On 25 September 2024, the Federal Court ordered Vanguard Investments Australia (Vanguard) to pay a $12.9 million penalty, after Vanguard admitted it had made false or misleading representations and engaged in conduct that was liable to mislead the public in relation to an ‘ethically conscious’ fund, in breach of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). The liability judgment handed down in April was ASIC’s first greenwashing court outcome. One interesting aspect of the Vanguard case is that the penalty relates to conduct that was admitted by Vanguard, whereas ASIC lost on the main issue that was litigated in the liability hearing in relation to an aspect of its product disclosure statement disclosure. For further details see our article here .
The $12.9 million penalty ordered against Vanguard is slightly higher than the penalty of $11.3 million ordered against Mercer Superannuation (Australia) Limited (Mercer) for similarly making false or misleading greenwashing representations in breach of the ASIC Act, which we’ve analysed here . Akin to the orders made in the Mercer proceedings, the Court also ordered Vanguard to publish a written adverse publicity notice on its website and pay ASIC’s costs for a portion of the proceeding. Since Vanguard was successful on the principal issue that was determined in the liability judgment, ASIC was ordered to pay Vanguard’s costs in connection with the liability hearing. It is interesting to speculate whether the net amount payable by Vanguard will be less than the $12.9 million headline penalty and how the net amount will compare to the total amount payable by Mercer after also paying ASIC’s costs.
We are still awaiting the penalty in ASIC’s third and final greenwashing case against Active Super, with the Court finding in June 2024 that Active Super made false or misleading representations by claiming it would not invest in companies associated with gambling, tobacco, oil tar sands and coal mining. The matter is listed for hearing later in December so we expect the penalty judgment to be handed down in 2025.
Key takeaways
Key learnings from this case include:
The extent to which senior employees are involved in the contravention will (unsurprisingly) be a key factor in determining the penalty (in particular where senior personnel have signed off on documents after being put on notice of concerns).
Seeking to dispute the quantum of penalty can be advantageous in terms of lowering the penalty but, even where the arguments for a lower penalty succeed, a party may nevertheless be ordered to pay ASIC’s costs of the penalty hearing.
Co-operation by admitting misconduct can result in a lower penalty, even if there is a contested dispute over the penalty.
Where the maximum penalty per contravention is determined by reference to annual turnover results (and not profit) this could mean a greater sting for lower-margin businesses (notably in this case the relevant fund was loss-making).
Payment of an infringement notice in relation to related conduct may not be a directly relevant consideration in and of itself, although admissions as to the underlying conduct may be.
Proportionality as a moderating factor is of critical importance in circumstances where theoretical maximum penalties yield unrealistically high figures.
Facts and findings
The Court found that Vanguard contravened:
ss 12DB(1)(a) and (e) of the ASIC Act by making false or misleading representations that the Vanguard Ethically Conscious Fund (Fund ) and interests in it were of a particular standard, quality or grade, and had certain performance characteristics or benefits; and
s 12DF(1) of the ASIC Act by engaging in conduct in relation to financial services that was liable to mislead the public as to the nature, the characteristics and the suitability for their purpose of those financial services.
At a high level, Vanguard was found to have made the following misrepresentations:
12 Product Disclosure Statements (PDS ) issued in 2018 and 2020 (PDS Representations ).
A media release issued in August 2018 in respect of the launch of the Fund (Media Release Representations ).
Statements published on Vanguard’s website from September 2018 (Website Representations ).
An interview of a Vanguard representative by the Finance News Network (FNN ) published on YouTube in December 2018 (YouTube Representations ).
A presentation given at an FNN Fund Manager event which was published on the FNN website in December 2018 (FNN Presentation Representations ).
Quantum of penalty
Vanguard did not agree to the penalties sought by ASIC, which totalled $21.6 million. While Vanguard accepted a substantial penalty ought to be imposed, it submitted a total penalty in the range of $9 million to $11.25 million would be appropriate.
For the reasons set out below, the Court ordered an aggregate penalty of $12.9 million.
Maximum penalty per contravention
The maximum penalty per contravention was approximately:
$2.1 million for each contravention that occurred wholly or partly before 13 March 2019 (being six PDS Representations published in 2018, the Media Release Representations, the Website Representations, the YouTube Representations and the FNN Presentation Representations); and
$25.6 million for each contravention that occurred wholly on or after 13 March 2019 (being six PDS Representations published in July 2020).
The reason for the higher penalty in the later period is because the relevant penalty provision was repealed and replaced by a new provision imposing significantly higher maximum pecuniary penalties with effect from 13 March 2019. This latter amount ($25.6 million) was calculated by reference to Vanguard’s annual turnover.
Number of contraventions
The court considered that Vanguard contravened ss 12DB(1)(a) and (e) and 12DF(1) each time a relevant representation was viewed by a potential investor. This occurred on thousands of occasions, resulting in a theoretical maximum pecuniary penalty in the billions of dollars. Accordingly, Justice O’Bryan observed that the “maximum penalty that may be imposed for the admitted contraventions is so high as to be practically meaningless .”
Penalty factors
Justice O’Bryan reiterated the primacy of deterrence and the desirability of encouraging cooperation to reduce the cost and burden of the proceeding to the Court, ASIC and the community.
The following table provides a high-level overview of the factors applied by Justice O’Bryan in determining a pecuniary penalty of appropriate deterrent value (the well-known ‘French factors’).
| Factor | Finding | Impact |
|---|---|---|
| Nature and extent of contraventions | Vanguard’s contraventions were serious and the misrepresentations concerned the principal distinguishing feature of the Fund, being its ethical characteristics, when in fact, approximately 74% of the securities in the Fund by market value were not researched or screened against applicable environmental, social and governance (ESG) criteria. Further, the conduct concerned an investment fund that the Court considered to be substantial in size, with more than $1.1 billion in funds under management (FUM) and close to a thousand investors. This is interesting because such a fund would generally be considered a very small fund, especially compared to the large superannuation funds which have over $100 billion in funds under management and hundreds of thousands of members. The contravening conduct continued for about two and a half years, from 7 August 2018 until 17 February 2021. During that period, it was estimated: Vanguard’s webpage on which the media release was published was viewed approximately 2,330 times.Copies of the PDS for the Fund were displayed to potential investors online approximately 1,276 times.Vanguard’s web page for the Fund, which contained the Website Representations, was viewed approximately 10,663 times.The YouTube video was viewed approximately 230 times. | Aggravating |
| On the other hand, there was some attempt to seek to reflect that ESG screening of securities in the Fund was limited to securities issued by corporates (albeit unsuccessfully). | Mitigating | |
| Circumstances in which the contravention occurred | The parties agreed that in the past several years, there has been a significant increase in demand for, and investment in, investment products focused on ESG considerations. Indeed, the demand from investors for investment products that are calibrated by reference to ESG criteria was expressly referenced by Vanguard when developing, launching and promoting the Fund. | Aggravating |
| Loss and damage suffered | ASIC did not contend that Vanguard’s contraventions caused any financial loss to investors but, rather, that investors lost the opportunity to invest in accordance with their investment values had they been provided with accurate information. | Aggravating |
| Benefits obtained | It was not feasible to quantify the financial benefit which Vanguard obtained from the contravening conduct. That said, the Court did accept that the misrepresentations enhanced Vanguard’s ability to attract investors to the Fund and Vanguard’s reputation as a provider of investment funds with ESG characteristics, as compared to what would have been the case if Vanguard had accurately disclosed the screening limitations and the Fund’s exposure to issuers engaged in the excluded industries. However, the Court did not accept the higher management fees charged for the Fund (compared to those charged for the Vanguard Global Aggregate Bond Index Fund) were attributable to its purported ESG characteristics. | Aggravating |
| Deliberateness | The parties agreed that Vanguard did not intend to contravene the ASIC Act. However, the Court found that the parts of the contravening conduct which involved the publication of the Media Release Representations, YouTube Representations and FNN Presentation Representations were engaged in with reckless disregard to the accuracy of the information conveyed. The Court did not agree that the PDS Representations and Website Representations were reckless - but that those aspects revealed a “very substantial failure in Vanguard’s practices with respect to legal compliance”. The Court also observed that the evidence adduced by the parties on the issue of deliberateness was limited; ASIC had not conducted examinations of relevant Vanguard employees (but relied on documents provided by Vanguard in response to s 912C notices) and Vanguard did not put on evidence from any person involved in the creation and promotion of the Fund. | Aggravating |
| Senior management involvement | Justice O’Bryan noted that in the absence of evidence concerning the precise role and tasks undertaken by certain senior employees with respect to the preparation of the media release, PDSs and website pages in relation to the Fund, it was open to find that each had some involvement in the contravening conduct on the basis of the statements made by or on behalf of Vanguard to ASIC (which constituted relevant admissions). This was particularly so given that senior personnel signed off on documents after Vanguard was put on notice regarding concerns. The Court also noted that “the desire to promote and market the Fund as ‘ethically conscious’ took priority over ensuring that the extent of ESG screening was accurately disclosed”. | Aggravating |
| Size and financial position | Vanguard is a wholly owned subsidiary of The Vanguard Group Inc, which is one of the world's largest investment management companies and has more than A$10 trillion in assets under management. | Aggravating |
| The Fund constituted a relatively small proportion of Vanguard’s overall business. The annual income earned by Vanguard from the Fund was less than 1% of Vanguard’s annual income in each year to FY22, and the market value of the FUM in the Fund averaged less than 1% of the market value of Vanguard’s total FUM in that period. | Mitigating | |
| Compliance culture | The Court considered evidence about the actions taken by Vanguard once it became aware of inaccuracies in the PDSs. In particular, when Vanguard’s Head of Risk became aware of the inaccuracies in the PDS Representations and Website Representations, the investment product was immediately put into a trading halt and Vanguard self-reported the conduct to ASIC. Vanguard had also made improvements to its compliance systems since the contravening conduct occurred to address the likely causes, including: Introducing new policies and procedures relating to the drafting, verification, implementation, finalisation and post-approval processes for PDSs and other disclosure documents.Introducing a ‘trigger event’ policy articulating the circumstances in which review of a PDS may be required and a new PDS may need to be issued.creating and filling a number of new dedicated product disclosure roles, comprising Vanguard’s Disclosure Team.Introducing a new governance body, being an operational forum enabling the Disclosure Team to comply with the end-to-end PDS process.Implementing training protocols to be rolled out at induction and on an annual basis for personnel in its Product, Client Operations, Finance, Office of General Counsel, Disclosure and Risk teams. | Mitigating |
| Cooperation and contrition | The Court found that Vanguard cooperated fully with ASIC in respect of the proceeding. The parties agreed that Vanguard self-identified and self-reported to ASIC, as well as cooperated with ASIC in respect of its investigation, including by responding to ASIC’s requests for information and documents in relation to the investigation in a prompt and constructive manner. This finding was made notwithstanding that Vanguard disputed the appropriate penalty. | Mitigating |
| Prior contraventions for engaging in similar conduct | Vanguard had not previously been found to have engaged in similar conduct by a court. Although it had paid three infringement notices issued by ASIC for similar statements made in a PDS for a separate fund (with no admission of liability), the Court did not place weight upon the fact of those infringement notices (merely being in relation to ASIC’s belief regarding alleged contraventions), but did however, attribute weight to admissions made as to the underlying conduct the subject of those infringement notices, which confirmed that the deficiencies in Vanguard’s disclosure compliance procedures were systematic. However, the Court was satisfied there was no ongoing history of non-compliance. | Neutral |
Vanguard’s contraventions were serious and the misrepresentations concerned the principal distinguishing feature of the Fund, being its ethical characteristics, when in fact, approximately 74% of the securities in the Fund by market value were not researched or screened against applicable environmental, social and governance (ESG) criteria.
Further, the conduct concerned an investment fund that the Court considered to be substantial in size, with more than $1.1 billion in funds under management (FUM) and close to a thousand investors. This is interesting because such a fund would generally be considered a very small fund, especially compared to the large superannuation funds which have over $100 billion in funds under management and hundreds of thousands of members.
The contravening conduct continued for about two and a half years, from 7 August 2018 until 17 February 2021. During that period, it was estimated:
Vanguard’s webpage on which the media release was published was viewed approximately 2,330 times.
Copies of the PDS for the Fund were displayed to potential investors online approximately 1,276 times.
Vanguard’s web page for the Fund, which contained the Website Representations, was viewed approximately 10,663 times.
The YouTube video was viewed approximately 230 times.
It was not feasible to quantify the financial benefit which Vanguard obtained from the contravening conduct.
That said, the Court did accept that the misrepresentations enhanced Vanguard’s ability to attract investors to the Fund and Vanguard’s reputation as a provider of investment funds with ESG characteristics, as compared to what would have been the case if Vanguard had accurately disclosed the screening limitations and the Fund’s exposure to issuers engaged in the excluded industries.
However, the Court did not accept the higher management fees charged for the Fund (compared to those charged for the Vanguard Global Aggregate Bond Index Fund) were attributable to its purported ESG characteristics.
The parties agreed that Vanguard did not intend to contravene the ASIC Act.
However, the Court found that the parts of the contravening conduct which involved the publication of the Media Release Representations, YouTube Representations and FNN Presentation Representations were engaged in with reckless disregard to the accuracy of the information conveyed. The Court did not agree that the PDS Representations and Website Representations were reckless - but that those aspects revealed a “very substantial failure in Vanguard’s practices with respect to legal compliance”.
The Court also observed that the evidence adduced by the parties on the issue of deliberateness was limited; ASIC had not conducted examinations of relevant Vanguard employees (but relied on documents provided by Vanguard in response to s 912C notices) and Vanguard did not put on evidence from any person involved in the creation and promotion of the Fund.
The Court considered evidence about the actions taken by Vanguard once it became aware of inaccuracies in the PDSs. In particular, when Vanguard’s Head of Risk became aware of the inaccuracies in the PDS Representations and Website Representations, the investment product was immediately put into a trading halt and Vanguard self-reported the conduct to ASIC. Vanguard had also made improvements to its compliance systems since the contravening conduct occurred to address the likely causes, including:
Introducing new policies and procedures relating to the drafting, verification, implementation, finalisation and post-approval processes for PDSs and other disclosure documents.
Introducing a ‘trigger event’ policy articulating the circumstances in which review of a PDS may be required and a new PDS may need to be issued.
creating and filling a number of new dedicated product disclosure roles, comprising Vanguard’s Disclosure Team.
Introducing a new governance body, being an operational forum enabling the Disclosure Team to comply with the end-to-end PDS process.
Implementing training protocols to be rolled out at induction and on an annual basis for personnel in its Product, Client Operations, Finance, Office of General Counsel, Disclosure and Risk teams.
The Court found that Vanguard cooperated fully with ASIC in respect of the proceeding. The parties agreed that Vanguard self-identified and self-reported to ASIC, as well as cooperated with ASIC in respect of its investigation, including by responding to ASIC’s requests for information and documents in relation to the investigation in a prompt and constructive manner. This finding was made notwithstanding that Vanguard disputed the appropriate penalty.
Vanguard had not previously been found to have engaged in similar conduct by a court.
Although it had paid three infringement notices issued by ASIC for similar statements made in a PDS for a separate fund (with no admission of liability), the Court did not place weight upon the fact of those infringement notices (merely being in relation to ASIC’s belief regarding alleged contraventions), but did however, attribute weight to admissions made as to the underlying conduct the subject of those infringement notices, which confirmed that the deficiencies in Vanguard’s disclosure compliance procedures were systematic. However, the Court was satisfied there was no ongoing history of non-compliance.
The Court's determination
Justice O’Bryan ultimately ordered Vanguard to pay $12.9 million in penalties, which is closer to the range proposed by Vanguard than the amount sought by ASIC. A more granular breakdown is set out in the table below.
| Penalty submitted by ASIC | Penalty submitted by Vanguard | Penalty ordered by Court | |
|---|---|---|---|
| PDS Representations | $18 million | Not specified | $9 million |
| Media Release Representations | $2 million | Not specified | $1.2 million |
| Website Representations | $2 million | Not specified | $1.2 million |
| YouTube Representations | $1 million | Not specified | $750,000 |
| FNN Presentation Representations | $1 million | Not specified | $750,000 |
| Less discounts | 10% for totality | 25% for cooperation | 25% for cooperation |
| Total penalty | $21.6 million | $9 million - $11.25 million | $12.9 million |
As can be seen from the figures above, the penalty for the PDS representations made up the bulk of the overall penalty, because they extended into the later period in which a higher maximum penalty was applicable. Notably, the Court agreed with Vanguard’s proposed 25% discount for cooperation.
Overall, the Court considered that a $12.9 million penalty was “proportionate and strikes an appropriate balance between deterrence and oppressive severity ”.
Proportionality was a key consideration, given that the Fund formed only a very small part of Vanguard’s overall business. The annual income earned by the Fund was less than $1 million in FY21 and about $1.3 million in FY22 (i.e. 0.34% and 0.45% of Vanguard’s total annual income respectively), noting that Vanguard also incurred expenses in managing the Fund and actually made a loss overall. Indeed, the penalty was more than Vanguard’s annual profit for the whole of its business in FY18 ($10.7 million) and only a little less than its profits in FY19 ($13 million).
How does this compare to the $11.3m imposed on Mercer?
The penalties handed down in Vanguard and Mercer are relatively comparable in quantum ($12.9 million as against $11.3 million), which is perhaps unsurprising given the short amount of time between the penalties and the factual similarities between the cases, including:
The contravening conduct involved a failure to properly screen investments against ESG criteria.
Both defendants have large parent companies with a strong financial position.
Senior management were involved in the preparation of the contravening representations.
Both defendants cooperated with ASIC and took immediate corrective action.
That said, similar penalties were imposed notwithstanding:
ASIC sought significantly higher penalties than those agreed with Mercer.
Vanguard disputed the appropriate penalty (noting Vanguard succeeded in reducing the penalty).
Vanguard had almost 50% more turnover than Mercer.
Vanguard’s contravening conduct extended over almost double the period.
Additionally, the adverse publicity order in Vanguard’s case is required for a longer duration (12 months, cf. 6 months for Mercer).
It should also be remembered that, while it was agreed Mercer would pay $200,000 for ASIC’s legal costs, ASIC was ordered to pay Vanguard’s legal costs of the liability hearing because the main liability questions that were litigated were determined in Vanguard’s favour. All things considered, the net amount payables by Vanguard and Mercer would be much closer than the headlines suggest.