes. The record was intended to show her position on closed positions. Mrs Tinney said that she made a number of purchases in this period with money in her Austrust account. She had discussed them with Mr Jungstedt on a number of occasions and, relying on his advice, considered the deposits in the Austrust account to be profit.

223. In cross-examination, Mrs Tinney said that she knew whether she was making a profit or incurring a loss other than in relation to the positions that remained open. An example of the computer record Mrs Tinney had prepared related to BHP options. It showed a loss in relation to the first call that was sold when the option was later bought back (T documents, page 1647). Mrs Tinney rejected Mr Rinaldi’s proposition that this indicated that she was aware of the risk of losing money in options trading at that early stage. She said:

“I don’t think it is quite as clear cut as you are saying because yes, there was a loss on this one. Jan would have chosen another position that would pay for this so I didn’t have to draw any money out of the bank or anything like that. ... And other positions closed with a profit.” (transcript, page 111)

Mrs Tinney recognised that she could suffer a paper loss but Mr Jungstedt just sold another position that would cover that loss and bring in a bit more money. It did not seem to her to be a loss out of her pocket. It was her understanding, she confirmed later in cross-examination, that the money she received when selling a call was instant cash profit. She did not understand at the time that the other end of the transaction might cost her money. At the hearing, she understood that but at the earlier time she had been under the impression that to open another position was giving more time.

224. Following Christmas, 1995, Mrs Tinney said that she became less excited about options trading. She realised that it took up a lot of her time and also noticed that Mr Jungstedt began calling less frequently with prices and would seem distracted when talking with her. Mrs Tinney said that she was concerned that Mr Jungstedt did not appear to be entering agreed trades immediately. He would advise her that everything was find and, on that advice, she continued with options.

225. In February, 1996, Mrs Tinney said that she asked Mr Jungstedt if it would be possible to purchase, on terms, 2 Peruvian alpacas and using options trading to finance the purchase. Mr Jungstedt told her, she said, that it would be difficult but thought that we could do it. Mrs Tinney said that she did not want to sell any shares to fund the purchase as this would reduce her dividend income. She withdrew $10,000 for the first instalment from her Austrust account in the belief that this was profit from her options trading.

226. In cross-examination, Mrs Tinney said that she would ask what he would suggest and that he had programs to use to suggest positions. They spoke to each other nearly every day. After watching the teletext, she asked him about two or three matters and whether it would be a good idea to buy them back. He often told her it was a good idea and there may have been a couple of times when he said that it was not but that was very hazy. She did not remember having told Mr Jungstedt to undertake a trade after he had told her that it was not a good idea.

227. By May, 1996, Mrs Tinney said in her statement, she became tired of watching the teletext to see what the share prices were. Due to a number of events occurring in her life, she did not want to continue trading after November, 1996 and told Mr Jungstedt that she did not want positions to extend beyond that time. Initially, Mr Jungstedt agreed that he would do this but he soon advised her that they needed to pay to buy back some positions and had to sell more positions to do that. Consequently, they needed to do trades that finished in December, 1996 and January and February, 1997. Taking positions in these months would give them more time, Mrs Tinney said that he told her. Although she told him on four occasions that she wanted these three months clear, she said that she eventually gave up. She followed his advice and still trusted his recommendations.

228. At the end of June, 1996, Mrs Tinney said that she received a letter from Epic advising her that Mr Jungstedt was to work with them. At about the same time, she met with Mr Werner who had moved to Deutche Morgan Grenfell to ask for advice about her share portfolio. Mr Werner asked her whether he would like her to take her options trading to his new firm. When he looked at her options positions, she said, he was amazed at the number of trades and told her that she had too many open positions. Mrs Tinney said that she did not understand what he meant and thought that Mr Jungstedt had more knowledge about options trading as he specialised in them. Consequently, she decided to transfer her account to Mr Jungstedt at Epic.

229. In cross-examination, Mrs Tinney said that she understood what was meant by the expression “open positions” but reiterated that, in June, 1996, she did not understand what was meant when Mr Werner told her that she had too many open positions. She did not then understand that an open position meant that she could owe money as a result of it.

230. By the end of August, 1996, Mrs Tinney said that she became worried after seeing some losses with trades. She did a rough calculation in relation to closed trades and found that she had incurred a loss in the order of $20,000. She discussed this with Mr Jungstedt, who told her “not to worry, you win some, you lose some” (T documents, page 1134). He assured her, she continued, that trading was going well. At no time did she know that her shares were at any risk. She had further conversations with him and told him of her concerns as there seemed to be more losses appearing as trades were closing. Mr Jungstedt again told her not to worry. He told her that “nearly everyone trading in options goes through a bad patch and the difference between an amateur and a professional is that the professional will ride out the problems and not panic” (T documents, page 1134). Mrs Tinney said that she knew that her parents had not sold their share in the 1987 crash and that the share market had improved. Her understanding was that the options market was the same as the share market and that it would improve as the share market had previously. She accepted what Mr Jungstedt said without questioning him. She thought that he knew a lot more than she did and, with trust and respect for his knowledge, listened to his advice.

231. In September, 1996, Mrs Tinney said that Mr Jungstedt suggested to her that she increase the number of contracts in which she traded from 10 to 100. He explained that this was a better way to make money. In addition, he suggested a strategy that he described as a “four leg strategy” for some of her positions. This would be better for controlling her margins, he told her. Although she was not sure what he meant, she trusted him.

232. In an earlier statement dated 17 October, 1997, Mrs Tinney referred to four conversations that she had with officers of Epic some time after August, 1996. Two of those conversations were with Mr Jungstedt. He told her that she was “a bit over the margins” and that it was in the order of $20,000 but that she should not worry as margins fluctuate from day to day. Despite his reassurance, Mrs Tinney said, she was still worried as she knew enough to know that she should always be within her margins. She trusted Mr Jungstedt as her adviser and accepted his reassurance. Mr Jungstedt followed this conversation with another on 3 October, 1996 when he told her that Epic needed more collateral and asked her whether she had more shares to fix up the margins. The following day, Mrs Tinney made available 3,000 Pacific Dunlop shares, 4,000 GIO shares and 250 Brambles shares. At this time, Mrs Tinney realised that Epic had almost all of her shares and even then Mr Jungstedt had told her that they would only half fix the problem but that was all right with Epic.

233. On 12 November, 1996, Mrs Tinney spoke with Mr Dunphy, who told her that she was $83,000 over her margins. She had not known and said that she told Mr Dunphy that she had not. He told her that every day that she was over her margins, Epic had to pay a cheque for her. This was the first time that it had been brought home to her that she was really in trouble. She had lost a huge amount of money, there were a lot of trades that had closed or that were closing and that were losing money and Epic was lending her money.

234. In cross-examination, Mrs Tinney said that she had not stopped adding to her positions when told that she was over her margins as she listened to Mr Jungstedt’s recommendations. She was under the impression that the trades that Mr Jungstedt had recommended would fix it all up.

235. On 18 November, 1996, Mrs Tinney met with Mr Jungstedt and Mr Dunphy together with her daughter. Mr Dunphy suggested that she sell her Brambles’ shares to cut the losses with two very bad trades by getting out of them. This would have resulted in realising $20,000 but, as Mrs Tinney said that she had never intended to sell any of her shares, she was against selling them. It was the first time that anyone had suggested selling them and she was terrified. When Mr Dunphy was out of the room, Mrs Tinney said, Mr Jungstedt told her that he did not think that the position was hopeless and that he could solve the problem by doing other trades. After the meeting, she said in her earlier statement, she continued to trade relying on Mr Jungstedt and on Epic. Mrs Tinney did not think that there was any discussion about her paying interest until the margins improved. There were no discussions about what would happen if it all went wrong but Mrs Tinney did not believe that she thought it all through. Mrs Tinney thought that she just relied on Mr Jungstedt’s assurance that it could all be fixed over time. Mr Jungstedt, she said in her second statement dated 20 July, 1997, that she had a further conversation with Mr Jungstedt in late October or early November, 1996 in which he indicated that she would be able to reduce her margin position by continuing to trade. Mrs Tinney said that she still believed that her shares were safe and he was not saying anything differently to her.

236. In mid February, 1997, Mrs Tinney said that she spoke with Ms Jane Hamilton, who worked at Epic. Ms Hamilton told her that there were too many open positions and she wanted to reduce them. She asked Mrs Tinney whether she knew that her exposure was $400,000. Mrs Tinney said that she did not react to the question as she did not understand what Ms Hamilton meant. Ms Hamilton suggested to her that some trades be bought back when they were in profit as a way of reducing her positions.

237. Mrs Tinney said that she told Mr Noel Harman, a senior employee with Epic, that she wanted to change adviser from Mr Jungstedt to Ms Hamilton. That meeting occurred on 19 February, 1997 when she met Mr Harman with her solicitor, Mr Peter Macnish. She said that she was told by Mr Harman that she had to continue to trade with Mr Jungstedt but could speak with Ms Hamilton. Mrs Tinney said that she did not feel comfortable but was very concerned that the money she owed Epic was putting her shares at risk. Mr Jungstedt was telling her that he could trade out of the situation but that if he ceased trading, he would realise losses. In order to protect her shares, she said, she continued to trade but was still not aware of the extent of her potential losses.

238. In cross-examination, Mrs Tinney’s attention was drawn to an entry in Mr Jungstedt’s diary for 22 April, 1997, which read:

“Told Anne T. about my calculations re her margins. If stock worth $250,000 were sold à debt down to $13,000. Smaller amounts would lead to smaller reductions. She would discuss it with her accountant re: tax and come back to me. Advised her to reduce debt by selling some stock.” (T documents, page 904)

Mrs Tinney said that she did not recall any of this. Had she discussed this with Mr Jungstedt, she felt that her accountant would have been with her. She could not recall her accountant’s ever having gone to a meeting with Mr Jungstedt.

239. On 26 May, 1997, Mr Jungstedt had noted in his diary:

“Asked Anne T. if she wanted to sell some shares to realise profits against tax losses and bring margins down. She said she prefer not to sell because she needs the dividend and her accountant could use losses in options without realising profits in shares. Advised her to sell at least a smaller parcel.” (T documents, page 933)

Mrs Tinney did not recall Mr Jungstedt’s telling her this but did not have any reason to deny that he had done so. She then thought that he had done so but that in the previous year.

240. Mrs Tinney said in her second statement that there appeared to be some improvement up to the end of May, 1997 but in June, 1997, the volume of trading was greater than it had ever been. In July, 1997, Mrs Tinney said, she became aware that some of the protection strategies that Mr Jungstedt had initiated had run out but that the positions the strategies were intended to protect still had some time before expiry. At this time, she realised that she was in substantial trouble but did not realise the extent of the trouble. Although she was still in contact with Mr Jungstedt, he did not indicate that he was losing hundreds of thousands of dollars.

241. On or about 26 August, 1997, Mrs Tinney said, she and Mr Macnish met with Mr Baring-Gould. They discussed her account and Mr Baring-Gould indicated that Epic would provide an interest free loan in respect of her margin. He asked whether she had any other shares to offer as collateral and asked about what he described as her “apalca farm”. She told him that she did not have a farm. It was agreed that her trading would be slowed down. She said that she was not told at this meeting that Epic could close out her positions and sell her shares. Mr Macnish asked for details of what Epic was offering but they were never provided, Mrs Tinney added.

242. On 16 September, 1997, Mrs Tinney said that she received a letter from Mr Baring-Gould stating that Epic would close out a number of options positions “as agreed” between herself and Mr Jungstedt. Mrs Tinney did not recall being given a choice and felt that, if she did not agree, Epic would do it anyway. Mr Baring-Gould told her in the letter that Epic would sell low yielding stock so that it would not have a major impact on her portfolio’s dividend yield.

243. On about 18 September, 1997, Mrs Tinney said, she received a further letter from Mr Baring-Gould in which he stated that she had to pay or secure the sum of $352,997.14 by no later than 4.00pm on 25 September, 1997. If she did not, she would have all of her positions closed and her shares sold to meet her debt. Epic closed out all of her positions on 25 and 26 September, 1997 and sold all of her shares to meet the debt. On 29 September, 1997, she received a letter from Mr Baring-Gould telling her that she owed $127,414.

244. Mrs Tinney said in her second statement that she received various documents including monthly statements. At no time, she said, did she perform a reconciliation of the various documents in order to ascertain her exposure at any particular time. She said that she did not properly understand that she should do a reconciliation or how she should do it. Mr Jungstedt did not, she added, give her any verbal advice indicating the overall state of her trading.

245. Mrs Tinney agreed in cross-examination that, for a lot of the time, she did not understand that her shares were sitting in the OCH as security. She saw them as sitting there working harder for her and that they were quite safe in there. She agreed that Mr Jungstedt had asked her to pay for CBA shares and to send them over as collateral but she did not put together her sending them to the OCH and their being security if she were closed up. “Collateral” was not a word that she had much to do with. She gained a greater understanding when Mr Dunphy told her that Epic was lending her money. The thought that Epic could sell her shares to recover its loan worried her but she had never thought that her shares could be sold to close her positions.

246. Mrs Tinney incurred losses in the order of $779,000. In the first year of options trading, she withdrew from the Austrust account the sum of $117,000. When she was taking the money out, she never thought that she would have to put it back. Had she known that she might suffer losses, she would never have spent the sort of money that she did.

Dealings relating to Mrs Tinney – Mr Jungstedt

247. Mr Jungstedt said that he had been informed about Mrs Tinney’s financial situation by Mr Werner and was informed that she had a substantial share portfolio worth at least $250,000 and a house. He said that they had five meetings and Mrs Tinney appeared to understand the options strategies he explained to her and appeared to understand options tradings.

248. With regard to the money that Mrs Tinney hoped to raise to pay Bankers Trust, Mr Jungstedt said that he told her that they could raise about half of the amount with the existing strategy of buy rights or selling covered calls but that they might be able to raise the full amount with a different, more risky strategy. He said that he told her that the simplest way was to sell some puts on the other side of the transaction to gain more premium income and still have a fairly conservative trade. This was a sold strangle, he said, but he was not sure whether he used that term to Mrs Tinney.

249. Mr Jungstedt said that Mrs Tinney’s account remained in credit while he was employed at Noalls but that she continued to increase her number of positions to quite high levels saying that she wanted to purchase alpacas, a car and other items. He said that he recommended against her opening too many positions and that she should not exceed $150,000 in margins with around $250,000 in collateral. That level was reached at the end of 1995 and was maintained for about six months. Mrs Tinney wanted to add more positions and suggested many of her own. Mr Jungstedt said that recommended against some of these and recommended particularly against opening too many positions.

250. Mr Jungstedt said that too many open positions were of particular concern when Mrs Tinney’s option account balance went into debit as that should normally be brought back to a nil balance within 24 hours. He first noticed that her account was in debit in September, 1996 and he asked her to provide cash or more shares as further collateral. She wanted, he continued, to trade into credit. Mr Jungstedt said that he asked his manager what to do in this situation and was told that, as long as the margins were not over 100% of the collateral shares value (as opposed to the figure of 70% used by OCH), and it was monitored closely, he should not worry about her account being in debit. He was told to keep trading in order to return to credit as soon as possible. This was a practice he had seen used at Epic for other clients.

251. Mr Jungstedt said that, despite lodging more collateral, Mrs Tinney’s account never returned to credit. The market volatility in the second half of 1996 made matters worse. He said that he explained this to Mrs Tinney together with his other clients. Their position was worse than it needed to be because their accounts were in debit. When Epic finally insisted that clients bring their account balances out of debit and they could not do so, Epic closed them out on 25 September, 1997 against his wishes.

CONSIDERATION

252. The first issue I will consider is whether a banning order may be made against Mr Jungstedt. In doing that, I will consider first whether he has contravened a securities law and, in particular, whether he has contravened s. 851. Section 851 has 3 aspects: whether Mr Jungstedt made a “securities recommendation”; if so, whether he made it to a person who may reasonably be expected to rely on it; and if so, whether he did not have a reasonable basis for making that securities recommendation.

253. Taking first whether Mr Jungstedt made a securities recommendation, if Mr Jungstedt has made recommendations about options, he has made securities recommendations for options of the sort which he was trading are options contracts within the meaning of Chapter 7 and so securities within the meaning of the Law. What is meant by the word “recommendation”? That word is not defined in the Law. Its ordinary meanings, in so far as they are relevant are:

“... 1 The action or an act of recommending a person or thing; a recommended course of action etc.; a proposal. ...” (The New Shorter Oxford English Dictionary, 3rd edition, 1993)

“... 1. the act of recommending. 2. a letter or the like recommending a person or thing. 3. representation in favour of a person or thing. 4. anything that serves to recommend a person or thing or induce acceptance or favour.” (The Macquarie Dictionary, 2nd edition, 1991)

The relevant meanings of the word “recommend” are:

“... 4a Mention or present (a thing, course of action, etc.) as desirable or advisable to or to a person. ... b Counsel or advise that, to do; (now rare) suggest (a thing) to a person as being advisable to do ...5 Procure a favourable reception for; make acceptable or desirable to or to a person. ...” (The New Shorter Oxford English Dictionary, 3rd edition, 1993)

“1. to commend by favourable representations; present as worthy of confidence, acceptance, use, etc,: to recommend a book. 2. To represent or urge as advisable or expedient: to recommend caution. 3. To advise (a person, etc., to do something): to recommend one to wait. 4. To make acceptable or pleasing: a plan that has very little to recommend it.” (The Macquarie Dictionary, 2nd edition, 1991)

254. There is very little case law that has considered the word “recommendation”. In Hadid v Lenfest Communications Inc [1999] FCA 1798, Lehane J considered it in the context of the expression “securities recommendation” as used in s. 851. He adopted the meanings given to the word “recommend” in the Macquarie Dictionary as those that should be given to the word “recommendation” as it is used in s. 851. The Supreme Court of Tasmania has considered the word “recommendation” in the context of a letter purporting to set out the recommendations according to which the executor of a will was to distribute the deceased’s estate. It did so in Stuart v Clemons and Others [1951] Tas S.R. 28 (Morris CJ and Clark J) in which Morris CJ said that, in a context other than that in which the word had been used:

“‘Recommendation’ implies a freedom to follow or not to follow, accept or reject the recommendations according to one’s own direction.” (page 30)

255. Having regard both to the ordinary meanings of the words and to the case law, it seems to me that the word “recommendation” in the context of s. 851 means a commendation, representation or advice by one person to another that a certain action or course of action in relation to securities or a class of securities is advisable or expedient for that person to adopt or follow as he or she chooses. As it is clear from the definition of “securities recommendation” in s. 9 that the recommendation may be explicit or may be made by implication, consideration must be given not only to what is expressly stated either orally or in writing by one person to another but what is suggested or implied. What is suggested or implied requires a consideration not only of what has been said by one person to another but by their whole relationship.

256. It has not been submitted in this case that Mr Jungstedt has not made recommendations about options trading to each of Mrs Corbett, Mr Roberts, Mr Jones, Mr Boltman and Mrs Tinney. What has been submitted on Mr Jungstedt’s behalf is that only Mr Roberts, Mr Jones and Mrs Tinney have complained about Mr Jungstedt. They have lost substantial amounts of money primarily as a result of trades they insisted on in lieu of those recommended by Mr Jungstedt. Reference was made to the positions opened on behalf of Mr Roberts on 30 September, 1996 in relation to which Mr Jungstedt said that he had recommended a spread at $11.00 and $12.00 but Mr Roberts had insisted on a spread at $10.00 and $11.00. Reference was also made to Mrs Tinney’s changing her initial conservative investment objectives to a more risky approach with the aim of achieving higher returns. Reference was also made to Mrs Tinney’s suggesting her own trades and, against Mr Jungstedt’s recommendations, having too many open positions.

257. I will return in a moment to whether or not Mr Jungstedt was instructed to undertake options trading against his recommendation. On the strictly limited question whether he made recommendations with respect to options trading with respect to each of Mrs Corbett, Mr Roberts, Mr Jones, Mr Boltman and Mrs Tinney, I am satisfied on the basis of his own evidence and of theirs that he did. He gave each of them advice or a representation as to a course of action that they could adopt in relation to securities trading. Even if they did not accept or act upon his recommendations that is a matter of choice for them and does not detract from his having made recommendations.

258. The next question to consider is whether Mrs Corbett, Mr Roberts, Mr Jones and Mrs Tinney are persons “who may reasonably be expected” to rely on his recommendations within the meaning of s. 851(1)(a). The expression does not appear to have been considered but similar expressions have been considered. In ss. 40(1)(d) and s. 43(1)(c)(ii) of the Freedom of Information Act 1982, for example, the words “would, or could reasonably be expected to” have been used and considered in cases such as Attorney-General’s Department v Cockcroft (1986) 64 ALR 97 (Bowen CJ, Sheppard and Beaumont JJ). Bowen CJ and Beaumont J:

“In our opinion, in the present context, the words ‘could reasonably be expected to prejudice the future supply of information’ were intended to receive their ordinary meaning. That is to say, they require a judgment to be made by the decision-maker as to whether it is reasonable, as distinct from something that is irrational, absurd or ridiculous, to expect that those who would otherwise supply information of the prescribed kind to the Commonwealth or any agency would decline to do so if the document in question were disclosed under the Act. It is undesirable to attempt any paraphrase of these words. In particular, it is undesirable to consider the operation of the provision in terms of probabilities or possibilities or the like. To construe s 43(1)(c)(ii) as depending in its application upon the occurrence of certain events in terms of any specific degree of likelihood or probability is, in our view, to place an unwarranted gloss upon the relatively plain words of the Act. It is preferable to confine the inquiry to whether the expectation claimed was reasonably based (see Kioa v Minister for Immigration & Ethnic Affairs [1985] HCA 81; (1985) 62 ALR 321 per Gibbs CJ and Mason J).” (page 106)

259. In Estee Lauder Pty Ltd v Federal Commissioner of Taxation (1987) 80 ALR 314, Burchett J considered the meaning of the words “the amount for which the manufacturer could reasonably be expected to purchase identical goods from another manufacturer ... by wholesale” in s. 18(2) of the Sales Tax Assessment Act (No 1) 1930. In Department of Social Security v Copping (1973) 73 ALR 343 (Forster, Jenkinson and Burchett JJ), the Full Court of the Federal Court considered the expression “the annual rate of income that could reasonably be expected to be derived from, or produced with the use of, [the] property” in s. 6AD of the Social Security Act 1947. Neither takes the matter any further than Attorney-General’s Department v Cockcroft for the purposes of this case.

260. The expression with which I am concerned is “may [as opposed to ‘could’] reasonably be expected to”. Does this mean that a different interpretation of the expression should be adopted in this case from that adopted in Attorney-General’s Department v Cockcroft? I think not. While the words “may” and “could” have different nuances of meaning, each conveys as an auxiliary verb the sense of possibility as those words are ordinarily used. Therefore, the use of the word “may” rather than the word “could” does not lead to the conclusion that an interpretation other than that adopted in Attorney-General’s Department v Cockcroft should be given to the expression “reasonably be expected”.

261. Adopting that interpretation, consideration of whether a person “may reasonably be expected to rely on” a securities recommendation within the meaning of s. 851(1)(a) requires a consideration of whether it is reasonable, as distinct from something that is irrational, absurd or ridiculous, to expect that the person to whom the securities recommendation is given would rely on it.

262. Returning to the circumstances of this case, I am satisfied that it was reasonable to expect that each of Mrs Corbett, Mr Roberts, Mr Jones, Mr Boltman and Mrs Tinney would rely on it. Mr Jungstedt had been recommended to each of them either by their stockbrokers or, in the case of Mr Roberts, by a number of other people engaged in options trading as a person who was skilled and experienced in options trading. Having regard to the evidence given by Mr Jungstedt and by each of Mrs Corbett, Mr Roberts, Mr Jones, Mr Boltman and Mrs Tinney, I find that he also presented himself as a person who was experienced in options trading and who understood it. I am satisfied on the basis of their evidence that each regarded Mr Jungstedt as a person who was skilled and experienced in options trading. Each, I also find, regarded Mr Jungstedt’s skill and experience as superior to his or her own. Each had experience in owning shares but that did not give them any experience in, or understanding of, trading options. Mr Roberts, I find, had some previous experience in dealing with options trades on his own behalf. His trading had been limited to selling calls on underlying shares he already owned and did not extend to the sorts of strategies to which I find he was introduced by Mr Jungstedt. Ms Tinney’s experience before she was introduced to Mr Jungstedt had comprised her buying one call option on which she had lost money. Mrs Corbett, Mr Jones and Mr Boltman did not have any prior experience in the options market. In view of all of these matters, I am satisfied that each of Mrs Corbett, Mr Roberts, Mr Jones, Mr Boltman and Mrs Tinney might reasonably be expected to rely on recommendations Mr Jungstedt made about options and trading in them.

263. The next issue to consider is whether Mr Jungstedt had a reasonable basis for making all or any of the recommendations that he made to Mrs Corbett, Mr Roberts, Mr Jones, Mr Boltman and Mrs Tinney regarding the options trading that he undertook on their behalf. The effect of s. 851(2) is to set out a circumstance that must exist if a securities adviser is to have a reasonable basis for making a recommendation within the meaning of s. 851(1)(b) but, in doing so, raises one or two questions. One question is whether, quite apart from the circumstance in s. 851(2), consideration can be given to whether a securities adviser does not have a reasonable basis for making a recommendation. It seems to me that it is permissible to look more widely. Section 851(2) is providing a standard that, if not met, means that the securities adviser does not have a reasonable basis for the recommendation but it does not, on its face, purport to limit the general words of s. 851(1)(b).

264. Another question is whether s. 851(2) requires a securities adviser to consider and investigate the information he or she has about the person’s investment objectives, financial situation and particular needs and whether that consideration and investigation must be reasonable. This may be less clear for it seems that s. 851(2)(a) assumes that the securities adviser has certain information and then asks whether, in order to ascertain whether his or her recommendation is appropriate having regard to that information, his or her consideration and investigation of the subject matter of his or her recommendation is reasonable in all of the circumstances. On its face, it does not require a consideration of whether the information on which the securities adviser based his or her consideration was reasonable information on which to base it. It requires only a consideration of whether the consideration and investigation of the subject matter of the recommendation is reasonable in all the circumstances.

265. What is incorporated in the words “subject matter”? The ordinary meanings of the words include:

“... 1a The matter out of which a thing is formed, raw material used in an art, process etc. ... b The ground, basis, or source of something. ...2 The subject or theme of a book, speech, etc., a topic ...3 Matter treated in writing, discussion, a lawsuit, etc; that dealt with by a science or branch of study; material expressed in a book, artwork, etc ...” (The New Shorter Oxford English Dictionary, 3rd edition, 1993)

“... 1. the substance of a discourse, book, writing, or the like, as distinguished from its form or style. 2. the matter which is subject to some action or operation. 3. the matter out of which a thing is formed.” (The Macquarie Dictionary, 2nd edition, 1991)

266. The subject matter of s. 851 and of the Act generally does not seem to invite a meaning other than the ordinary meanings of the words. Section 851 is concerned with the substance of the recommendation rather than its style or form. That is to say, it is concerned not with the manner in which a recommendation is presented but with the substance of what is recommended. The substance of a recommendation has two parts. One is the action or course of action that is commended or advised. The other is that the action or course of action is advisable or expedient for a person to adopt or follow if he or she chooses to do so. Section 851 requires the consideration and investigation of both aspects to be reasonable in all the circumstances. Consideration and investigation of the second part of the recommendation cannot be reasonable unless the consideration and investigation of the information he or she has about the person’s investment objectives, financial situation and particular needs is reasonable.

267. What sort of information about a person is required by a person giving investment advice? Knowledge of a person’s total assets can only be part of the information that is relevant in giving investment advice. It must be with knowledge that enables an adviser to assess whether a course of action is advisable for a person to take. That means that the adviser must have some appropriate knowledge of a person’s overall financial situation, his or her financial objectives and his or her objectives generally. A person’s overall financial situation does not simply comprise his or her assets but also his or her income and sources of income, his or her debts and his or her outgoings to service any debts and for living expenses. Information such as this is necessary in assessing whether or not a person can afford to undertake an investment or, in the case of options trading afford to undertake the risk of the trade. An assessment of the person’s financial objectives is necessary to determine matters such as the sort of investment in which a person should engage. It will be relevant, for example, to know whether an investor is wishing to increase his or her income stream for shorter term needs or whether he or she is looking to longer term capital growth. That objective will have to be weighed against the feasibility of obtaining that income when balanced against the person’s other objectives such as preservation of his or her asset base. Also relevant is the person himself or herself. His or her capacity to understand the concepts that are being discussed and to relate them to his or her own situation is relevant. So too are his or her values and outlook on life. Some may be prepared to:

“... make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings,
And never breathe a word about your loss” (If, Rudyard Kipling)

but others will not be prepared to do so and, indeed, may not have the psychological disposition to do so. Yet others will come some way between the two positions and be prepared to risk some of their assets on one turn of pitch-and-toss but not all of them.

268. That takes me back to Mrs Corbett, Mr Roberts, Mr Jones, Mr Boltman and Mrs Tinney. On the basis of his own evidence, I find that Mr Jungstedt relied on information that he had been given by others as to the financial situation of Mr Roberts, Mr Boltman and Mrs Tinney. I am also satisfied that Mr Jungstedt did not ask any of these three clients for further information about their financial situation or update the information that he did have although I am also satisfied that they did give him further information and I will return to that. My finding is also supported by the oral evidence that each of the three gave and, in the case of Mr Roberts and Mr Jones, by the documentary evidence. In relation to Mr Roberts, the documentary evidence is contained in the Client Information Checklist that Mr Dunphy had signed in relation to Mr Roberts. I find that he had taken some information from Mr Jones as to his assets and those of Circle Jay and that is confirmed by the Client Information Checklist that he signed in relation to Circle Jay. Having regard to the evidence of Mrs Corbett and Mr Jungstedt, I find that he had an understanding that she had a share portfolio but that, on the balance of probabilities, he did not ask for any further information. In reaching that conclusion, I also take into account Mr Jungstedt’s own evidence that he just followed the check list used at the firms in gathering information and that many fewer questions were asked in the 1990s than are asked by investment advisers today (transcript, pages 459-460).

269. What of the information that Mr Jungstedt did have regarding his clients’ financial position? Taking first Mrs Corbett, I find on the basis of his own evidence that he was aware that she had shares, a flat and a farm business but did not have any other knowledge of her overall financial situation (transcript, page 779). He did not, for example, have any knowledge of her liabilities, income, outgoings, financial needs, objectives or the level of risk she was willing to undertake. Without information of that sort, he could not make a recommendation as to the type of trading, if any, that was suitable for her.

270. The approximate net worth of Mr Roberts was noted in the Client Information Checklist and his assets listed as investment real estate, cash and securities. This was treated as his trading portfolio but the Client Information Checklist failed to note whether Mr Roberts intended to use all of his assets for trading or only some of them. His trading objectives were noted as income, growth, trading profits and safety of principal. I find that Mr Roberts relied on his share portfolio to generate income and that it was his major source of income. Although there is no evidence that Mr Roberts specifically told Mr Jungstedt of his position in that regard, I find that Mr Jungstedt was told by Mr Roberts that he was using the capital from his redundancy payment as his investment capital and that he had been generating income from it over the previous three years.

271. Information as to assets of Circle Jay was included in the Client Information Checklist he had prepared. He noted Circle Jay’s investment objectives as income only and did not note any other objectives. That checklist raises a further matter. Mr Jungstedt said that he was aware of Mr Jones’ assets but he did not mention asking about Circle Jay’s assets. His omission is consistent with Mr Jones’ evidence that he did not mention Circle Jay or its financial circumstances. It is also consistent with Mr Jungstedt’s entering on the Client Information Checklist, the information that Mr Jungstedt had recorded as Mr Jones’ having given him in relation to his personal situation and not in relation to that of Circle Jay. In Mr Jones’ case, I am satisfied that Mr Jungstedt did not ask Mr Jones as to his income or the sources of his income. That finding is consistent with Mr Jones’ evidence and also with Mr Jungstedt’s own evidence that he used the check list provided by the firms for which he worked. As the Client Information Checklist did not contain an entry in relation to income and in view of Mr Jungstedt’s own uncertainty whether he ever asked Mr Jones about his income (transcript, page 738), I find that he did not do so.

272. Beyond his having a house at Brighton, Mr Boltman’s financial situation, I find on the basis of Mr Jungstedt’s own evidence, was something about which Mr Jungstedt knew very little (transcript, page 467).

273. In relation to Mrs Tinney, I accept his evidence that Mr Jungstedt knew that she had shares and a house. He knew nothing else about her income, her assets and liabilities, her objectives or her financial needs. From time to time, she revealed to him her financial liabilities, such as the interest payments due to Bankers Trust, and her desires, as in purchasing paintings and alpacas.

274. In view of the information that Mr Jungstedt did have about each of Mrs Corbett, Mr Roberts, Mr Jones, Mr Boltman and Mrs Tinney, I am satisfied that the only reasonable course of action open to him was to make further enquiries of each of them. In the case of Mr Roberts, as a person whom he knew was using a redundancy payment to generate income and as a person who had no other known source of income, Mr Jungstedt should have asked him questions relating, for example, to the proportion of his investments and/or the particular investments that he was wishing to use in options trading. He should have asked him about the level of risk that he was prepared to accept or, in other words, the proportion or part of his assets that he was prepared to risk. He should have assessed the level of risk that was appropriate for a person in Mr Roberts’ situation to assume. Although the others were not using redundancy payments, similar questions were no less relevant to be asked and assessments to be made. His omission cannot be excused by reference to the omission of relevant questions from the checklists he was given by the firms for which he worked. It cannot be excused by reference to his claim that such questions were not asked in the mid 1990s. Section 851 was incorporated in the form in which it is considered in this case from the beginning. That would seem to be the standard that prevailed in the mid 1990s rather than any firm’s checklist.

275. That brings me to the other part of Mr Jungstedt’s recommendation and that is the trading that he recommended for each of Mrs Corbett, Mr Roberts, Mr Jones, Mr Boltman and Mrs Tinney. Did Mr Jungstedt give consideration to or conduct investigations of the trades he was recommending that were reasonable in the circumstances. This enquiry brings two further matters into play. The first is whether his consideration and investigations were reasonable on the information that he had available about the trades themselves and about his clients’ investment objectives, situation and particular needs or ought to have had after reasonable investigation. The second is whether any lack of understanding by his clients about the particular trades he was undertaking and their implications for them meant that it was reasonable that he took further steps to acquaint them with the nature of the trades and their implications.

276. As I have said, the second aspect of the trading recommended by Mr Jungstedt is concerned with his clients’ understanding of the options trading he was entering on their behalf. Having heard the evidence of Mrs Corbett, Mr Jones, Mr Boltman and Mrs Tinney, I am satisfied that they were, in the world of options trading, unsophisticated and unworldly. That is not to say that they were unsophisticated or unworldly in other areas of their lives for they had engaged in other pursuits with success. Some of those pursuits included, in the case of Mrs Corbett and Mr Jones, the establishment and running of businesses and in the case of Mr Boltman, a very well established legal practice. Mrs Tinney was a painter and, in a small way, had an interest in alpacas. All of them had acquired assets either through their own efforts with some passing to them through inheritance or, in the case of Mrs Tinney, partly through gifts from her father and later through inheritance. There is no suggestion in the evidence that any of them had experienced any difficulty in understanding what they were doing in amassing and preserving their assets.

277. Mr Boltman and Mrs Tinney had both dealt with a sharebroker before consulting Mr Jungstedt but that does not lead to the conclusion that they are anything other than unsophisticated players in the world of options trading. Owning shares is a very different thing from trading options. Mrs Tinney had undertaken one options trade on the recommendation of a friend before she was introduced to Mr Jungstedt. Having heard her evidence and read her questions of Mr Jungstedt in the two taped meetings with him I find that she had gained very little knowledge of options trading from the experience. She had a far better understanding of options trading at the date of the hearing than she did at the time that she met Mr Jungstedt.

278. Mr Jones was a shareholder and had purchased shares but he had not taken any active interest in the share market. Although Mr Jungstedt seemed to consider that Mr Jones’ knowledge of cattle trading, of which he had a little, was relevant in enabling him to understand options, I do not consider that it had any relevance at all and was no more relevant than the fact that Mrs Corbett was involved in running a business. It seems to me that options trading is a trade in intangibles in which a profit may be realised or a loss incurred depending upon whether the price of a share, over which an investor has no control, increases, decreases or stays the same and depending upon whether the investor had the foresight to open positions that took advantage of the movement in the share price that actually occurs. Trade in cattle is a trade in tangibles and is a trade in which the purchaser has far greater control over the outcome even if engaged in trade for cattle in utero.

279. Mr Roberts is in a slightly different category. Like the others, he had carefully husbanded his assets which, in the main, were the fruits of 21 years of his working life. He had some knowledge of options trading and had successfully engaged in it for three years prior to his meeting Mr Jungstedt and has since engaged in it in a limited way on his own behalf. At the time that he consulted Mr Jungstedt, I find that Mr Roberts had a good understanding of selling calls covered with scrip and put options covered by his cash assets but not of more complicated positions of the sort set out in earlier paragraphs of these reasons and which I find later in these reasons to have been undertaken on his behalf. He was, however, in the best position of all of Mr Jungstedt’s clients to understand strategies and to assess their merit at the time he met Mr Jungstedt. I am satisfied, however, that his understanding of the strategies underpinning the trades that were done on his behalf in options in ANZ, NAB and CML shares was insufficient to understand the risks to which he was exposed.

280. Given the unsophistication and lack of experience of Mrs Corbett, Mr Jones, Mr Boltman and Mrs Tinney, it was reasonable that Mr Jungstedt should have taken some care to explain the sorts of trades that he was recommending and the risks that they were undertaking. It was reasonable that he did not embark upon trades on their behalf unless he had reasonable grounds to form the view that they understood what he was doing. How else could he be reasonably confident that he had their instructions to proceed? Even in the case of a person such as Mr Roberts who was more experienced in options, it was important to make the explanations and to reach the same conclusion although fewer explanation might have been necessary to reach that point with Mr Roberts than with other clients.

281. Did Mr Jungstedt take such steps to explain the trades he undertook and the risks as were reasonable in the circumstances? It seems to me on all of the evidence that he did not and I so find for the following reasons. Beginning at a general level, I find that each of Mr Jungstedt’s clients claimed to have gained the impression from him that options trading was safe or involved little or no risk. If one had said that, it could be thought that he or she was mistaken. That all of them, even Mr Roberts who could be expected to have used his greater knowledge to analyse what he was being told, adds weight to what each claims individually. That they did so is understandable from the initial letter that Mrs Corbett and Mr Jones were sent by Mr Jungstedt when they began options trading. In both of those letters, Mr Jungstedt referred to their being able to make a profit in a clear majority of cases. He made no reference to any risk that they might incur. Indeed, in the example that he chose to include in the letter, there is no risk other than, if the option is exercised, having to sell the underlying shares and even then it is at a price above the price for which they were selling when the option was sold.

282. Mr Jungstedt’s discussion with Mrs Tinney similarly fails to explain the level of risk inherent in her trading in options. Early in his first conversation, he did explain the risk involved in selling naked calls and then went on to explain how she could make money out of selling calls if she purchased the underlying shares for a price lower than the strike price and if the market moves above the purchase price. He explained how the premium acted as an “insurance” to protect her to some extent against the share price’s falling below the price at which she purchased it. He also explained that, if the share price rose to the strike price, she could choose to let the option be exercised or buy back the call at a cheaper price than that for which she sold it. If it were to rise above the strike price, he properly explained that it might cost her more to buy back the option than she received when selling it and that she might incur a loss at that point. At the same time, however, he pointed to the increase in value of her shares and said that they showed a profit and, on the example he had given, a net gain to her if the investment was taken as a whole. By taking the investment as a whole, he referred to the results of the options trading and the movement in the share price.

283. Later on in his explanation, he referred to incurring a loss in an example he gave her of a roll over but immediately pointed to their still being ahead. No outlay of money is realised at this point, he told her and that was an ideal position. He emphasised during that conversation that she would get credits in her account. Later, he referred to those who sell options as making a profit in 70% of cases and told her that in the other three out of ten cases, she would be looking at either a very small loss or, if she had the shares already, she did not need to look at a loss at all. Mr Jungstedt spoke of options trading as being a way of distributing risk among different parties in the market but presented it as a risk that was divided into parts and distributed so that a person could choose to divest himself or herself of the whole or a part of the part of the risk that he or she had accepted. Towards the end of the first conversation, Mr Jungstedt said that there was a certain risk if she sold shares but there was no risk as she had shares. They were not looking at some huge risk no matter what happened and she would receive money every time they sold a call (T documents, page 1246). The money she received could be put in her Austrust account and she could do whatever she wanted to do with it including buying more shares or going on a holiday.

284. In summary, although Mr Jungstedt certainly mentioned risk, the overall impression that is to be gained from a fair reading of the first taped conversation is that he told Mrs Tinney that options trading for a person who has shares has either no risk or that the level of risk is so small that it is counteracted by any sale of a further call option. If she wished, she could keep her shares by choosing to buy back an option. She might lose on occasion but, again, it would be only a small amount. There is nothing to dispel this view in the subsequent conversation.

285. Mr Jones also said that he was told that there was no risk but conceded that he could have been told that there was practically no risk. I accept his evidence for it is supported by Mr Jungstedt’s letter to him of 11 September, 1995 written in similar terms to that written to Mrs Corbett. Again, the letter addressed only call options sold when Mr Jones held the underlying shares.

286. On the basis of Mr Jungstedt’s own evidence, I find that he did not give to Mr Boltman the basic explanation that he had given to Mrs Corbett and Mr Jones in writing and to Mrs Tinney in their conversations. Instead, he assumed that Mr Boltman understood those basics because he had already been engaged in selling calls against his shares before he went to him (transcript, page 687). Consequently, I find that he did not give Mr Boltman an explanation of basic options trading or any indication of risk.

287. In relation to Mr Roberts, I have only Mr Roberts’ evidence but the assertions he made that Mr Jungstedt had told him that the strategies were safe are consistent with the statements made by the other witnesses. I accept that his understanding of what Mr Jungstedt told him was a fair understanding for him to gain in the circumstances. Despite his greater understanding of basic options trading, I also find that Mr Roberts did not fully understand the strategies explained by Mr Jungstedt. Although he understood flaws in those strategies at the time of the hearing, I find on the basis of his own evidence that he did not have the knowledge at the time that he was consulting Mr Jungstedt. It is also inherent in his evidence, and I so find, that he assumed that Mr Jungstedt was using superior knowledge based on analysis of the market on which to base his recommendations. That was a factor in his accepting Mr Jungstedt’s advice.

288. What were the trades recommended by Mr Jungstedt? Mr Murphy analysed certain trades undertaken by Mr Jungstedt in relation to Mr Roberts, Mr Jones and Mrs Tinney but did not do so in relation to Mrs Corbett or Mr Boltman. Beginning with Mrs Corbett, I have the contract notes/liquidation advices exhibited to her affidavit. The earliest contract note is dated 8 November, 1996 but that is not necessarily the first trade that was made on her behalf by Mr Jungstedt (Exhibit 4, Exhibit EMC 9). It is the sale of 10 BHP $19.00 puts at 16 cents and 10 BHP $15.00 calls at 22 cents in the March, 1997 series on that day. Although not described as such, it was a short strangle. The premium she received on the former was $1,600 and on the latter $2,200. That sum, less fees and commissions was paid into her account on that day. In view of what I have said about a short strangle in earlier paragraphs, the most that Mrs Corbett could profit from it was the amount of the premium and that occurs if the price of the underlying BHP share does not move outside the two strike prices i.e. $19.00 and $15.00. Should it move outside one or other of them, her potential loss is unlimited after the difference in the market price exceeds either the lower strike price less the net premium she received or the higher strike price plus the net premium she received.

289. The contract note also referred to another purchase on that day. Six contract notes showing various trades in lots of 10 contracts succeeded the first and many more followed the sixth. That sixth contract note was dated 14 January, 1997. It refers to the March, 1997 series of options and shows that 10 BHP $15.00 puts at 3 cents were bought on that day for a total of $300. That indicates that the short put leg of the short strangle was closed out. A debit for that amount together with fees and commission was shown. The seventh contract note repeats what is shown in the first, to some extent, and the sixth. While not indicating that it is repeating what was said in the contract note dated 8 November, 1996, it seems to be when it refers to the sale of 10 BHP $15.00 puts at 16 cents in the March, 1997 series on that day for a credit of $1,300. That credit was already included in the amount transferred to Mrs Corbett’s account on 8 November, 1996 and that would seem to be the reason why, although shown as a credit on the later contract note, no amount was transferred to her account. There was no explanation.

290. A further three contract notes later on, the purchase of 10 BHP $19.00 calls were bought in the March, 1997 series. The price paid was 2 cents per option for a total cost of $200. This indicates that the other leg of the short strangle was closed out at that time. A further contract note summarised the position and showed a credit of $2,000. Taking the strategy overall and excluding fees and commissions, Mrs Corbett made a profit of $3,300.

291. The trade I have used as an example is simply one of many. It cannot be criticised on the basis that it did not profit Mrs Corbett for it surely did. The point of it is that I am satisfied that it went outside the bounds of what he had led Mrs Corbett to understand would be the type of trading in which she would be involved. That was the type of trading set out in the letter he had written to her and which referred to covered calls and to buying back the option if she did not want it exercised. It did not extend to selling puts or engaging in any more sophisticated trading. There was a suggestion that the reference to the “basic strategy” in that letter meant that other strategies were contemplated. I do not read it that way. It seems to me that the letter is conveying the sense that covered calls are the strategy that will be basic to every trade carried out on her behalf although she could choose to close out a position.

292. The same criticism can be made of the very first trade that was made on her behalf. Although it is not shown in contract notes available to me, I accept her evidence that it was in CML options. I find that she did not own those shares at the time of the trade. This was contrary to the understanding that Mr Jungstedt had given her that he would not trade in options relating to shares she did not own.

293. The manner in which the trades were reported to Mrs Corbett may also be criticised. The contract notes she received from Epic do not show her the strategy that is undertaken or reflect the risks. Mrs Corbett, I am satisfied, did not have sufficient knowledge of options trading to work her way through it or to analyse those risks in order to assess whether or not she wanted to undertake them.

294. Mr Roberts’ situation was analysed by Mr Murphy. His situation is more difficult to assess in some ways than most of Mr Jungstedt’s other clients for there was strong disagreement between Mr Roberts and Mr Jungstedt as to the trading that had been recommended by Mr Jungstedt and that which Mr Roberts had initiated. Mr Jungstedt claims that all of the trades undertaken in relation to Mr Roberts other than the first 20 ANZ contracts were against his recommendation. I have considered both his evidence and that of Mr Roberts’ at some length. Certainly, Mr Roberts had some knowledge of options trading and had some views. That could suggest that he insisted on his own trades. On the other hand, the pattern of trading that was undertaken does not accord with the cautious approach previously adopted by Mr Roberts. Furthermore, he has divided the trading into three categories and readily accepted responsibility for one category and joint responsibility for the second. He attributes only trades in three shares (ANZ, NAB and CML) to Mr Jungstedt. On balance, I am persuaded by these latter issues that Mr Roberts relied on Mr Jungstedt’s recommendations in relation to those trades.

295. A number of strategies were employed on behalf of Mr Roberts. I will not repeat the analysis undertaken by Mr Murray but, after examining it, accept its conclusions. Between 8 August, 1996 and 26 September, 1996, eight positions were opened on behalf of Mr Roberts in options in ANZ shares. Four were closed and the remaining four expired worthless. Not having regard to fees and commissions, the cost to Mr Roberts outweighed the premium he received by $14,202.00.

296. It is difficult to understand the first set of positions opened for they represented two short puts with strike prices of $5.50 and $6.00 respectively, a short call at $7.00 and a long call at $7.25. Twenty contracts were traded on each occasion and then the same trades were repeated a month or so later for an additional 80 contracts although at different premiums. The strategy netted Mr Roberts 16 cents in premiums. His break even point occurred if the share price was $7.25 less that 16 cents, or $7.09. Between $7.01 and $7.09, he incurred a loss if the short call was exercised. If the share price fell to a price between below $7.00 but above $6.00, Mr Roberts was not exposed to any risk because the purchaser of the short call would do better on the market as would the purchasers of the short puts. Between $5.50 and $6.00 Mr Roberts would have been at risk of the exercise of the $6.00 short put and if the share price fell below $5.50, he would have been at risk of both the $6.00 and the $5.50 short puts being exercised. If exercised, his losses would have been unlimited. A 16 cent net premium is unacceptably small for the extent of the risk to which he was exposed.

297. I will not set out the remaining trades in detail other than to accept Mr Murphy’s analysis of them. I accept that a reverse calendar spread was opened in calls on 3 December, 1996. It cost Mr Roberts $2,000.00 more in premiums than he received. The risk are necessarily greater in a calendar spread than the potential profit. With regard to options in NAB shares, I find that Mr Jungstedt traded in bear call spreads and bull put spreads. The spreads cost him $28,960.00 over and above the premiums he received. Putting together the two spreads, the bull put spread resulted in a 20 cent maximum profit with an 80 cent maximum loss and the bear call spread resulted in a 20 cent maximum profit with a 30 cent maximum loss. The risk reward ratio was too far against Mr Roberts and should have been sold for a larger credit. Trading took place in either 100 or 96 contracts.

298. On 12 December, 1996, a bear call spread was opened with a 50 cent spread in NAB shares between strike prices of $15.00 and $15.50. It was sold for a 17 cent credit. Again 100 contracts were opened. I accept Mr Murphy’s evidence that a 17 cent credit of premium was too small a reward for a 50 cent spread. It was closed out and Mr Roberts incurred a loss of $34,000.00 as a result. Other trades in options in NAB and CML shares followed with similar results for Mr Roberts. They included reverse calendar spreads and bull put spreads.

299. Although I have not set out each of the trades conducted on behalf of Mr Roberts by Mr Jungstedt, I am satisfied that, for the most part, they exposed him to a level of risk that was unacceptable in view of the premium Mr Roberts received and in view of the level of risk to which they exposed him. In making those trades, Mr Jungstedt went outside the instructions he had received. Mr Roberts had made it clear to Mr Jungstedt that he was using his share portfolio to generate income. He had not given any indication to him that he could trade in a manner that prejudiced those shares. Mr Roberts had not authorised him to expose him to a level of risk that exceeded the value of those shares. When Mr Jungstedt traded in up to 100 contracts, those trades could not be covered by the collateral provided by Mr Roberts’ shares or even by his total asset base. It was not reasonable to recommend such trades not only because they exceeded the asset base but also because they were contrary to Mr Roberts’ wishes to preserve his share base and inappropriate for a person who was no longer earning income from employment or wishing to do so.

300. Mr Murphy analysed the trades that were made on behalf of Mr Jones or Circle Jay. The two are not distinguished and I will not do so either. On the basis of the evidence of Mr Murphy, I find that Mr Jungstedt’s first trade on behalf of Mr Jones was undertaken on 3 October, 1995. It was to sell 25 WOW $3.25 calls and 25 WOW $3.00 puts. This is known as a short strangle and, as I have set out above, Mr Jones would make a profit if the market remained between the two strike prices of $3.25 and $3.00. If the share price moved below $3.00 less the premium Mr Jones received on the sale of the call or above $3.25 plus the premium he received on the sale of the put, Mr Jones stood to lose money and the extent of his loss depended upon the extent to which the WOW share price rose or fell above those break even points.

301. This was not a trade that was contemplated by Mr Jungstedt’s letter to Mr Jones. That letter contemplated covered calls or closing out a covered call if he did not want to have the option exercised. It did not contemplate others. Therefore, I find that the first trade that Mr Jungstedt undertook on his behalf was outside the terms of that letter and of the understanding he had given Mr Jones of what his options trading would comprise.

302. So too was selling naked calls and puts outside the letter and understanding. That there were naked calls and puts sold follows from my finding, as I do, that Mr Jones lodged shares but not cash. It also follows from Mr Jones’ having 432 open contracts in July, 1996 when Mr Jungstedt moved to Epic. This represented options relating to 432,000 shares. When Mr Jones first began trading with Mr Jungstedt, he had 70,183 shares. Although contradicted by Mr Jungstedt, I accept Mr Jones’ evidence that he only transferred further shares to Epic in order to have them registered for CHESS. That accords with what I find to be his more conservative nature. It also accords with his not being aware that there was any need for additional shares to be lodged with the OCH. He relied on Mr Jungstedt’s assurance that his trading was going well. Although the number of those additional shares was not specified in the evidence, it is highly unlikely that they took Mr Jones’ shareholding from a little over 70,000 to 432,000. On the basis of Mr Murphy’s evidence and on the basis of Mr Jones assets that he had been prepared to provide as collateral, or even on the basis of his whole asset base, I find that 432 open contracts could not be justified. It exposed him to a risk far beyond what was reasonable in view of his asset base.

303. Mrs Tinney, I find, had a margin facility with Bankers Trust but it was limited. She had certain shares. The first trade that Mr Jungstedt undertook on her behalf occurred on 22 June, 1995. He sold 10 ANZ $5.25 calls for a premium of $1,139 and 10 ANZ $4.50 puts for a premium of $839. This was a short strangle. On 3 August, 1995, Mr Jungstedt closed out the put leg by purchasing 10 ANZ $4.50 puts in the same series for a total cost of $285. This meant that the total profit on the put leg had been $839 less $285. He allowed the call leg to run until 16 October, 1995 when it was closed by his purchasing 10 ANZ $5.25 calls for a total premium of $4,498. This meant that he had incurred a loss on the call leg of $3,359 and a loss on the whole short strangle strategy of $2,805.

304. I find that Mr Jungstedt continued to open and close positions in lots of five or ten contracts each of 1,000 shares. He extended the range of underlying shares as well as increasing the number of contracts to 20 or 30 and even up to 100 in each trade . By July, 1996, she had 760 contracts in 119 different put and call positions in about 15 different underlying shares. The cash collateral required by the OCH exceeded the value of her shares which then stood at $350,000. This meant that she was exposed to a level of risk above what was reasonable given her asset base.

305. On 18 September, 1996, Mr Jungstedt sold 100 CML $4.50 calls for a premium of $22,552 and bought 100 CML $5.00 calls for a cost of $8,223. Mrs Tinney received a net payment of $14,329. This is what I have referred to as a bear call spread. Mrs Tinney would incur a loss if the short call were exercised when the share price was greater than the lower strike price of $4.50 but less than the long call strike price of $5.00. That loss would be limited to 50 cents for, once the share price increases above $5.00, she had the right to purchase them at that price. If the share price dropped below $4.50, the risk of the exercise of the option is reduced substantially if not removed. As there were 100 contracts, there were 100,000 shares in each leg and this meant a potential loss of $50,000.

306. Also on 18 September, 1996, Mr Jungstedt sold 100 CML $4.50 puts and 100 CML $4.00 puts. The premium received for the former was $18,612 and the cost of the latter $5,178. The net premium paid to Mrs Tinney was $13,434. This is described as a bull put spread and the four legs together as a butterfly. Apart from commission and fees, the net premium paid to Mrs Tinney on opening the butterfly was $27,763. Again omitting commission and fees, the amount set at risk by Mrs Tinney in gaining that premium was her potential loss of $50,000 less the amount of $27,763 she had received as premium. That is to say, the amount she risked was $23,000.

307. As matters turned out, the bear call spread was closed out on 25 February, 1997. This occurred when 100 CML $4.50 calls were bought at a cost of $136,443 and 100 CML $5.00 calls were sold for a premium of $85,682. The net loss she incurred in closing out the position was $50,671. When taken with the $14,329 she received in premium for the strategy, Mrs Tinney incurred a loss of $22,998.

308. On the basis of what I have found about Mrs Tinney’s ability to understand strategies, I am satisfied that it could not reasonably be expected that she would have been able to follow the strategy or to analyse its risks and assess whether she should accept Mr Jungstedt’s recommendation to undertake it. That is so before the trades. Once the trades had been undertaken, I am satisfied that she would not have been able to draw the relevant information from the contract notes and her difficulty would have increased as the number of contracts increased.

309. I also find that Mrs Tinney did not authorise Mr Jungstedt to undertake trades other than covered trades. This is the type of trade of which he spoke to her and he emphasised either the lack of risk or the minimal amount of risk. Contrary to what he had told her, he immediately engaged in trades that went far beyond covered calls and exposed her to a degree of risk of which he had never hinted at. It was unreasonable to expose her to such a level given her stated objective to preserve her shares as they provided her with the major source of her income.

310. Having regard then to all of these matters, I have reached the conclusion that Mr Jungstedt did not have a reasonable basis for making the securities recommendations that he made to any of his clients. Having regard to the findings I have made above, in the case of all of them, he did not have sufficient knowledge of their financial situation or their objectives on which to base his recommendations. In the case of each of them, he made recommendations that exposed them to a degree of risk that was unreasonable given the their asset base and also given their objectives. In the case of each of them, he did not give an explanation of the options trading in which he actually engaged. In view of what he did know of each of his clients, he had no basis on which it was reasonable for him to assume that they had sufficient knowledge to instruct him in relation to specific trades taken by him on their behalf. Any one of these grounds leads me to conclude that Mr Jungstedt did not have a reasonable basis for making securities recommendations and was in breach of s. 851 and so in breach of a securities law within the meaning of s. 829(d).

311. Section 781 is to be considered in the context of Mr Jungstedt’s dealings with Mrs Corbett. On the basis of the search of the Commission’s search of current and ceased proper authorities held by Mr Jungstedt as at 13 August, 1999, I find that Mr Jungstedt ceased to hold a proper authority from Epic on 15 January, 1999 (T documents, page 1404). Mr Jungstedt is in breach of s. 781 if he carried on an investment advice business or held himself out to be an investment adviser. When used in relation to a person, an investment advice business includes a reference to “a business of advising other persons about securities” by virtue of ss. 9 and 77(1). What is a “business”? I considered that case in a recent decision of Re Buchan and Dairy Adjustment Authority [2002] AATA 644 when I said:

28. Before regard can be had to the chameleon like qualities of the word “business”, I should have regard to its ordinary meanings. In so far as they are relevant, they are:

“1. one’s occupation, profession, or trade. 2. Econ. the purchase and sale of goods in an attempt to make a profit. 3. Comm. a person, partnership, or corporation engaged in this; an established or ongoing enterprise or concern: to be in business. 4. volume of trade; patronage. 5. one’s place of work. 6. that with which one is principally and seriously concerned. ...” (The Macquarie Dictionary, 2nd edition, 1991)

“... II The object of concern or activity. 6 The object of serious effort; an aim. LME-M16 7 An appointed task; a duty, a province; spec. a particular errand, a cause of coming. LME 8 Action demanding time and labour; serious work. LME 9 A habitual occupation, a profession, a trade. L15 10 A thing that concerns one; a matter in which one make take part. E16 11 A particular matter requiring attention; a piece of work; a job; an agenda. M16 b A topic, a subject. Only in 17. c A difficult matter. colloq. M19 12 gen. An affair; a concern, a process; a matter; a structure; slang all that is available. Usu. derog. E17 13 Dealings, intercourse, (with) E17 14 Theatr. Action on stage (as opp. to dialogue). L17 15 Trade; commercial transactions or engagements; total bookings, receipts, etc. E18 16 A commercial house, a firm. L19 ...” (The New Shorter Oxford English Dictionary, 3rd edition, 1993)

29. The focus of the word’s ordinary meanings is upon the endeavour, as it were, be it described as an activity, occupation, dealing or the like. It is not upon the implements used to undertake the action or the place at which the action takes place. Certainly, evidence of the nature of any action undertaken, the tools used and the place at which action is undertaken is relevant in determining whether or not there is a business. That is apparent from cases such as Ferguson v Federal Commissioner of Taxation [1979] FCA 29; (1979) 26 ALR 307 (Bowen CJ, Franki and Fisher JJ) which considered the definition of “business” in s. 6(1) of the Income Tax Assessment Act 1936. That definition read:

“`business’... includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee;”

Their Honours Bowen CJ and Franki J then summarised the effect of the authorities at the time:

“... This does not afford much assistance in the present case. It is necessary to turn to the cases. There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin, and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial. See generally, Trautwein v. FC of T (No 2) [1936] HCA 46; (1936) 56 CLR 196; Tweddle v. FC of T [1942] HCA 40; (1942) 7 ATD 186; 2 AITR 360; Fairway Estates Pty Ltd v FC of T; [1970] HCA 29; (1970) 123 CLR 153; 1 ATR 726; Thomas v. FC of T (1972) 46 ALJR 397; 3 ATR 165; especially at 399-401; (67-71) in all of which cases it was held the taxpayer was carrying on business; and Martin v FC of T [1953] HCA 100; (1953) 90 CLR 470; 5 AITR 548, in which it was held the taxpayer was not carrying on business.” (pages 311)

30. Having regard to the ordinary meanings of the word “business” and to the authorities, it seems to me that, taken in the context of the Act, the word should be given its most general meanings. That is to say, it should be interpreted as covering a wide field of human endeavour whether described as a profession, trade, employment, vocation or calling or occupation in which a person is engaged provided that it may not be more properly described as something such as a hobby or recreational pursuit. Identification of an endeavour as a business will depend upon the consideration of a wide range of issues including matters such as the regularity and repetition of the endeavour, its purpose, its record keeping, those engaged in it and the place at which the endeavour is conducted. No one factor is essential in order to make an endeavour a business. So, for example, while it may well be that the endeavour is carried out for the purpose of making a profit, I do not consider that such a purpose is an element that is required to make it a business. In the context of the Act this follows from the fact that, when viewed at the most basic level, the Scheme provides compensation to those who have delivered milk that has been subject to regulation (be it in the form of a payment or a levy) and the amount of that compensation is calculated on the basis of the amount of that milk delivered during 1998/99. Whether or not that milk was delivered for a profit or not or with the intention of gaining a profit or not is irrelevant. Again in the context of the Act, the precise place at which the endeavour is conducted is also irrelevant. The Act’s object is to assist the dairy industry and that, when read with the availability of dairy exit payments for farmers who wish to leave the industry, must mean that the emphasis is upon the business of dairy farming rather than upon the place at which that business is conducted.”

312. I note that this conclusion is consistent with the principles expressed in Taylor v White [1964] HCA 11; (1963) 110 CLR 129, Edgelow v MacElwee [1918] 1 KB 205 and Hyde v Sullivan (1956) 56 SR (NSW) 113. In the context of s. 781 and of the Act more generally, it seems to me that a similar interpretation of the word “business” is applicable. It should be interpreted as covering a wide field of human endeavour whether described as a profession, trade, employment, vocation or calling or occupation in which a person is engaged provided that it may not be more properly described as something such as a hobby or recreational pursuit. It need not generate a profit or even be engaged in for the purpose of making a profit.

313. With regard to Mrs Corbett, I find on the basis of his own evidence that Mr Jungstedt continued to give advice to her regarding the options trading she undertook with Colonial. I accept his evidence that he saw himself as doing so in the role of her friend or agent in trying to close out the positions she had previously opened with him. I find that he debated the merits of certain positions with Mr Dunphy at Colonial and he gave her some advice about closing down the positions. He did so regularly but, without more, I am not satisfied that Mr Jungstedt’s advising Mrs Corbett about options, which are securities, leads to the conclusion that he was carrying on a business of advising Mrs Corbett or anyone else about securities and so an investment advice business. There is no evidence that he received payment for his actions or that he received contract notes from Colonial or that he maintained records. On balance, I am not satisfied that he was carrying on an investment advice business.

314. Although Mr Jungstedt was not carrying on an investment advice business, was he holding himself out as doing so and so holding himself out as an investment adviser? The ordinary meaning of the expression “hold out” is, in the context of s. 781, to “represent” (The New Shorter Oxford English Dictionary, 3rd edition, 1993) or to “present” (The Macquarie Dictionary, 2nd edition, 1991). That seems to be the meaning in which the expression is used in the section. A person must not represent or present him or her self as an investment adviser unless he or she is an investment adviser. He or she may do so explicitly or implicitly and the whole course of the dealings between Mrs Corbett and Mr Jungstedt must be considered as well as his dealings with other people.

315. I accept that Mr Jungstedt regarded Mr and Mrs Corbett as the parents of his best friend if not his own friends. At the same time, I accept that he and Mrs Corbett had previously enjoyed a professional adviser and client relationship in which she had signed a Client Agreement Form. When she moved to Colonial, she thought that Mr Dunphy and Mr Jungstedt were going to do the same as Mr Jungstedt had done for her before. Therefore, I am satisfied that she saw him as looking after and winding down her options trading. She did not see him as her agent and was quite clear that she had not signed an authority to act on her behalf or to operate her account.

316. Mr Jungstedt agreed that, when she transferred from Epic to Colonial, he had been instructed to close down her positions as quickly as possible. He understood that he was assuming some sort of responsibility for Mrs Corbett’s trades. He agreed that he was “partly advising her” in relation to her closing down her positions (transcript, page 760) but saw his position as no different from that of Mr Corbett who had previously telephoned him on Mrs Corbett’s behalf when Mr Jungstedt had been at Epic. Mr Dunphy’s evidence given at the hearing before the Commission was to the effect that Mrs Corbett had given Colonial written authority to the effect that Mr Jungstedt had authority to operate her options and equities trading accounts (Exhibit 3, pages 9-10). Taking the relationship overall, I find that, by continuing to act on her behalf as he had in the past and without any evidence of any overt change in their relationship or change in the basis of their professional relationship or any reference to his no longer being in the business of advising other persons about securities, I am satisfied that Mr Jungstedt represented or presented himself, at least impliedly, as a person who was carrying on a business of advising other persons about securities and so held himself out as an investment adviser.

317. I am also satisfied that Mr Jungstedt held himself out in this way to Colonial. He not only conducted trades on Mrs Corbett’s behalf with Colonial but also told Mr Dunphy that Mr Jungstedt told him that he had had no problems with Mrs Corbett’s account and that she had expressed a desire to continue trading in the same way. This finding is based on the evidence of Mr Dunphy (Exhibit 3, page 10). On Mr Jungstedt’s own evidence, I find that he discussed the trades and strategies from time to time with Mr Dunphy. In acting in this way, I find that Mr Jungstedt was holding himself out as an investment adviser to Colonial as well as to Mrs Corbett. In doing so, he contravened s. 781 and so a securities law.

318. Section 829(f) requires a consideration of whether the Commission has reason to believe that he or she has not performed efficiently, honestly and fairly the duties of, among others, a representative of an investment adviser. What is meant by the words “efficiently, honestly and fairly” was considered by Young J in Story v National Companies and Securities Commission (1988) 6 ACLC 560:

“ Thus I turn to the phrase ‘efficiently, honestly and fairly’. In one sense it is impossible to carry out all three tasks concurrently. To illustrate, a police officer may very well be most efficient in control of crime if he just shot every suspected criminal on sight. It would save a lot of time in arresting, preparing for trial, trying and convicting the offender. However, that would hardly be fair. Likewise a judge could get through his list most efficiently by finding for the plaintiff or the defendant as a matter of course, or declining to listen to counsel, but again that would hardly be the most fair way to proceed. Considerations of this nature incline my mind to think that the group of words ‘efficiently, honestly and fairly’ must be read as a compendious indication meaning a person who goes about their duties efficiently having regard to the dictates of honesty and fairness, honestly having regard to the dictates of efficiency and fairness, and fairly having regard to the dictates of efficiency and honesty.

To take the contrary view, as the defendant Commission did is to read ‘and’ as ‘or’. That proposition, of course, runs contrary to Blackburn J.'s famous dictum that ‘the proposition that “and” can sometimes mean “or” is true neither in law nor in English usage’. Re The Licensing Ordinance (1968) 13 F.L.R. 143 at p. 147. There are, of course, cases where in a statute one does construe ‘and’ as ‘or’, but I cannot see how, in the instant case, those exceptions apply as there is no absurdity or unintelligibility in reading ‘and’ as ‘and’, or giving the word some dispersive effect. However, in the long run it does not seem to me to much matter whether one reads the words cumulatively or disjunctively, because unless a licence holder possesses the three attributes whether as one package or as three separate parcels, the Commission can revoke his licence.

So far as ‘efficient’ is concerned, someone is an efficient person or performs his duties efficiently if he is adequate in performance, produces the desired effect, is capable, competent and adequate, see e.g. Spotts v. Baltimore & Ohio Railroad Co. (1939) 102 F. (2d) 160 at p. 162. Although that definition comes from a case dealing with handbrakes on railway cars, it seems to me that it can be applied to the word used in the current statute.

I do not think I need dwell on the meaning of the word ‘honestly’ except to remark that it is significant that it is used in conjunction with the word ‘fairly’. Those words tend to give the flavour of a person who not only is not dishonest, but also a person who is ethically sound, indeed, the sort of person reflected in the words of Psalm 15.” (pages 571)”

319. The duties of a representative of an investment adviser are not set out in the Act but, whatever their extent, they must include acting in accordance with any obligations imposed by legislation or by the ASX Rules that regulate trading on the AOM. I have set out the relevant ASX Rules earlier in these reasons. Rule 7.1.19 or its replacement Rule 7.3.1A reflect the essential features of s. 851. To that extent, therefore, the findings of fact that I have made in relation to that section are equally applicable in this context. In addition, ASX Rules 7.1.20 and 7.3.4 are applicable if Mr Jungstedt was engaged in discretionary trading. The latter rule set out the meaning of a “discretionary account” and that meaning appears equally applicable to the earlier rule.

320. In relation to Mrs Corbett, I am satisfied that Mr Jungstedt engaged in discretionary trading. She was a person who had little understanding of options trading and whom Mr Jungstedt accepted had little understanding and placed her trust in him (transcript, pages 774). On the basis of Mr Jungstedt’s evidence, I also find that Mr Jungstedt agreed upon a strategy to diversify her options portfolio so that she had not only options in resource shares but also options in companies other than those in which she held shares (transcript, page 777). He did not discuss with her the particular companies but rather was “... looking for a good option to diversify it and I found a bank and I do that ...” (transcript, page 777). They had agreed upon the strategy, he said, but not the particular companies. To my mind, this is discretionary trading. Agreement on the general strategy does not take away from the fact that it is Mr Jungstedt’s decision as to the option chosen and his decision as to the time and price at which it is bought or sold. Each of those decisions is a fundamental decision before a trade in an option is undertaken and none of them was a decision made by Mrs Corbett or a decision for which her approval was sought. Instead, each was a decision taken by Mr Jungstedt according to what he judged appropriate to implement the general strategy. The trades, I have concluded, was conducted at his discretion and Mrs Corbett’s account was conducted as a discretionary account.

321. Mr Jones, I find, also permitted Mr Jungstedt to operate his account as a discretionary account. He did not understand options but left it to Mr Jungstedt to trade as he thought fit. Both Mr Jones and Mrs Corbett were entitled to authorise Mr Jungstedt to act in this way but Mr Jungstedt was in breach of the ASX Rules because, I find, he did not obtain from either of them, or from Circle Jay, their written authorisation specifically authorising options trading in the account.

322. I also find that Mr Jungstedt was in breach of the ASX Rules in that he exercised his discretionary power to undertake trades that were excessive in size or frequency in view of the financial resources of Mr Jones or Circle Jay. I have already found that the trades conducted on behalf of Mr Jones could not be justified. It exposed him to a level of risk far beyond what could be justified by his asset base. I would go further. It could not be justified on the basis of his financial situation, his income, his objectives. It was excessive at least in size in view of his financial resources.

323. Moving from the particular findings I have made with regard to discretionary trading and Mr Jungstedt’s breach of his duties in that aspect, I also find that he did not carry out his duties as an investment adviser generally in a manner that was efficient, honest and fair. As I have already found, he either failed to make appropriate enquiries about his clients’ financial situation or made insufficient enquiries. Having done that, I find that he made assumptions about the assets that his clients were prepared to risk in options trading. He assumed, for example, that Mr Roberts would risk his family home. He assumed that Mrs Corbett wanted the assets of Agrahire risked in options trading and that Mr Boltman would risk his house at Brighton. Those assumptions were without foundation and incorrect.

324. With regard to the risks they faced, I have already found that he failed to advise them of those risks and failed to explain the nature of the trades he was undertaking in a manner that was appropriate to their level of understanding. Options trading is a complicated subject but its very complications imposes a heavier burden on an investment adviser as he or she must take more time and be more careful to explain its intricacies and satisfy him or her self that the client has grasped a sufficient understanding to be able to give instructions.

325. The understanding of Mr Jungstedt’s clients was limited, although Mr Roberts knew more than the rest, and he could reasonably have been expected to have known of its limitations. There is something of a tension between the responsibility that clients should bear to inform themselves and the responsibility of the person advising them. Clients cannot deliberately choose to remain ignorant of their investments and then choose to blame the adviser if the investments do not fare as they would wish. At the same time, an adviser must be sensitive to the limits of the clients’ knowledge, experience and, even, naivety. The more limited the client’s knowledge, the greater was Mr Jungstedt’s responsibility to explain the trades before he accepted instructions. Mrs Corbett was such a person. Even in the case of greater knowledge in his clients, he cannot absolve himself of responsibility for their trades. He had a duty to advise of the risks to which trades exposed them and I find that he failed to do so. Mrs Tinney was such a person. I am satisfied that he did not advise her of the level of risk to which her trades were exposing her. Instead, he led her to believe that she could use the money in the Austrust account and that all was well.

326. In relation to Mr Roberts, I find that Mr Jungstedt’s advice was not to crystallise his losses as he was confident that they could outrun the market. He gave similar advice to Mrs Tinney when he told her that he should continue trading for otherwise he would realise losses. I find that he told none of his clients of the risks to which they were exposed by continuing to trade.

327. Having regard to all of these matters, I am satisfied that Mr Jungstedt did not perform the duties of a representative of an investment adviser efficiently, honestly and fairly. On the evidence that I have, I am not satisfied that he will do so in the foreseeable future. I have reached that conclusion because I am not satisfied that Mr Jungstedt has reached any proper understanding of how he has erred in carrying out his duties and in conducting himself as a representative of an investment adviser. He considers himself as a person who has technical knowledge and expertise, an ability to explain options trading, an ability to inform clients and who has honesty and integrity. He refers to former colleagues and clients who have provided statements in support of him (T documents, pages 1813-1824). Mr Jungstedt considered that the problems of the five former clients in this case were caused and compounded by a combination of bad investment decisions made and insisted upon by them, Epic’s practice of allowing trading in debit and unfavourable market conditions towards the end of trading.

328. The personal testimonials certainly speak highly of Mr Jungstedt. Some come from a time before he joined Epic and others from former clients who remained with him until December, 1998. They were not cross-examined but, for all that, I am prepared to accept them at face value. That does not detract from the findings that I have already made in this case. It seems to me that Mr Jungstedt does not understand that he had some responsibility for the losses that the five clients incurred. That responsibility arises for a number of reasons some of which are more applicable to some clients than others. In part, it arises from the assumptions that he made about their financial situation, in part from his inadequate explanations of the trades he was undertaking, in part from his failing to explain the risk and in part by his telling them that he could fix the problems when one or other of them received demands for payment from Epic. The size of his clients’ losses was increased by his belief that he could outrun the market and by his failing to understand that his clients, whom I have found were not aware of the level of risk to which they were exposed, had neither the nerves of steel nor the depth of pocket required to outrun the market and profit from the multitude of trades opened on their behalf. Until Mr Jungstedt understands that he had some measure of responsibility, there is reason to believe that he will not conduct efficiently, honestly and fairly the duties of a representative of an investment adviser.

329. It follows that I consider that a banning order may be made against Mr Jungstedt by reason of the grounds set out in ss. 829(d), (f) and (g) but the final question to ask is whether it should be made?

330. Section 829 and the principles governing the exercise of the discretion inherent in that section have been considered in a number of cases. At their heart is the principle that we must bear in mind that we are not imposing a penalty. As the Full Court of the Federal Court said in Australian Securities Commission v Kippe and Another (1996) 67 FCR 499 (Von Doussa, Cooper and Tamberlin JJ) in relation to a banning order made under s. 829 of the Act against a dealers representative:

“The immediate and direct legal effect intended by a banning order is not to impose a penalty or punishment on the person concerned, but to be preventive in that it removes a perceived threat to the public interest and to public confidence in the securities and futures industry by removing that person from participation therein.” (page 508)

331. This approach is consistent with the more recent judgement of the New South Wales Court of Appeal in New South Wales Bar Association v Hamman [1999] NSWCA 404, (Unreported, Mason P, Priestley JA and Davies AJA, 29 October 1999). The court considered disciplinary proceedings against a legal practitioner and said:

“... Disciplinary proceedings against a legal practitioner are concerned with the protection of the public (Wentworth v New South Wales Bar Association [1992] HCA 24; (1992) 176 CLR 239 at 250-251). The object is not to punish the practitioner but to protect the public and to maintain proper standards in the legal profession. ...” (paragraph 21)

332. Authorities such as New South Wales Bar Association v Evatt [1968] HCA 20; (1968) 117 CLR 177 (Barwick CJ, Kitto, Taylor, Menzies and Owen JJ) and Hardcastle v Commissioner of Police [1984] FCA 105; (1984) 53 ALR 593 (Bowen CJ, Gallop and Lockhart JJ) acknowledge that, in achieving the objects of public protection and the maintenance of proper professional standards, an order made in disciplinary proceedings may involve great deprivation for the person who is the subject of that order. Despite that, the object of the order is not to punish or to extract retribution.

333. Cancellation or suspension of a person’s right to engage in his or her chosen profession does not only follow because a person has intentionally committed a wrong-doing. As Kirby P said in Pillai v Messiter [No.2] (1989) 16 NSWLR 197:

“... The public needs to be protected from delinquents and wrong-doers within professions. It also needs to be protected from seriously incompetent professional people who are ignorant of basic rules or indifferent as to rudimentary professional requirements. Such people should be removed from the register or from the relevant roll of practitioners, at least until they can demonstrate that their disqualifying imperfections have been removed. ...” (page 201)

334. How is the public to be protected? In Re Wolstencroft and Companies Auditors and Liquidators Disciplinary Board (1998) 54 ALD 773 (Deputy President Forgie and Mr Way, Member) the Tribunal, which was reviewing a banning order made in respect of an auditor, considered in what respects the public is to be protected. It said:

“It follows from the view taken by the full court of the Federal Court in the Kippe case that our choice of one of those courses must be guided by what is in the public interest in two senses. First, there is a public interest in ensuring that the individual follows the appropriate course of action in the future. Second, there is the public interest in ensuring that the public can be secure, or as secure as is reasonably possible, in the knowledge that those who are entrusted with the auditing of accounts can be properly entrusted with that task. It is particularly important that auditors ensure that the financial information of whom they audit is presented fairly within an identified financial reporting framework. That is so because their reports are relied upon by those who are both related to and unrelated to the subject of the audit. Those people must have confidence that they can rely on the audited accounts.” (page 786)

335. The imposition of a banning order against a representative of an investment adviser certainly achieves, in respect of at least one member of that profession, the second aspect of public protection for the period in respect of which it is imposed. That is, it ensures that the public can be certain that a particular person, who has been found to have breached a statutory standard applicable to him or her, is no longer entrusted with giving investment advice. At the same time, it informs both other dealers representatives and members of the general public that the behaviour is neither acceptable nor tolerated.

336. In Re Donald and Australian Securities and Investment Commission [2001] AATA 366, (4 May, 2001) I was a member of a tribunal (with Mr McLean and Mr Elsum, members) that reflected on the benefits and disadvantages of the imposition of a banning order in certain circumstances. As we said in that case, a:

“...period of prohibition may, rather like a retreat or a period of contemplation, lead a person to reflect upon his or her behaviour and to come to an understanding of why that behaviour has been regarded as inappropriate by others and, if it is necessary to do so, to take steps to improve his or her knowledge of what is an appropriate manner of behaviour. On the other hand, a period of prohibition may not result in such reflection or lead to a person’s coming to any greater understanding than he or she had when it was imposed.” (paragraph 117)

337. Mr Jungstedt has had a period of prohibition already imposed upon him but I do not consider that it has led to his reflecting or to his reflecting to a sufficient degree to understand the reasons why the manner in which he gave investment advice to his five clients who gave evidence was inappropriate for a person acting as a representative of an investment adviser. In Donald, we decided upon another approach which has been the subject of appeal (Australian Securities and Investment Commission v Donald [2002] FCA 1174; (2002) 69 ALD 187) and is the subject of a further appeal by the Commission. I do not consider that the alternative approach comprising an enforceable undertaking, supervision and education is justified in this case. Mr Jungstedt’s breaches of the statutory standards are broadly based and effectively extend across the whole range of the client/adviser relationship. They are not limited to a particular area of his expertise and they are not minor breaches or breaches that have the character of isolated occurrences. They are breaches which indicate a continuing pattern of disregard for the standards expected of a representative of an investment adviser.

338. In reaching this conclusion, I would distinguish the cases of Story and Re Codey and Australian Securities Commission [1995] AATA 249; (1995) 18 ACSR 209 (Deputy President Breen, Senior Member Muller and Captain Keane, Member). In the latter case, Mr Codey had operated false names over a limited period of some five months and no other breaches of standards or of the Code were found. In the former case of Story the conduct was of a much more circumscribed nature. In neither case was there the degree of disregard for legislative provisions and standards which I have found in this case.

339. Given this purpose, the length of the banning order causes me some concern in this case. As I have said, banning of itself will certainly have the effect of removing Mr Jungstedt from the industry and so protect the investing public during that time. More indirectly, it may protect the public by discouraging other representatives of investment advisers from following his example. Whether or not it plays any part in changing his attitudes or in encouraging him to familiarise himself with the standards and laws he should follow remains to be seen.

340. Having regard to the nature of the findings I have made and their seriousness and to the length of time, I have concluded that the banning order imposed by the Commission was appropriate.

341. For the reasons I have given, I affirm the decision of the respondent dated 29 February, 2000.

I certify that the three hundred and forty-one preceding paragraphs are a true copy of the reasons for the decision herein of Miss S A Forgie (Deputy President)

Signed: ...............................................................

P. Paczkowski Associate

Date/s of Hearing 25 June, 2001, 27 to 29 June, 2001,
7 to 9 November, 2001

Date of Decision 14 February, 2003

Counsel for the Applicant Mr M. Rinaldi

Counsel for the Respondent Mr J. Elliott

Solicitor for the Respondent Australian Securities & Investments Commission