Lobbyists David Gazard and Jonathan Epstein settle legal battle over Afterpay options

Court documents reveal high-profile lobbyists David Gazard and Jonathan Epstein have settled a secret and protracted battle over $4.5m of Afterpay options.

David Gazard is one of the founders of ECG Advisory Solutions. Picture: Milan Scepanovic / The Australian

It’s the secret legal brawl that has threatened to engulf some of the most influential names in lobbying – Scott Morrison confidant David Gazard, Nine Entertainment chairman Peter Costello, and their one-time business partner Jonathan Epstein – all over $4.5m in Afterpay options.

Kept confidential until now and recently settled out of court, the lawsuit has avoided the embarrassment of witnesses including Mr Costello being forced to give testimony about his former business partners, allegations of broken promises and a bundle of cash.

Ultimately, it is a fight over 60,000 options in the market’s hottest buy now, pay later stock, Afterpay, and the break up of their powerful lobbying shop ECG Advisory Solutions.

Court documents obtained by The Australian can reveal a protracted legal case that saw Mr Gazard and Mr Epstein duke it out over who owned the proceeds of just under $4.53m after a tranche of Afterpay options handed to the firm was sold by Mr Gazard in October 2020.

If the shares were held when US payments giant Square made its $39bn takeover for Afterpay this year, they would have been worth almost $8.5m.

A former adviser to John Howard and Mr Costello, and a close friend of the Prime Minister’s, Mr Gazard in 2011 launched his specialist government relations and public policy firm called ECG Advisory Solutions.

Mr Gazard, Mr Costello and Mr Epstein, a former analyst at the Future Fund where Mr Costello is chairman and the former treasurer’s one-time adviser, were equal partners in the firm.

David Gazard at the 2019 Liberal election night party at Sydney’s Wentworth Sofitel. Picture: Hollie Adams / The Australian

By July 2014, Mr Costello had left the business and his shares in the firm were transferred, in equal parts, to Mr Gazard and Mr Epstein, who were then the two principals of ECG.

Implicit in their partnership was, according to the court documents, Mr Gazard’s duty as a director “not to improperly use his position as a director of ECG to gain an advantage for himself or someone else … and a fiduciary duty not to make or pursue a gain in circumstances where there was a conflict, or a real possibility of a conflict, between his interests and those of ECG”.

As the fast-growing buy, now pay later sector heated up, led by market leader Afterpay, it attracted regulatory scrutiny from a number of authorities and ECG was hired in November 2018 to “provide services including government relations advice and lobbying”.

According to the statement of claim lodged with the Supreme Court of Victoria, the terms of ECG’s engagement by Afterpay was to provide “strategic services as a broad spectrum adviser” for 12 months at the rate of $15,000 per month plus GST.

However, as an added sweetener Afterpay agreed to issue ECG with 60,000 options to acquire Afterpay shares at a strike price of $12.50 per share. This was a good offer for Mr Gazard and Mr Epstein – given shares at the time were trading above $30.

But almost immediately the problems began. Mr Gazard and Mr Epstein agreed the options would be issued pursuant to an employee incentive plan operated by Afterpay and therefore could not be issued in the name of ECG and instead would, according to the statement of claim, “be held by Gazard for the benefit of ECG”.

“The acknowledgment and agreement of Epstein, Gazard and ECG was partly in writing, partly oral and partly to be inferred,” documents read.

Former Future Fund chairman Peter Costello is a former partner in ECG Advisory Solutions. Picture: David Geraghty/The Australian.

The details of the options and specifically that it would be held by Mr Gazard was later discussed in an email between the former partners as well as on the phone.

“Insofar as it was in writing, it consists of an email sent from Gazard to Epstein at 10.17am on 18 January 2019 in which Gazard wrote ‘What do you think?’ and attached an unexecuted document entitled ‘Offer of options under Afterpay Employee Incentive Plan’,” the document read.

“Insofar as it was oral, it consisted of telephone conversations between Epstein and Gazard in or around January and February 2019, the substance of which was that the options would be issued in accordance with the Afterpay Engagement for the benefit of ECG as trustee of the ECG Advisory Trust.”

Mr Gazard, according to defence documents, claimed Mr Epstein had stopped providing services to Afterpay when he left ECG in June 2019. He also denied there had been any conversation about keeping the options on trust for ECG

Afterpay issued the options in November 2019. The defence document also said Mr Gazard had provided his services to Afterpay through a company called DPG Advisory Solutions.

It’s not the first time Afterpay has paid its external lobbyists and consultants with options.

In a similar case, Afterpay had paid another high-profile public relations operative, Brett Clegg, with 40,000 options at a strike price of $12.98 in 2019 when his firm Cato & Clegg, run jointly with PR specialist Sue Cato, represented the fintech company.

Meanwhile, by mid-2019 ECG had broken up – for unexplained reasons – with Mr Gazard and Mr Epstein going their separate ways. But that still left a pile of options worth millions of dollars on the table and – awkwardly – in Mr Gazard’s name.

According to court documents on or around October 8, 2020, Mr Gazard exercised his rights to the 60,000 Afterpay options netting him $4.528m.

Mr Epstein hired Melbourne corporate heavyweight law firm Tisher Liner FC Law and demanded details of the share sale, in keeping with the business partnership, and the proceeds from the sale but no details were handed over.

“Despite demand, and in breach of duty, Gazard has failed or refused to acknowledge that he holds the shares or the proceeds thereof on trust for the benefit of ECG as trustee for the ECG Advisory Trust,” the documents lodged at the Victorian Supreme Court read.

It was then Mr Epstein lawyered up, again demanding details.

“Gazard has failed or refused to acknowledge that the proceeds of sale of the shares are held on trust for the benefit of ECG as trustee for the ECG Advisory Trust,” a court document said.

“In the premises, in breach of trust and the duties alleged in paragraph 12 above, Gazard has improperly diverted and usurped to himself the benefit of the options, the shares and the proceeds of sale thereof.

“Despite the proceeding being in the interests of ECG, and Gazard owing ECG fiduciary duties as its director, and despite demand, Gazard has failed or refused to permit this proceeding to be brought on behalf of ECG as trustee for the ECG Advisory Trust.”

Avoiding a potentially embarrassing and awkward court case that would have thrown open the inner workings of one of Australia’s most connected and influential lobby firms, Mr Gazard and Mr Epstein settled out of court recently through mediation.

Mr Gazard declined to comment, noting there was a confidential agreement attached to the settlement. Mr Epstein also declining to comment.

Originally published as Lobbyists David Gazard and Jonathan Epstein settle legal battle over Afterpay options