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BFCSA: James Wheeldon evidence in the Senate slams corrupted ASIC; Bankers and Financiers Lean On ASIC Commissioners and Lawyers.

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Here its is Neil   James Wheeldon's evidence at SENATE Economics Committee Hearing - ASIC Performance Inquiry

[11:46]    Senate Inquiry 2nd April, 2014....

WHEELDON, Mr James, Private Capacity  

CHAIR: Welcome. Do you have an opening statement you would care to make?

Mr Wheeldon: Yes, I do have a brief opening statement, if I may. First, thank you very much for inviting me here today. I would like to share with the committee my experience working as a lawyer in the regulatory policy branch of ASIC. I am a corporate lawyer with my own practice in Sydney. After graduating from law school in the United States in 2000 I spent four years working in the mergers and acquisitions group in the New York City office of a leading international law firm. In 2004 I returned to Australia and joined ASIC's regulatory policy branch, or RPB.

Shortly after joining ASIC, Mark Adams, then the head of RPB, assigned me to a group of lawyers who were tasked with responding to an application for relief that had been submitted by IFSA, the Investment and Financial Services Association. IFSA is the peak lobby group for Australia's financial services businesses. It has since been renamed the Financial Services Council and is presently leading the charge for relaxation of the FOFA laws. But, in the lead-up to the introduction of super choice in 2005, a key focus of IFSA's lobbying efforts was online superannuation calculators. In a nutshell, the corporations ACT required online super calculators to have a reasonable basis for the outputs they produced. Starting in 2004, IFSA aggressively lobbied ASIC to issue a class order that would amend the Corporations Act so that IFSA's members could offer online calculators that did not comply with the act's reasonable basis for advice standard. This would allow IFSA members to use online calculators as marketing tools rather than as reasonable educational tools and would also relieve IFSA members from the obligation to include fees in their online calculators. The relief IFSA sought would, in the words of a lawyer from ASIC's consumer protection directorate, 'allow the bad end of the market to spruik projections that they would not be permitted to promote on paper or verbally.' On the other hand, of course, the amendment, if granted, would deliver IFSA members a valuable commercial benefit.

ASIC has strict procedures in place for reviewing relief applications as set out in what was then known as 'Policy statement 51: applications for relief'. PF51 requires, among other things, applicants for relief to submit a formal application and pay a fee. It requires ASIC to undertake a strict analysis of the regulatory detriment that would flow from any grant of relief. It says that ASIC can only issue class order relief after public consultation unless the underlying policy is well settled; and, of course, it acknowledges that ASIC does not have the legal authority to grant relief that overturns the intended effect of an act of parliament.

Any ordinary person or business who applies to ASIC for relief would be required to comply with PS51, or RG51 as it is known today. However, the rules that apply to everyone else did not apply to IFSA's application for calculator relief. ASIC never required IFSA to submit a formal relief application or, to the best of my knowledge, to pay the mandatory application fee. Instead, IFSA was allowed to submit its application for relief in the form of personally addressed letters to senior ASIC staff. There was a 'Dear Ian' letter in August 2004 addressed to Mr Ian Johnston of ASIC's financial services regulation directorate; and there was a 'Dear Mark' letter addressed to Mark Adams of RPB in February 2005. These letters did not even pretend to comply with the requirements of PS51.
Yet, nonetheless, in late 2004 Mark Adams established a team of RPB lawyers to respond to IFSA's request for relief. On 8 November 2004, Mr Adams sent an email to a number of senior ASIC staff, including John Price, who is now a commissioner of ASIC. In that email, Mr Adams stated that his intention was to pre-empt IFSA's request for calculator relief. Mr Adams said that, based on IFSA's lobbying to date, he thought IFSA was likely to seek class order relief, exempting online superannuation calculators from the reasonable basis standard, and, thus, Mr Adams had set up a team of five lawyers to progress IFSA's anticipated request. Mr Adams tasked to me with preparing a class order that would exempt online calculators from the Corporations Act. He instructed me to start drafting this relief instrument despite the fact that no formal relief application had been submitted.

My opinion as a lawyer was that parliament's intent was clear and that, as a matter of law, ASIC did not have the authority to grant IFSA's request for relief; and, even if the application had merit, ASIC first had to undertake public consultation. Further, it was crystal clear that the relief would cause significant regulatory detriment in the form of reduced disclosure of fees to superannuation investors. On more than one occasion, however, Mr Adams explicitly told me that ASIC had to produce a result for IFSA and that, if we did not, IFSA would bring pressure to bear on the commissioners of ASIC and that he did not want anyone to be able to say that the regulatory policy branch was responsible for any delay in giving IFSA what it had asked for. IFSA's application was not to be judged on its merits; it was to be judged by reference to the clout and influence of the applicant. The message was clear: ASIC could not say no to IFSA Complicating matters further was the fact that Mr Adams required me to report to Mr Grant Jones, a more senior lawyer who had also been assigned by Mr Adams to the calculator relief project. But Grant Jones was not an ASIC employee; he was employed by MLC, the wealth management division of National Australia Bank. MLC was an IFSA member. Mr Jones was at ASIC on secondment from MLC. On 5 November 2004, Mr Jones told Mr Adams in my presence that Mr Jones had, as an MLC employee, helped draft IFSA's letters to ASIC lobbying for calculator relief. Mr Jones specifically told Mr Adams that he thought he had a conflict of interest. Despite this disclosure, Mr Adams kept Mr Jones on the calculator relief team.

Unsurprisingly, Mr Jones of MLC was an enthusiastic advocate within ASIC for the relief his employer sought. He amended ASIC's internal issues papers on calculator relief to advance his employer's interests. He drafted emails to IFSA on behalf of ASIC. He actively lobbied ASIC lawyers, including me, to support changing the law to benefit his employer. He did this with the full knowledge of Mark Adams.
I considered this to be highly improper and, after considerable deliberation, I complained to a variety of senior ASIC staff, including, among others, Malcolm Rodgers, the head of regulation, and Brendan Byrne, ASIC's general counsel. Their response was, in essence: 'How dare you suggest we have done anything improper?'

In early April 2005, I left ASIC without giving notice. I thought Mr Adams's instructions to me were improper and unlawful and I could no longer obey them in good conscience. On 15 June 2005, ASIC issued a class order granting IFSA and its members exactly what IFSA had asked for—actually, in a sense it gave it more than it had asked for. The explanatory statement to the class order stated that ASIC did not undertake public consultation prior to granting relief because the relief was of 'a minor and machinery nature'. In my professional opinion, the issuance of this class order was tainted by corruption—and I use that word after due consideration—and the explanatory statement to the class order was deliberately misleading and contemptuous of parliament. I think that the Australian people would be dismayed and, frankly, outraged if they knew the truth about how ASIC has made policy that affects the superannuation savings of working Australians. I am happy to take your questions.

CHAIR: Okay, and there will be a few. Let me cut to the chase here. You submit to us, in respect of this online calculator business, that incorrect process, undue influence, a predetermined outcome and undue regard for industry participants' wishes occurred, leading you to the view that the entire process is tainted by corruption.

Mr Wheeldon: The process was a sham, from beginning to end.

CHAIR: Just put on the record now for us the significance of this online calculator business.

Mr Wheeldon: From a certain point of view, I guess you could say, 'Online calculators—who cares?'

CHAIR: Yes—our phones have them, so who cares.

Mr Wheeldon: Yes. I think I can tell you what the significance is. There are good people in the market and there are some good online superannuation calculators out there. For example, AMP superannuation have one that would, I think, comply with any legal standard in terms of offering reasonable advice. I think it would comply with the new FoFA standards. They have a very clear set of inputs and outputs as to how it is intended to be used and the AMP calculator allows you to fully put in fees, so you can see how fees will affect it over a 30-year time frame and so forth. The AMP calculator says, 'We have given all of our assumptions and all of the modelling to these third-party actuaries. They've reviewed it and they say that what we're doing is reasonable.' I think AMP would tick every box. It would pass any test.
By contrast, if you look at the online superannuation calculator of MLC, who, curiously enough, happened to have their fellow writing the policy, it had no capacity for modelling fees in it; it acted as if fees did not exist. In fact, it would ask the user a bunch of very intrusive questions: how old are you? How old is your spouse? What is your income? What are your superannuation savings? How long do you plan on working for? And so on. Then it would come up with a projection which would not really have much to do with reality at all. Then, on the next page, it would say, 'Put in your phone number and your email address and we'll have a financial adviser call you'—and, presumably, sell you MLC products.

If the law were applied, superannuation calculators would look like the AMP superannuation calculator or the pretty good superannuation calculator that ASIC has on its FIDO website, which really educates users about how super works and how fees apply. You can change the settings and see it over time. But the bad end of the market, like MLC, used it simply as a marketing tool to get people into their financial adviser network. That would not have been legal if the law had not been amended by ASIC. Interestingly, a journalist from Fairfax asked MLC some questions about this at the end of last year and said, 'Does this comply with FoFA?' As I understand it, MLC's response was, 'We don't need to comply with FoFA because we got an exemption from ASIC that exempts us from the requirement to give proper advice.' When pressed, 'How do you justify putting this out there to users?' MLC said, 'All right, we're taking the calculator down.' Their calculator is still down. I think, if you ask ASIC about this, they will say, 'They're great educational tools.' They are great educational tools if they are reasonable as the law requires. If you do not comply with the law, they are just marketing tools.

CHAIR: Are you really saying to us that these online calculators, which you characterise as marketing tools, are necessarily designed to lead to an outcome that misleads the consumer when he or she is making his or her decision as to the financial product he or she might purchase?

Mr Wheeldon: They are not necessarily trying to guide people into a specific financial product. I think what they are trying to do, as they are used by the bad end of the market, is firstly to hide the impact of fees, to make it much more difficult to compare low-fee funds and higher fee funds, which is part of why I believe this was a big question for IFSA, because it was in the lead-up to Super Choice, when workers were for the first time going to be able to choose between various funds. I think IFSA—and this is an inference that I am drawing from their conduct—wanted this amendment because they wanted to make it easier for their members to confuse or hide the difference between different funds and the impact that fees would have.

CHAIR: Let me ask the question in a slightly different way. Do you say to us that these online calculators, as you have instanced in the case of MLC but also similar calculators—excluding AMP—are designed to deceive customers?

Mr Wheeldon: I think they are reckless at least as to whether or not they deceive customers. I think they are not designed to inform and educate customers—I would put it that way. The law as passed by parliament says that you have to have a reasonable basis for the outputs, which means that they would educate.

CHAIR: Did the online calculators misrepresent information to make some products appear more attractive in comparison to others?

Mr Wheeldon: I think you could say that, yes. Just let me say that one of the qualifications that ASIC did give on the relief is that you cannot link the calculator to a specific product. So it would not say, 'Buy this particular fund,' but it would still give a misleading impression and it would not let people understand how fees operate.

CHAIR: ASIC have described the online calculators in question as 'generic' calculators. Is this a fair and accurate description?

Mr Wheeldon: The word 'generic' was thrown around a lot while they were being used. I do not really understand what the word means. I do not think you will find a lawyer who would tell you that those calculators were not giving you personal advice, as defined in the Corporations Act.

CHAIR: Would you agree that in some instances generic online calculators can help consumers?

Mr Wheeldon: Absolutely. I think ASIC's Fido calculator is good. I think AMP's calculator is good.

CHAIR: Since the internet has become so intrusive, online calculators have become common in all sorts of fields of endeavour. Why did those particular companies or members seek the exemption back in 2004 or 2005?

Mr Wheeldon: I can only guess why they sought the exemption. The reason they gave was, 'All calculators are educational. The more of them, the better.' I do not think that is an argument that stands up to even cursory analysis. My belief, which I cannot prove, is that the reason they did it is that Super Choice was coming in and they wanted to have a full armoury of marketing tools in order to promote their financial planning networks and their financial services businesses.

CHAIR: What are the critical things that you believe are missing, say, from the reputable online calculators? You gave the example of AMP and said there are those that do not meet this standard. What are the critical features that are necessary?

Mr Wheeldon: One word: fees.

CHAIR: So it is about the fees.

Mr Wheeldon: It is about the fees.

CHAIR: And the impact on long-term income?

Mr Wheeldon: Correct.

CHAIR: Why do you think ASIC granted an exemption for the inclusion of such important information? You instanced the two senior officers. Why were they so insistent that the relief, as sought, be granted?

Mr Wheeldon: I was told specifically that it was because IFSA had clout. IFSA had political influence. There were political sensitivities and they were somebody that ASIC was not in a position to say no to. The merits of the application did not really matter. The relief had to be given CHAIR: When you were instructed by your more senior officers to have a particular outcome—you of course are required to follow lawful instructions—did you make any protests to them? Did you make a note on the file or comment that you thought the advice was incorrect and that you were only pursuing it because you had been instructed by senior officers?

Mr Wheeldon: It would probably take me a week to read all the notes on the file that I have about this. The notes were copious. My objections were explained at length.

CHAIR: They are on ASIC's file?

Mr Wheeldon: I assume so.

CHAIR: You did not take them when you left?

Mr Wheeldon: I can back up the fact that I objected.

CHAIR: You would be aware that FoFA reforms now require financial advisers to act in the best interests of their clients, to exercise a fiduciary duty. Under the new regime, the law as it stands, do all online calculators now meet this obligation?

Mr Wheeldon: No, because, very briefly, technically, they issued this class order in 2005 and, after issuing the class order, ASIC undertook public consultation which was expressly on the basis that they were not going to revisit the grant of relief. They then reissued the class order with some minor technical adjustments and then, on 1 July 2013, there was an amendment to the Corporations Regulations which grandfathered those class orders so that the exemptions under the previous section 945A and so forth, which have been repealed, the calculators are now exempt from FoFA.

CHAIR: When did that go through?

Mr Wheeldon: I believe it was an amendment to the Corporations Regulations on 1 July of last year.

CHAIR: 1 July?

Mr Wheeldon: It was whenever—

CHAIR: It was proclaimed at that time. Got you. You have raised this issue. The press may or may not report it in due course. What do you want the public to know about these calculators?

Mr Wheeldon: I think the calculators, in a sense, are not even really the issue. To me, the issue is how ASIC makes its policy. I could go on at length about what the public should think about in terms of doing their investments and so on and the concern they should have for fees and diversification and various other things. I think, if the public wants to use a superannuation calculator, they should use the one at the ASIC website, which is or something like that. It is pretty good and you can adjust the inputs and you can see exactly what that does on the outputs.

CHAIR: There are really two issues. There is the whole process when you were involved in ASIC and now the outcome, and you have given the answer, in terms of the outcome, to the second question. Having alerted us to this matter, what relief or recommendation do you seek that we make?

Mr Wheeldon: I have thought about that a lot. I really do not know what to say. I think it is a problem within the culture of the organisation—the fact was there was a fellow who was a lawyer for IFSA coming in and writing policy in response to an application from IFSA. I complained about that. The general council of ASIC told me, 'What are you complaining about?' I do not know how you deal with that.

CHAIR: Is your version of events disputed by ASIC?

Mr Wheeldon: I do not think they can dispute the facts, because I think I can prove the facts. I think what they would dispute is my judgement, in that they protested loudly and vehemently that there was nothing wrong with that process.

CHAIR: Do you then seek us to make a recommendation that either the government or ASIC cause an independent expert review to be conducted and made public of how the online calculators issue has been handled in ASIC?

Mr Wheeldon: I think that would be outstanding, yes.

CHAIR: All right. The committee will think about that.

Senator FAWCETT: Can I just clarify: in your statement I think you said that the MLC member flagged the fact that he had a conflict of interest Mr Wheeldon: Yes, I did. So I want to say that Mr Jones did nothing underhanded or hidden or secretive. Everything he did was with the full knowledge and consent and approval of


Mark Adams, the head of the regulatory policy branch. He volunteered that he had a conflict and he was effectively told, 'No; go ahead.'

Senator FAWCETT: When we have spoken to ASIC about the level of industry experience and competence within their senior management and other levels of the organisation, industry secondments are something that they highlight as being a positive. Given your experience of this, do you have any comment on the whole concept of industry secondments, either industry coming into ASIC or ASIC officers going to industry?

Mr Wheeldon: The first comment I have about the industry people coming to ASIC is that as far as I can tell the entire policy is top secret. My research skills are okay. I have looked high and low for information about ASIC's policy of accepting secondees. If you go to the website you cannot find anything. If you go through their annual reports, which I have done for the last 10 years, there is effectively zero disclosure of the secondees from industry coming to ASIC. It is obviously something they are not willing to tell the Australian people about. I do not know why that is. I also note that Mr Medcraft spoke to the Joint Committee on Corporations and Financial Services on Friday and he said, 'We are very careful about secondments. If we do secondments clearly we have to be sure that they are not into an area where they are regulating their own firm, for example.' Mr Medcraft said that there were very strict rules governing secondments. That was absolutely not true when I was working there. What he says may be true today but if it is true today it is because they have changed things in the years since I was there. As far as I know, I do not think the SEC has secondments in that nature and I think having secondments into the policy branch—you just cannot do it that way. ASIC need to have their own people who are doing that. That cannot be the only way that you get the skill in. If they want somebody who has got experience working for an investment bank or a top law firm, they should hire somebody and they should become members of the Australian Public Service and bound by the Public Service code of conduct and owing a fiduciary duty only to the Public Service and to the Australian people. But instead you had a fellow who I assume owed a duty primarily to his employer and he was representing his employer's interests within ASIC, and ASIC tolerated it. Mr Medcraft says they no longer do that. I guess we have to taking him at his word on that, because the entire secondment process so far as I can tell is top secret and the Australian public are not allowed to know about it.

Senator WILLIAMS: You are saying this is clearly a case of the big end of town influencing ASIC and the decisions ASIC made.

Mr Wheeldon: It is a big end of town, the banks and financial services companies, dictating the law to ASIC.

Senator WILLIAMS: And setting it up before it even went there, emails within ASIC saying that this is coming to us, we have got to rubber-stamp it. Is that what you are saying?

Mr Wheeldon: It is kind of worse than that. They have these industry liaison meetings, and I went to a couple of those, where you would have about four ASIC lawyers. They would go off to IFSA's offices and go into a large boardroom and there would be literally 20 or 25 senior executives and lawyers from the top six firms and so on and then there would be the ASIC guys outnumbered 6-1. And the IFSA guys would basically say, 'This is the way the wind is blowing, ASIC. We have got influence. This is what we want. This is a very high priority for our people. You can expect us to be submitting some applications in respect of these things and we want you to give our application a serious focus.' ASIC would say, 'Yes sir, understood,' not in so many words, but that would be the way it would work. So you would have the industry liaison meeting where the senior ASIC policy people would get told face-to-face what IFSA wanted. That would then be followed up by a Dear Mark letter, for example. That would not then be followed up by a formal relief application, it would instead be followed up by ASIC, which seemed to be strapped for cash but nonetheless able to find large numbers of lawyers to assign to the team to progress this application going forward. So it is a very unusual process. Maybe it has completely changed in the time since I was there but that is how it was when I was there, that it was a very strange process.

Senator WILLIAMS: You started with ASIC in 2004. When did you finish?

Mr Wheeldon: In April 2005, from memory. It was about nine months.

Senator WILLIAMS: In summary, how would you describe the culture of ASIC in those days, what you saw firsthand?

Mr Wheeldon: The culture of ASIC, within the Regulatory Policy Branch, was a culture of favouritism to certain applicants. It was not a culture of rigorous thinking. I am old fashioned; I think parliament makes the laws and the public servants should enforce the laws, and their personal opinions should be set to one side. They should not be prognosticating. They should not be sticking their fingers in the air to see which way the political winds are blowing. They should say: 'Right, here's the book. It's called the Corporations Act. We're going to

enforce it.' That is not the way it was done. I think that, for anybody who likes to see things being done by the book, the Regulatory Policy Branch of ASIC circa 2004 was not a welcoming place.

Senator WILLIAMS: Hypothetically, if I were to put you in charge of ASIC tomorrow and say, 'You change what you want,' even though you did not work there long, where do you see that the performance of ASIC could be improved?

Mr Wheeldon: I do not think the commissioners are up to the job, frankly. I do not think they are aware of what is going on within the organisation. John Price has vehemently protested that ASIC never do favours. In my experience that is not the case, and John Price was aware of this calculator relief project when it was going on. I was able to work out they were doing favours. I do not know why he has not been able to work it out.
That is the culture of it. I do not know how you change the culture. Honestly, I really do not know. I think ASIC does way too much. I think competition is great. I think that, if there were a separate organisation in charge of enforcing the laws that specifically related to retail investors and that got in a bit of competition with ASIC, there could be sort of an elite unit. You could have ASIC monitoring the registry stuff and so on and markets. What I am suggesting is never going to happen, but I do not know how you change the culture of such a huge organisation that is responsible for so many different things. No one person can wrap their mind around all of the things that it has to do. I admit these are extremely complex areas of law. It is economics, which is complicated enough. It also involves law and things to do with behavioural finance—how people think—and also political judgements layered on top of that.
The first thing that I would do if I were in charge of ASIC would be to say: 'From now on, we're enforcing the law and that's all we're doing. We're doing it by the book. If the law is on the book, it gets enforced. If we have a policy in place, we follow that policy. There's no guesswork about who's got clout. If we have to say something that people don't like but the law dictates that outcome, that's what we say, and we wear our knocks if people don't like the outcome that we're producing, regardless of how politically well-connected they are.'

Senator WILLIAMS: Have governments of all persuasions overloaded ASIC with too much work? Every time there is something new, it is dumped on ASIC: financial planning, liquidators, company register—

Mr Wheeldon: Yes. The short answer is yes. I think they have too much work. I think it is beyond the ability of any person to be on top of. I think there is one particular area, the protection of retail investors, which in a sense you could say is the most important thing. These are the working Australians—the millions of people who are putting the money into the superannuation system and are least empowered to protect themselves. They are the ones who need the most protection. I think they are the ones who have been let down the most by ASIC, and I think the only way that you can really get them protected is with an agency that is dedicated to nothing but protecting retail investors. I am well aware that is not going to happen.

Senator WILLIAMS: Thanks for your courage in coming along here today, Mr Wheeldon.

Mr Wheeldon: Thank you. Could I make one further point, which is something that I adverted to briefly: the explanatory statement to the class order. The class order that ASIC issued is a disallowable instrument. The parliament can only exercise its power to disallow an instrument like that if it is given accurate and reliable information from ASIC, and I think the explanatory statement that ASIC provided to the parliament that accompanied that class order was intentionally misleading. I think that was, frankly, contemptuous of parliament.

CHAIR: That comment has come out of left field. So the relief that was sought on the online calculators is achieved by the issuance of a regulation by ASIC under delegated authority—

Mr Wheeldon: A class order under delegated authority.

CHAIR: a class order, and you say that is a disallowable instrument.

Mr Wheeldon: As I understand it, yes.

CHAIR: That can be disallowed by either house?

Mr Wheeldon: In my view it would be disallowable by the Senate.

Senator BUSHBY: There are a certain number of days it has to lie on the floor of parliament: 15 days of sitting.

Mr Wheeldon: There is a brief window. Obviously senators and members cannot do the research—cannot go back and say, 'Let's check ASIC's work.' ASIC said this relief is of a minor and machinery nature. We did not need to do any consultation. They did not properly explain the effect of the instrument, so they effectively denied parliament its ability to properly oversee what it did

CHAIR: Essentially, you are opening up some interesting areas there. You are alleging that ASIC have deliberately at best misinformed the parliament as to the effect of the class order issue.

Mr Wheeldon: All I can tell you is my honest opinion as a lawyer after thinking about this and after researching it. My honest opinion is that, yes, ASIC misled the parliament about the effect of the class order.

CHAIR: I think we will have to ask them in due course, as you can expect. Thank you very much for your attendance and assistance.


Mr Wheeldon: Thank you.

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  • doyla66
    doyla66 Thursday, 03 April 2014

    Also read the statements from the first person to speak to the Senators Dr Stuart Fysh and how he spent seven and a half months in prison and lost 3.5 million dollars for insider trading and was beaten up because ASIC and the DPP stuffed up. The Senators go to great lengths to apologise to Dr Fysh for what he has had to endure at the hands of ASIC's incompetence. The DPP were next to speak after Dr Fysh and started to refute his statements when the chair Senator Bishop tore into the DPP and ASIC over their actions towards Dr Fysh, at last these bozo's who work in cushy jobs and ruin innocent people's lives are being called to account, well done Senators.

  • doyla66
    doyla66 Monday, 07 April 2014

    criminal charges should be laid

    if after this enquiry there is no criminal charges laid on the persons within ASIC to participate, contribute, instigate these corrupted secondments and unlawful changes, there is something wrong.
    We need these criminals jailed. Enough is enough.
    We are an embarrassment on the world corporate regulating platform because of ASIC's uselessness.

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Guest Thursday, 28 May 2020