R v Dalzell
[2011] NSWSC 454
•20 May 2011
Supreme Court
New South Wales
Medium Neutral Citation: REGINA v DALZELL [2011] NSWSC 454 Hearing dates: 21 March 2011, 22 March 2011, 7 April 2011, 16 May 2011 Decision date: 20 May 2011 Jurisdiction: Common Law - Criminal Before: Hall J Decision: The offender is sentenced to a term of imprisonment of 2 years to commence on 20 May 2011 and to expire on 19 May 2013.
Pursuant to s.7(1) of the Crimes (Sentencing Procedure) Act 1999, I make an intensive correction order and direct that the sentence which I now impose be served by way of intensive correction in the community. The conditions of the latter order include the mandatory conditions referred to in s.81 of the Crimes (Administration of Sentences) Act 1999 and Regulation 175 of the Crimes (Administration of Sentences) Regulation 2008 and an additional condition set out in paragraph 169 of these remarks on sentence.
Legislation Cited: Corporations Act 2001 (Cth)
Crimes Act 1914 (Cth)
Crimes (Administration of Sentences) Act 1999
Crimes (Administration of Sentences) Regulation 2008
Crimes (Sentencing Procedure) Act 1999
Crimes (Sentencing Procedure) Regulation 2010Cases Cited: ASIC v Fortescue Metals Group Limited (No 5) [2009] FCA 1586; (2009) 264 ALR 201
DPP v Bulfin (1998) 4 VR 114
DPP (Cth) v El Karhani (1990) 21 NSWLR 370
DPP v O'Reilly [2010] VSC 138
Einfeld v R [2010] NSWCCA 87; (2010) 266 ALR 598
Hili v The Queen [2010] HCA 45; (2010) 272 ALR 465
R v Doff (2005) ACLC 317; [2005] NSWSC 50
R v Douar [2005] NSWCCA 455; (2005) 159 A Crim R 154
R v Firns (2001) 51 NSWLR 548
R v Hinton (2002) 134 A Crim R 286
R v McQuoid [2009] EWCA Crim 1301
R v Pantano (1990) 49 A Crim R 328
R v Rivkin [2003] NSWSC 447; (2003) 198 ALR 400
R v Rushby (1977) 1 NSWLR 594
R v Williams (2005) 216 ALR 113Category: Sentence Parties: REGINA v Andrew DALZELL Representation: Counsel:
Crown: R Bromwich SC
Offender: N J Williams SC/W Hunt
Solicitors:
Crown: Commonwealth DPP
Offender: Tress Cox Lawyers
File Number(s): 2009/276594
SENTENCE
HALL J:
Introductory remarks
The offender was charged on indictment that on or about 13 November 2006 he committed an offence against the provisions of s.1311(1)(a) of the Corporations Act 2001 (Cth) in that he acted contrary to the provisions of s.1043A of that Act.
Those provisions prohibit conduct by a person in possession of "inside information" as defined in s.1042A of the Act.
The indictment charged the offender of having been in possession of information that was not generally available but which, if it were generally available, a reasonable person would expect it to have a material affect on the price or value of Division 3, Financial Products, namely, securities, being fully paid ordinary shares in a company, Promentum Limited ( "Promentum" ). The indictment further alleged that the offender knew or ought reasonably to have known that such information was not generally available, and that if it were generally available, a reasonable person would expect it to have a material affect on the price or value of those securities and that he acquired 40,000 fully paid ordinary shares in Promentum.
The offence to which the offender pleaded guilty is commonly referred to as "insider trading" .
The offence of insider trading
It has long been recognised that restrictions on insider trading are designed to ensure that the market operates fairly, with all participants having equal access to relevant information. The playing field is to be levelled: R v Firns (2001) 51 NSWLR 548 per Mason P at [50].
One of the vices of insider trading is its capacity to undermine, to a serious degree, the integrity of the market in public securities. But that is not the only vice. Additionally, it has been held that it has the capacity to diminish public confidence not only so far as investors are concerned, but the general public as well. Such diminution in confidence may occur subtly and is not confined to circumstances where a substantial insider trading transaction has taken place.
In R v Rivkin [2003] NSWSC 447; (2003) 198 ALR 400, Whealy J observed:-
"... There is a capacity to undermine and diminish public confidence in the market even where the offence may be shown as one which in some respects occurs at a lower level of seriousness. This is likely to be particularly so in the case of an offender who occupies a substantial position as a trader and advisor in the market."
As I will explain shortly, it was argued in the present case that the offence committed by the offender was at the end or lower level of seriousness. Even if that be the case, the offence remains one that is to be regarded as a serious one. Where it is either proved or admitted to have occurred, it remains for a sentencing judge to have regard to the importance of the element of general deterrence. In particular, it is especially important in matters such as the present because of the need to mark out plainly to others who might be minded to breach their professional or related obligations that such conduct will generally merit, in appropriate cases, a sentence that is appropriate to the particular crime: see Rivkin (supra).
In that case, Whealy J added:-
"There is a need to sound, in effect, a clarion call to discourage illegal and unethical behaviour among company directors, company officers, brokers, traders, advisors and those who have a close connection through, for example, merchant banking, to the stock market."
As I will make clear in these remarks, the submission for the offender was that, his conduct, is to be distinguished from other insider trader cases involving offences by company directors and others.
Finally, in determining sentence in respect of the subject offence, it is necessary that the particular facts and circumstances be identified and considered. In ultimately determining sentence, I am also to have proper regard to the relevant approach to be taken in sentencing in respect of such offences. In that respect, the Court of Criminal Appeal in R v Doff [2005] NSWCCA 119; (2005) 54 ACSR 200 observed the seriousness of the offence is not to be lost sight of. The Court there stated at [56]:-
"[W]e do not, in this respect, suggest that anything other than a stern approach should be taken to offences of insider trading for the reasons earlier identified. It remains a serious offence, and there needs to be a considerable deterrent aspect reflected in order to protect the integrity and efficacy of the market. Those in a position of trust who receive price sensitive information in relation to securities are expected to conform to exacting standards of honesty, and transgression can normally be expected to lead to custodial sentences as well as to pecuniary penalties."
To mark out the seriousness of insider trading offences, the legislature has recently increased the maximum penalty available to be imposed upon such offenders.
It is by reference to the relevant sentencing principles in respect of the subject offence that I turn to consider the objective gravity of the offence. In that respect, I have examined the relevant facts and circumstances and I take into account the submissions that have been made both on behalf of the Crown and those on behalf of the offender.
The subject offence
The offender was initially charged by way of a Court Attendance Notice in November 2009 in the Local Court of New South Wales. The matter was listed for a partially contested committal hearing but, in due course, proceeded by way of a paper committal in this Court on 29 July 2010. Not long after the committal, the offender indicated an intention to plead guilty. He subsequently agreed to a statement of relevant facts concerning the offence.
The offence which involves the purchase of shares in a private company, Promentum, occurred at a time during which the offender was employed as part of a team of people to assist in advising Promentum about a potential acquisition. The offence occurred whilst he was in possession of the inside information particularised in the indictment.
The prescribed maximum penalty for an offence under s.1311(1)(a) of the Corporations Act , at the time the offence was committed, was 5 years imprisonment or a fine of $220,000 or both: Schedule 3, Item 311C of the Corporations Act and s.4AA of the Crimes Act 1914 (Cth).
I note that the maximum penalty for the offence was increased after the offence, with effect from 13 December 2010, to 10 years imprisonment and/or a fine.
The indictment set out "Particulars of information" in five paragraphs.
A sentence hearing took place on 21 and 22 March 2011 at which the offender was represented by Mr N J Williams SC who appeared with Mr W Hunt of counsel.
Evidence
The Crown tendered an Agreed Statement of Facts entitled "Summary of Facts" (Exhibit A) and a document, "Supplementary Agreed Facts" (Exhibit B).
Exhibit A identified the factual matters concerning two relevant stages in the process of investigation directed to the proposed acquisition of the company, McMillan Print Group ( "McMillan" ). These are referred to as "Project Royal" (paragraphs 17 to 18) and "Project Fox" (paragraphs 19 to 22).
Exhibit A also records the relevant matters under the headings "Not generally available information available to Mr Dalzell" and "Materiality of not generally available information available to Mr Dalzell" . The statement of facts also identified the relevant matters concerning the events leading to the acquisition of the shares under the sub-headings "Margin lending facility" and "Trading in PPR (Promentum) shares" .
Mr Wayne Richard Lonergan, a director of Lonergan, Edwards & Associates, a specialist corporate valuation firm, gave evidence on behalf of the offender. He swore an affidavit on 18 March 2011, which was read at the sentence hearing. Annexed to his affidavit is a report by him dated 18 March 2011 and he gave evidence on 21 March 2011.
The Crown tendered a (draft) report entitled "Project Royal, Board Papers September 2006, advisory" (Exhibit C). This draft report is central to the offence and is referred to in the particulars of information in the indictment.
The Crown also tendered a document entitled "McMillan Group, Information Memorandum, For the Sale of the Business and Assets of the McMillan Group" (Exhibit D). The report was marked "Strictly Private & Confidential" and was dated 29 August 2006.
On behalf of the offender, nine affidavits, including an affidavit by himself, were relied upon. Each affidavit was taken as read at the sentencing hearing and copies were contained within the volume that has become Exhibit 1 in the proceedings.
On 21 March 2011, the offender gave evidence. His evidence in chief supplemented the material contained in his affidavit.
Facts
The offender is aged 49 years (date of birth, 7 June 1961).
On 26 June 2006, he commenced work at KPMG Financial Advisory Services Division as a Senior Manager in the Transaction Services Group. In that position, he reported to a KPMG Executive Director, Ajay Rawal.
The information particularised in the indictment was acquired by the offender in his capacity as a Senior Manager of KPMG Transaction Services Group. KPMG Transaction Services were advising Promentum on the due diligence part of what was a friendly acquisition of the privately owned McMillan.
The shares acquired by the offender in Promentum were purchased in his own name for himself as a part of a parcel of shares in a number of companies which he acquired between 11 and 13 November 2006.
On 13 November 2006, he sought to acquire 50,000 worth of shares in Promentum at $1.32 per share. On 13 November 2006, his broker acquired 40,000 shares in Promentum at $1.295 per share at a total cost of $52,369.80.
Following detection of the offence, the shares were sold a short time later at a loss.
Promentum is a commercial printing business. The company was listed on the Australian Stock Exchange. Up until 29 June 2007, McMillan was a privately owned commercial printing business conducting operations in Granville and Canberra.
In or about August 2006, McMillan issued to Promentum a Confidential Information memorandum for the sale of the business and assets of McMillan.
In September 2006, Promentum engaged KPMG Corporate Finance (Aust) Pty Limited to undertake a financial due diligence and a synergies due diligence on the proposed acquisition of McMillan.
On 13 September 2006, KPMG Corporate Finance (Aust) Pty Limited commenced what is referred to as the "pre-deal" work to assist Promentum for an indicative bid for McMillan. This work was called "Project Royal" .
In September 2006, KPMG Corporate Finance (Aust) Pty Limited completed a high level synergy analysis and a draft report dated 28 September 2006 for Promentum on Project Royal. The draft report (Exhibit C) was followed on 28 September 2006 by an indicative bid by Promentum to acquire McMillan for $75 million.
On 9 October 2006, Promentum was advised that it had been successful in proceeding to Stage 2 of the sale process.
On 4 November 2006, KPMG Transaction Services Australia Pty Limited ( "KPMG TS" ) were engaged to perform due diligence work for Promentum on the Project Royal matter. This project was named "Project Fox" .
On or about 7 November 2006, McMillan opened up a data room for authorised bidders to access. One of the authorised bidders was Promentum.
The offender did not work on Project Royal, but he did attend co-ordination meetings at which manpower planning requirements for the project and other matters were discussed.
The offender was subsequently assigned to KPMG TS within the KPMG Financial Advisory Services Division.
He was a Senior Manager in the Merger Integration Advisory Unit which was a part of KPMG TS. In his affidavit, the offender described his role as one to provide high-level advice to clients on what were referred to as the management imperatives of proposed acquisition integrations. He reported directly to Mr Rawal.
Mr Rawal was the Executive Director of KPMG Integration Advisory, Transaction Services (Australia) Pty Limited. The Integration Advisory Team focused on providing advice to KPMG clients in relation to potential Synergy opportunities (benefits) and integration considerations which may result as part of a transaction whereby one company seeks to acquire or merge with another. It also advised companies seeking to divest or sell parts or the whole of their company.
Prior to him commencing work on Project Fox, the offender was briefed by Mr Rawal on the work that had been performed and the expected "deliverables" . The offender was then set up as the Project Lead for the Synergy's team work. In the course of working on Project Fox, the offender was also given access to material known as the Master Initiatives Spread Sheet.
The Master Initiatives Spread Sheet (compiled by Mr Telfer, Promentum's Sales and Marketing Manager and Mr Rawal) formed the basis of the analysis for the Project Royal Synergies Report.
In his briefing by Mr Rawal, the offender was shown information and documents arising from Project Royal. He was told where he could locate the appropriate Project Royal and Project Fox files on the KPMG server including the Master Initiatives spreadsheet, the draft Project Royal Board Report and the Project Royal Synergies Report.
On 7 November 2006, the offender was brought in to work on Project Fox as a "Synergy Team Leader" . As part of his role in that position, he worked primarily at Promentum's offices.
The offender's main focus when working on Project Fox was to evaluate the businesses of both Promentum and McMillan. This involved analysing their employee base, services and products, customers, sales and operating functions, head office and administrative support activities, costs to identify how the two businesses could be merged and the potential synergies that might arise. Performing this work, the offender used the work from the Project Royal Master Initiatives spreadsheet and the Project Royal synergies report. He was responsible for assessing and evaluating these documents alongside other opportunities based on information made available through the due diligence process.
The Master Initiatives spreadsheet contained information about the synergy benefits to Promentum from acquiring McMillan.
Mr Telfer, an employee of Promentum, referred to the spreadsheet during his initial meeting with the offender in November. The offender is said to have commented:-
"I have seen the spreadsheet. I have my own way of doing it."
A junior accountant, Mr Isami Morris, who worked within the Integration Advisory Team worked directly for the offender on Project Fox.
On or about 7 November 2006, McMillan opened up a data room for authorised bidders to have access. Promentum was one of the authorised bidders. The McMillan data room was a computer based system which was remotely accessible by the various parties involved in making bids for the McMillan business. The data room contained detailed information about McMillan including a whole range of files, historical financial information, metrics, forecasts and a sanitised version of contracts. The data room was designed to permit a bidder to analyse information about a company before considering a bid.
According to the agreed facts, the data room worked on a question and answer basis. Initially, the target puts base level information into the data room. This is sometimes done in response to an initial request for information submitted by a bidder. Bidders can ask the target for more information if necessary in a question and answer style. All questions and answers were published on a data room page that could be accessed by some or all of the prospective bidders.
Between 7 and 10 November 2006, the offender and Mr Morris reviewed and analysed data from the data room.
Mr Telfer worked with the offender on Project Fox. He attended a meeting on 10 November 2006 in the boardroom of Promentum. The offender and other representatives of Promentum and KPMG were present. The offender was introduced to Mr Telfer and others. The meeting was advised that the offender would be working under Mr Rawal on Project Fox but would be working with Mr Telfer on a day-to-day basis.
During that meeting, there was discussion about the "Master Initiatives" Excel spreadsheet.
During the course of his work on Promentum's bid to purchase McMillan, Mr Telfer formed the view that the bid was only marginally likely to succeed. He formed that view because he thought that McMillan wanted too much for McMillan Print Group.
Whilst Mr Telfer had discussed his view about the matter with two other employees in the period from September to November 2006, it was not one conveyed to the offender.
In the supplementary agreed facts, Exhibit B, it is stated:-
"5. Mr Telfer recalled having discussions after he and the offender first met regarding the Promentum share price. On one of those occasions, which took place in the Promentum boardroom, the offender said words to the effect, 'This is a good deal for the value to the shareholders'. On another of these occasions, the offender said words to the effect, 'This will lift the share price'. Mr Telfer recalls these conversations in relation to the Promentum share price were initiated by the offender."
In the Crown's written submissions at [35], it was observed that the draft Project Royal Board Report contained statements that the Promentum acquisition "had the ability to double the size of Promentum and increase investor perception and confidence" . It included reference to pro-forma sales growth, potential doubling in size, around $8,000,000 synergies and a potential share price increase to $2.40.
In relation to events leading to the acquisition of the shares by the offender, the agreed statement of facts record that on 25 October 2006, the offender rang Ms Fabiela Gibson who was his "client manager" at the then Citigroup asking her to set up a margin loan account. Ms Gibson's diary note for that date recorded that the offender was interested in purchasing $100,000 worth of shares in each of "Telstra" and "Promina" .
On 27 October 2006, Ms Gibson met the offender to complete the necessary margin lending documentation required to establish his margin loan account. On 31 October 2006, she received an email from him asking her to purchase $100,000 of Promina shares and $100,000 of Telstra shares.
On 11 November 2006, the offender sent two emails to Ms Gibson as follows:-
(1) At 1.30 am the offender sent an email asking Ms Gibson to call him so that she could execute purchases of a number of different shares, namely, $100,000 National Hire Group, $100,000 Harvey Norman, $100,000 St George Bank, $100,000 AGL Energy, $100,000 Coles Myer and $100,000 Oxina for his benefit.
(2) The second email was sent at 9.59 am. The offender asked Ms Gibson to cancel the purchase of the Coles Myer shares and instead purchase $100,000 of Promentum shares at a price range of around $1.32 per share.
On 13 November 2006, Ms Gibson advised the offender that Citigroup did not margin lend against Promentum shares. Accordingly, this meant that if he wished to purchase those shares, he would have to fund the full purchase cost of them.
Later on 13 November 2006, Ms Gibson telephoned the offender to confirm the instructions which he had sent through in his emails of 11 November 2006. During the conversation, the offender changed the amount of Promentum shares he wished to purchase from $100,000 to $50,000 by reason of the fact that Citigroup did not margin lend against Promentum shares.
Following this conversation, Ms Gibson executed the share purchase of 40,000 shares in Promentum at $1.295 cents per share at a total cost of $52,369.80.
Citigroup recorded an entry on 13 November 2006 in relation to the share purchase. It showed a debit of $51,800 to the offender's margin loan account at a cost of his trade in Promentum shares on 13 November 2006 with additional costs of $518 for brokerage and GST of $51.80. It showed the offender's margin debit balance therefore had increased to the amount of $154,898.59. Consistently with his instructions, all of the purchases, including the shares in Promentum, were made and recorded in his name.
On 29 November 2006, the Chairman of Promentum, Mr Ian Elliott, called Mr Rawal inquiring about a share purchase that appeared on the Promentum share trading register in the offender's name.
On the same date at 7.42 pm, Mr Rawal spoke to the offender on the offender's mobile phone and asked him about the share trade. During this conversation, Mr Rawal said words to the effect "Andrew, the Chairman of PPR has just told me that he has noticed a share trade in PPR shares in your name. Did you buy these shares?" .
According to the agreed facts, the offender did not answer the first three times that Mr Rawal asked him, despite being prompted about whether he had heard the question.
On the fourth occasion that Mr Rawal asked him, the offender said words to the effect:-
Mr Rawal: "Andrew, did you buy these shares?"
Offender: "Could you be more specific?"
Mr Rawal: "Approximately $40,000 worth of shares in PPR have been purchased in the last four weeks under the name 'Andrew Dalzell'. Did you buy these shares?"
Offender: "Yes. What happens from here Ajay?"
Mr Rawal: "I cannot answer that. I need to seek advice on this matter and I will get back to you."
On 30 November 2006, the offender resigned from KPMG and confirmed that he had sold the shares, on legal advice, at $1.244 cents per share.
The offender made a loss on the overall transaction (including transaction fees) of $3,030.24.
The offender's evidence
The offender gave evidence, firstly, by affidavit sworn on 18 March 2011 and in oral evidence at the hearing on 21 March 2011.
In the affidavit, he set out his history of employment and the nature of the duties and functions performed by him whilst employed by KMPG Australian Services Pty Limited and KPMG Transaction Services Australia Pty Limited.
He stated that, by September 2006, he had finished paying off his home mortgage and was looking to making tax effective investments. He decided on a negatively geared share portfolio, starting with $100,000 investment in each of the up-coming Telstra T3 instalments issue and Promina shares. He provided an account of the purchase orders he made on 11 November 2006.
He stated that he decided overnight to buy the Promentum shares instead. He stated that his reasons for doing so were (affidavit at [24]):-
"(a) I thought that companies in the printing industry had the potential for short and medium term share price growth;
(b) Promentum was in the front of my mind;
(c) My knowledge, based on publicly available information of Promentum's performance in the year or two before the share purchase suggested it had value not fully reflected in its share price."
The offender referred to having followed the printing industry reasonably closely since he worked on a project for Westpac in 1999. He stated that he believed that shareholders of the company benefited significantly and the company became a target.
He stated that before he started work on Project Fox, he had been aware of the fact that the share price of Promentum had been affected by a series of adverse events and that he believed that the company had good fundamentals.
He stated in his affidavit at [28]:-
"Nothing that I had seen in the week commencing Monday 6 November 2006 suggested any underlying difficulties with Promentum ..."
He said that he thought there was good chance that Promentum itself would become a takeover target. Even if it did not, he said, he thought the share price did not fully reflect its underlying value and was likely to improve.
The offender acknowledged that in the week commencing 6 November 2006, he believed that he saw the Project Royal Draft Board Report. He stated (affidavit at [29]:-
"... In light of the significance that the Project Royal draft Board Report has later acquired for me, I have difficulty in separating what I thought then of the Project Royal draft Board Report from what I think now. However, as best I recall, the Project Royal draft Board Report was not a document that I took much notice of at the time as it was not essential for my synergies validation work, and it was not a significant part of the reason why I decided to buy Promentum shares. It was, in reality, a Stage 1 'pitch document' designed by KPMGCF and Promentum Management to convince the Promentum board to submit a non-binding indicative offer ..."
The offender proceeded to identify what he described as "other limitations on the usefulness or reliability of the Project Royal draft Board Report ..." . These are set out in paragraph 30(a), (b), (c) and (d) of his affidavit.
On 21 March 2011, he gave further evidence as to the Project Royal draft Board Report in evidence (transcript, p.23 ff). He was asked in evidence in chief what role, if any, the Project Royal draft Report played in his decision to buy Promentum shares. He replied "Not a significant part" (t.23).
He then sought to explain that statement by further reference to what he referred to as "limitations" on the draft report. One "limitation" was said to be the fact that the report was prepared for the sole purpose of submitting a non-binding indicative offer to qualify for the Stage Two due diligence and that it had no "downside" to it. The second was that it was "very introductory" (t.24). The draft report being based on information memorandum issued by the vendor with unsubstantiated descriptions of the defendant's finances, its business and its future were also referred to.
The offender was specifically asked what part the draft report played in his decision to acquire the shares. He responded (t.25):-
"I guess it reminded me front of mind that Promentum was active in the print industry and that there was consolidation going and it could either be a target or acquire McMillan."
In cross examination, the offender agreed that the movement to Stage Two in the investigation process was of significance to the four or five companies who were invited to go to Stage Two (including Promentum). It was put to him in cross-examination (t.26):-
"Q. Would you accept that the movement to Stage Two, the approval to do the due diligence and the pending access to the data room, was significant steps in relation to this proposed transaction?
A. No, because four or five other companies were invited to go to the same path.
Q. All that means, Mr Dalzell, is that it was a significant step for organisations other than Promentum?
A. Yes.
Q. So that it was a significant step for each of the prospective bidders to go past that first stage to the second stage?
A. Yes, if you want to use the word significant.
...
Q. But I'm suggesting to you, Mr Dalzell, that it was a significant further step?
A. I don't agree with the word significant."
He was also asked in cross-examination (t.27):-
"Q. And I suggest to you that the totality of that information did play a part in your decision to purchase Promentum shares?
A. Yes, I said not a significant part.
Q. Well, I suggest to you that it was a positive component of your decision making process?
A. Bearing - yes, bearing in mind there was no guarantee that anything would come out of it.
Q. It attributed positively to your decision to buy the shares in Promentum?
A. Yes."
I will discuss separately the question of the quality of the information available to the offender. It is sufficient here to observe that there was an attempt by the offender, in my opinion, to play down the significance of the information available to him. That said, I accept his evidence that he also took into account other information relevant to the printing industry.
In his affidavit at [34], the offender stated that at the time of his purchase of Promentum shares, he did not appreciate nor recognise that he was "doing anything criminal" . He relied, in this respect, upon the fact that he bought the shares in what he described in an open manner, in his own name and through his regular broker.
Relevant statutory provisions on sentencing
The sentence to be imposed on the offender is to be determined in accordance with Part 1B of the Crimes Act . Section 16A contained in that Part provides what has been referred to in submissions as a "check list" of the matters which a court should take into account in the sentencing of federal offenders.
The Crown submissions addressed the key matters said to arise in the sentencing of the offender in the present case.
It is clear that, although not expressly included in the check list in s.16A, general deterrence is a matter that must be taken into account in determining the sentence to be passed: DPP (Cth) v El Karhani (1990) 21 NSWLR 370 at 377.
The Court there cited the well-known dicta of Street CJ in R v Rushby (1977) 1 NSWLR 594 at 597 to 598 in which it was stated that one of the main purposes of punishment is to protect the public from the commission of such crimes by making it clear to the offender and to other persons with similar impulses, that, if they yield to them, they will meet with severe punishment.
The list of particular considerations in s.16A(2) must be read as subject to the primary obligation of the Court specified in s.16A(1). Section 16A(2) requires that the Court should "take into account" the listed matters. They provide a catalogue of matters to be considered in determining the "severity appropriate in all the circumstances of the offence" . However, in El Karhani (supra) at 378, it was observed that the opening words of s.16A(2) must be noted. They state that the matters there listed "are to be taken into account in addition to any other matters" . One such matter, the Crown observed in these proceedings, is clearly the general deterrent effect of the sentence.
A sentence of imprisonment is not to be imposed unless, having regard to all other available sentences, no other sentence is appropriate: s.17A, Crimes Act .
In relation to the imposition of a fine on a person for a Federal offence, a court must take into account the financial circumstances of the person, in addition to any other matters that a court is required or permitted to take into account: s.16C(1).
However, s.16C(2) provides that a fine may be imposed, notwithstanding that the financial circumstances of the offender cannot be ascertained.
Nature and circumstances of the offence
In accordance with the provisions of s.16A(2)(a), I turn to consider the relevant matters in sentencing the offender.
The Crown identified the following matters in that regard I quote from the (Crown's written submissions at [22]):-
"(a) The offender was a 'true insider', being a Senior Manager of KPMG Transaction Services engaged to advise Promentum Pty Limited on the acquisition of the McMillan Print Group;
(b) The information used was obtained in the offender's capacity as a Senior Manager of KPMG Transaction Services Group, and thus used in breach of trust;
(c) The individual conduct was deliberate, planned and executed over a period of time, rather than being spur of the moment;
(d) The potential gains were substantial, even though they were not realised;
(e) The absence of general availability of the information was obvious;
(f) The Crown contends that the materiality of the information was also obvious, such that the offender must have known it was material - a likely point of disagreement between the parties requiring resolution by the Court;
(g) The offender was evasive when confronted by his supervisor when the offence was detected, but then acknowledged to his superiors that his actions involved a lapse of judgment;
(h) The offender was twice offered the opportunity to be interviewed by ASIC on 13 September 2007 and 5 August 2008 (in order to resolve the matter of the share purchase). He declined both offers, necessitating a full investigation by ASIC);
(i) It is no part of the offence that the offender was motivated by the subjectively perceived value of the inside information to engage in the prescribed transaction - while the presence of such a motive is likely to be an aggravating circumstance, its absence is not a mitigating circumstance."
The Crown further contended that the information within the offender's knowledge included the following:-
· That KPMG, based on the relevant information, had forecast in a Draft Board Report that the potential acquisition had the potential to increase Promentum's sales from about $190 million to $300 million in the financial year 2007.
· That the acquisition had the ability to double the size of Promentum and increase investor perception and confidence of Promentum.
· With synergies of approximately $8 million, a share price increase to $2.40 was possible.
The Crown submitted that the value of the "information" was its value to a "common investor" (an abbreviated reference to the requisite materiality as which is defined in s.1042D of the Corporation Act ). In that respect, it was submitted (at [24]):-
"... Common investors cover the entire spectrum of the investing community, from sophisticated and full-time professional investors, through to ordinary citizens investing directly or through self-managed superannuation funds. The prohibition should not be seen as protecting only the high end investor."
The Crown also submitted that the assessment of the value of the "information" is required to be prospective. In that respect, it relied upon the dicta of the Federal Court (Gilmour J) in ASIC v Fortescue Metals Group Limited (No 5) [2009] FCA 1586; (2009) 264 ALR 201 at 301, [474]. The chance of a real gain, the Crown contended, must have been in contemplation by the offender at the time that he placed the order of "$50,000 worth of shares in circumstances where he was required by law not to engage in such a transaction" .
The Crown, however, acknowledged that, in the end result, the offender did not realise a profit from the acquisition of the shares and that, upon discovery of the transaction, he voluntarily sold them at a loss. Having said that, the Crown submitted:-
"... However, this does not derogate from the objective seriousness of this offence, particularly in light of the substantial potential profit referred to in paragraphs 25 and 26 above ..."
In this respect, the observations of Barr J in R v Doff (2005) ACLC 317; [2005] NSWSC 50 at [31] was relied upon. It was there stated:-
"It seems to me that the amount invested is a more important indicator of criminality than the amount ultimately realised from the criminal activity concerned. One would not regard as trivial the criminality of an insider trader who ventured much but lost."
In relation to the particular circumstances, the following submissions were made by the Crown:-
(1) Circumstances of victim, injury loss and damage: s.18A(2)(d) and (e)
The Crown referred to a number of authorities that identify the nature of "victims" of offences of the kind in question. Those authorities identify both the seller or sellers of the stock at the lower price and as well the public. In respect of the latter, emphasis in the authorities is given to the position of the investing public at large that the "injury" relates to the loss of confidence in efficacy and integrity of the market in public securities that can result. The Crown referred to the dicta of Lord Judge in DPP v O'Reilly [2010] VSC 138 cited in R v McQuoid [2009] EWCA Crim 1301 to the following effect:-
"Those who involve themselves in insider dealing are criminals: no more and no less. The principles of confidentiality and trust, which are essential to the operations of the commercial world, are betrayed by insider dealing and public confidence in the integrity of the system which is essential to its proper function is determined by market abuse."
(2) Plea of guilty: s.16A(2)(g)
The Crown observed that the plea of guilty by the offender was not entered at the earliest opportunity, although it was entered soon after the committal which was not ultimately contested. However, it is stated ASIC had had to undertake a full investigation. Additionally, as earlier noted, the offender had declined the opportunity to be interviewed by ASIC officers.
(3) Deterrence: s.16A(2)(j)
The Crown relied on a number of authorities including Rivkin (supra) at 409 to 410, [44]; R v Pantano (1990) 49 A Crim R 328 at 330 and Doff (supra).
The Crown emphasised that the need for general deterrence in white collar crimes was high and that in such cases less weight is given to prior good character, based upon recognition by the Courts that it is often an offender's prior good character and standing in the community that places him or her in the position of trust from which he or she has been able to commit the offence: DPP v Bulfin (1998) 4 VR 114 at 131; R v Williams (2005) 216 ALR 113 at 140 to 141, [60] to [61].
(4) Character, antecedents, age, means and physical/mental condition of the offender: s.16A(2)(m)
The Crown accepted that the offender, at 49 years of age, was a person of good character.
In relation to the reports tendered on sentence of both Dr Pell and Dr Nielssen, the Crown contended that these do not identify any special matter which would enliven a special or a particular sentencing consideration. In particular, the evidence did not, it contended, reveal that any mental illness issue contributed to the commission of the offence in any way or that the offender's moral culpability was reduced.
The Crown relied upon the circumstances concerning the orders placed by the offender, initially for 100,000 shares and then 50,000 shares after he became aware of the fact that a margin loan was not available. This was said to demonstrate active decision-making in the purchase.
(5) Effect on family or dependents: s.16A(2)(p)
The Crown contended that the effect of an order on a persons family or dependents are factors that are only taken into account in exceptional circumstances: R v Hinton (2002) 134 A Crim R 286 at [31] and the Crown submitted there was nothing exceptional in the circumstances of the present case.
(6) Extra-curial punishment
The Crown relied upon the observations of Basten JA in Einfeld v R [2010] NSWCCA 87; (2010) 266 ALR 598 at 618, [85] to [118], the extra-curial punishment in this case said to be the publicity given to the offender.
(7) Comparative sentences
The Crown provided a schedule setting out a summary of previous authorities where sentences have been imposed for insider trading under the Corporations Act and equivalent legislation.
The Crown noted the observations of the High Court in Hili v The Queen [2010] HCA 45; (2010) 272 ALR 465 at 478 to 479 and, in particular, the statement by the Court (at [56]):-
"(c)onsistency in Federal sentencing is to be achieved through the work of the intermediate courts of appeal."
Submissions for the offender
Mr N Williams SC, who appeared on behalf of the offender, emphasised, in his submissions, that although the offender fell within the description "an insider trader" , there were two central matters that placed his offending at the low end of the scale for such offences. This was said to be in contradistinction to other cases that involved what were referred to as "gross abuse" .
Cases in the latter category were said to involve cases whereby an insider has used highly reliable information about a matter (eg, a takeover or a bank foreclosure) that is imminent. Additionally, in some such cases, the offenders had used subterfuge, false names and other devices to achieve an immediate and fairly certain personal gain.
These two matters, it was submitted, were central to determining the objective seriousness of the offence. The contention was that it was necessary in sentencing the offender to recognise and take into account what was said to be the "grade of information" used and the part that that information played in the share purchasing in question. Secondly, it must also be taken into account what was said to be the "openness" of the dealing (the purchase of the shares).
As to the first matter, the offender's evidence in his affidavit sworn 18 March 2011 was that he had followed the printing industry reasonably closely and was aware that it was in a period of consolidation. He was interested in companies that were themselves potential takeover targets. He said that, given the then recent decline in the share price of Promentum and the interest of private equity firms in printing businesses, he thought that there was a "good chance" that Promentum would itself become a takeover target. He thought that this was very likely if a successful takeover for McMillan did not eventuate. The fact that he held this information, it was in effect submitted, indicated that the confidential information played only a part in the offender's decision to buy the Promentum shares.
In relation to the Project Royal draft board report, this, it was said, was, in reality, a Stage 1 "pitch document" and that everything had to be validated in Stage 2. There had been no KPMG financial due diligence on McMillan's detailed accounting information.
The offender's evidence was that there were limitations on the usefulness or reliability of the Project Royal draft report which were said to be apparent. Certain of these were referred to in his affidavit (at [30]).
The offender gave evidence at the sentencing hearing on 21 March 2011. In evidence, he stated that he would have read the Project Royal draft board report as part of "the background information" before starting off on Phase 2 Project Fox. When asked what role, if any, the Project Royal draft board report played in his decision to buy Promentum shares on the morning of Saturday 11 November 2006, he replied, "Not a significant part" . When asked to explain that answer, he stated (t.24):-
"A. The Project Royal Draft Board report had two limitations. The first one was it was prepared by corporate finance for the sole purpose of submitting a non-binding indicative offer such that Promentum would qualify for stage two due diligence. There was no downside to the report like there was refundable deposit that would be sacrificed. Going to stage two due diligence would cost a moderate amount of money, maybe $100,000 dollars [sic] or so, or 200 and Promentum had to look at McMillan if they were on the selling block, well, Promentum had to look at it. The draft board report just had the purpose of saying, well, this is what it looks like and this is what it could be. That was its first aim and corporate finance's job is to do deals so they put forward many of these and some proceed, some don't.
Q. So essentially promotional, is that what you are saying?
A. Not promotional. It's very introductory to suggest that it's worth spending and going to stage two due diligence which is when you'll find out the truth. The second sort of limitation is the draft board report is based on the information memorandum which is issued by the vendor and it has unsubstantiated descriptions of the vendor's finances, its business, and what the outlook is for the future. Because in the stage one there would be no KPMG due diligence, financial due diligence ..."
The offender was cross-examined on this evidence and stated that he did not consider that the draft board report was a significant matter in his decision to buy the shares. He again accepted that it did play a part, but not a significant part. It was then put to him (t.27):-
"Q. Well, I suggest to you that it was a positive component of your decision making process?
A. Bearing - yes, bearing in mind there was no guarantee that anything would come out of it.
Q. It attributed positively to your decision to buy the shares in Promentum?
A. Yes."
Whether or not the word "significant" is apt to convey its impression made on the offender, it is clear that the information was affirmative or material information in the offender's decision to purchase the Promentum shares.
I have referred earlier to the report of Mr Lonergan dated 18 March 2011 (MFI 2). That report was prepared at the request of the offender's solicitors. It is unnecessary to detail Mr Lonergan's evidence contained both in his report and in his oral evidence.
In summary, he expressed a view that the draft board report, had it become generally available, a person who commonly acquired shares would have been able on reading it to have identified a number of flaws "at high level" . He said that a person who commonly acquired shares was likely to conclude that, a bid at the price and terms recommended by KPMG was extremely unlikely to succeed.
In general terms, I am prepared to accept and I proceed upon the basis that the confidential information central to the offence would not be classed as high grade information as, for example, of the kind where an insider receives high grade information that a significant trade is about to occur. However, that is not to say that it did not provide information which was of material advantage to an insider such as the offender in contemplating investing in shares in Promentum.
The offender's evidence that it did play a part in his decision-making, is hardly surprising and it underlines the fact that the draft report, in particular, did have information in it of value and which was not generally available in the relevant sense.
However, the submission made on behalf of the offender was that taking into account the nature of the material, the fact that the offender had over the years followed the printing industry and had contemplated investing in a company in the industry put the draft board report and its use in perspective.
I accept, in general terms, the submission that, on the evidence, this case does not fall into the class of case of insider trading cases described in submissions as involving a "gross abuse" of highly confidential information of the character and in the circumstances I have earlier referred to. It is to be seen in the context of all the matters that have been identified.
In relation to the second matter, it was contended that, again unlike the cases in the worst category, there was, in this case, no subterfuge or use of devices designed to disguise the share purchase. The fact that the offender purchased the 40,000 Promentum shares in his own name (which he said was an unusual surname) indicated that he did not act in a devious fashion. The purchase through his regular broker was an additional matter that was said to emphasise that fact.
In paragraph 37 of his affidavit, the offender stated:-
"I now absolutely accept that, at the time I bought the Promentum shares, I was in receipt of specific information about Promentum including the Project Royal draft board report that was not generally available to the public ..."
The offender stated in evidence that the fact that he bought the shares in an open fashion is evidence of that fact that he did not appreciate at the time of the share purchase that what he was doing was criminal in nature.
Whilst I am of the opinion that, given the offender's education, he must have been aware that purchasing the shares when he was specifically engaged as the synergy team leader for Project Fox and had had access to confidential information in the period immediately prior to the purchase, was wrong and an abuse of trust thought he was not mindful of the serious criminality of his act.
Subjective circumstances
Evidence has been led as to the subjective circumstances including the adverse effects that the offender has brought upon himself and his family. Included in the evidence is his own affidavit evidence according to which he said he has been unemployed since August 2009. Additionally, the charge brought against him attracted media publicity. He said that recruitment consultants who he has made contact with had not returned his calls in 2010.
The offender, accordingly, said that his offending has resulted in him suffering irreparable damage in his professional relationships and that the offence will prevent him from working in the financial services industry again.
I accept the Crown's submissions to which I have earlier referred that such matters do not, in this case, constitute "exceptional circumstances" for sentencing purposes.
In addition to the impact upon his career and professional standing, there is evidence that he has suffered a degree of depression and anxiety. I again accept the Crown's submission in relation to the report of Dr Nielssen and Dr Pell.
Determining the sentence in this case
In addition to consideration of the list of matters provided for in s.16A(2) of the Crimes Act , s.17A provides that a Court shall not pass a sentence of imprisonment in respect of a Federal offender unless the Court, having considered all other available sentences, is satisfied that no other sentence is appropriate in the circumstances. It was the Crown submission in these proceedings that no other sentence other than a sentence of imprisonment is appropriate.
It was submitted on behalf of the offender that the nature and circumstances of the offence places the offence outside the range in which a full-time custodial sentence is available as a sentencing option. Indeed, it was submitted that it was not an available sentence, having regard particularly to subjective matters.
Attention was drawn to the schedule of cases produced by the Crown and it was observed that in some of them non-custodial penalties had been given despite the fact that serious offences were involved.
Whilst it was accepted that the offender fell within the true insider classification and that that was a matter that is relevant to sentence, nonetheless, it was observed, an examination of all objective facts and circumstances must be brought into account in determining whether a custodial penalty or otherwise is appropriate.
It was contended that, in those cases in which custodial sentences had been imposed, the insider information was highly material and, in some cases, used to generate profits made within a short period of time.
It was again submitted in relation to the consideration of sentencing options, that the information utilised by the offender in the present case, not being what was described as "highly reliable information" from a very close source, is a matter that militates against the imposition of a custodial term.
It was submitted that a review of the sentencing in certain of the cases to which the Crown referred, in fact supported the submission for the offender.
Reliance was also placed upon the character references which were tendered in evidence. They were said to be "exceptional references in several respects" in particular as to the offender's character and demonstrates that his offending was out of character.
It was submitted that the evidence, including the offender's guilty plea, demonstrated his genuineness of contrition.
Reliance was also placed upon the pre-sentence report which was said to corroborate the subjective case of the offender and indicated that he was eligible for a community service order.
Mr Williams submitted that the appropriate penalty in this case was the imposition of a bond.
Determination
I have had regard to both the evidence and the submissions as to the objective circumstances of the case as well as to the subjective factors in determining the appropriate sentence. I accept that this case, though involving serious criminality, nonetheless takes its place towards the lower end of the range of insider trading offences. That conclusion, of course, is significant in determining the appropriate sentence to be imposed.
A pecuniary penalty may be imposed in relation to an insider trading offence. The Crown, in its written submissions, noted that if the quantum of any profit made from a charged transaction was determinative of the appropriate penalty, there could be an individual consideration of the quantum of each amount of profit for each set of transactions when considering individual sentences for each charge. This could be reflected by different penalties for each charge. However, having said that, the Crown did not suggest that that was the appropriate way to proceed in all the circumstances. No other submissions by the Crown urged that a pecuniary penalty ought be imposed.
As I have indicated, the offender did not profit by the charged transaction and, in fact, incurred a small loss. In the circumstances of the case and the submissions made, I have determined that it is not appropriate in the circumstances of the case to impose an order of that kind.
I do not, however, accept the submission for the offender that the imposition of a bond would be an appropriate sentence. A bond, in my assessment, would not reflect either the seriousness of the offence, nor give proper effect to the sentencing principles to which I have referred in the context of the facts and circumstances established in evidence in this case. I have concluded that the offence should be marked out by the imposition of a term of imprisonment. That conclusion has been reached following consideration of all other available sentences. I am satisfied that no other sentence is appropriate in the circumstances.
In sentencing an offender for a Commonwealth offence, an Intensive Correction Order is a sentencing option that is also available together with the imposition a term of imprisonment. The Crown submitted that such an order give effect to the requirements of general deterrence as it would not require the offender to be held in custody in a correctional institution.
An intensive correction order is a term of imprisonment, but it directs that the sentence is to be served by way of intensive correction in the community. I accept that, in many cases, it would not be appropriate in respect of insider trading offences. However, as important as is the principle of general deterrence in sentencing for such offences, there is a statutory requirement for a full consideration of the nature and the circumstances of the offence: s.16A(2). It is to be borne in mind that a term of imprisonment rather than a bond served under an Intensive Correction Order is a significant sentence, in my view, more onerous than a suspended sentence.
In accordance with the provisions of s.67(2) of the Crimes (Sentencing Procedure) Act , in deciding whether or not to make an Intensive Correction Order, the Court is required to have regard to:-
(1) The contents of the assessment report on the offender (prepared under s.70).
(2) Such evidence from the Commissioner of Corrective Services as the Court considers necessary for the purpose of deciding whether to make such an order.
Under the provisions of s.67(3) of the Act, a court may, for any reason it considers sufficient, decline to make an Intensive Correction Order despite the contents of the assessment report.
On 16 May 2011, the proceedings were listed for further hearing, an assessment report having been received. On that occasion, some brief supplementary submissions were made on behalf of the offender by Mr Hunt of counsel.
The assessment report is dated 28 April 2011. It indicates the factors that have been assessed to determine the offender's suitability in accordance with the requirements of s.70 of the Crimes (Sentencing Procedure) Act . It states that the offender has been assessed as suitable for an Intensive Correction Order and that he has signed an undertaking to comply with the obligations in the event that such an order is made.
The final matter in the consideration is whether or not the service of the term of imprisonment pursuant to such an order would adequately address the purposes of punishment and reflect the objective seriousness of the offence.
Intensive Correction Order
Pursuant to the Crimes (Sentencing Procedure) Regulation 2010, an Intensive Correction Order is to be in approved form: Regulation 12(1). A copy of the order is to be given to the offender and a further copy sent to the Commissioner of Corrective Services.
The undertaking that has been signed by the offender is in the approved form: Crimes (Sentencing Procedure) Regulation .
The Intensive Correction Order if made is to contains the mandatory conditions for such an order under s.81 of the Act and s.175 of the Crimes (Administration of Sentences) Regulation 2008. Regulation 175(o) proscribes, as one of the mandatory conditions:-
"A condition that requires the offender to undertake a minimum of 32 hours of community service work per month, as directed by a supervisor from time to time."
Regulation 176 permits additional conditions to be imposed on the Intensive Correction Order.
I note that the Intensive Correction Order Assessment Report recommend that any order contain the following condition:-
"(c) The offender must comply with any direction of a supervisor as to the kinds of occupation and employment in which the offender may or may not engage."
The offender is sentenced to a term of imprisonment of 2 years to commence on 20 May 2011 and to expire on 19 May 2013.
Pursuant to s.7(1) of the Crimes (Sentencing Procedure) Act 1999, I make an intensive correction order and direct that the sentence which I now impose be served by way of intensive correction in the community. The conditions of the latter order include the mandatory conditions referred to in s.81 of the Crimes (Administration of Sentences) Act 1999 and Regulation 175 of the Crimes (Administration of Sentences) Regulation 2008 and an additional condition set out in paragraph 169 of these remarks on sentence.
In respect of mandatory condition prescribed by Regulation 175(b), the offender is to report on 1 June 2011 to the specified Local Office of the Corrective Services Department or on such other date as may be determined by the Commissioner of Corrective Services.
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Decision last updated: 23 May 2011
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