The Australian Securities and Investments Commission (ASIC) has lodged a Notice of Appeal against the Federal Court’s decision to relieve Block Earner from liability to pay civil penalties for contravening the Corporations Act 2001 (Cth) (Corporations Act).
On 4 June 2024, his Honour Justice Jackman of the Federal Court found that Block Earner would be relieved from pecuniary penalties after breaching the Corporations Act by providing unlicensed financial services in the form of its Earner product.
ASIC’s appeal
ASIC’s notice of appeal outlines three grounds of appeal, which contests both the factual findings and legal analyses of Justice Jackman’s 4 June 2024 decision. In summary, ASIC is seeking to overturn nearly all of Justice Jackman’s penalty decision, other than the order that the parties bear their own costs for the main proceedings, meaning ASIC cannot recover any of the costs they incurred in suing Block Earner.
Ground One
The first ground of appeal is a contention that Justice Jackman entirely erred in finding that section 1317S of the Corporations Act, in all the circumstances considered by the Federal Court, should relieve Block Earner from liability.
As we set out in our article on Justice Jackman’s earlier judgment, section 1317S of the Corporations Act acts as a safety net for those that have breached the civil penalty provisions of the Corporations Act but otherwise acted with honesty.
ASIC contends that Justice Jackman was in error to apply the relief as the circumstances when considered as a whole indicated otherwise.
Ground Two
This ground of appeal is split across four sub-grounds. First, ASIC contends Justice Jackman erred by inferring that Block Earner had relied on legal advice to reasonably form the view that there was no identified risk the Earner product would breach relevant provisions of the Corporations Act as no evidence put forward by Block Earner to that effect. ASIC also contends that Justice Jackman erred by drawing favourable inferences to Block Earner in relation to the legal advice obtained by Block Earner in circumstances where Block Earner did not tender the document due to legal professional privilege.
This is an interesting point as privilege was not waived over the legal advice, so neither Justice Jackman, nor ASIC, has seen the contents of the advice.
Second, ASIC argues that Justice Jackman erred by providing relief to Block Earner in circumstances where Block Earner profited from the unlicensed offering of Earner. This is despite his Honour’s finding that the relatively small profit of Block Earner, being $21,306.90, was not a matter of “substantial weight” to his finding.
Third, ASIC contends Justice Jackman erred by considering the uncertain regulatory environment as a relevant consideration in circumstances where Block Earner perceived said uncertainty but nonetheless engaged in contravening conduct to make a profit. Given the absence of any clear guidance from ASIC on crypto-assets and the numerous consultations which have been undertaken by Treasury, it will be interesting to see how this ground of appeal is addressed.
In its fourth ground of appeal, ASIC is doubling-down on the issues concerning their press release, which Justice Jackman found was unfair and misleading.
Ground Three
Finally, ASIC contends that Justice Jackman erred in finding that he would not have imposed a penalty even if all the facts available under section 1317S of the Corporations Act were not present.
Penalty sought
ASIC is still pressing for the Full Federal Court to impose “a pecuniary penalty in the amount of $350,000 or such other amount the Court sees fit”. This was the amount originally sought by ASIC and rejected by Justice Jackson.
Conclusion
ASIC’s appeal has caused concern in the Australian crypto-community signaling an aggressive enforcement posture against those who seek to develop innovative product offerings in an uncertain and shifting regulatory environment.
ASIC is likely to face a number of challenges in their appeal, including that appeals from discretionary matters such as penalty decisions are difficult to challenge, and ASIC’s decision not to challenge evidence from Block Earner, noting that there are 9 references to “unchallenged evidence” in the judgment concerning matters argued by Block Earner.
Beneath the legal matters arising from this appeal lies a far more important macro issue, that regulation, sought by the industry for years, is finally starting to be formed, and that regulation by enforcement is a very inefficient means to make rules, as has been seen in the USA, and often court decisions can raise more questions than they answer.
In a regulatory environment that has been judicially recognised as unclear and “tangled mess”, the question of how precious public funds are spent and what outcomes are being achieved from that spending is an important question that needs to be considered. Setting clear rules of the road and a viable pathway for licensing for crypto-asset products, to the extent it is required to manage real risks (such as custody), would appear an outcome more consistent with traditional notions of rule of law and one better reached by consultation and rule/law-making by parliament.
Michael Bacina – Partner, Piper Alderman
Steven Pettigrove – Partner, Piper Alderman
Luke Higgins – Associate, Piper Alderman