ASIC v Rich
[2005] NSWSC 149
•7 March 2005
Reported Decision:
53 ACSR 110
(2005) 23 ACLC 430
New South Wales
Supreme Court
CITATION: ASIC v Rich [2005] NSWSC 149
HEARING DATE(S): Various dates between 6 September 2004 and 7 December 2004, then written submissions, and oral submissions on 4 and 7 February 2005
JUDGMENT DATE :
7 March 2005JURISDICTION: Equity
JUDGMENT OF: Austin J
DECISION: Report inadmissible as a whole; in the alternative, to be excluded as a whole on discretionary grounds
CATCHWORDS: EVIDENCE - expert opinion evidence - forensic accountant's report on financial position and board reporting in complex corporate group - whether report, as a whole, admissible under s 79 as opinion evidence wholly or substantially based on specialised knowledge - whether report should be excluded on discretionary grounds under s 135 - applicability of Makita principles to an accountant's report - whether expert's prior relationship with litigant, involving access to additional information and formation of opinions for another purpose, rendered expert's evidence tendered by that litigant inadmissible under s 79 or open to exclusion under s 135 - whether lack of independence rendered expert opinion evidence inadmissible or open to exclusion
LEGISLATION CITED: Australian Securities and Investments Commission Act 1989 (Cth), ss 19, 68
Corporations Act 2001 (Cth), ss 180, 206C, 206E, 1317H
Evidence Act 1995 (NSW), ss 55, 56, 60, 76, 79, 135, 137
Supreme Court Rules, Pt 36 r 13C and Sch KCASES CITED: Adler v Australian Securities and Investments Commission (2003) 46 ACSR 504
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Sebastian v Neufeld (1995) BCJ 1684
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South Australian River Fishery Association v South Australia (2003) 84 SASR 507
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Whitehouse v Jordan [1981] 1 WLR 246PARTIES: Australian Securities and Investments Commission (P)
John David Rich (D1)
Mark Alan Silbermann (D4)FILE NUMBER(S): SC 5934/01
COUNSEL: R B S Macfarlan QC with J P A Durack SC, N J Beaumont and J E O'Sullivan (P)
D L Williams SC with M J Steele and S A Goodman (D1, D4)SOLICITORS: Jan Redfern, Solicitor for Australian Securities and Investments Commission (P)
Joanne Kelly, Solicitor (D1, D4)
LOWER COURT JURISDICTION:
INDEX
1. The issue of admissibility of the Carter Report 2. ASIC’s case against the defendants 3. An overview of the Carter Report 4. The defendants’ objections to the Carter Report, in summary 5. Facts 5.1 PwC’s original retainer 5.2 The expansion of PwC’s role in the investigation 5.3 Ms Redfern’s e-mail of 19 October 2001 5.4 The period from 18 October to 5 November 2001 5.5 The period from 5 to 21 November 2001 5.6 The presentation of the 21 November 2001 report 5.7 A comparison of the 21 November report and the Carter Report 5.8 The period from 22 November 2001 to 3 December 2001 5.9 The period from 4 to 12 December 2001 5.10 The period from 13 December 2001 to 1 February 2002 5.11 Retainer of Mr Carter as an expert witness 5.12 Preparation of the Carter Report, and concurrent work for ASIC, up to the draft of 9 April 2002 5.13 The draft report of 9 April 2002 5.14 The revision of the 9 April draft 5.15 The “re-forming” of Mr Carter’s opinions 5.16 Finalisation of the Carter Report 5.17 Specific problems with the Report 5.18 (1) Dates upon which management accounts were “finalised” 5.19 (2) Comparison.xls 5.20 (3) Ms Randall’s “deferred payments lists” 5.21 (4) “Profile summaries” and ”collection profile summaries” 5.22 Allegations of lack of full and frank disclosure 5.23 Lack of records 6. Some principles of admissibility of expert opinion evidence 6.1 Opinions, facts and assumptions 6.2 Specialised knowledge 6.3 Opinions based on specialised knowledge 6.4 Disclosure by expert of factual basis of opinions 6.5 Disclosure by expert of his or her reasoning process 6.6 Must the report refer to information considered and rejected or discounted? 6.7 Opinions based on inadmissible evidence 6.8 Expert’s delegation and reliance on others 6.9 Considerations relating to expert’s independence 7. Application of these principles to the Carter Report 7.1 How should the intermediate propositions in the Carter Report be categorised? 7.2 What is Mr Carter's specialised field of knowledge? 7.3 Are the opinions expressed in the Carter Report based on Mr Carter's specialised knowledge? 7.4, 7.5, 7.6, 7.7, 7.8 and 7.9 Does the Carter Report adequately identify the factual basis for Mr Carter's opinions? Does it adequately disclose the reasoning upon which Mr Carter's opinions are based? Does it fail to identify factors considered but discarded? Are Mr Carter's opinions based on inadmissible facts? Was there impermissible delegation to assistants? Is it objectionable by reference to considerations going to independence? 8. Should the Carter Report be excluded under s 135? 9. Conclusions
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
AUSTIN J
MONDAY 7 MARCH 2005
5934/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V JOHN DAVID RICH & ORS
JUDGMENT (Admissibility of Carter Report)
HIS HONOUR:
1. The issue of admissibility of the Carter Report
1 In my reasons for judgment delivered on 16 February 2005, concerning what the parties have called "the search warrant issues" (ASIC v Rich [2005] NSWSC 62), I explained that most of the four months of the hearing of this case had been taken up with two matters, namely the search warrant issues and the admissibility of the expert opinion evidence of Paul Carter of PricewaterhouseCoopers ("PwC"). I outlined the course of the hearing in that judgment.
2 As I explained there, Mr Rich and Mr Silbermann ("the defendants") have, through a process of calling for production of documents, explored the history of PwC's involvement with One.Tel and with ASIC before Mr Carter was retained to prepare a report for use in the present proceeding. Those issues were pursued during the lengthy cross-examination of Cassandra Reynolds, now a partner at PwC, who at the relevant times was a senior employee of the firm working with Mr Carter. Later Mr Carter himself gave lengthy evidence. Evidence has so far been taken in the proceeding generally, though largely directed to questions of admissibility, with the exception of the evidence of Mr Carter, which was taken on the voir dire. I ruled, however, in a published judgment ([2004] NSWSC 1062 (10 November 2004)), that his evidence once given was evidence in the proceeding.
3 ASIC wishes to tender in evidence the principal report of Mr Carter dated 31 May 2002 ("the Carter Report"), together with some affidavits and other reports by Mr Carter, and 12 volumes of documents exhibited to his evidence. The defendants have objected to the tender of Mr Carter's evidence, submitting that the evidence is inadmissible, and alternatively, if it is strictly admissible, that it should be excluded by the court in the exercise of its discretion under s 135 of the Evidence Act 1995 (NSW) ("Evidence Act").
4 The issue to be dealt with now relates to the Carter Report alone. If I had decided not to exclude the Report as a whole from evidence, it would have been necessary to decide questions of admissibility of the Report on what has been called, in submissions, a "paragraph-by-paragraph" basis. But for reasons I shall endeavour to explain, I have decided that the Carter Report is inadmissible, and further that it should be wholly excluded by it from evidence in exercise of the discretion conferred on me by s 135.
5 In their written submissions, the defendants said they anticipated that a ruling on the Carter Report would be readily interpreted and applied mutatis mutandis to the other reports and affidavits of Mr Carter. That is probably correct, but I shall give ASIC the opportunity to make further submissions, if it wishes, as to whether any of the other evidentiary material produced by Mr Carter should stand on a different footing. In the meantime, I shall not make findings of fact in respect of the circumstances surrounding preparation of his other reports, which have been addressed in evidence and submissions. I am in a position to make the requisite findings readily, if called upon.
6 The defendants' principal written submission dated 6 December 2004 (marked DS 37) is a 171-page document plus some annexures (including a schedule comprising a detailed evidentiary review of 66 pages). DS 38 is the defendants' index to their bundle of cases. ASIC provided a general submission dated 8 December 2004 (AS 39, 33 pages plus annexures), and then submissions in two tranches responding to DS 37, marked AS 40 (11 pages) and AS 41 (34 pages). ASIC also responded to the evidentiary schedule to DS 37, in a submission marked AS 42 (10 pages). The defendants made a written submission in reply, marked DS 39, which was in three parts (comprising 28, 32 and 6 pages respectively). I was provided with written submissions on some other matters, namely: AS 43 (ASIC's short supplementary note on paragraphs 156 and 157 of DS 37 - 3 pages), AS 44 (a four-page table in which ASIC responds to some submissions of the defendants on Mr Carter's report of 21 November 2001), DS 40 (the defendants' two-page table summarising PwC work hours) and DS 41 (the defendants' four-page submission on Elliott v Ivey [1998] NSWSC 116). DS 42 is a document headed "PwC task list". The written submissions were supplemented by oral submissions heard on 14 and 15 December 2004.
7 I have recorded the submissions that I have received and considered for two reasons: one, to make sure that nothing has been overlooked; and the other, to demonstrate that so much effort has been put into the issue of admissibility of the Carter Report that, inevitably, my judgment responding to that work is a lengthy one.
8 It is unusual that so much time in the final hearing should have been devoted to the hearing and determination of issues of admissibility of evidence. But, as will be seen, the Carter Report is a central plank of ASIC's case against the defendants, and its removal is likely to cause substantial damage to the structure of the case. Sometimes it is feasible and fair, where difficult questions of admissibility are raised about important evidence, to reserve the decision on admissibility until the conclusion of the final hearing. To do so would be unfairly prejudicial to the defendants in this case, because the conduct of their defence will be very significantly affected by the status of the Carter Report and the other Carter evidence. To leave the evidentiary status of Mr Carter's evidence unresolved during the hearing would create the situation described by Heydon JA in Rhoden v Wingate [2002] NSWCA 165 at [60]:
- "… the court and the parties would be confronted by an ever-changing sea in which items of evidence slither about indecisively with questions about ultimate admissibility hanging over their heads. That would lead to even more uncertainty and confusion, in difficult trials, than that which is inevitably generated by conflicting bodies of evidence the weight of which is hard to evaluate."
9 It is appropriate to begin by briefly outlining the case that ASIC wishes to make out against the defendants at the hearing, for two reasons: first, some of the defendants' submissions depend upon understanding the nature of ASIC's pleaded case; and secondly, the outline will show the forensic importance of the Carter Report and explain the significance, to ASIC's case, of certain documents used by Mr Carter which have been the subject of evidence and submissions on the matter before me now.
2. ASIC's case against the defendants
10 These are civil proceedings brought by ASIC under the Corporations Act against four defendants, relating to the failure of One.Tel Ltd at the end of May 2001. The first defendant, Mr Rich, was one of the joint managing directors of One.Tel. The second defendant, Mr Keeling, was the other joint managing director. The third defendant, Mr Greaves, was the chairman of directors of the company. The fourth defendant, Mr Silbermann, was the finance director. Mr Keeling and Mr Greaves have been the subject of orders so that the proceeding is no longer continued against them. The remaining defendants are Mr Rich and Mr Silbermann.
11 This brief outline of ASIC's case against the defendants has been taken principally from ASIC's pleading (the Third Amended Statement of Claim), the opening of the case by senior counsel for ASIC and ASIC's detailed chronology (marked AS 1). No part of the case has been proven, at this stage, and my account is not intended to be, or to imply, any findings of fact or any decisions on the admissibility of evidence. It is not a full account because I have limited it to those parts of senior counsel's opening that relate to evidence given by Mr Carter and the documents to which he refers.
12 ASIC seeks declarations of contravention of s 180 of the Corporations Act, which requires directors and other officers of a corporation to act with a reasonable degree of care and diligence. It seeks orders under ss 206C and 206E prohibiting the defendants from managing corporations, and orders under s 1317H that they pay compensation to the company representing the loss which the company suffered as a result of the contraventions which ASIC alleges, in an amount of approximately $92 million.
13 ASIC's complaints, which have been pleaded and particularised in detail, relate to the period from 1 January to 17 May 2001. In broad summary, ASIC complains that the defendants:
· failed to take reasonable steps to ensure that the board of directors was aware of various financial circumstances affecting the One.Tel Group;
· withheld information from the board as to those financial circumstances;
· to the extent that they were unaware of the financial circumstances, failed to take reasonable steps to apprise themselves of them;
· failed to recommend the appointment of an administrator at appropriate times;
· failed in a number of respects relating to the supervision of the company's operations - failure to monitor management, assess the financial position and performance of the company, ensure that appropriate systems were established, and see that the cash reserves of the company were appropriately maintained.
14 In the case of Mr Rich, there is an additional allegation, namely that he was involved in the issue of press releases on 27 February and 4 April 2001 relating to the financial position of the company and that there was no reasonable basis for the statements made in those releases.
15 To a large extent, ASIC's case is based on documents. Twelve volumes of documents are exhibits to Mr Carter's evidence, and there are another six volumes of documents in ASIC's tender bundle. ASIC also proposes to read affidavits by various witnesses, who are to be called for cross-examination, including some non-executive directors of One.Tel (James Packer, Lachlan Murdoch and Peter Howell-Davies), some witnesses who were overseas One.Tel officers, and a One.Tel treasury manager (Ms Randall). There is to be evidence by some of these witnesses about conversations during which one or other of the defendants are alleged to have made representations to individual directors about the strength of the company's financial position and cashflow, evidence about the financial position of the One.Tel Group's UK business, and evidence about a transfer of $26 million from the UK business at the end of February 2001 to meet the cash needs of the Australian operations. There is to be evidence from Ms Randall about her discussions with Mr Hodgson, one of the company's general managers, on a daily basis as to whether she should release significant cheques for payment. But the principal evidence about the financial position of One.Tel and the significance of the documentary records ("principal" in the sense that it is proffered as a systematic and comprehensive analysis of the financial position at key times) is intended to be given by Mr Carter.
16 ASIC wishes to show, relying on documentary records including the annual report for the year to 30 June 2000 and board reports, that by 31 December 2000 the Group's cash balance had been reduced to a third of the level at which it stood on 30 June, and that it was critical to the survival of the company that predictions made to the board of a significant turnaround in its fortunes, both as to earnings and cashflow, be achieved. ASIC has submitted that those circumstances required "the utmost vigilance" to be exercised by the defendants in relation to the Group's financial position and performance and, in particular, in relation to its cash and earnings, and also required the defendants to observe "the utmost candour" in dealing with the board on matters concerning the Group's financial position and performance.
17 In his opening of the case, senior counsel for ASIC took the court through a substantial number of documents which, he said, demonstrated the financial deterioration of the Group in the period from January to May 2001. In developing the case, senior counsel punctuated his remarks by references to Mr Carter's evidence. For example, he took the court to the January flash report (the flash reports were summary financial reports provided to the directors each month). Senior counsel said it showed that the Group cash balance at the end of January was $86 million against a forecast of $85 million, but he informed the court that Mr Carter would give evidence to the effect that the actual balance, after making adjustments for pledged funds and unpresented cheques, was only $71 million; and moreover, on a Group basis there were overdue creditors at the end of January in the sum of $74 million. ASIC intends to submit that, by presenting the figures in the flash report without adjustment, the defendants represented to the directors that there was a significant cash balance which, by inference, was available as a buffer, but in reality there was no such buffer (T 57-8).
18 Monthly management accounts were prepared, but it seems there will be issues as to whether they were prepared on a timely basis. ASIC intends to rely on the evidence of Ms Randall to establish that from mid-February until after 17 May 2001 she prepared cashflow spreadsheets on a daily basis, recording actual and forecast cashflow, which (it will contend) were available to the defendants. Therefore, it will contend, the means were available for management to monitor the cashflow position closely, and if the defendants had done so, the picture that would have been revealed would have been very different from what was conveyed to the board and to the public through stock exchange announcements. The Carter Report makes statements about the untimely production of the management accounts for January, February and March 2001.
19 ASIC proposes to rely on the March cash forecast, prepared by Ms Randall on about 20 February, predicting an overall negative net cash position of $24 million in respect of the Australian operations. The Carter Report identifies some matters which in fact improved the March cashflow, including the $26 million transfer from the UK, $17.5 million creditor deferrals beyond what was contemplated by Ms Randall, and $3.1 million in higher receipts. Even so, ASIC will lay emphasis on Ms Randall's evidence which, it will say, shows that as at 20 February the person responsible for managing the cashflow situation of the Australian operations was forecasting that the company would completely run out of cash by the end of March.
20 Ms Randall is to give evidence that, after conversations with Mr Silbermann, she adopted the practice of preparing additional documents, one of which was a "deferred payments listing" recording the company's debts to creditors she had been instructed to exclude from her cashflow forecasts, and cashflow variance reports which she prepared for daily discussions with Mr Silbermann. Ms Randall's reports showed, for example (according to ASIC's case), that as at 20 March it was expected that the cash balance for the Australian operations would be $28.3 million at the end of March. By the end of March the actual closing balance was $22.4 million.
21 ASIC wishes to put before the court evidence of a voicemail left by Mr Keeling on 20 March 2001 and, it alleges, heard by Mr Rich and Mr Silbermann, in which it appears that Mr Keeling refers to Ms Randall's figures as identifying a "$16 million hole", and expresses concern as to whether he could reassure Mr Packer that the cashflow forecast for March would be met. ASIC will say that this voicemail contains evidence of a concerted plan to avoid or delay payment of debts to carriers who were in financial difficulties, on the apparent assumption that those carriers would be in a weaker position to protect their interests than normal creditors. ASIC will also seek to rely, for this purpose, on an e-mail dated 27 March 2001 which is described as "Belly Up Carrier Campaign.doc".
22 ASIC proposes to rely on the Carter Report for Mr Carter's criticisms of the February flash report, including his assertion that the digital fixed wire results were based on budget figures rather than actual figures, and his assertion that the Group cash balance stated in the flash report to be $64 million did not take into account pledged amounts, unpresented cheques and amounts overdue to creditors, which (according to Mr Carter) brought the cashflow well into negative territory.
23 To support its contention that there was no reasonable basis for Mr Rich to participate in the announcement to the market on 27 February 2001, ASIC proposes to rely on the analysis of Australian aged creditors lists in the Carter Report (including Appendix E, which analyses various deferrals in payments to creditors). ASIC contends that Mr Carter's analysis of aged creditors shows that $29.2 million needed to be paid as at 27 February, the date of the announcement, but the board was not informed.
24 ASIC proposes to rely on Mr Carter's evidence, together with Ms Randall's daily cashflow spreadsheets, to show that $26.3 million went out from the company on 1 and 2 March, very soon after the transfer of $26 million was received from the UK. It will also rely on Mr Carter's evidence that, at the end of February 2001, the Group's available cash balance was $48 million but there were substantial overdue creditors ($29 million in Australia and $56 million in the UK) producing a substantial cash deficiency, and that the Group was in need of a cash injection in the order of at least $270 million. This evidence is an important component of ASIC's case that One.Tel would have been placed into administration at the end of February if the directors had been properly apprised of the financial position of the Group at that time.
25 Ms Randall is to give evidence that on about 23 March she prepared and incorporated into the daily cashflow spreadsheet the monthly cash forecast for the month of April, and gave copies to Mr Silbermann and Mr Hodgson. The document indicates that she was anticipating a net cash outflow for the month in excess of $47 million, and a deficiency of $24 million after taking into account bank deposits. Although there is no primary documentary evidence, ASIC will say that shortly after this time, she produced another forecast which predicted a net cash outflow of $53.5 million.
26 Ms Randall's evidence will be that she had a discussion about the figures with Mr Silbermann and Mr Hodgson, during which Mr Hodgson gave her some handwritten adjustments to the figures. She will say the effect of this was to suggest that the forecast to the board for April cashflow should be a deficiency of $13 million rather than the deficiency of $53.5 million that Ms Randall had calculated, and that she was to adjust her calculations by $40 million. The net deficiency of $13 million in fact appeared in the board papers for the meeting held on 30 March 2001.
27 Ms Randall is to give evidence that she endeavoured to amend the cashflow forecasts to achieve the net $13 million outflow as directed, but she was unable to achieve that result. She will say that she reported back to Mr Silbermann, who made some handwritten notes and explained the changes he wanted to the forecast. ASIC will submit that to a significant extent, Mr Silbermann sought to achieve the desired result by deferring the payment of creditors and making a more optimistic assessment of inflows as a result of billing. In fact, according to ASIC's contention, relying on the Carter Report, the actual billing for the month was substantially lower than the $46 million shown on Mr Silbermann's calculations. The result, ASIC will say, is that the cashflow forecast presented to the board at the end of March was an artificial construct based, to a significant extent, on deferrals in payment of creditors identified by Mr Silbermann, in addition to the deferrals of debts that Ms Randall had already been instructed to take out of cashflow calculations.
28 ASIC will rely on an e-mail dated 29 March 2001 from a One.Tel billing analyst, Ms Ashley, to Mr Silbermann and others, on the subject of "Unbilled Calls - Revenue Gap", to submit that at that time, billing revenue was failing to meet expectations to the tune of at least $15 million. ASIC will suggest a correlation between Ms Ashley's e-mail and a board paper for 30 March which identifies a cash shortfall of $20 million, out of which $15 million is attributed to bill runs which were lower than expected.
29 According to the monthly trend analysis in the board papers of 30 March, EBITDA was ($8.2 million) for January 2001, $2.8 million for February and $3.5 million for March. ASIC proposes to rely on Mr Carter's evidence to contend that these figures were incorrect, even before any adjustment to take into account insufficient provision for doubtful debts and other matters, and that the correct figures should have been ($20.9 million) for January, ($16 million) for February and ($7.7 million) for March.
30 The board papers of 30 March contained a cashflow forecast for March of $61 million. ASIC proposes to rely on Mr Carter's evidence that after proper adjustments, the figure should have been $58 million, but more significantly, the cashflow position should have taken into account overdue creditors of $132 million on a Group basis, and consequently the board papers distorted the true financial position of the company. ASIC intends to submit, relying on Mr Carter's evidence, that overdue creditors had increased by approximately $47 million over the previous month. The board papers did not refer to the overdue creditor position. ASIC will also contend that the board papers did not make it clear that the earnings figures were based in a significant respect on budget rather than actual figures.
31 The board papers of 30 March contained projections to June 2001, including a projected cash balance of $91 million. ASIC proposes to rely on Mr Carter's evidence that there was no reasonable basis for that asserted figure. The board papers referred to a provision of $54 million for doubtful debts which, relying on Mr Carter's evidence, ASIC intends to submit was inadequate. Mr Carter has calculated that the actual provision should have been about $102 million. ASIC will refer to some debtors' collections profiles and will contend that about two-thirds of the total debtors were problem debts or worse.
32 Ms Randall will also give evidence that she prepared and maintained billing run inflow projections on a daily basis, and ASIC will say that the defendant had access to these "bill run spreadsheets"; and that a perusal of them would show that local calls in the fixed wire business, which were being sold at a loss (according to ASIC's contention), represented in excess of 50% of the billing.
33 ASIC will rely on an e-mail from Ms Randall dated 2 April 1994 enclosing a form of bell curve which shows the anticipated normal time of payment of bills after a bill run. It shows that 13 weeks after a bill run, 90% of the bills have been paid. Mr Carter has made calculations as to the appropriate provision for doubtful debts, reflecting the unlikelihood of the remaining 10% of the bills being collected. In fact the provision for doubtful debts was much less than 10%.
34 The March flash report shows EBITDA before unbudgeted prepaid marketing at $4.4 million. ASIC proposes to rely on evidence of Mr Carter that the actual EBITDA for the month, before any adjustment for a provision for doubtful debts, was ($7.7 million). ASIC will say that results of the Australian digital and fixed-wire business unit were, for the purposes of the flash report, based on budget rather than actual figures.
35 An announcement was made to the Australian Stock Exchange on 4 April 2001 that the company was on track to become cash positive with a cash balance of $75 million by 30 June, as forecast. ASIC wishes to contend, relying on the Carter Report, that there was no reasonable basis for this optimistic statement.
36 ASIC will rely on evidence of conversations, voicemails and e-mails to show that by mid-April 2001 the defendants were very concerned about deteriorating cashflow, but that Mr Rich was assuring Mr Packer that the position would improve without any further injection of funds. Billing in the UK was disrupted by a break-in to the UK premises. Mr Packer and Mr Murdoch are to give evidence that they met and formed the view that a substantial cash injection was needed, and that Mr Murdoch said that since this would destroy the credibility of Mr Rich and Mr Keeling, they would have to go. Early in May there was a transfer of funds from Hong Kong.
37 The April flash report recorded positive EBITDA of $1.1 million before unbudgeted prepaid marketing. ASIC intends to rely on the Carter Report to show that the true figure, after adjustment for bad debts and other adjustments are made, is a loss of about $25 million.
38 There is to be on evidence about the board meetings of 17 and 28 May, discussions concerning a rights issue of $132 million to be underwritten by Publishing and Broadcasting Ltd ("PBL") and News Ltd, and of enquiries by and on behalf of Mr Packer including a report from Mr Green and Mr Miller of PBL. The major points in the report, as summarised to the board, were that creditors beyond normal payment terms were estimated to be in the order of $80 to $106 million; due to movements in monthly cash a monthly buffer of $30 million would be required; the Australian business (excluding the Next Generation business) had an estimated cash burn rate of between $15 and $35 million per month; and as regards receivables, a further provision of $50 million was likely to be needed due to billing problems. At the board meeting on 28 May, Ernst & Young were retained to carry out a review and management were instructed to report to the board on initiatives to improve the company's cash position, on the basis that the board would meet on the following day to consider their reports.
39 There is to be evidence that on the next day (29 May), when the board met again, Ernst & Young reported that the immediate requirement for cash to meet current obligations and fund ongoing operations, and to pay costs associated with closing down certain operations, was in the order of $290-320 million, including payment of a secured debt of $50 million owing to Toronto Dominion. There was also a management report that confirmed this analysis. The directors resolved not to proceed with the proposed rights issue, on the stated basis of the company would be likely to become insolvent even after raising the $132 million. Mr Sherman and Mr Walker of Ferrier Hodgson were appointed administrators.
40 ASIC will seek to combine the evidence in the Green/Miller and Ernst & Young reports, and the various discussions to which I have referred, with the conclusions in the Carter Report, which senior counsel for ASIC summarised fairly fully in opening ASIC's case. One of the conclusions that ASIC will ask the court to draw, on the basis of the Carter Report and other evidence, is that if the board had been fully apprised of the Group's financial position during January and February 2001, it would have caused administrators to be appointed at the end of February (or, if not, at the end of March) rather than at the end of May, and if that had occurred, losses in the order of $92 million (on the February scenario) would have been avoided. ASIC will point to Mr Carter's calculations as to the extent to which the value of the Group's assets changed from February to May, and his calculations based on the net trading loss during the period from February to May, as alternative bases for assessing loss.
41 In answer to a question from me as to whether ASIC's evidence on quantum of loss went beyond Mr Carter's evidence, senior counsel for ASIC informed the court that the evidence was not confined to Mr Carter's evidence, but "the primary calculation, the drawing together of the threads, is through Mr Carter": T 162.
42 It is plain from this brief summary that ASIC wishes to make out, in very considerable detail, a case which compares the financial position of the company and the Group, as presented by One.Tel management including the defendants to the One.Tel board, with the true financial position, month by month during the January-May period - with particular emphasis on earnings, cashflow, overdue creditors and debtors/billings. If admissible, Mr Carter's evidence as the actual financial position of the company and the Group, dealing in detail with these matters, would be a very important part of ASIC's case. ASIC wishes to rely not only on Mr Carter's overall opinions as to the financial position at specified points, but also on various intermediate stages in his reasoning, in which he asserts specific and detailed propositions about the company's position at particular times, which are not merely extracts from or summaries of the documents to which he had regard, but are purportedly based on calculations and inferences made by him. ASIC wishes to say that, because the documents upon which Mr Carter bases his views were available to the defendants, they knew or had the means of knowing, and ought to have known, the true position.
43 Other components of the case relate to whether, in various ways, the board of directors was provided with sufficient information during the relevant period, and whether adequate systems were in place to produce the information needed to make proper assessments. Mr Carter expresses opinions about these matters, and once again there is a large body of intermediate reasoning in which he asserts specific and detailed propositions, purportedly based on calculations and inferences from documents.
3. An overview of the Carter Report
44 The Carter Report is a document running to 155 pages plus 15 appendices, presented in three volumes. It is divided into three subject areas. The first, headed "Background", describes the business and history of the One.Tel Group and the composition of the board of directors. It gives an overview of the information provided to the board, and a quite detailed chronology of events presented in tabular form. The chronology is expressed to record "significant events relating to the Group and its financial position" (Report para 42). The second and third components of the Report relate, respectively, to the actual financial position of the One.Tel Group and the reporting of financial information to the board of directors of One.Tel. In those two components of the Report, Mr Carter answers a series of seven questions which had been put to him by ASIC.
45 The first five questions relate to the actual financial position of the One.Tel Group. ASIC asked, in substance:
· whether the Group's financial position altered between 1 January and 17 May 2001;
· what amount of cash injection was required by 28 February, or alternatively 31 March 2001, if the Group was to continue its existing operations and meet current and reasonably foreseeable liabilities;
· what were the reasons for that state of affairs;
· whether the Group incurred net liabilities or suffered a reduction in net worth between 28 February (or alternatively 31 March) and 29 May 2001 and, if so, by what amount; and
· whether there was any reasonable factual basis for announcements made to the market on 27 February and 4 April 2001.
46 ASIC asked two questions about the adequacy and quality of management reporting to the board of directors, namely, in substance:
· whether the information provided to the board in the period between 1 January and 17 May 2001 included all material information concerning the Group which was necessary to enable the board properly to perform certain specified functions (including assessment of the Group's financial position and performance) - specific mention being made of the adequacy of the Group's cash reserves, its actual financial position, the performance of the various business segments, and key events and transactions affecting its financial position and performance; and
· whether any, and if so what, systems were established, maintained and monitored within the Group, resulting in material financial information, which was accurate and reliable, flowing from management to the board in a timely fashion, so as to enable the board to perform those specified functions.
47 This is not the occasion to provide a full exposition or a critique of Mr Carter's report, but it is relevant to set out, briefly, a summary of Mr Carter's conclusions, so as to convey the flavour of their subject matter and to correlate the Report with ASIC's case as outlined above.
48 Mr Carter expressed the opinion that in the period between 1 January and 17 May 2001, the financial position and performance of the Group progressively deteriorated. He identified and quantified trading losses and net cash usage for each month in that period. He asserted that the Group had failed to pay an increasing balance of overdue creditors so that overdue creditors of the Group increased during the period by amounts which he quantified. He recorded that the Group had received from creditors several threats to supply as a result (he said) of the Group's inability to meet its obligations, and said that the Group experienced significant growth in uncollectable debtors.
49 He said that the Group had under-performed, by reference to its budgets, in terms of profitability; had used substantially more cash than anticipated; and had materially less cash available at each month-end than had been projected. Again he quantified the Group's results to support these assertions. He set out tables showing, on a monthly basis, the Group's cash position after allowing for overdue creditors, and the liquidity position of the Australian operations, and drew conclusions from those tables. As previously mentioned, he said that the Group required a cash injection of $270 million to meet current and reasonably foreseeable liabilities as at 28 February, and by 31 March that amount had risen to $287 million.
50 He expressed the opinion that the cash deficiency position of the Group had arisen from its progressively deteriorating financial position, to which three causes contributed: namely, decreases in gross margin arising from revenue and gross margin percentage shortfalls against budgets and against the results of the previous six months; increases in operating expenses; and growth in uncollectable trade receivables. He gave particulars. He expressed the opinion that between 28 February and 29 May 2001 the Group incurred net liabilities and suffered a reduction in net worth of at least $92 million, and between 31 March and 29 May the figure was at least $60 million. He expressed the opinion that there was no reasonable factual basis for the positive announcements made to the market on 27 February and 4 April, drawing attention to his views as to the financial position of the Group at those times.
51 He expressed the opinion that the information provided to the board was insufficient to enable it properly to discharge its specified tasks. The information deficiencies included non-disclosure to the board of information available to management which indicated that the Group was experiencing serious cash difficulties, non-disclosure to the board of the cause and true extent of material difficulties in the collectability of debtors, and differences between the earnings information available to management and the earnings information provided to the board. Additionally there were, in his view, a number of key events and transactions which were not made known, or fully and accurately made known, to the board.
52 He said that management had established a range of systems which were capable of providing accurate and reliable information to the board, but the information actually provided to the board did not incorporate all the relevant information which was produced by the systems overseen by management. He said that in his opinion, if the limited information in fact provided to the board, though insufficient, had been accurate and reliable, the board would probably have been alerted to the problems in the Group well in advance of when it actually became aware.
53 The bulk of the Report is the presentation of Mr Carter's analysis and reasoning proffered to support his answers to ASIC's questions. As previously indicated, much of the reasoning involves the development of intermediate propositions of a very specific kind about aspects of the financial position at stated points. These propositions are "intermediate" in the sense that they purport to provide a bridge, or more accurately a series of connecting bridges, between the documentary evidence and the ultimate conclusions expressed in answer to ASIC's questions. The intermediate propositions often have the appearance of propositions of fact, but a full reading of the Report (including footnotes) shows that those propositions purport to be derived from the documents, through processes of reasoning, such as by inference or through calculations.
54 Early in the Report, Mr Carter said that he had been provided with access to, and relied upon, the information and documentation contained in Appendix B and the exhibits to the Report: para 9. Appendix B contains a long list of documentary sources. It emerged during his evidence that there were some documents that he had considered, in addition to those listed in Appendix B. A subpoena was issued to PwC at the request of the defendants and some documents, said to have been considered but not relied upon, were duly produced (Exhibits P14 and 15).
55 He also said (para 11):
- "I have conducted extensive reviews of the information available to me as set out in this report, but have not done anything in the nature of an audit of that information. Consequently, I express no opinion on the reliability or completeness of the information supplied to me, except as specifically stated in this report."
4. The defendants' objections to the Carter Report, in summary
56 The defendants submit that the Carter Report does not satisfy the requirements of s 79 of Evidence Act, as explained by the Court of Appeal in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705, by failing to set out fully and clearly:
- (a) the opinions expressed;
(b) the facts observed or assumed which form the basis of those opinions; and
(c) the reasoning process by which Mr Carter's specialised knowledge as an accountant has been applied to those facts so as to reach the opinions expressed.
The consequence of these failures, according to the defendants, is that "it is not possible to be sure whether the opinion[s] [are] based wholly or substantially on the expert's specialised knowledge", and therefore the Report is inadmissible: Makita at [85] per Heydon JA.
57 Further and in the alternative, the defendants contend that the Carter Report ought not to be admitted by the court in the exercise its discretion under s 135 of the Evidence Act, on the basis that its probative value is substantially outweighed by the danger that it might:
- (a) be unfairly prejudicial to the defendants;
(b) be misleading or confusing; and
(c) cause or result in undue waste of time.
58 The defendants seek to support these submissions in many ways but, on analysis, their contentions are all referable to either or both of two problem areas, one relating to alleged formal defects in the Report, on the other relating to the history of the relationship between Mr Carter and ASIC.
59 As to formal defects, the defendants submit that:
- (a) the Report fails to differentiate between facts, assumptions and opinions;
(b) Mr Carter has usurped the function of the trier of fact and has expressed opinions not shown to be based on his specialised knowledge;
(c) the Report has failed to set out the factual basis for Mr Carter's opinions and his reasoning process;
(c) no proper records were kept of the information to which PwC had access, there was no proper segregation of PwC's roles as independent expert and as assistant to ASIC, there were no minutes of meetings, and drafts of documents were destroyed; and
(d) Mr Carter's failure to disclose in the Report that he had previously been involved in assisting ASIC was misleading.
60 The second problem area relates to the history of Mr Carter's relationship with ASIC. PwC, and specifically Mr Carter, were involved from the commencement of ASIC's investigation of One.Tel by assisting it in the investigation. As part of that process, Mr Carter prepared a report in November 2001. PwC's staff who had been working with Mr Carter continued to assist ASIC's investigation while Mr Carter prepared his expert's report for the purposes of the proceeding. He prepared drafts of his Report in April 2002 at a time when he had recourse to ASIC's information without restriction. He was instructed in April 2002 not to rely on information gained by ASIC from interviews under s 19 of the ASIC Act, and was instructed in mid-May 2002 not to rely on certain witness statements and affidavits. It was therefore necessary for him to cleanse the draft report and "re-form" his views. The defendants say that these historical circumstances have meant that:
· the Report contains pre-conceived ideas on the part of Mr Carter, by reference to his prior expressions of opinion based on unrestricted sources;
· there was a flawed process for preparation of the Report, because the views of Mr Carter and his team had been formed by recourse to a large pool of documents and through a long process of questioning witnesses as to the meaning of documents, and it was not humanly possible for Mr Carter to exclude all this information and to re-form the opinions by recourse to only a small subset of documents while excluding the explanations that he and his team had received; and
· the Report, consequently does not (and probably could not) reveal the actual process by which the opinions came to be formed.
61 The defendants say that if, contrary to their submission, these problems do not render the Carter Report strictly inadmissible as a whole, they should lead the court wholly to exclude it from evidence on the discretionary grounds stated in s 135.
5. Facts
5.1 PwC's original retainer
62 PwC were originally retained by ASIC on 31 May 2001, the day before search warrants were executed at the business premises of One.Tel and residences of the defendants and other directors and officers. Their retainer was to provide "investigative assistance". Mr Carter signed the engagement letter of that date as the partner responsible.
63 ASIC's immediate need was for forensic computer assistance in connection with the execution of the search warrants. Mr Henley and others with expertise in the extraction of evidence from computers attended on the execution of the warrants as "constables assisting". The engagement letter noted that ASIC might require other assistance from PwC such as forensic accounting, and that the scope of that work would be agreed at a later time.
5.2 The expansion of PwC's role in the investigation
64 In mid-October 2001, PwC's work for ASIC was expanded to include forensic accounting work. Mr Carter was approached by ASIC on 17 October, and on 18 October he met with Ms Redfern, then Deputy Director of Enforcement for ASIC, and Ms Rees, a senior lawyer engaged by ASIC as a consultant to assist in the One.Tel matter. On that day and on the following day, arrangements for the expanded work were finalised, and Mr Carter obtained clearance from his partners to accept instructions.
65 There is a dispute between the parties as to the nature of the engagement and, in particular, whether Mr Carter and his team acted as co-investigators with ASIC, or were there to provide forensic accounting assistance to the ASIC investigators.
66 On 17 October Mr Carter sent an e-mail to his partners in which he said PwC had been asked by ASIC "to consider acting as the investigators of One.Tel on behalf of the Commission". In cross-examination Mr Carter said that his e-mail overstated the position, and that PwC's role was "acting to assist in the investigation" conducted by ASIC (T 2283.39-2284.9; T 2790.6). In the report that he prepared for ASIC dated 21 November 2001, he said that the investigation into One.Tel was "being conducted by ASIC and ourselves". The reference to "ourselves" was added by Mr Carter to a previous draft of the report, because (he said) the draft had wrongly suggested that ASIC was to choose the documents for Mr Carter to consider (T 2790.6-11).
67 In the engagement letter for forensic accounting services sent by Mr Carter to ASIC on 19 October, he said that PwC had been requested to assist ASIC in its investigation of the affairs of One.Tel and its directors, and that "the scope of the Services is to be wide, although initially limited to reviewing and providing advice concerning materials obtained by ASIC in relation to the Investigation".
68 I do not regard Mr Carter's evidence in cross-examination as "resiling" from what was said in the documents, but rather as clarifying the precise role PwC had been retained to perform and had performed. In my view Mr Carter and his team were not engaged to carry out all or part of the investigation which it was ASIC's statutory function to perform, but rather to assist in that process by performing forensic accounting work (see also Ms Redfern's evidence at T 2887.37). That work included matters which could accurately be called matters of investigation, such as the interviewing of witnesses and the comparison of bundles of documents to see if anything was missing. But it was by way of professional assistance to the ASIC investigators, rather than any sharing of their primary role.
69 Nevertheless, in ways that I shall explain, their forensic accounting work led to Mr Carter and his team being extensively involved in the investigation process. I do not mean to suggest that extensive involvement was in any way improper. No doubt it was thought necessary and appropriate, by ASIC and PwC, having regard to the enormous investigatory task to be undertaken. Indeed, professional advocacy rules may require counsel or solicitors to advise their clients to obtain expert assistance before commencing proceedings: see, for example, New South Wales Barristers' Rules, rules 35-37. The extent of PwC's involvement (and in particular, the involvement of Mr Carter) is relevant because of the later retainer of Mr Carter to provide expert evidence.
5.3 Ms Redfern's e-mail of 19 October 2001
70 On 19 October, Ms Redfern sent an e-mail to members of the ASIC investigation team informing them that Mr Carter had been retained to assist in the investigation, and directing that he be briefed with various documents. She continued:
- "We may need to retain an accounting expert to actually give evidence and in my view this should not be PwC as they will have been part of the investigative process and will be compromised."
71 In the same e-mail Ms Redfern reiterated her concern to ensure that expert witnesses should not become involved in the investigative process, by saying that the proposed expert witness on the responsibilities of company directors should be given "a clean brief of documents", having regard to the "practice note about experts" (presumably the Expert Witness Code of Conduct, Schedule K to the Supreme Court Rules).
72 In cross-examination Ms Redfern said she thought that "ideally you should separate the two" (T 2889.35). She explained her concern, saying that "it just becomes a sometimes messy exercise to ascertain what they had regard to when they prepared the report, as opposed to part of the investigative process" (T 2890.8-10).
73 Another matter raised by Ms Redfern in the e-mail of 19 October was whether a notice should be issued to PwC in respect of some instructions they had received from One.Tel about billing problems, before the company's collapse. That question had also been raised in the Consolidation Report (noted below), which Mr Carter received on about 19 October. He gave evidence that he read the suggestion in that report that PwC be examined to determine their understanding of the extent of the billing problems. He said that while he understood that one of the things he would have to examine in its work for ASIC was the true extent of the billing problems, this did not cause him grave concern and he did not believe it gave rise to conflict of interest (T 2305.21-2306.25). Subsequently Mr Carter was given access to reports prepared by Mr Hockings of PwC on One.Tel's billing system (T 2306.47-2307.20, T 800.24).
5.4 The period from 18 October to 5 November 2001
74 On about 19 October, at least six folders of documents were made available to Mr Carter for review (T 2288.39). He was provided with a copy of the Consolidation Report dated 3 October 2001, a document that I described in my judgment on the search warrant issues. As my description of the document in that judgment made clear, it was a report summarising the results of the investigation to that time, containing many expressions of opinion, statements of "concern" and commentaries on evidence by Mr Connor and Mr Hogan, the ASIC officers who were its authors. The document had substantial attachments, which Mr Carter was also given, including s 19 examination transcripts of Mr Packer, Mr Kleeman, Mr Rich and Mr Keeling, and also drafts statements of several former finance staff of One.Tel including Mr Holmes, Ms Randall, Ms Thomas, Ms Nassif and Ms Ashley. Also attached were some reports on One.Tel prepared by Mr Kleeman and a report by Ms Croft, an ASIC accountant. Mr Carter gave evidence that he had no recollection of receiving the Consolidation Report, although he did not deny receiving it (T 2302.7). At some stage Mr Carter received a copy of the Croft report, prepared by an ASIC accounting officer, and he was eventually asked to comment on it in his 21 November report.
75 It was originally intended that Mr Carter would produce a report on PwC's forensic accounting investigations by 12 November 2001. During the remainder of October and until 21 November, Mr Carter and his staff (Ms Reynolds, Mr Hall and Ms Rock) were substantially treated as an integral part of the ASIC investigation team. They had a room allocated to them at ASIC's offices, and were frequently at ASIC's premises. They met daily. They were permitted to select the documents they thought might be relevant for the purposes of their work, from all the electronic and hardcopy documents that ASIC had (T 2312.1) and they had unrestrained access (including electronic access with a search facility) to the documents stored on ASIC's LSS computer system which related to One.Tel (T 2259.9, T 2309.9, T 2311.43). The LSS system included copies of documents obtained from One.Tel's I:drive directories, which had been printed and scanned (T 1097.8, T 2311.37-2312.9). One of PwC's tasks was to review documents received from Publishing and Broadcasting Ltd and News Ltd. They also had access to at least some of the transcripts of other s 19 examinations that had been conducted by ASIC up to that point in time (T 2309.20, 2310.28, 2577.25) and they saw witness statements and draft witness statements prepared by ASIC (T 2577.31, T 2761.26).
76 It seems to follow from the evidence of general access to ASIC's documents that Mr Carter and his team had access to material obtained from the residences of Mr Rich, Mr Silbermann and others as result of the execution of search warrants there on 1 June 2001. The evidence does not establish that Mr Carter and his assistants in fact accessed or relied upon the home search warrant material of Mr Rich and Mr Silbermann at any time during the period from October 2001 to May 2002. Mr Carter said he did not know whether he had done so but it was possible (T 2285.28-36).
77 Mr Carter attended a number of conferences with ASIC's solicitors and counsel (T 2321.28, T 2576.45) and was provided with advices of counsel, which he read (T 2321.32-2322.3). He participated with ASIC officers (including Ms Redfern and Ms Rees) and counsel in discussions about what the relevant issues were in bringing proceedings and about the type of approach that might be taken in civil penalty proceedings against directors (T 2966.43, T 2544.46-2545.39).
78 On 24 October 2001 Mr Carter took part in an important meeting with Mr Pembroke SC, Ms Redfern, Ms Rees, Mr Connor and Ms Croft. As explained in my judgment on the search warrant issues, Ms Redfern had by that time formed the view that ASIC had a reasonable case for a civil penalty proceeding against some, at least, of the directors. There was discussion at the meeting about the nature of the case ASIC would pursue, the bringing of civil penalty proceedings against directors and how such a case might be put, and the work to be undertaken by PwC to assist ASIC in bringing such proceedings. Mr Carter made a detailed note of the meeting, the substance of which he conveyed to Ms Reynolds. According to the note, there was discussion of two schools of thought as to the approach to the legal issues: one approach, favoured by Ms Redfern, was based upon the knowledge of the defendants ("who knew what and lied about it"); the other approach, said to be favoured by Mr Carter as well as Ms Pembroke and Ms Rees, was based upon the adequacy of One.Tel's reporting system. Mr Carter noted that PwC had been asked to consider what announcements were made by One.Tel, when and by whom; who had actual knowledge and who used that knowledge to deceive ('who knew what when')"; and why 30% of debtors were written off as bad debts. Mr Carter agreed in cross-examination that, following the meeting, his view was that PwC had been engaged to assist ASIC in its deliberations whether or not to proceed with civil penalty proceedings (T 2555.18-31).
79 There was a meeting of the PwC and ASIC teams on 29 October, at which PwC was given a number of tasks, including to identify issues for the s 19 examinations and "to update knowledge", presumably the knowledge of directors of the true financial position of One.Tel. Mr Carter and Ms Reynolds prepared a checklist of issues, which began with the statements:
- "The key forensic accounting issues relating to the One.Tel investigation are set out below. We wish to gather as much evidence as possible in relation to these and especially Messrs Rich and Keeling's knowledge and the timing of that knowledge. Such evidence may come from interviews, e-mails and documents."
80 In an e-mail to Ms Redfern dated 30 October 2001, Ms Rees noted that another ASIC investigator was to put in writing a list of questions for PwC to answer in their report, following a conference with Mr Pembroke on that day. She said there would be a further meeting with counsel on the following day, attended by Mr Carter and Ms Reynolds, to ensure that they were "on track" with what ASIC needed them to do. That meeting was duly held. A letter setting out questions to be addressed by PwC, misleadingly headed "Expert Report", was sent to Mr Carter on 1 November 2001.
81 Mr Pembroke SC provided written advice dated 31 October 2001, which Mr Carter read about that time. The advice describes causes of action under s 180 of the Corporations Law and the accounting and corporate governance evidence that should be gathered by PwC. Mr Carter said in cross-examination that Mr Pembroke's opinion may have assisted him in his approach to the collection of evidence on the matters upon which he had been asked to express opinions (T 2572.13-2573.1).
5.5 The period from 5 to 21 November 2001
82 A draft of Mr Carter's investigation report was prepared and circulated to ASIC on 5 November 2001, and on that day Mr Carter gave a PowerPoint presentation to ASIC officers and counsel. At or following the meeting, Mr Pembroke asked Mr Carter to investigate and identify "warning bells" that were available to non-executive directors, and whether there was some obvious connection between any negligence of the directors and the consequences that may flow to the company, and what happened to debtors (T 2573.39-2574.43).
83 Mr Carter made another PowerPoint presentation on 15 November 2001, to provide a further updating before the Commission briefing on 21 November. Ms Reynolds was in attendance, together with Mr Pembroke SC and Mr Stack of counsel, Ms Rees and members of the ASIC investigation team.
84 Members of the PwC team, including at times Mr Carter personally, were involved in planning sessions with ASIC as to who would be the subject of s 19 examinations, and Mr Carter and Ms Reynolds helped formulate questions to be put in those examinations (T 2309.28-36). Ms Reynolds attended the s 19 examinations of Mr Keeling on 5 November, Mr Rich on 7 November, Mr Kleeman on 9 November, Mr Green on 12 November and Mr Greaves on 29 November. Mr Carter attended the s 19 examinations of Mr Miller on 15 and 22 November.
85 Additionally, Mr Carter interviewed Mr Basman, a former employee of One.Tel, on 20 November, and he agreed in cross-examination that during the interview he was very active in asking questions (T 2578.5), including questions about the collection profile summary documents to which I shall return, because those documents were at least in some respects not self-explanatory (T 2534.33), although there was a lot about the document that he could understand without talking to Mr Basman (T 2527.21). It is worth noting that the topics covered in the interview with Mr Basman included credit checks and credit limits of customers, the process by which One.Tel checked adherence to credit limits, the percentage of collections of debts more than 90 days old and Mr Basman's belief as to the percentage of debtors that was collectable.
86 Ms Rock, one of the PwC team, interviewed another former One.Tel employee, Ms Joukhadar, on 15 November. Members of the PwC team spoke in less formal settings with other former employees of One.Tel, including (in the case of Ms Reynolds) Mr Holmes (T 2320.3, T 1133.37). During this period, as one would expect, Mr Carter and his staff discussed with each other what had happened at the s 19 examinations and the interviews that they had attended (T 2310.23, T 2320.10, T 2320.22, T 736.19, T 860.26, T 962.29).
87 I have set out these matters in some detail because they show the substantial degree to which Mr Carter and his assistants were involved in the ASIC investigation during the period up to completion of the 21 November investigation report. The evidence also shows how there was an interplay, during that period, between examining documents and obtaining explanations from former One.Tel staff about the meaning of documents, their context and their internal use at One.Tel, either in interviews or s 19 examinations. On the other hand, I have no reason to doubt the evidence of Mr Carter and Ms Reynolds, given on a number of occasions, that their interest was to ascertain the true financial position, rather than to search for documents which supported a pre-ordained ASIC case, while excluding documents that may have undermined it.
5.6 The presentation of the 21 November 2001 report
88 By 21 November 2001, Mr Carter and his staff had been occupied for just over a month in an extensive review of the information that had been made available to them by ASIC. It is evident from PwC's billing records that hundreds of hours had been spent on this assignment. Mr Carter personally had recorded 125.5 hours during the period from 18 October to 21 November, and Ms Reynolds 240.5 hours. In her e-mail to the Chairman of ASIC and others dated 21 November 2001, Ms Redfern said that ASIC had "extensively used PwC to assist with the investigation", including assistance with examinations, and that "PwC will continue in this role".
89 The culmination of this phase of PwC's work was the presentation of Mr Carter's report to ASIC of 21 November 2001. The report was prepared by Mr Carter, with assistance from Ms Reynolds, Ms Rock and possibly also Mr Hall (T 2326.3, T 961.32).
90 Mr Carter presented the report, with PowerPoint slides, to a meeting of ASIC's National Enforcement Co-ordination Committee ("NECC") on that day. The meeting was attended by the ASIC Commissioners, Ms Reynolds, Mr Pembroke SC, Ms Rees and senior members of the ASIC investigation team. Presentations were also made by Ms Redfern and Mr Pembroke. The advice of counsel on available enforcement options was considered was discussed, and there was a discussion, to which Mr Carter was privy, about the question which directors should be joined as defendants in the contemplated civil penalty proceeding (T 2756.40-2757.13). The NECC deferred its decision on commencement of proceedings and sought further advice from Mr Pembroke SC.
91 At various stages in the report (particularised below), references were made to information that is not in evidence, and not intended to be adduced by ASIC in this proceeding, including transcripts of various s 19 examinations. In its concluding remarks, the report said that it reflected work done up to 20 November 2001 and that investigations were continuing. One area of ongoing investigation was said to be "refining findings in the light of further information arising from additional section 19 interviews with relevant parties". In his accompanying PowerPoint presentation of 21 November, Mr Carter noted that "a number of key One.Tel personnel have not been fully interviewed and may provide further relevant information".
92 The evidence concerning presentation of the report confirms the deep degree of involvement Mr Carter had in the ASIC investigation, and his access to information about ASIC's evolving ideas, formed with the assistance of counsel, as well as his access to the documents, interviews and examinations relevant to the investigation. References to and reliance on the s 19 transcripts are specially significant, because (as considered more fully at 6.7) s 68(3) of the ASIC Act provides that statements made in a s 19 examination under claim to privilege are inadmissible in a proceeding against the person making the statement for the imposition of a penalty, where the conditions stated s 68(2) have been satisfied.
5.7 A comparison of the 21 November report and the Carter Report
93 The 21 November report was prepared to state the results of the forensic accounting work that PwC had been retained to perform, in circumstances where (to Mr Carter's knowledge) the report would be likely to be used by ASIC in making its decisions about whether to commence proceedings, the nature of any proceedings, and the identity of the defendants. It is a 90 page document, which set out to address from accounting perspective the "utility and adequacy" of information provided to the board, and the specific issues raised in the Croft report, and also the knowledge of each director regarding One.Tel's financial position from time to time, particularly with respect to the timing and content of market announcements.
94 The report concluded that a major cause of One.Tel's financial failure was its inability to bill and subsequently collect its accounts receivable balances (para 12); that the executive directors appeared to have failed to provide essential information on such matters as cash balances and information as to the aging of accounts receivable and payable (para 14); and that certain information provided by the executive directors to the board was materially inaccurate, and the executive directors knew or should have known that this was so (para 15). Information not given to the board (which was of "great importance in the apparent failure of directors to foresee the imminent, potentially terminal, cash flow difficulties of One.Tel") included information relating to debtor composition and ageing, and the accumulation of unpaid aged creditors (at para 117). The board did not consider information as to the working capital balance, which was "of crucial importance" (at 130).
95 The later Carter Report was prepared as an expert witness report for the purposes of the proceeding, but the subject matter is substantially the same as the 21 November report over a fairly wide field (excluding matters going to the actual knowledge of the directors and the quantification of damages). This can be seen by considering specific criticisms of the adequacy of information provided to the board, made in the 21 November report, having regard to the contents of the Carter Report. The 21 November report asserts that the information was inadequate in the following specific ways:
- (a) the provision for doubtful debts was "demonstrably insufficient" (para 18);
(b) cash balances were reported on a group basis and without disclosure of $8 million in pledges (para 16);
(c) monthly cash balances had been artificially "managed" in a way that was not readily apparent to the non-executive directors, by delaying payment of creditors (especially carriers) for payment at the beginning of the ensuring month, producing what was described in the PowerPoint presentation accompanying the 21 November report as a "Volcano" effect (paras 16, 19, 42-57);
(d) reporting to the board of EBITDA, revenue and gross margins, in flash reports and board papers, was based on estimates which were materially at odds with management account figures (para 20); and
(e) there was a failure to report on internal control weaknesses, including problems associated with the billing system which caused extensive billing delays and consequent collection problems (para 112, which refers in some detail to Mr Holmes' draft undated statement).
96 These matters are also an important part of the substance of the views expressed in the Carter Report. Overall, there is a high degree of similarity in the approach, analysis and views expressed in the two documents. This is acknowledged in ASIC's general submission (AS 39), where it is said (at [25]-[26]):
- "What Mr Carter is doing in providing expert evidence to the court is little different in principle to the role he performed in late 2001 in providing independent advice and assistance to the statutory regulator. ... he was (and is now) seeking to ascertain and report as to the true position concerning accounting issues which arose out of One.Tel's collapse. …"
97 Two general differences in content that should be noted are:
· the Carter Report does not deal with the knowledge of particular directors, but proceeds on an assumption that the only information the directors had during 2001 was the information contained in board papers, board minutes and flash reports (supplemented, in the case of Mr Packer, by daily e-mails): see Carter Report, para 41;
· the Carter Report lays less emphasis than the 21 November report on billing issues as the root cause of the company's financial difficulties.
98 The significance of the first difference is considered below. As to the second difference, billing problems remain an important issue in the case. In the 21 November report Mr Carter's overall conclusion, stated in paragraph 12, was that a major cause of One.Tel's financial failure was its inability to bill and subsequently collect its accounts receivable balances. As the defendants pointed out in their submission in reply (DS 39), the Defences claim that the difference between actual group cash and forecast group cash during 2001 (a difference commented on in the Carter Report at paras 58, 63, 67 and 70), is primarily referable to timing differences in the receipt of expected billings as a result of disruption to the billing systems of the Australian operations, and resultant disruptions to the timing of the collection of trade debtors.
99 There are also important structural differences, apart from the fact that the specific questions that the reports answered were different. First, there is no equivalent to Appendix B in the 21 November report, although there is a section of the report dealing with sources of information. Secondly, the 21 November report makes reference to substantial quantities of material not to be adduced in evidence in the proceeding, including some transcripts of s 19 examinations which could not be adduced in evidence because of s 68(3) of the ASIC Act.
100 In their principal written submission, the defendants drew attention to material referred to in the 21 November report and not in evidence for general purposes in the proceeding. ASIC produced a shorter list in Attachment A to AS 39. In the result, combining the two submissions, the following matters have been identified:
- (a) in a paragraph headed "Sources of information", reports prepared by the staff of ASIC, including the Croft report and the Connor report, transcripts of interviews under s 19 and numerous discussions with ASIC staff and legal advices (para 8);
(b) Mr Rich's s 19 transcripts (paras 55, 63, 93, 95, 99, 110, 113, 114);
(c) Mr Keeling's s 19 transcript of 5 November 2001 (paras 63, 93, 99, 110);
(d) Mr Pryke's statement dated 12 October 2001 (paras 63, 97, 99, 113);
(e) Mr Green's s 19 transcript of 12 November 2001 (paras 63, 99, 110, 113, 120 (footnote 8));
(f) Mr Miller's s 19 transcript of 15 November 2001 (Appendix A, entries for 8 May, 18 May and 27 May 2001);
(g) information from Mark Basman (paras 74, 89, 93, 193 (b), and 77-82 relating to Mr Basman's methodology for assessing collectability of debts);
(h) Mr Holmes' draft, undated statement (para 112(b));
(i) information from Mr Kleeman (paras 110, 121, 195);
(j) information from Mr Miller (paras 120 (footnote 8), 121);
(k) information apparently sourced from various s 19 examinations (para 132(b));
(l) Mr Kleeman's report of January 2001 (para 168(b));
(m) Ms Cutting's examination of 15 November 2001 (Appendix A, entries for 6 April and 10 May 2001);
(n) the Croft report (paras 152-3);
(o) reference at [37] to a request of the directors to receive daily advice on cash balances, and reference at [53] to Mr Silbermann being responsible for the deferred payments listing, admitted by ASIC (Attachment A to AS 39) to be based on material excluded from consideration in the later Carter Report.
101 Taking into account all the matters contained in the list, and exercising judgment as best I can about the reasoning process in the report, my view is that a substantial component of the factual basis for the opinions expressed in the 21 November report was information later excluded from the Carter Report.
102 ASIC submitted, in its detailed response to the defendants' submissions as to the contents of the 21 November report, which was marked AS 44, and in AS 41, that:
· the matters addressed in paragraphs [55], [63], [93], [99], [110], [120 ], [121], [132(b)], [168(b)], [193 (b)], [195], Appendix A entries for 8 May and 18 May 2001, of the 21 November report, which rely on "extraneous" materials, relate to the question of knowledge of One.Tel's directors, a matter handled in the Carter Report by the assumption stated in paragraph [41];
· the matters considered at [113] and [114] of the 21 November report, where examples are given of incomplete explanations or matters not reported to the board based, relying on "extraneous" materials, and also the reference to Mr Rich's s 19 examination at paragraph [95], do not appear in that form in the Carter Report;
399 They also submitted that in substantial parts of the Report, the link between any specialised knowledge of Mr Carter and the topics which were the subjects of his opinions was tenuous. They gave, as examples, provisioning for doubtful debts (which they said was patently a management decision depending on knowledge of the character of the particular debtors involved), quality of information provided to the board (a matter, they said, which the court was well able to assess for itself), and the manner in which One.Tel dealt with creditors (which required knowledge of the course of dealings over time). They made specific and detailed reference to Mr Carter's opinions at paras 127-155 about the inferences to be drawn as to the conduct of management and what he referred to as "indicators", which were to be "considered collectively" and, so considered, showed "a systematic process of managing cash and creditors". They gave particulars of the reasoning process in these paragraphs and the documentation upon which Mr Carter placed reliance. They submitted:
- "No doubt, in considering whether some of these facts existed, the court might gain some assistance from an accounting expert if accounting calculations were required or some piece of accounting knowledge were required in order to interpret a particular accounting record, but whether this assemblage of 'evidence' allows the inference to be drawn that One.Tel was engaged in 2001 in 'a systematic process of managing cash and creditors' is not a matter on which Mr Carter is entitled to express an opinion".
400 In my opinion this submission misconceives the breadth of expertise that Mr Carter would bring to bear as a forensic accountant and financial expert. As I have explained at 6.2 above, there is a category of financial expertise going beyond narrow accounting specialisation. Decisions in other cases cannot govern the outcome here, but there are some factual analogies between the Carter Report and reports considered in modern cases concerning accounting and financial experts. The cases show that is appropriate for an accounting and financial expert to have regard to a wide range of business records not confined to accounting records in a narrow sense.
401 For example, Mr Madden's report in Quick v Stoland expressed a general conclusion as to the financial position of the company (namely, that it was insolvent during the relevant period), tabulated the documentation that had been provided to the accountant for the purposes of his review, addressed the company's working capital and net assets position, and contained Mr Madden's "summary" of certain company accounts. Although the Carter Report is no doubt much more extensive in scope and documentation (given the size and complexity of the One.Tel Group and the fact that Mr Madden was expressing an opinion about the solvency of a proprietary building company), and the specific questions addressed in the reports are different, there appears to be some general similarity in the scope and content of the two reports. It appears from the judgment at first instance (Stoland Pty Ltd v Thurn (1997) 29 ACSR 280, at 284-6, that Mr Madden's consideration extended to a range of documents going beyond financial statements and accounting records, including a Report as to Affairs, correspondence with creditors and financiers, a handwritten document "releasing" a bobcat to a creditor as part payment of a debt, and a letter to the ANZ Bank giving information as to the state of the company's business. It is probable, from the descriptions of Mr Madden's report given in the judgments, that it contained, like the Carter Report, intermediate reasoning about particular aspects the financial position of the company (such as the amount of working capital and the value of net assets). But, whereas Emmett and Finkelstein JJ detected in Mr Madden's report opinions going outside his expertise, I do not detect in the Carter Report, on any general basis, reasoning that goes outside the expert's specialised knowledge into the sphere of commonsense inferences of a kind that the court can make for itself.
402 My opinion is that, considered overall, the Carter Report presents a chain of reasoning leading to the ultimate opinions expressed in answer to ASIC's questions, and the steps in the reasoning process are related to Mr Carter's specialised knowledge as an accounting and financial expert (I put to one side the background and chronology in Part 2 of the Report). I agree with ASIC that, while it is up to management to make decisions from time to time as to provisions for doubtful debts, it is within the field of expertise of an accounting and financial expert to express his opinion, considering all relevant documentation, as to the adequacy of the provision for doubtful debts, along the way to forming a conclusion as to the financial health of the business enterprise. The same reasoning applies to the expression of opinions, from a financial point of view, as to management's dealings with creditors and arrangements for the deferral of payment of debts, and as to the adequacy of financial information provided by management to the board of directors.
403 In reaching this conclusion, I do not mean to say that, if the Carter Report had been otherwise allowed into evidence, there would not have been scope for challenging particular propositions for failure to comply with this requirement.
404 As noted at 6.3, one of the aspects of the requirement that the opinions be based on the expert's specialised knowledge is that observations that could have been undertaken by the court without the expert's assistance are not admissible as expert opinion evidence. The defendants submitted that some of Mr Carter's assertions, when tested on the voir dire, were shown to have been based not on any specialised knowledge or expertise, but on a process of reasoning which the court was more than capable of undertaking for itself. One example was whether payment transactions for which there was no proof either way should be assumed to have been paid or not paid. Another was whether one should assume that the ARPU figures on one page of a document were more accurate than the ARPU figures on another page because one page appeared to contain "more detailed analysis" than the other.
405 I disagree, to the extent that this submission is meant to establish a general deficiency in the Report. I am inclined to think that the reasoning process for preferring one set of ARPU figures to another was within the Carter's expertise, though the reasoning was very general. If the evidence its final form as to paragraph 141 was that Mr Carter or one of his assistants had simply made an assumption that nine debts had not been paid before the appointment of the voluntary administrators, without evidence whatever, then of course that "reasoning" would go outside Mr Carter's specialised knowledge, and indeed would not be reasoning at all. The relevant sentence of paragraph 141 would not be allowed, unless the evidence were permissibly supplemented. But these matters would not warrant the exclusion of the Carter Report as a whole. Compare the Carter Report with the report in the Evans Deakin case, which had a general similarity to the Carter Report, as regards the nature of the specialised knowledge brought to bear and the scope of the opinions. I would not describe the Carter Report, in general terms, as a discursive body of views putting forward an argumentative case; and in contrast with the report in the Evans Deakin case, here there are many accounting opinions displayed, and they are certainly not buried.
406 Although many of the intermediate propositions in the Carter Report have, in form, the appearance of findings of fact, those propositions are, by and large, properly analysed as opinions, for the reasons I have given. That being so, it cannot generally be said that Mr Carter has "usurped the functions of the trier of fact", if (notwithstanding the views I have expressed) there is a separate principle of admissibility to that effect.
407 My conclusion on this ground is subject to considerations that arise out of the history of Mr Carter's relationship with ASIC and the unarticulated assumptions and reasoning processes that appear to have emerged from it. For the reasons given above and summarised at 7.4 and 7.5, the Carter Report suffers from the general deficiency that, having regard to the history of the matter, Mr Carter has failed to disclose the true factual basis and reasoning processes supporting his opinions. That means, in turn (as Heydon JA explained in Makita at [85]), that the court could not be sure whether the opinions are based wholly or substantially on the expert's specialised knowledge.
7.4, 7.5, 7.6, 7.7, 7.8 and 7.9 Does the Carter Report adequately identify the factual basis for Mr Carter's opinions? Does it adequately disclose the reasoning upon which Mr Carter's opinions are based? Does it fail to identify factors considered but discarded? Are Mr Carter's opinions based on inadmissible facts? Was there impermissible delegation to assistants? Is it objectionable by reference to considerations going to independence?
408 It is appropriate to deal with these matters together, because the factual application of the principles involves considerable overlapping.
409 The defendants submitted that Mr Carter's presentation of the intermediate propositions in the form of assertions of fact rather than as expressions of opinion led him to fail to disclose, or to disclose adequately, the factual basis and the reasoning process for his opinions. I do not agree that the formal structure of the Report or the presentation of intermediate opinions as if they were opinions of fact has led to any general failure to disclose the factual basis of the expert opinions. By and large, the nature of the intermediate propositions is adequately exposed by the place that they occupy in the reasoning process, and so the mischief that arises when an expert's report does not set out to distinguish between facts, assumptions and opinions and consequently fails to disclose adequately the factual basis and reasoning process, does not arise here.
410 In my opinion there is no general formal or structural flaw in the Report that would prevent the court, reading the Report as a whole, to identify the factual basis and general reasoning process, including the intermediate inferences, that have led to Mr Carter's concluding opinions in answer to ASIC's questions. ASIC submitted that the defendants' written objections to the admissibility of the Report (Exhibit P2) show the very limited extent to which they were able to find alleged oversight in identification of source documents. But I need not reach conclusions on this derivative basis. My conclusion arises from my own consideration of the Report. When considering particular statements in the Report, it is necessary to bear in mind Appendix O, which provides detailed references to documents supporting the tables on the Report. To the extent that there were a few occasions when the source documents for statements were not identified, it would have been appropriate, in my view, to allow the problem to be rectified by supplementary evidence. Indeed, Mr Carter's report of 23 July 2004, Appendix C, purports to do so.
411 No problem arises here out of lack of independence in the traditional sense. The evidence does not support any inference that Mr Carter behaved in a subjectively biased or partial way. Mr Carter was not in the kind of close or financial relationship with ASIC that has led to problems about bias in other cases. Even if he were, that fact alone would not, according to the authorities, have destroyed his testimonial capacity or the admissibility of his expert evidence. A fortiori, the very fact that Mr Carter was engaged by ASIC in another capacity before becoming an expert witness for the Commission would not of itself provide a basis for excluding his expert evidence. The problem is, rather, the exposure to information that he had during the investigative process, on a broader front than he was allowed to consider for the purposes of his expert report.
412 It seems to me that there are problems arising out of the history of the relationship between Mr Carter and PwC and ASIC that lead to difficulties of four kinds, namely:
· failure fully to articulate the factual basis of the opinions, because of undisclosed assumed or accepted facts about the meaning, significance and status of documents;
· failure to disclose the true reasoning process by which the opinions were formed;
· a substantial risk that the reliance has been placed, in factual assumptions and reasoning, on information not before the court and (to a degree) not capable of being placed before the court;
· a process of involvement in ASIC's investigation as a result of which it is humanly not possible for Mr Carter to exclude extraneous influences.
413 These difficulties arise in consequence of my cumulative findings of fact that, in summary:
· it is likely that the 21 November report influenced the preparation of the initial draft of the Carter Report (at 5.12 above);
· it is likely that information obtained by Ms Reynolds and other PwC personnel in carrying out their continuing assignments for ASIC while they were assisting with the drafting of the Report influenced the drafts (at 5.12 above); and
· it is likely that Mr Carter, directly or through his assistants, took into account and relied upon information other than the information in Appendix B, arising from his and their other connections with ASIC (at 5.15 above).
414 These findings of fact are general findings as to the likelihood of excluded information leaking into the opinion-forming process. They do not depend upon identifying a particular fact that has crossed the barrier. There are evidentiary indications, in the four areas explored by the defendants in cross-examination that, subject to such further evidence that Mr Carter may have given had he been permitted to do so, specific facts were used to support the opinions in the Report. My conclusion does not depend on those particular subject areas, but rather on facts which create such an implausibility that excluded materials can be kept out of the opinion-forming process, as to lead to the conclusion that it was humanly impossible to maintain the exclusion, or in other words the use of excluded information was inevitable. The absence of contemporaneous or other satisfactory records leaves the court uncertain as to how extensive the use of excluded materials has been. But factors that lead to the conclusion that usage was inevitable also make it likely that usage was significant. In particular, usage of information explaining the meaning and significance of particular documents and the way they were used within One.Tel, once learned, could not be forgotten and in my opinion, must have been extensively used, probably unconsciously, both by those who drafted the Report and Mr Carter when he settled the draft.
415 It follows from these findings of fact that the Carter Report has failed to comply with the Makita requirements as to identification of the factual basis of the opinions and reasoning process that were used, and it has failed to do so in a significant manner. The statements of principle in Makita, which, I have held, should be followed at first instance in New South Wales, and are in any case good law, produce the consequence that the Report is inadmissible as a whole. It is inadmissible as a whole because the failure to comply with the Makita principles is pervasive. This is not a case where particular propositions can be identified and excised with surgical precision. The problem has arisen because of a serious defect in the process, arising when it was decided that Mr Carter would be used as the expert witness notwithstanding involvement in the investigation, and it has affected the entire process of formation of the opinions ultimately expressed in the Report.
416 This is not a case, in my view, where the expert has failed to disclose a reasoning process that should have been disclosed, that has lead to the discounting or disregard of a document or documents apparently relevant to the opinions. Rather, the problem is a probably unconscious use of excluded material and a consequent failure to state the full and real factual basis and reasoning process.
417 It does not seem to me that Mr Carter excessively or impermissibly delegated to his assistants. The evidence indicates that the final settlement of the draft was undertaken by him, and those who prepared it did so in a subsidiary role. The problem arising with respect to the assistants was that they had access to information (including excluded information) for the purpose of drafting, which assisted them to formulate the reasoning and draft opinions, and contributed thereby to the conclusion that it had become inevitable that excluded materials would be used in the formation of the opinions.
418 As I have explained, in both the 21 November report and the 9 April draft, references were made to the transcripts of Mr Rich's s 19 examinations. Those references were removed before finalisation of the Carter Report. There is a residual concern that the s 19 transcripts may have affected the formation of the final opinions. But I am not able to find, on the evidence, that this was generally the case or was the case in relation to particular opinions. I have not reached my conclusion on the inadmissibility of the Report on any basis relating to the use of inadmissible materials.
8. Should the Carter Report be excluded under s 135?
419 My conclusion as to admissibility makes it strictly unnecessary for me to consider the discretionary question under s 135. However, if I am wrong in my view that the evidence justifies a positive finding of reliance on excluded material, then in my opinion the same evidence supports, at the very least, the conclusion that there was substantial risk, higher than a real sensible possibility of the kind referred to in Elliott v Ivey, that the excluded material may have unconsciously affected Mr Carter's opinions, such that I should intervene by the exercise of my discretion under s 135.
420 The defendants submitted that they should not be left to extract a clear statement of the opinions, factual assumptions and reasoning processes of Mr Carter by cross-examination, and therefore the correct approach was for the court to exclude the Carter Report under s 135.
421 They contended that they would be unfairly prejudiced if the Report were not excluded, in two ways. The first, more general submission was that they would be forced to "unravel and test the assertions made about the factual basis of the reports in circumstances whether the records which would allow a proper testing are manifestly inadequate". They would be forced to choose between either cross-examining in the dark, "with all the perils which usually faced journeys into darkness" (Makita, at [62] per Heydon JA), or choosing not to cross-examine, running the risk that the court might attach weight to unsubstantiated opinions. Secondly, they said that if they are left to cross-examine Mr Carter in order to show that he has illegitimately relied on such information in preparing his Report, they would run the gauntlet of putting some potentially prejudicial material before the court during the cross-examination process.
422 The defendants submitted, additionally, that receiving the Report into evidence would be likely to result in confusion and undue waste of court time. They relied on the following remarks by Allsop J the Evans Deakin case, [2003] FCA 171 at [679]:
- "Whatever may be the strict requirements of s 79 of the Evidence Act, s 135, in at least other than straightforward cases, demands that the basis of expert opinion be apparent, and that the opinions, in respect of which the witness has expertise, be displayed and apparent. Cross-examination, in particular of a determined and dialectically combative kind, should not be necessary … to shear away the layers of evidence, in order to assess whether such evidence does involve opinions, and if so, what they are and whether they are relevant …."
423 ASIC submitted that the defendants have had the Carter Report for over 2.5 years, and they drew attention to some evidence (the affidavit of Mr Johnston made on 7 September 2002) which indicates that the defendants have been working on the Report, with expert assistance, for most if not the whole of that period. Further, ASIC said, the defendants have had access to the business records of One.Tel in the possession of ASIC since 2002, and they obtained the remaining business records in the possession of the liquidators in 2003. They drew attention to evidence which indicates that in 2002 the lawyers then acting for Mr Rich sought access to these records in order to respond to the material contained in the Carter Report. They did not, at that stage, assert that they were prejudiced by the form of the Report. Since, therefore, Mr Carter's reasoning and the documents to which he refers have been available to the defendants for a substantial period of time, there is, on ASIC's submission, no unfairness in any prejudice that would arise from admitting the Carter Report into evidence.
424 ASIC challenged the assertion by the defendants that, in order to test Mr Carter's conclusions, it would be necessary for them to put before the court "a body of potentially prejudicial material". ASIC's point was that if the documents in Appendix B do not support what Mr Carter says in the Report, then there is no need to go further, and therefore no need to put before the witness and the court any other prejudicial material. In any event, ASIC submitted, the position of the defendants could be protected, to the extent that it might be necessary to put such material before the court, by an application for appropriate orders under s 136 of the Evidence Act.
425 In my opinion the defendants' submissions are correct on this issue. I am persuaded, in terms of s 135, that I should refuse to admit the Carter Report as a whole, on the ground that its probative value is substantially outweighed by the danger that the evidence constituted by the Report might be unfairly prejudicial to the defendants, or might be misleading or confusing, or might cause or result in undue waste of time. The defendants' submissions as to unfair prejudice are made out, once it is appreciated that they would be confronted, if the Carter Report were allowed into evidence, with the prospect that evidence would be held against them, and given weight, that was derived from excluded materials, unless they embarked upon a process, illustrated in the four areas explored on the voir dire, of exposing that reliance. The process of exploration of the four areas pursued on the voir dire amply demonstrates the danger that the evidence in the Carter Report might be confusing and result in undue waste of time. As I have said, there is a reasonably strong factual analogy with the McMartin and Kovats cases, where courts exercised comparable discretions to exclude evidence in similar circumstances.
9. Conclusions
426 I have therefore reached the conclusion that the Carter Report is inadmissible as a whole. If the facts did not, contrary to my view, support the findings upon which my decision as to admissibility is based, then I would exercise my discretion to exclude the Carter Report from the evidence in this case, as a whole, under s 135. I shall give the parties the opportunity to prepare submissions as to whether any other part of Mr Carter's evidence should be admitted, in view of my conclusions on the principal Report.
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