In Australian Prudential Regulation Authority v Kelaher the Federal Court of Australia has rejected APRA's application to the effect that two superannuation trustee entities belonging to the wealth manager IOOF and two of their former directors contravened ss52 and 52A Superannuation Industry (Supervision) Act 1993.

Section 52 contains the covenants by the trustee taken to be contained in the governing rules of a superannuation entity. Section 52A contains the covenants by the directors of a corporate trustee taken to be contained in the governing rules of a superannuation entity. Under these two sections the regulator accused the wealth management giant IOOF's executives of failing to act in the best interests of their members.

APRA alleged that two entities in the IOOF group of companies, referred to as IIML (the sixth respondent) and Questor (the seventh respondent), and two of their directors, IOOF ex-CEO Chris Kelaher (the first respondent) and IOOF ex-chairman George Venardos (the second respondent), contravened ss52 and 52A. APRA sought disqualification orders against the directors and three responsible officers of the entities, namely David Coulter (the third respondent), Andrew Paul Vine (the fourth respondent) and Gary William Riordan (the fifth respondent).

APRA was contending that Kelaher and Venardos contravened various covenants imposed on by ss52 and 52A to exercise the requisite degree of care, skill and diligence, to act in the best interests of the beneficiaries of the super funds, and to give priority to the interests of the beneficiaries in the event of a conflict of interest. Judge Jayne Jagot largely demurred.

A cash management fund known as the CMT was a managed investment scheme of which Questor was the responsible entity. In June 2009, NAB (acting as a custodian) incorrectly classified a maturing term deposit as 'income' instead of 'capital' and proposed to Questor that the capital totalling $6.16 million should be distributed as investment income. Questor consequently distributed the capital as an income distribution to investors and beneficiaries. This created what the contemporaneous documents label as an “overdistribution” and what the court described as "the CMT overpayment."

Regarding Vincent Rossitto, IOOF’s Head of Investment and Accounting Services, who had the job of correcting the mistake, she opined: "APRA’s case appears to assume that merely because beneficiaries’ distributions were being diluted it virtually goes without saying that Mr Rossitto’s plan could not have been in the best interests of members. But this overlooks the fact that some members had the benefit of the wrongly distributed capital (to their advantage) and others who did have that benefit were intended to be compensated for any loss. Mr Rossitto’s plan, all in all, was a practical and sensible way to cause the least inconvenience to the members whilst nevertheless ensuring all were treated fairly and equitably, even if over the longer-term. The mere fact that APRA thinks another plan would have been in the best interests of members does not mean Mr Rossitto’s plan was not."

At another point the judge added: "APRA’s case on Questor’s alleged CMT Remediation Breach is affected by the same problems as its case on the CMT Overpayment Breach, a lack of reliable evidence...APRA’s case, at every level, lacks reliable proof...Its case rises no higher than assertion and speculation."

The case is a major piece of fallout from the Banking Royal Commission, which did not go well for Kelaher and his subordinates. Despite his poor performance on the stand, with some onlookers accusing him of arrogance, he left his job in the summer with a A$1.3 million payment in lieu of his contractual notice and with leave entitlements included.

APRA's defeat might be of cold comfort to IOOF, however, as two class actions are pending against it. The law firm of Quinn Emanuel alleges that between 27 May 2015 and 9 August 2018, IOOF contravened its continuous disclosure obligations under the Australian Stock Exchange Listing Rules and engaged in misleading or deceptive conduct. Registration is open to IOOF shareholders who acquired IOOF shares between those two dates. Quinn Emanuel’s proposed claim against IOOF arises from, amongst other things, evidence given by IOOF at the Royal Commission that concerned breaches by IOOF’s subsidiaries, and directors and officers, of their obligations as superannuation trustees.

Meanwhile, Shine Lawyers of Brisbane proclaim on the front page of their website: "Are you an IOOF investor who suffered losses as a result of IOOF’s alleged non-disclosure of corporate misconduct? You may be eligible to participate in our proposed class action against IOOF. Shine Lawyers is investigating the allegations and seeking compensation on behalf of affected persons who acquired shares in IOOF between 29 April 2014 and 5 December 2018 (inclusive)."