ASIC v Matthews [2001] NSWSC 735

(2001) 39 ACSR 110 Reported Decision : (2001) 19 ACLC 1648 [2001] NSWSC 735 [2001] ACL Rep 105 NSW 16

New South Wales Supreme Court

CITATION : ASIC v Matthews [2001] NSWSC 735 revised - 31/08/2001 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 1635/2000 HEARING DATE(S) : 15 August, 2001 JUDGMENT DATE : 30 August 2001

PARTIES : Australian Securities & Investments Commission v Stephen Lewis Matthews JUDGMENT OF : Foster AJ at 1

COUNSEL : Mr D.R. Stack for the plaintiff Mr R. Killalea for the defendant SOLICITORS : Jan Redfern for the plaintiff. Ian D Graham & Associates for the defendant. CATCHWORDS : Contempt of Court - failing to comply with orders of the Court - breach of Corporations Law by publication on website of securities reports - circumstances making acts of publication innocent - arranged for website to be operated by a New Zealand company of which defendant was a director and sole shareholder - contractually bound to that company to provide at least five postings per week to the website. LEGISLATION CITED : s 781 Corporations Law Australian Meat Industry Employers Union v Mudginberri Station Pty Limited (1986) 161 CLR 98 CASES CITED : He Kaw The v The Queen (1985) 157 CLR 523 Hyde v Sullivan (1956) SR (NSW) 113 at 119 United Dominions Corporation Limited v Brian Pty Limited (1985) 157 CLR 1 at 15 DECISION : Refer paragraphs 52-54.

THE SUPREME COURT OF NEW SOUTH WALES

EQUITY DIVISION

CORAM: FOSTER AJ

THURSDAY, 30 AUGUST, 2001 1635/00 - AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION v Stephen Lewis MATTHEWS JUDGMENT 1 HIS HONOUR: In these proceedings the plaintiff, Australian Securities & Investments Commission (ASIC) moves the Court on its Interlocutory Process and Statement of Charge, filed on 11 May 2001, for a finding that the defendant, Stephen Lewis Matthews (Mr Matthews) is guilty of contempt of this Court for failing to comply with certain orders made by Santow J on 4 October 2000. The orders were orders 8 and 9 in a series of orders made by consent, as final orders in proceedings brought by ASIC against Mr Matthews alleging various breaches on his part of the Corporations Law. The orders were as follows:- "8. Order that the Respondent be permanently restrained from undertaking, either directly or indirectly, the business of: (a) advising other persons about securities; and/or (b) publishing securities reports, except as otherwise permitted by the Corporations Law. 9. Order that the Respondent be permanently restrained from undertaking, either directly or indirectly, the business of: (a) advising other persons about securities on the internet; and/or (b) publishing securities reports on the internet, except as otherwise permitted by the Corporations Law." 2 It may be noted that the orders relate to s 781 of the Corporations Law which provides as follows: "A person must not: (a) carry on an investment advice business; or (b) hold out that the person is an investment adviser; unless the person is a licensee or an exempt investment adviser." 3 It is alleged that Mr Matthews is in breach of these orders by engaging in the following activities: "(i) 26 February 2001, published and/or allowed the publication of, a securities report entitled "Buying opportunity in HIH" on an internet web-site known as "The Chimes" and situated at http://www.chimes.com.au ; (ii) 26 February 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "Buying opportunity in HIH" on an internet web-site known as "The Chimes" and situated at http://www.chimes.com.au ; (iii) 27 February 2001, published and/or allowed the publication of, a securities report entitled "ERG strides forth" on an internet web-site known as The Chimes and situated at http://www.chimes.com.au ; (iv) 27 February 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "ERG strides forth" on an internet web-site known as "The Chimes" and situated at http://www.chimes.com.au ; (v) 27 February 2001, published and/or allowed the publication of, a securities report entitled "broker advisers have much explaining to do" on an internet web-site known as "The Chimes" and situated at http://www.chimes.com.au ; (vi) 27 February 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "broker advisers have much explaining to do" on an internet web-site known as "The Chimes" and situated at http://www.chimes.com.au ; (vii) 28 February 2001, published and/or allowed the publication of, a securities report entitled "follow the lead of international investors" on an internet web-site known as "The Chimes" and situated at http://www.chimes.com.au ; and (viii) 28 February 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "follow the lead of international investors" on an internet web-site known as "The Chimes" and situated at http://www.chimes.com.au , in circumstances where he was not permitted to do so by the Corporations Law." 4 In argument, these activities have been conveniently and compendiously referred to as the publication of (a) the HIH report, (b) the first ERG report, (c) the second ERG report and (d) the third ERG report. More detailed reference to this material will be made later in these reasons. 5 There was no dispute that Mr Matthews was, relevantly, the publisher of the material on the occasions referred to and that he was not "a licensee or an exempt investment adviser". Apart from concessions made in this regard, the evidence tendered on behalf of ASIC clearly established these matters to the requisite criminal standard of proof. There is no need to refer to this evidence in these reasons. It was not disputed. 6 Before I turn to consider other questions in the case, it is convenient to set out the relevant principles relating to "contempt" of Court orders. Those relied upon by ASIC are to be found in Australasian Meat Industry Employers Union v Mudginberri Station Pty Limited (1986) 161 CLR 98. The following passages appear in the judgment at the pages noted: ( At p 106) " Punishment for contempt serves two function: (a) enforcement of the process and orders of the Court, disobedience to which has been described as "civil contempt"; and (b) punishment of other acts which impede the administration of justice. . ., which have been described as "criminal contempt". ( At p 107 ) "the underlying rationale of every exercise of the contempt power, (is) namely that it is necessary to uphold and protect the effective administration of justice. Although the primary purpose in committing a defendant who disobeys an injunction is to enforce the injunction for the benefit of the plaintiff, another purpose is to protect the effective administration of justice by demonstrating that the court's orders will be enforced." ( At p 107 ) ". . .contempt consists of wilful disobedience to a Court order in the sense that the disobedience is not casual, accidental or unintentional." (At p 113) " a deliberate commission or omission which is in breach of an injunctive order or an undertaking will constitute such wilful disobedience unless it be casual, accidental or unintentional." 7 It was submitted on behalf of Mr Matthews that if there was disobedience to the orders of Santow J, it was unintentional and not wilful. 8 Reliance was also placed upon a submission that Mr Matthews had an "honest and reasonable belief" as to circumstances making the acts of publication innocent. (He Kaw The v The Queen (1985) 157 CLR 523). This matter of defence relied, in part, upon two ASIC documents being an Interim Policy Statement (IPS 162) and accompanying Media Release, both of 15 August 2000. Reference will be made to these documents later in these reasons. 9 Additionally, it was submitted on Mr Matthews' behalf that the HIH and ERG publications were not relevantly advice or reports or, alternatively, that Mr Matthews believed, on reasonable grounds, that they could not be so characterised. It was also put that the activities of the defendant relied upon by ASIC could not be properly characterised as "undertaking" a "business". 10 As these matters raise, in part, questions as to Mr Matthews' subjective appreciation of what he was doing when engaging in the activities relating to the HIH and ERG reports and their consequences, it is necessary to set out in short form the background to the present proceedings. The relevant matters have been summarised in the submissions provided by ASIC. They are not disputed. It is convenient to set them out in these reasons in the form in which they were submitted with certain additions, as follows:- " 3. On 16 February 1999, the Commission commenced proceedings ("the Proceedings") against Mr Matthews in the Federal Court of Australia, pursuant to section 1324 of the Corporations Law. 4. Essentially, the Proceedings concerned the publication of "securities reports" on an internet site ("the Chimes Web Site") known as "The Chimes" and situated at www.chimes.com.au, in breach of section 781 of the Corporations Law. 5. On 19 February 1999, Justice O'Connor made a number of interlocutory orders ("the Interlocutory Orders") which included orders preventing Mr Matthews from publishing "securities reports: or allowing such publication on the internet. 6. Notwithstanding he Interlocutory Orders, Mr Matthews continued to either publish "securities reports" or allowed "securities reports" to be published on the internet. 7. On 22 March 1999, the Commission filed a Notice of Motion for Contempt ("the First Contempt Motion") in respect of the publication of "securities reports" on the Chimes Web Site between 19 February 1999 and 18 March 1999. 8. On 10 June 1999, at the hearing of the First Contempt Motion, Mr Matthews entered a plea of guilty to the majority of the charges contained in the First Contempt Motion. 9. On 16 June 1999, Justice Sackville delivered a Judgment in respect of the First Contempt Hearing wherein he accepted Mr Matthews guilty plea and imposed a penalty of 2 months imprisonment in the event that Mr Matthews further breached the Interlocutory Orders. 10. On 29 June 1999, Mr Matthews established a new web-site in New Zealand known as and situated at http://www.chimes.com.nz ("the New Zealand Site"). 11. On 14 July 1999, Mr Matthews closed, in effect, the Chimes Web Site. 12. On 15 July 1999, Mr Matthews established a company known as "Chimes.co.nz Limited" ("the New Zealand Company"). He was a director and sole shareholder. 13. On 21 July 1999, Mr Matthews sold the Business Name, "the Chimes News", the substance of the Chimes Web Site and the New Zealand Site to the New Zealand Company. Further, the New Zealand Company appointed Mr Matthews as the publisher of the New Zealand Site. He was required by the contract of sale to make five postings per week to the web-site. 14. On 26 July 1999, following the High Court's decision in Ex parte Wakim delivered on 17 June 1999, the Proceedings were transferred from the Federal Court to the Supreme Court of New South Wales. The orders included an order that the Interlocutory Orders be confirmed as orders of the Supreme Court. 15. Between 23 July 1999 and 10 August 1999 Mr Matthews, as the publisher of the New Zealand Site, published and allowed to be published various "securities reports" on the New Zealand Site in breach of the Interlocutory Orders. 16. On 12 August 1999, the Commission filed a further Notice of Motion for Contempt ("the Second Contempt Motion") in respect of various "securities reports" published on the New Zealand Site between 23 July 1999 and 10 August 1999. 17. On 23 March 2000, following a lengthy hearing of the Second Contempt Motion, Justice Windeyer delivered a written judgment in which he found that Mr Matthews was guilty of the majority of the charges contained within the Second Contempt Motion. On 4 May 2000, Justice Windeyer sentenced Mr Matthews to gaol for 3 months. 18. On 4 October 2000, at the hearing of the Proceedings before Justice Santow, Mr Matthews consented to final Declarations and Orders ("the Final Orders") being made against him in the Proceedings. 19. The Final Orders were entered on 24 January 2001 and were personally served on Mr Matthews on 5 February 2001. 11 In December 2000 and January 2001, Mr Matthews made or attempted to make certain arrangements in respect of the New Zealand company, to which reference will be made later. 12 In January and February 2001 there were discussions between ASIC and Mr Matthews in relation to his posting certain documents on The Chimes Website, it being asserted by ASIC that the publication was in breach of the Corporations Law, as well as certain other orders made by Santow J. Remedial action was requested by ASIC and undertaken by Mr Matthews, in circumstances where he denied any wrong-doing. Thereafter Mr Matthews undertook the activities in relation to the HIH report and the three ERG reports which are the subject of the present complaint, such activities, as already indicated, occurring on 26, 27 and 28 February 2001. 13 These activities were, of course, undertaken after Mr Matthews had served the sentence imposed by Windeyer J on 4 May 2000. In evaluating his contentions in the present case that any breach of Santow J's final orders were unintentional and not wilful or that the relevant activities were undertaken with an honest and reasonable belief that they were innocent, it is relevant to have regard to the nature of the material relied upon by ASIC in the contempt proceedings before Windeyer J. 14 The ultimate question before Windeyer J was whether material published by Mr Matthews on The Chimes web-site constituted, relevantly, reports about securities or advice, the publication of which would render him in contempt of the previous interlocutory orders made in the proceedings. His Honour annexed to his judgment the text of the material complained of. There were a number of individual publications which he considered separately. In respect of a large number, he held that they were "more properly described as random gossip". However, in respect of nine of the postings he held that they fell "within the description 'reports about securities'". He said of this material: "It is of course difficult to think that people could be so stupid as to take notice of those postings. . .However, the purpose of the Corporations Law is to protect those who need protection, not those who can treat this material as it ought to be treated." 15 I do not propose to set out in these reasons the text of the postings so described by his Honour. Suffice to say that, in my view, they are relevantly equivalent to the postings which are the subject of complaint in these proceedings. Mr Matthews did not appeal against the decision of Windeyer J. I have observed him in the witness box in this hearing. He is obviously an intelligent person. In my opinion, he could not have failed to be aware that the HIH and ERG material, the subject of the present proceedings, was of like nature to the material impugned in Windeyer J's judgment. He could have been under no illusion that the publication of it could amount to a breach of the orders made by Santow J, if other circumstances did not render the publication innocent. 16 Indeed, Mr Matthews conceded as much in his oral evidence. He acknowledged, in cross-examination, that the publication of the material on 26, 27 and 28 February 2001 would be in breach of orders 8 and 9 made by Santow J, unless he could properly rely upon the terms of the ASIC documents to which reference has been made earlier in these reasons and upon actions taken by him, purportedly to achieve compliance with them. As formulated in counsel's written submissions on his behalf, it was put that he had an honest belief that the ASIC IDS Policy permitted these publications to be made, with the result that no wilful breach of the orders had occurred. In these circumstances, it is necessary to consider the IDS Policy and the terms which are relied upon. 17 The ASIC Interim Policy Statement - Exposure Draft in relation to "Internet discussion sites" (IPS 162) was issued on 15 August 2000. It was, therefore, made public after the decision of Windeyer J in March 2000 and before Mr Matthews entered into the consent orders made by Santow J on 4 October 2000, which disposed of the ASIC proceedings against him, and in which the earlier interlocutory findings of contempt by Sackville J and Windeyer J had been made. I am satisfied that the Policy Statement was the subject of some discussion between the parties before the making of the orders by Santow J and that, in the discussion, Mr Matthews was advised informally, on behalf of ASIC, that he could rely upon the Policy Statement provided that, in so doing, he committed no breach of the Corporations Law. I am persuaded that he was thus put on notice that he should consider carefully the terms of the Policy Statement in relation to any activities he contemplated on The Chimes website after becoming bound by the orders of Santow J. 18 IPS 162 was issued with a media release which summarised its aims and, in part, read as follows:- The ASIC Exposure Draft released today continues the policy that a licence should not be needed to run a facility that only allows ordinary investors to swap information and talk to one another about their investment experiences. But this applies only if the site is not likely to lead investors to mistake it for a place where they can expect to get professional advice, or access professional investment services. " ASIC is seeking to strike a balance between allowing people to communicate freely with each other, inform themselves about securities and minimising the risk that sites may be used to manipulate markets, trade on inside information or take advantage of less well informed investors," ASIC Commissioner Jillian Segal, said. "ASIC will require IDSs to display prominent warnings before users can participate in the discussions on the IDS." ASIC has refined the warning that users must get before they can view postings. These warnings are designed to make sure people understand the kind of information that they get on these sites. "The sorts of warnings we suggest include that the IDS itself does not endorse or vouch for the accuracy of the postings, a statement that the postings are general information and a declaration that people who post information will be individually responsible for their authenticity and accuracy," Ms Segal said. " ASIC also suggests that sites link to ASIC's web-page www.watchdog.asic.gov.au so people can find a licensed investment adviser and get general information about investing."" 19 Mr Matthews claims that he relied upon the terms of IPS 162 as sanctioning his use of The Chimes web-site for the posting of the HIH and ERG material. He says that he took steps to comply with its requirements and believed that he had done so. 20 I gained a strong impression, from his testimony and demeanour in cross-examination, that he gave the document only scant attention. I am satisfied that he certainly did not read it closely with a view to determining, with reasonable satisfaction, whether the publications he had in contemplation could be undertaken without breach of s. 781 of the Corporations Law and would otherwise comply with the orders of Santow J. 21 It is convenient, at this stage, to refer to the HIH and ERG reports. I will not set them out in the body of these reasons but will include them in a Schedule. I shall discuss, here, only their salient features. The HIH report is headed "Buying opportunity in HIH". It was posted on The Chimes web-site by Mr Matthews, describing himself in the report as "the publisher". It commences by Mr Matthews describing his experience and success in "the insurance business". Then, after extolling the talent of Mr Larry Adler in his management of FAI Insurances, he moves on to "the buying opportunity in HIH". After discussion of the company's balance sheet and the company's current "request for a trading halt" the opinion is put forward that the new CEO, Mr Wein, was, "by frightening off the weak holders of HIH", able to "bring in a rash of short-term speculators to replace them". The report concludes "It is these short-termers who can sell their HIH stock - for a good turn - to a fresh acquirer." 22 The first ERG report is headed "ERG strides forth". It was posted by "the publisher" on 27 February 2001. It refers to a "Sydney breakfast briefing by CEO Peter Fogarty". It speaks of share analysts at the meeting "rushing back to tell the revitalised story of a company on the brink of establishing an unassailable lead in the Smartcard industry". It finishes with the words "Expect a share price rally in ERG today." 23 The second ERG report posted by "the publisher" on 27 February 2001 is headed "Broker advisers have much explaining to do." The report is somewhat lengthier than the previous one and is a sequel to it. It refers again to the "breakfast meeting" and comments that those who had previously sold their stock were definitely poorly advised. It gives reasons why in the opinion of "the publisher" a particular strategy is advantageous to ERG. The report concludes, "For me it is the critical event to vault ERG into the global big-time". 24 The third ERG report is entitled "Follow the lead of international investors". It is posted by "the publisher" on 28 February 2001. It is a lengthy document. After a long and rather, disjointed analysis of ERG's strategy in relation to the former "MOT Alliance" and what appears to be a broad ranging discussion of its prospects in the global "smartcard" industry, it speaks glowingly of the company's prospects over the next twelve months "from operations in Manchester, Rome, San Francisco" and records Mr Fogerty's forecast of "revenue growth of 20% plus over the next year." The report concludes with the words "its destiny is increasingly in the hands of the international investors who recognise a global growth story in the making. If your broker expresses caution about ERG's outlook. . .ignore her." 25 The evidence clearly establishes that "the publisher" is a pseudonym for Mr Matthews, regularly used in relation to The Chimes web-site both before and after its operation by the New Zealand company. 26 It was submitted on behalf of Mr Matthews that these postings should not be characterised as "securities reports" or as "advice about securities". It was put that I should regard them as being no more than "random gossip" posted on a web-site which, in itself, only amounted to a "chat show" of the type envisaged by IPS 162 as not requiring that the participants have licenses. The same submission was put to Windeyer J in respect of the material published by Mr Matthews in that case. Like his Honour, I am quite unable to view the present material as capable of being so characterised. 27 It was submitted that, having regard to common law principles relating to freedom of speech and also to strict construction of "penal provisions", I should view these reports as conveying no more than mere opinions and as being no more than "commentaries". As such they would not fall within the ambit of s 781 of the Corporations Law and, more particularly, of the orders made by Santow J. I am not persuaded that any such reading down should occur. I am satisfied that those whom the law seeks to protect by s 781 could well view the reports as being "securities reports" and containing "advice" in relation to the securities discussed. 28 I am also satisfied that Mr Matthews, having regard to previous experience in relation to the interlocutory orders made in the proceedings, would, subject to considerations discussed below, have been satisfied that certain types of readers could well have regarded these postings as amounting to reports on securities and conveying advice about them. 29 The fact is, of course, that despite Windeyeer J's finding that postings by Mr Matthews of a similar kind were, relevantly, securities reports and advice, Mr Matthews simply went ahead with the posting of December 2000 and the later postings in February 2001 which are the subject of this case. He did so in purported reliance on IPS 162. I am quite satisfied that, confronted with Windeyer J's decision and the orders of Santow J, to which he consented on 4 October 2000, Mr Matthews sought to utilise this ASIC document as a means of continuing his postings on The Chimes web-site, without infringing those orders or the Corporations Law. 30 In the first place he sought to convert the web-site into what was described in the media release as "a facility that only allows ordinary investors to swap information and talk to one another about their investment experiences". In other words, he wished to give it the appearance of a "chat show" rather than a medium for the provision of professional advice. 31 It is clear that Mr Matthews had regard to various provisions of the document. He obviously had regard to IPS 162.7 which permitted "a limited type of IDS to operate without a license", providing the following guidelines were complied with: " (a) the IDS is operated to enable people who are not securities market professionals to exchange information that may include opinions and advice about securities; (b) postings on the IDS are clearly identified and kept separate from commercial material on the site; and (c) people who use the IDS receive adequate disclosures and warnings including that the material posted on the IDS is not professional investment advice." 32 It may be noted that in IPS 162.8 ASIC states that: "Our policy allows this type of IDS to operate without a license provided it does not create risks for consumers or for the integrity of securities markets."