R (Financial Markets Authority) v Maywald
[2015] NZHC 2264
•18 September 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CRI-2013-004-12254 [2015] NZHC 2264
THE QUEEN
(FINANCIAL MARKETS AUTHORITY)
v
JASON ROBERT DUNCAN MAYWALD MARK LAWRENCE LACY
Hearing: 18 September 2015 Appearances:
B Dickey and A R Lyne for Crown
R B Stewart QC and N Utadhyay for Mr Maywald
T A Simmonds and S Cann for Mr LacySentence:
18 September 2015
SENTENCING REMARKS OF ANDREWS J
THE QUEEN (FINANCIAL MARKETS AUTHORITY) v MAYWALD & LACY [2015] NZHC 2264 [18
September 2015]
[1] Mr Maywald and Mr Lacy, you have both pleaded guilty to two charges under s 58 under the Securities Act, namely:
(a) Distributing an advertisement, namely the Investment Statement dated
14 September 2007 for MFS Pacific Finance Ltd (PAC) that included untrue statements; and
(b) Signing a registered prospectus, namely PAC’s prospectus dated
14 September 2007, that was distributed and included untrue statements.
[2] On each offence, the maximum available penalty is imprisonment for five years or a fine not exceeding $300,000.
[3] At your request I gave a sentence indication on 21 August 2015, which you both accepted. I will now sentence you in accordance with the indication.
Relevant Facts
[4] You were both directors of PAC. You Mr Lacy were a director from February
2005 until November 2008 and, at least for some part of that time, you were Chairman of Directors. You signed the 2006 and 2007 prospectuses. In the 2007 prospectus you were described as a partner in one of the largest law firms on the Gold Coast in Australia, and a specialist in commercial and property law, and banking and finance matters.
[5] Mr Maywald, you were a director from December 2006, and signed the 2007 prospectus. That document described you as having extensive experience in the financial services sector, with experience as a solicitor specialised in commercial transactions and litigation.
[6] PAC was one of a number of indirect subsidiaries of the Australian-based company MFS Ltd. I understand that MFS was a 40 per cent shareholder in PAC, and PAC was a New Zealand arm. MFS was listed on the Australian Stock Exchange. Of particular relevance to the present proceedings is the put option between MFS and PAC. That agreement allowed the directors of PAC to require
MFS to acquire its overdue loans at any time. The agreement could not be cancelled without giving PAC an opportunity to first elect such loans as it wished to pass on at the time of cancellation. The put option was explicitly referred to in the prospectus as a source of further comfort for investors.
[7] The particular falsehoods which were contained in the two statements are set out in the Crown Summary of Facts.
[8] The 2007 prospectus in essence painted a substantially untrue picture of the health of the business. In particular, it assured investors of three general things: First, that the business was generally in good health; secondly, that there were no circumstances arising which were likely to adversely affect the business in a significant way; and thirdly, that the put option would act as an effective protective measure should the business encounter difficulty. In effect, the put option could be described as having been put forward as an insurance.
[9] This general picture was made up of further, particular untruths as to the state of the business. The prospectus recorded that the loan portfolio had grown in the lead up to it being issued, but in reality, PAC had ceased making loans between July and September because of a lack of liquidity. Further, the earlier growth that was recorded was largely the acquisition of poorly performing loans from another company and from loans to other members of the MFS group. By the time the prospectus was issued, the loans to related parties amounted to more than $60 million. PAC had already required financial support and at the time incoming debentures were not meeting outgoing debentures. As I understand it, relevant internal accounts within PAC recorded these matters.
[10] In addition, the prospectus failed to note that reinvestment rates for maturing debentures had fallen from about 60-70 per cent to less than 50 per cent. It also did not disclose that its cash reserves had fallen significantly in the preceding six months. In relation to past due loans, the prospectus failed to show an increase of more than $25 million in such loans. Nor did it report that the share of first and second mortgages had declined from above 66 per cent to less than 50 per cent. The prospectus also made statements about the matching of maturities, but did not
disclose that these statements assumed that the past due loans would be repaid within six months. It treated them as loans which were yet to expire.
[11] While the prospectus made frequent reference to the established policies and guidelines, it did not reveal that there were around 20 loans with loan to value ratios above the recommended maximum.
[12] In addition to these falsehoods, the assurances in the prospectus that PAC would receive financial assistance from MFS if required proved to be untrue as the directors did not exercise the put option when that need arose.
[13] It appears from the summary of facts that between 1 October and
31 December 2007, PAC received new subscriptions for debenture stock and unsecured notes in the sum of approximately $33.2 million, comprising $11.3 million of new subscriptions. Australian-based entities within the MFS group accounted for approximately $21 million of the new subscriptions, and the remainder of those new subscriptions, it appears came from the members of the general public of New Zealand.
[14] While it is a reasonably difficult exercise to estimate the amount invested or re-invested following the issuing of the prospectus in September 2007, it would appear from material given to me today that the lowest approximate new investment by New Zealand investors after September 2007, is in the order of $10.5 million.
Crown Submissions
[15] Mr Dickey submitted that you, Mr Maywald, are the more culpable of the defendants, and the starting point for your sentencing should be a term of between two years and two years and six months’ imprisonment. This is on the basis of aggravating factors of the high degree of harm that his loss caused, a neglected opportunity to correct that loss by exercising the put option, and what he submitted was gross negligence on your part, and the harm caused to the reputation of the New Zealand financial market. Making allowance for previous good character, co- operation with the authorities, and guilty pleas, Mr Dickey submitted that an end
sentence of a little less than two years imprisonment, or an equivalent sentence less than imprisonment would be appropriate
[16] In relation to you, Mr Lacy, Mr Dickey proposed a starting point of between two years and two years and six months’ imprisonment. He submitted that the offending is defined by a high degree of loss, compounded by the opportunity to prevent the loss by utilising the put option. Mr Dickey submitted that your conduct amounted to gross negligence and that it is also particularly serious because of the harm caused to investors’ perception of the New Zealand Financial Market.
[17] Again, Mr Dickey accepted that a discount may be available for previous good character but he submitted it should be minimal in that you took advantage of this character to mislead investors. He accepted that there should be further discounts for your offer of reparation, cooperation and guilty pleas. Mr Dickey therefore submitted that a short sentence of imprisonment would be appropriate.
Defence Submissions
Mr Maywald
[18] Mr Stewart submitted for you, Mr Maywald, that you were a young man at the time of the offending (you were 29 at the time), acting as a director for the first time. He submitted that you took those responsibilities seriously, but you were mistaken. In particular, he submitted that you were not grossly negligent. He submitted that you had at the time considered, not unreasonably, that it was not necessary to exercise the put option. On this basis, Mr Stewart submitted that a starting point of community detention or community work would be appropriate.
[19] Mr Stewart noted the change in the applicable law with the recent repeal of s 58 of the Securities Act, and its replacement by s 264 of the Financial Markets Conduct Act 2013. He noted that under the new legislation criminal liability is now reserved for only the most serious of violations. Mr Stewart handed up a separate written submission summarising his submissions as to the level of your offending. He submitted that you believed the statements in the prospectus and investment statement to be accurate.
[20] Mr Stewart submitted that some alleged failures had occurred before you commenced work with PAC. He submitted that you had questioned management, and he noted that you had insisted on a previous occasion on a report being made to the trustee in relation to a breach. He submitted that you were too inexperienced at the time to identify untrue statements and, as a result of your inexperience, relied on information and material provided to you.
[21] Mr Stewart referred to your cooperation with the authorities and your indication of an intention to plead guilty at an early opportunity. He submitted that you are of previous good character and integrity and are genuinely remorseful. You have made an offer of reparation in the sum of $100,000AUD which you are only able to make with the assistance of your parents. Finally, Mr Stewart submitted that you have already suffered considerably as a result of this matter becoming public, and so any sentence will be additionally harsh.
[22] Mr Stewart submitted that a full guilty plea discount is appropriate as you agreed to plead guilty at the first call of this matter having come voluntarily from Australia for that call, but that the guilty plea has been delayed due to uncertainties around the agreed statement of facts which have now been resolved.
[23] Mr Stewart noted that you are now employed after a period of being unemployed. He submitted that a sentence of either community detention or home detention would mean the loss of that job, because they both would have to be served in New Zealand, and you would therefore lose any capacity to provide for your family. You have said that you are able to complete community work in New Zealand, by completing it in several blocks of time.
Mr Lacy
[24] On behalf of you, Mr Lacy, Mr Simmonds submitted that your role in the offending was minimal. You were the only non-executive director of PAC and you received only nominal remuneration. You were not involved in the day to day running of the business. On this basis, Mr Simmonds submitted that you acted entirely in good faith and without any dishonesty, and that this is not disputed by the Crown.
[25] Mr Simmonds also submitted that you had made due inquiries about the financial status of the company before signing the prospectus. He did not accept the Crown’s submission that you had been negligent, in any respect. Mr Simmonds also submitted that you genuinely believed that the put option should not be exercised, due to other statements made by MFS.
[26] Mr Simmonds submitted that you were misled and deceived by others, but not Mr Maywald, and you were not given important information. Material information was withheld from you. He submitted that you believed that PAC had proper governance processes in place and you believed in the integrity of those processes.
[27] Mr Simmonds acknowledged that, in hindsight, things could have been done better but he submitted that your offending is at the lowest possible end of the scale of this type of offending and that a starting point of either community detention or community work would be appropriate, in line with the starting point adopted in the Lombard decision.1 He said it could be accepted that you had been careless, but no more than that. Accordingly, he submitted I should not go higher than the starting point adopted for the Lombard directors.
[28] From this point, Mr Simmonds submitted that there should be discounts for remorse, your previous good character, and the losses you have personally suffered from the collapse of the MFS group and the potential loss of your practising certificate as well as his co-operation. Finally you have also offered to make a payment of reparation.
[29] On this basis, Mr Simmonds submitted for you that the end sentence should be one of community work. He strongly submitted that because you are based in Australia and have no connections in New Zealand, a sentence of home detention or community detention, which would have to be served in New Zealand, would have
an enormous and detrimental impact on you.
1 That is, R v Graham [2014] NZSC 55.
Starting Points
[30] The authoritative statement on sentencing levels for this kind of offending is in the decision of Heath J in R v Moses where his Honour observed:2
At the most serious end would be offending involving dishonesty, for example, and intention to mislead potential investors in order to secure funds for a particular venture or to obtain a personal financial gain. Immediately below that would be conduct that could be characterised as either reckless or grossly negligent. By gross negligence, I refer to conduct that that involves a major departure from the standard of care expected when a director performs a statutory duty. Below that are cases involving innocent misrepresentation arising out of greater or lesser degrees of carelessness.
[31] This comment has been approved by the Supreme Court.3 It establishes a hierarchy of offending from deliberate dishonesty, to gross negligence, to mere carelessness. The sentence for the offending will depend largely on where it falls on this particular scale. This is borne out by recent decisions where cases involving misjudgement tend to receive sentences of community work,4 whereas cases involving gross negligence receive substantial sentences of home detention.5 It appears clear that cases involving deliberate falsehood would inevitably receive
sentences of imprisonment.
[32] This is also consistent with the comments of the Supreme Court in R v
Graham, where the Court observed:6
It is not easy to think of cases from any area of the criminal law in which imprisonment has been seen as an appropriate response to offending where culpability arises out of a misjudgement by people who took their responsibilities seriously and where the consequences have been economic and have not involved physical injury or death.
[33] In the present case, the degree of loss or the amount invested is not insignificant even at the lowest of the assessed figures and, in my view, it is
compounded by the failure of either defendant to attempt to exercise the put option,
2 R v Moses HC Auckland CRI-2009-004-1388, 2 September 2011 at [15].
3 R v Graham, above n 1.
4 R v Moses HC Auckland CRI-2009-004-1388, 2 September 2011; R v Davidson HC Auckland
CRI-2008-004-29179, 7 October 2011.
5 R v Graham, above n 1.
6 R v Graham, above n 1, at [39].
which could have avoided the losses. But the real question is where the offending sits on the scale between gross negligence or mere carelessness.
[34] Both defendants have strongly argued that their conduct is consistent with “mere carelessness” or mistake. They say they took adequate steps to ensure the truth of the statements made in the prospectus, but that they were ultimately mistaken. They seek to rely on the reports and statements given to them by others in the organisation as providing a basis for their belief in the truth of the statements.
[35] The Crown accepts that neither defendant was reckless. It accepts that they genuinely believed the statements they made. The question is whether their error in believing them was reasonable.
[36] On the information before me, I conclude that the offending, while not gross negligence, is more than mere carelessness or misjudgment. As is set out in detail in the agreed summary of facts, the 2007 prospectus presented an entirely untrue picture of how PAC’s business was operating. It substantially underestimated the number of bad loans and the degree of related party lending that was occurring.
[37] These facts are not the conclusions of financial analysis about which intelligent minds may differ, they are rather the fundamentals of the business’s assets, with which reasonable directors could be expected to be familiar. When it occurs that a director displays a high degree of unfamiliarity with the business’s assets, I could not conclude that this was mere carelessness. I have concluded that both defendants were negligent, to some degree.
[38] Turning then to the appropriate starting points, I note that you, Mr Lacy, were a non-executive director. You were the only non-executive director. However, I am not persuaded that that substantially reduces your culpability. The perceived independence of a non-executive director places a responsibility on that director to maintain familiarity with the business and not to accept, without proper enquiry, information given by those within the business. I have concluded that your apparent lack of awareness as to the business was unreasonable in the same sense as was Mr Maywald’s.
[39] Given my findings that this is negligence rather than mere carelessness or misjudgement, I consider that the starting point for each of the sentences must be one of imprisonment. On the information before me at this stage I adopt a starting point for the sentences of both of you of around two years and three months’ imprisonment.
Personal Factors
[40] I now turn to the personal factors in respect of each of you. Both of you are men of previously good character, and you are supported by character references. You have no prior history of offending.
[41] I must add, however, that it is clear from the profiles of each of you in the PAC prospectus that your good character has been used in support of their role as directors, and to obtain business for PAC. You have, therefore, enjoyed some advantage from their good character. While to some extent that diminishes its value, I am nonetheless satisfied that a discount is appropriate for the previous good character of both of you. I apply a discount of around three months in each case.
[42] Both of you are also remorseful. I accept that your remorse is genuine, and that is not always the case in front of a sentencing Judge. Both of you have cooperated. You have faced the company’s investors. You have both also offered to make reparation for your offending. While the offers, albeit substantial to each of you, cannot greatly ameliorate the loss suffered by investors, I accept that they demonstrate the genuineness of your remorse and it is appropriate to have regard to them in making a discount for this factor. I therefore apply a further discount of five months for each of you for remorse and cooperation.
[43] It has also been submitted that you have each suffered significantly in loss of reputation as a result of the publicity surrounding this offending. I accept that this inevitably has an impact on their career opportunities in the future. I consider a small discount is appropriate for this factor, although it is tempered by the discount already given for previous good character.
Guilty Plea Discount
[44] I now turn to the discount for your guilty pleas, entered immediately after the sentence indication.
[45] You were both charged in late 2013, and the trial is due to commence in early
October.
[46] As is well known, the Supreme Court in Hessell indicated that a plea at the first reasonable opportunity could attract a discount of up to 25 per cent.7 I accept that discussion of the summary of facts has been protracted. I also accept that while a guilty plea entered within two months of trial might not usually attract a substantial discount, in this case it appears to me at least possible that your guilty pleas are likely to significantly reduce the complexity of the trial. For that reason I allow a discount of 20 per cent. On that basis, you would each receive an end sentence of
around 15 months’ imprisonment, and you are eligible for consideration of a sentence of home detention, or a combination of community work and home detention.
Sentence
[47] Were you New Zealand residents, I would be imposing sentence along the lines that I have just indicated. But that is not the case here, and you have both made submissions as to either the impossibility of completing a sentence of home detention if the Court were considering imposing one, or the extreme hardship that that would cause.
[48] In terms of the Sentencing Act 2002 that leads me to consider whether a sentence of either home detention or community detention would cause hardship that is disproportionate to the offending. I am satisfied that it would. As such, I intend to impose a sentence of community work, together with an order to make reparation. The period of community work involved must necessarily be reasonably lengthy,
given the sentence that would otherwise be called for. However, I accept that the
7 Hessell v R [2010] NZSC 135, [2011] 1 NZLR 607.
sentence will have a significant impact on you, because you will need to travel to
New Zealand to complete it.
[49] You have each specified periods where you have undertaken to travel to New Zealand to complete community work as directed, in blocks of no less than five 8- hour days. Counsel for the Crown has no concern as to your compliance with the conditions of a sentence of community work, including travelling to New Zealand when required.
Sentence
Please stand.
[50] Mr Maywald, on each charge you are sentenced to 200 hours community work, to be served concurrently. You are directed to report to the Department of Corrections Probation Service within 72 hours to make arrangements for completion of the sentence. In the light of your commitment to give evidence in the trial in October of this year, I direct that you are to commence community work no later than 4 January 2016, and it may be completed in blocks of no less than five days. The sentence of community work must be completed by 31 July 2016. You are also ordered to pay AUD 100,000 in reparation. This payment is to be made to the receivers of PAC, within 28 days of today.
[51] Mr Lacy, on each charge you are sentenced to 200 hours community work, to be served concurrently. You are directed to report to the Department of Corrections Probation Service within 72 hours to make arrangements for completion of the sentence. You are directed to commence community work no later than
30 November 2015, and it may be completed in blocks of no less than five days. The sentence of community work must be completed by 31 May 2016. You are also ordered to pay AUD 100,000 in reparation. This payment is to be made to the
receivers of PAC, within 28 days of today.
Andrews J
Solicitors:
Crown Solicitor, Auckland
Chapman Tripp, Auckland