R v Anderson

[2015] NZHC 2342

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CRI-2013-004-12254 [2015] NZHC 2342

THE QUEEN

v

DAVID MARK ANDERSON

Hearing:	25 September 2015
Appearances:	B H Dickey and A Lyne for Crown D P J Jones QC, A M Callinan and A E Murray for Defendant
Judgment:	25 September 2015

SENTENCING REMARKS OF ANDREWS J

R v ANDERSON [2015] NZHC 2342 [25 September 2015]

[1]      Mr Anderson has pleaded guilty to two charges under s 58 of the Securities

Act 1978, namely:1

(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.

I shall refer to the Investment Statement and the prospectus collectively as “the 2007 prospectus”.

[2]      On each offence, the maximum available penalty is imprisonment for five years or a fine not exceeding $300,000.

[3]      Mr  Anderson  entered  the  guilty  pleas  following  his  having  accepted  a sentence indication given earlier on 25 September 2015.  He was then convicted and sentenced in accordance with the sentence indication. The indication was given on the basis of the material provided to me; namely, the agreed summary of facts, submissions made by counsel for the Crown and on behalf of Mr Anderson, and by reference to other sentences referred to in counsel’s submissions.

Relevant Facts

[4]      PAC was one of a number of indirect subsidiaries of the Australian-based company  MFS  Ltd.     I  understand  that  MFS  was  (ultimately)  a  40  per  cent shareholder in PAC, and PAC was a New Zealand arm.   MFS was listed on the Australian Stock Exchange.

[5]      Mr Anderson was an executive director of PAC.  During the period covered by the charges, Mr Anderson was the Chief Financial Officer of MFS.   He was

described in the 2007 prospectus as being “responsible for the treasury and financial

1      These offences are ongoing ones, and apply both to falsehood at the time the prospectus is signed, and also falsehoods that arise at any time when the prospectus is before the public. R v Steigrad [2011] NZCA 304 at [119].

structuring roles throughout the MFS Ltd businesses and overseeing the financial

reporting function”.

[6]      Of particular relevance to the present proceedings is a 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 Put Option 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 alleged in the two statements are set out in the agreed 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 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 not made loans between July and September.  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.   PAC had already required financial support and at the time, incoming debentures were not meeting outgoing debentures.   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 PAC’s 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 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]     The agreed summary of facts also referred to a significant “off-balance sheet” transaction,   the   so-called   “Fortress”   transaction,   and   a   “loan   participation agreement”.  In the “Fortress” transaction, in order to support an MFS company (MFS Castle), another company in the MFS group (PIF) acquired AUD62.5 million of loan interests from PAC in November 2007.  None of the AUD62.5 million was ever paid by PIF to PAC.  However, PIF paid a further company in the group (MYF) AUD55 million, as a subscription for units in PIF, and MYF was shown as having acquired  loan  participation  interests  from  PAC.    PAC  received  a  payment  of AUD17.5 million on 27 December 2007.   The effect of the transactions was that PAC  sold AUD117.5  million  of  loan  interests,  for  which  it  received AUD17.5 million in cash.

[14]     The loan participation agreements were created in early February 2008, to document the transactions referred to above.   That work was undertaken by Mr White   and   his   team.      At   the   same   time,   Mr   Anderson   and   his   team completed the accounting entries to reflect the transactions.    Mr Anderson subsequently refused to sign the loan participation agreements.

[15]     The agreed summary of facts recorded that between 1 October 2007 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 it appears that the remainder of the new subscriptions came from members of the general public of New Zealand.

[16]     While it is a reasonably difficult exercise to estimate the amount invested or re-invested following the issue of the prospectus in September 2007, it would appear that the lowest approximate new investment by New Zealand investors after September 2007, was in the order of $10.5 million.

Previous sentence indication

[17]     Mr Anderson was charged with three co-defendants, Mr Maywald, Mr Lacy, and Mr White.  All three entered guilty pleas after accepting sentence indications. Mr Maywald and Mr Lacy were sentenced on 18 September 2015, and both were ordered to complete 200 hours of community work in New Zealand, and to pay reparation of AUD 100,000.2     Mr White was sentenced on 23 September 2015, and was ordered to complete 250 hours of community work in New Zealand and to pay reparation of AUD 100,000.3

Crown Submissions

[18]     Mr Dickey submitted that Mr Anderson must be seen as more culpable than the three directors who have already been sentenced; and certainly as at least as culpable at Mr White.   He submitted that, of all the defendants Mr Anderson, as Chief Financial Officer of MFS, was best placed to know that MFS was in financial difficulties, and that it was absolutely in the best interests of PAC and its investors that the Put Option be exercised to convert the past due loans to cash.  He submitted that if this step had been taken, PAC’s investors would have benefitted by tens of

millions of dollars.

2       R(FMA) v Maywald and Lacy [2015] NZHC 2264.

3      R (FMA) v White [2015] NZHC 2308.

[19]     Mr Dickey submitted that Mr Anderson was aware of the serious financial difficulties that the MFS group was experiencing in late November 2007, and his role as Chief Financial Officer of MFS gave him insight into MFS’s illiquid position. He submitted that Mr Anderson was therefore on notice to act as a director of PAC to protect its position and that of its investors, but he did not.   Exercising the Put Option would have been commercially more advantageous for PAC than relying on ad hoc buffer loans from MFS.

[20]     Mr Dickey accepted that Mr Anderson’s offending was not at the level of an intention to mislead, but submitted that it was well within the category of gross negligence.   He submitted that the appropriate starting point for sentencing was a sentence of imprisonment of three years and three months.

[21]     Mr Dickey accepted that Mr Anderson would be entitled to a discount of around 10 to 15 per cent for his previous character (albeit noting that a director’s good character is often relied on to persuade investors to invest).  Mr Dickey further accepted that there could be a further discount for any meaningful offer to pay reparation.  He also accepted that Mr Anderson would be entitled to some discount for a guilty plea, but submitted that Mr Anderson was the last of the defendants to engage with the Crown  in  respect  of pleas,  and  did  so  in  substance only after sentence indications were given to his three co-defendants.

[22]     Mr Dickey submitted that Mr Anderson could not be given any discount for assistance to the authorities, such as was allowed in the sentencing of his co- defendants, as no assistance had been given.

Defence Submissions

[23]     Mr Jones QC submitted that Mr Anderson was less culpable than Mr White, and  should  be  regarded  as  having  equivalent  culpability  to  Mr  Maywald  and Mr Lacy.

[24]     An affidavit sworn by Mr Anderson on 23 September 2015 was submitted in

support of his submissions for the sentence indication.   Mr Anderson’s affidavit

included comments as to the preparation of the 2007 prospectus, the collapse of MFS

and PAC, and various steps he took in January 2008.

[25]     I was also provided with a copy of a statement dated 18 September 2015, by Mr Barry Jordan, who was instructed by Mr Anderson’s solicitors to give expert evidence.   Extracts from Mr Jordan’s statement were annexed to Mr Jones’ submissions for Mr Anderson.  In some respects, Mr Jordan’s statement is at odds with the agreed summary of facts; for example, in his assertion that PAC’s investors were not disadvantaged by the “Fortress” transaction.   Where that was the case, I have proceeded on the basis of the agreed summary of facts.

[26]     Expert  evidence  was  also  filed  in  this  proceeding  on  behalf  of  the prosecution.   The experts did not agree on all matters.   None of the evidence has been tested at trial.  In the circumstances, my focus has been on the agreed summary of facts.4

[27]     Mr Jones submitted that Mr Anderson honestly believed that the statements in the 2007 prospectus were true.   He had undertaken a diligent review of the draft prospectus, first providing comments on matters of detail, then identifying a substantive error in the description of the circumstances in which the Put Option could be exercised.

[28]     Mr Jones further submitted that during the relevant period, Mr Anderson paid close attention to the cash flow position of PAC, and ensured that PAC had sufficient funds to meet its financial commitments, including by arranging funding from MFS as  required.     He  submitted  that  Mr  Anderson  had  relied  on  Mr  White  and Mr Maywald, and others in the organisation, for information about the assets of PAC.

[29]     As to the financial position of MFS, Mr Jones submitted that Mr Anderson reasonably believed that it was sound, particularly given the anticipated sale of the

4      See Criminal Procedure Act 2011, s 61(3)(a) and s 24 of the Sentencing Act 2002.  See also R v Apostolakis (1997) 14 CRNZ 492 (CA) at 494, in which Richardson P said “The sentencing proceeded on an agreed summary of facts and, although invited by the Crown to go beyond it, the Judge rightly emphasised that the summary was the basis on which the matter was to be dealt with.”

“Stella” aspect of the business (in essence, a number of travel-oriented companies), the proceeds of which were expected to extinguish MFS’s liabilities completely, and leave MFS with significant net assets.

[30]     Regarding the “Fortress transaction” and the loan participation agreement, Mr Jones submitted that by the time that Mr Anderson learned the details of this transaction, the prospectus had already been withdrawn from the market.  He further submitted that Mr Anderson was not involved in any concealment of the actual use of funds, or in creating backdated documentation.  He also noted that Mr Anderson had refused to sign the loan participation agreement.

[31]     Finally, Mr Jones referred to positive steps taken by Mr Anderson to ensure that any investor funds received after the prospectus was withdrawn were held in a trust account and that no securities were allotted, and in reporting to PAC’s trustee.

Starting Point

[32]     In sentencing Mr Anderson, I have had regard to the relevant purposes of sentencing, in particular the need to hold him accountable, denunciation, and deterrence.  I have also had regard to the relevant principles of sentencing.

[33]     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:5

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.

[34]     Heath  J’s  comments  have  been  approved  by  the  Supreme  Court.    They establish a hierarchy of offending from deliberate dishonesty, to gross negligence, to mere carelessness6.  The sentence for the offending will depend largely on where it

5      R v Moses HC Auckland CRI-2009-004-1388, 2 September 2011 at [15].

6      R v Graham [2014] NZSC 55.

falls  in  the  particular  scale. This  is  borne  out  by  recent  decisions  where  cases involving misjudgement tend to receive sentences of community work,7  whereas cases involving gross negligence receive substantial sentences of home detention.8   It appears  clear that  cases  involving  a deliberate  falsehood  will  inevitably receive sentences  of  imprisonment.    This  is  also  consistent  with  the  comments  of  the

Supreme Court in its judgment in R v Graham, where the Court observed:9

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.

[35]     In  the  present  case,  the  degree  of  loss  or  the  amount  invested  is  not insignificant even at the lowest of the assessed figures and it is compounded by the failure of any of the defendants to attempt to exercise the put option, which could have  avoided  losses  to  PAC’s  investors.    The significant  question  is  where  the offending sits on the scale between gross negligence and mere carelessness.

[36]     As I recorded earlier, Mr Dickey accepted for the Crown that Mr Anderson was not reckless.  However, he submitted that Mr Anderson was aware of the serious financial difficulties, and on notice to act to protect PAC’s position, and that of its investors.  He submitted that Mr Anderson’s actions were a serious departure from acceptable standards, and thus properly regarded as gross negligence.

[37]     On  the  information  before  me,  I  have  concluded  that  Mr  Anderson’s offending must be described as, at least, negligent.   Mr Anderson was one of the drafters of the prospectus.  As is set out in detail in the agreed summary of facts, the

2007 prospectus presented an untrue picture of how PAC’s business was operating. It substantially underestimated the number of bad loans.  It gave investors the false impression that PAC would ultimately be protected by MFS against losses coming

from bad loans.

7      R v Moses, above n 5; R v Davidson HC Auckland CRI 2008-004-29179, 7 October 2011.

8      R v Graham, above n 6.

9      R v Graham, above n 6, at [39].

[38]     These are the fundamentals of the business’s financial position, and they are matters with which reasonable directors and, in particular, indeed, a reasonable Chief Financial Officer of the parent company, with Mr Anderson’s background, should have been aware.

[39]     Mr Anderson cannot rely on his separate roles within the MFS group to remove himself from his responsibilities as a director of PAC.  It is apparent from the agreed summary of facts that the “Fortress transaction” had a negative effect on PAC’s liquidity.  It reflected on the commercial viability of the wider MFS group.  In relation to the loan participation agreement, while Mr Anderson refused to sign this agreement, he completed accounting entries which reflected the transaction, in part enabling it to continue.

[40]     Further, I have difficulty with Mr Anderson’s reliance on the possible Stella sale.  First, it was not referred to in the agreed summary of facts.  Secondly, the fact that the market reacted suddenly, and adversely, to the announcement of the Stella sale gives rise to an available inference that the Stella part of MFS’s business was seen  as  vital  to  the group’s  ongoing success.   Thirdly,  even  on  Mr Anderson’s account, the Stella sale was seen by MFS as significant for reducing substantial liabilities of the MFS group.   In these circumstances, it is at least questionable whether Mr Anderson could reasonably have held the optimistic view he says he held as to MFS’s ability to protect PAC.

[41]      I have concluded that Mr Anderson was negligent, to at least the same degree as Mr White.

[42]     The starting point must be one of imprisonment, as it was for Mr Anderson’s co-defendants.  I adopt a starting point of two years and six months’ imprisonment, which is the same as that adopted for Mr White.

Personal Factors

[43]     I now turn to the personal factors applying to Mr Anderson.  Mr Anderson is a man of previously good character, and he is supported by many character references.  He has no prior history of offending or indeed any subsequent history of

offending.    I accept that Mr Anderson is entitled to a discount for previous good character but, as was the case with his co-defendants, this must be tempered by the fact that the same good character was used in support of his role as a director, and to obtain business for PAC.  I allow a discount of three months from the starting point for this factor.

[44]     Mr Anderson has expressed remorse, both in a letter to the Court, and through counsel, and he has made an offer to pay reparation in the same amount as have his co-defendants; that is AUD 100,000.   He is entitled to a further discount of two months  for  these  factors.      However,  I  accept  Mr  Dickey’s  submission  that Mr Anderson  should  not  have  the  benefit  of  a  discount  for  assistance  to  the authorities, and one was not sought on his behalf.

[45]     The  discounts  just  referred  to  reduce  the  starting  point  to  25  months’

imprisonment.  I turn to consider a discount for a guilty plea.

[46]     Mr Anderson was charged in 2013, and is presently awaiting a trial (in which he is now the sole defendant) which is due to commence on 5 October, and is scheduled to take eight weeks.

[47]     As is well known, the Supreme Court in Hessell v R indicated that a plea at the first reasonable opportunity could attract a discount of up to 25 per cent.10    I accepted that in the cases of Mr White, Mr Maywald and Mr Lacy, discussion of the draft agreed summary of facts was protracted.  The same appears to be true in the case of Mr Anderson.  A guilty plea entered within two weeks of trial would not usually attract a substantial discount.   However, a guilty plea entered now would

entirely avoid the need for trial.  In this case, that is a significant consideration.  For that reason I allow a discount of 20 per cent (that is, four months) on account of Mr Anderson’s guilty pleas.

[48]     On that basis, Mr Anderson would receive an end sentence of around 21

months’ imprisonment.  That makes him eligible for consideration of a sentence of

10     Hessell v R [2010] NZSC 135, [2011] 1 NZLR 607.

home detention, or a combination of community work and home detention or community work on its own.

Sentence

[49]     In serving any sentence, Mr Anderson will face the additional hardship of having to travel to New Zealand from Australia, which will also involve his being absent from commitments in Australia, and the support structures he enjoys at home.

[50]     As I did for Mr Anderson’s co-defendants, I accept that the requirement to travel to serve a sentence in New Zealand will cause him some hardship, and will have many of the consequences that home detention would have for a New Zealand resident.   As I did with his three co-defendants, I have considered whether it is necessary to impose a sentence of home detention, in order to meet the purposes of sentencing, in particular, deterrence and denunciation.    In Mr Anderson’s circumstances,  I accept  that  a  sentence  of  community work,  with  the  attendant requirement to complete it in New Zealand, carries with it a sufficient, and appropriate, element of deterrence and denunciation.

[51]     Having regard to the principle of maintaining consistency, and bearing in mind my conclusions as to the appropriate end sentences for each of Mr Maywald, Mr Lacy, and Mr White, I have concluded that a final sentence of 300 hours of community work is appropriate for Mr Anderson’s offending.  An order for payment of reparation in the sum offered, of AUD 100,000, will also be made.

[52]     On each  of the two  charges  under s  58  of the Securities Act  1878,  Mr Anderson is sentenced to 300 hours’ community work, to be served concurrently, in New Zealand.  Mr Anderson is directed to report to the Department of Corrections Probation   Service   today  (that   is,   before   he   returns   to  Australia)   to   make arrangements for completion of the sentence.

[53]     Mr Anderson is to begin serving the sentence of community work no later than 3 November 2015, and it is to be completed in blocks of no less than one week. The sentence is to be completed by 31 April 2016.

[54]     Mr Anderson is ordered to pay reparation in the sum of AUD 100,000.  This

payment is to be made to the receivers of PAC, within 28 days of today.

Andrews J

Solicitors:

Crown Solicitor, Auckland

Simpson Grierson, Auckland