Court Rules Mayfair 101, James Mawhinney Did Not Mislead Investors Over Bank Deposits

The Federal Court yesterday found Mayfair 101 Managing Director James Mawhinney did not misrepresent Mayfair debt products as being comparable to bank term deposits and he did not on-lend money sourced from noteholders to his family.

Mayfair 101 Managing Director, James Mawhinney

Justice Catherine Button delivered her judgment in the re-run of the case originally brought by the Australian Securities and Investments Commission against James Mawhinney in August 2020. The regulator was ordered to re-make its case in 2022 by the Full Court on appeal after ASIC’s first attempt failed due to denying Mr Mawhinney procedural fairness.

Case VID524/2020 commenced in August 2020 on an ex parte basis with ASIC labelling the private equity business a “ponzi scheme” and Mr Mawhinney a “flight risk”, resulting in interim fundraising injunctions and an overseas travel ban being imposed on Mr Mawhinney during the onset of the COVID-19 pandemic.

On appeal, ASIC’s first attempt at running the case was labelled “absurd” and “mistaken” by the Full Court in 2022 who remitted the appeal case to be re-heard. In the re-run case determined yesterday, Justice Button has made mixed findings both for and against ASIC and Mr Mawhinney.

Of the nine claims made against Mr Mawhinney the Court found Mr Mawhinney liable for five. Some contraventions were for limited periods of between days and a couple of weeks.

Significantly, the Court found that neither Mr Mawhinney nor his companies represented Mayfair’s fixed income notes products as being comparable to, and of a similar risk profile to, bank term deposits, and therefore did not engage in misleading or deceptive conduct in this regard. The court found:

“Those features, to which access was offered, do not convey a risk profile similar to that associated with a bank term deposit. If anything, they tend to describe “higher risk, higher reward” types of investments…

“Appealing to an audience interested in taking out a term deposit with a bank is not the same as conveying that the non-bank product being offered has a similar risk profile to a term deposit issued by a bank.

“If anything, the brochure was presenting an image that sought to differentiate the offering as much as possible from such conventional, staid investments. There is nothing in the text of the brochure that would be understood by the hypothetical representative member of the class as conveying that an investment with a Mayfair Group entity would have a “similar risk profile” to a bank term deposit.”

This is in contrast to the findings of Justice Anderson in 2021, who at an uncontested trial brought by ASIC which alleged Mayfair’s advertising was misleading or deceptive, found Mayfair liable for a near-identical bank term deposit representation and issued a $30 million penalty to the Group. Yesterday’s Federal Court ruling was also in contrast to the decision of the Full Court in 2022 which upheld Justice Anderson’s decision.

The 2021 trial was uncontested because Mayfair had been financially incapacitated by the August 2020 injunctions sought by ASIC and the reputational harm arising from the regulator’s misplaced allegations of fraud, making it virtually impossible to obtain funding. The allegations were made by ASIC at an urgent ex parte hearing of which neither Mr Mawhinney nor Mayfair 101’s lawyers were informed, resulting in a provisional liquidator being appointed to the company which had raised $63 million from 128 noteholders over the previous six months.

In respect of Mr Mawhinney’s compliance efforts the Court noted:

“I accept that Mr Mawhinney took meaningful steps to have the M Notes marketed in a way that was not misleading, to the extent that Mr King [Mayfair’s lawyer] was asked to review the contents of the marketing material”.

The Court rejected ASIC’s argument that Mr Mawhinney on-loaned monies originating from the M Core notes to family members, exonerating Mr Mawhinney on a serious allegation which ASIC had pursued unsuccessfully for nearly five years.

The Court also found in favour of Mr Mawhinney in relation to the issue of a property bond secured by a property in Mission Beach, Queensland, to a private financier. The court found Mr Mawhinney did not engage in misleading or deceptive conduct in this regard.

The Court found in ASIC’s favour in respect of loan agreements entered into by various private lenders and Mayfair’s IPO Capital business in 2016. The court found the agreements themselves to be debentures, which meant IPO Capital was found to have operated without the requisite Australian Financial Services License. Mr Mawhinney had previously sought legal advice in mid-2016 which confirmed an AFSL was not required to borrow money, though the court placed limited weight on the advice.

The Court found that for a period of between approximately 13-20 days Mr Mawhinney failed to disclose to new investors that the group had suspended redemptions. Mayfair 101 suspended redemptions on the same day the World Health Organisation declared COVID-19 a global pandemic, to manage the liquidity challenges arising from the pandemic.

The Court also found that for a period of approximately 13 days, a misleading representation was made in respect of the group’s ability to provide security for a new property bond product it had promoted but in which it had not yet raised money. On the 14^th day Mr Mawhinney successfully renegotiated the release of mortgages off individual properties which enabled the product to be issued in the manner represented, before any monies were raised from the public.

The Court has ordered the parties to prepare written submissions within 21 days on the duration of the imposition of an order under s1101B of the Corporations Act. ASIC has sought a 20-year ban, while Mr Mawhinney has already been prohibited from dealing in financial products on an interim basis for nearly five years.

Rhys Roberts, Mr Mawhinney’s instructing solicitor and Managing Partner of Roberts Gray Lawyers, stated:

“Today’s judgment is significant progress toward clearing Mr Mawhinney’s name. We successfully defended significant parts of ASIC’s case. We look forward to Mr Mawhinney continuing to rebuild so Mayfair 101’s lenders can be made whole regardless of the court outcome.”

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