Dom is a 70 year old Hungarian retired pensioner who can read little English. His only assets are his home worth $700 000 and $20 000 cash at Big Bank. He has been a customer of Big Bank for many years and considers himself a friend of its local manager, Leo. Leo tells Dom about an investment strategy using margin loans that enables investors to obtain a large investment portfolio and great returns without using their own money. He tells Dom that lots of Big Bank’s customers have done really well out of this strategy and it hasn’t cost them a thing. However, Leo fails to explain to Dom what a margin loan is, how margin loans work, or about any of the risks of margin loans, such as going into margin call as a result of market volatility, or increases in borrowing costs due to interest rate increases. He only tells him about the benefits of margin loans. Leo refers Dom to a local financial planning business, Cyclone Financial (Cyclone), which has been sending their clients to Big Bank to obtain margin loans to invest in Cyclone products.  

As a result Dom goes to see Cyclone who also fail to explain margin loans or advise him about the risks of such loans. They tell him they are experts at making people wealthy and will manage his investment portfolio for him so that he won’t have to worry about a thing. Dom is really sold on the idea, although he doesn’t have a clue as to how it works.  

In July 2008, Dom obtains a margin loan through Big Bank, approved by Leo, in the amount of $100 000 for the purposes of investing in a managed Cyclone investment portfolio. The loan from Big Bank is secured over the Cyclone investment portfolio.  

For the next couple of months Dom receives statements from Cyclone advising him that the value of his Cyclone investment portfolio is growing. Dom has no idea that his Cyclone investment portfolio consists of high-risk volatile shares. In October 2008, Dom receives a letter from Big Bank informing him that his $100 000 margin loan has gone into margin call as the security value of his Cyclone investment portfolio is now only $20 000 due to the impact of the global financial crisis. Therefore Big Bank demands Dom pay the Bank an $80 000 margin call within seven days. When Dom fails to do so, Big Bank, exercising its rights under its security, sells Dom’s Cyclone Investment Portfolio at market value for $20 000 and demands that Dom pay them the $80 000 outstanding balance of his margin loan. 

 On the same day, that Dom obtained the margin loan from Big Bank, Dom grants to Big Bank a mortgage over Dom’s home. Dom provides this mortgage to Big Bank as security for a loan of $5000 from Big Bank to Dom’s son’s company. What Dom doesn’t know is that Dom’s son’s company is in serious financial difficulty and is heavily indebted to Big Bank. When Dom attends at Big Bank to sign the documents in Leo’s presence, Dom’s son tells his father that the mortgage is only for $5000 for a period of six months. Leo, who hears Dom’s son telling his father this, fails to inform Dom that:  

(a) in fact the mortgage is not limited, but also guarantees all present and future indebtedness of his son’s company to Big Bank; and (b) his son’s company is already heavily indebted to the bank.  

When Leo asks Dom to read over the mortgage before signing, Dom says, “You know my English isn’t too good, and I can’t read all that little print but I trust you and my son not to take advantage of me.”  Two months later Dom receives a letter from Big Bank’s lawyers advising that his son’s company has gone into liquidation owing $500 000 to Big Bank and demands that Dom pay this amount within seven days, pointing out that failure to do so will result in the Bank, as mortgagee, exercising its rights to sell Dom’s home to recover the $500 000.  

Advise Dom of his rights and possible remedies against Big Bank and Cyclone, using common law and equitable principles, explaining to Dom the principles involved. Discuss possible defences that could be argued by Big Bank and Cyclone, and what Big Bank and Cyclone should have done to limit their legal liability. For this assignment answer, do not discuss the Australian Securities and Investments Commission Act 2001 (Cth).