The lawsuit, filed in the Federal Court on Monday, alleges compliance and legal specialist Sophie Grace breached its retainer with Gallop by signing off on compliance checks despite investor loans entered into which were in breach of GIG’s AFSL.

“In failing to advise [GIG] that the AFSL did not authorise [GIG] to enter into the loans, and that the loans were not in the best interests of [GIG], [Sophie Grace Legal] and [Sophie Grace Compliance] breached their duties to [GIG],” the lawsuit says.

GIG, previously known as Weather Pro, was an over-the-counter derivatives and foreign exchange trader that was a subsidiary of Seychelles-based Hung Ding Financial Management Company. The company was led by directors Ming-Chien “Ken” Wang, Fan “Van” Zhuo, James Marshall and Julia Tsai.

According to the lawsuit, Wang mostly resided overseas in China or Taiwan, Zhuo had “no experience or qualifications” as a company director or working in financial services, and Marshall and Tsai took no part in GIG’s management.

Sophie Grace lax on compliance advice, lawsuit claims

Sophie Grace was retained by GIG to provide “ad-hoc legal and compliance services” and “other legal services as requested from time to time,” according to the lawsuit.

GIG claims that Sophie Grace breached the terms of its retainer by failing to provide accurate advice about whether Wang or Zhou could legally make compliance declarations for GIG. This failure to properly oversee the business’ obligations led to US$11.3 million ($15.4 million) in investor funds being “loaned” to Wang and his firms, the lawsuit says.

Not only were compliance declarations that investor funds were held on trust “incorrect and misleading”, but Zhou’s lack of experience meant he was unable to make these declarations, the lawsuit says.

“By failing to advise [GIG’s] directors that they were not able to answer ‘yes’ to the compliance declarations referred to … above, [Sophie Grace Compliance] breached its duties to [GIG].”

A loan agreement for a “big client” named Mr Chen was settled by Sophie Grace director Sophie Gerber in July 2016. Gerber was allegedly aware that this agreement allowed GIG to “use investor funds in whichever way it wished” and that Wang and Zhou were regularly transferring investor funds to Hong Kong.

Sophie Grace should have known that GIG could not enter into the loans under the terms of its AFSL and that Zhou had “insufficient experience” to handle obligations imposed by an AFSL or the Corporations Act, the lawsuit claims.

“Neither Ms Gerber nor any other officer or employee of [Sophie Grace] took any action to advise [GIG] that [GIG’s] AFSL did not authorise it to enter into the loans and that the entry into the Loans was not in the best interests of [GIG].”

Sophie Grace is also accused of breaching the Corporations Act by failing to advise GIG to update terms on its website relating to investor funds and trust accounts which were misleading.

“[Sophie Grace] engaged in conduct in relation to a financial product or financial service that was misleading or deceptive or was likely to mislead or deceive [GIG’s] investors and was in breach of the duty pursuant to section 1041H of the Corporations Act.”

Sophie Grace is also facing a separate lawsuit by collapsed financial advisor Dover Financial. alleging negligence, breach of contract and misleading and deceptive conduct.

Landmark penalty issued after $40M wiped

GIG was wound up by the Federal Court in June 2018 after a successful application by investor Yen Yu Ching, with Martin Lewis of KPMG stepping in as liquidator.

In September 2019, the Federal Court hit Wang with an unprecedented $3 million penalty, imposed a lifetime ban on the GIG director managing companies in Australia, and ordered that another firm, Gallop Asset Management, be wound up. In that case, the Australian Securities and Investment Commission showed that over $40 million in investor funds had disappeared from Gallop’s bank accounts.

From April 2016, GIG marketed its services to investors in China and Taiwan, inviting them to deposit their funds into an account with the Commonwealth Bank of Australia. The GIG website claimed these funds would be held in segregated trust accounts in compliance with Australian law.

These statements were allegedly misleading because the majority of funds were not held in trust accounts but rather were deposited into a separate CBA foreign currency account. Around $40 million was placed into this account from May 2016 to October 2017 and was subsequently transferred to Wang, Hung Ding and a related firm, Shenzhen Unite Auto Resources Tech.

Gallop is represented by Johnson Winter & Slattery.

The case is Gallop International Group Pty Ltd (in liquidation) v Sophie Grace Legal Pty Ltd & Anor.

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