How do you penalise a $14tn global investment giant?

The $12.9 million penalty against Vanguard Investments represents a challenge for the courts as to how to financially penalise a company that holds $14 trillion globally in assets under management.

Last week, Vanguard received the penalty from the Federal Court for making misleading claims about certain ESG exclusionary screens that were applied to the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Ethically Conscious Fund). 

False or misleading statements about the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Ethically Conscious Fund) were made in:

• 12 product disclosure statements (PDSs), related to the AUD Hedged, NZD Hedged and ETF classes of the Ethically Conscious Fund.
• A media release.
• Material on Vanguard’s website.
• An interview that was published on YouTube.
• A presentation that was given at a fund manager event and then published online.

But with the company having such high assets under management, it is difficult to determine how to apportion a suitable penalty, particularly as the conduct is contravened every time a page is viewed by a potential investor which occurred thousands of times.

“The maximum penalty that may be imposed for the admitted contraventions is so high as to be practically meaningless. In respect of the contravening conduct that occurred wholly or partly before 13 March 2019 […] the applicable maximum penalty is $2.1 million per contravention.

VIEW ALL

View all

“That occurred on thousands of occasions, which results in a theoretical maximum pecuniary penalty in the billions of dollars.”

Regarding the six PDSs published in July 2020, the applicable maximum penalty rose to $25.6 million for each contravention – again the PDSs were viewed on hundreds of occasions.

“Where there was no meaningful overall maximum penalty given the very large number of contraventions, the assessment of the appropriate penalty was best assessed by reference to factors other than the statutory maximum.”

Instead, the court opted to consider the annual income earned by Vanguard from the affected fund. This was less than $1 million in FY21 and $1.3 million in FY22, while the income represented only 0.34 per cent of its total annual income in FY21 and 0.45 per cent in FY22. 

Vanguard’s Australian operations earned an annual profit of $21.6 million in FY21 and $26.1 million in FY22, while the global company has US$7.2 trillion in assets under management.

Ultimately, the penalty reflected $9 million for the first point, $1.2 million for the website material, $1.2 million for the media release, $750,000 for the YouTube interview, and $750,000 for the presentation. A 25 per cent discount was applied to reflect the high level of cooperation by Vanguard in the investigation and court proceedings.

Justice O’Bryan said: “I consider that an aggregate penalty of this size is proportionate and strikes an appropriate balance between deterrence and oppressive severity. In aggregate, it is an amount that is many multiples of the total revenue earned by Vanguard from managing the fund during the relevant period, and many multiples of the annual revenue earned by Vanguard from managing the fund after the end of the relevant period.”