New South Wales Supreme Court CITATION : R v LO [2007] NSWSC 105 HEARING DATE(S) : 19 January 2007 JUDGMENT DATE : 23 February 2007 JURISDICTION : Criminal JUDGMENT OF : McClellan CJatCL DECISION : Count 1: fixed term of imprisonment of six months commencing on 23 February 2007 and expiring on 22 August 2007; Count 2: fixed term of imprisonment of six months to be served concurrently with the sentence on count 1; Count 3: fixed term of imprisonment of six months commencing on 23 May 2007 and expiring on 22 November 2007; Count 4: term of imprisonment of six months to be served concurrently with count 3; Total term of imprisonment is nine months CATCHWORDS : CRIMINAL LAW - Sentencing - State and Commonwealth offences - white collar crime - company officer - intent to obtain for financial advantage - pledging of assets - reckless signing of quarterly and annual returns - failure to disclose financial state of affairs - departure from standards of corporate governance - sentence structure - aggravating and mitigating factors - assistance to authorities Crimes Act 1900 (NSW) Crimes Act 1914 (Cth) LEGISLATION CITED : Criminal Appeal Act 1912 (NSW) Corporations Act 2001 (Cth) Crimes (Sentencing Procedure) Act 1999 (NSW) Insurance Act 1973 (Cth) R v Boskovitz [1999] NSWCCA 438 R v Boulden [2006] NSWSC 1274 R v Cassidy [2005] NSWSC 410 CASES CITED : R v Kelly [2006] NSWSC 1142 R v Pantano (1990) 49 A Crim R 328 R v Rivkin [2004] NSWCCA 7 R v Sukar [2006] NSWCCA 92 R v Thompson (1975) 11 SASR 217 PARTIES : The Crown Frederick Lo (offender) FILE NUMBER(S) : SC 2006/2130 COUNSEL : P Roberts/R T Beech-Jones SC (Crown) P R Boulton SC (Offender) SOLICITORS : Commonwealth Director of Public Prosecutions (Crown) Legal Aid Commission of NSW (Offender) IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION CRIMINAL LIST McCLELLAN CJ at CL FRIDAY 23 FEBRUARY 2007 2006/2130 REGINA v LO, Frederick REMARKS ON SENTENCE HIS HONOUR: Introduction 1 On 6 October 2006, Frederick Lo ("the offender"), pleaded guilty to the following four counts in an indictment: "1. On or about 22 November 1999, at Sydney in the State of New South Wales, did, with intent to obtain for CIC Insurance Limited ("CIC") a financial advantage namely authorisation from the Australian Prudential Regulation Authority ("APRA") for CIC to continue business as an insurer, make a statement in writing to APRA, namely a Certificate of Reporting Approach and Compliance and accompanying yearly statutory accounts and statements for CIC, which was false or misleading in a material particular and was made with reckless disregard as to whether it was true or was false or misleading in a material particular. 2. Between about 12 May 1999 and about 24 May 2000, at Sydney in the State of New South Wales, did, with intent to obtain for CIC Insurance Limited ("CIC") a financial advantage namely authorisation from the Australian Prudential Regulation Authority ("APRA") for CIC to continue business as an insurer, make statements in writing to APRA, namely Quarterly Statement of Assets and Liabilities for CIC for the periods ending 31 March, 30 June, 30 September and 31 December 1999 and 31 March 2000, which were false or misleading in a material particular and were made with reckless disregard as to whether such statements were true or was false or misleading in a material particular. 3. On or about 26 May 2000, at Sydney in the State of New South Wales, with intent to obtain for FAI Insurances Limited ("FAI") a financial advantage namely the avoidance of the risk of calling in of amounts owing under Notes issued by FAI as part of the US$150,000,000 Domestic and Euro Medium Term Note Programme, made a statement to officers of Westpac Banking Corporation, namely words to the effect "management of HIH Group is not able to produce consolidated accounts of the FAI Group for the financial period ended 30 June 1999 because the company structure has changed, the accounts cannot be reconstructed and it would be too costly" which he knew to be false or misleading in a material particular. 4. On or about 19 October 2000, at Sydney in the State of New South Wales, as an officer of HIH Insurance Ltd ("HIH"), was reckless and failed to exercise his powers and discharge his duties for a proper purpose in that he signed a letter dated 18 October 2000 addressed to Noteholders, who had purchased Notes issued by FAI Insurances Ltd ("FAI"), a subsidiary of HIH, pursuant to a US$150,000,000 Domestic and Euro Medium Term Note Programme ("the MTN Programme") which contained a misleading statement. 2 Counts 1, 2 and 3 ("State offences") constitute breaches of s 178BB of the Crimes Act 1900 (NSW), whereas count 4 ("Commonwealth offence") is an offence by virtue of s 184(1) of the Corporations Act 2001 (Cth). 3 The maximum penalty prescribed for each offence is five years imprisonment and/or, in the case of offences under the Corporations Act 2001 (Cth), a fine of $20,000. The facts 4 An agreed statement of facts in relation to counts 1 and 2 was tendered. I have annexed it to these remarks as Annexure A. I do not propose to read the Statement of Facts, which is well known to the parties in this matter. 5 The agreed statement of facts in respect of counts 3 and 4 is Annexure B to these remarks. Again, I do not propose to read the facts. They are well known to the parties. 6 I have relied upon those agreed statements when considering the objective criminality of the offender which is relevant insofar as I have to determine the appropriate sentences. Principles of sentencing 7 For the purposes of sentencing the offender for the State offences, I am to have regard, inter alia, to the following provisions of the Crimes (Sentencing Procedure) Act 1999 (NSW): "3A Purposes of sentencing The purposes for which a court may impose a sentence on an offender are as follows: (a) to ensure that the offender is adequately punished for the offence, (b) to prevent crime by deterring the offender and other persons from committing similar offences, (c) to protect the community from the offender, (d) to promote the rehabilitation of the offender, (e) to make the offender accountable for his or her actions, (f) to denounce the conduct of the offender, (g) to recognise the harm done to the victim of the crime and the community. … 5 Penalties of imprisonment (1) A court must not sentence an offender to imprisonment unless it is satisfied, having considered all possible alternatives, that no penalty other than imprisonment is appropriate. 21A Aggravating, mitigating and other factors in sentencing (1) General In determining the appropriate sentence for an offence, the court is to take into account the following matters (a) the aggravating factors referred to in subsection (2) that are relevant and known to the court, (b) the mitigating factors referred to in subsection (3) that are relevant and known to the court, (c) any other objective or subjective factor that affects the relative seriousness of the offence. The matters referred to in subsection 21A are in addition to any other matters that are required or permitted to be taken into account by the court under any Act or rule of law. (2) Aggravating factors The aggravating factors to be taken into account in determining the appropriate sentence for an offence are as follows: (a) the victim was a police officer, emergency services worker, correctional officer, judicial officer, health worker, teacher, community worker, or other public official, exercising public or community functions and the offence arose because of the victim's occupation, (b) the offence involved the actual or threatened use of violence, (c) the offence involved the actual or threatened use of a weapon, (d) the offender has a record of previous convictions, (e) the offence was committed in company, (f) the offence involved gratuitous cruelty, (g) the injury, emotional harm, loss or damage caused by the offence was substantial, (h) the offence was motivated by hatred for or prejudice against a group of people to which the offender believed the victim belonged (such as people of a particular religion, racial or ethnic origin, language, sexual orientation or age, or having a particular disability), (i) the offence was committed without regard for public safety, (j) the offence was committed while the offender was on conditional liberty in relation to an offence or alleged offence, (k) the offender abused a position of trust or authority in relation to the victim, (l) the victim was vulnerable, for example, because the victim was very young or very old or had a disability, or because of the victim's occupation (such as a taxi driver, bank teller or service station attendant), (m) the offence involved multiple victims or a series of criminal acts, (n) the offence was part of a planned or organised criminal activity. The court is not to have additional regard to any such aggravating factor in sentencing if it is an element of the offence: (3) Mitigating factors The mitigating factors to be taken into account in determining the appropriate sentence for an offence are as follows: (a) the injury, emotional harm, loss or damage caused by the offence was not substantial, (b) the offence was not part of a planned or organised criminal activity, (c) the offender was provoked by the victim, (d) the offender was acting under duress, (e) the offender does not have any record (or any significant record) of previous convictions, (f) the offender was a person of good character, (g) the offender is unlikely to re-offend, (h) the offender has good prospects of rehabilitation, whether by reason of the offender's age or otherwise, (i) the offender has shown remorse for the offence by making reparation for any injury, loss or damage or in any other manner, (j) the offender was not fully aware of the consequences of his or her actions because of the offender's age or any disability, (k) a plea of guilty by the offender (as provided by section 22), (l) the degree of pre-trial disclosure by the defence (as provided by section 22A), (m) assistance by the offender to law enforcement authorities (as provided by section 23). (4) The court is not to have regard to any such aggravating or mitigating factor in sentencing if it would be contrary to any Act or rule of law to do so. … 22 Guilty plea to be taken into account (1) In passing sentence for an offence on an offender who has pleaded guilty to the offence, a court must take into account: (a) the fact that the offender has pleaded guilty, and (b) when the offender pleaded guilty or indicated an intention to plead guilty, and may accordingly impose a lesser penalty than it would otherwise have imposed. … 23. Power to reduce penalties for assistance provided to law enforcement authorities (1) A court may impose a lesser penalty than it would otherwise impose on an offender, having regard to the degree to which the offender has assisted, or undertaken to assist, law enforcement authorities in the prevention, detection or investigation of, or in proceedings relating to, the offence concerned or any other offence. (2) In deciding whether to impose a lesser penalty for an offence and the nature and extent of the penalty it imposes, the court must consider the following matters: (a) the effect of the offence on the victim or victims of the offence and the family or families of the victim or victims, (b) the significance and usefulness of the offender's assistance to the authority or authorities concerned, taking into consideration any evaluation by the authority or authorities of the assistance rendered or undertaken to be rendered, (c) the truthfulness, completeness and reliability of any information or evidence provided by the offender, (d) the nature and extent of the offender's assistance or promised assistance, (e) the timeliness of the assistance or undertaking to assist, (f) any benefits that the offender has gained or may gain by reason of the assistance or undertaking to assist, (g) whether the offender will suffer harsher custodial conditions as a consequence of the assistance or undertaking to assist, (h) any injury suffered by the offender or the offender's family, or any danger or risk of injury to the offender or the offender's family, resulting from the assistance or undertaking to assist, (i) whether the assistance or promised assistance concerns the offence for which the offender is being sentenced or an unrelated offence, (j) the likelihood that the offender will commit further offences after release. (3) A lesser penalty that is imposed under this section in relation to an offence must not be unreasonably disproportionate to the nature and circumstances of the offence." 8 In respect of the Commonwealth offence, I am to have regard to the following provisions of the Crimes Act 1914 (Cth), in particular: "16A Matters to which court to have regard when passing sentence etc. (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; (b) other offences (if any) that are required or permitted to be taken into account; (c) if the offence forms part of a course of conduct consisting of a series of criminal acts of the same or a similar character—that course of conduct; (d) the personal circumstances of any victim of the offence; (e) any injury, loss or damage resulting from the offence; (f) the degree to which the person has shown contrition for the offence: (i) by taking action to make reparation for any injury, loss or damage resulting from the offence; or (ii) in any other manner; (g) if the person has pleaded guilty to the charge in respect of the offence—that fact; (h) the degree to which the person has co-operated with law enforcement agencies in the investigation of the offence or of other offences; (j) the deterrent effect that any sentence or order under consideration may have on the person; (k) the need to ensure that the person is adequately punished for the offence; … (m) the character, antecedents, cultural background, age, means and physical or mental condition of the person; (n) the prospect of rehabilitation of the person; (p) the probable effect that any sentence or order under consideration would have on any of the person's family or dependants. … 17A Restriction on imposing sentences (1) A court shall not pass a sentence of imprisonment on any person for a federal offence, or for an offence against the law of an external Territory that is prescribed for the purposes of this section, unless the court, after having considered all other available sentences, is satisfied that no other sentence is appropriate in all the circumstances of the case." The nature and objective circumstances of the State offences Counts 1 and 2 9 The objective criminality of the offender in relation to Counts 1 and 2 derives from his failure to correctly classify the pledged CIC assets and exclude them from the "Quarterly Statement of Assets and Liabilities" and "Certificate of Reporting Approach and Compliance". The ability of an insurer in Australia to carry on business is dependent, inter alia, on compliance with minimum solvency requirements under the Insurance Act 1973 (Cth). Unless accurate disclosure is made to APRA the capacity for effective regulation of an insurer is removed and the protection intended to be provided to shareholders and policy holders may be lost. 10 Although the agreed facts raise the possibility that the offender may have known that Quarterly and Annual returns were not correct, the offender is to be sentenced on the basis that he was reckless in signing CIC's Quarterly and Annual returns when he was aware of the possibility that the assets, pledged by CIC to support the Cotesworth Letters of Credit, had to be excluded for solvency purposes. Furthermore, he made no independent enquiries to satisfy himself as to the accuracy of the information in the returns and did not seek the advice or assistance of APRA. 11 Where representations of this nature have been made without an honest belief in their truth, rather than with actual knowledge of their falsity, the facts require careful consideration. The objective criminality of the offender will depend upon the facts of the case, the nature of the representations made, the degree of recklessness involved and the ambit of the loss occasioned. 12 In the present case by incorrectly treating the fixed interest securities, which had been pledged to Westpac and Société General to support the underwriting obligations of the Cotesworth syndicates, the available assets attributed to CIC were overstated, effectively misrepresenting a deficiency as an apparent surplus. 13 The gravity of the offences is demonstrated by the following matters: a) the offender was familiar with and understood the provisions of the Insurance Act 1973 (Cth), in particular, the minimum solvency requirements, the need to lodge quarterly and annual returns and the need to disclose and exclude assets charged for the benefit of third parties. He had developed considerable experience with compliance issues; b) at all relevant times, the offender was responsible for signing all returns for HIH licensed entities; c) the offender was involved in giving instructions to Westpac to structure the Letter of Credit to support the Cotesworth syndicates so that 50% would be secured, an amount representing a substantial proportion of CIC's assets; d) the offender was aware that the securities had been secured by way of pledge. He had also received legal advice that such pledges created a charge over securities. Furthermore, he was also aware that the pledged assets were not merely contingent liabilities, as had been suggested by Mr Fodera, the Chief Financial Officer of HIH, but nevertheless proceeded to sign the returns despite reservations he had harboured. 14 The offender has a degree in Economics and also has considerable experience in areas of insurance-related and corporate finance. The incorrect classification of the pledged assets and his failure to make diligent inquiries to remove any doubts or reservations, constitute a serious breach of trust and of the duties which attach to his position as a company secretary of a large public company. 15 The Crown does not contend that these offences caused the collapse of HIH. The offender was not a controlling mind of HIH or its subsidiaries. Furthermore I accept that the corporate environment meant that he was under pressure, especially from Mr Fodera, to carry out his functions as Mr Fodera and Mr Williams desired. To do otherwise would probably have cost him his job. Nevertheless the following statement by Wood CJ at CL when sentencing Mr Cassidy, a director of HIH, is of relevance: "Notwithstanding the foregoing, a significant responsibility rests upon directors of insurance companies to ensure that there is a complete and accurate compliance with the requirements arising under the Insurance Act. Policy holders, share holders, and APRA are entitled to expect nothing less, since upon the honesty, integrity and competence of such officers depends the viability of the insurance industry, upon which so many commercial and other activities are in turn reliant. The duties which arise in this respect are an incident of the overriding obligation which is imposed on all company directors to act with proper diligence in the discharge of their office, at the pain of prosecution if they deliberately or recklessly abandon that duty." ( R v Cassidy [2005] NSWSC 410 at [18] per Wood CJ at CL) 16 The touchstone of the offender's criminality in relation to counts 1 and 2 is recklessness, not embezzlement or some form of deceitful self-enrichment. However, there can be no doubt that the fixed interest securities pledged to Westpac and Societé General, should have been treated as having been charged or charged for the benefit of a third party. In the result the value of the available assets was overstated by $129 million creating an apparent surplus of $17,139,000 when the true position was a deficit of $111,861,000. Count 3 17 This offence relates to steps taken to conceal from noteholders under the MTN Programme the breach of undertakings, which required group shareholders' funds be maintained at a level not less than A$200 million. It was a further condition of the MTN Programme that FAI provide annually to Westpac (as agent for the noteholders) its group consolidated accounts for distribution to the noteholders. 18 HIH deprived Westpac (as agents for the MTN Programme noteholders) of information to which they were entitled by virtue of covenants made under the MTN Programme. In the latter part of 1999 and the early part of 2000, Westpac had communicated its request for relevant FAI consolidated accounts and an "Auditor's Compliance Certificate" to the HIH secretariat. The offender, in his capacity as company secretary, was aware of these communications. The requests were not met. Had the noteholders been given documentation, including the group consolidated accounts, as required under the MTN Programme contractual obligations, they would have had the opportunity to consider exercising their rights to recover their investments, or any significant part thereof, pursuant to the issued notes, in the event of a default on the A$200 million undertaking. 19 The gravity of the offence is demonstrated by the fact that: a) as company secretary of HIH, the offender had responsibility for monitoring the MTN Programme and the loan covenants. b) he was aware that FAI had been in breach of its undertakings to ensure the group shareholders' funds were not less than A$200 million; c) he was aware that FAI had been in breach of its undertakings to provide its consolidated (and unconsolidated) balance sheets and profit and loss accounts; d) he made a false or misleading statement to Westpac (as agent for the noteholders) by providing false reasons for the non production and disclosure of the group consolidated accounts, being that the company structure had changed and it would be too costly to reconstruct FAI's consolidated numbers and have the accounts audited. Instead he offered to provide the consolidated accounts of HIH in lieu of the FAI consolidated accounts, together with a letter of comfort. The continued concealment of the breach by FAI of the undertaking to maintain group shareholders' funds above A$200 million enabled FAI to avoid the risk of the noteholders acting on the occurrence of an Event of Default and presenting their notes to Westpac. 20 The agreed facts confirm that the offender made the statement at the behest of Mr Fodera. Although this explains why the events occurred it cannot ameliorate the seriousness of the offence. As company secretary those he dealt with on behalf of the company were entitled to be dealt with honestly and to place their trust in the offender. This offence was serious. The nature and objective circumstances of the Commonwealth offence Count 4 21 This offence arose from the same factual matrix as the offence in count 3, being the failure to disclose the true financial state of affairs of FAI in accordance with covenants and undertakings under the MTN Programme. 22 The offender's objective criminality lies in the fact that he knowingly signed the "Letter of Comfort and Awareness" addressed to the noteholders. The letter was misleading insofar as the offender was aware at the time of signing the letter that FAI continued to be in breach of covenants and undertakings under the MTN Programme since its group shareholders' funds were below the covenanted A$200 million. 23 As with the State offences, it is not contended by the Crown that the action of the offender was the cause of the collapse of HIH. Others including officers superior to the offender, were involved. However, the conduct of the offender cannot be "dismissed as insignificant or as equivalent to that of a mere amanuensis, or of someone placing his signature mistakenly on a document without any awareness of its significance" (R v Cassidy [2005] NSWSC 410 at [33] per Wood CJ at CL). 24 The offence involved serious criminal conduct. The offender failed to act in accordance with the standard of corporate governance upon which the market economy fundamentally relies. In the words of Wood CJ at CL in Cassidy "it amounted to a significant departure from the exacting standards of honesty and diligence in corporate governance, upon which the market economy is reliant". Accurate representation of the financial state of affairs of a corporate entity is of great importance not only to the parties who are immediately affected, such as shareholders or noteholders, but also to regulators, auditors and investigators who have the responsibility of checking or verifying corporate compliance. There can be no excuse for making false or misleading representations to third parties. The noteholders under the MTN Programme suffered significant losses when FAI was placed into liquidation, failing to recover any of their investment. The offender's subjective circumstances Personal background 25 The offender is aged 57 years, having been born in 1949. He has no prior convictions. He graduated with a degree in Economics from the University of Sydney. From 1974 to 1984, he worked for a public accounting firm, starting as a graduate clerk and finishing as an audit manager. 26 In 1987 the offender commenced employment with C E Heath, the antecedent firm to the HIH Group of companies. From 1987 to 1995, he carried out a range of accounting and secretarial functions and was responsible for the production of statutory accounts and the preparation of the consolidated group accounts. In 1995, he became the company secretary for the entities in the HIH Group and continued in that role until 2001. He is currently employed as a part-time accountant for a small funds management firm. 27 The offender's solicitor, colleagues, friends and family provided character references. They attest to his integrity and honesty. They also indicate that the offences were out of character and, that he has expressed shame and remorse. I accept that the offender has shown genuine remorse. 28 In the context of "white collar" offences, good character cannot be given undue significance as a mitigating factor: (R v Rivkin [2004] NSWCCA 7 at [410]). Even if evidence as to character is afforded some weight, the need for general deterrence may be strong enough to outweigh good character as a significant mitigating factor (R v Thompson (1975) 11 SASR 217 at [222] per Bray CJ). Remorse, contrition and related matters 29 In addition to the remorse and contrition manifested by the pleas, assistance and cooperation discussed above, the pre-sentence report of the Probation and Parole Service recorded that the offender "regrets his actions in relation to these offences and mistakenly placed the interests of the company first…that he is deeply ashamed of his involvement surrounding the collapse of the company". 30 A report prepared by Megan McDonald who is a clinical psychologist was tendered. The weight to be given to its contents must be considered in light of all other relevant factors. The report refers to the offender's "profound shame and remorse" about his criminal behaviour. Ms McDonald concludes: "Mr Lo is struggling to deal with the moral consequences of not merely the collapse of HIH, the company, but also, in some grieving sense, the loss of HIH, his corporate "family". …… [H]e is now dealing with the unpleasant reality that his unquestioning loyalty, deference to authority and willingness to 'keep his head down' and 'take orders' – rather than to listen to his doubts and to ask questions – has taken him to a pass where his own integrity has been ultimately compromised" (at p 11) 31 The report confirms the offender's naivety, weakness of character and chronic susceptibility to the sway of his superiors that blinded him to the necessity of bringing to bear an independence of mind commensurate with his role as a corporate officer and the duties and responsibilities attached to it. Mitigating and aggravating factors 32 In relation to the State offences, there are no aggravating factors by reference to those enumerated in s 21A(2) of the Crimes (Sentencing Procedure) Act 1999 (NSW). On the other hand, of those mitigating factors listed in s 21A(3), the factors specified in paragraphs (e), (f), (g), (i), (k) and (m) should be taken into account when sentencing. 33 Each relevant factor is discussed elsewhere in these reasons. Those specified in paragraphs (k) and (m) read in conjunction with ss 22 and 23 of the Crimes (Sentencing Procedure) Act 1999 (NSW), relate to pleas of guilty and assistance and are of particular significance to the circumstances of the offender. 34 In relation to the Commonwealth offence, the Court must advert to matters enumerated in s 16A(2) of the Crimes Act 1914 (Cth) for its consideration. There are no identifiably aggravating matters that affect the circumstances of the Commonwealth offence. On the other hand, a number of matters afford a basis for mitigating the severity of the sentence, especially those set out in paragraphs (f)(ii), (g), (h), (j), (k), (m), (n) and (p). Of particular significance to the offender are paragraphs (f)(ii), (g) and (h), which are concerned with the degree of contrition, plea of guilty and degree of cooperation with law enforcement agencies. These matters justify a discount of the appropriate sentence in the present case. 35 It will be necessary for me to comply with s 21E of the Crimes Act 1914 (Cth) and bearing in mind s 5DA of the Criminal Appeal Act 1912 (NSW) I shall specify the extent of the discount allowed in respect of future promised assistance. 36 In relation to the State offences I am also to have regard to s 23(2) of the Crimes (Sentencing Procedure) Act. The collapse of the HIH group was a result of a complex failure of management and corporate governance. It is not possible to identify the effect, if any, of the offender's offending on individual victims. However, the offender's assistance has been and is likely to continue to be of significant assistance. He has admitted his own offending and indicated his preparedness to give evidence against others. His assistance has been provided from the time efforts commenced to unravel the affairs of HIH. The offender's family have not suffered as a result of his assistance and there is nothing which would persuade me that if sentenced to a term of fulltime custody he will suffer harsher custodial conditions. Pleas and assistance 37 There is no doubt that the offender has provided considerable assistance to the authorities in unravelling the affairs of HIH and its associated companies. The prosecution tendered a letter from the liquidator of HIH which explains the many and varied ways in which the offender cooperated in supplying prompt and accurate information about many corporate transactions. I am satisfied that the assistance given by the offender enabled the liquidator to save substantial costs. 38 A statement was tendered from Ms Lucy McCallum SC who, as junior counsel, assisted the HIH Royal Commission. Ms McCallum states that the offender was extremely helpful to the Royal Commission and was "unfailingly cooperative, polite and generous with his time." The HIH Report acknowledges the offender's assistance in the difficult process of reconstructing a complete set of board papers and minutes. 39 The offender has also offered to give evidence against others involved in the affairs of HIH. A statement from Allen Turton, the Deputy Executive Director of Enforcement for ASIC records that the offender has already provided assistance by way of statements and information in aid of investigations and prosecutions. 40 ASIC instituted civil proceedings against Messrs Williams, Fodera and Adler. The offender provided assistance in relation to those proceedings attending a conference with Mr MacFarlane QC, senior counsel for ASIC. Those proceedings concluded in 2002. 41 The offender also provided a written statement relating to Rodney Adler and Pacific Eagle Equities Pty Ltd ('the PEE matter'). It was originally intended to call him as a witness, but by reason of Mr Adler's plea this became unnecessary. Similarly, in relation to the prospectus for the issue of unsecured converting notes by HIH Holdings (NZ) Ltd in 1998 ('the HIH NZ Prospectus matter', which is yet to be heard), the offender provided a statement although the prosecution no longer proposes to call him as a witness. 42 In the statements relating to both the PEE matter and the HIH NZ Prospectus matter, the offender's assistance was limited to the identification of company records. He, understandably, lacked independent recollection of the matters referred to in those records. 43 On 21 March 2005, the offender attended a s 19 examination in relation to a transaction involving the HIH group of companies and Allianz ('the Allianz matter'). In connection with this matter, which is yet to be heard, Geoffrey Cohen, the Chairman of HIH Insurance Limited, has been charged. The offender is to be called as a witness in that prosecution, having already been called at the committal. His proposed evidence apparently corroborates the evidence of Mr Cassidy, the managing director of HIH Insurance Limited, and is also relevant to the conduct of Mr Cohen. 44 On 15 December 2004, the offender provided an induced statement relating to the treatment of reinsurance arrangements, entered into by the HIH group of companies with Hannover Re, in the HIH consolidated financial statements ('the Hannover Re matter', which is yet to be heard). It is alleged that the transactions were not genuine reinsurance contracts as HIH had simultaneously entered an agreement to provide Letters of Credit that had the effect of ensuring the ultimate risk continued to be borne by HIH. 45 The offender's contribution in the Hannover Re matter has been of some assistance in furthering the work of the ASIC HIH Taskforce in respect of the conduct of Mr Fodera, the Chief Financial Officer of HIH Insurance Limited. The assistance went beyond the mere identification of documents to provide evidence linking Mr Fodera to certain conduct the subject of investigation. The offender is said to be prepared and able to give evidence: (a) of conversations with, and instructions received from, Mr Fodera concerning the reinsurance arrangement; (b) of what Mr Fodera told the HIH Board and certain Board committees about this transaction; and (c) how the various Board and committee meetings were not told about the Letters of Credit agreements or their effect. The prosecution intends to call the offender as a witness in this matter. 46 The offender has signed two undertakings to cooperate with law enforcement agencies (including ASIC, the Commonwealth DPP and the NSW DPP) on the understanding that should he breach these undertakings, the Crown may appeal against any reduced sentence he receives. 47 Consistent with his complete cooperation with the investigating authorities the offender offered to plead guilty to relevant charges during the course of the investigations. His plea was entered at the first available opportunity and he is accordingly entitled to the maximum discount for that plea. I accept that in all his actions the offender has demonstrated genuine remorse and contrition. This is confirmed by the Probation and Parole Service which records that the offender is "deeply ashamed of his involvement surrounding the collapse of the company." He is also entitled to a significant discount for the assistance he has given the authorities. However, I bear in mind the remarks of Howie J in R v Sukar [2006] NSWCCA 92 with which I joined, the appropriate total discount in most cases is of the order of 40% for the plea and assistance to the authorities. The level of intense cooperation which the offender provided to the unravelling of the affairs of HIH has caused me to exceed this figure in this case. I have determined that a total discount of 50% is appropriate. 48 It is important that the sentences imposed, even after allowing for these favourable matters, remain proportionate to the seriousness of the offences. It must also be remembered that a discount for future assistance is often justified because of the hardship an offender is likely to suffer in prison or the impact on his family. Those matters are not present in this case. With this in mind I have determined that I should allow a discount of two months for future assistance in relation to each offence and will reflect that in the overall sentence. General deterrence 49 When sentencing offenders for "white collar' offences the courts have consistently stressed the importance of general deterrence. The rationale is revealed in observations made in R v Pantano (1990) 49 A Crim R 328 at 330 by Wood CJ at CL: "Those involved in serious white collar crime must expect condign sentences. The commercial world expects executives and employees in positions of trust , no matter how young they may be, to conform to exacting standards of honesty . It is impossible to be unmindful of the difficulty of detecting sophisticated crime of the kind here involved, or of the possibility for substantial financial loss by the public … " (emphases added) 50 Although general deterrence is not expressly referred to in s 16A(2) of the Crimes Act 1914 (Cth) unlike s 3A of the Crimes (Sentencing Procedure) Act 1999 (NSW), it is just as relevant for Commonwealth offences as it is for State offences where corporate conduct involves dishonesty, false and misleading statements or breaches of trust. The form of the sentence Imprisonment or otherwise 51 I have given earnest consideration to whether a sentence of imprisonment should be imposed on the offender and, if imposed, whether it could appropriately be suspended or served by periodic detention. Although the offender has by his subsequent conduct demonstrated remorse and complete cooperation with the authorities and, notwithstanding his good prospects of rehabilitation, I am satisfied that a term of imprisonment served in fulltime custody is the only appropriate penalty. The offender was appointed to a position of trust in which a great many people and corporations depended on him carrying out his office with honesty and diligence. He failed to meet his obligations for which he must be appropriately punished. The offences are serious. Furthermore, as I have indicated, general deterrence is a significant consideration which, in my opinion, in the offender's case weighs heavily in favour of a term of fulltime custody. However, having regard to the many favourable aspects of the offender's subsequent conduct, his assistance to the authorities, both in the past and prospectively, I am satisfied that he should only be required to serve the minimum appropriate period in fulltime imprisonment. When sentencing for these offences it is important to recognise that the maximum term of imprisonment provided by statute is five years. There will be very significant variations in the objective criminality of the offences covered by the section. The present offender's crimes, although serious, were not at the highest end of the scale of offending. Comparative sentences in HIH and non-HIH matters 52 In the course of submissions, I was provided with an agreed schedule of sentences in other matters where HIH officers have been prosecuted together with other "white collar" offences. I have identified below some relevant principles and the assistance which is available from these decisions, recognising that each offence and offender requires unique consideration. 53 R v Boskovitz [1999] NSWCCA 437. Ms Boskovitz was a director and senior executive. She made false or misleading statements to 3 lending institutions. Moreover, in order to procure credit facilities, she created false impressions that did not reflect the true financial position of the company. 54 The Court of Criminal Appeal held that the presence of a dynamic or dominating superior's influence or sway, particularly where "business methods employed sail too close to the wind", cannot exculpate a corporate officer who makes false statements and engages in conduct in derogation from their responsibility to uphold honesty and truthfulness. The court determined that the offences were serious but could not fairly be regarded as amongst the worst of the kind in question to warrant the maximum penalty. They were "a little below the worst type." There were no pleas of guilty and no cooperation. The "trial was hard fought". Mrs Boskovitz was sentenced to 4 years imprisonment, with a minimum of 2 years 2 months and an additional 1 year and 10 months. 55 R v Boulden [2006] NSWSC 1274. Mr Boulden was the financial controller of the Corporate and Professional Insurance Division within FAI General Insurance Company Ltd. His role was best characterised as middle management. He fraudulently altered the books of a company, by making false entries in the ledger, thus giving rise to a false profit figure. He lied to other employees of the FAI group about the reasons for the false entries. The sentencing judge found that he failed to "resist the urgings of his superiors but went along with them, no doubt influenced by the general culture of dishonesty within the corporate group." 56 The sentencing judge concluded that imprisonment was the only appropriate sentence given the offence itself was "reasonably serious" that "falls comfortably into the mid-level range of seriousness" and the criminality involved was "at a reasonably high level." However, in light of Mr Boulden's "demonstrated rehabilitation over a period of many years," his "plea and his clear willingness to facilitate the course of justice" and his unlikelihood to reoffend, the trial judge was of the view that appropriate recognition of the objective seriousness of the offence could still be achieved by an alternative to fulltime imprisonment. He was sentenced to 12 months imprisonment to be served by way of periodic detention. 57 R v Kelly [2006] NSWSC 1142. Mr Kelly concurred with the offender's (Lo's) false or misleading statements that it would be too costly to reconstruct accounts in response to Westpac and noteholders' concerns whether FAI complied with the undertaking to maintain group shareholders' funds at or above A$200 million. He pleaded guilty at the earliest opportunity and also provided assistance and cooperation. 58 Mr Kelly was assistant company secretary for the HIH Group. However, he played a minor role in the events surrounding the concealment of FAI's breach of the A$200 million undertaking under the MTN Programme. 59 He was sentenced to perform 500 hours of community service. The sentencing judge found that "the offence committed by the offender is qualitatively different and of a significantly lower order than other offences in relation to which sentences of imprisonment have been imposed in HIH prosecutions." 60 R v Cassidy [2005] NSWSC 410. The offender's counts 1 and 2 are identical in substance to counts 2 and 1 respectively of Mr Cassidy. The facts related to these counts are also similar. Mr Cassidy was the managing director of HIH Insurance Ltd. Like the offender, he has provided significant assistance to ASIC in their investigations and prosecutions. 61 The sentencing judge found that general deterrence militated against any sentence other than full-time imprisonment. 62 For each of counts 1 and 2, Mr Cassidy was sentenced to 9 months imprisonment. For count 3 he was sentenced to 12 months imprisonment (partially cumulative). The overall sentence was 15 months imprisonment, of which 10 months were required to be served in custody. 63 To my mind the sentence imposed on Mr Cassidy is the most relevant to the sentencing of the offender. However, Mr Cassidy was the Managing Director of HIH Insurance Limited and carried more significant corporate responsibility than the offender. However, the different is not of a great nature. Although less, the offender's sentence should reflect the fact that because of his role in the company's affairs he must carry responsibility for his serious breaches of his corporate and statutory responsibilities. 64 All of these decisions reflect the fact that the courts have consistently treated offences of the kind committed by the offender as serious involving as they do dishonesty in dealings with regulators or the market. In these circumstances the importance of general deterrence must be emphasised. Although the offender may not have had a policy or critical decision making function within the company this cannot mean that a sentence which does not involve fulltime custody should be imposed. It is also noted that pleas of guilty and assistance are recurrent features of the HIH prosecutions. Totality, accumulation and concurrence 65 The offender is to be sentenced for multiple offences to which he has pleaded guilty. A judge sentencing an offender for more than one offence must fix an appropriate sentence for each offence and then consider questions of cumulation or concurrence, as well, of course, as questions of totality. 66 Where there are two different sentencing regimes, each offence under the relevant regime must be considered for sentencing and the application of the principle of totality in light of the overall criminality. 67 Counts 1 and 2 are State offences relating to problems with the accuracy of the declaration. Sentences for these offences should be concurrent. Counts 3 and 4 are also related and in my opinion it is appropriate that they also be concurrent. An appropriate overall sentence will allow for half of the term of imprisonment for counts 3 and 4 to be served concurrently with the sentence for counts 1 and 2. There will be some accumulation between those sentences and those appropriate for the Commonwealth offence. Parole 68 In my opinion it is unnecessary to impose a sentence which provides for a period of parole. The offender has demonstrated genuine contrition and remorse and I am satisfied is most unlikely to reoffend. The fixed term I have in mind, whilst marking out his serious crimes, are not such as to require his supervised re-introduction into the community. His family connections remain strong. Accordingly, I see no purpose in providing a period of parole or providing that he enter into a recognizance. Imposition of sentences 69 Mr Lo you are convicted upon each of the counts for which you have pleaded guilty. In relation to count 1 I sentence you to a fixed term of imprisonment of six months commencing on 23 February 2007 and expiring on 22 August 2007. In relation to count 2, I sentence you to a fixed term of imprisonment of six months to be served concurrently with the sentence on count 1. In relation to count 3 I sentence you to a fixed term of imprisonment of six months commencing on 23 May 2007 and expiring on 22 November 2007. In relation to count 4, I sentence you to a term of imprisonment for six months, to be served concurrently with count 3. 70 The sentences are structured on the basis that the total term of imprisonment is for nine months based on my evaluation of the objective criminality, the gravity of the offences and all relevant mitigating factors. 71 I further indicate in relation to each offence that but for the offer to give evidence in respect of the prosecution of Mr Cohen and Mr Fodera the term of the sentence for each offence would have been eight months and the total term of imprisonment of thirteen months. In that event the sentence for counts 3 and 4 would have commenced on 23 July 2007. ********** ANNEXURE A Agreed facts in relation to counts 1 and 2 OVERVIEW Lo's role in the HIH Group 1. The HIH Insurance Group came into existence in 1995, when CE Heath Casualty and General Insurance Ltd acquired the CIC Insurance Group. Frederick Lo ("Lo") was CE Heath's Group Accountant from 1987 until 1991, and carried out a range of accounting and secretarial functions for the CE Heath Group between 1991 and 1995. In 1995 Lo became the Company Secretary for entities in the HIH Group, and he continued in that role until 2001. At 25 May 2001 Lo held 212,675 shares in HIH Insurance Limited which were never sold prior to the collapse. 2. Insurance business in Australia may only be carried on by a company authorised to do so under the Insurance Act 1973 ("the Act"). There were three main authorised insurers in 1999 within the HIH Insurance Group: CIC Insurance Limited ("CIC"), HIH Casualty and General Insurance Limited ("C&G") and FAI General insurance Company Limited ("FAIG" Lo was at the relevant times one of a number of company secretaries of each of these three authorised insurers. 3. In 1998 to 2000 Lo, who held a Bachelor of Economics degree from the University of Sydney, possessed extensive experience in the areas of insurance and corporate finance and investments. He had a close working relationship with Dominic Fodera ("Fodera"), Chief Financial Officer of HIH. He also had regular dealings with Terence Cassidy, Managing Director (Australia) and with Raymond Williams ("Williams"), Chief Executive Officer of HIH. Fodera, Cassidy and Williams were also directors of HIH, C&G and CIC. Acquisition of the Cotesworth syndicates 4. In October 1998 HIH acquired the Cotesworth Group Limited and its subsidiaries ("Cotesworth"), a Lloyd's of London managing agency and corporate syndicate based in the United Kingdom. Lloyd's of London required HIH to either deposit funds at Lloyd's or to arrange for banks to provide Letters of Credit to guarantee the obligations of the Cotesworth syndicates. 5. HIH made arrangements for Letters of Credit to be issued by Westpac and Societe Generale Australia Limited ("SG") to support the obligations of the Cotesworth syndicates. The Letters of Credit were secured by indemnities from companies within the HIH group, including the authorised insurers, and supported by securities owned by the authorised insurers. The effect of these financial arrangements was that the securities lodged by the authorised insurers were subject to charges in favour of Westpac and SG for the ultimate benefit of the Cotesworth syndicates. 6. The quantum of funds required by Lloyd's to guarantee the obligations of the Cotesworth syndicates increased between November 1998 and March 2000. At all times during the period March 1999 to March 2000 CIC had provided a total of between $108 million and $129 million (face value) in securities pledged to Westpac and SG to secure the obligations of the Cotesworth Group. Regulation of authorised insurers under the Act 7. Under the system of regulation applicable in Australia in 1998 to 2000, an entity's authorisation to carry on insurance business was under the Act subject to minimum solvency conditions. These conditions required that the value of the entity's assets should at all times exceed the amount of its liabilities by not less than the greater of $2 million, 20% of its premium income during its last financial year, or 15% of its outstanding claims provision as at the end of its last financial year - s 29(1)(b). 8. An authorised insurer was required by the Act to lodge quarterly returns and annual returns with the Australian Prudential Regulation Authority ("APRA") and the annual returns were required to be audited - s 44 and s 47. These returns were to include a statement of assets and liabilities. The purpose of these returns was to ensure that authorised entities complied with minimum solvency requirements. 9. Section 30(1) of the Act provided that some assets could not be counted by an authorised entity for the purpose of the minimum solvency calculations, including an asset "charged for the benefit of a person other than the body corporate to the extent that it is so charged" - s 30(1)(c). 10. If a licensed insurer failed to comply with the minimum solvency requirements it could be required under Part V of the Act to cease writing insurance business. 11. Upon the filing by an entity of the quarterly return APRA would undertake an assessment of the entity's compliance with the minimum solvency requirements and provide that assessment to the entity. The assessment by APRA was undertaken in reliance upon information provided by the entity in the quarterly return. 12. The annual return required the entity to prepare, as part of the return, a minimum solvency calculation. CIC's Quarterly APRA returns for the periods ending 31 March 1999, 30 June 1999, 30 September 1999, 31 December 1999 and 31 March 2000 13. CIC lodged five Quarterly returns with APRA for the relevant periods between March 1999 and March 2000, as follows: Period ended Date of lodgement (on or about) Document reference or about) 31 March 1999 11 May 1999 RC0184021 - RC0184030 30 June 1999 18 August 1999 RC0184031 - RC0184046 30September1999 26November 1999 RC0192020 - RC0192023 RC0184093 - RC0184096 31December 1999 11 February 2000 RC0192014 - RC0192019 RC0184049- RC0184052 31 March 2000 24 May 2000 RC0192029 - RC0192034 RC0184075- RC0184077 14. Lo signed each page of each of these five Quarterly returns. 15. As at the dates of signature and lodgement of each of these returns, CIC had encumbered between $108 and $129 million (face value) fixed interest securities in Austraclear, to Westpac and SG to support the Cotesworth Letters of Credit. 16. Each of the five Quarterly returns included a Form 302 - Statement of Assets and Liabilities encumbered or charged or subject to a floating charge or contingent liability. 17. Each of the five Quarterly APRA returns lodged by CIC and signed by Lo was false in that each Form 302 recorded the value of assets encumbered or charged for the benefit of third parties as nil. None of the Forms 302 disclosed the assets encumbered for the ultimate benefit of the Cotesworth syndicates. CIC's Annual APRA Return for the period ending June 1999 18. On or about 22 November 1999, CIC's Annual APRA return for the period ending 30 June 1999 was lodged with APRA. (RCO215336 to RCO315380). Lo and Cassidy signed the Form 100 Certificate of Reporting and Compliance on or about 22 November 1999. (RCO215338) 19. The Annual APRA return included Form 102(i) (Minimum Solvency Requirements) and Form 103 - a Statement of Assets and Liabilities encumbered or charged or subject to a floating charge or contingent liability. (RCO215345 and RCO215347) 20. The Annual APRA return lodged by CIC and signed by Lo and Cassidy on or about 22 November 1999 was false in that the $129 million fixed interest securities that had been pledged by CIC to support the obligations of the Cotesworth syndicates had not been disclosed and excluded on Form 102(i). (RCO215345 ) 21. Form 103 was also false in that it did not disclose the $129 million charged assets as statutory exclusions. As recorded on Form 103, the value of assets encumbered or charged was nil. (RCO215347) 22. Had the $129 million in encumbered fixed interest securities been disclosed and excluded from the solvency calculations in Form 102(i), as it should have been, CIC would have recorded a deficiency of $111,861,000, rather than the surplus of $17,139,000 it declared. Disclosure of the true (charged) nature of the assets pledged to support the Cotesworth syndicates would have resulted in CIC disclosing its failure to comply with the minimum solvency requirement. CIRCUMSTANCES OF THE OFFENCE Lo's knowledge of pledged assets, securities and the minimum solvency requirement 23. As Group Accountant and then Company Secretary, Lo had a responsibility to oversee the Group's compliance with its statutory obligations, including those imposed by the Insurance Act. Lo had been the primary liaison between HIH and both APRA and its forerunner, the Insurance and Superannuation Commission ("ISC"), over many years. 24. At the beginning of 1999 Lo assumed responsibility for signing the returns for all HIH licensed entities as required under the Insurance Act. Lo had by that time developed considerable experience in reviewing the licensed entities' ISC/APRA returns, having shared the responsibility for the pre-lodgement review process from the late 1980s through to the early 1990s. The requirements of section 30(1) of the Act did not change between that period and 1999. 25. Lo was familiar with and understood the provisions of the Act including the minimum solvency requirement, the need to lodge quarterly and annual returns and the need to disclose and exclude assets charged for the benefit of third parties. Major compliance issues which arose within the Group were routinely referred to Lo, who took those matters up with APRA on behalf of HIH. Lo had corresponded extensively with the ISC/APRA over a number of years in seeking permission under section 30 of the Act to treat various intercompany assets as the assets of a licensed insurer for the purposes of the minimum solvency calculation, and in seeking permission under section 30(2) of the Act to not treat subordinated loans from related companies within the Group as liabilities of a licensed insurer for the same purpose. In 1997 Lo was the author of a short paper entitled "General Insurance - Regulatory Environment" (S01119145) in which, inter alia, he stated "Of importance are the various statutory quarterly and audited annual financial returns and accounts which all authorised insurers must lodge with the Commissioner for his examination. An authorised insurer is required to maintain at all times specified solvency margins... Section 30 of the Act specifies what may or may not be treated as assets for the purpose of the authority to carry on insurance business." 26. Further, Lo was aware that a licensed insurer which failed to comply with the financial standards, including the minimum solvency requirement, could be required to cease writing insurance business. 27. By 1998 Lo was experienced in considering the effect of assets pledged, to support Letters of Credit on an authorised entity's solvency margin. Lo had been involved in negotiating a Letter of Credit arrangement with Westpac in 1996, and had sought legal advice from Mallesons at the time in relation to that Letter of Credit. On 6 November 1996 Lo had signed a power of attorney on behalf of C&G, in relation the execution of certain documents concerning the 1996 Letter of Credit. 28. Further, on 6 November 1996, Lo attended a board meeting of HIH C&G at which this Letter of Credit was discussed. The minutes, compiled by Lo as Company Secretary, record amongst other things that the Board noted that "the above facility will be secured by pledges or mortgages given by the Company to Westpac from time to time over, inter alia, certain Australian Government and semi Government bonds though Austraclear and RITS clearing systems". These terms of the 1996 Letter of Credit, relating to the pledging or mortgaging of assets to Westpac in the Austraclear or RITS systems, were in fact incorporated into the terms of the Cotesworth Letter of Credit issued by Westpac in November 1998. 29. The assets of CIC pledged to secure the Letters of Credit were charged via the system provided by Austraclear Limited ("Austraclear"). Austraclear, a wholly owned subsidiary of the Sydney Futures Exchange, provides a service to members by which debt securities may be sold and on sold within the financial market. Austraclear holds those debt securities for its members, registers, encumbers and transfers those securities within the system, and provides a settlement procedure for transactions involving the transfer of those securities. This procedure is one with which Lo had some familiarity. Lo was not involved on a day to day basis with the operation of the Austraclear system. When a security is encumbered within the Austraclear system, Austraclear transfers the entitlement to the security to the encumbrancee, while maintaining the registration of the security in the name of the encumbrancer. While the encumbrance is registered, Austraclear recognises the encumbrancee as being solely entitled to transfer the security or uplift it out of the Austraclear system: that is, the encumbrancer loses for the life of the encumbrance its unilateral right to deal with the security. This procedure is inconsistent with the concept of such securities being subject to a negative pledge. 30. Lo was familiar with financial arrangements involving negative pledges and understood the characteristics of a negative pledge. He was involved in a number of financial transactions during the 1990s in which negative pledges were variously given over the assets of subsidiary companies or required by subsidiary companies over the assets of third party borrowers to secure loans provided by the subsidiaries. 31. From time to time the ISC and APRA issued circulars and guidelines to general insurers to provide guidance on their various obligations under the Insurance Act, including their obligations in relation to the minimum solvency requirements and the application of section 30 of the Act to the assets of licensed insurers. These circulars and guidelines were generally sent by the ISC/APRA to HIH. On occasion Lo circulated and discussed the contents of these circulars with other senior HIH officers. One such circular dated November 1995 located in a file in Lo's office, confirmed that placing assets with custodians such as Austraclear and the Reserve Bank Information Transfer System ("RITS") would result in licensed insurers being required to exclude those assets from their minimum solvency calculations, unless those assets remained under the direct control of the insurer and could be dealt with by the insurer without recourse to third parties.[2] 32. Lo was one, of a number, of CIC's authorised signatories to Austraclear. He was also one, of a number, of the Group's authorised signatories to RITS, which allows members to, inter alia, mortgage the assets deposited by corporate entities within the system. Cotesworth Letters of Credit - negotiations and documentation 33. HIH commenced negotiations in early November 1998 with Westpac and SG to secure Letters of Credit to support the underwriting obligations of Cotesworth in the UK. As early as 4 November 1998, HIH had advised SG that it required an £88 million standby Letter of Credit. 34. Lo and William Howard ("Howard"), HIH's General Manager Finance, had responsibility, subject to direction and authorisation of Mr Fodera, for negotiating on behalf of HIH the financial arrangements concerned with the issue of the Letters of Credit. Lo had discussions during this period with Fodera, Cassidy and Howard concerning the financial arrangements involved with the Letters of Credit and their possible implications for the solvency requirements of the authorised insurers. Westpac 35. In early November 1998, various HIH personnel, including Lo, commenced negotiations with Westpac and Societe Generale to secure Letters of Credit to support the underwriting obligations of Cotesworth in the UK. Lo and Howard were primarily responsible for negotiating with Westpac. 36. On 4 November 1998, Howard approached Stuart Johnson ("Johnson") of Minter Ellison to obtain legal advice about pledged assets and the ISC/APRA solvency rules. (S01006824) Johnson advised Howard, orally, later that day that depending on the actual documentation, a 'charge' may include a deposit of securities or pledge, and that assets subject to a charge are excluded from an entity's assets for the purposes of solvency calculations. Johnson further advised Howard that, in practice, APRA should be consulted prior to the pledging of any assets to avoid any arguments at a later time (SBA325076). 37. On 13 November 1998, Lo had a telephone conversation with Craig Parker of Westpac concerning the prospective Letter of Credit. Following that conversation, Lo wrote a memo to Fodera in which he advised Fodera that he had discussed with Parker the possibility of the secured bonds/notes being registered in HIH's name in the CHESS system, with Westpac as a sponsor. CHESS is a clearing house system for securities, run by the ASX. Registration of securities in the CHESS system would allow the original owner of the securities (for example, CIC) to retain its control of those securities and would thus allow those securities to be admissible for the original owner's ISC/APRA solvency calculation purposes. Lo advised Fodera in this memo that, by adopting this course, HIH could "alleviate the potential problem with the Insurance Commissioner". Lo further advised that he did not propose at that time to meet with or divulge any information on the Letters of Credit to the Insurance Commissioner. (SBB158311) 38. On 16 November 1998, Lo and Howard attended a meeting with Parker and Michael Gearin ("Gearin") of Westpac. Gearin's handwritten notes record that the issue of assets lodged with Lloyd's having to be deducted for APRA purposes was discussed in the course of that meeting. (S01168040) 39. The next day Lo wrote to Parker and advised him that SG had not yet been able to get approval from its French Head Office on the unsecured portion of the Letter of Credit, but that " naturally the secured portion was not a problem ". Lo accordingly instructed Westpac to commence putting in place its Letter of Credit on the basis of £30 million secured and £30 million unsecured, and agreed that, in the event that SG approval was not forthcoming, the secured portion could be increased to £45 million. (SO1006844) 40. Westpac advised HIH by a letter addressed to Lo of 23 November 1998 that it had approved the provision of a £60,000,000 Letter of Credit on behalf of the Cotesworth Group Limited. The letter to Lo specified that: "Facility is to be secured by a pledge over at least GBP35m in cash and/or qualified securities to be held in RITS or Austraclear.... as discussed the bank requires that the unsecured amount of this facility is not to be more than GBP15m as soon as possible. This may be achieved by increasing the secured portion of this facility...." As well as requiring that the facility be secured by a pledge over at least £35,000,000 in cash or qualified securities to be held in Austraclear or RITS, Westpac required indemnification. 41. On or around 5 November 1998, in a then unrelated transaction, Lo and Cassidy had signed a Guarantee and Indemnity to Westpac on behalf of HIH Underwriting and Agency Services Limited and HIH Insurances Limited, guaranteeing the obligations of HIH America Insurance Services Inc, HIH Underwriting and Agency Services Limited, and HIH Insurance Limited. That Guarantee and Indemnity concerned a USD14,000,000 Floating Rate Term Loan provided by Westpac to HIH America Insurance Services Ltd (RC0016945 to RC0016958) Under the terms of the Cotesworth Letter of Credit arrangement, C&G was required to complete a third party indemnity specific to the Cotesworth transaction. Rather than creating new guarantees for the Cotesworth transaction, HIH Underwriting and Agency Services Limited and HIH agreed in writing to amend the earlier agreement so as to include a guarantee of C&G's liability under the Cotesworth indemnity. 42. Lo, Fodera and Cassidy attended a meeting of the board of directors of HIH Underwriting and Agency Services Limited on 24 November 1998 regarding the proposed Cotesworth transaction (Fodera attending by telephone). The minutes, prepared by Lo as Company Secretary, record that the board resolved to authorise Cassidy and Lo to sign Westpac's offer letter of 23 November 1998 and to execute all relevant ancillary indemnity and guarantee agreements to give effect to the acceptance of the Cotesworth Letter of Credit and to enable the issue of that Letter of Credit. 43. Lo, Fodera and Cassidy further attended a meeting of the board of directors of C&G on 24 November 1998 regarding the proposed Cotesworth transaction (Fodera attending by telephone). The minutes record that the board resolved to authorise Cassidy and Lo to sign Westpac's offer letter of 23 November 1998 and to execute all relevant ancillary indemnity and guarantee agreements to give effect to the acceptance of the Cotesworth Letter of Credit and to enable the issue of that Letter of Credit. 44. On or around 25 November 1998 Lo and Cassidy duly signed the relevant documentation, accepting Westpac's Letter of Credit offer and amending the 5 November 1998 guarantee and indemnity. The Westpac offer accepted by Lo and Cassidy reflected the fact that Westpac charged HIH higher fees for the unsecured portion of the facility than for the secured portion: the fee for the unsecured portion was in fact double the fee for the secured. The terms of this agreement were obviously inconsistent with the characterisation of the securities as being subject to a mere negative pledge. SG 45. On 6 November 1998, John Harvey of Societe Generale Australia Ltd ("SG") wrote to Howard enclosing an indicative term sheet for a Letter of Credit for £88 million to be partly secured (£40 million), and partly unsecured (£10 million). SG advised that, if required, it would look to underwrite the full unsecured amount with a view to syndicating £38 million. As an alternative, SG advised that it would split the deal with Westpac. (SBB000016) 46. On 23 November 1998 SG wrote to Lo and offered HIH finance which was described as a performance guarantee facility for £30 million, comprising £15 million to be secured and £15 million unsecured. 47. The terms of the offer required HIH to provide acceptable security, defined as including Australian government or state government securities, or cash deposited with SG. In the event that HIH provided Australian government securities as acceptable security, SG required HIH to execute mortgage documentation in favour of SG. HIH was also required to execute a letter of deposit and set off, and pledge documentation in form and substance satisfactory to SG relating to SG's possession and control of the acceptable security. The offer could only be accepted by HIH delivering to SG a cheque representing the establishment fee, and documentation satisfying the conditions precedent. The provision of cash security was not an option for HIH. 48. On 20 November 1998, Lo sought legal advice from Johnson of Minter Ellison as to the difference between a pledge with a power of sale, and an equitable mortgage. (501006817, SBA331392). Later that day, Johnson consulted Paul All ("Ali"), a Minter Ellison solicitor with expertise in the area, who advised that there was no difference between the two, as a pledge effectively created an equitable charge. (S01006815) Johnson's handwritten notes record a telephone call out to Lo later that day in which Lo was told in words to the effect, "In the case of Australian Government Bonds and Austraclear and Chess securities, there is no real difference between granting an equitable charge and a mortgage and the pledging of assets with a power of sale. Granting a pledge with a power of sale is effectively creating a charge. There is no real distinction between the two unless it is over land. This is not the case as Austraclear involves the pledging of bonds." Lo was also told, "You are effectively creating a charge or mortgage. There is no real difference between the two types of security." 49. After being given this advice Lo then stated in words to the effect, "The bank wants an equitable mortgage and 1 understand that there is no real difference between the 2 types of security." Lo did not pass the advice from Minter Ellison on to Cassidy or to Howard, neither of whom was aware that he had sought such legal advice. 50. On 23 November 1998 Lo forwarded the SG performance guarantee documents to Ali, and asked him to "carry out a quick review and let me know if there are any exposure areas that I should be aware of. Ali prepared a draft reply that included a paragraph relating to the exclusion of assets charged for the benefit of another person from an entity's solvency calculation pursuant to s 30(1)(c) of the Act, stating that "the Acceptable Securities will not be taken into account for valuation of HIH's assets" (S01050030). There is no evidence that Lo saw this draft reply. 51. Between 11am and 11.30am on 25 November Ali discussed the contents of the draft reply with Lo by telephone. He then forwarded an amended version of the advice to Lo by facsimile at 11.30am (S01500029). A number of matters contained in the original draft were deleted from the version forwarded to Lo. Ali's usual practice was to make such alterations only on instructions from the client. One of the paragraphs deleted from the final version is the paragraph which relates to the Insurance Act and contains the passage extracted above: 52. On 25 November 1998, Lo wrote to SG regarding the SG letter of offer of 23 November 1998 for a Standby Letter of Credit for £30 million. (S01042601 to S0104605) Lo attached various documents including: - duly signed Deposit and Set-Off - duly signed Issue Notice - cheque for the Establishment Fee - company records as required by SG; and - drafting amendments suggested by Minter Ellison (Annexure A). 53. Lo and Cassidy signed the letter of deposit and set off on 25 November 1998. (S01042603). Pursuant to that agreement, Lo and Cassidy agreed to establish an account and to deposit the initial deposit of £16 million by 27 November 1998. They further authorised SG to appropriate the whole or part of the deposit balance towards satisfaction of the liabilities. Liabilities were defined to include any liability or obligation owed to SG by HIH under the performance guarantee facility provided to the Company pursuant to the letter of offer of 23 November 1998. This documentation thus stated that SG was at liberty, in the event of a default, to apply the charged funds to discharge Cotesworth's liabilities. Again the SG documentation recorded that the fees to be charged for the unsecured aspect would be greater than for the secured aspect. The terms of this document are obviously inconsistent with the characterisation of those funds as being subject to a mere negative pledge. 54. Cassidy signed the issue notice on 25 November 1998, thereby giving SG notice that HIH required a Letter of Credit to be issued on behalf of Cotesworth Capital Limited on 27 November 1998 to the value of £30 million. (SO1042605) 55. The pledge documentation was subsequently signed on 5 January 1999 by Fodera and witnessed by Lo. Fodera signed pursuant to powers of attorney executed by the directors of HIH C&G and CIC. (S01042420) Pledging of securities in November 1998 Westpac 56. On 24 November 1998, Parker advised Lo that HIH needed to pledge to Westpac approximately $62 million of additional security to cover the Cotesworth Letters of Credit. The $62 million was in addition to $31.6 million excess security currently held by Westpac. The $31.6 million excess security was part of Cotesworth Letters of Credit cover. (SBB158277). 57. On 26 November 1998 HIH advised Westpac of the securities C&G and CIC had currently pledged to Westpac for existing Letters of Credit, and the securities it would pledge to Westpac for the Lloyd's Letter of Credit. The amount of securities to be pledged to Westpac totalled $53 million. (S01006868) 58. On 26 November 1998, CIC pledged $48 million of securities, encumbered in Austraclear, to Westpac for the Cotesworth Letter of Credit. (S01143008) 59. On 26 November 1998, C&G pledged $5 million of securities, encumbered in Austraclear, to Westpac. (S01143008) 60. On 27 November 1998, Westpac issued a standby Letter of Credit to Lloyd's on behalf of Cotesworth to the value of £54,157,500. (SBB000046) SG 61. On 27 November 1998, CIC pledged a total of $36 million of fixed interest securities, encumbered in Austraclear, to SG. (S01143008). 62. As at 27 November 1998, CIC had pledged a total of $84 million of fixed interest securities, encumbered in Austraclear, to support the Cotesworth Letters of Credit. 63. Between December 1998 and June 1999, requirements by Westpac for the amount pledged to be increased caused this figure to rise to $129 million. HIH Board Meeting 2 December 1998 64. On 2 December 1998, Lo attended a Board meeting of HIH. The package of papers presented to each of the directors for this meeting contained a paper prepared by Lo entitled "Letters of Credit - Cotesworth Capital Limited". (SBB025157) Lo's paper noted that Letters of Credit were issued by Westpac and SG on 27 November 1998 for and on behalf of Cotesworth, and that HIH needed to provide a performance guarantee in the event that the Letters of Credit were drawn down and Cotesworth was unable to indemnify the banks. Lo's paper set out the amount of securities secured to support the Letters of Credit from Westpac and SG. Lo's paper also noted "security on the secured commitment was provided through the pledge by HIH of a portfolio of government and semi-government securities acceptable to the issuing banks". 65. The minutes of the 2 December 1998 Board meeting record that Fodera advised that Letters of Credit in favour of Lloyd's totalling £84.16 million had been issued by Westpac and SG for and on behalf of the company and that the Letters of Credit were required as a security deposit to support Cotesworth Capital Limited's underwriting operation in line with its business plan. The Board resolved to ratify the action of management in securing the Letters of Credit. (SBB054802) Subsequent Dealings with Financial Institutions regarding the Letters of Credit 66. On 1 May 1999, Parker wrote to Lo requiring further security be pledged to Westpac. (SBB158286). The requirement for further security was a condition precedent of Westpac's Letter of Credit offer of 23 November 1998. In this letter Parker reminded Lo that HIH was required to reduce the unsecured amount to £15m as soon as possible and therefore Westpac required additional security immediately. On 18 May 1999, additional security was pledged to Westpac. (S01426792) 67. On 3 June 1999, Lo sent an email to Bill Howard advising that HIH's major concern was to reduce the portion of "SECURED LOC". (SBA174555) Lo further advised in that email that: "we'll be happy to talk to any body who can offer LOC on an unsecured basis as my impression is that SG and Westpac would be reluctant to reduce their security further as they are heavily exposed to us in other areas." 68. On 12 July 1999 Lo wrote to Hong Kong Shanghai Bank Limited in the context of HIH seeking to replace the existing Letters of Credit issued by Westpac and SG (RC0167689). In that letter Lo noted that HIH were looking to minimise the secured amounts of the Letters of Credit because "... they are solvency unfriendly in the context of an insurance company's regulatory environment." 69. In September to December 1999 Lo was involved negotiations and signed documentation on behalf of CIC and FAIG relating to amendments to the Westpac Letter of Credit. 70. On 16 November 1999 Lo and Fodera met John Harvey and Peter Edwards of SG and were advised, amongst other things, that SG wished to move to a fully secured position in respect of the Letters of Credit. Edwards file note of the meeting records that the following comment was made during that meeting by either Fodera or Lo: "Security granted by H/H comes out of assets for solvency" 71. On 22 November 1999 Lo sent an email to Ballhausen advising of SG's requirements: "The unsecured portion of the SG LOC (for the purpose of Cotesworth and currently standing at stg15M) will need to be secured as SG is of the view that it is overexposed to H1H...this news is hardly surprising as SG met with Dominic and / last weekend told us as much." Lo noted in that email that "generally security would have to be in the form on cash or tiered one government securities, and of a larger amount (say plus 5%) to provide a safety margin." Lo further advised that HIH was about to commence negotiations with HSBC to secure another Letter of Credit for Cotesworth and expected that half the amount would require security. (SBA174496). 72. On 26 November Lo wrote to SG seeking a refund in fees paid for the unsecured portion of the facility as SG now required a fully secured arrangement. Conversations with other HIH officers 73. Lo and other HIH officers had, at different times, adverted to the possible exclusion of the assets of the authorised insurers that secured the Cotesworth Letters of Credit. 74. From at least 1996 onwards Lo regularly met with Fodera, Howard and other HIH officers to discuss ISC/APRA and Standard and Poors solvency issues on an ongoing basis. During these meetings, the group discussed ISC/APRA solvency calculations for each licensed entity on an individual basis. 75. Lo also attended solvency meetings with the same participants which were convened on an ad hoc basis to discuss the solvency implications of proposed acquisitions. One of these meetings was held to address concerns about the solvency implications of the proposed Cotesworth acquisition. 76. Lo was involved in an ongoing review with Fodera and Howard of the issue relating to alternative assets which might be used to support the Cotesworth Letters of Credit, because of the possible solvency impact of providing bonds or fixed interest assets. 77. Howard had also informed Fodera of the content of Minter Ellison's advice of 4 November 1998. Fodera stated that he held a different view: namely that the pledges were in fact contingent liabilities in that the assets supporting the Letters of Credit would only be called on if losses occurred, and so HIH would have the opportunity of funding the loss in alternate ways. Fodera stated that as the pledges were only contingent liabilities, they did not affect solvency, and that he had directed Lo to look further into the matter. 78. Howard discussed Fodera's view with Lo in early November 1998. Lo stated to Howard that he supported Fodera's view that the pledges were contingent liabilities. 79. In November 1998 Cassidy had conversations with Fodera and Lo and was told in each case that "the Letter of Credit is a form of negative pledge". Cassidy was surprised by the explanation, and asked Lo again in 1999, either when signing CIC's APRA Quarterly Return for the three month period ending 30 June 1999 (signed on 19 August 1999) or when signing CIC's APRA Annual Return for the period ending 30 June 1999 (signed on 22 November 1999), about the nature of the encumbrance. Cassidy expressed surprise to Lo that the encumbrance could be described as a negative pledge, but chose to make no further enquiries before co-signing those returns with Lo. Lo failed to inform Cassidy of the content of the verbal advice he had received from Minter Ellison on 25 November 1998. 80. Paul Abela ("Abela") HIH's Group Tax Counsel was involved in the review of the 31 March 2000 APRA returns. During this review, Abela spoke to Lo who told him that the security interests held by banks that had issued the Cotesworth Letters of Credit were in the style of negative pledges. Abela understood from this that the assets did not need to be disclosed in the APRA returns. 81. The view that the pledging of assets in support of the Letters of Credit created an interest in the nature of a negative pledge was inconsistent with Lo's own knowledge as to the security required by financial institutions for Letters of Credit and with Lo's understanding of the nature of a negative pledge; it was also inconsistent with the documentation Lo had signed on behalf of HIH on 25 November 1998. It was inconsistent with the advice Lo had received from Minter Ellison. It was also inconsistent with Lo's subsequent dealings with Westpac and SG regarding variations to the security arrangements relating to the Letters of Credit, including SG's requirement in November 1999 to move to a fully secured position. 82. Lo adverted to the possibility that the view that both he and Fodera expressed may have been wrong. However, he made no further enquiries to satisfy himself as to the accuracy of that view including seeking the advice or assistance of APRA, as he had done in relation to other issues arising under the Act. 83. When signing CIC's APRA Quarterly Return for the three month periods ending 31 March 1999, 30 June 1999, 30 September 1999, 31 December 1999 and 31 March 2000 and when signing CIC's APRA Annual Return for the period ending 30 June 1999, Lo was aware of the possibility the assets pledged by CIC had to be excluded for solvency purposes and were not a negative pledge or created only a contingent liability. However, despite his advertence to the possibility that the view expressed by Fodera was wrong, and to the consequence that CIC's assets may not have been admissible for regulatory solvency purposes, Lo chose to proceed on each occasion to sign the APRA Returns. Lo's state of mind in the relevant period 84. In addition to Lo's state of mind as identified in paragraphs 73 to 83 above, Lo was aware at the time of signing the Quarterly and Annual returns that the proper classification of the securities pledged was necessary to the licensed insurer's ability to meet the minimum solvency requirement. He knew that in each case there was no disclosure of and exclusion of assets pledged by CIC to support the Cotesworth Letters of Credit. 85. Lo signed both the Westpac and SG documentation that imposed the requirement that securities be pledged in Austraclear to support the Cotesworth Letters of Credit. Lo knew that CIC had pledged securities in support of the Letters of Credit provided to Cotesworth by Westpac and SG. 86. Lo was aware that the pledges constituted the secured component of the transactions with Westpac and SG. 87. Lo appreciated that the exclusion of the pledged assets meant excluding assets, that had a very considerable value (in fact between $108 million and $129 million); and that this was very likely to affect the solvency of the company or companies pledging the assets. 88. Lo understood the quarterly and annual return had a significant role in the assessment by the regulator of the long term viability of the licensed insurer 89. Lo understood the regulatory solvency requirements were applied to each general insurer entity within the HIH Group on an individual basis. 90. Lo was aware that a failure to meet the minimum solvency requirement raised the real risk that CIC may have been required to cease writing insurance business. Other matters 91. APRA was not informed, as it should have been, of the parlous financial position in 1999 of the authorised insurer CIC. CIC continued to carry on business as an insurer until the collapse of HIH in March 2001. Under the terms of the Act, CIC was in breach of the conditions required for continuing authorisation to conduct insurance business. 92. On or about 30 November 2000 CIC's Special Purpose Financial Report for the year ended 30 June 2000 (SBB027855) was lodged with ASIC. This Report discloses, inter alia, the amount of insurance business written by CIC during that twelve month period. 93. Page 13 of that Report states that, for the year ended 30 June 2000, CIO's gross written premium was $517,873,000. An insurer's gross written premium quantifies the total premiums on insurance underwritten by that insurer during a specific period, before deduction of outwards reinsurance claims. 94. In continuing to write insurance business while in fact in breach of the regulatory solvency condition, CIC contributed to the ever worsening financial position of the HIH group. At the winding-up of HIH on 27 August 2001, the deficiency of the group was estimated to be between $3.6 billion and $5.3 billion, making it one of the largest, if not the largest, corporate failure that Australia has experienced. Personal circumstances 95. Lo is 57 years old. He has no prior convictions. 96. Lo, through his legal advisors, offered to plead guilty to this offence following the offering of a record of interview but prior to the laying of any charge." ANNEXURE B Agreed statement of facts in respect of counts 3 and 4 MTN Programme entered into by FAI 1. On 30 May 1997, FAI Insurances Limited ("FAI") entered into a domestic and euro medium term note programme as Issuer, with Westpac Banking Corporation as Agent ("MTN Programme"). The MTN Programme had a maximum aggregate face value amount of US$150 million. The MTN Programme was established pursuant to a number of written agreements. 2. The MTN Programme was subscribed to US$75 million, with unsecured Notes being issued to overseas institutional investors. Westpac, as Agent, had the role of facilitating the management of the MTN Programme by receiving from FAI documents required to be produced from time to time and distributing those to each of the Noteholders. 3. The terms of the MTN Programme provided for Events of Default including in Condition 7.2(k) which in essence provided: (Financial covenants): any breach of the undertakings set out in 7.5 (Undertakings) without remedy within 7 days of FAI becoming aware of the breach, or being made aware by Notice from Westpac Hong Kong. 4. Condition 7.5 required FAI to procure at all times certain things (being the various undertakings referred to in Condition 7.2(k)), including at 7.5(a): (Group Shareholders' Funds) Group Shareholders' Funds (including minority or outside interests) of FAI and its consolidated subsidiaries will not be less than A$200 million. and at 7.5(d): (Auditors) Arthur Andersen, or a firm of similar standing, were to be appointed as auditors of FAI and were to certify annually that FA1 was in compliance with the financial undertakings in Condition 7.5 ("Auditor's Compliance Certificate"). 5. No Event of Default was taken to have occurred where the undertaking in Condition 7.5(a) was breached unless FAI remained in breach for 90 days after Notice of the breach from the auditors. 6. After an Event of Default occurred, and at any subsequent time, a Noteholder could declare all moneys owing under the MTN Programme to be immediately due and payable. 7. FAI also undertook to provide copies of the audited consolidated balance sheet and profit and loss account of FAI and its subsidiaries and the unconsolidated audited balance sheet and profit and loss account of FAI to Westpac. Westpac was required to make the accounts available to Noteholders. FAI was required to meet this obligation within 120 days after the close of the relevant accounting period. Acquisition of FAI by HIH 8. In September 1998 HIH Insurance Limited ("HIH") made a takeover offer for FAI, then a public company listed on the Australian Stock Exchange. The takeover was successful and the acquisition was completed in January 1999. 9. The MTN Programme was inherited by HIH when it acquired FAI and its subsidiaries. After the acquisition, FAI became a wholly owned subsidiary of HIH Investment Holdings Limited ("HIHIH"). HIHIH was itself a wholly owned subsidiary of HIH. 10. Following the acquisition of FAI the HIH Secretariat had responsibility for monitoring the MTN programme and its loan covenants. Fred Lo ("Lo") as Company Secretary had responsibility for the Secretariat. Robert Kelly ("Kelly"), Assistant Company Secretary, was also employed in the Secretariat and reported to Lo. Lo reported to Dominic Fodera ("Fodera"), Chief Financial Officer and a Director of HIH, HIHIH and FAI, who in turn reported to Raymond Williams ("Williams"), Chief Executive Officer and Director of HIH, HIHIH and FAI, who reported to the Board. Lo's role in the HIH Group 11. The HIH Insurance Group came into existence in 1995, when CE Heath Casualty and General Insurance Ltd acquired the CIC Insurance Group. Frederick Lo ("Lo"), who holds a Bachelor of Economics Degree from the University of Sydney, was CE Heath's Group Accountant from 1987 until 1991, and carried out a range of accounting and secretarial functions for the CE Heath Group between 1991 and 1995. In 1995 Lo became the Company Secretary for entities in the HIH Group, and he continued in that role until 2001. 12. From 1987 to 1995, Lo was responsible for the production of statutory accounts and the preparation of the consolidated group accounts. After early 1995, Lo's role mainly involved secretarial functions. Lo began reporting to Fodera in relation to the day to day operations of the Secretariat when Fodera became Chief Financial Officer in September 1995. 13. At 25 May 2001 Lo held 212,675 shares in HIH and did not sell any prior to the collapse. BREACH OF FAI'S DEBT COVENANTS Consolidated Accounts and Auditor's Compliance Certificate for year ended 30 June 1999 14. On 13 August 1999 Kelly sent a memo to Lo (S01164470) which advised him of financial covenants under the MTN Programme, in particular of the Group Shareholders' Funds A$200 million requirement, and of any Events of Default which could be triggered as a result of the proposed 30 June 1999 year end reporting. 15. A "Detailed Balance Sheet" (SBB260580), prepared by HIH for FAI and its subsidiaries for the year ended 30 June 1999 and dated 7 September 1999, shows that the Group Shareholders' Funds of FAI and its subsidiaries was A$80.973 million. It was therefore below the A$200 million required under Condition 7.5(a) of the MTN Programme. A Profit & Loss Statement was also prepared for FAI and its subsidiaries at this time. There is no evidence as to whether Lo received a copy of the Balance Sheet or the Profit and Loss statement. 16. As part of the audit of HIH's accounts for 1999, Arthur Andersen audited the accounts of the FAI Group. FAI Group's "Detailed Balance Sheet" and Profit and Loss statement referred to above were located in the 1999 Audit Working file of Arthur Andersen. There is no evidence as to whether Lo received a copy of the Balance Sheet or the Profit and Loss Statement. The Balance Sheet and Profit and Loss Statement were reviewed by the auditors. As at September 1999 the FAI Group Balance Sheet and Profit & Loss Statement were available but simply not in the format for sign off by the auditors. In August and September 1999, Arthur Andersen provided details of their audit fees for the year ended 30 June 1999 to Lo and to HIH's audit committee (S01133631, SBB279081, RC0087212). The total fees were $2,417,000, of which $626,000 related to the FAI Group (BRAM.0001.180 of RC0087212 and p. 72 of SBA194365). Communications in respect of the consolidated accounts of FAI for 1999 17. There were ongoing communications between the HIH Secretariat and Westpac Hong Kong in the latter part of 1999 and the early part of 2000 whereby Westpac, on behalf of the Noteholders, sought to obtain the relevant FAI consolidated accounts and an Auditor's Compliance Certificate (SO1012166), and HIH sought to obtain a waiver by the Noteholders of the requirement to produce the consolidated FAI accounts for the relevant period. Lo was aware of such communications either because they were directed to him or as a result of information provided by Kelly. 18. Some of the Noteholders expressed concerns to Westpac as to the information supplied at that time by HIH under the MTN programme, which consisted of unconsolidated accounts for the parent entity, FAI Insurances Limited, rather than the consolidated accounts for FAI and its subsidiaries, and which did not include an Auditor's Compliance Certificate (S01012165, S01012152). 19. Westpac communicated these concerns to HIH. Thereafter Kelly made inquiries with the Financial Services Division ("FSD") as to whether such accounts were available. Colleen Chapman ("Chapman") of the Financial Services Division advised Kelly that consolidated accounts for FAI had not been prepared. Shortly afterwards Chapman advised Kelly that since the acquisition by HIH, FAI and its subsidiaries were not required to produce consolidated accounts. (S01012188, S01012189) . HIH then sought the waiver of the requirements to produce the consolidated accounts and an auditor's certificate together with the consent of the Noteholders to accepting the consolidated accounts and Auditor's Compliance Certificate for HIH in substitution for those of FAI (SO1012138, S01012196). 20. On or about 26 April 2000 Westpac sent a fax (S01012198) to Kelly stating that the attempt to seek a waiver of the requirement for the consolidated accounts and Auditor's Compliance Certificate for FAI had not been achieved. Kelly was absent on leave in the period 20 April to 2 May 2000. Lo wrote a note on the document in the following terms "Rob — I think you have to ask FSD ("Financial Services Division") to prepare a set of FAl consolidated a/c's— unless you have other ideas." On 27 April 2000 Lo sent an email (SO1168320) to Kelly stating that he wanted to discuss matters with him when he returned including "FA/ consolidated accounts". 21. In the period from 27 April to 22 May 2000, Kelly liaised with Colleen Chapman ("Chapman") (FSD) for the purpose of providing FAI consolidated accounts, and had conversations with Gary Ho ("Ho") of Westpac Hong Kong, who was continuing to request those accounts. Further, while Kelly states that he did not inform Lo of each occasion, he did make Lo aware that Ho was continually requesting the said accounts. 22. On 16 May 2000 Kelly sent an email to Chapman (S01135047) and received a reply from Chapman on 22 May 2000, which advised that the net assets (or Group Shareholders' Funds) of the FAI Group was A$81 M (SO1119079). Kelly states that on receiving Chapman's email he went to see Lo and told him that the net assets (or Group Shareholders' Funds) of the FAI Group was A$81 M. Kelly states that Lo told him to organise a meeting with Fodera and to ask Chapman to prepare the consolidated profit and loss for the FAI Group by company, as Fodera may want to know the loss to 30 June 1999. Kelly then . sent an email to Chapman requesting advice as to FAI's consolidated loss for the 12 months to 30 June 1999 (S01135046). 23. By early May 2000, Westpac Hong Kong had thus advised Kelly and/or Lo on a number of occasions that FAI had not provided the consolidated balance sheet and profit and loss account of FAI and its subsidiaries for the year ended 30 June 1999, and had not supplied the Auditor's Compliance Certificate. FAI did not at any time thereafter provide the necessary accounts or the Certificate. Meetings at HIH 24 May 2000 24. At 10 am on 24 May 2000 Lo and Kelly met with Fodera. At the meeting Fodera was given a copy of Chapman's email dated 22 May (SO1119079). Fodera was told that there was a problem with the FAI consolidated accounts for 1999, as the MTN Programme required the FAI Group's net assets to be A$200 million and its net assets were only A$81 million. According to Kelly, Fodera instructed Lo and Kelly that "... we will not provide Westpac with a copy of the FA/ June 1999 Consolidated Financial accounts. We will only provide Westpac with the H/H Insurance Financial accounts to 30 June 1999 and if Westpac aren't satisfied with that, we will provide them with some sort of letter of comfort or guarantee. Still try and obtain from the noteholders approval to alter the agreement to substitute the financial accounts for FA/ with H1H's financial accounts. Fred arrange a meeting with Westpac to tell them. Fred, 1 want you to report back to me after the meeting." Fodera also instructed Lo and Kelly to advise Westpac that the reason the FAI accounts could not be provided was that it would be too costly to get FAI's consolidated numbers reconstructed and have the accounts audited. 25. At about 10.30am on 24 May 2000 Bill Howard, General Manager Finance of HIH, states that he attended a meeting with Fodera and Lo. Howard states that prior to the meeting Chapman showed him her email to Kelly of 22 May and told him that the FAI Group was in default in relation to the Group Shareholder's Funds. Howard states that he told Fodera that he had been speaking to Chapman and that there was a breach of one of the debt covenants. Howard says Fodera responded "Don't worry, the issue is in hand. We have started a process at the moment with the Noteholders in regards to the accounts." Meeting with Westpac 26 May 2000 — Lo and Kelly 26 At about 4pm on 26 May 2000 Lo, accompanied by Kelly, met Mark John and Lucy Chiu of Westpac Sydney (SO1012391). At the meeting Lo falsely advised Westpac, in words to the effect, that HIH could not produce the consolidated accounts of FAI and its subsidiaries, "... because the company structure has changed, the accounts cannot be reconstructed and it would be too costly." 27. During the meeting Lo offered for HIH to provide its own consolidated accounts, in lieu of production of FAI's, and a Letter of Comfort to Noteholders under the MTN Programme. 28. For the year ended 30 June 1999, therefore, there was a breach by FAI of the undertaking to maintain Group Shareholders' Funds above A$200 million. HIH's consolidated accounts to 30 June 1999 did not disclose that this breach had occurred. Further, FAI did not provide the Auditor's Compliance Certificate and did not remedy the non-compliance after notice from the Agent that the Certificate was required. This potentially constituted an Event of Default. 29. For the year ended 30 June 1999, FAI was therefore exposed to the risk of a Noteholder acting on the occurrence of an Event of Default and presenting the Note to Westpac Hong Kong and the Note becoming due and payable. In that event the Group was vulnerable to cross defaults in other facilities. Pre-Audit Committee Meeting, 7 September 2000 30. As at 7 September 2000, Group Shareholders' Funds of FAI and its subsidiaries, for the year ended 30 June 2000, was still below the A$200 million required under Condition 7.5(a) of the Notes, and was in fact some A$32.8 million. This was known to the HIH Secretariat and to the auditors of HIH, Arthur Andersen, by mid September 2000. 31. On 7 September 2000 Williams attended a meeting with Cassidy, Fodera, John Buttle (Arthur Andersen) and Jon Pye (Arthur Andersen) in an office on level 42 of HIH's offices. Buttle and Pye were audit partners of Arthur Andersen. Board and Audit Committee meetings, 8 and 12 September 2000 32. On 8 September 2000, a meeting of the Board of HIH commenced at 12.45pm and was adjourned at 3.45pm to resume at 2.00pm on 12 September 2000. On 12 September 2000, Lo attended the Board meeting re-commenced at 2pm and adjourned at 3.15pm. An Audit Committee meeting was held at 3.20pm and concluded at 4.35pm. The Minutes of the Audit Committee meeting (SO1123587) show that in addition to the members of the Audit Committee, Lo was present and all of the other members of the Board of HIH were also in attendance. This included Williams, Cassidy and Fodera. Also present were other officers of HIH as well as Buttle and Pye. 33. The Minutes of the Audit Committee meeting record that Buttle tabled a paper titled "Summary of 30 June 2000 Audit of Financial Statements", "and advised that the major audit issues, including outstanding matters yet to be resolved, were summarised therein". Copies of the paper by Arthur Andersen were distributed to those present in the meeting, including Lo (SBB023001). The last page of the paper "Summary of 30 June 2000 Audit of Financial Statements"; with a heading "Outstanding Audit Matters", refers to "Compliance with debt covenants". 34. Buttle and Pye took the persons present at the meeting through the issues identified in the paper. This included addressing the issue of compliance by FAI with debt covenants. 35. The Minutes of the Audit Committee meeting also record that Williams tabled a Financial Statements Questionnaire (SBB055964), in respect of the financial statements for the year ended 30 June 2000. The content of the Questionnaire was prepared by the Auditors. The answers to the Questionnaire were compiled by Lo from copies of Questionnaires completed by each group manager. Williams and Fodera signed the completed Questionnaire. The Questionnaire was accepted and countersigned by Geoffrey Cohen, the Chairman of the Audit Committee. 36. On page 4 of the Questionnaire, the question "Have all debt covenants in force during the period been complied with?" was answered "Yes". Westpac Meeting 37. During October 2000 negotiations were ongoing between HIH and representatives of Westpac regarding a review of HIH's banking arrangements. 38 On 11 October 2000 Lo, Williams and Fodera met with representatives of Westpac at the offices of HIH. Fodera and Lo again met Westpac on 12 October 2000. No mention was made at that meeting of the MTN Programme. The meeting with Westpac on 12 October occurred after the Audit Committee meeting of that day referred to below. Audit Committee meeting, 12 October 2000 39. On 12 October 2000, an Audit Committee meeting was held preceding a meeting of the Board of Directors of HIH. The Minutes of the Audit Committee meeting (SBB054750) show that in addition to the members of the Audit Committee, Lo was present and other members of the Board of HIH were also in attendance, including Williams, Fodera and Cassidy. Representatives of the auditor, Arthur Andersen, (Buttle, Pye and John Fanning) and Robert Martin, HIH Financial Controller were also present. 40. Andersen prepared a presentation for the Audit Committee meeting (S01137012). The presentation document was not provided to those present at the meeting however Buttle and Pye took those present through the issues identified in the presentation. The Debt covenant breaches are dealt with on pages 0008 and 0009 of the presentation. Page 0008 of the presentation includes the following: "Facility Undertakings Breach Action $US 75m Shareholder yes Potential funds >$200m (1999 & 2000) redeemable preference shares" The issue of the debt covenant breaches was discussed at the Audit Committee meeting of 12 October 2000 including the potential solution for the breach of the Group Shareholders' Funds covenant identified as at 30 June 2000. 41. Certain persons present at the Audit Committee meeting including Martin and Pye took notes of the meeting. The notes of Martin include the following: "Debt covenant breach for FAI", "Redeemable preference shares from FAI $200m to Non-Insurance A/c's", "$200m with debt then need legal opinion", "Net asset $35M Need to be $200M [therefore] Need $170M", "Redeemable Pref. Shares — Andersen Legal & Abela". 42. Pye's note of that meeting records: "Debt covenants- FAI legal advice as to whether preference shares can be issued for a receivable." Board Meeting, 12 October 2000 43. The Minutes of the Meeting of the Board of Directors of HIH on 12 October 2000 show the Financial Statements Questionnaire, presented during the 12 September 2000 meeting, was tabled during this meeting and it was resolved that it be accepted and signed by Cohen as Chairman of the Board. Lo was present at the Board meeting. 44. On 12 October 2000, following the Board Meeting, Lo sent an email (S01135028) to various persons including Fodera which includes the following: "1. FAl US$75 MTN AA has put forward an idea to boost the net assets of the FA/ consolidated accounts through the issue of redeemable preference shares by FAI Insurances Ltd to UAS. This approach his been agreed by the board subject to legal sign-off which we have asked AA to obtain from Andersen Legal. On the tax side, could you liase with Alf Capito to obtain a tax sign-off to ensure there are no major problems... I'd appreciate your advice that both 1 and 2 have been resolved ASAP as the board is anxious to finalise the accounts." Facsimile to Westpac Hong Kong, 13 October 2000 45. On 13 October 2000, Lo sent a facsimile to Gary Ho of Westpac (R00015011) which included the following: "You will see from the above that the FAI business is very much alive and active well past the maturity date of the FRN's. FAI is and will be able to fulfil its obligations under the terms of these FRN's. Indeed we are in discussion with Westpac, Sydney with a view to issuing a letter of comfort by HIH to alleviate any concern that the FRN holders may have. " (FRN Holders were the Noteholders under the MTN Programme) Legal Advice from Andersen Legal 46. Fodera received a letter of advice from Andersen Legal dated 13 October 2000 (SBB266898) on the following issue: "whether FAI Insurances Limited (ACN 004 304 545) ... is capable of issuing redeemable preference shares for consideration other than immediate payment of cash." 48 The advice from Arthur Andersen provided an analysis of FAI's capacity to issue the shares under Corporations Law. The print date on the document (SBB266898) is 16 October 2000. Management representation letter to Arthur Andersen 48. The management representation letter, dated 16 October 2000, was signed by Williams, Cassidy and Fodera and addressed to Arthur Andersen (S00069530). The fax transmission imprint on the management representation letter (S00069530) shows it was faxed from HIH at 5.25pm, 16 October 2000, and from the Ritz Carlton at 8.25am,(USA time) 16 October 2000. At the time Williams was a guest at the Ritz Carlton in San Francisco. 49. The management representation letter was drafted by Arthur Andersen and was prepared "in connection with (Arthur Andersen's) audit of the financial report of HIH Insurance Limited and Controlled Entities for the year ended 30 June 2000. The management representation letter confirmed, on the part of the signatories, "to the best of our knowledge and belief, as of the date of the letter, the following representations made to you during your audit", including: "The company and its controlled entities have complied with all aspects of the contractual agreements that would have a material effect on the financial report in the event of noncompliance. In particular, the company and its controlled entities have complied with all debt covenants and financial undertakings except as specifically disclosed to you and, in respect of the events of non-compliance communicated to you (the US$75 million FA/ facility), the company and its controlled entities have been in contact with the relevant debt providers and, in the opinion of the directors, these events of non-compliance will not result in an early call for repayment of the related debt facilities. The event of non-compliance has subsequently been remedied by the subscription of $200 million in subordinated redeemable preference shares." This paragraph was drafted by Buttle on information provided by executives of HIH including Fodera and following identification of a possible solution to the 30 June 2000 breach of the Group Shareholders' Funds covenant. There is no evidence that Lo saw this letter. 50. As at the date of the management representation letter, HIH had not disclosed, and did not subsequently disclose, to Westpac Hong Kong or Sydney that Group Shareholders' Funds of FAI and its subsidiaries as at 30 June 1999 and 2000 was below A$200 million, and that FAI was therefore in breach of Condition 7.5(a). Further, non-compliance with Condition 7.5(a) of the MTN Programme had not been remedied at the date of the management representation letter by the issue of redeemable preference shares. 51. Lo was aware that the Auditors were awaiting a management representation letter before providing the audit report for 2000 (SBB210206). LETTER OF COMFORT AND AWARENESS TO NOTEHOLDERS 52. The Letter of Comfort had been foreshadowed in the meeting between Lo and Kelly and Westpac Sydney on 26 May 2000, referred to in paragraphs 26 and 27 above. 53. On 17 October 2000 Lo and Kelly met with Chiu and Cathy Black of Westpac regarding the MTN Programme (SO1012390). Again Westpac was not advised of any breach of covenants. 54. On 19 October 2000 a "Letter of Comfort and Awareness", addressed to the Noteholders and dated 18 October 2000 (S01012104), was signed by Williams and signed by Lo at or about the same date. The Letter of Comfort was then forwarded to Westpac Hong Kong and copied to Westpac Sydney, accompanied by: (a) A letter issued by HIH outlining the details of the initial acquisition of FAI and the recently announced underwriting agency agreement with Allianz Australia Limited; (b) an abridged corporate structure of the HIH Group; (c) HIH and Controlled Entities General Purpose Financial Report for the year ended 30 June 2000. 55. The Letter of Comfort provided the following: "We advise that [HIH] is the beneficial owner of 100% interest in [FAI]. HIH currently has no intention of diluting its interest in FAI. … We hereby advise you that in the event we propose to reduce our shareholding in FAI at any time prior to the maturity of the Notes, we will provide you with reasonable notice and, if you request, we will use our best endeavours to cause FAI to repurchase the Notes. It is our policy that our subsidiaries be managed and operated in such a way that they meet their obligations. We follow this policy with respect to FAl and we will use our best endeavours to prevent FAI from entering into any financial commitment which it cannot or could not see its way clear to fulfil." 56. On 13 November 2000, Westpac distributed the Letter of Comfort and accompanying documents to the Noteholders under the MTN Programme, with further advice that HIH was liaising with the auditors Arthur Andersen for the issue of the Auditor's Compliance Certificate for the year ended 30 June 2000, and would forward the Certificate to Westpac Hong Kong, when received from the Auditors, for distribution to the Noteholders (S01131215). 57. At the time of signing the Letter of Comfort Lo was aware that FAI had been in breach of the MTN Programme through a shortfall in required FAI Group Shareholder's Funds. ISSUE OF THE PREFERENCE SHARES 58. On or about 26 October 2000, Fodera received a further letter of advice dated 25 October 2000 from Andersen Legal regarding the issue of the preference shares. (SBB266899). The print date on the document is "26/10/00". Included with this advice were drafts of documents necessary to effect the issue of the preference shares. 59. FAI issued the redeemable preference shares on or about 24 November 2000 by documents falsely bearing the date 23 June 2000. Lo witnessed the Application for Preference Shares dated 23 June 2000 (S01100031). Further Lo signed as secretary of FAI Insurances Limited the 200,000,000 Cumulative Redeemable Preferences Share Certificate, dated 23 June 2000 (SO1051007). IMPORTANCE OF THE FACILITY TO HIH 60. As at 30 June 2000, the FAI US$75 million MTN Programme was the largest external borrowing of the HIH Group. An event of default under the US$75 million MTN Programme was likely to trigger defaults in other HIH banking facilities. 61. By reason of the events set out above the Noteholders were denied the opportunity to consider whether they could, and if so would, exercise their contractual entitlements and take steps with a view to demanding repayment of the whole of the amount then owed pursuant to the MTN Programme. ISSUE OF THE ANNUAL ACCOUNTS 62. On or about 13 September 2000 HIH had advised the ASX its accounts would be lodged around the 20 October 2000. HIH had an extension to lodge accounts with ASIC to 31 October 2000. The accounts of HIH were dated 16 October 2000 although signed by Williams and Geoffrey Cohen on a later date probably 19 October 2000. 63. On or about 11 January 2001, HIH provided to Westpac for distribution to Noteholders, copies of the FAI and Controlled Entities Special Purpose Financial Report to 30 June 2000 ("FAI Financial Report"). The FAI Financial Report reflected the issue of the 200 million redeemable preferences shares as at 30 June 2000. Further, the FAI Financial Report did not contain comparative figures for 30 June 1999. Consequently, the Noteholders were not provided with information concerning the FAI Group Shareholders' Funds as at 30 June 1999. APPOINTMENT OF LIQUIDATOR 64. On 15 March 2001, when the Provisional Liquidators were appointed to HIH, the Noteholders had not been repaid any monies the subject of the MTN Programme. Further Mr Anthony McGrath, one of the liquidators, has stated that as at 31 March 2005 the Balance Sheet of FAI Insurances Limited records the following: TOTAL Assets (not specifically charged) as $42.755 million. TOTAL Liabilities (including MTNs) as $2.099 billion. Therefore any recovery of funds by Noteholders will be negligible at best. PERSONAL CIRCUMSTANCES 65. Lo is 57 years old. He has no prior convictions. 66. Lo, through his legal advisors, offered to plead guilty to these offences following the offering of a record of interview but prior to the laying of any charges." 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.