Director of Public Prosecutions v Story
[2022] VCC 1000
•27 June 2022
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE CRIMINAL DIVISION | Revised Not Restricted Suitable for Publication |
Case No. CR-21-02328
| DIRECTOR OF PUBLIC PROSECUTIONS |
| v |
| MICHAEL STORY |
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JUDGE: | His Honour Judge Moglia | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 21 June 2022 | |
DATE OF SENTENCE: | 27 June 2022 | |
CASE MAY BE CITED AS: | DPP v STORY | |
MEDIUM NEUTRAL CITATION: | [2022] VCC 1000 | |
REASONS FOR SENTENCE
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Subject:Criminal Law – Sentence upon plea of guilty
Catchwords: Sentencing – Sentence indication – Insider trading – Division 3 financial product – Off-market transfer – Price-sensitive information – Inside information – Utilitarian benefit of plea – Pharmaceutical industry – Integrity and efficacy of markets – Confidence in the commercial world – True insider – Central figure in the negotiations – Attempt to avoid significant losses – One-off trade – Trade not concealed – General deterrence, denunciation and just punishment – Inherent dishonesty – No criminal history – Good character – Less weight to specific deterrence and community protection – Chenhall – Lack of further offending – Good prospects of rehabilitation – Imprisonment – Recognisance release order – Immediate release – Fine – Pecuniary penalty order
Legislation Cited: Crimes Act 1958 (Vic); Sentencing Act 1991 (Vic); Corporations Act 2001 (Cth); Proceeds of Crime Act2002 (Cth)
Cases Cited:Chenhall v The Queen [2021] VSCA 175
Sentence:14 months imprisonment and a recognisance release order made
providing for immediate release
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APPEARANCES: | Counsel | Solicitors |
For the CDPP | Mr C Winneke QC | CDPP – Mr A Murphy |
For Mr Story | Mr N Clelland QC | Rotstein Commercial Lawyers |
Michael John Story, you have pleaded guilty to a single charge of insider trading relating to your conduct on 21 June 2018, contrary to sections 1043A and 1311 of the Corporations Act 2001 (Cth).
The maximum penalty for this offence is 10 years imprisonment or a fine of $210,538 or both.
Summary of offending
The agreed basis of your guilty plea is set out in the Crown Opening Upon Sentence Indication dated 17 June 2022. You are to be sentenced based on those facts which I summarise and make findings about as follows.
During the relevant time in 2018 you were the General Manager, Strategic Projects of Sigma Healthcare Limited, a wholesale and distribution pharmaceutical business servicing pharmacies and hospitals throughout Australia. Sigma's largest customer at the time was the Chemist Warehouse Group. It accounted for approximately 49 per cent of Sigma's net sales in the 2018 financial year and, as at 27 June 2018, 47.2 per cent of Sigma's direct income.
Clearly the supply contract between Chemist Warehouse and Sigma was significant to Sigma's profitability, its income and the value of Sigma's shares. Brokers’ reports identified the contract as a material risk and a main driver for Sigma stock. Perhaps exemplifying this, in May 2017 following an announcement that litigation was proposed between Chemist Warehouse and Sigma, the Sigma share price declined steeply from well over a dollar per share to 76 cents on 25 May 2017.
At all relevant times ordinary shares of Sigma were a Division 3 financial product within the meaning of 1042A of the Corporations Act.
Over the years you held high level roles in both Sigma and Chemist Warehouse. You were Sigma's Victorian state manager responsible for the Chemist Warehouse account from 1993-2001. From 2002-07 you were General Manager at Chemist Warehouse. You were then involved in business development and as the Senior Vice President, Operations Development for 2 other pharmaceutical companies until 2012 when you became a director of PharmaSave Australia and CEO of the Central Healthcare Group, both of which were acquired by Sigma in 2014. Sigma retained you as group CEO and then appointed you as Sigma's General Manager, Strategic Projects in 2017, which position you held until the offending in this case.
In February 2017 Sigma invited you to participate in its loan-funded share plan. Accordingly, on 26 May 2017, following the decline in price I described earlier, you purchased 500,000 Sigma shares at an average value of 76.9 cents. A few weeks later on 20 June 2017, you effected an off-market transfer of 250,000 of those shares to an account in your wife’s name, which account you were authorised to operate.
Later that year Chemist Warehouse for the first time went to tender for its supply contract. Given the existing relationship, not then due to expire until the end of 2018, Sigma was not required to tender. Rather, it engaged in direct negotiations with Chemist Warehouse to seek the renewal of the existing contract.
By January 2018 Sigma became aware that the best tender had come in around $30m better than the existing arrangement.
In February, Sigma established a project board and a project team to develop a negotiation strategy and initial response to Chemist Warehouse. You were a member of that team, appointed as a subject matter expert due to your previous experience at Chemist Warehouse.
In March, you met the Chemist Warehouse Chief Operating Officer about the tender process. You received a ‘Comparison of Options Report’ that Chemist Warehouse had created. To summarise the results of the tender, it showed projected savings to Chemist Warehouse of $23m to $59m over the existing contract. You received an email from the Sigma CEO saying among other things, 'I don't think we're going to get there.'
In April, you met with a co-founder of Chemist Warehouse and acknowledged that losing the business could be catastrophic.
By the end of May, communications between Sigma and Chemist Warehouse, albeit not said to directly include you, acknowledged that the terms of Sigma's offer of 25 May was a ‘fair way short’ and that unless it materially improved it may well signal the ‘beginning of the end’ of the longstanding relationship.
During a meeting on 7 June 2018, you spoke directly with another co-founder of Chemist Warehouse discussing how far apart the companies were and expressing the view, amongst other things, that a deal could not be done. You were aware of the very real likelihood of Sigma losing the contract. On 11 June the Sigma CEO emailed you commenting that 'discussions are heading down the toilet.'
By 20 June, negotiations had progressed to the point where you emailed an acquaintance about missing a social event, explaining that you were, 'About to lose our biggest account which will have large ramifications for the business.' I find this to be an accurate reflection of your then understanding of the state of affairs.
You were also aware that relevant decisions of the Sigma board were imminent.
You were aware that your knowledge of the state of play amounted to price sensitive information.
The very next morning, 21 June 2018, you instructed your sharebroker to sell the 250,000 Sigma shares held in your wife's name. When asked, you said the trading window was open. They were then sold at 81.5 cents per share, totalling $202,629.37.
During the following days the Sigma board indicated it was unable to improve on its offer of 25 May and Chemist Warehouse determined not to renew the supply contract.
On 2 July 2018, it was announced to the market that the supply agreement had not been renewed. The share price at the close of trading that day had dropped to 48.5 cents, a 40.12% drop compared to the last trade prior to the announcement. The volume of trade in Sigma shares during the 10 days following the announcement was up by a factor of 14.7 compared to the previous 10 days.
Had you sold the 250,000 shares following the 2 July announcement you would have received $70,179.37 less than you did by selling on 21 June based on your inside information.
Procedural history
ASIC investigated the circumstances of this matter and interviewed you on 18 December 2018 when you admitted having conducted the trade.
You were charged in October 2020 and were committed following a contested committal hearing in October 2021.
By application this year on 4 May you sought a sentence indication from the court which was granted and heard on 21 June 2022. Following the indication, you pleaded guilty.
Your plea has real utilitarian benefits in obviating the cost and burden of conducting a trial. It reflects to some extent a willingness to facilitate the course of justice and some acceptance of responsibility for your wrongdoing.
Personal circumstances
You are now 61 years old and have been married with Amanda for 20 years. You have two teenage children together.
As outlined earlier, you have successfully worked in positions of high responsibility in the pharmaceutical industry since at least 1993. The companies for whom you have worked have been successful, no doubt in part due to your diligence and efforts.
Numerous character references (Exhibit 4), attest to your reputation within the pharmaceutical sector, a reputation built upon honesty, passion and integrity. They describe your long-proven history of working with sensitive and confidential information with the utmost professionalism. Some describe specific circumstances where you would proactively distance yourself from deals and transactions that you perceived to be unethical. Other referees described situations where you made business decisions which prioritised your clients and colleagues’ interests over you own.
Your wife, Amanda Story, in her reference spoke of your commitment to her efforts in her own business and your support of her which demonstrates something about your character. A psychological assessment by Dr Glowinski was tendered and it spoke of the extent to which your offence, the investigation of your offending and the delay in the case have affected you psychologically. You have had depressive symptoms and it is clear that the delay since the offending came to light has had some effect on you.
Your counsel submitted that your offending has irreparably damaged your reputation and prospects within the pharmaceutical industry. I find however that your future with industry, or business more generally, is not without hope. It appears from your references that many within the industry will continue to rely on you for advice and guidance and still regard you as a truly valuable asset.
Sentencing issues
The seriousness of insider trading relates largely to the losses it causes to other investors and its undermining of the integrity and efficacy of markets along with confidence in the commercial world generally.
In your case, you are a principal offender possessing firsthand inside information and directing the relevant trade. I find you to have been a true insider, not only because of your managerial position within Sigma, albeit not at director level, but also because you were a central figure in the negotiations with Chemist Warehouse over a significant period of time. The quality of the information you held was not low level. There is no explanation for your conduct other than it was an attempt to avoid significant losses in the market to which you were exposed.
Whilst the trade in question here was a one off and not in any meaningful way concealed, deterring others tempted to engage in such trading must assume significant weight when sentencing you. I also denounce the inherent dishonesty in your conduct and in the sentence I am about to announce I aim to impose just punishment upon you.
You do not have any criminal history and other than this offending you enjoy a good character. While it was in part due to your good character that you were able to retain a position of trust in Sigma where you obtained price sensitive information, your breach of that trust does not mean that your character is irrelevant to sentence. In light of your otherwise blemish-free history, I do not find the need to attach much weight to specific deterrence or community protection when sentencing you.
You have entered a guilty plea during the COVID-19 pandemic, when the justice system has continued to operate under significant burdens. Your plea has obviated the need for a trial when the time and resources it would require are under great pressure. This increases its utilitarian value and will be reflected in sentence in such a way as to provide an incentive for others to do likewise.[1]
[1]Chenhall v The Queen [2021] VSCA 175
I am conscious of the delay since the offence – now four years old. I do not regard this as having given rise to any unfairness to you, but your lack of further offending or other misconduct during that time is a cause for optimism and lowers the need for greater punishment.
You are regarded by many as having good intellect and principles and so I expect that your sentence will provide sufficient incentive to avoid any future offending. In those circumstances I regard your prospects for rehabilitation to be reasonably good.
The prosecutor submitted that a term of imprisonment providing for immediate release under a recognisance release order was appropriate and your counsel agreed, as do I.
On the charge of insider trading, I sentence you as follows:
a.You are to be imprisoned for 14 months.
b.Upon entering into a recognisance in the sum of $5,000 conditional upon you being of good behaviour for 3 years, you will be released forthwith.
c.In addition to the term of imprisonment, you are to pay a fine of $30,000. I order that the fine be paid within 4 months, according to s 59 of the Sentencing Act.
In accordance with s6AAA of the Sentencing Act 1991 (Vic), but for your guilty plea I would have imposed 2 years and made a recognisance release order providing for your release after serving 14 months.
In addition, noting the lack of any opposition, I make a pecuniary penalty order in accordance with s 116 of the Proceeds of Crimes Act (Cth) in the amount of $70,197.37, representing the loss in the proceeds of sale of the shares that you avoided by trading when you did due to your insider information.
My sentence today will allow you to leave once you have signed the recognisance release order. That is, your acknowledgement of continuing to live in the community under certain conditions. Upon your signing of that document, you will be released. For the next three years you remain under your own acknowledgement that you will not further offend. If you further offend during those three years you will forfeit the $5000 that I've made the subject of the recognisance and there may be further consequences in terms of serving further time.
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