R v Davidson HC Auckland CRI 2008-004-029179
[2011] NZHC 1423
•7 October 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CRI 2008-004-029179
THE QUEEN
v
BRUCE NELSON DAVIDSON
Hearing: 7 October 2011
Appearances: W P Cathcart and T M Molloy for Crown
C R Carruthers QC and D G Hurd for Prisoner
Judgment: 7 October 2011
SENTENCING NOTES OF ANDREWS J
Solicitors: Meredith Connell, PO Box 2213, Shortland Street, Auckland 1140 Counsel: C R Carruthers QC, PO Box 305, Wellington 6140 D G Hurd, PO Box 37726, Parnell, Auckland 1151
R V DAVIDSON HC AK CRI 2008-004-029179 7 October 2011
Charges
[1] Mr Davidson, you appear for sentencing today having pleaded guilty to ten charges which were laid under s 58 of the Securities Act 1978, of distributing offer documents of various kinds, containing untrue statements. The maximum penalty on each of those charges is imprisonment for five years, or a fine of up to $300,000.[1]
That is provided in s 58(5)(a) of the Securities Act.
[1] Securities Act, s 58(5)(a)(i).
[2] Your guilty pleas came after a sentence indication hearing on 2 September
2011. At that hearing, after I had received detailed written submissions from your counsel and counsel for the Crown, and having heard oral submissions from both counsel, I indicated that a sentence of nine months home detention, together with
200 hours of community work and an order for reparation in the amount offered by you, would be imposed in the event that you pleaded guilty. At your request, you were then arraigned and pleaded guilty following that indication.
[3] Although I explained, in general terms, how I arrived at the sentence indication, it is necessary for me, today, to set out my reasons in more detail.
Relevant facts
[4] My summary of the relevant facts is taken from the statement representing the factual basis that your counsel and counsel for the Crown agreed is appropriate for the purpose of sentencing. Many of the facts that I will refer to may well remain in dispute so far as your co-accused are concerned, and they will be determined when they stand trial.
[5] You were Chairman of the Board of Directors of Bridgecorp Limited from
2001, and of Bridgecorp Investments Limited from 2003, until the companies were put into receivership in July 2007. The charges to which you pleaded guilty are in respect of untrue statements contained in prospectuses and investment statements
issued by Bridgecorp and Bridgecorp Investments dated 21 December 2006, and
distributed up until 6 July 2007, and extension certificates to the prospectuses dated
30 March 2007.
[6] The untrue statements were in four categories.
[7] The first is that a company Barcroft Holdings Limited was not a related party. A loan of $76.7 million to Barcroft Holdings was represented in the offer documents as not being related party lending. In fact, Barcroft Holdings was a related party to Bridgecorp and Bridgecorp Investments, and the loan should have been disclosed as such. The failure to disclose the loan as related party lending significantly reduced Bridgecorp’s reported exposure to related parties, and significantly reduced the prospect of Bridgecorp breaching the terms of its Trust Deed as to the aggregate of loans to subsidiaries outside the Charging Group.
[8] The second group of untrue statements were to the effect that Bridgecorp would not, and did not, provide credit, or advance loans, other than in accordance with good commercial practice and internal credit approval policies. In fact, Bridgecorp advanced loans and provided credit to borrowers other than in accordance with good commercial practice and internal credit approval polices. It failed to obtain sufficient documentation before advancing loans, it failed to obtain Credit Committee or Board approval for loans, it failed to obtain or maintain sufficient security for loans advanced, it failed to monitor loans properly, and it failed to record loan information properly. As a result, investors were led to believe that Bridgecorp was a prudent lender, when it was not, and significant funds were advanced with little if any adherence to proper, prudent commercial lending criteria.
[9] The third group of untrue statements was that Bridgecorp had never missed an interest payment, or repayment of principal when due. In fact, the companies began defaulting on principal and interest from 7 February 2007. The length of default varied between one and ten days. Some defaults after 20 June 2007 were not rectified before the receivership. Also, after 7 February 2007, Bridgecorp was selective in payments made to investors, with preferential payments made to particular investment brokers, or to investors who complained the most.
[10] The fourth group of untrue statements was that Bridgecorp’s financial position as at 21 December 2006 was as it had been set out in the audited accounts for the year ended 30 June 2006. In fact, Bridgecorp’s financial position had substantially deteriorated by December 2006, and it faced a liquidity crisis. There had been a decline in investment and reinvestment; an increase in loan impairment and non-performing assets; an inadequate provision for bad debts; Bridgecorp had advanced substantial funds to support the Australian operations; there was shrinking cash flow; and Bridgecorp had refinanced and borrowed on unfavourable terms. The extension certificates signed on 30 March 2007 also failed to refer to the deterioration in Bridgecorp’s financial position.
[11] All of the untrue statements led to investors being misled. After the misleading prospectuses, investment statements, and extension certificates were issued, about $27.7 million was invested, and $91 million was reinvested, in Bridgecorp or Bridgecorp Investments. When Bridgecorp went into receivership in July 2007, approximately $459 million of secured debenture stock was outstanding to some 14,500 debenture holders, and Bridgecorp Investments Ltd had approximately $28.8 million outstanding to members of the public.
[12] The Securities Act is designed to protect potential investors by prescribing what information must be provided to them. Debt securities must be offered to the public by way of an offer in an authorised advertisement, an investment statement, or a prospectus that satisfies the requirements of the Act. The purpose of an investment statement or prospectus is to give the potential investor information that will help prudent, but non-expert, people to decide whether to subscribe for securities. If information in these documents is not true, people who decide to invest will have based their decision on incorrect information. An untrue statement is one that is actually not true, is misleading in the form or context in which it is made, or is misleading by virtue of the omission of a material particular.
[13] I record that your guilty pleas were entered on the basis that at the time the statements were made, you genuinely and honestly believed that they were true. You now accept that your belief was not reasonable in the light of what you knew or
ought to have known. It is accepted that your offending did not involve dishonesty or any intentional wrongdoing.
Victim impact statements
[14] I have read victim impact statements from four of the people who invested in the companies and lost their savings. In every case these people lost savings for their retirement. Their losses ranged from $17,000 to more than $2 million. They will receive little or nothing from their investments.
Sentencing process
[15] I turn now to the process of sentencing. Sentencing of any offender in New Zealand is governed by the purposes and principles set out in ss 7 and 8 of the Sentencing Act 2002. Section 7 sets out the purposes of sentencing. The purposes which are particularly relevant in your sentencing are to hold you accountable to the community, to consider deterrence, and to denounce the offending. The purpose of deterrence and denunciation in your sentencing is to make it known to the community that a firm sanction will be imposed when people fail to perform their statutory functions as directors and cause significant loss to investors.
[16] The relevant principles of sentencing require me to have regard to the gravity of your offending, including your own culpability, the seriousness of your offending in comparison with other types of offences, and the general desirability of maintaining consistency in appropriate sentencing levels. I am also required to take into account any information provided about the effect of the offending on the victims. Finally, I am directed to impose the least restrictive outcome that is appropriate in the circumstances. The court should not impose a sentence of imprisonment unless the purposes of sentencing cannot be achieved with a lesser sentence.
[17] In summary, I am required to decide what the appropriate sentence is by reference, primarily, to the seriousness of the offending and your own culpability.
[18] The first step in any sentencing is to establish a starting point which properly reflects your culpability for the offending, and takes account of aggravating and mitigating features of the offending. Then I consider matters that relate to you, personally, and adjust the starting point as necessary to arrive at the appropriate sentence for your offending.
[19] Counsel referred me, in the earlier hearing, to the starting points adopted, and end sentences imposed, in a number of other cases. These are useful to a limited extent, but the particular circumstances are different in every case, and these must be reflected in the result of each case. I have found the starting points adopted by
Lang J in his sentencing of the Nathans Finance Limited director, Mr Hotchin,[2] and
by Heath J in his sentencing of the three other Nathans Finance directors,[3] the most relevant. The starting point adopted for Mr Hotchin was three years imprisonment, and the starting points adopted for Mr Doolan and Mr Moses (the Chairman of Nathans Finance), and Mr Young were three years four months, three years three months, and two years nine months, respectively. I note that appeals against s e n t e n c e b y M r D o o l a n a n d M r M o s e s h a v e b e e n d i s m i s s e d . [4]
[2] R v Hotchin HC Auckland CRI-2009-092-20926, 4 March 2011.
[3] R v Moses, Doolan & Young HC Auckland CRI-2009-004-1388, 2 September 2011.
[4] Doolan and Moses v R [2011] NZCA 511.
[20] Mr Cathcart has today submitted submitted that the starting point for your sentencing should be four year imprisonment which is in line with that for Mr Moses and Mr Doolan. Mr Carruthers submitted that it should be two years imprisonment. In order to decide what the starting point should be, I must make an assessment of your culpability.
Assessment of culpability
[21] In order to do that I refer to your first affidavit sworn on 29 August 2011, and the submissions that were made by counsel as to the four categories of untrue statements.
[22] The first category of untrue statements related to Barcroft Investments. Barcroft was described as a conduit through which loans totalling $76.7 million
could be advanced by Bridgecorp to a joint venture comprising various Bridgecorp entities. Had those loans been reported as being to related parties, Bridgecorp would have been shown to be in breach of its Trust Deed. It was submitted that you first became aware of the Barcroft transaction on 29 June 2006, and that it was explained to you as a sale of receivables, and would result in Bridgecorp having security for loans which it would not otherwise have. You said you were told the transaction had to be completed by 30 June. You did not focus on whether Barcroft was a related party, because you understood that Bridgecorp’s internal accounting advice was that Barcroft was not a related party, so you did not appreciate that there was an issue. You accept that you ought to have insisted on obtaining a greater understanding of the transaction.
[23] The second category of untrue statements related to Bridgecorp’s lending practices and policies. You believed that the statement was true, that significant policies and practices were in place and were adhered to. Only loans of over $20 million came to the Board, and while you became involved in any matters where problems were identified, that depended on what information you were given. In hindsight, you have accepted that there was evidence of problems with Bridgecorp’s management of loans, and indeed with some of the loans themselves, and that you should have been more alert to those problems, and sought more information. You were too forgiving of Bridgecorp’s deficiencies.
[24] The third category of statement was that Bridgecorp had never missed payment of interest or, when due, a payment of principal. It can be accepted that the statement was true when prospectuses were signed in December 2006, but it was not true once Bridgecorp began defaulting in February 2007. You believed that it continued to be true up until mid-2007. You returned to New Zealand from leave in mid-June, and the internal auditor then told you of defaults which had occurred. Nothing had been disclosed to you before then, and the defaults had not been noted in the Minutes of Executive Committee meetings. You consider that you were deliberately misled or kept in the dark.
[25] As to the fourth category of statements, you accept that your belief, at the
time you signed each document, was that Bridgecorp’s financial position had not
substantially declined since June 2006. The executive directors and management were adamant that Bridgecorp’s position was sound and manageable, that there was no deterioration, and that Bridgecorp’s position continued to be viable. You did not get full and frank disclosure from the executive team, and you were authorised by the full Board to sign the documents.
[26] Mr Davidson, your position as Chairman of the Board involved leadership. You had the primary obligation to ensure that Board meetings and discussions were conducted efficiently and effectively. The Institute of Directors Code of Practice for Directors states that the chairman’s role involves ensuring that all directors receive sufficient and timely information so that adequate information is before them on issues which require their decision.[5] However, as you have acknowledged, you were too forgiving of deficiencies, and not sufficiently alert to problems, or insistent on receiving full information.
[5] The Institute of Directors in New Zealand (Inc), Code of Practice for Directors (2005).
[27] There are both similarities and differences between this case and that of the Nathans directors. I have concluded that the appropriate starting point is three years and three months imprisonment. That starting point does not require any adjustment for aggravating and mitigating features of the offending, as I have already taken these into account.
Mitigating factors
[28] I turn, then, to the relevant mitigating factors, personal to you. You have had a distinguished career and you have always had the highest reputation in your profession. The references and letters of support, and there have been many of them, demonstrate your achievements and contributions in areas outside your profession. Your pre-sentence report recorded that you have been involved in a lot of charity work over many years. It was submitted on behalf of the Crown that “good character” should be regarded as a neutral factor, in that you and your co-accused may have relied on your good character and reputation to induce investors to invest in the companies. As you heard me say earlier, none of the victim impact statements
that I have been provided with appear to support this, and I have no other evidence to
support it. If there had been, I would have accepted the Crown’s submissions.
However, I am prepared to apply a discount for good character.
[29] I turn now, to remorse. I accept that you have demonstrated genuine, sincere, and deep remorse. The pre-sentence report records that you explained your devastation when you discovered the discrepancies, and when the company collapsed. You are remorseful that so many people will suffer. I accept that quite apart from the offer of reparation, which I will refer to shortly, your remorse can be recognised. The report writer considered that you are at a low risk of re-offending, and that you need little rehabilitation.
[30] Mr Davidson, you have offered to pay $500,000 in reparation, which is agreed by the Crown to represent a substantial sum in reparation. I accept it as such. I will be ordering that the reparation payment is to be held by the Court, for distribution to the investors who come within the definition of victims in the Sentencing Act.
[31] I also accept that right from the time the companies were put into receivership, you have voluntarily, and at your own cost, co-operated with the receivers and relevant authorities. I am not sure whether this is a case where you could give evidence that is either fundamental or crucial or relevant to the Crown case, but even if that were not the case, I would not belittle the value of the assistance that you have already given.
[32] For all of the matters I have just referred to, I allow a reduction of 35 per cent, adjusting the starting point to two years and one month imprisonment, before going on to consider your guilty plea.
[33] In the temporal sense, your guilty plea came at what appeared to be a very late stage, just days before what was then the scheduled start of the trial. I was told during earlier submissions that discussions as to a plea had been under way for some time before that. I therefore accept that a further discount can be given on account of your guilty plea, to reduce the end sentence to one year and eight months imprisonment.
Home detention
[34] That now brings me to consider whether imprisonment would in fact be the appropriate sentence, or whether a less restrictive sentence would meet the purposes and principles of sentencing.
[35] On behalf of the Crown, Mr Cathcart acknowledged that the Court has the jurisdiction to impose a sentence of home detention rather than imprisonment, and that a sentence of home detention would be available in this case, but he also submitted that the Crown does not actively support such a sentence. It was submitted that the Court must consider whether the purposes and principles of sentencing, in particular deterrence and denunciation, would be met if a sentence of home detention were imposed rather than imprisonment. It was submitted earlier that a sentence of home detention would in fact send a message of some comfort and relief to other, and perhaps the finance industry generally, as to the consequences of conviction for this type of offending.
[36] Mr Carruthers submitted to me earlier that an appropriate sentence would be a lengthy period of community work, and an order to pay reparation. He had earlier submitted that a sentence of home detention would be inappropriate and unnecessary. Today Mr Carruthers referred me to the recommendation in the pre-sentence report that a sentence of community detention might be considered.
[37] I am satisfied that the sentences of imprisonment that were imposed in the case of the Nathans Finance directors (and upheld by the Court of Appeal) will ensure that the sentencing “message” is that imprisonment is a real prospect for offending of this nature. On the other hand, home detention is not to be regarded as (as it is sometimes colloquially put) a soft option. Home detention is the second most restrictive sentence after imprisonment, and it is a real alternative to imprisonment.
[38] Having considered the matter carefully, I cannot accept that the purposes of accountability, deterrence and denunciation, and the principles of assessing culpability and maintaining consistency in sentencing, would be met by a sentence
that is less restrictive than home detention. Specifically, I do not accept that community detention, or indeed community work, would be an appropriate sentence. However, I accept that in your case, a sentence of imprisonment is not appropriate.
[39] Mr Davidson, would you please stand.
Sentence
[40] Mr Davidson, on each of the charges to which you have entered pleas of guilty, you are sentenced to nine months home detention. All sentences are to be served concurrently. The sentence will commence on Monday 10 October at
9.00 am. You are remanded on your present terms, which is, at large, until the beginning of the sentence.
[41] I also order that you complete 200 hours of community work.
[42] Further I order that you are to pay reparation in the sum of $500,000 to the Registrar of the High Court at Auckland, such payment to be made immediately. The Registrar is to hold the reparation payment in his trust account, on interest bearing deposit, pending further order of the Court as to distribution on a pro rata basis, to those investors who fall within the definition of victims under the Sentencing Act. I understand that it will be necessary for the receivers to identify the relevant investors. Leave is reserved for the receivers to be heard on any application concerning distribution of the reparation payment.
[43] The conditions of the sentence of home detention are as follows:
(a) You are to be at the nominated address, that is, 38 Glanville Terrace, Parnell, Auckland, at 9.00 am on Monday 10 October 2011, to await the arrival of a Probation Officer and a representative of the electronic monitoring company.
(b)You are to remain at the nominated address for the duration of the sentence.
(c) You may leave the nominated address only with the prior written approval of the Probation Officer. I note and refer for the Probation Officer’s information, the doctor’s report provided to me as to your health issues which require attention.
(d)Other standard conditions of a sentence of home detention, as set out in s 80C of the Sentencing Act, apply.
(e) Pursuant to s 80(2)(a) of the Sentencing Act, I direct that the standard post-detention conditions shall not apply.
[44] Finally, I make an order that the further affidavit sworn by you on 29 August
2011 remain on the Court file and shall not be available for inspection by any person, except with leave of a Judge, on application on notice.
[45] You may stand down.
Andrews J
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