Appeal court upholds venture capitalist’s misleading & deceptive claim against handpicked IPO chairman

A finance industry chief has been held to have engaged in misleading or deceptive conduct when negotiating the terms his appointment as chairman of an Australian peer to peer lending venture soon after leaving his post as Aussie Home Loans CEO.

Tortola in British Virgin IslandsA banker with connections to a company headquartered in a Caribbean tax haven, Stephen Porges has been ordered to pay $1.1 mil to the venture capital firm that launched the IPO and sought him out to head it up.

Porges had been identified by Brooke Adcock in early 2015 as a likely banking industry identity for the role of non-executive chairman of a new internet-based lending platform DirectMoney.

Porges told Adcock – that despite being canvassed to take on another bank CEO role – he was interested in the job but would need to liquidate some investments to “free up some cash to meet personal expenses and invest those funds if an opportunity comes along”.

Adcock Private Equity Pty Ltd agreed – as requested – to buy 300 of Porges’ shares in British Virgin Island based company “SecureOne” at the asking price of USD $500 per share.

SecureOne described itself as a “pre-revenue development-stage company” intending to offer a “data-centric, security focused, cloud-based mobile payments platform seeking a robust set of recurring revenue streams”.

APE soon after acquired a further 800 of Porges’ S1 shares at USD $700 per share and offered share options as part of his remuneration package at DirectMoney.

Unknown to Adcock, Porges was at the time of the sale aware of an USD $11 mil lawsuit against S1 over the proposed “seed capital” sale of shares to a multi-national online sports and betting company; and the possibility of an ATO audit.

It was later revealed that Porges had delivered an ultimatum to the company requiring it find a buyer for “200-500k of stock”, stating that “it should be an easy and small matter or it could be a clusterf…”.

S1 was victorious in the lawsuit but legal costs due to its BVI lawyers of USD $1.74 mil proved crippling and resulted in S1’s collapse and its shares being rendered worthless.

APE sued Porges in the NSW Supreme Court, alleging that its would-be chairman had – by representing the BVI company had a viable business plan, was trading profitably and that it would be a good and profitable investment – engaged in misleading & deceptive conduct.

Trial judge Justice Robert McDougall observed dryly that he “understood the expression ‘cluster****’ whether written elliptically or in full, to denote a perilous state of affairs indicating a chaotic situation where everything goes wrong”.

APE’s did not specifically allege having been misled by reason of Porges’ silence as to the pending litigation and his dissatisfaction with the company’s performance.

Nevertheless, the trial judge concluded that when the whole of the chairman’s conduct was taken into account “including what was not said, his conduct was misleading for failing to disclose facts that he must have known would be material to APE’s decision”.

Porges appealed contending that he had reasonable grounds for making the profitability representations and that APE had not in any event relied on any such representations if they were found to have in fact been made.

The appeal court agreed that evidence as to express reliance was “scanty”.

It also rejected APEs allegation that the evidence established that Mr Porges “wanted out” and that he had made the alleged “reluctant seller representation”. After all, he still still retained 6500 S1 shares after the sale to APE.

So with several of the alleged representations struck down and unsatisfactory evidence of “reliance” on what basis did the appeal court uphold the judgement in favour of APE?

Is was clear that Porges did want to sell and – concluded the appeal judges – that the need for cash to satisfy his wife’s lifestyle and to take up another investment opportunity “were not his only reasons”.

The non-disclosure of the potentially devastating lawsuit, the possible ATO audit and his ‘disenchantment’ with the company’s management  was found to have been misleading or deceptive or likely to mislead or deceive.

In such circumstances, “reliance” or misrepresentation by silence were not necessary to be proved and the $1.1 million award by the trial judge in APE’s favour was upheld.

Porges v Adcock Private Equity Pty Ltd [2019] NSWCA 79 Payne JA White JA Sackville AJA, 17 April 2019

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