Musumeci and Australian Securities and Investments Commission
[2009] AATA 524
•15 July 2009
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2009] AATA 524
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2008/0420
GENERAL ADMINISTRATIVE DIVISION ) Re ROCCO MUSUMECI Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal Mr P W Taylor SC, Senior Member Date15 July 2009
PlaceSydney
Decision The decision under review is set aside. In substitution for the Delegate’s 4 January 2008 decision I order that pursuant to s 920A(1)(e) of the Corporations Act 2001, Mr Rocco Musumeci is prohibited from providing any financial services for a period of two years. ..................[sgd].........................
Mr P W Taylor SC
Senior Member
CATCHWORDS
CORPORATIONS – financial services – failure to comply with a financial services law – market manipulation – involvement in transactions likely to create an artificial share price – banning order – length of banning order – relevance of a conviction for offences that involve the same conduct as that relied on to enliven the banning power – punitive effect of a banning order – general and personal deterrence – decision under review set aside
Corporations Act 2001 – s 920A, 1041A
Regulatory Guide 98 – Licensing: Administrative action against financial services providers (April 2006)
Adler v R (2006) 57 ACSR 675
Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561
Australian Securities and Investments Commission v Petsas (2005) 23 ACLC 269
Australian Securities and Investments Commission v Vizard (2005) 145 FCR 57
Australian Securities Commission v Donovan (1998) 28 ACSR 583
Elliott v Australian Securities and Investments Commission (2004) 48 ACSR 621
Kamha v Australian Prudential Regulation Authority (2005) 147 FCR 516; 88 ALD 620
Re HIH Insurance Ltd and HIH Casualty and General Insurance Ltd, Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80
Re Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602; [2008] AATA 278
Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203
Re One Tel Ltd (in liq); Australian Securities and Investments Commission v Rich (2003) 44 ACSR 682; [2003] NSWSC 186
Re Tasmanian Spastics Association; Australian Securities Commission v Nandan (1997) 23 ACSR 743
Rich v Australian Securities and Investments Commission (2004) 220 CLR 129
REASONS FOR DECISION
15 July 2009 Mr P W Taylor SC, Senior Member background
1. In September 2006, Mr Musumeci was 25 years old and an authorised representative of Bell Potter Securities Limited (Bell Potter). Not long after he became an authorised representative he acquired a new client interested in purchasing shares in Genetic Technologies Limited, a publicly listed company. Between mid September and late November 2006, Mr Musumeci implemented frequent purchase instructions. His conduct in doing so concededly involved participating in transactions likely to have the effect of creating an artificial price for shares in Genetic Technologies Limited. It involved Mr Musumeci in contraventions of a financial services law, namely s 1041A of the Corporations Act 2001.
2. On 27 November 2006, Bell Potter suspended Mr Musumeci’s authority. After an investigation of the share purchase transactions, it terminated Mr Musumeci’s employment on 11 December 2006.
3. On 4 January 2008, after its own investigation, ASIC made a banning order under s 920A of the Corporations Act 2001. The order prohibited Mr Musumeci from providing financial services for a period of four years.
4. Mr Musumeci contends the prohibition period is excessive. He contends that the banning order period should be no more than two years.
factual basis for the banning order
5. XY Incorporated was a private company that had been incorporated in Colorado, in the United States of America. Dr Mervyn Jacobson was XY Inc’s president, chairman of the board and chief executive officer. He was also Chairman of Genetic Technologies Limited.
6. In September 2006, Dr Jacobson telephoned Mr Musumeci and told him that he wanted to purchase USD$500,000 worth of shares in Genetic Technologies Limited. (It will be convenient to refer to the company by its ASX code “GTG”.)
7. Over the course of the following 10 weeks XY Inc’s instructions to purchase GTG shares were conveyed to Mr Musumeci by Dr Jacobson (until about 27 September) by his daughter, Tamara Newing (between 28 September and 2 November 2006) and by an XY Inc employee, Ms Bratz (between 3 and 23 November 2006).
8. Mr Musumeci says Dr Jacobson told him he wanted to have the GTG share price close the trading day at a particular price. Mr Musumeci placed his bid orders partly on the basis of specific instructions from Dr Jacobson. Partly they were also influenced by his own analysis of the state of the market, but against the background of Dr Jacobson’s instructions. The purchase orders were placed as part of an endeavour to show strength to the buy side of the market and, where the orders resulted in successful trades, to actually increase the reported share price.
9. When, in late September 2006, Dr Jacobson told Mr Musumeci that future instructions for XY Inc’s GTG share purchases would be provided by his daughter, Ms Newing, Mr Musumeci contacted Ms Newing and confirmed with her Dr Jacobson’s instructions. Ms Newing told Mr Musumeci the objective was to ensure a GTG closing share price of at least $0.35. Thereafter Mr Musumeci placed further orders for the purchase of GTG shares. Ms Newing mostly conveyed her instructions to Mr Musumeci by telephone. Later on, she merely emailed instructions. Sometimes those instructions related to specific offers or transactions. Occasionally, because of Ms Newing’s anticipated unavailability, Mr Musumeci was given a general instruction to follow the previously implemented trading pattern. At one stage, when the share price had dropped to about $0.34, Ms Newing told Mr Musumeci that Dr Jacobson did not want the GTG share price to close below $0.35.
10. On 2 November 2006, Dr Jacobson telephoned Mr Musumeci and nominated XY Inc’s company secretary, Ms Gail Bratz, as the person who would be responsible for any further instructions to purchase GTG shares. Between 3 and 23 November 2006, Mr Musumeci obtained further instructions from Ms Bratz. Apart from a few initial telephone conversations, those instructions were typically communicated by e-mail. They were to substantially the same effect as the instructions Mr Musumeci had previously been given by Dr Jacobson and by Ms Newing.
the market significance of xy inc’s trades
11. In the course of its investigation, ASIC carried out a detailed analysis of XY Inc’s purchases of GTG shares. The analysis quantified the number and timing of the transactions as well as the prices and the volume of shares purchased. It also sought to assess the significance of XY Inc’s transactions relative to Bell Potter’s other clients, the activities of other brokers, movements in the GTG share price and to the level of Mr Musumeci’s personal remuneration.
12. It is unnecessary to detail all of the many observations that can be drawn from the ASIC analysis. The broad indicators of the frequency of the orders Mr Musumeci placed, and the extent of XY Inc’s resultant GTG share purchases between September and November 2006 is summarised in the following table:
Period Purchases Start End Orders Trades Number $ Value Av price 14-Sep-06 28-Sep-06 38 92 1,392,784 485,325 0.348 29-Sep-06 02-Nov-06 70 127 1,865,416 653,160 0.350 03-Nov-06 23-Nov-06 7 9 117,500 43,300 0.369 Totals 14-Sep-06 23-Nov-06 115 228 3,375,700 1,181,785 0.350 ASX Trade times $ values % of $ val First 20 minutes 407,455 12% Last 20 minutes 1,130,025 33% Rest of day 1,838,220 54% Total XY trades ($) 3,375,700 100%
13. The information summarised in the table is consistent with XY Inc’s attributed strategy of trying to maintain the GTG closing price at around $0.35. More detailed analysis of the trading pattern shows that XY Inc’s purchases were responsible for a very substantial portion of the GTG share price increases. However, there was also a significant trading volume apparently attributable to other traders. There were even many days, at least during the period between 10 and 22 November 2006, on which XY Inc did not trade in the market. On those days the closing price of CTG shares was at least $0.37.
14. XY Inc’s closing GTG share price objective of around $0.35 was reflected in Mr Musumeci’s recollection of the oral instructions Dr Jacobson gave him, and in the email exchanges between Mr Musumeci and Ms Newing in October 2006. It is consistent with the “average” price calculated in the summary table set out earlier in these reasons.
15. ASIC does not contend that XY Inc’s share purchases were intended to attempt to achieve significant increases in the GTG share price. Neither does ASIC contend there was anything particularly significant about the $0.34/$0.35 closing price objective. It may have been a trigger price for margin calls Dr Jacobson apprehended, and wanted to avoid. That suggestion was noted in the County Court sentencing remarks to which I will later refer, but it is not clear that that particular motive was ever communicated to Mr Musumeci.
asic’s reasons for the banning order
16. Mr Musumeci attended an interview with ASIC on 24 July 2007. The Delegate’s 4 January 2008 statement of reasons refers, in several places, to various admissions Mr Musumeci made during the course of that interview. The reasons also record that, during the 20 December 2007 hearing Mr Musumeci expressed remorse for his conduct and demonstrated an appreciation it had involved a failure to comply with a financial services law. Mr Musumeci assured the Delegate that if a similar situation arose in the future he would appropriately report the circumstances.
17. In the 4 January 2008 reasons the Delegate observed that Mr Musumeci’s conduct and representations at the hearing alleviated some of the concern that Mr Musumeci would not comply in the future with a financial services law. However, the Delegate specifically noted that Mr Musumeci’s failures had occurred even after, according to his own admission, he had become aware of the price manipulation that XY Inc’s instructions were intended to achieve. This led the Delegate to conclude that ASIC had “reason to believe” Mr Musumeci would not in the future comply with a financial services law.
18. Mr Musumeci does not dispute that he failed to comply with a financial services law. Neither does he dispute that his failure permits ASIC to make a banning order. His objections are two fold. He objects to the Delegate’s finding that there was reason to believe he would not comply with a financial services law in the future. He also objects to the length of the period for which the banning order has been made.
19. The Delegate’s 4 January 2008 reasons do not suggest that any apprehension about Mr Musumeci’s future compliance with financial services laws was a significant consideration in determining the period of the banning order. On the contrary, and perhaps somewhat inconsistent with the formal finding in relation to the risk of future non-compliance, the reasons themselves contain a degree of ambivalence (which I do not suggest was inappropriate in the circumstances) about the desirable period for which a banning order should be made. This is apparent from the following paragraph of the Delegate’s reasons.
51.The conduct engaged in by Mr Musumeci has some of the features of the conduct for which a banning “for under 3 years” applies in that that there has been full co-operation with ASIC, no previous history of a failure to comply with financial services laws and indications of a clear intention to comply in future with financial services laws. The conduct has a feature of the conduct for which a banning “from 3-10 years” applies in that the conduct is more as a result of incompetence rather than carelessness and it continued after it became apparent to Mr Musumeci that what he was doing involved failures to comply with financial services laws.
the criminal proceedings against mr musumeci
20. After the delegate’s 4 January 2008 decision, Mr Musumeci was charged with three counts of contravening s 1041A of the Corporations Act 2001. The three charges related to the periods during which he effected XY Inc’s GTG share purchases on the direct instructions of either Dr Jacobson, Ms Newing or Ms Bratz. The penalty for an offence against s 1041A is 200 penalty units (a penalty unit being $110) or five years imprisonment, or both.
21. In June 2008 Mr Musumeci pleaded guilty to all counts. He was finally sentenced, in the Victorian County Court, in February 2009.
the sentencing submissions
22. The Crown’s sentencing submissions in the proceedings against Mr Musumeci emphasised the objects of Chapter 7 of the Corporations Act 2001. Those objectives include promoting fairness, honesty and professionalism by those who provide financial services, and maintaining fair, orderly and transparent markets for financial products: see s 760A of the Corporations Act 2001.
23. The criteria set out in s 16A of the Crimes Act 1914 (Cth) require a court dealing with a federal offence to impose a sentence that is of a severity appropriate in all the circumstances of the offence. In particular, the sentencing court is required to consider a range of factors personal to the individual. These include two matters of particular relevance in the present situation: (i) the need to ensure that the person is “adequately punished for the offence” and (ii) the deterrent effect that the sentence may have on the person.
24. The Crown’s sentencing submissions contended that an element of general deterrence, even though it is not specified as one of the inclusive sentencing criteria in s 16A(2) of the Crimes Act 1914, was also a relevant sentencing consideration: Director of Public Prosecutions (Cth) v El Karhani (1990) 21 NSWLR 370 at 377. Indeed the Crown submissions identified it as a particularly important consideration where “white collar” offences were involved. The reason advanced was that these types of offences are considered typically difficult to detect, investigate and successfully prosecute: R v Pantano (1990) 49 A Crim R 328 at 330; Director of Public Prosecutions v Bulfin (1998) 4 VR 114 at 131-132.
25. In addition, the Crown submissions remarked that in “white collar crime” matters offenders are typically likely to have no prior convictions, to have good character references, and to have good prospects of rehabilitation. Indeed, the personal qualities of the offender, and the positions of trust and influence they often occupied, is said to be one reason why offences are difficult to detect. Precisely because of these considerations the offender’s personal circumstances, which are often relevant mitigatory factors in the sentencing process, must be given less weight than the factor of general deterrence: Director of Public Prosecutions (Cth) v Page [2006] VSCA 224 at [37] and R v Adler (2005) 53 ACSR 471 at [51].
26. In the course of the Crown sentencing submissions the Crown drew attention to sentences that had been imposed in a number of other matters involving contravention of similar provisions to the Corporations Act. In particular the submissions noted the observation of McClure JA in R v Lloyd (1996) 19 ACSR 528 at [50]. There His Honour had observed that “a sentence of immediate imprisonment is not consistent with the type of sentences previously imposed for this type of offence. However, that does not prevent this court from re-assessing and re-evaluating what is an appropriate sentence reflecting current values and circumstances”. In that case, Rothwells Ltd had arranged and funded substantial trading in the shares of Paragon Resources NL. The former managing director of Rothwells Ltd was convicted of three offences of creating a false appearance with respect to the price of shares. On an appeal against sentence the majority of the Western Australia Full Court substituted a fine of $50,000 for the originally imposed fine of $22,500.
27. In contrast to the sentence imposed in R v Lloyd (1996) 19 ACSR 528 the Crown submissions relating to Mr Musumeci also drew attention to, and the sentencing judge made specific note of, the sentence that had been imposed in Scook v R [2008] WASCA 114. In that case the instigator of a scheme involving manipulated trading was sentenced to a period of three years’ imprisonment. The broker implicated in the trading activities was fined $24,000 and sentenced to a period of one year’s imprisonment, although that sentence was wholly suspended.
28. The Crown sentencing submissions accepted that Mr Musumeci’s role in the offences was subsidiary. The submissions at least implicitly accepted that the significance of his involvement was partly ameliorated by his relative youth and inexperience. Nevertheless, the Crown submitted that a sentence of immediate custodial imprisonment would have been appropriate, but for his early plea of guilty, his apparent remorse, his past and future corporation with law enforcement authorities, and his prospects of rehabilitation.
the county court’s sentencing remarks
29. In the Victorian County Court Judge Cotterell noted that Mr Musumeci had waived his right to committal and had pleaded guilty when he was arraigned on 8 July 2008. He had been on bail since he entered his plea and had honoured all of the bail conditions. The judge described Mr Musumeci as having been “exemplary” in his co-operation with enforcement authorities.
30. That co-operation had included explicit acknowledgement of the seriousness of the offences. The judge recorded Mr Musumeci’s acknowledgement that he was aware of the practice of market manipulation and ultimately aware that was what was occurring as a result of implementing XY Inc’s instructions. Nevertheless, the judge also noted that Mr Musumeci was “neither an initiator nor principal author of this scheme”. But once he became aware of the true nature and purpose of XY Inc’s share purchase activities, he had failed to extricate himself and had failed to report the matter to his superiors. The judge accepted Mr Musumeci did not benefit financially from the transactions. Her Honour considered that Mr Musumeci had remained silent, and not reported the matter, “out of fear of losing [his] top client”. The judge identified Dr Jacobson’s motive for the share purchase instructions on behalf of XY Inc as being to maintain the GTG share value at approximately $0.35 in order to avoid the risk that he, and members of his family, would face margin calls.
31. The judge described the public interest in maintaining the market for securities free from manipulation and described it as a matter of “the gravest concern”. In obvious acceptance of the Crown’s submissions, the judge specifically noted that traders such as Mr Musumeci were in a position to “totally undermine the system” if they allowed “integrity and obligations to comply with the law to be undermined by temptation” - as Mr Musumeci concedes he had done. Nevertheless, the judge also took into account that the prosecution case did not establish the impugned trading had actually caused any demonstrable loss. The judge acknowledged Mr Musumeci’s contrition, and the significant co-operation with law enforcement authorities that was reflected in his subsequent conduct. The judge was positively satisfied that Mr Musumeci was not likely to offend again and that the penalties he had already suffered in relation to the matter “would be sufficient to deter [him] from any further criminal actions.”
32. The judge accepted the Crown submissions that a custodial sentence would ordinarily have been appropriate. Indeed she explicitly said that “the only option open to me is to impose a term of imprisonment and that is to act as a deterrence in these matters”. However, the judge ordered that the sentence be wholly suspended in view of Mr Musumeci’s excellent character and “exceptional degree of co-operation”.
the sentence imposed on mr musumeci
33. The judge sentenced Mr Musumeci to 10 months’ imprisonment on each of the three counts. Nine months of each sentence was concurrent. This resulted in a total effective custodial sentence of 12 months. The judge recorded (in accordance with the requirements of s 6AAA of the Sentencing Act 1991 (Vic)) that she would have imposed a total effective sentence of 16 months but for Mr Musumeci’s guilty plea. The judge then discounted the sentence to take into account Mr Musumeci’s co-operation with enforcement authorities. That sentencing discount, which the judge was required to identify under s 21E of the Crimes Act 1914 (Cth), was five months. The discount reduced the total effective sentence from 12 months to 7 months’ imprisonment.
34. That latter discount took into account a written undertaking Mr Musumeci gave in December 2008 to co-operate with law enforcement authorities in relation to proposed proceedings against Dr Jacobson, Ms Newing and her husband Mr Geoffrey Newing (the Chief Operating Officer of GTG). Long before giving that undertaking Mr Musumeci had already co-operated with ASIC in the preparation of a detailed 132-page statement. If he fails to co-operate further in accordance with the undertaking, Mr Musumeci is liable to have his sentence increased, pursuant to the appeal provisions contained in s 21E(3) of the Crimes Act 1914.
35. After imposing the custodial sentence, Judge Cotterell ordered Mr Musumeci’s release, conditional upon his providing a recognisance and bond under s 20(1)(b) of the Crimes Act 1914.
36. At the conclusion of her sentencing remarks the judge continued with this final additional observation (which was addressed to both Mr Musumeci and another person sentenced in relation to the same matters):
… The reason for imposing the term of imprisonment is to reflect the seriousness of the offending and the reason for suspending it, is to give you the opportunities, which I think are required in your situation, or justified in your situation, to return to, and become properly contributing members of the community. It is not intended as a measure of leniency, it is a sentence which is in the interest of the community which will enable you to return to be proper functioning members of the community and will mean that there would be no further offending on the part of either of you.
…
37. On 16 February 2009, the same day that he was sentenced, Mr Musumeci entered into a bond to be of good behaviour for a period of two years. He was then released from custody in accordance with the judge’s order.
the applicant’s grounds for imposing a shorter banning period
38. The submissions made on Mr Musumeci’s behalf emphasise that he has made a full, remorseful and contrite acknowledgement of his conduct in connection with the GTG share purchases by XY Inc. They also accurately contended that Mr Musumeci pleaded guilty to the proceedings that were brought against him, at the first available opportunity. Mr Musumeci has formally indicated his willingness to cooperate with ASIC in the prosecution of any other person arising out of the conduct with which he was involved on the behalf of XY Inc. That undertaking has the potential sentencing sanction to which I have already referred.
39. Mr Musumeci says there is nothing within Regulatory Guide 98 – Licensing: Administrative action against financial services providers (April 2006) (Regulatory Guide 98) that bears directly on his particular circumstances. Mr Musumeci contends that his involvement with XY Inc was not in any sense motivated by a desire to obtain any improper personal benefit. He neither solicited nor received any profit or commission in relation to XY Inc’s share trading activities - other than the ordinary proportion of the direct brokerage fees charged by his employer, Bell Potter. The amount was less than $1,500. He seeks to characterise his conduct as misguided and regrettable enthusiasm to fulfil Dr Jacobson’s wishes. He concedes that the conduct was wrongful. He asserts a determination never to be involved in its repetition.
mr musumeci’s personal circumstances
40. Mr Musumeci began his employment in the financial services industry in October 2000, when he was aged 19. He was employed by Credit Suisse First Boston Australian Equities Private Ltd as a Dealer’s Assistant in its stockbroking operation in Wollongong. His duties at that time were essentially administrative and did not include any advisory function. In 2002 the Challenger Group purchased the Credit Suisse business. Challenger First Pacific Ltd became Mr Musumeci’s new employer, but his duties remained essentially unchanged.
41. Bell Potter purchased the Challenger business in January 2003. Mr Musumeci’s role remained essentially unchanged until about July 2006. But he aspired to work as a broker and, starting in 2004, he undertook studies with the Finance Industry Association with a view to becoming appropriately qualified.
42. On 5 July 2006 Bell Potter appointed Mr Musumeci as an authorised representative pursuant to s 916A of the Corporations Act 2001. At the same time he was appointed an Advisor Assistant/Trainee Advisor. In this role his previous responsibilities were expanded to permit him to provide advice, subject to the supervision of a Senior Client Advisor in the Wollongong office, a Mr Symes. With his new, but limited, advisory function, Mr Musumeci was expected to establish his own client list.
43. When he first accepted instructions from Dr Jacobson, in September 2006, Mr Musumeci was 25. He was a very recently appointed financial adviser, with only a few months experience and only a small number of his own clients. XY Inc was his most substantial client for the whole of the time between mid September and the end of November 2006.
44. Since he was dismissed by Bell Potter on 11 December 2006, Mr Musumeci has not been involved in the financial services industry. He currently works as a barista at his parent’s café. He is married, with a non-dependent wife.
45. He has, perhaps unsurprisingly, been unable to find any employment within the financial services industry. He tried to find suitable employment, and made various applications, throughout 2007. But after March 2007, when he had his first dealings with ASIC in relation to the investigation of XY Inc’s trading activities, he was subject to restrictions, or at least regarded himself as subject to confidentiality restrictions, about the extent of the disclosure he could appropriately make to prospective employers. Those difficulties, together with the extent of the disclosures that he did make, effectively precluded him from obtaining employment in the financial services industry.
46. If that practical inability to obtain appropriate employment is added to the four-year banning period imposed on 4 January 2008, his actual and required absence from the industry will exceed five years – that is the period from December 2006 until January 2012.
the gravamen of mr musumeci’s misconduct
47. Mr Musumeci says he initially believed that the rationale for Dr Jacobson and Ms Newing’s instructions was to counter other people from manipulating, or trying to manipulate, the GTG share price downwards. However, he concedes that he grew increasingly suspicious of the intended purpose of the share trades. Certainly by November 2006 when he was being provided with instructions by Ms Bratz, Mr Musumeci believed that XY Inc’s trades were intended to manipulate the market price in GTG shares. However, he remained silent. XY Inc was his major client. He did not wish to risk losing his major client.
48. An inference from Mr Musumeci’s July 2007 interview with ASIC, and one apparently accepted by the Delegate, is that he was unaware of any impropriety in the XY Inc share trading activities until sometime in early November 2006. The elaborate details of Mr Musumeci’s recollection of his instructions from XY Inc are set out at length in a long statement dated 19 December 2007. The form and contents of that statement indicate the scope and extent of Mr Musumeci’s co-operation with ASIC in its investigation. The statement appears to have been prepared with a view to its evidentiary use in connection with prosecution of offences involved in XY Inc’s purchase transactions. It was certainly so used in the proceedings against Mr Musumeci himself, and it is, I was informed, part of the prosecution brief against other persons who have been prosecuted in connection with the same transactions.
49. The details of Mr Musumeci’s oral instructions from Dr Jacobson, or at least Mr Musumeci’s recollection of them as conveyed in his December 2007 statement, convey a level of disquiet. There are instances where Dr Jacobson is recounted as placing offers at different prices, and characterising the lower bid as being “for support”. The instructions seem, at least in hindsight, to be very purposeful in attempting to see the GTG share price trade at no less than $0.34 or $0.35.
50. Despite these appearances ASIC did not seek to contradict Mr Musumeci’s claim that he was not initially aware of any market manipulation purpose for Dr Jacobson’s instructions. He explained that, despite a possible contrary inference that could be drawn, his state of mind at the time perceived the instructions as consistent with Dr Jacobson’s initially declared intention to purchase up to USD$500,000, and a desire to support that intention. In effect, he interpreted Dr Jacobson as merely laying out the strategy by which he would seek to complete his total purchase plan and obtain the best available purchase prices. The background to that interpretation was his relative youth and inexperience, his enthusiasm to have an apparently significant new client, and his initial and ordinary expectation that a man in Dr Jacobson’s position would not likely be involved in any improper practices.
51. ASIC contends that Mr Musumeci’s perception of Dr Jacobson’s instructions during the initial trading period reflects an uncritical, and unacceptably naive approach. ASIC stresses the content of the communications, as Mr Musumeci recounts them in his 19 December 2007 statement, and the timing, number, amount and prices of the share transactions. ASIC contends that whilst Mr Musumeci’s lack of subjective awareness of Dr Jacobson’s apparently improper purpose may be accepted, it indicates a lamentable lack of competence on his part.
52. The account in Mr Musumeci’s statement provides some justification for ASIC’s concern. However, other aspects of Mr Musumeci’s conduct, both his concededly knowing involvement, and his later co-operation, are more significant considerations. Moreover, there are reasons not to embrace unreservedly the candour of Mr Musumeci’s retrospective account of his initial instruction period. Those reasons include reasonable recognition of the effect of the sharper focus inevitably contributed by hindsight. Memory is inherently fallible and not a little suggestible. Perceptions altered by the clarity of hindsight can themselves lead to re-interpretations that do not reflect the real subtleties of what may, in fact, have occurred. Conversely, protests asserting a lack of full contemporaneous awareness, despite the blinding focus of hindsight, can be correspondingly difficult to articulate and defend. Those are relevant considerations against the background in which Mr Musumeci first received his instructions from XY Inc. He was a young, and obviously inexperienced, adviser. But he had no particular association with Dr Jacobson and he worked for a reputable and well-known broking firm. Dr Jacobson could have had little, if any, initial reason to expect Mr Musumeci’s compliant co-operation in irregular trades, and for that reason it is in fact reasonable to infer, consistent with Mr Musumeci’s own recollection of gradual awareness, that Dr Jacobson would have been concerned, at least for a time, not to convey any reasons for apprehension about the propriety of his share purchase instructions.
53. ASIC’s concerns about the apparent obviousness of the impropriety of the XY Inc share purchase instructions is of more significance during the second period, during October 2006. In this period Mr Musumeci’s instructions were mainly contained in Ms Newing’s emails. These began in early October and by at least 20 October 2006, they were quite explicit in recording the intention to maintain the price and around $0.34 - $0.35. They also evidence Mr Musumeci’s contemporaneous understanding that XY Inc did not intend to purchase shares where other active buyers were already involved in purchases at around $0.35.
54. Despite the objective appearance that XY Inc’s instructions were intentionally directed towards maintaining the reported GTG closing price, and Mr Musumeci’s knowledge, at least after sometime in early November 2006, of the impropriety this involved, he did not inform Mr Symes, or anyone else at Bell Potter, of the nature of XY Inc’s instructions and his compliance with them.
principles and policy informing the exercise of the banning order power
55. There is a strong public interest in maintaining markets, particular financial markets that are free from manipulation and influenced only by the genuine forces of supply and demand: see North v Marra Developments Ltd (1981) 148 CLR 42 at 59; R v Rivkin (2003) 198 ALR 400 at [44]. That public interest extends to require due regard to deterring the commission of offences involving prohibited market conduct that is not the result of those genuine forces being brought to bear: Brown v R (2006) 58 ACSR 290; R v Pantano (1990) 49 A Crim R 328 at 330.
56. ASIC refers to Regulatory Guide 98 and its indication that a ban of between 3 to 10 years where the impugned conduct includes significant loss, wilful and sustained failure to comply with legal obligations. ASIC says that Mr Musumeci’s conduct, merits characterisation as sustained. It also suggests that the nature and frequency of his conduct in placing the XY Inc share purchase orders justifies an inference of intentional wrongdoing. And particularly in relation to the share purchases in November 2006, ASIC says that inference is corroborated by Mr Musumeci’s admission that he was aware of the impropriety those transactions involved.
regulatory guide 98
57. The criteria that enliven ASIC’s power to make a banning order under s 920A(1) and (2) of the Corporations Act 2001 include a person’s actual non-compliance with their obligations under s 912A or non-compliance with any “financial services law”. Necessarily, those criteria involve the possibility of ASIC making such an order where the conduct also involves contravention of the Corporations Act and therefore exposes the person to the risk of prosecution.
58. Paragraph 2.3 of the Regulatory Guide 98 recognises that the range of remedies available to ASIC in relation to financial services participants engaging in misconduct include: (i) criminal action, (ii) civil action and (iii) administrative action. As the Regulatory Guide warns, ASIC may “use these remedies in combination”. Paragraph 2.4 lists a number of factors which inform ASIC’s decisions about what remedial action to take. Among those considerations are the seriousness of the wrongdoing, the apparent appropriateness of the proposed remedial action and its degree of consistency with ASIC’s functions and priorities in relation to deterrence and public education. Paragraph 2.5 carries a further warning that any administrative action ASIC may take may be by one of supplementing “other civil or criminal action” against the person involved. However, paragraph 2.5 includes a specific note that the Guide does not discuss ASIC’s complementary criminal and civil enforcement powers.
59. Paragraph 2.7 of the Regulatory Guide announces, though with somewhat uninformative generality, that “whether administrative action will be taken will turn on the facts of each matter”. Table 1 of the regulatory guide lists “key factors we consider in deciding to take administrative action”. The four key factors are:
(i)the nature and seriousness of the misconduct;
(ii)whether the misconduct involves the idiosyncratic behaviour of an individual person or is indicative of systemic deficiency by the person or entity involved;
(iii)the conduct of the person involved after the misconduct; and
(iv)the previous compliance history of the person or entity involved.
60. Table 2 of the Regulatory Guide 98 provides a list of “factors and examples of conduct relating to specific periods of banning”. The table is preceded by a general explanation which is in the following terms:
These factors are indicative examples only. Each case must depend on its particular circumstances and will be determined on a case-by-case basis. The factors in this table have been compiled having regard to the propositions formulated in HIH Insurance Ltd and HIH Casualty and General Insurance Ltd, Re: ASIC v Adler, (2002) 168 FLR 253. A combination of more than one example of misconduct can increase the seriousness of the misconduct, so that a longer banning than indicated by this table is merited. Consumer loss is not a prerequisite for a period of banning.
Outcome
Factors
Examples of conduct
(indicative only)
…
…
…
banning from 3-10 years
· A significant loss
· A deliberate course of conduct to enrich themselves at others’ expense but with a lesser degree of dishonesty
· Incompetence and irresponsibility but with the possibility that the person may develop requisite skills and abilities
· Continued, knowing and wilful contraventions of the law and disregard of legal obligations
· Does not have a reasonable basis for advice provided, such as making inappropriate recommendations in high risk schemes
· Offers or recommends interests in managed investment schemes which need to be, but have not been registered
· Provides financial services which are not covered by an AFS licence if one is required
· Fails to keep financial records that must be kept
· Fails to comply with disclosure requirements, including not disclosing commissions and other benefits
Banning for under 3 years
· Some loss to client, but as a result of carelessness or inadvertence rather than dishonesty
· Has attempted to remedy the contravention and person has fully cooperated with ASIC
· No previous history of contraventions
· Indications of clear intention to comply with legal obligations by demonstrated behaviour
· Fails to give disclosure document or statements within required time
· Fails to lodge documents with ASIC as required
· Fails to notify ASIC about an authorised representative’s breach of their licensing obligations
· Fails to make adequate inquiries about clients’ personal circumstances
…
61. The warning that introduces the indicative summary in Table 2 is apt for at least three reasons. The first is that such an indicative summary cannot be allowed, as a matter of principle, to deflect attention away from the generality of the statutory power, and the considerations that can properly influence its exercise. The Regulatory Guide specifically does not address the situation where the affected person has already been convicted and sentenced for offences that involve the same conduct as that relied on to enliven the banning power. That is a particularly important consideration to recognise in the circumstances of the present case where the Guide recognises, but contains no discussion of, the complementarity of ASIC’s various powers. In fact, as Finkelstein J discussed in Australian Securities and Investments Commission v Petsas (2005) 23 ACLC 269 at paragraphs [1] and [2], there are significant respects in which the powers, particularly the powers to seek criminal and civil penalties for the same conduct, are at least partly alternative rather than complementary.
62. The second reason is provided by the generality of the “factors” and “examples” used in the table to illustrate the differentiation between the three categories of banning order to which the Regulatory Guide refers – namely: (i) permanent, (ii) periods of 3 – 10 years and (iii) periods under 3 years. The use of generality in these examples is an unavoidable necessity, not a point of criticism. The examples are useful indicators of the parameters that potentially inform the exercise of the power in any particular case. But the examples should not be allowed to obscure the reality that the three illustrated categories are essentially arbitrary in their demarcation, and that the factors chosen to characterise the demarcation are impressionistic rather than predictive. Two points illustrate this reality with some force. The first concerns the demarcation between banning periods of more or less than three years. One suggested factorial distinction between the two is the comparison between “some loss … as a result of carelessness or inadvertence rather than dishonesty” and “a significant loss”. This is clearly an impressionistic, and patently incomplete, dichotomy. It cannot be used to require an interpretation that any perceived dishonesty precludes a banning period of less than three years. Much more discrimination and evaluation is required about the true character and significance of the conduct involved. The second example concerns the demarcation between permanent and lesser banning periods, and the suggested factorial distinctions between “disregard for the law and compliance with regulations”, “incompetence and irresponsibility” and “continued, knowing and wilful contraventions of the law and disregard of legal obligations”. It is no criticism of the illustrative factors to note the synonymous use of the expressions “disregard for the law” and “disregard of legal obligations” and to suggest that individual considerations such as these merely begin, rather than conclude, an informed and principled selection of an appropriate banning period.
63. The third reason is provided by the fact that the illustrative table in Regulatory Guide 98 is avowedly based on the propositions formulated by Santow J in Re HIH Insurance Ltd and HIH Casualty and General Insurance Ltd, Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80. In paragraph [56] of the judgment Santow J set out 15 propositions, which he derived from an extensive review of many cases that had involved disqualification orders under the Corporations Act, and its predecessor legislation. In those considerations Santow J:
§highlighted the essentially protective purpose of banning orders (propositions (i) - (iv));
§acknowledges that a banning order had a motive of personal and general deterrence without being punitive – (propositions (v) and (vi));
§said that personal hardship needed to be balanced against public interest and the need for protection with the result that the unlikelihood of repeated misconduct was a mitigating factor – (propositions (x) and (xi)); and
§noted that instances involving the shortest period of disqualification (for periods of up to three years typically involved remorse, contrition, an acknowledgement of wrongdoing, compensation and the absence of any immediate or discernible future intention to be involved in corporate management – (proposition (xv)).
64. Thereafter, however, Santow J warned against any mechanistic application of the propositions he had identified as relevant to the exercise of the banning power. His Honour’s warning was set out in paragraph [70] and substantially repeated at paragraph [126]. The warning was that:
[70]The principles of parity which guide the exercise of judicial discretion do not produce any neat arithmetic algorithm from other cases though the earlier propositions ([56] above) give some guidance.
banning orders – protection and deterrence
65. A fundamental and often repeated concept is that the banning power is a protective power. Its principal purpose is to contribute to the public interest by limiting the conduct of financial services business to people with the requisite capacity and integrity to provide the services in a lawful and competent manner: Santow J’s propositions (i) to (iv) reflect this stated purpose and are supported by numerous cited authorities: see Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80 page 97 at [56].
66. A corollary of this often repeated concept is the proposition that the exercise of the banning power is not concerned with punishment and may be regarded as entirely protective: Re Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602; [2008] AATA 278 especially at [170], [176] and [180].
67. The proposition that the relevant powers conferred by the Corporations Act 2001 contemplate parallel courses of protective and punitive action has explicit recognition. Partly that is evident in the very criteria expressed in s 920A itself. Those criteria include personal and financial misfortune conceptually unrelated to any impropriety: see s 920A(1)(a) (read with s 915B(10)(d)). They also include both apprehended and proven contravention of the Corporations Act: see s 920A(1)(b),(ba),(e),(f). In addition ss 206C, 1317E and 1317P of the Corporations Act 2001 recognise both that: (i) banning orders can be made and (ii) criminal proceedings can be taken, even after civil penalties have been imposed for contravention of the Act. Section 1317P specifically warns that criminal proceedings can be taken against a person for contravention of the Corporations Act regardless of whether or not a banning order has already been made against them.
68. The specific legislative provisions to which I have referred suffice to indicate that the general propositions asserting the protective purpose of the banning power, and disavowing punishment as a justification for its exercise, are informatively useful and may be reasonably accurate. But their ultimate utility depends on the degree of reliance sought to be placed on them in deciding any particular matter. That qualification is critically important because the reality, remarked on by the High Court in Richv Australian Securities and Investments Commission (2004) 220 CLR 129, is that the concepts of public protection and personal punishment are not mutually exclusive fields of discourse.
69. The decision in Rich was concerned with the question of whether the characterisation of the banning order power as “protective” precluded regard being had to the “effect” of its exercise and, in particular, required the conclusion that proceedings seeking a banning order could not be regarded as proceedings to impose a penalty. The High Court rejected that conclusion in terms that cogently emphasised the artificiality of positing a complete dichotomy between protection and punishment. The relevant passages in the majority judgment were as follows (for the sake of convenience I omit the footnotes included in the original):
…
[30]The decisions of the primary judge and the majority in the Court of Appeal proceeded from the premise that a distinction between “punitive” and “protective” proceedings was possible and useful and that, when applied to the present proceedings, it led to the conclusion that the present proceedings have a protective not punitive purpose. There are several reasons to reject that reasoning.
[31]First, adopting such a classification diverts attention from the relevant question which is whether the privilege against exposure to penalties applies. That requires consideration of the kinds of relief which are sought in the proceeding. Neither the purpose which the applicant may have in seeking relief of that kind, nor the effects on persons other than the appellants of obtaining that relief, bears upon whether the proceedings expose the appellants to penalties. Yet an attempt to classify the proceedings as “punitive” or “protective” appears to require consideration of only those purposes or effects. Thus it is said that to disqualify a person from managing a corporation protects shareholders or creditors of the corporations in which the person concerned would otherwise have held office. If a disqualification order has that effect, and it may well, that is not relevant to whether exposing the person concerned to the possibility of such an order being made is to expose that person to a penalty.
[32]Secondly, and more fundamentally, the supposed distinction between “punitive” and “protective” proceedings or orders suffers the same difficulties as attempting to classify all proceedings as either civil or criminal. At best, the distinction between “punitive” and “protective” is elusive. That point is readily illustrated when it is recalled that, as McColl JA pointed out, account must be taken in sentencing a criminal offender of the need to protect society, deter both the offender and others, to exact retribution and to promote reform.
…
[35]That it may be possible to characterise proceedings as having a purpose of protecting the public is not determinative. And to begin the inquiry from an a priori classification of proceedings as either protective or penal invites error. It invites error primarily because the classification adopted assumes mutual exclusivity of the categories chosen when they are not, and because the classification is itself unstable. To assume mutual exclusivity of the categories is to fall into the same kind of error as was identified in the constitutional context in Actors and Announcers Equity Association v Fontana Films Pty Ltd. Just as a law may bear several characters, a proceeding may seek relief which, if granted, would protect the public but would also penalise the person against whom it is granted. That a proceeding may bear several characters does not deny that it bears each of those characters. Moreover, as Hayne J emphasised in Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd, those who seek the “essential character” of statutory provisions do not proffer explanations of that process of distillation.
…
70. The potential for overlap between the two concepts of protective purpose and punitive effect, specifically in the context of banning orders under the Corporations Act 2001, has not often been explicitly addressed. This may be partly explicable by an inferred regulatory preference to emphasise the protective purpose of banning orders and to avoid duplication of civil and criminal remedies where an appropriate and unchallenged banning order has been made. It may be partly explained by the apparent preference for civil penalty proceedings – remarked on in Australian Securities and Investments Commission v Petsas (2005) 23 ACLC 269 at [2]. It may also be partly because in many instances where criminal proceedings have been successfully undertaken, the findings and conviction carry their own particular significance in dictating the inevitability of a complementary protective banning order.
71. An occasion to distinguish between the protective and punitive aspects of related powers under the Corporations Act 2001 did arise in Re HIH Insurance Ltd and HIH Casualty and General Insurance Ltd, Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80. In that case ASIC sought a both a banning order (under ss 206C and 206E of the Corporations Act) and a pecuniary penalty order under s 1317G. That latter section permitted the court to order a person to pay a pecuniary penalty to the Commonwealth, in an amount up to $200,000 if: (i) the person had contravened various specified “civil penalty provisions” of the Corporations Act (which included the market manipulation prohibition in s 1041A), (ii) the contravention materially prejudiced the interests of the corporation or its ability to pay creditors and (iii) was a serious contravention.
72. Earlier in these reasons I referred to the 15 propositions Santow J set out (at 42 ACSR 80 paragraph [56]) as providing relevant guides to the exercise of the banning power. It is particularly apposite in the present context to refer to proposition (v) (that a banning order has a motive of personal deterrence, though it is not punitive) and proposition (vi) (that objects of personal deterrence are also sought to be achieved). In support of these propositions Santow J cited Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203; Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561; Australian Securities Commission v Donovan (1998) 28 ACSR 583; Re Tasmanian Spastics Association; Australian Securities Commission v Nandan (1997) 23 ACSR 743.
73. Each of the cases cited by Santow J merits a short comment, to provide a relevant context. In Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203 the banning power arose under s 122 of the Companies Act 1961 (NSW). It was relevantly pre-conditioned on the person’s prior conviction of offences involving fraud and dishonesty “in connection with” the management of a corporation. The director in that case had been convicted and fined $2,000 (with a default sentence of 6 months’ imprisonment). Given that prior conviction it is understandable that the exercise of the power conferred by s 122 was described as “not punitive” and as exclusively designed “to protect the public”. In the Pegasus case the disqualification power arose partly because the person had acted as a director whilst disqualified, and partly because their activities as a director involved deceptive conduct in enlisting public investment in the corporation. Again it is unsurprising, given the nature and seriousness of the impugned conduct, that the judgment of Davies AJ emphasised the protective purpose of the banning order. In each of Donovan and Nandan the banning power exercised was conferred by s 1317EA of the Corporations Law. It applied to declared contraventions of a “civil penalty provision” of the Corporations Law. Subsection 1317EA(4) specifically provided that the court could not make an order banning a person from participating in the management of a corporation if the court was satisfied that, despite any established contravention, “the person is a fit and proper person to manage a corporation”. Again the legislative context of that case provides an explanatory background that highlights the justification for characterising the power as protective in its essential purpose.
74. It can be seen from this summary of the cases Santow J cited for his propositions (v) and (vi) that their emphasis was on the protective purpose of the orders with which they were concerned. The decision in Donovan also involved consideration of a pecuniary penalty under s 1317EA(3)(b) of the Corporations Law, an order that certainly involved deterrence as a primary consideration. But Santow J apparently relied on all these cases as generally establishing the relevance of deterrence to fulfilment of the protective purpose of banning orders. And Santow J’s subsequent consideration shows that characterising a banning power as essentially protective in its purpose still requires a proper understanding of how that purpose is intended and likely to be achieved by the proposed order. That understanding may require due acknowledgement of the punitive effects of the order. Subsequent cases have consistently recognised that it is at least permissible, and often necessary, to take into account those punitive effects and their relevance to the deterrent, and thus to the protective, effect of the proposed order. That proposition is implicitly endorsed in Richv Australian Securities and Investments Commission (2004) 220 CLR 129 at [37] and again at [51] – [52] per McHugh J. It underlies what the majority judgment was referring to in Rich when it complained about the unexplained “process of distillation” involved in embracing an ultimate characterisation of complex criteria – because of its tendency to deflect attention from proper assessment of relevant considerations.
75. The permissible relevance of deterrent motives, and the relevance of punitive consequences, to the exercise of a disqualification power was approved by the Full Court of the Federal Court of Australia in Kamha v APRA (2005) 147 FCR 516 at [73] and [74]; 88 ALD 620. It has been emphatically accepted in many cases: Australian Securities and Investments Commission v Vizard (2005) 145 FCR 57 at [43] and [46] – [49]; Australian Securities and Investments Commission v Forge [2007] NSWSC 1489 at [102] – [103] and Elliott v Australian Securities and Investments Commission (2004) 48 ACSR 621 at 658. In the latter case the Victorian Court of Appeal, after referring with approval to Santow J’s 15 propositions, unambiguously linked the concepts of protection and deterrence. The Court of Appeal said “Matters going to aggravation and mitigation in relation to contraventions … need to be considered and accorded proper weight. But above all else protection of the public and deterrence, specific and general, must also be given appropriate consideration” and indeed, “strong weight”: 48 ACSR 621 at [137] and [145].
76. Santow J’s attempt to recognise explicitly the relationship between public protection, deterrence and punishment is instructive. The judge rejected an argument that Mr Adler’s extensive private commercial interests merited them being excluded from the scope of any banning order. The judge had special regard to the absence of any sufficient indication to provide confidence against future re-offending by Mr Adler. That apprehension satisfied His Honour of the continuing need for public protection. That need was the overriding consideration. At 42 ACSR 80 at [80] Santow J said:
[80]The public protective purpose must clearly be paramount. That precludes a simple balancing exercise. While the disqualification order should not be disproportionate to the public protective purpose it is intended to serve, for that indeed would be punitive, it would subvert that public purpose if private interest considerations were to prevail or preclude an order which went no further than necessary to serve that public purpose. A lesser period of disqualification than that, designed to serve a private interest consideration, would thus sacrifice the public interests to be protected.
77. In relation to the imposition of a pecuniary penalty Santow J recognised its essentially punitive character, but considered its principal purpose was that of personal and general deterrence. The consequence of this distinction, between punishment and deterrence, was that the penalty should be no greater than necessary to achieve the object of deterrence. More specifically, the judge acknowledged that in assessing the amount of any pecuniary penalty it was important to consider the consequences of any associated disqualification order. Implicitly recognising the potential punitive effect of such an order, His Honour said that if a disqualification order had significant consequences for the person affected, then those consequences potentially operated as a factor in favour of a lesser pecuniary penalty. In support of that consideration the judge cited Re Tasmanian Spastics Association; Australian Securities Commission v Nandan (1997) 23 ACSR 743 at 751-752. Santow J saw a broad analogy with the general sentencing principle of “totality” – a principle that requires a court to avoid, so far as possible, duplication in the components of punishment imposed upon a person being sentenced for multiple offences (see for example [127] – [130]). And this general approach, of striving to avoid duplication of punitive effects, where both banning orders are made and monetary penalties imposed, has subsequently been adopted in many cases: see Australian Securities and Investments Commission v Doyle [2002] WASC 223 at [76] – [79]; Australian Securities and Investments Commission v Plymin (No 2) (2003) 21 ACLC 1237 at [111]; Australian Securities and Investments Commission v Loiterton (2004) 50 ACSR 693 at [54] and Australian Securities and Investments Commission v Forge [2007] NSWSC 1489 at [70].
78. A case that explicitly recognises the legitimacy of general, as distinct from personal, deterrence in the exercise of a banning power is Australian Securities and Investments Commission v Vizard (2005) 145 FCR 57. That was another case in which ASIC sought both pecuniary penalties and a banning order. However, unlike the situation in Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80, Finkelstein J concluded that Mr Vizard’s contrition was complete and that there was no prospect of any re-offence: see 145 FCR 57 at [31]. It was not, therefore, a case in which the banning order was required either for the ordinary direct protective purpose of preventing apprehended misconduct, or for the indirectly protective purpose of providing a personal deterrent. Nevertheless, Finkelstein J considered that a banning order was required, in addition to a substantial pecuniary penalty, in order to satisfy the needs of general deterrence. After referring (at paragraph [30]) to the four sentencing concepts of general and personal deterrence and “rehabilitation and retribution (where punishment is imposed simply because the offender deserves it)” Finkelstein J continued:
…
[33]While retribution is important as a stamp of society’s disapproval of particular conduct, the governing principle of “sentencing” in cases of the kind with which we are concerned is general deterrence. The sentence must be exemplary and sufficient so that members of the business community are put on notice that if they break the trust which has been reposed in them they will receive a proper punishment. It is vital not only in the interests of the business community but in the interests of society that leaders of that community will act honestly in all their dealings. Any slip from the high standards demanded of directors can put at risk the fortunes of their company and also the fortunes (large or small) of those who invest in them. In extreme cases the misconduct can affect the economy as a whole.
[34]It could hardly be denied that, as a rule, directors of publicly listed companies are sensitive to risk. The few that may be tempted to gain prestige, wealth and security by illegal means can be dissuaded from that course if the risk of detection and serious punishment is too great. Although the civil penalties are not substantial when compared with the possible gains from corporate crime, other penalties may act as a better deterrent.
…
79. Even in the cases where strong preference has been expressed for the view that the purpose of the relevant disqualification power is protective, that preference has not been regarded as excluding the relevance of concepts of deterrence: see Re Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602; [2008] AATA 278 at [135], [161], [162], [173] and [180]. And because deterrence is a permissible consideration, regard must be had to the person’s personal circumstances and the extent to which, if at all, they already involve an element of hardship and punishment that will itself have relevance, at least as a personal deterrent: Re One Tel Ltd (in liq); Australian Securities and Investments Commission v Rich (2003) 44 ACSR 682; [2003] NSWSC 186.
the significance of mr musumeci’s conviction and sentence
80. In none of the cases to which I was referred, and certainly not in the Regulatory Guide, is there any explicit consideration of the relevance that should be accorded to any conviction or sentence that has already been imposed on the affected person. As I have previously suggested, and as the criteria in s 920A(1)(c) and (e) indicate, sometimes prior conviction is the event that actually enlivens the power. Sometimes also, the circumstances of the offence, irrespective of the nature of any sentence that may have been imposed, dictate the exercise of the banning power – irrespective of its punitive effect. One case in this category is Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80. Another is Re Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602; [2008] AATA 278 at [195] – [200].
81. The explicit elements of punishment involved in Mr Musumeci’s conviction and sentence, reflecting as they do a curial assessment of adequate punishment for his offences, must be taken into account in the exercise of the banning power under s 920A of the Corporations Act. This proposition is consistent with the contemplation that previously imposed civil penalties may be relevant in any sentencing for convictions involving the same subject matters: Adler v R (2006) 57 ACSR 675 at [46] and [47]. It is also consistent with the contemplation that the punitive effects of a banning order are relevant considerations in the exercise of the power to impose civil penalties: Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80 at [126]. And since it is now accepted that potential punitive effects of a banning order power are considerations relevant to its exercise, it must also follow that the punitive effects of either a prior sentence or civil penalty must also be relevant considerations in the exercise of such a power. This is so because the protective purposes of the power are fulfilled partly by the directly disqualifying effect of the power and also partly by the deterrent impact the prospect of such a sanction is intended to have.
82. That potential impact is both personal, in relation to the convicted person, and general, in the sense that it is contemplated as likely to have an impact on those who might be minded to emulate his transgressions. The potential general deterrent role of a banning order may be a particularly significant consideration where the decision maker has obtained a comfortable satisfaction about the convicted person’s inherent competence and integrity and the real unlikelihood of their personal recidivism. In such a case there is no need for personal deterrence. The objective of general deterrence may suffice to justify the exercise of the power (as it was held to do in Australian Securities and Investments Commission v Vizard (2005) 145 FCR 57). But that objective must necessarily be a less compelling consideration in the exercise of the banning power if the occasion for consideration of its exercise arises after, and in the light of, a curial assessment of what constitutes adequate punishment of the convicted person in the particular circumstances.
83. ASIC submitted that the Tribunal might proceed on the basis that the County Court sentence largely satisfies the “retribution” considerations relevant to the exercise of the banning power in the present case. But ASIC also submitted that the Tribunal should not proceed on the basis that the criminal sentence precluded regard to considerations of personal and general deterrence. In support of those submissions ASIC drew attention to the fact that the material placed before the County Court included the fact of the Delegate’s four year banning order, and the Applicant’s appeal to this Tribunal. ASIC submitted the Tribunal should infer that the ban that had been imposed by the Delegate was one of the factors that the County Court took into account in the sentence it had imposed on Mr Musumeci. Therefore, says ASIC, the Tribunal should not proceed on the basis that the criminal sentence imposed on Mr Musumeci itself entirely satisfied the relevant considerations of deterrence.
84. The difficulty with this submission is that Judge Cotterell’s sentencing remarks both acknowledged that the January 2008 banning order was subject to appeal to this Tribunal and also explicitly declared that her decision to impose a custodial sentence was intended to achieve the appropriate deterrent effect. It is true, of course, that in referring to the unlikelihood of Mr Musumeci re-offending the judge declared her satisfaction that “the penalties [he] had already suffered in relation to [the matter]” would operate as a sufficient personal deterrent to Mr Musumeci. But three things may be said about these remarks. First, they appear to have been explicitly concerned with the concept of personal, as distinct from general, deterrence. Second, in her final remarks about the deterrent purpose of the sentence the judge did not expressly refer to the banning order itself. She was, in my opinion, compendiously referring to the totality of the adverse consequences that had already affected Mr Musumeci. Third, since the judge had earlier acknowledged the existence of an appeal to this Tribunal, there is no sure basis to conclude that the judge was proceeding on the basis of any assumption about the likely outcome of those proceedings. It is much more likely, and in any event only prudent to assume, that the judge was simply taking into account the fact that the banning order had been made and that, at the time of her sentencing remarks, remained in place. Moreover, and rather contrary to ASIC’s submissions, there is no justification for assuming that the judge proceeded on the basis of having failed to appreciate both: (i) that the banning order had been imposed by the Delegate without regard to the prospect of any criminal proceedings against Mr Musumeci and (ii) that the fact of the conviction and sentence would be new material of considerable potential relevance to the appeal proceedings in this Tribunal.
85. There is, of course, a fundamental difference between a criminal sentence and a banning order. It is quintessentially expressed in the ultimate distinction between the basic protective and punitive purposes of the two powers. But removed from the perspective of ultimate considerations, and applied to the myopia of particular circumstances in an individual case, the difference may be less clear and certainly less informative. Despite the fundamentally different basic conceptual purpose for the sentencing procedure in the County Court, it is only proper to recognise the emphasis that the judge placed on the deterrent role of the sentences she imposed. It was basic to the judge’s sentencing reasons that she regarded a custodial sentence of 16 months as the appropriate custodial sentence for the offences. The reduced actual sentences imposed took into account the personal contrition and co-operation Mr Musumeci had exhibited.
86. It is clear that Judge Cotterell was affirmatively satisfied of the unlikelihood of Mr Musumeci re-offending. I would also infer that a similar view, despite the degree of ambivalence to which I have previously referred, was held by the Delegate. I am also affirmatively satisfied of Mr Musumeci’s inherent qualities of integrity, that the impugned conduct is aberrant and that there is no real basis to apprehend the likelihood of future transgressions. Once that finding has been made, and the sentence imposed on Mr Musumeci is viewed against the background of the sentencing considerations mandated by s 16 of the Crimes Act 1914 (that the convicted person should be adequately punished) and the specific Crown submissions about the relevance of general deterrence, it would not be appropriate to approach the exercise of the banning power in the present case on the basis that either personal or general deterrence remain as significant considerations to support a banning order of the length imposed by the Delegate.
the banning order that should be imposed
87. As Mr Musumeci conceded, his conduct in co-operating with XY Inc’s improper instructions merits characterisation as serious and sustained. Although it may be understood in the light of his limited experience, and naively self-interested enthusiasm, it is not to be excused on that basis. He had support available to him. That he chose not to use it, and confide in his superiors and supervisors, is not to his credit.
88. However, there is no sufficient basis for apprehending the real likelihood of future transgression by Mr Musumeci. He did not initiate the impugned trading. He never had any incentive, or prospect of gain, other than the ordinary terms of his employment. As against that, the circumstances that have already befallen him provide ample and salutary sanction. He lost his employment – employment that, in various capacities, he had held since he left school. His conviction and sentence carry stigma and potential consequences in a wide range of situations from future employment prospects to travel restrictions: see Australian Securities and Investments Commission v Petsas (2005) 23 ACLC 269 at [14]. He faced, and still faces, the risk of incarceration as a result of his conviction and sentence.
89. As I pointed out earlier, when outlining the Delegate’s reasons, Mr Musumeci’s circumstances defy neat accommodation within either of the limited categories of banning periods illustrated in the Regulatory Guide table. The decision making process in determining any appropriate banning period is educated by a range of considerations. The force of any particular consideration cannot be measured or predicted in any very precise way. The conceivable limits of the exercise of the power are narrowed by a process of evaluation in which the particular circumstances are examined against the statutory discretion, principle and policy. The process of evaluation, whilst necessarily disciplined by principle and policy, is not one of rigorous and predictable reasoning from premise to conclusion. It is more a matter of attempting to achieve an “instinctive synthesis” that reflects all the relevant, and sometimes partly competing, considerations in a single outcome: Wong v The Queen (2001) 207 CLR 584 at [75]. But when the impact of Mr Musumeci’s conviction and sentence is taken into account, especially against the context of Judge Cotterell’s sentencing remarks, the instinctive synthesis involved in applying the relevant considerations requires a banning period within the lesser range of potentially available periods of disqualification.
90. The Applicant contends for a period of no more than two years. I consider that two years is an appropriate period for a number of reasons. First, it will have effect, by virtue of the practical impact of the termination of Mr Musumeci’s employment in December 2006, as if it was a formal disqualification period of nearly three years. Second, it reflects a reduction in the banning period because of Mr Musumeci’s conviction and sentence – neither of which the Delegate’s decision could have addressed. Third, by providing a substantial reduction from the banning period already imposed, it reflects what I consider is a more appropriate recognition of the quality of Mr Musumeci’s conduct, and the absence of any real need for a personal deterrent. Finally, although an argument could be made that Judge Cotterell’s sentencing remarks about the deterrent effect of the sentences she imposed wholly satisfied any deterrent considerations relevant to the exercise of the banning power, I do not consider that those remarks necessarily preclude the imposition of a banning order of the length I propose. The judge’s remarks were made against the background of an existing, albeit challenged, banning order. It would have been reasonable to infer the likelihood of its probable eventual reduction in these proceedings (for the reasons I indicated earlier) but the timing and extent of any such reduction would not have been predictable. I consider that a two year banning period is both broadly consistent with a reasonable interpretation of the background to the judge’s sentencing remarks and reasonably accommodates the deterrent objectives appropriate to the exercise of the banning power in the present circumstances.
decision
91. The decision under review is set aside. In substitution for the Delegate’s 4 January 2008 decision I order that pursuant to s 920A(1)(e) of the Corporations Act 2001 Mr Rocco Musumeci is prohibited from providing any financial services for a period of two years.
I certify that the 91 preceding paragraphs are a true copy of the reasons for the decision herein of Mr P W Taylor SC, Senior Member
Signed: …[sgd]………………………………………………
Associate
Date of Hearing: 1 June 2009
Date of Decision: 15 July 2009
Counsel for the Applicant: Mr S J Stanton
Counsel for the Respondent: Ms E Collins
Solicitor for the Respondent: Ms K Prasad, ASIC
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