Law of Investment and Financial Markets Assignment (Bdeft 6th Intake)

Topics: Financial services, Investment, Bernard Madoff Pages: 19 (5226 words) Published: March 15, 2010
Law of Investments & Financial Markets


23 MARCH 2009

Compiled and Completed by:





Table of Contents


Ignorant Hairdresser vs. Professional Consultant4

Know Your Client5

Appropriate Advice based on Reason6

Fiduciary Duty and Conflict of Interests7

Making False Representations as to returns – Misrepresentation8

Fraudulent Misrepresentation8

Is Paula able to claim in negligence under tort?9

Factors determining existence of a special relationship and duty of care:9

Resulting Remedies?11

Should Eastpoint be held responsible for the unprofessional conduct of Norm?12


Con of the century14

In Other Words...17

Violation: Statements of law18

Relevance between “Con of the Century” and Investment Law19

Commentary on the “Con of the Century”21



Ignorant Hairdresser vs. Professional Consultant

Before we begin, it is understood that Norm is providing financial services in a financial services business: s 761A.

Puala is considered as a consumer of financial services as the financial services are of a kind ordinarily acquired for personal, domestic or household use – ASIC Act, s 12 BC.

Hence she will be able to use the ASIC Act against Eastpoint and Norm.

Assuming that Paula is in the retail category (s 761G (5)) and does not fall into the threshold of wholesale, Norm have more obligations towards Paula.

As a professional financial consultant providing personal advice to a retail client, Norm is bound by Regulatory Guide 175 (RG 175) and he should act in the best interests of his client – Paula – and take a step further in understanding her financial situation and risk tolerance. For further enforcement, does a contract[1] exist between the two parties? 1. Offer and Acceptance

Paula approached Eastpoint to provide professional financial advice – an offer has been made by Paula to Eastpoint. Eastpoint accepted the offer by appointing Norm as their representative. Norm, as a financial consultant, is obligated to perform his duty towards Paula. 2. Consideration[2], with intention to create legal relationship The moment Paula paid Norm consultation fee, consideration has been established, with the intention to bind the two parties under contract law. With the offer accepted, consideration and intention established, both Norm and Paula were bound to a legal contract. Hence, Norm must fulfil his fiduciary obligations.

Know Your Client

Under “Guidelines on Standard of Conduct for Financial Advisers” of the Financial Advisers Act (FAA), Norm should take reasonable steps to determine Paula’s financial objectives, risk tolerance, financial situation, investment experience and particular needs in order to understand her risk profile. Obviously, Paula desired income and capital growth from a portfolio of suitable investment products. Norm, as her consultant, is obligated to adhere to the rules of “Know Your Client” and “Know Your Product” as mentioned in section 945 A of the Corporations act 2001, which requires the advisor not only to determine the investor’s relevant personal circumstances, but also actively acquire more knowledge to those personal circumstances. Norm had failed to understand Paula’s personal and financial situation and neglected to investigate her risk appetite. In this case under s 945A (1), Paula has the right to take necessary actions for loss or damaged caused by the non-compliance with the “know your client, know your product” rule. However Norm failed to do so. The obligations cannot be avoided by any disclaimer or warnings given to Paula.

Appropriate Advice based on Reason

Section 945A (1)(c) requires that personal advice must be “appropriate” to the client. According to RG 175.115, advice is appropriate if it is fit for its purpose, i.e. satisfies...

Bibliography: 1. Aidikoff, Uhl & Bakhtiari. (2008). SEC Statement on Madoff Investigation. Weblog post, 17 December. Viewed January 18, 2009, from
3. Diana B. Henriques & Zachery Kouwe. (2008, December 11). Prominent Trader Accused of Defrauding Clients. The New York Times. Viewed January 17, 2009, from
5. Matthew Goldstein. (2008, 18 December). Madoff: What a Week. BusinessWeek. Viewed January 16, 2009, from
7. Nelson D. Schwartz & Julia Werdigier. (2009, January 16). Suit Claims Madoff’s Role was Kept from Investors. The New York Times. Viewed January 25, 2009, from
9. Robert Chew. (2008, 15 December). How I Got Screwed by Bernie Madoff. Times. Viewed January 15, 2009, from,8599,1866398,00.html
11. Stephen Gandel. (2008, 12 December). Wall Street’s Latest Downfall: Madoff Charged with Fraud’. Times. Viewed January 15, 2009,from,8599,1866154,00.html?iid=sphere-inline-bottom
13. Voltairenet. (2008). Bernard Madoff: Wall Street Swindler Strikes Powerful Blows for Social Justice. Viewed January 17, 2009, from
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