Australian Securities and Investments Commission v Vines

[2005] NSWSC 738

Reported Decision: 55 ACSR 617
(2005) 23 ACLC 1387

New South Wales

Supreme Court

CITATION:	ASIC v Vines [2005] NSWSC 738 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	21-24, 27-31 October, 3-7, 10,11,13,14, 17-20, 24-28 November, 1-5, 8, 10-12, 15-19 December 2003, 3-6, 10, 11 February, 13, 15, 16, 20-23, 28-30 April 2004 and written submissions
JUDGMENT DATE :	22 August 2005
JURISDICTION:	Equity
JUDGMENT OF:	Austin J
DECISION:	See under heading "Conclusions"

CATCHWORDS:	CORPORATIONS - Officers of a corporation - chief financial officer - executive director of reinsurance business - meaning of "executive officer" - statutory standard of care and diligence - content of standard - application to profit forecast in target's statement in response to takeover bid - application to due diligence process in respect of profit forecast - statutory duty to act honestly - application to statements made during a meeting with auditors and financial experts - application to letter offering to take back risk in order to obtain financial reinsurance
LEGISLATION CITED:	Corporations Act 2001 (Cth) ss 1400, 1401 Corporations Law ss 9, 232, 1317FA Evidence Act 1995 (NSW) s 140
CASES CITED:	Adler v ASIC (2003) 46 ACSR 504 Andrews v DPP [1937] AC 576 ASIC v Vines (2003) 48 ACSR 322 Australian Growth Resources Corporation Pty Ltd v Van Reesema (1988) 13 ACLR 261 Australian Securities Commission v Gallagher (1993) 11 WAR 105 Briginshaw v Briginshaw (1938) 60 CLR 336 Callaghan v The Queen (1952) 87 CLR 115 Chew v The Queen (1992) 173 CLR 626 Clout v Hutchinson (1950) 51 SR (NSW) 32 Commissioner for Corporate Affairs v Bracht [1989] VR 821 Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 Corporate Affairs Commission v Papoulias (1990) 20 NSWLR 503 Customs and Excise Commissioners v A [2003] 2 All ER 736 Dabholkar v The King [1948] AC 221 Digi-Tech (Australia) Ltd v Brand [2004] NSWCA 58 Feil v Commissioner of Corporate Affairs (1991) 9 ACLC 811 Fitzsimmons v R (1997) 23 ACSR 355 Forge v ASIC (2004) 52 ACSR 1 Forkserve Pty Ltd v Jack (2001) 19 ACLC 299 Hksar v Lee Ming Tee & Securities and Futures Commission [2004] 1 HKLRD 513 Marchesi v Barnes [1970] VR 434 Mercer v Commissioner for Road Transport and Tramways (NSW) (1936) 56 CLR 580 Moukhayber v Camden Timber & Hardware Co Pty Ltd [2002] NSWCA 58 R v D [1984] 3 NSWLR 29 R v White (1951) 51 SR (NSW) 188 Rich v ASIC (2004) 78 ALJR 1354 Southern Resources Ltd v Residues Treatment & Trading Co Ltd (1990) 56 SASR 455 Standard Chartered Bank Ltd v Antico (No 1) (1995) 38 NSWLR 290 Swinton v The China Mutual Steam Navigation Co Ltd (1951) 83 CLR 553 Sycotex Pty Ltd v Baseler (No 2) (1994) 51 FCR 425 Tesco Supermarkets Ltd v Nattrass [1972] AC 153 Trust Co of Australia v Perpetual Trustees Ltd (1997) 42 NSWLR 237 Watson v Foxman (2000) 49 NSWLR 315 Whitlam v ASIC (2003) 46 ACSR 1 Wyong Shire Council v Shirt (1980) 146 CLR 40
PARTIES:	Australian Securities and Investments Commission (P) Geoffrey William Vines (D1) Francis Timothy Robertson (D2) Timothy John Henry Fox (D3)
FILE NUMBER(S):	SC 3138/01
COUNSEL:	S D Robb QC with R Beech-Jones & E Collins (P) B Oslington QC with G Seib (D1) D L Williams SC with M Fisher (D2) J W J Stevenson SC with L P Menzies (D3)
SOLICITORS:	Jan Redfern, Solicitor for Australian Securities and Investments Commission (P) Sparke Helmore (D1) Henry Davis York (D2) Gadens (D3)

LOWER COURT JURISDICTION:

INDEX

Volume 1

1. Introduction	[1]
1.1 General	[1]
1.2 Reinsurance concepts	[10]
2. Dramatis Personae	[26]
2.1 The roles of Mr Vines, Mr Robertson and Mr Fox	[26]
2.2 The roles of others relevant to this case	[59]
2.3 Credibility of witnesses	[73]
3. Facts	[107]
3.1 The GIO Group, up to June 1998	[107]
3.2 Results to June 1998, and budgeting for the year to June 1999	[147]
3.3 The August 1998 valuation report	[169]
3.4 AMP’s takeover bid	[173]
3.5 GIO’s Federal Court proceedings to challenge AMP’s Part A statement	[175]
3.6 The due diligence process for preparation of the Part B statement	[177]
3.7 The development of the A$80 million profit forecast	[194]
3.8 Hurricane Georges	[207]
3.9 First quarter results and highlights	[229]
3.10 Management discussion of the first quarter highlights	[253]
3.11 Mr Vines’ and Mr Robertson’s awareness of the relevance of Hurricane Georges claims to the profit forecast	[275]
3.12 PwC’s developing concerns about the Hurricane Georges reserve, up to 4 November 1998	[277]
3.13 Contract-by-contract analysis	[303]
3.14 Discussions about the contract-by-contract analysis, and the HG table	[319]
3.15 Mr Robertson’s memorandum of 4 November 1998	[365]
3.16 Mr Fox’s meetings on 5 November, including the meeting with Mr Lange	[379]
3.17 Mr Schneider’s memorandum of 8 November 1998	[450]
3.18 Mr Vines’ “unders and overs” analysis, November 1998	[454]
3.19 October results	[474]
3.20 The October valuation report	[500]
3.21 The Hurricane Georges register and other reports on Hurricane Georges	[503]
3.22 Negotiations with Guy Carpenter for retrocession cover	[558]
3.23 Discussions about the HG table, and negotiations for American Re agreement	[591]
3.24 Amendments to the placement slip	[662]
3.25 Mr Fox’s letter to American Re dated 13 November 1998	[685]
3.26 Accounting advice on the American Re agreement	[716]
3.27 Due diligence documentation, November 1998	[751]
3.28 Mr Robertson’s responsibilities after his return from Boston	[771]
3.29 GIO’s board meeting and annual general meeting on 17 November 1998	[777]
3.30 Some noteworthy events in the second half of November 1998	[784]
3.31 Investigation of “areas of conservatism” in early December 1998	[817]
3.32 Due Diligence Committee meeting, 6 December 1998	[828]
3.33 The Terrigal meeting	[834]
3.34 November results	[854]
3.35 The events of 7 December 1998	[861]
3.36 Due diligence documentation, December 1998	[917]
3.37 Final DDC meeting and report, and board meeting approving Part B statement	[940]
3.38 PwC Securities’ report on profit forecast	[946]
3.39 AMP’s bid increase, and publication of the profit forecast	[951]
3.40 The Part B statement in final form, and the announcement to the market	[954]
3.41 The Grant Samuel valuation report	[960]
3.42 Events after board’s approval of Part B statement	[963]
3.43 Close of the AMP bid, and subsequent recognition of the impact of Hurricane Georges losses	[967]
3.44 GIO’s results for July-December 1998	[985]
4. The responsibilities of Mr Robertson and Mr Fox from 5 November 1998	[989]
4.1 Further evidence concerning transfer of responsibilities from Mr Robertson to Mr Fox	[989]
4.2 Mr Fox’s responsibility as executive director	[997]
4.3 Mr Robertson’s continuing responsibilities after the arrival of Mr Fox	[1012]

INDEX

Volume 2

5. Some legal issues	[1030]
5.1 The statutory provisions	[1030]
5.2 “Executive officer”	[1037]
5.3 Content of the statutory duty of care and diligence	[1057]
5.4 Content of the statutory duty of honesty	[1097]
5.5 Standard of proof	[1104]
6. ASIC’s case against Mr Vines	[1112]
6.1 ASIC’s allegations against Mr Vines	[1112]
6.2 Mr Vines as an “officer of a corporation”	[1123]
6.3 Allegations group (1): Events on and after 7 December 1998	[1133]
6.4 Allegations group (2) The American Re agreement	[1185]
6.5 Allegation (3) Inadequate investigations	[1198]
6.6 Allegations group (4) Non-disclosure to the board and DDC	[1217]
6.7 Allegations group (5) Instructions to Mr Schneider	[1258]
6.8 Conclusions as to Mr Vines’ liability for breach of s 232(4)	[1262]
7. ASIC’s case against Mr Robertson	[1263]
7.1 ASIC’s allegations against Mr Robertson	[1263]
7.2 Mr Robertson as an “officer of a corporation”	[1266]
7.3 Allegations group (1): Mr Robertson’s memorandum of 4 November 1998	[1277]
7.4 Allegations group (2): the November due diligence questionnaire and the November management sign-off	[1302]
7.5 Allegations group (3): Mr Robertson’s affirmation of the profit forecast after the HG table	[1324]
7.6 Allegations group (4): the meeting with PwC on 7 December 1998	[1336]
7.7 Allegations group (5): the representation letter and the December management sign-off	[1374]
7.8 Allegations group (6): Mr Robertson’s conduct after publication of the Part B statement	[1406]
7.9 Conclusions as to Mr Robertson’s alleged breaches of duty	[1408]
8. ASIC’s case against Mr Fox	[1413]
8.1 ASIC’s allegations against Mr Fox	[1413]
8.2 Mr Fox as “an officer of a corporation”	[1415]
8.3 Allegations group (1): the events of 7 December 1998	[1426]
8.4 Allegations group (2): American Re agreement and letter to American Re dated 13 November 1998	[1458]
8.5 Allegations group (3): general failings	[1477]
8.6 Conclusions as to Mr Fox’s liability for breach of ss 232(2) and (4)	[1493]
9. Conclusions	[1494]

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

MONDAY 22 AUGUST 2005

3138/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V GEOFFREY WILLIAM VINES & 2 ORS

JUDGMENT (Revised on 16 December 2005 to correct typographical and similar errors)

HIS HONOUR:

1. INTRODUCTION

1.1 General

1 This is a civil penalty proceeding brought by the plaintiff against three executive officers of the GIO Group, arising out of their part in the making of a profit forecast used by the Group parent, GIO Australia Holdings Limited ("GIO Australia Holdings"), in a Part B statement responding to a takeover bid by a subsidiary of AMP Limited ("AMP"). I have adopted the expedient of referring to the plaintiff by its acronym, ASIC, solely for convenience.

2 Although there was a substantial amount of oral evidence, the central evidence in this case is a large quantity of documents, sometimes complex documents about technical matters. The final hearing, which ran for 56 hearing days, was much longer than the estimate of counsel (PTB 0055-0057). After the conclusion of the hearing, the court received written submissions in excess of 800 pages in length, and there were supplementary oral submissions heard over a period of 9 days, leading to these very long reasons for judgment. Although the judgment is long, I have not set out and expressly dealt with every written and oral submission (cf Digi-Tech (Australia) Ltd v Brand [2004] NSWCA 58, at [282]-[291]). I have done my best to consider every submission, but I have confined my express reasons for judgment to the findings of fact and submissions that I regard as material, in the sense of being significant to "the decision-making process": see Customs and Excise Commissioners v A [2003] 2 All ER 736, at 753-4; and Digi-Tech at [284].

3 GIO Australia Holdings was a listed public company until a time well after the AMP takeover bid closed. It was the holding company of GIO Insurance Ltd ("GIO Insurance") and other companies in the GIO Group. GIO Insurance conducted its business in two divisions, corporate insurance (not relevant here) and reinsurance ("GIO Re"). From about July 1998, the board of directors of GIO Insurance was composed of full-time executive officers of the GIO Group.

4 The first defendant, Mr Vines, was the chief financial officer ("CFO") of the GIO Group. The second defendant, Mr Robertson, was the executive director of GIO Insurance at all material times until early November 1998. He continued to have a role at GIO Re thereafter, though the scope and nature of his role is one of the controversial factual issues to be resolved. Mr Robertson was replaced as executive director of GIO Insurance by the third defendant, Mr Fox, in early November 1998, though Mr Fox says, controversially, that some of the responsibilities attaching to the office of executive director (including those most germane to this case) were left with Mr Robertson.

5 In its Second Amended Statement of Claim ("SASC"), ASIC alleges that, during the period from August to December 1998, while AMP's takeover bid was open, the three defendants contravened the statutory duty of care and diligence of executive officers, then found in s 232(4) of the Corporations Law. ASIC also alleges that Mr Fox, but not the other two defendants, failed to act honestly in the exercise of his powers and the discharge of the duties of his office, contrary to the provision that was then s 232(2) of the Corporations Law.

6 GIO Australia Holdings' Part B statement, issued in December 1998 in response to AMP's takeover bid, used a profit forecast for the year ended 30 June 1999 for the GIO Group as a whole. The forecast for GIO Re, a component of the Group forecast, was for a business profit before tax of A$80 million.

7 Central to ASIC's case is the assertion that the three defendants failed to inform GIO Australia Holdings or GIO Insurance, their directors and management, or the due diligence committee established in connection with the AMP bid, or the financial advisers of the Group, of the true potential effect on the $80 million profit forecast of claims received or likely to be received by GIO Re in respect of Hurricane Georges, a hurricane that passed through Puerto Rico, the American Virgin Islands and the Gulf of Mexico in the period from 21 to 28 September 1998, causing substantial damage leading to insurance and reinsurance claims.

8 In the ensuing sections of my reasons for judgment, I shall, in this order:

explain some technical concepts concerning reinsurance (section 1.2);
describe the main and the subsidiary participants in GIO's Part B process and their roles (sections 2.1 and 2.2);
make observations about the credit of the witnesses for ASIC and for the defendants (section 2.3);
set out, in the degree of detail that is (regrettably but unavoidably) necessary in such a technical case, the facts relevant to my decision, dealing with disputed questions of fact along the way (sections 3.1 to 3.44);
make findings about the respective responsibilities of Mr Robertson and Mr Fox in the period from 4 November onwards (section 4);
make observations on some relevant questions of law (section 5);
deal with the pleaded claims and defences of each of the three defendants, making determinations on the basis of my factual findings (section 6, 7 and 8); and
provide my conclusions (section 9).

9 By and large, the resolution of this case depends upon findings of fact and inferences from them, rather than upon any point of law. There are particular and discrete factual issues about the duty of honesty, applying only in the case of Mr Fox. Otherwise, the case requires an assessment of whether each defendant's conduct involved breach of their statutory duty of care and diligence, in various particularised respects. ASIC's case against each defendant, and their defences, depends upon the overall conclusions to be drawn from many detailed and accumulating determinations of the meaning and significance of documents, what was said at meetings and in conversations, how people acted and why they did so. The facts must be considered in detail to do justice to the contentions of both sides.

1.2 Reinsurance concepts

10 As this case requires some understanding of reinsurance, it is as well to set out at the beginning some basic reinsurance concepts and terminology. The explanations that I shall record were provided by lay counsel to a lay judge, and so they do not purport to have technical precision, but are thought to be sufficient for the purposes of this case. The subject is reinsurance of general insurers in areas of risk such as property, marine, business, professional indemnity, aviation and space insurance.

11 Reinsurance essentially involves the offering of insurance to a direct insurer, who is conventionally called a cedant. It is effectively the sub-underwriting of the insurance risk assumed by the cedant. The cedant arranges reinsurance in order to reduce its underwriting risk and thereby provide additional capacity and lower exposure to dramatic movements and profitability. From the insurer's point of view, the reinsurance is described as outwards reinsurance, putting the risk out to the reinsurer. From the reinsurer's point of view, the reinsurance is inwards reinsurance. Typically, when the parties to a reinsurance negotiation reach agreement on its terms, the terms are recorded in a placement slip, a short summary document prepared before and in anticipation of a formal policy document.

12 Reinsurance is written in a relatively small number of key markets around the world, including London, New York and Bermuda. The London market is the most sophisticated reinsurance market, reflecting the concentration in London of brokers, underwriting skills and underwriting capacity, which is provided by the Lloyd's syndicates and corporate reinsurers. The greatest demand for reinsurance is generated out of North America, reflecting the size of the US economy and high levels of insurance there.

13 Reinsurance can be classified into facultative reinsurance, which involves the reinsurance of an individual risk offered by a cedant, and treaty reinsurance, where the reinsurer agrees to accept automatically the transfer of all risks falling within the scope of the agreement. Reinsurance may also be subdivided into proportional reinsurance, where the reinsurer accepts a designated percentage of the premiums and losses of the cedants, and non-proportional, where the reinsurer accepts only specified risks between or above certain limits. A common example of non-proportional business is excess of loss reinsurance.

14 Reinsurers customarily insure themselves, to a degree, by taking reinsurance from others. That is referred to as retrocession. The reinsurer who provides cover to another reinsurer is called a retrocessionaire. It is common for reinsurers to act as retrocessionaires as well, so that the international insurance market is a complex web of risk transfers and retransfers amongst the world's reinsurers, acting either as reinsurers to primary insurers or as retrocessionaires to reinsurers.

15 Typically a reinsurer such as GIO Re offers reinsurance cover for cedants in relation to various categories of loss - for example, property, marine, space, directors and officers liability, and professional liability. It is convenient to mention, in passing, that GIO Re and other reinsurers participated in the Minet Accountants International Professional Indemnity Programme (MIPI), a complex program to share the risk of losses by the large international accounting firms, on a global basis.

16 Most cedants classify the business they write under four broad headings, namely direct and facultative, proportional treaty, risk excess-of-loss (risk XL), and catastrophe excess-of-loss (catastrophe XL). It was the practice of GIO Re to draw a distinction, in its reinsurance business, between its attritional book and its catastrophe book. The attritional book related to reinsurance on an ongoing basis of typical and recurring risks not related to any single specific event. The catastrophe book related to claims for losses in respect of major events, typically natural catastrophes such as earthquakes and hurricanes. GIO Re's practice was to regard any single occurrence which caused it to make total payouts greater than $10 million as a catastrophe, for this purpose.

17 Generally cedants enter into reinsurance contracts on a calendar yearly basis, that is, the contract provides cover from 1 January to 31 December in a particular year, to be replaced, if renegotiated, as from 1 January in the following year. In accounting for the premiums received for reinsurance contracts, the reinsurer distinguishes between earned and unearned premium. Where a premium accrues in a given period but it is likely that a proportion of any claims payments under the contract to which the premium relates will be made in a later period, the reinsurer treats a portion of the premium corresponding with future anticipated payouts as unearned premium, in its financial statements for the period in which the premium accrued.

18 A premium for reinsurance is sometimes quoted as a percentage rate on line or ROL. To say that a particular insurance has a rate on line of 1% is to say that the insurer is paid a premium of $1 for every $100 of cover.

19 A claim by a cedant on its reinsurer implies that the cedant has a liability to its own insureds in respect of which it is entitled to reinsurance indemnity. Sometimes, however, a cedant may notify its reinsurer on a precautionary basis that according to its assessment, it will receive claims from its insureds in the future of a specified amount. In the present case such notifications have been called precautionary claims. The amount notified as a precautionary claim may lead to an actual claim by the cedant of the same amount, or of a greater or lesser amount.

20 The impact of claims can be offset by a reinstatement premium, which is a premium payable to reinstate the policy for the remainder of its term after a claim has been made.

21 The profit of an insurer in any period is equal to the increase in its total assets over the period reduced by the increase in its total liabilities over the same period. As the settlement of insurance claims is subject to delays it is necessary for an insurer to set up reserve provisions for claims that have been incurred and reported but not fully settled at the balance date; and also for claims that have been incurred but not yet reported to the insurer, called IBNR claims. There is no generally accepted actuarial method of determining outstanding claims provisions for reinsurers (Mr Robertson's affidavit, paras 34-5).

22 When a catastrophe occurs, the reinsurer makes an assessment of what is called the ultimate loss, that is the amount that will be required to meet all claims liabilities, eventually, in respect of that occurrence. The assessment of ultimate loss is partly an actuarial task, but of course it involves the exercise of judgment. It is a difficult and uncertain process, because the extent of the reinsurer's exposure to a particular catastrophe will depend not only on identifying the nature of the damage and the cedants who are at risk in the locality of the catastrophe, but also the other reinsurance arrangements and retrocessions that bear upon the event. When the ultimate loss has been assessed, it is discounted to present value and brought to account together with premiums and retrocession arrangements so as to calculate profit for the year in which the catastrophe occurred. But those calculations are based on assessments that may need to be revised in later years, as experience of the losses caused by the catastrophe unfolds. In calculating the ultimate loss for a catastrophe, a reinsurer will take into account paid claims, reported and outstanding claims, and also an estimate of IBNR.

23 In assessing the ultimate loss for a catastrophe, a reinsurer might be forced initially to rely on percentage figures showing its average share of total market losses for previous similar events. A calculation of ultimate loss based on average share makes the rather vulnerable assumption that the loss for the new catastrophe will conform to the average. The validity of that assumption depends, in part, on the actual reinsurance contracts that have been written by the reinsurer covering the new catastrophe. One method of checking the validity of the assumption is to conduct a contract-by-contract analysis. This procedure involves staff of the reinsurer identifying from its records (usually, in recent times, computerised) the cedants likely to have suffered losses from the catastrophe, and then reviewing the insurance files for those cedants. In the course of the review, the staff consider policy terms and limits, and excess clauses, perhaps also obtaining information from the underwriters who wrote the reinsurance policies, and considering the reinsurer's experience with those cedants in prior years. Using their expertise, the staff then make an estimate of the claims to which they are exposed from those cedants.

24 Finally, it is appropriate to make some observations about the processes of modelling and forecasting. Mr Robertson submitted (written submissions, para 43) that the reinsurance industry is volatile and that forecasting profits in the industry is hampered by inherent uncertainties. The evidence in this case supports that submission. As Mr Vines observed in an e-mail dated 22 November 1998 (PTB 1179), an adjustment of 5% to the claims reserve will impact on reported results, in the case to GIO Re, by $110 million, and "no-one can predict claims to that level of accuracy particularly when $1.4 billion of the liability is represented by an estimate of claims that are thought to have been incurred have not yet been reported to us (IBNR's)". Mr Robertson himself said on 7 December 1998 (affidavit para to 213) that the $80 million profit forecast was his best estimate, but the final profit result could easily differ from the forecast by $100 million, and he had no way of knowing whether the difference would be positive or negative. Factors that can materially impact on actual profits include actual versus expected development of long tailed classes of business and unpredictable events such as earthquakes, hurricanes, storms, freezes, floods, fires, tornadoes and other man-made or natural disasters (Part B statement, Appendix One:1999 Forecast: PTB 1935). Consequently, as Mr Murray of PwC observed (PTB 1458), profit forecast in reinsurance "is not an exact science", and "differences of opinion about the level of reserving can legitimately and reasonably be reached by an differing actuaries".

25 These features of the reinsurance industry add to the court's difficulty in applying the statutory standard of care and diligence, and are matters that need to be carefully borne in mind. The fact that a profit forecast is adhered to over a substantial period of time and then, only a few months later, the actual results show that the forecast was wrong by many millions of dollars is not, per se, an indication of negligence, let alone dishonesty, in the preparation and maintenance of the forecast. But the duty of care and diligence may not have been discharged where pertinent information (including the existence of a contrary view supported by analysis) is disregarded or not properly reviewed and verified, or where the reasoning process employed to support the forecast is inadequate.

2. DRAMATIS PERSONAE

Mr Vines

26 Mr Vines was by profession and training a chartered accountant and auditor (T 2496-2498). He worked with Price Waterhouse from 1968 to 1995, beginning in the London office and becoming an audit partner in 1981. He specialised in banking and had a number of prominent banking clients, and was also auditor of GIO Australia Holdings. Importantly for present purposes, he was not a specialist auditor of general insurance businesses. In his capacity as auditor of GIO Australia Holdings he had frequent contact with Mr Robertson, whom he knew to be an actuary of longstanding experience, extensively involved in GIO's privatisation and listing in 1992. Mr Vines said he participated in discussions about technical issues with the actuaries but left it to the specialists to descend into the details (T 2516). He regarded Mr Robertson as an actuary with a very good understanding of the business and situation within GIO, who was highly regarded by GIO's board of directors (T 2517). He formed the view that reports received from Mr Robertson would be very well considered and soundly based (T 2517).

27 During his last five years at Price Waterhouse, Mr Vines was the managing partner for New South Wales, spending about three quarters of his time dealing with questions of management, and the remainder doing audit work. He had frequent contact with the chief financial officers of his audit clients, whose qualifications and training were generally in accounting. After his employment with GIO ended in 1999, Mr Vines became a senior executive officer with ReAC and became chief executive officer of that company in about May 2000, at a time when the company was not writing new business and had gone into run-off (T 2499).

28 Mr Vines commenced his employment at GIO in July 1995 (T 2499), under a written service agreement with a subsidiary in the GIO Group. The employment agreement described his position as chief financial officer (PTB 0001). At that time Bill Jocelyn was the group managing director (T 2500), and GIO Australia Holdings had been a listed public company for about three years.

29 Mr Vines said that, as chief financial officer, he had responsibility for the financial reporting of the Group. This entailed the consolidation of financial reports produced by the subsidiaries, and forming his own view about the financial soundness and integrity of the business, but not the production of the subsidiaries' reports (T 2501). He had responsibility for tax matters, and for capital management within the Group, including the allocation of capital to existing businesses and to prospective businesses. He was responsible for financial matters at the Group level in the context of reporting to the stock market and to the public. For various purposes (for example, in the course of the due diligence process described below) the Group's activities and subsidiaries were classified into four categories, namely GIO General (which included home and vehicle insurance and compulsory third-party insurance), GIO Insurance (corporate and reinsurance), financial services (including GIO Finance and GIO Building Society) and other activities (including the investment function, asset management, central costs and income tax). Mr Vines' financial responsibilities at the Group level extended to all of these categories.

30 There appears to have been some expansion of Mr Vines' role and responsibilities when Stewart ("Nick") Steffey replaced Mr Jocelyn as chief executive in July 1998. During the period when Mr Jocelyn was chief executive officer, the operating subsidiaries were largely independent businesses whose executive directors reported to the subsidiary boards, on which the holding company directors sat. As chief financial officer, Mr Vines was responsible for financial reporting and taxation affairs of the Group, including the consolidation of reports coming from the subsidiaries, but he did not prepare the financial reports of any of the subsidiaries (T 2501). He attended the monthly board meetings of GIO Australia Holdings and the quarterly board meetings of the subsidiaries by invitation, but he was not a director (T 2502). The subsidiaries held management committee meetings attended by the executive director of the subsidiary and his team. Mr Vines did not attend those meetings. The executive director of each subsidiary had management responsibility for the subsidiary’s business, including retrocession protection and regulatory compliance (T 2502). The subsidiaries prepared 6-monthly valuations but Mr Vines did not play any role in their preparation (T 2503-4). All this suggests that Mr Vines may have had a limited involvement in the financial affairs of the subsidiaries, through his role in financial reporting at the Group level and his observation of quarterly board meetings.

31 After Mr Steffey replaced Mr Jocelyn in June 1998, the holding company directors resigned from the boards of the subsidiaries (T 2504), and those boards became executive boards. The executive director of each operating subsidiary reported to Mr Steffey, who reported to the holding company board as chief executive. Mr Vines joined some of these subsidiary boards including the board of GIO Insurance, where he was a director from 21 July 1998 to 22 February 1999 (T 2504-5). Mr Vines said there were no formal directors' meetings of GIO Insurance and he regarded his appointment as a director of that company as a formality (T 2821), because all substantive decisions taken in respect of the reinsurance business, and all other parts of the Group, were taken by the parent board (T 2822).

32 It seems to me that, whatever may have been the position before Mr Steffey arrived, Mr Vines' role thereafter put him in closer contact with financial matters at a divisional level, though in a supervisory role. Mr Vines agreed in cross-examination that his role as chief financial officer required him to satisfy himself that such matters as budgets were properly and reasonably formulated (T 2812), and that it was his function to investigate what was reported to him in order to satisfy himself, through his own inquiry, that it was essentially valid (T 2816). As regards financial accounts and reporting, he agreed (T 2890) that as chief financial officer of a substantial company group, he had the following responsibilities:

· to review financial information on a consolidated basis;

· to respond to issues raised by management or auditors at the subsidiary level;

· to ensure that the financial statements of the Group as a whole and its divisions reflected compliance with Australian accounting standards, and to give advice to the management and the board to ensure that this happened;

· to ensure that accurate information about the company's financial position was prepared and provided to management and the board of directors;

· to ensure that the information that was supplied to the stock exchange in the investment community was accurate and meaningful; and

· to intervene if he became aware of some deficiency in a division's financial statements that was not being dealt with.

33 Mr Vines agreed that he "had, generally speaking, a supervisory role in relation to [the financial affairs of the Group]" (T 2816), and "had the responsibility of a chief financial officer, as [he] saw it”. In cross examination, senior counsel for ASIC explored with Mr Vines what he understood by the responsibilities of a chief financial officer. While he said that the chief financial officer's role is influenced by how the group is managed and personalities involved, he accepted that there is a substantial commonality of role and function in the positions of chief financial officers of company groups, and agreed that a chief financial officer of a company group has responsibility for the financial integrity of the group (T 2889).

34 There were substantial additions to these functions in the second half of 1998, particularly after AMP's takeover bid was announced. The result was, in my opinion, to leave Mr Vines with a very heavy workload (demonstrated by his diary entries, to which he was taken during examination in chief), and also to put him in a central position in the takeover response process. I shall deal with some of these matters in more detail later, but it is appropriate to bring together here the principal elements of his additional responsibilities:

· he attended meetings of the takeover response committee and the Part B working group as well as the DDC, where he had a co-ordinating role;

· he was in very frequent contact with the advisers, including Macquarie Bank, Chase, PwC and the lawyers;

· he met with Mr Steffey and Macquarie Bank every day, often for hours on end (T 2564);

· he participated in meetings organised by Macquarie Bank with institutional shareholders, and had discussions with rating agencies (T 2565) and brokers (T 2567);

· he devoted substantial time to discussions with McKinseys in relation to their strategic review and with Trowbridge in respect of the capital adequacy study (T 2566);

· there was additional work for him in the area of commentary on monthly management reporting (T 2566), and in redefining the delegation authorities to executive directors consequent upon Mr Steffey's revised board structure (T 2567);

· he was required to supervise projects which involved restating GIO's accounts under United States Generally Accepted Accounting Principles;

· he supervised the outsourcing of the internal audit function, a task involving a tendering process by external accountants who were briefed by Mr Vines (T 2567);

· he reviewed the tax and accounting implications of various senior management employment incentive programs formulated by the new general manager of human resources hired by Mr Steffey, Stuart Yoland (T 2568);

· he and his team continued their responsibilities for capital management, tax compliance and tax planning (T 2570).

35 A proper assessment of Mr Vines' responsibilities involves adding to the more "routine" responsibilities he had in his position as chief financial officer of the Group, the additional special responsibilities assigned him in respect of the takeover response and other projects.

36 Mr Vines initially had a professional staff of three. Jenny Lau worked on the preparation of consolidated financial reports for the Group. There were two tax specialists involved in the preparation of tax returns and tax planning for the Group. At a later time, after Mr Steffey became chief executive in June 1998, Jodie Johnson joined Mr Vines' staff as the first member of a proposed mergers and acquisitions group which Mr Steffey wished to establish (T 2501-2). When pressure built up for the supply and processing of information during the Part B process in response to AMP's takeover bid, a senior manager at PricewaterhouseCoopers, Richard Deutsch, was seconded to Mr Vines' group (T 2552).

Mr Robertson

37 Mr Robertson, now retired, was an actuary by profession. After about 10 years with the AMP Society in New Zealand, and another 14 years in professional consulting work, he undertook a consulting assignment for the Government Insurance Office of New South Wales (as GIO then was) in 1989, and then was appointed to establish a representative office for GIO Reinsurance in Malaysia. When GIO's privatisation was completed in mid-1992, Mr Robertson became group financial officer until 1995, and he was also secretary of the Board Audit Committee of GIO Australia Holdings. He gave evidence that in these roles he became aware of the operations of GIO Re and in particular, the volume and type of business it was writing (Mr Robertson's affidavit, paras 7 and 8).

38 From 1995 to 1997 he was the executive director of GIO General. He said that in early 1997, the chairman of the GIO Group at that time, John Iliffe, approached him in relation to the job of executive director of GIO Insurance, thinking that the present holder of that office, Mr Roach, was about to resign. Mr Iliffe told Mr Robertson his brief would be to find a replacement executive director or a purchaser for the reinsurance business, and also told him that he had been "earmarked to assume the position of managing director" of GIO Australia Holdings when Mr Jocelyn retired in 1998. Mr Iliffe arranged for Mr Robertson to be interviewed by executive search consultants for the position of managing director, but then Mr Iliffe was overcome by illness and died in May 1997 (affidavit, para 10).

39 In September 1997 Mr Robertson became executive director of GIO Insurance after the sudden resignation of Mr Roach (Mr Robertson's affidavit, annexure FWR1). He accepted the appointment after the new chairman, Stanley Howard, offered it to him on "conditions to be discussed later". Mr Robertson said he assumed this was a reference to what Mr Iliffe had discussed with him earlier in 1997. In other words, he was expecting to be elevated to managing director and chief executive after the retirement of Mr Jocelyn. At Mr Howard's instigation, he was contacted by new executive search consultants who were assisting the board in recruitment to that position, and he had two meetings with them.

40 On 18 May 1998 Mr Howard called on Mr Robertson to inform him that the GIO board had chosen Mr Steffey as managing director. Mr Robertson met Mr Steffey later that day. Mr Robertson said he told Mr Steffey on that day that he did not wish to work in reinsurance and did not intend to remain long-term in the role he was then occupying. He said Mr Steffey told him he would recruit a new executive director for GIO Insurance, and asked him to stay on until a replacement was found, at which time Mr Steffey would either find him a job that he would be interested in or would give him a redundancy package (Mr Robertson’s affidavit, para 15).

41 Mr Robertson occupied the position of executive director of GIO Insurance until early November 1998, when Mr Fox took up his appointment. Mr Robertson remained employed by the GIO Group until 31 August 1999 (when his position was terminated on the ground of redundancy), performing various special assignments, but the nature of his position during the period from early November to mid-December 1998 is controversial. I shall deal with it in section 4.

42 It is relevant to note that Mr Robertson was away from GIO's offices from Friday 4 September to Sunday 20 September (Monte Carlo conference), on Wednesday 14 October, on Tuesday 3 November, from Friday 6 November to Tuesday 17 November 1998 (Boston insurers' meeting), and from Friday 18 December 1998 to Sunday 3 January 1999 (vacation).

Mr Fox

43 Mr Fox is a Chartered Insurer who had a career in the insurance industry in London for over 20 years before his appointment to GIO. From 1972 to 1998 he was employed by the American Reinsurance Company Inc or its UK branch. In 1993, when American Re obtained a branch licence to act as both insurer and reinsurer in London, Mr Fox coordinated the process and was the Principal UK Executive nominated on the licence.

44 When Mr Steffey took up his position as chief executive in July 1998, he briefed an executive placement bureau to find a new executive director for GIO Insurance. They contacted Mr Fox, and a televideo conference was arranged between Mr Fox and Mr Steffey, in August 1998. According to Mr Fox (first affidavit, para 11) Mr Steffey told him that the GIO reinsurance operation was in a mess and suffered badly from lack of management, and that GIO Re were not aware of what was happening in the international market.

45 Mr Fox attended an interview with Mr Steffey in Sydney on 31 August 1998. He gave evidence (first affidavit, para 12) that Mr Steffey said the reinsurance business would need to be moved out of Sydney, perhaps to London, and if Mr Fox came on board that idea could be further explored. He also said he was looking at offshore funding and a group stop loss coverage and would want the new executive director to put the project together. According to Mr Fox, Mr Steffey referred to Mr Robertson and said, "you would primarily be taking his role although he will stay on for approximately 6 months to continue work on the financials, the takeover response and to help out generally." Mr Robertson gave evidence that Mr Steffey never described his ongoing role at GIO Insurance in this fashion (T 3117). He gave similar evidence with respect to other claims by Mr Fox (set out below) as to their respective responsibilities.

46 Mr Steffey told Mr Robertson he had asked executive search consultants to headhunt a new executive director for GIO Insurance. Mr Fox visited Sydney again on 19-22 September at GIO's request. According to Mr Fox, Mr Robertson took him for a trip to the Blue Mountains (Mr Fox's first affidavit, para 16). Mr Robertson located the trip to the Blue Mountains late in August (Mr Robertson's affidavit, para 16; T 3120). Nothing turns on this discrepancy of evidence. On 21 September Mr Fox attended an informal dinner with Mr Robertson, at which he met Mr Schneider and Annemie Pelletier of GIO Re (Mr Fox's first affidavit, and para 22; Mr Robertson's affidavit, para 96).

47 During that visit, Mr Fox was interviewed again by Mr Steffey, but he was not interviewed by Mr Robertson (Mr Fox's first affidavit, para 22). According to Mr Fox (first affidavit, para 18), Mr Steffey repeated that Mr Robertson would remain for at least 6 months and said:

"I can't expect you to know immediately all about the current financial status of GIO. Frank will stay on to handle the financial aspects of the AMP takeover bid. This will free you up to sort out the management of the company and to focus on the key objective of relocating the business."

48 Mr Fox said (first affidavit, para 19) that he knew nothing of GIO's financial position, did not feel qualified to participate in the takeover process, and did not wish to do so. He said he would not have accepted the position at the GIO had he thought he was to be responsible for those matters.

49 During his visit to Monte Carlo in September 1998, Mr Robertson interviewed at least one of the candidates for the position, and sent an e-mail to Mr Steffey recommending that Mr Fox should be appointed (Mr Robertson's affidavit, para 80). Mr Robertson gave evidence explaining his reasons for recommending Mr Fox (affidavit, para 81). One of his reasons was his belief that Mr Fox had some, admittedly limited, experience in alternative risk transfer products.

50 Mr Fox was offered the position of “Executive Director, Reinsurance” by a letter from Mr Steffey dated 22 September 1998 (PTB 0529A), his employment to commence on a date to be agreed. There was some further correspondence concerning the redundancy provision in his employment contract, in which (by letter from GIO's Director Human Resources dated 25 September 1998 (PTB 0535)) it was made clear that redundancy entitlements would operate in the event of takeover regardless of the takeover circumstances. Mr Fox accepted the appointment by telephone on 30 September, ceased employment with American Re on 30 October, and travelled from London to Sydney on 2 November, arriving in Sydney at approximately 6 a.m. on 4 November (affidavit, para 25-27).

51 On 2 October 1998 Mr Robertson sent an e-mail to various staff announcing Mr Fox's appointment (Exhibit P21). He said that until that time, GIO Re had been run by "enthusiastic amateurs", including himself. He said that since arriving at GIO Insurance just over 12 months previously, he had become convinced that it was time to appoint an executive director who had "a really deep background in the reinsurance business", and that after interviewing quite a number of people he had finally found the right one. He gave brief information about Mr Fox and said that Mr Fox would arrive in Sydney on about 1 November, and he added:

"I shall stay on for some months to introduce him around and familiarise him with GIO Re and its style of operation, and will progressively move into a strategic role which Nick Steffey has in mind for me in GIO's other corporate activities".

52 The e-mail implied that the decision to recruit a new executive director, and the selection of Mr Fox, had been decisions made by Mr Robertson. In fact the decision was taken by Mr Steffey, although it was supported by Mr Robertson.

53 Mr Fox took up the position of executive director early in November 1998. He gave evidence that his first day on the job was Wednesday 4 November 1998, though Mr Vines and Mr Robertson said his first day was Thursday 5 November. According to Mr Fox's account (first affidavit, para 27), Mr Vines telephoned him at his hotel about an hour after he had arrived, and asked him to come to GIO's head office, and he promptly did so and remained in the office for the rest of the morning. Mr Vines said he could not recall doing so, and that he believed Mr Fox commenced work on 5 November. For reasons I shall explain, it seems to me probable that a discussion with representatives of Guy Carpenter located by Mr Fox on 4 November in fact occurred on 5 November, and if Mr Fox came into the office on 4 November nothing significant occurred for the purposes of this case.

54 Mr Fox gave evidence (first affidavit, para 35) that on his first day in the office Mr Steffey told him:

"Frank knows all about the finances and will stay on board with you as joint executive director for 6 months to handle the financials and the response to the AMP bid to let you get your feet under the table. It would be impossible for you to understand GIO Re's financials in such a short time. I want you to concentrate immediately on reorganising the management and getting the UK branch licence under way for the next renewal season [and then he mentioned other tasks for Mr Fox, none of which related to the profit forecast or the AMP bid]."

55 Mr Fox gave evidence (first affidavit, para 36) that he understood that Mr Steffey's instructions related to his areas of responsibility, and that Mr Steffey had authority as chief executive to determine such matters. He gave details of the work he did in the areas of responsibility assigned him by Mr Steffey (first affidavit, paras 229-247). He said he assumed Mr Robertson had been given corresponding instructions but he did not have any discussions with Mr Robertson about their respective roles (para 37).

56 Mr Fox was appointed to the board of GIO Insurance on 25 November 1998. Mr Robertson remained a director of GIO Insurance, with some executive responsibilities.

57 Mr Fox's employment with GIO was terminated, effectively from 15 June 1999 (Mr Fox's first affidavit, para 228).

58 The question of the respective responsibilities of Mr Fox and Mr Robertson after Mr Robertson's arrival was the subject of conflicting evidence by them. I shall consider further evidence and make findings in section 4. My overall conclusion is that Mr Fox acquired the unqualified responsibilities of the executive director of GIO Insurance, as from his arrival on 5 November 1998, but Mr Robertson retained a concurrent role with joint executive responsibility, with Mr Fox, for financial matters in GIO Insurance relating to the profit forecast to be inserted in the Part B statement.

2.2 The roles of others relevant to this case

59 Gregory Schneider's working career began in 1990 as an actuarial assistant in the United Kingdom, and in 1993 he was employed by Lloyd's of London to work on the Equitas project, which valued the insurance and reinsurance assets and liabilities of numerous Lloyd's syndicates that had reported major losses, in order to set a price for the transfer of their portfolios to a new corporate vehicle. Mr Schneider said (first affidavit, para 4) his main work with Equitas was to evaluate the adequacy of the reserves set by the Lloyd's syndicates. This included review of reserves for syndicates participating in the MIPI program. He said (para 5) some of the contracts he evaluated were financial reinsurance contracts. After his work for Equitas, he joined a firm that managed portfolios for a number of Lloyd's syndicates, occupying the position of group actuarial manager. He passed 8 of the examinations required by the Institute of Actuaries in the United Kingdom for fellowship of the Institute, but he did not complete the remaining examinations, which were in superannuation and life insurance. The examinations he passed entitled him to be classified as an associate of the Institute of Actuaries in the United Kingdom, and in 1997 he became an associate member of the Institute of Actuaries of Australia.

60 He commenced employment with the GIO in February 1997, initially as an assistant actuary with GIO Re, reporting to the financial controller of GIO Insurance who, in turn, reported to the executive director (Mr Schneider's first affidavit, paras 9-10). Mr Robertson explained (affidavit para 29) that in his initial capacity, Mr Schneider's main responsibilities had been to operate GIO Insurance's computer programs which calculated provisions for IBNR, outstanding claims and unexpired risks, and to construct and maintain a management information system, using a computer system known as COGEN. Mr Schneider said (first affidavit, para 11) that his main duty was to recommend reserves at the end of each half-year. But that, presumably, was a recommendation based upon the application of a valuation model designed by someone else (as the evidence, explained below, shows), and was not a recommendation direct to the board of GIO Insurance because Mr Schneider reported to the financial controller and was not, at that stage, the company's actuary.

61 Mr Schneider became "General Manager, Technical Services" in GIO Insurance in June 1998, pursuant to Mr Robertson's business plan of May 1998 (PTB 0006), reporting directly to Mr Robertson as executive director of that subsidiary. He said (first affidavit, para 13) that he retained his existing responsibilities and in addition, he was regularly required to analyse and prepare reports on GIO Re's reserving requirement (valuation). Mr Robertson's evidence was consistent with Mr Schneider's on this point. The additional responsibilities of Mr Schneider's new role, said Mr Robertson (para 30), included recommending provisions for catastrophe claims, modelling aggregate exposures, and retrocession protections (Mr Robertson's affidavit, paras 29 and 30).

62 It is relevant to note that, according to Mr Robertson's memorandum to the board of directors of GIO Insurance dated 18 May 1998, Mr Schneider was "chiefly responsible for making recommendations to the Reinsurance Committee about the design (but not the implementation) of GIO Re's retrocession protection". That is relevant because it suggests that Mr Schneider would not have had the authority to negotiate or, a fortiori, to enter into the American Re retrocession agreement, which is one of the important transactions in this case.

63 Once he became General Manager, Technical Services, for practical purposes Mr Schneider was (at all times relevant to this case) the internal actuary for GIO Re, although he had not quite completed all of the examinations necessary to become an actuary. He was part of the executive team but in a less senior position than Mr Vines, Mr Robertson and (later) Mr Fox. Mr Schneider was assisted by a team of actuarial and technical staff including Paul Driessen.

64 Mr Schneider's work on such matters as valuation and the recommendation of reserves will be referred to frequently in this judgment, but at this stage a general comment by Mr Robertson should be noted. Mr Robertson said in his affidavit (para 41) that he had difficulty with what he claimed was Mr Schneider's "inability to meet Group reporting deadlines", because he was always "tinkering" with complex valuation models, and was "invariably late" in providing the GIO Re accountants with information required for their accounting packs which had to be reported to the chief financial officer, and even when he supplied purportedly final figures he would "invariably propose that later adjustments should be made". Mr Robertson said that on more than one occasion he told Mr Schneider he was "driving Ken Wright and his accountants mad" by proposing changes to valuation figures after they had closed their accounting packs, and that he was to stop "fiddling with the computer programs". Mr Robertson said he believed that Mr Schneider was good at building computer models, but he did not have a high regard for the accuracy of Mr Schneider's work and the figures that he would present (affidavit, para 42).

65 It is clear from the evidence of the two men that there was a degree of tension between them, bordering on animosity. That being so, Mr Robertson's criticisms of Mr Schneider's delay and inaccuracies may have been a little exaggerated. But other evidence establishes that Mr Schneider did not meet Mr Vines' deadline for the first quarter highlights and it appears that Mr Robertson had to finalise his memorandum of 4 November 1998 without being able to wait for Mr Schneider's revised first-quarter results. Other evidence points to the fact that there was not only a mismatch error in the valuation model developed by Mr Schneider but there were some other errors made by him as well.

66 Mr Schneider was ASIC's most important witness, in the sense that he gave evidence broadly to the effect that he warned the defendants at various times in the period from October 1998 onwards that Hurricane Georges would have a larger effect on the profit performance of GIO Re than had been allowed for in the profit forecast. He gave evidence that in the period between 19 October and 9 November 1998 he caused a review to be conducted of the insurance policies that gave GIO Re an exposure to Hurricane Georges claims, and that this work confirmed his warnings. This came to be called the "contract-by-contract analysis". Much of the evidence given by Mr Schneider was contradicted by the defendants.

67 Gerhard Fricke was, at the relevant times, GIO Re's reinsurance claims manager, reporting to the executive director (Mr Robertson until November 1998, and thereafter Mr Fox). He supervised approximately 35 staff in the claims department. The claims department recorded and advised the company's executive managers of claims experience in relation to events reinsured by GIO Re. Mr Fricke's role included overseeing the claims processes, registration and recording of inward reinsurance claims from cedants, and preserving appropriate amounts to cover the claims on the claims recording system, called COGEN. He sent various e-mails with respect to Hurricane Georges claims to Mr Fox and others, as will be seen.

68 Connie Daviskas was an assistant manager in the claims department of GIO Insurance. On about 9 November 1998 she was instructed by Mr Fox to set up what was referred to in evidence as "the Hurricane Georges register". When the register was set up, arrangements were instituted within GIO Insurance for personnel of the claims department to enter Hurricane Georges claims on COGEN, as soon as they were received, to make sure that the COGEN records were up-to-date.

69 Simon Hedley was an underwriter for GIO Insurance. He was involved with Mr Schneider in the contract-by-contract analysis in relation to Hurricane Georges claims. Sean Peak was an assistant to Mr Schneider in work connected with the contract-by-contract analysis.

70 At all relevant times the auditors of the GIO Group were PricewaterhouseCoopers ("PwC"). Ian Hammond was the senior audit partner responsible for the GIO work. Patrick Murray was the audit partner for GIO Insurance. Mr Murray had spent most of his career auditing insurance-related businesses (T 1367; T 2498). He was assisted by Victoria Howell. As well as discharging their functions as GIO Insurance's auditors throughout 1998, PwC had specific instructions in October 1998 to review the first-quarter results (T 1369).

71 Stephen McClintock was a PwC partner who was a director of PricewaterhouseCoopers Securities Ltd ("PwC Securities"), a company associated with PwC that was used for work for which a securities dealers or advisers licence might be needed (T 1368). The company was retained to prepare a review of the business profit forecast for 1998/99 for the purposes of the GIO Part B statement in response to AMP's takeover bid. Christopher Latham was an actuary and a partner of PwC, who provided external actuarial advice to GIO Re.

72 Until 1998 the public regulator of the general insurance industry was the Insurance and Superannuation Commission ("ISC"), but on 1 July 1998 the ISC was replaced by the Australian Prudential Regulatory Authority ("APRA").

2.3 Credibility of witnesses

73 I have not reached any generally adverse conclusions with respect to any witness other than Mr Fox. When I recount the evidence of a particular witness on a subject, it is to be taken that I accept that evidence unless I say otherwise. It is, however, necessary to resolve conflicts in the evidence and I shall do so as and when they arise. There was no assault on the overall credibility of any witnesses other than Mr Schneider, Mr de Vroome (an expert witness), Mr Vines, Mr Robertson and Mr Fox, and I shall therefore make observations only about those five witnesses.

74 In no case was I given a generally unfavourable impression of a witness by observing his demeanour, or prevarication in response to questions, or inconsistencies in his answers. In those circumstances the approach I have taken to resolving conflicts in the evidence is, bearing in mind the Briginshaw standard, to assess each matter upon which evidence was challenged in its own terms, in light of the context, other documentary and witness evidence bearing on the question, and the coherence and plausibility of the competing evidence. I have endeavoured not to approach the task of resolving conflicting evidence on any given issue with a predisposition in favour of or against the evidence of a particular witness. This is so even in respect of Mr Fox, whose evidence on many points I have rejected. As I shall explain, the result of my analysis of the evidence, question by question, is to put Mr Fox in an unfavourable light reflecting adversely on his credibility. But that is the result of my analysis rather than a step in the reasoning.

75 There was inevitably a degree of reconstruction, rather than pure recollection, in the evidence of witnesses who were being asked about events and conversations that occurred more than five years before they gave their evidence. Often it was evident that the witnesses were influenced by documentary evidence, not infrequently observing that they had no independent recollection of a certain matter (for example, a date) but would accept the accuracy of what was indicated by the documents. In such circumstances it is important for the witness to do his or her best to recollect and to be honest about the limits of recollection and the extent of reliance on the documents. ASIC contended that in some respects, the defendants went beyond the limits of recollection and gave evidence that was pure reconstruction. I shall deal with that contention where appropriate.

Mr Schneider

76 Senior counsel for Mr Vines objected to Mr Schneider giving his evidence in chief by affidavit, since his evidence included evidence of the contents of conversations central to ASIC's case. I decided to allow Mr Schneider's affidavit to be read, except for certain designated paragraphs which related to the crucial conversations, and in respect of those matters, Mr Schneider gave viva voce evidence. It was put to him in cross-examination that he had memorised the relevant parts of his affidavit, and he admitted that he read through the conversations two or three times in preparation for giving his oral testimony. That does not seem to me to provide a basis for any adverse inferences about his evidence.

77 Mr Schneider's evidence was extensively tested in lengthy cross-examination. Although he was occasionally combative and (as noted below) had a tendency to try to create a debate with cross-examining counsel, I did not form an adverse impression of his honesty as a witness.

78 It was submitted (Mr Robertson's written submissions, para 510) that Mr Schneider gave his evidence in an evasive manner and made a determined effort to obfuscate and be unco-operative with his cross-examiner. I agree that there were some difficulties encountered in the course of his cross-examination, but I think that submission is not an accurate account of them. It is true, as was submitted on Mr Robertson's behalf, that Mr Schneider from time to time answered a question with the question and sometimes gave non-responsive answers. I formed the view that he did not properly understand his role as a witness, and may have believed that his function was to debate the point with counsel rather than simply to answer the question. But that tendency did not undermine his credibility. It was more in the nature of over-enthusiasm.

79 Mr Robertson submitted (written submissions, para 511) that Mr Schneider displayed arrogance and ambition, frequently telling the court that he had more experience than Mr Robertson in reinsurance, and aspiring to Mr Robertson's job. Mr Robertson gave evidence (affidavit paras 112-3) of a conversation with Mr Schneider in which, according to Mr Robertson, Mr Schneider said he was not willing to be blamed for a profit forecast that turned out not to be realised, and that he would create a history file showing that he opposed the forecast, to show to AMP when they arrived. Mr Schneider denied this conversation but he agreed that he created a "sequence of events" file in 1999 (T 0716-9). He agreed with a suggestion in cross-examination that he had acted in a disloyal fashion to Mr Robertson.

80 It seems to me probable that Mr Schneider became concerned about his career when the AMP takeover bid was announced, particularly as the announcement hinted that the reinsurance business might not be retained after the bid was successful. There is evidence of his concern about his career and his reputation in his e-mail to Mr Fox dated 3 May 1999 (PTB 2275). It is understandable, in circumstances where there was an emerging disagreement between Mr Schneider and Mr Robertson with respect to the impact of Hurricane Georges, which became evident with the publication of the first quarter highlights, that Mr Schneider would have decided to keep file copies of documents relating to the profit forecast, which he eventually (some time in 1999: T 0718) brought together in a file. None of that reflects adversely on his credit.

81 His credit would be adversely affected if I were to find, contrary to his denial, that he told Mr Robertson he would show the file to AMP and that he created it for that purpose. But Mr Schneider gave an alternative explanation for the ultimate creation of the file (T 0717-8), which is not implausible. It was hardly necessary for Mr Schneider to create a special file to demonstrate to AMP that he opposed the profit forecast, given the contents of the first quarter highlights. On the very limited evidence I am not able to find in favour of Mr Robertson's version of their discussion about the "history" file.

82 Mr Vines (written submissions, para 122) made a similar though somewhat more general submission. He said it was apparent that Mr Schneider was concerned about his own position in 1999, and he suggested that Mr Schneider was also concerned that he should have done more about Hurricane Georges than he had done, given that by 1999 its very large impact on GIO Re had become evident. Mr Vines suggested that before Mr Schneider was examined under s 19, he may have recalled the statements he had made about Hurricane Georges in October and November 1999 and reconstructed them from statements that the maximum exposure was $100 million to statements that he thought that Hurricane Georges would be a $100 million type event. It may be, said Mr Vines, that at the time Mr Schneider was confident that exposure to Hurricane Georges would be contained by the American Re contract or it may be he believed that a redundancy in MIPI would be relied upon by Mr Robertson and Mr Fox and approved by PwC in order to maintain the forecast, despite his own claimed belief that there was no redundancy in MIPI. Mr Vines made the point that the existence of these and other possibilities is the reason why the court should not act on uncorroborated and uncertain accounts of conversations inherently unlikely to have taken place.

83 It seems to me that these "possibilities" are really speculations which, though perhaps consistent with the evidence, have no foundation in it. In particular, there is no proper basis for a finding that Mr Schneider reconstructed his communications about Hurricane Georges in preparation for his s 19 examination. Briginshaw does not require that the evidence must remove all alternative possibilities. I disagree with Mr Vines' submission.

84 Mr Vines made the related submission (para 124) that the court should conclude that at the time, Mr Schneider did not have the heightened concern about Hurricane Georges which he later claimed to have. He noted that Mr Schneider did not make any written report to anybody recording his opinion that Hurricane Georges was a $100 million type event and did not prepare any written report about his contract-by-contract analysis, other than the HG table. He noted that Mr Schneider never told Mr Murray or Mr McClintock of that opinion.

85 The argument is essentially directed to Mr Schneider's credit, and I do not accept it. By the time he embarked on the contract-by-contract analysis which led him to form the view that Hurricane Georges was going to be a $100 million type event, Mr Schneider had twice been criticised for not following proper reporting lines and expressing his views directly to PwC. There was every probability that Mr Schneider would seek to verify the opinions expressed in the first quarter highlights (opinions that had been challenged), complete or substantially complete the verification exercise before talking about it, and then report the outcome to his immediate superior, who by that time was Mr Fox. This is essentially the approach he followed, except that he spoke about his work and its probable outcome to Mr Robertson and Mr Fox a little before the analysis was complete, because they were relevant to the disagreement that Mr Lange had wanted resolved at the meeting on 5 November. Therefore I do not agree that there is any proper basis in the evidence for a finding that Mr Schneider, with the benefit of hindsight, subconsciously reconstructed events to avoid being placed in an unfavourable light.

86 The defendants drew attention to some inconsistencies in Mr Schneider's evidence, particularly as between the evidence he gave during his s 19 examination by ASIC in 2000 and the evidence he gave at the hearing. There is a convenient summary of these submissions in ASIC's submission on Mr Schneider's credibility, para 51. It is unnecessary to set out the various inconsistencies here. Having considered them, my view is that they do not rise to the level of calling into question the reliability of Mr Schneider's evidence as a whole. In my opinion they show only that discrepancies are likely to arise when an honest witness gives evidence on the same complex subject matter on two occasions separated by several years and on the second occasion, is subject to very extensive cross-examination.

87 Mr Robertson submitted (para 514) that Mr Schneider's evidence should be treated with caution given his refusal ever to admit that he might have been wrong. Reference was made to evidence that he gave in cross-examination about the space error and MIPI, and about omitting some contracts in his contract-by-contract analysis. Mr Schneider was in the witness box for a very long time and it was noticeable, as Mr McClintock said, that Mr Schneider was never backward or reticent in expressing opinions he held, and was to some extent assertive (T 1561). But he did eventually admit to error (T 0661) and again, I do not agree that there was any reason for generally concluding that he was not a credible witness.

88 My rejection of the submissions attacking Mr Schneider's credit on a general basis does not entail that I disagree with submissions that his evidence should be assessed cautiously. He was ASIC's central witness. ASIC must prove its case on the Briginshaw standard, as explained in section 5 of these reasons for judgment. It was necessary to be careful, when assessing Mr Schneider's evidence, to consider whether he had clearly recollected that one defendant rather than another participated in the conversations of which he gave evidence. From time to time in the body of this judgment I shall conclude that the particular defendant was not a participant in a conversation notwithstanding Mr Schneider's evidence to the contrary.

89 Additionally, and perhaps understandably given the lapse of time, some of his evidence in cross-examination about the content of conversations was rather vague, both as to content and as to time, and some of it I have rejected partly for that reason. But again these matters are not destructive of his credit in a general sense. Mr Vines submitted (written submissions, para 121) that the uncertainty and generality of Mr Schneider's account of the critical conversations suggested that his accounts were generally unreliable (though, he said, not necessarily consciously unreliable). I have not extracted any such general principle from his evidence. I have tried to weigh up the quality of his evidence and the quality of other documentary and witness evidence as well as the inherent plausibility of what is said, so as to reach a conclusion, where the evidence allows me to do so, bearing in mind the Briginshaw standard.

90 There were extensive submissions about Mr Schneider's credibility, which often descended into the specifics of whether the court should accept particular aspects of his evidence. I shall deal with those issues in my presentation of the facts.

Mr de Vroome

91 Anthony de Vroome was ASIC's reinsurance expert. He swore two long affidavits, one in respect of Mr Robertson and one in respect of Mr Fox. He gave extensive oral evidence.

92 Mr de Vroome has had a long career in general insurance, as an underwriter and in management, and in the period from 1985 to August 2001 he was the National Reinsurance Manager for NRMA Insurance. Mr Robertson attacked his evidence by comparing Mr de Vroome's curriculum vitae with the curriculum vitae of James Morgan, who gave expert opinion evidence on Mr Robertson's behalf. I accept that Mr Morgan's curriculum vitae speaks of a broad experience in the reinsurance industry and in particular, in the management of large international reinsurance companies, whereas Mr de Vroome's specific reinsurance experience is focused on his time as reinsurance manager with NRMA, where the reinsurance business was conceded by Mr de Vroome to be "a sideline" to the company's main business (T 2191). GIO Re's reinsurance business was much larger. But still it was very extensive experience in reinsurance, amply sufficient to establish a field of expertise for the purposes of expert opinion evidence.

93 I found that Mr de Vroome gave clear and plausible evidence of a kind that was helpful to the court on various issues. The same was true of Mr Morgan. Occasionally I have not accepted their respective opinions, as noted elsewhere (particularly in section 7 of this judgment). But the fact that Mr de Vroome’s extensive experience in reinsurance was with a substantially smaller business than GIO Re, or the businesses with which Mr Morgan was associated, was not a ground upon which I relied for disbelieving or discounting his evidence or preferring the evidence of Mr Morgan.

Mr Vines

94 Mr Vines gave viva voce evidence in chief and was extensively cross-examined. Substantial parts of his evidence concerned his recollection of documents, and events recorded in documents, but he also gave evidence about meetings and conversations, frequently disagreeing with Mr Schneider's evidence about such matters.

95 ASIC submitted (written submissions, para 326) that the court should assess Mr Vines' evidence on the basis that he was able to give it after he had heard ASIC's opening and all of ASIC's evidence, and therefore with a complete opportunity to reflect upon the whole case put against him before he was obliged to put forward his own recollection of events. That is in fact what happened, in accordance with Mr Vines' rights: see Rich v ASIC (2004) 78 ALJR 1354; [2004] HCA 42. In my view it would be wrong to approach Mr Vines' evidence with any presumption or attitude generated by those circumstances.

96 Mr Vines studied all or a large portion of the documents in ASIC's tender bundle as part of his preparation for his evidence, and read Mr Schneider's affidavits closely (T 2806). He said that prior to doing so, there was quite a bit of confusion in his mind. He agreed (T 2807) that sometimes he could not actually remember a conversation or a meeting but, when hearing what another witness said had happened, he drew the conclusion that he simply would not have said the things attributed to him. When it was put to him in cross-examination (T 2790) that it was difficult, giving evidence about matters that had occurred five years previously, to distinguish between memory and reconstruction, he said:

"I think what I've come to realise is you may not know what happened, but you often know what didn't happen."

97 That seems to me a frank and reasonable explanation. I formed a generally favourable view of Mr Vines as a witness, and although I have not accepted all of his evidence, I was not given reason to doubt his credibility on any general ground. Indeed, ASIC did not invite me to do so (written submissions, para 329).

98 ASIC submitted (written submissions, para 327) that there is a very real risk in the case of a party in the position of Mr Vines, that over the course of time the party will come to believe, contrary to the truth, that he or she could not have done, said or heard any of the things that would subject the party to onerous liability. I agree that this risk must be borne in mind. It is true for all defendants that the court should be cautious in accepting their evidence when the case against them "gets close to the quick" (ASIC's written submissions, para 329). But there are also circumstances in which it is acceptable for a party to give evidence that particular conduct or a statement alleged against him or her did not occur because, for stated reasons, the allegation is implausible. In the end, I have found observations at a general level unhelpful in assessing Mr Vines' evidence. I see no general reason for rejecting his evidence where it is not contentious, and where it is in conflict with other evidence, it is necessary to assess the particular matter rather than to apply some general approach.

Mr Robertson

99 Mr Robertson 's affidavit made on 8 December 2003 was a carefully considered response to the case against him, prepared after ASIC's evidence had closed, making frequent references to that evidence by transcript page and purporting to answer it in detail. He was cross-examined at length.

100 In April 2000 he gave evidence over a period of three days in a private examination before an ASIC examiner. Some of the answers he gave on that occasion were inconsistent with his affidavit and oral evidence at the hearing. He sought to explain the discrepancies in his affidavit (para 241ff). He said that he was contacted to appear at the examination after he had been retired for about 8 months, that his memory of events had faded and he was confused about some of the issues, that he did not seek legal advice or representation during his examination, that he spent no time refreshing his memory from documents or otherwise preparing for the examination, that he had not seen most of the documents for over 12 months and some for over 18 months, that he did not invoke the privilege against self-incrimination because he did not consider that he had done anything wrong, and that he was happy to help ASIC in its investigations. He then sought to correct some discrepancies between the transcript of examination and his evidence at the hearing.

101 On the whole, this episode is to the credit of Mr Robertson, who has no doubt had many occasions in the period up to and during the trial to rue his open co-operation with the regulator. But of course, I shall from time to time have to deal with discrepancies between his s 19 evidence and his evidence at the hearing.

102 ASIC submitted that the court should prefer Mr Schneider's evidence to Mr Robertson's evidence on various specific matters (for example, whether Mr Schneider told Mr Robertson about the contract-by-contract analysis, a question I have resolved in ASIC's favour). ASIC also made the general submission (written submissions (Robertson), para 40) that Mr Robertson's evidence about his recollection of events and the reasons why he acted or did not act should either be rejected or treated with caution. This submission was made on the ground that much of this evidence was reconstruction rather than recollection, in the context of litigation where his conduct was subject to scrutiny, with the inevitable result that his version of events was more favourable to him than the true facts. ASIC did not submit that in his process of reconstruction Mr Robertson was intending to mislead the court or give false evidence (written submissions (Robertson), para 47).

103 I found Mr Robertson to be an honest witness who was prepared from time to time to make admissions against his interest, such as his admissions that Mr Schneider told him in their meeting on 5 November that he believed Hurricane Georges would be a $100 million type event, and that they discussed the claims figures in the October Status of Registered Events report during that meeting.

104 I agree with ASIC that in respect of particular components of his evidence, Mr Robertson did endeavour to reconstruct without any independent recollection, and on other occasions his recollection was faulty. But my approach has been to assess those components of his evidence in their own terms, rather than to approach his evidence with a general predisposition to treat it more cautiously than the evidence of other witnesses. The outcome has been that I have accepted Mr Robertson's version of the events more often than I have rejected it, although on one important matter (whether Mr Schneider told him about the contract-by-contract analysis at their meeting on 5 November) I have found against Mr Robertson.

1449 Applying those principles, it seems to me that it was misleading for Mr Fox to execute the representation letter and management sign-off as executive director of GIO Insurance, and specifically the statement in the representation letter about deterioration of the catastrophe portfolio, if he had in fact, as he claimed, "binned" the Hurricane Georges register e-mails (or even if, as I have found, he binned some of them), and had not otherwise taken steps to ensure that he had current information about the position in the catastrophe portfolio, including the claims position for Hurricane Georges. It was no answer for Mr Fox to say that he was relying on Mr Schneider to keep him abreast of claims developments, because the Hurricane Georges register e-mails were directed to Mr Fox and it was not suggested that Mr Schneider was aware that Mr Fox was binning them without reading them.

1450 Mr Fox made the point in evidence and in submissions that he was given no advance notice of the subjects to be discussed at the meeting with PwC, and it came as a surprise to him, on 7 December, that he was asked to take part in the management sign-off process. It appears that the decision that he should provide a sign-off was taken only at the DDC meeting on 6 December, as a consequence of the Committee noting that Mr Fox had "assumed responsibility for the areas for which Frank Robertson was formerly responsible" (PTB 1594). I therefore accept that the events of 7 December were to some extent, surprising to Mr Fox. But it does not seem to me that the element of surprise was a justification for signing documents that were misleading.

1451 Although he said he was given no advance notice of the subject of the meeting with PwC on 7 December, Mr Fox accepted that he realised during the course of the meeting, that PwC were involved in a last and final conference about the efficacy of the American Re contract and the financial effects of Hurricane Georges (T 3870), and that PwC would act on the basis of what was said at the meeting (T 3871). He said that during the meeting he realised that the meeting was occurring because there was doubt about the effect of Hurricane Georges (T 3871). He said he understood that the sign-off process that occurred on 7 December related to the Part B exercise, and that the Part B statement would go forward on the basis of what was said in the sign-offs (T 3870). In these circumstances, ASIC submitted (written submissions (Fox), paras 209, 235) that Mr Fox's conduct on 7 December should be measured against the fact that he had an actual appreciation of the purpose of his involvement in the events of that day, and that he had a duty to take all reasonable steps to ensure that any information provided orally or in writing was accurate. I agree with this submission

1452 My conclusion is that on 7 December Mr Fox, either having some detailed knowledge of the level of Hurricane Georges claims (as I have held) or knowing that he had not made adequate inquiries with respect to Hurricane Georges, should have declined to sign the management sign-off and representation letter and should have explained comprehensively to PwC what he knew about the likely effect of Hurricane Georges and what further inquiries he should make before he could give any certification. In signing the documents in those circumstances he breached his statutory duty of care and diligence.

Mr Fox's conduct after 7 December

1453 Para 148 of the SASC alleges that Mr Fox failed after the date of publication of the Part B statement and before the end of the period in which the AMP takeover remained open to have any or any adequate regard to the available evidence concerning whether it was likely that GIO Re would achieve the $80 million profit forecast in the 1999 financial year.

1454 Mr Fox submitted (written submissions, paras 529-530) that there was no suggestion in the evidence that Mr Fox was asked to take any responsibility for the Part B statement, let alone after it was published. But as executive director of GIO Re he had responsibility for the reinsurance business and, as I have held, the reinsurance profit forecast, and since his executive office continued after 8 December his responsibility continued as well.

1455 In its written submissions (para 310), ASIC referred to evidence given by Mr Fox that he was advised by Mr Schneider's secretary that the American Re agreement had been be negotiated in a manner that would satisfy the concerns of PwC. ASIC submitted that the court should not accept that evidence. But Mr Fox contended (written submissions, para 530) that it was not put to Mr Fox that this evidence was false.

1456 Assuming that Mr Fox's evidence on this matter is correct, it does not seem to me that it would provide him with a sound basis for failing to discharge the monitoring duty that he had while the offer period continued. This is because the new American Re retrocession agreement of 18 December was essentially the same transaction, no more likely to be regarded as a genuine retrocession agreement than the 13 November placement slip.

1457 In 1998 there was no specific statutory duty on the part of a target company to provide replacement or supplementary information once the Part B statement had been dispatched. However, since GIO Australia Holdings was a listed entity, it was under a continuing obligation by virtue of the Listing Rules of the Australian Stock Exchange, reinforced at the time by s 1001A of the Corporations Law, to disclose material information to the market. Failure to do so would expose the company to the risk of contravention of the statute and possibly civil liability. Information about the developing claims experience for Hurricane Georges was material, disclosable information (or at least arguably so). Mr Fox's statutory duty of care and diligence required that he monitor the development of Hurricane Georges claims and bring any material information forward so that the board could consider whether to disclose it, and thereby attend to the performance of the parent entity's statutory duty. He did not do so.

8.4 Allegations group (2): American Re agreement and letter to American Re dated 13 November 1998

1458 Para 143 of the SASC alleges that Mr Fox breached his statutory duty of care and diligence by causing, or participating in causing, GIO Re to enter into the American Re agreement and the amended agreement, and that he made a related offer in the "side letter" of 13 November: in the circumstances pleaded in paras 113(a)-(e) and para 62. I take the following summary of the pleaded circumstances from ASIC's written submissions (para 285):

(a) the real purpose for GIO Re's entering into each agreement was to maintain the $80 million profit forecast by artificially deferring the requirement that total Hurricane Georges claims in excess of $25 million be brought to account in the 1999 financial year;
(b) neither agreement was a genuine retrocession agreement in commercial terms, as the only apparent underwriting risk undertaken by American Re was extremely remote;
(c) the profit commission payable to American Re was uncommercial and an excessive consideration for the degree of apparent underwriting risk undertaken by American Re;
(d) the profit commission payable to American Re was substantially a consideration for American Re's facilitating GIO Re's being able to defer bringing to account total claims resulting from Hurricane Georges in excess of $25 million until after the 1999 financial year;
(e) GIO Re entered into each agreement without any expert actuarial or accounting advice that the agreement was a proper retrocession agreement, or that the deferral of the bringing to account of total claims resulting from Hurricane Georges in excess of $25 million until after the 1999 financial year was in accordance with proper accounting practices.

1459 In section 3.23, after considering the evidence in some detail, I held that Mr Steffey and Mr Vines (to the extent that they were involved), and Mr Fox and Mr Schneider, caused GIO Re to enter into the American Re placement slip for the sole or primary purpose of protecting the profit forecast from adverse movement in Hurricane Georges claims. Therefore para (a) is satisfied. In section 6.4 I held that Mr Vines had in fact not caused or participated in causing GIO Re to enter into the American Re agreement for the purposes of para 113 of the SASC, essentially because he dropped out of the picture on or shortly after 6 November. Mr Fox argued (written submissions, para 138ff) that he did not cause or participate in causing GIO Re to enter the contract, but I have decided that the preponderance of evidence supports the conclusion that he was substantially engaged in the transaction, as Mr Schneider's supervisor.

1460 As to para (b), ASIC's contention is that it had become plain to Mr Fox by 11 November, if not before, that the ultimate predicted losses in Hurricane Georges had substantially exceeded the $25 million reserve that had been established for it. Since the American Re placement slip did not involve any transfer of risk in respect of Hurricane Georges, the only way that the agreement could operate to protect the profit forecast was by enabling GIO Re to make claims for losses above $25 million in the year to 30 June 1999, on the basis that equal amounts would be repaid to American Re over the life of the agreement in the form of premiums. In my view, that statement is correct.

1461 ASIC submitted that the profit figure which is of interest to the market is a real profit likely to be earned by a company from its ordinary business activities. Had it succeeded, the American Re agreement would have operated artificially in a way that was very material to the market's understanding of the real profit performance of GIO Re, because it would have enabled a decline in profit caused by excessive claims on GIO Re to be made good by receipts from American Re, but only on the basis that an equivalent sum be repaid to American Re in subsequent financial years. ASIC submitted that it had become clear on the evidence that the American Re agreement was not a genuine retrocession agreement.

1462 Mr Fox's submissions (written submissions, para 485ff) challenged the claim that such an agreement is artificial. He submitted that the American Re agreement was not a traditional contract of retrocession but was, instead, financial reinsurance, as Mr de Vroome agreed (T 2414). He contended that in 1998, financial reinsurance contracts were regularly entered into by insurers, with the object of smoothing the costs of catastrophes by taking the top off a high catastrophe year and moving it or spreading it over a number of subsequent years (referring to the evidence of Mr Murray T 1522-3). In Mr Fox's contention, it was neither objectionable nor improper for an insurer to enter into such a contract, provided it was accounted for in the books of the insurer openly, properly, completely and in accordance with prevailing accounting principles. If it were possible to "move" and spread the impact of Hurricane Georges over subsequent years there would be nothing artificial about the result, which would be the consequence of the nature of the contract and what was permitted by prevailing accounting standards.

1463 The evidence of Mr Murray seemed to confirm that there was a legitimate field of operation for financial reinsurance. He said he did not reject the views of Mr Vines and Mr Schneider out of hand and thought the matter over carefully for a number of days, and consulted colleagues overseas, before deciding that the "reinstatement premium" should be accounted for in the first year, thereby denying the efficacy of the arrangement. But he agreed that the appropriate accounting treatment of the contract was a matter about which accounting minds might legitimately differ (T 1521).

1464 In my opinion Mr Fox's submissions do not take adequate account of the nature of the "defined event" cover. A financial arrangement under which A pays B $100 million in year 1 and in return, B pays A $100 million plus a fee in year 2, is an acceptable commercial transaction unless there are special additional facts. But presumably it would not assist B to spread profit into year 2, because B would be required to account in year 1 for the liability to make the payment in year 2, thereby making the transaction balance-sheet neutral. If the contract is a reinsurance contract, so that payment obligations are related to risk, it may be possible to break the link between the receipt and the outgoing. But if the "risk" is so remote as to be artificial (as in the present case), then the whole transaction acquires an air of artificiality. The artificiality is reinforced if the amount of subsequent year premiums is equivalent to the amount of claim recovery in the first year. One can see in the ISC circular, discussed in section 3.26, various attempts to distinguish true retrocession from transactions artificially made to look like retrocession agreements. To say that such a transaction is a legitimate commercial transaction so long as the accounting standards permit it is to overlook the contrived and theoretical risk transfer. In my opinion ASIC's submission about paragraph (b) is correct.

1465 As to (c) and (d), the artificiality of the transaction may be enhanced by an uncommercial and excessive consideration. Here the evidence establishes, in my view, that the US$7.2 million total commission that American Re would earn under the agreement if it ran for its four-year term was an excessive premium for the highly remote risk of the "defined event" (see esp, the affidavit and report of Ms Pearson). As Mr Fox noted (written submissions, para 109), there is no evidence as to whether the commission payable was a justifiable consideration for the financial aspect of the transaction, but in the present case that is beside the point, because there was no other commercial objective than to protect the profit forecast of GIO Re.

1466 As to (e), it is a fact that no external actuarial or accounting advice was taken as to whether the agreement was a proper retrocession agreement before it was entered into. Mr Fox submitted (written submissions, para 123ff) that Mr Vines had the responsibility to obtain auditor approval and decided not to seek it prior to the execution of the contract (T 2665; T 3018). That is correct. But it was Mr Fox who saw the transaction through to completion, contributing his letter of 13 November, and knowing that there would be no prior auditor approval.

1467 It is reasonably clear from the evidence, set out in section 3.23, that the American Re agreement was negotiated in circumstances of urgency, the party seeking urgency being GIO. As indicated earlier, ASIC has suggested that a reason for urgency might have been the impending publication of the first four-month profit figures, which had been prepared on the assumption that the retrocession agreement was in place. An alternative explanation is that when the Federal Court's judgment on the challenge to the Part A statement was handed down, which could have been at any time, GIO might find itself forced to complete the Part B statement quickly.

1468 ASIC submitted that Mr Fox's letter of 13 November 1998 was a "farce". Mr Fox's position (written submissions, para 184) was that he understood American Re wished to know what GIO Re's appetite was for the kind of cover referred to in the letter, and that by writing the letter, he was conveying what he had been told of GIO Re's underwriting department's response to that inquiry. Mr Fox invited me to find that the letter was American Re's idea, something it insisted on in exchange for the urgent issue of cover on 13 November. But his evidence and submissions were inconsistent with other evidence, which I have accepted.

1469 I reviewed the evidence about Mr Fox's letter in section 3.25, and reached the conclusion that Mr Fox's evidence was to be rejected. I concluded that the letter was written by Mr Fox in order to offer to take back a proportion of the top US $40 million relating to the "defined event" in the placement slip. It was written by him to secure the urgent completion of the transaction at a time when American Re was concerned about even the very remote risk transfer that the placement slip involved. It was, I found (at 712) a "side" transaction, as Mr Yee said it was, implying that it was not to be disclosed to those whose job it would be to determine the true nature of the American Re agreement for accounting and regulatory purposes, namely the auditors and APRA. The vague language of the letter reinforced that conclusion.

1470 In my opinion the evidence establishes that Mr Fox caused or participated in causing GIO Re to enter into the American Re agreement in the circumstances set out in paragraphs (a) to (e) above. A reasonable person acting with care and diligence in the position of Mr Fox in the circumstances of GIO Australia Holdings and GIO Insurance would not have participated in the making of the American Re agreement. Nor would a reasonable person in Mr Fox's position acting with due care and diligence sign the letter of offer of 13 November 1998.

Para 157I - failure to act honestly

1471 ASIC also contends that by causing or authorising the American Re agreement and writing the letter of offer of 13 November to American Re, Mr Fox engaged in an act of dishonesty within s 232(2) of the Corporations Law, in the Marchesi v Barnes sense described in section 5.4. The test is whether Mr Fox's conduct was a breach of his obligation to act bona fide in the interests of the companies of which he was an officer, involving consciousness that what he was doing was not in the interests of the company and deliberate conduct in disregard of that knowledge.

1472 In my view, the American Re agreement was not in the interests of GIO Australia Holdings and GIO Insurance because:

· it involved the payment by GIO Re to American Re of a substantial fee disproportionate to the remote risk transferred to American Re;

· it was an artificial transaction involving no risk transfer in respect of the American Re cover and only an extremely remote risk transfer in respect of a defined event (the risk of loss from a second US$10 billion Gulf of Mexico hurricane within any period of 12 months); and

· it was not a genuine retrocession agreement capable of achieving the accounting advantages that GIO Re sought.

1473 When one considers the combined effect of the American Re agreement and the letter of offer, this conclusion is even more powerful. The effect of the letter of offer was that GIO Re was offering to take back the major part of the remote risk that was being undertaken by American Re, and it was doing so for a fee much less than the fee it was paying American Re for transfer of largely the same risk.

1474 In my opinion, his writing of the letter of offer on behalf of GIO Re is strong evidence of Mr Fox's consciousness that the transaction comprising the American Re agreement and the letter was not in the interests of either GIO Australia Holdings or GIO Insurance and was deliberate conduct in disregard of that knowledge. In writing the letter, Mr Fox must have understood that the inclusion of the top-level cover for the remote defined risk was intended to create the artificial appearance of a retrocession agreement to achieve the accounting advantage that was sought. The fact that he wrote the letter of offer in the terms it contains shows that he appreciated that the supposed element of risk in the American Re agreement was negligible, because by the letter he was offering to take back a major share of the defined event risk for a much lower premium. Mr Fox's own evidence to the effect that he believed American Re was testing GIO Re's appetite and the subject matter was unconnected with the American Re transaction, is highly implausible and I have rejected it, for reasons given in section 3.23.

1475 In my view ASIC has proved a contravention of s 232(2) on the Marchesi v Barnes test. The reasons I have given with respect to the interests of the company make it plain that a contravention would have been found if the Australian Growth Resources v Van Reesema test were to be applied.

1476 In oral submissions (T 4463-4) senior counsel for ASIC made it clear that his contention was that the whole of Mr Fox's involvement in relation to the American Re agreement was a contravention of s 232(2). He said the signing of the letter of offer demonstrated what Mr Fox knew, namely that the top level of cover for a defined event was fanciful or illusory. My finding is that Mr Fox caused or participated in causing GIO Re to enter into the American Re agreement and to make the related offer in the "side letter", in breach of s 232(2). That is a finding in accordance with the pleading, as I understand it. I do not believe that senior counsel for ASIC meant to put the matter inconsistently with that.

SASC para 140A-failure to inform of the true potential effect of Hurricane Georges claims on the profit forecast

1477 Para 140A pleads that Mr Fox failed to inform GIO Australia Holdings or GIO Insurance, their boards of directors and management, the DDC or PwC Securities of the true potential effect of the claims received, or likely to be received, by GIO Insurance in respect of Hurricane Georges on the attainment of the $80 million profit forecast.

1478 ASIC submitted (written submissions (Fox), para 280) that Mr Fox, if he had acted with care and diligence, would have positively brought to the attention of those bodies and individuals the likely effect of Hurricane Georges. In the period up to and including 7 December, this would have included showing that Hurricane Georges would have a large and uncertain effect that would be likely to diminish profits very substantially. ASIC contends that Mr Fox should positively have brought to the attention of those bodies and individuals the fact that Mr Schneider had expressed the opinion, as early as 5 November, that Hurricane Georges was likely to be a $100 million type event. It says that Mr Fox should have provided advice of the results of the contract-by-contract analysis. He should have reported on the purpose of the American Re agreement and its manner of operation, and when he learned at the meeting on 7 December that the American Re agreement would not be effective in an accounting sense to protect the profit forecast, he should have advised that no sufficient investigations had been carried out to measure the likely effect of Hurricane Georges as at that time.

1479 Mr Fox's response (written submissions, para 458ff) was to point out that he was not involved in the creation of the profit forecast and was not a participant in the debate as to its achievability. If (contrary to his submission) he attended the meeting with Mr Robertson and Mr Schneider on 5 November 1998, at the suggestion of Mr Lange, it was not as a protagonist in the debate about the impact of Hurricane Georges on the profit forecast. He said there was no evidence that any of the bodies or individuals referred to in para 140A of the SASC had any expectation that Mr Fox would make any statement or comment about the achievability of the profit forecast.

1480 Mr Fox's submission seems to me to disregard the centrally important fact that he was appointed executive director of GIO Re with plenary executive responsibility. That conclusion was resisted on behalf of Mr Fox (written submissions, para 16ff; spreadsheet entitled "Occasions and communications said to be inconsistent with Fox's limited responsibilities"). But I have found that the weight of evidence is in favour of the view that Mr Fox held the position of executive director without limitation. The question was not whether there was any expectation that he would make statements or comment, but rather whether the development of Hurricane Georges and its potential impact on the profit forecast were matters for which he had executive responsibility. My finding that the position was akin to the position of a chief executive, allowing the fact that Mr Fox reported to the Group chief executive, implies that his responsibility extended both to the reinsurance profit forecast and to the system for monitoring catastrophe claims.

1481 As to ASIC's point that Mr Fox should have disclosed what he was told by Mr Schneider on 5 November, Mr Fox asserted that Mr Schneider said only that Hurricane Georges' "worst-case scenario" was $100 million. I have considered and found against this evidence in section 3.16, with some additional comments at section 8.3.

1482 As to the contention that Mr Fox should have advised the bodies and individuals mentioned in para 140A about the American Re agreement, Mr Fox contended that the American Re agreement was Mr Steffey's initiative and he was never asked for advice about how it operated. However I have found, notwithstanding Mr Fox's detailed contentions (written submissions, para 138ff), that Mr Fox had an important role in the American Re negotiations, supervising Mr Schneider.

1483 In my opinion ASIC's case is made out under para 140A. As executive director of GIO Re, Mr Fox was placed in a relationship not only with GIO Insurance, but also with the parent board and the DDC, because of the takeover defence process and the relevance to that process of the reinsurance profit forecast. His duty of care and diligence implied that as a senior executive officer he would bring to the attention of the DDC and PwC developments that would or might materially impact on the profit forecast during the course of the takeover bid. The evidence, and his own submissions, indicate that he did not discharge that duty.

SASC paras 141, 142 and 14 3A - failure to act on information supplied

1484 These three paragraphs of the SASC allege in substance that Mr Fox failed to ensure that information provided to him was verified and followed up for the purpose of assessing the validity of the $100 million profit forecast. The information was:

· Mr Schneider's statement to Mr Fox on 5 November 1998 that GIO Re had received $26.9 million in claims notification for Hurricane Georges and that Hurricane Georges would be a $100 million type event;

· the information provided by Mr Schneider to Mr Fox on 9 November giving the results of the contract-by-contract analysis and the range of results it had determined, and that Mr Schneider believed that Hurricane Georges would be a $100 million type event;

· the results of the contract-by-contract analysis.

1485 ASIC's contention (written submissions (Fox), paragraph 282) was that a careful, diligent and skilful executive director in the position of Mr Fox would have taken a positive interest in the development of Hurricane Georges and would have monitored its development personally, to ensure that the ultimate likely cost was investigated and ongoing developments measured against forecasts.

1486 Mr Fox denied that he received the information alleged by ASIC. I have found against him. My view is that, while it is an overstatement to say that a person in the position of the executive director of GIO Re would be required personally to monitor claims developments, I accept that if there is a takeover due diligence process in place, the executive director's statutory duty requires him or her to exercise care and diligence to ensure, once the importance and sensitivity of a particular matter such as the development of Hurricane Georges has become evident, that the phenomenon is properly investigated and monitored. That would include ensuring that any potentially material information provided to the executive director is properly verified and investigated. To that extent I agree with ASIC. In the present circumstances, once Mr Fox as executive director of GIO Re heard Mr Schneider, acting in the position of internal actuary, say that he had conducted a contract-by-contract analysis and believed that Hurricane Georges would be a $100 million type event, he had a duty to bring that information to the DDC and PwC, and perhaps to investigate or verify it. Mr Fox did no such thing.

1487 ASIC contended (written submissions, para 282) that Mr Fox would not discharge this duty simply by taking the view that the American Re agreement obviated the need for continuing investigation and assessment of the likely effect of Hurricane Georges on the profit forecast. This was because a competent executive director could anticipate the possibility of being required to provide a current forecast and for that purpose, be required to point to investigations positively undertaken in order to justify any new forecast objectively.

1488 I am not persuaded by that submission, cast in that general form. Mr Fox alleged that he did not take the initiative to propose the American Re agreement, no one sought his advice about it, and he believed it was an effective retrocession until PwC said otherwise, to his surprise, on 7 December. It seems to me unlikely, in such circumstances, that an executive director would have the extensive positive duty alleged by ASIC.

Para 142A - failure to have regard to information

1489 Para 142A of the SASC alleges that Mr Fox failed to have any or any adequate regard to the October 1998 results, and in particular the October valuation report distributed on 1 December 1998 (PTB 1453), the Hurricane Georges register e-mails, and the current information given for Hurricane Georges claims at the 25 November 1998 management committee meeting.

1490 The substance of this allegation, according to ASIC (written submissions (Fox), para 284) is that Mr Fox learned, no later than at the 11 November meeting where the October profit figure was discussed, that Hurricane Georges losses had already substantially exceeded the $25 million reserve which was the assumed cost of Hurricane Georges for the purposes of maintaining the $80 million profit forecast. That position was reinforced by the October valuation report. Mr Fox also learned on 25 November 1998, when he chaired a management committee meeting, that the total gross Hurricane Georges claims had reached $82 million, $65 million net. ASIC alleged that a diligent, careful and skilful executive director in Mr Fox's position should have been concerned of a real probability that Hurricane Georges losses could go much higher. Such an executive director would have actively investigated the developing effect of Hurricane Georges.

1491 I agree that Mr Fox's statutory duty of care and diligence, referable to a reasonable person in a like position, would require him to take some positive action in appropriate circumstances. The "like position" is not simply the position of a reinsurance manager; it is the position of a reinsurance manager responsible for providing information as part of a due diligence process. However, it is not clear to me precisely what investigations are said to be necessary in response to the information identified. The most important thing to do would presumably be to have accurate daily information about claims developments, something that Mr Fox endeavoured to establish shortly after his arrival.

1492 ASIC also submitted, in the context of para 142A, that the diligent, careful and skilful executive director in Mr Fox's position would not have entered into the American Re agreement without first obtaining regulatory confirmation, and would not have rested easy on the ability of the agreement to protect GIO Re from ultimate net Hurricane Georges claims up to $100 million. In my opinion, ASIC's propositions are expressed too broadly. In my view specific duties concerning the American Re agreement do not flow from the general obligations of an executive director to make appropriate investigations of material matters.

8.6 Conclusions as to Mr Fox's liability for breach of ss 232(2) and (4)

1493 I have found that there were breaches of s 232(4) by Mr Fox, specified in paras 1438, 1452, 1457, 1470 and 1486. I have found that Mr Fox also contravened s 232(2) in the circumstances specified in paras 1442, and 1474.

9. Conclusions

1494 I have found that each of the three defendants has failed to meet the statutory duty of care and diligence contained, at the relevant times, in s 232(4) of the Corporations Law. Mr Fox has also contravened the statutory duty to act honestly, contained at the relevant time in s 232(2) of the Law. In the case of Mr Vines, and to a lesser extent Mr Robertson, a significant number of the alleged contraventions have not been made out. In the case of Mr Fox, ASIC has made out all of its principal allegations.

1495 This judgment is confined to the question of liability for contravention of the two provisions. It will be necessary to give the parties the opportunity to make submissions and, if they wish, adduce evidence on the question of remedies, in accordance with the procedure recently affirmed by the Court of Appeal of New South Wales in Forge v ASIC (2004) 52 ACSR 1. In addition, there is an outstanding matter going to liability, namely whether any of the defendants should be given the benefit of the "honesty defence" in s 1317JA or s 1318 of the Corporations Law. During the hearing it was arranged that I would hear submissions on that question, if necessary, after publishing my reasons on convention (T 4109). I shall stand the proceedings over in order to give the parties and their legal advisers the opportunity to consider these reasons for judgment and to give some thought to the next steps, which should include a timetable and directions.

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