Commercial Law Update - Fraud and liability in restitution for online sports betting companies and their operators

Introduction

In March 2017 a sports betting company, its sole director, its general manager, and associated companies were found liable following the receipt of stolen funds of over $2million, by the Victorian Supreme Court. The case is Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd [2017] VSC 101.

Issues of law raised by the fraud and addressed in the judgment include claims for money had and received, Black v Freedman trusts of stolen money, and Barnes v Addyknowing assistance and knowing receipt claims against third parties. It is useful for practitioners to be across the five Baden categories of knowledge, to assess when on a particular set of facts a claim may be established or a defence to such a claim made out.

Key Points/ How does it affect you?

• At least for sports betting agencies or other agencies who receive money for others – caution should be exercised where unexpected or suspicious payments are received.
• Those involved will be judged by what an honest and reasonable person would consider or do in the same circumstances and with the same knowledge or awareness [1]
• Especially if put on enquiry in some way, it may be prudent to make the “simple inquiry”[2] to check the money’s provenance, before on-paying, releasing or using the funds
• The “simple inquiry” as outlined by the court in Sino Iron, is this: seek to ascertain the identity of the depositor of the funds, contact them, and inquire whether they intended to make the deposit or payment to the benefit and for the purposes of the person or entity claiming to be entitled to access or control the funds[3]
• If stolen money is received and released or used without this, those liable might include not only the recipient company, but potentially also associated individuals and associated companies, depending upon what they did or did not do, and where the money or its traceable product went
• Each case will turn on its own facts. Check those against the Baden categories of knowledge

Summary of facts as found by the Court

The two plaintiff companies operated a mining project in the Pilbara, and incurred large debts to an engineering company. The fraudster, pretending to be an authorised representative of the engineering company, contacted the plaintiffs and directed that invoices be paid into a new bank account. The bank account details given were those Worldwide Wagering Pty Ltd. Worldwide carried on an international sports betting business under the name “Pinnaclebet”.

The plaintiff mining companies paid over $2m into Worldwide’s ANZ bank account on 30 May 2016. Worldwide’s sole director Mr H, and its general manager Mr O initially suspected fraud when the funds were received, as there had been a similar theft from La Trobe University about two weeks earlier. They reported it to the police. So far so good.

However they then spoke with a Worldwide customer known to them, a Mr S, who claimed an entitlement to bet with the funds. He was persuasive and they decided to let him.

On 1 June 2016 they had Worldwide credit the stolen funds to Mr S’s betting account. Mr O and Mr H gave evidence this was after checking by email with the police[4], although the judge found on the evidence that in their emails to the police Mr H and Mr O withheld important information including Mr S’s surname, to protect Mr S from further enquiries by the detective.[5]

The stolen funds were then gambled on international sporting events. There were some wins paid out to Mr S, but most bets were lost. The Court found that most of the approximately $2million was used by Worldwide, Mr H, or related companies.

The defendants admitted they had actual knowledge of the fraud at 1.13pm on 7 June 2016, after Mr S had placed his last bet. However even after that the stolen funds continued to be used by the defendants or related companies.[6] This included a sum of nearly $800,000 which passed through a related company The Odds Broker and was used to purchase a bank cheque, which Mr H and Mr O then used to buy a property at Bondi Junction.[7]

The Result – Overview

The Court held the plaintiffs had established an entitlement to relief on multiple co-existing and overlapping grounds. These included –

1. For $2,077,210 against Worldwide on the basis of:
   1. the common law claim for money had and received;
   2. the proprietary claim under Foskett v McKeown principles; and
   3. breach of its Black v Freedman (stolen money received) trust obligations.

1. Against Mr H (the director) and Mr O (the general manager) for $2,077,210 for knowingly assisting Worldwide to breach its Black v Freedman trust obligations (knowing assistance is the second limb of Barnes v Addy liability).
2. Against Mr O for knowingly assisting Worldwide, The Odds Broker and Mr H to breach their respective Black v Freedman trusts by disposing of the traceable proceeds of the stolen funds comprised in the $800,000 transferred from Worldwide’s ANZ account to a bank account of The Odds Broker to personal bank accounts of Mr H.
3. Against Mr H for the traceable proceeds of the stolen funds comprised in the $800,000 on the basis of:
   1. money had and received; and
   2. knowing receipt of trust property (Barnes v Addy first limb).

1. Against Worldwide for an equitable charge over the Worldwide ANZ account to secure the traceable proceeds of the stolen funds remaining in that account.
2. Against Mr H and Mr O for an equitable charge over the Bondi Junction property to secure the traceable proceeds of the stolen funds used to purchase it.

These findings involved rejection of the change of position and bona fide purchaser for value without notice defences, on the ground that the defendants did not act in good faith at relevant times because of their knowledge of the fraud to the level of the third Baden category (wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make). The indefeasibility defence also failed.[8]

Three Key Legal Issues

1. Knowledge of the fraud & the Baden categories

In making his findings as to knowledge, Hargrave J first set out the five so-called “Baden categories of knowledge”.[9] These are useful for practitioners to be across. The level of knowledge required to be met to succeed in a particular claim or defence varies. The Baden categories of knowledge are –

(1) actual knowledge;

(2) wilfully shutting one’s eyes to the obvious;

(3) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make;

(4) knowledge of circumstances which would indicate the facts to an honest and reasonable person; and

(5) knowledge of circumstances which would put an honest and reasonable person on inquiry.[10]

The defendants admitted they had actual knowledge of ‘a suspicion of’ the fraud at approximately 1.13pm on 7 June 2016, several hours after an ANZ officer initially told Mr H of it. By 1.13pm Mr H believed the stolen funds were ‘likely’ to have been fraudulent deposits and instructed a staff member to freeze Mr S’s betting account. The Court found that Mr H had actual knowledge of the fraud in the first Baden category from the time he gave that instruction on 7 June.[11]

However recapping the earlier timeline with the Baden categories in mind –

The stolen moneys had been paid in on 30 May.

On 1 June 2016 Mr H and Mr O arranged for Worldwide to credit the stolen funds to Mr S’s betting account. They contended that at this time, they had spoken to the police and made all reasonable inquiries to satisfy themselves that Mr S was entitled to bet with the funds.[12] Hargrove J did not accept this. He found their inquiries to have been “manifestly inadequate”.[13]

His Honour took the view that as at 1 June the knowledge they had was such that an honest and reasonable person would have made further inquiries before crediting Mr S’s account with the stolen funds – so Baden category 3. They should have made those inquiries – including the ‘simple inquiry‘ of ascertaining the identities of the depositors of the stolen funds (the plaintiffs) from the internet bank statements, and contacting them to ask if the deposits had been made by the plaintiffs and for the purpose of the international sports betting customer claiming the money.[14]

The Court held that Mr H and Mr O acted wilfully and recklessly in failing to make the ‘simple inquiry’ – see Baden category 3 above. His Honour observed that they also had a commercial motive to want to believe Mr S’s claims, being their plan to expand the business’s turnover and customer base to ready it for sale from which they each stood to profit. As a result, his Honour found, they accepted flimsy information from a man with, at best, a mixed reputation, and made only superficial inquiries.[15]

2. Money had and received; claims in restitution based on mistaken payments; change of position defence

The key legal principles his Honour identified from the authorities were these[16] –

1. When money is paid under a mistake of fact, the person paying the money may recover it from the recipient in a common law action for money had and received. Recovery depends upon whether it would be inequitable for the recipient to retain the benefit. Retention may not be inequitable if the recipient has changed its position on the faith of the receipt and thereby suffered a detriment: Australian Financial Services Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14; (2014) 253 CLR 250, 568 per French CJ;
2. Direct receipt is unnecessary; indirect receipt by a volunteer of traceable proceeds of the money paid by mistake is enough: Fistar v Riverwood Legion & Community Club Ltd [2016] NSWCA 81; (2016) 91 NSWLR 732, 746 [62]-[64];
3. In a common law action based on money paid by mistake, it is not necessary for the plaintiff to allege or prove that the retention of the money received by the defendant would be inequitable. That is a matter for defence, on which the defendant bears the onus: ASFL v Hills Industries at 593 [66]-[67]; David Securities Pty Ltd v CBA [1992] HCA 48; (1992) 175 CLR 353, 379;
4. One such defence is change of position. Gageler J in AFSL v Hills Industries proposed two conditions for proof of this defence –
   1. That the defendant has acted or refrained from acting in good faith on the assumption that he/she/it was entitled to deal with the payment received. The defendant need not have relied on knowledge derived from the payer.
   2. That by reason of having so acted or retained from acting, the defendant would be placed in a worse position if ordered to make restitution of the payment than if the defendant had not received the payment at all. The detriment need not always be financial. If it is, it need not be established with precision. It can be an opportunity forgone. However it must, in every case, be shown by the defendant to be substantial: ASFL v Hills Industries at 625-626 [157];
5. This formulation has been accepted by the Victorian Court of Appeal as consistent with the defence and the principles on which it is based as set out by the majority in AFSL v Hills: Southage PL v Vescovi [2015] VSCA 117; (2015) 321 ALR 383, 399 [65].
6. A defendant relying on a change of position defence who, prior to the change of position, wilfully and recklessly fails to make such inquiries as an honest and reasonable person would make in all the circumstances (i.e. once they have knowledge to the 3rd Baden category), does not act in good faith on the assumption that he, she or it is entitled to deal with the mistaken payment (which is the 1st of Gageler J’s two conditions for this defence): Macquarie Bank Ltd v Sixty Fourth Throne PL [1998] 3 VR 133, 143-144.

The Court held that the defendants could not avail themselves of the defence here because they had sufficient (Baden category 3) knowledge of the fraud at the time each bet was accepted.[17]

3. The Black v Freedman trust on which Worldwide held the funds

Hargrove J considered the nature of the trust created by receipt of stolen moneys under the Black v S Freedman & Co [1910] HCA 58; (1910) 12 CLR 105 line of authorities. His Honour discussed these principles[18] –

1. Black v Freedman has been treated in Australia as a settled law that a thief holds stolen property on trust for the victim: Levy v Watt [2014] VSCA 60; (2014) 308 ALR 748, 766 [65];[19]
2. For volunteer recipients of stolen money from the fraudster: a person entirely innocent of a fraud who comes to know that he or she has received and still retains the proceeds of, or taken advantage of, a fraud to which he or she was not party, cannot knowingly seek to retain those proceeds or that advantage without, in effect, becoming a party to that fraud and liable accordingly: Heperu Pty Ltd v Belle [2009] NSWCA 252; (2009) 76 NSWLR 230, 253 [92];[20]
3. The innocent recipient’s liability is limited to the amount of the stolen funds (or their traceable proceeds) remaining in the hands of the innocent recipient at the time sufficient knowledge of the theft is obtained: Heperu at 264-268 (145]-[163];[21]
4. In summary, a third party who receives stolen money as a volunteer is only obliged to account to the beneficial owner of the stolen property on Black v Freedman principles to the extent the recipient holds the stolen property or its traceable proceeds at the time the recipient obtains sufficient knowledge of the theft.[22]

His Honour concluded that a trust did not arise upon Worldwide’s receipt of the stolen funds on 30 May – it did not then have sufficient knowledge of the fraud.[23] However, when the defendants did acquire sufficient knowledge of the fraud on 1 June 2016, Worldwide became liable in equity to account to the plaintiffs for the stolen funds, all of which were still in its hands. The Court held that from that time, Worldwide was a trustee of those funds under either a constructive or resulting trust.[24]

Conclusion

The case stands as a salient warning to sports betting companies and those associated with them. It is not only anti-money laundering laws they need to pay heed to, as Tabcorp’s $45million fine by the Federal Court in March 2017 underscores. In some cases liability to make restitution for receipt of stolen money may extend also to individuals and related companies, if a suspicious payment is received and not enough caution is exercised before releasing or using it. Each case will turn on its own facts. As this case illustrates, a failure to meet the standard of caution the law requires, in the circumstances, can have significant consequences for all involved.

FOOTNOTES

[1] Absent actual knowledge or willfully ignoring the obvious, this is the guiding inquiry to which the Baden categories of knowledge direct attention.

[2] As described by Hargrave J in Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd [2017] VSC 101 at [158]-[159].

[3] Ibid.

[4] See Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd [2017] VSC 101 at [140]-[142].

[5] Ibid at [193]-[200].

[6] Ibid, at [8].

[7] See [6]-[12] of the judgment for summary details of the application of the funds.

[8] See [452]-[462] for these conclusions.

[9] See Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd [2017] VSC 101 at [27].

[10] For a useful discussion of these categories, see my 2012 article on Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 – here.

[11] See Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd [2017] VSC 101 at [98]-[99].

[12] Ibid at [157].

[13] Ibid at [180].

[14] Ibid at [158]-[161].

[15] ibid at [168]-[182].

[16] Ibid at [275]-[279] and [286]-[288].

[17] Ibid at [282].

[18] From [306].

[19] Ibid at [313]. I note there has been controversy to date about whether this is indeed the correct proposition for which Black v Freedman stands. See Fistar v Riverwood Legion and Community Club Ltd [2016] NSWCA 81; (2016) 91 NSWLR 732 at [37] per Leeming JA, and Bride v Shire of Katanning [2013] WASCA 154 at [72] per Edelman J.

[20] See Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd [2017] VSC 101 at [314].

[21] Ibid at [315].

[22] See Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd [2017] VSC 101 at [316].

[23] Ibid at [316].

[24] Ibid at [325], and see the citations of Heperu at [154]-[155] and Sze Tu v Lowe at [141]-[162].