New South Wales Supreme Court CITATION : Regina (Commonwealth) v Dominic FODERA [2007] NSWSC 1242 HEARING DATE(S) : 5, 6, 7, 8, 9, 12, 13, 14, 15, 19, 20, 21, 22, 26, 27, 28, 29, 30 March, 2 , 3, 4, April, 2007 JUDGMENT DATE : 7 June 2007 JUDGMENT OF : Latham J DECISION : Sentenced to imprisonment for three (3) years, to date from 10 May 2007, expiring on 9 May 2010. I order your release on 9 May 2009, upon your giving security, yourself, in the sum of $10,000, without surety, by way of recognisance that you will be of good behaviour during the balance of your term CATCHWORDS : SENTENCE - Authorising issue of a Prosectus from which there was a material omission - s 996(1)(b)(ii) of Corporations Law - dishonesty as opposed to recklessness - general deterrence - extra curial punishment Corporations Law LEGISLATION CITED : Crimes Act 1914 Insurance Act 1973 R v Wiliams (2005) 152 A Crim R 548 ; [2005] NSWSC 315 R v El Karhani (1990) 21 NSWLR 370 R v Thomas (1997) 96 A Crim R 32 R v Pantano (1990) 49 A Crim R 328 CASES CITED : R v Rivkin [2004] NSWCCA 7 R v Brown [2002] VSCA 99 DPP v Buffin [1998] 4 VR 114 Cheung v The Queen (2001) 209 CLR 1 R v Doff [2005] 54 ACSR 200 ; [2005] NSWCCA 119 PARTIES : Regina - Commonwealth Director of Public Prosecutions Offender - Dominic Fodera FILE NUMBER(S) : SC 1714/2006 COUNSEL : Regina - AJ MacSporran SC/GP Long SC/ LA Clegg Fodera - GP Ellis/SP Lo Schiavo SOLICITORS : Regina - Solicitor for the Commonwealth Director of Public Prosecutions Fodera - Dibbs Abbott Stillman IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION CRIMINAL LIST LATHAM J 7 JUNE 2007 2006/1714 R v DOMINIC FODERA SENTENCE 1 The prisoner appears for sentence in respect of one count of Authorising the Issue of a Prospectus from which there was a Material Omission pursuant to s 996(1)(b)(ii) of the Corporations Law. That offence carries a maximum penalty of five years imprisonment and/or a fine of $20,000:00. 2 The prisoner was found guilty by a jury on 4 April 2007, following a trial lasting 22 days. He was remanded in custody on 10 May 2007, it being accepted by his counsel during submissions on sentence that full-time custody was the inevitable penalty. This concession realistically acknowledged the role of parity in this sentencing exercise, in that a relevant co-offender, Ray Williams, was sentenced to a fixed term of two years imprisonment on 15 April 2005 after entering a plea of guilty to the same offence (amongst others) before Wood CJ at CL. (See R v Wiliams (2005) 152 A Crim R 548 ; [2005] NSWSC 315) I shall return to the basis upon which Mr Williams was sentenced and the relevant points of departure from the circumstances of the prisoner's offending later in these remarks. 3 In brief terms, the prisoner, who was the Chief Financial Officer and a Director of HIH Insurance Ltd (HIH), authorised a prospectus by a subsidiary of HIH, HIH Holdings (NZ) Ltd, that sought to raise $155m by the issue of converting notes. The strategy behind the converting note issue was to raise sufficient funds to allow for the takeover of FAI by HIH. The prospectus disclosed that an underwriter of the converting note issue, Societe Generale Australia Limited (SG), had taken a priority allocation of $35m of the converting notes, thereby leading potential investors to believe that SG had sufficient confidence in the strength of the securities to invest on the same terms as any other investor in the financial market place. The prospectus did not disclose that SG and HIH had entered into a financial arrangement, whereby HIH placed $35m on deposit with SG at a net cost to HIH of 0.35% per annum, known as the "Total Return Swap" (TRS) and Collateral Deposit. This transaction was a material omission (as the jury's verdict clearly established), in that the decision of the reasonable investor to invest in the securities was likely to have been affected or influenced by the knowledge that SG was not bearing any risk in relation to its apparent investment in $35m of the converting notes. 4 It should be emphasised at the outset that the prisoner's conduct in the commission of this offence did not directly or indirectly lead to the collapse of HIH. He is to be punished for the offence upon which he was tried and convicted and no other. A significant issue for sentencing purposes is whether the Court is satisfied beyond reasonable doubt that the prisoner deliberately withheld critical information from the Board of HIH and the Due Diligence Committee, so as to ensure that the prospectus was authorised and published in the form that it was. The prisoner's counsel forcefully submitted that the Court would not be so satisfied, on the basis that the jury's verdict did not mandate such a finding and that the evidence at trial, in particular the prisoner's evidence, was consistent with recklessness, not dishonesty on his part. 5 Before turning to this issue, it is important to refer to the principles applicable to the sentencing of federal offenders, according to Part 1B of the Crimes Act 1914. Sentencing Principles 6 Section 16A of the Crimes Act relevantly provides as follows :- (1) In determining the sentence to be passed, or the order to be made, in respect of any person for a federal offence, a court must impose a sentence or make an order that is of a severity appropriate in all the circumstances of the offence. (2) In addition to any other matters, the court must take into account such of the following matters as are relevant and known to the court; (a) the nature and circumstances of the offence ; ………………………………………………… ………………………………………………….. …………………………………………………. (i) the deterrent effect that any sentence or order under consideration may have on the person ; (j) the need to ensure that the person is adequately punished for the offence ; (k) the character, antecedents, cultural background, age, means and physical or mental condition of the person ; (l) the prospects of rehabilitation of the person ; (m) the probable effect that any sentence or order under consideration would have on any of the person's family or dependants. 7 Whilst the principle of general deterrence does not appear in the "checklist" of matters set out in section 16A(2), it nonetheless must be taken into account in determining the appropriate sentence : R v El Karhani (1990) 21 NSWLR 370 at 377 : R v Thomas (1997) 96 A Crim R 32. It has been held that general deterrence is of particular significance in sentencing for "white collar" offences, principally on the basis that they are difficult to detect, difficult to investigate and difficult to prosecute successfully : R v Pantano (1990) 49 A Crim R 328 at 300 ; R v Rivkin [2004] NSWCCA 7 at [423] : R v Brown [2002] VSCA 99 : DPP v Buffin [1998] 4 VR 114. 8 The nature and severity of the conditions that may be imposed on, or may apply to, an offender under a sentence, also play a part in determining the sentence appropriate to the offence : s 16A(3). 9 I am mindful of the terms of section 17A, which prohibit the passing of a sentence of imprisonment unless the court, having considered all other available sentences, is satisfied that no other sentence is appropriate in the circumstances. I have reached that level of satisfaction independently of the acknowledgement by the prisoner's counsel that a submission proposing a lesser penalty would not be advanced. The Nature and Circumstances of the Offence 10 Critical to an assessment of the objective gravity of the offence is the resolution of the issue whether the prisoner dishonestly withheld information that would have allowed the Board, its solicitors and the Due Diligence Committee to assess the true significance of the TRS and collateral deposit. 11 It was the prisoner's case at trial that the TRS and collateral deposit was a transaction legitimately adopted by him, at the suggestion of SG, in order to earn a higher rate of interest than was available generally for the deposit of monies surplus to the immediate requirements of HIH. The transaction was explained to the Board and the Due Diligence Committee (responsible for the oversighting of the prospectus) by the prisoner in these terms. That explanation was apparently accepted by the Board and those advising HIH on the prospectus issue, including a number of lawyers with experience in the finance industry, hence the omission of that transaction from the prospectus. The prisoner gave evidence that he genuinely believed that the TRS and collateral deposit served no other purpose and that he relied upon the knowledge, experience and expertise of the numerous lawyers involved in the issue of the prospectus, all of whom failed to recognise the transaction with SG as material. It is clear that the jury rejected the prisoner's defence, but the basis upon which they did so deserves closer analysis. 12 The Crown case at trial was conducted on the basis that this explanation for the TRS and collateral deposit was false to the prisoner's knowledge. The prisoner was cross-examined to this effect. The prisoner's dishonesty in that regard was said to be demonstrated by the evidence, if accepted, that the prisoner had critical information relating to the lack of investor demand for the converting note issue, which he deliberately withheld from the Board, the Due Diligence Committee and HIH's lawyers. According to the way in which the Crown case went to the jury, the prisoner had been told by SG at an early stage of their negotiations that SG were not confident that the market appetite for the converting notes was as high as $150m. Moreover, the prisoner was aware that investor demand was being monitored by SG throughout their negotiations, and that SG would not underwrite the whole of the proposed note issue, without the TRS and collateral deposit to offset the risk. Had that information been divulged by the prisoner, the true purpose of the TRS and collateral deposit would have been made clear. Integral to the prisoner's defence at trial was a denial that he was informed at any time of any shortfall in investor demand or that he had any knowledge of the level of investor demand. 13 The jury's verdict necessarily arose from the failure of the prisoner to satisfy them on the balance of probabilities of any one of three things, namely, that he believed the omission was not material, that in forming that belief he had made reasonable enquiries, or that he had reasonable grounds for the belief. In the light of the issues joined at trial, had the jury accepted the prisoner's evidence that he did not know of any shortfall in investor demand, they would have been satisfied on the balance of probabilities that he believed the omission was not material. Similarly, the prisoner's asserted ignorance of the level of investor demand underpinned the reasonable nature of his inquiries and the reasonable grounds for the belief. 14 Theoretically, the jury either rejected the prisoner's evidence or accepted it, yet failed to be satisfied to the requisite standard of the three limbs of the defence. It is difficult to contemplate how, practically speaking, the jury could have reasoned in the way suggested by the latter of these two alternatives. In the result, the jury's rejection of the prisoner's evidence as truthful is, in my view, implicit in the jury's verdict : see Cheung v The Queen (2001) 209 CLR 1 at 14. 15 If I am wrong in that regard, I am nevertheless satisfied beyond reasonable doubt that the prisoner did know of the shortfall in investor demand and that he acted dishonestly in withholding that information from those responsible for ensuring that HIH complied with both the letter and the spirit of the law. Contrary to the submissions of the prisoner's counsel, I see no reason to reject the evidence of Mr Harvey from SG, the most significant witness in the Crown case to have given evidence of conversations with the prisoner on the subject of investor demand. There is no aspect of his evidence that undermines his reliability to the extent that it provides an insufficient foundation for proof beyond reasonable doubt. Moreover, it offends common sense to entertain the proposition that a Finance Director of a large insurance company, undertaking negotiations with an underwriter in order to advance a major capital-raising exercise, would not be keenly aware of, and interested in, the level of investor demand. 16 It follows that the offence is a very serious one. The prisoner occupied a position of trust vis-a-vis the company, its shareholders and others with whom it conducted its business. The prisoner breached that trust by deliberately engaging in conduct likely to mislead potential investors, who relied, either by their own enquiries or through their financial advisors, upon the accuracy of information contained in the prospectus. 17 The prisoner's counsel submitted that there was no evidence in the trial that any individual investor was misled by the prospectus, and that in those circumstances the prisoner's criminality should not be assessed on that basis. There are two answers to this proposition. Firstly, the Crown relied upon the evidence of a Mr Martin, an investor who was unable to recall when he read the prospectus, albeit his financial advisors had given him the salient features of the prospectus, including the fact that SG was both underwriting the converting note issue and taking a priority allocation to the value of $35m. Mr Martin's recommendation to his brother, that the family trust invest a significant amount of money in the converting notes, was substantially based upon these considerations. In my view, this evidence clearly demonstrated the probability that the salient feature of the prospectus, namely a substantial investment in the converting notes by an underwriter, would have had the same effect upon other investors in the market place. Secondly, it is sufficient for the purposes of the charge that the material omission is likely to mislead potential investors. 18 As his Honour Justice Wood made clear in Williams (at 573) :- It is essential for the proper operation of the securities market that prospective investors have faith in the accuracy of the information contained in any prospectus that is issued. That faith can only be maintained if an exacting standard of corporate governance, including full and accurate disclosure, is accepted by Directors. Failure to perform to that standard, as occurred in this case, must be regarded as particularly serious. 19 There, Justice Wood was referring to the objective gravity of the offence committed by the Chief Executive Officer of HIH, who was sentenced on the basis that there was no deliberate deception of investors on his part. The prisoner stands in a somewhat different position in view of the findings I have made above. His role in the fund-raising inherent in the converting note issue was a significant one, in that he was involved in discussions with Standard and Poor's (S&P) at an early stage of the enterprise, with a view to ensuring that the converting note issue would not adversely affect the credit rating issued by that company to HIH. The evidence at trial established that the representatives of S&P were comforted by the fact that SG, itself rated "AA", were prepared to fully underwrite the note issue. 20 The prisoner also actively promoted to the Board and to the members of the Due Diligence Committee, by way of a presentation to a Board meeting on 16 October 1998 (ten days before the issue of the prospectus), that the purpose of the total return swap and the collateral deposit was unconnected to SG's commitment to underwrite the converting note issue. In short, the prisoner took a number of positive steps to deceive relevant persons over a period of approximately one month. 21 A further significant point of departure from the basis upon which Williams was sentenced is the discount of 25% applied by Wood CJ at CL in order to reflect the plea of guilty to the offence by Williams and his co-operation with law enforcement authorities, albeit that co-operation did not extend to any undertaking to give evidence against other persons charged with related offences. The Prisoner's Subjective Circumstances 22 The prisoner is presently 47 years of age. He was born and raised in Sydney, the elder of two brothers. His parents had migrated from Italy and purchased a house at Lakemba where the family lived until his parents separated when the prisoner was seven years of age. The prisoner remained in the family home with his brother and mother and had little contact with his father from that point in time. When the prisoner was aged 10, his mother was diagnosed with breast cancer and subsequently underwent surgery and chemotherapy. Her health never recovered and she was unable to earn the income she had previously earned as a seamstress. It appears that the prisoner and his brother lived in reduced economic circumstances for much of their childhood and adolescence. The prisoner's mother died in 1993. The prisoner re-established contact with his father in about 1978 and continued to visit him until the father's death in 1993. 23 Otherwise, the prisoner's early life was largely unremarkable. He applied himself to study and to participation in rugby league. He met and married his wife at a relatively young age. The marriage has been happy and prosperous, allowing the prisoner and his wife to supply every material benefit and emotional support to their four children, aged between 12 and 18 years. Not surprisingly, the media publicity and legal proceedings surrounding the collapse of HIH have brought considerable strain, both emotionally and financially upon the family. The prisoner has been unable to secure employment since early 2000. His conviction for this offence necessarily disqualifies him from holding a similar position within any company for a period of five years. 24 To the prisoner's great credit, he has remained active in the Christian faith since his late teens. His family life has been built upon active participation in the church, a feature which has been the subject of impressive evidence from a number of character witnesses, including the rector at St Thomas Church, North Sydney and a Minister of religion at a Mosman church where the prisoner and his family formerly worshipped. The former acknowledged that he had only a rudimentary understanding of the circumstances of the offence but remained of the view that the prisoner "would not knowingly breached the law". The latter character witness told the Court of instances where the prisoner had exhibited honest and ethical behaviour and that he had never known the prisoner to act dishonestly. 25 I do not seek to minimise the weight of the character evidence called on the prisoner's behalf, nor to discount it in the sentencing exercise, by the observation that similarly impressive and extensive character evidence was received by the Court in Williams, where the following was said :- As was observed in R v El-Rashid (unreported, Court of Criminal Appeal NSW, 7 April 1995) at 3 per Gleeson CJ and in R v Rivkin (at [410]) the existence of good character is a circumstance that normally places the offender in the position whereby he or she is in a position to commit white-collar crime. As a consequence the need for general deterrence may displace, to some degree, the benefit which might otherwise attach, although for the reasons identified in Cameron v the Queen (2002) 209 CLR 339, it is not to be ignored. 26 I accept that the prisoner's acute shame and regret, in so far as he now finds himself a convicted criminal whose children are reduced to visiting him in gaol, are powerful factors in the assessment of the prisoner's prospects of rehabilitation and in the deterrent effect that the sentence to be imposed will have upon the prisoner. The extent of the prisoner's remorse has not however changed since the verdict of the jury was delivered. The presentence report of 4 May 2007 (Ex A) notes that "he stated that he was unaware at the time [of the signing of the prospectus] that the omission was material and should have been included. He further claimed that the advice he received in the preparation of the prospectus did not alert him to the necessity of its inclusion. He now regrets his actions and, with the benefit of hindsight, realises the inadequacy of his actions and would deal with a similar situation in a very different manner." 27 In DPP v Bulfin [1998] 4 VR 114 the Victorian Court of Criminal Appeal made the following comments at 131-132 which are apposite to the instant case :- Discovery and punishment make it unlikely that the white collar criminal will reoffend, not least because the offender will probably never again be given the opportunity to do so. In these circumstances specific deterrence will often not feature largely in sentencing consideration, and the prospects of rehabilitation will generally be very high. A further matter is that, in the case of white collar crime, the lives of the offenders and their families will frequently have been devastated by the consequences of discovery and punishment. ……. It would be difficult not to feel great sympathy for the [prisoner's] wife and family and, indeed, for the [prisoner] himself. But … there is a serious risk that the consequences of discovery and punishment, and the havoc that a custodial sentence usually wreaks on the lives of the white-collar criminal and his or her family, may have a tendency to distract attention from the importance that general deterrence ought to carry in the imposition of sentences for crimes such as the present. Other Factors 28 The prisoner's counsel places reliance upon the Court of Criminal Appeal decision in R v Doff [2005] 54 ACSR 200 ; [2005] NSWCCA 119, wherein a Crown appeal against sentence was dismissed in circumstances where the Crown took issue with undue weight accorded by the sentencing judge to the expeditious conduct of the trial. The Court declined to intervene for a number of reasons, including :- the efficient way in which the Appellant's trial was conducted, including the making of extensive admissions, which while not demonstrating contrition or remorse, did show a willingness to facilitate the course of justice by refraining from resort to dilatory and technical objections of no merit. We do not see why this should not be taken into account for the purposes of sentencing, particularly in a case where there was a single issue of substance which was appropriate for decision by a jury. 29 The conduct of the trial was not attended by "dilatory and technical objections of no merit" on the part of the prisoner's counsel. All in all, the trial was conducted with admirable efficiency on the part of both prosecution and defence. A not insignificant number of admissions were made by the prisoner, thus relieving the prosecution from the burden of calling a large number of witnesses and allowing the parties to concentrate on the substantive issues in dispute. The prisoner is to be given some credit for this demonstrated willingness to facilitate the course of justice, although that credit cannot be allowed to unduly ameliorate a sentence that is otherwise appropriate to the commission of the offence. 30 The prisoner's counsel also draws attention to the substantial lapse of time since the commission of the offence in October 1998 and the initiation of the charge against the prisoner in October 2005. In particular, the prisoner's counsel submits that the delay cannot be explained or justified by the lengthy proceedings before the HIH Royal Commission, given that ASIC commenced its section 19 examinations five months before the instigation of the Royal Commission in August 2001. Further, the report of the Royal Commission was published in April 2003, yet the prisoner was not charged until two and a half years later. 31 In response to this submission, the Crown points to the limited relevance, if any, of the findings of the Royal Commission to the institution of the prosecution against the prisoner. There was limited cross-examination directed to the transaction underlying this offence at the Royal Commission. In this regard, the Crown does not seek to justify or explain the delay in the prosecution of the prisoner by the intervening proceedings before the Royal Commission. However, it remains true to say that were it not for the collapse of HIH, no investigation of the financial dealings of the company would have taken place, that is, no opportunity would have arisen for the instant offence to have come to light. 32 Substantially the same submission was advanced before Wood CJ at CL in Williams, however no allowance was made for the delay in that case on the basis that delay in the prosecution of corporate offences is not unusual, generally owing to the fact that they only come to light after a corporate collapse and extensive investigations into that collapse. Those extensive investigations are often productive of delay in the institution of charges, owing to the necessity of retrieving and analysing accounting records, company documents, and a large volume of correspondence in the possession of a number of companies, not just the company the subject of the collapse. In these circumstances, I am not persuaded that any allowance should be made for the delay between the commission of the offence and the institution of the charge. There has been no undue delay between the institution of the charge and the matter coming on to trial. 33 Finally, the affidavit of Wendy Elizabeth Jacobs of 9 May 2007 sets out the extent of the extra curial punishment visited upon the prisoner since the collapse of HIH. In summary, the prisoner has paid a penalty of $5,000 arising out of proceedings taken by ASIC in this Court in relation to a payment of $10 million by HIH insurance to the trustee of Australian Equities Unit Trust, the prisoner has been disqualified under section 25A(1) of the Insurance Act 1973 thereby effectively preventing the prisoner from being or acting as a director or senior manager of a general insurer, and the prisoner has been suspended from membership of the Institute of Chartered Accountants in Australia and disqualified from membership of the Australian Society of Certified Practising Accountants. In addition, the plaintiff has suffered the loss of the value of shares he held in HIH and the public vilification which has followed upon the collapse of HIH and the punitive nature of the subsequent media coverage. 34 Of direct relevance to the question of extra curial punishment is the five-year disqualification period referable to the conviction upon the instant charge. The remainder of the matters set out above cannot be said to relate specifically or solely to the present offence. Rather, they arose out of the collapse of the HIH group, which was itself the product of a combination of circumstances unconnected with this offence. For these reasons, they are of limited relevance to the imposition of sentence. 35 Dominic Fodera, on the charge in the indictment upon which you have been convicted, I sentence you to imprisonment for three (3) years, to date from 10 May 2007, expiring on 9 May 2010. I order your release on 9 May 2009, upon your giving security, yourself, in the sum of $10,000, without surety, by way of recognisance that you will be of good behaviour during the balance of your term. 36 The effect of the orders I have made is that you will be obliged to spend 2 years in custody. You will be released on 9 May 2009 upon entering a recognisance to be of good behaviour, without lodging cash security. That recognisance will continue until 9 May 2010. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.