R v Smith

[2013] NZHC 1341

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CRI-2011-004-17096 [2013] NZHC 1341

THE QUEEN

v

STEPHEN CHARLES WILLIAM SMITH

Hearing:                   7 June 2013

Appearances:           JC Gordon QC, NR Williams and K Chang for Crown

S Bonnar for Prisoner

Judgment:                7 June 2013

SENTENCING NOTES OF TOOGOOD J

R v STEPHEN CHARLES WILLIAM SMITH [2013] NZHC 1341 [7 June 2013]

[1]      Stephen Charles William Smith:  you  appear for sentence having pleaded guilty on 25 May 2013 to four charges under the Crimes Act 1961 of making a false statement  by a  promoter;  one  representative  charge  under  the  Securities Act  of making an untrue statement in an advertisement; 19 charges under the Crimes Act of theft by a person in a special relationship; and one representative charge under the Companies Act for making a false statement to a trustee.

[2]      Your offending occurred over a period of just under three   years   while   you were engaged as a senior manager and director of Belgrave Finance Limited (“Belgrave”)  between  July 2005  and  May 2008  when  the  company  went  into receivership.  Belgrave, which had been incorporated some five years earlier, was a commercial lender for property investment and development, the investment funds being obtained from members of the public through the offering of first ranked secured debenture stock.  This means of investment involved the company entering into a debenture trust deed, the terms of which offered a measure of protection to investors, with compliance being monitored by a trustee company.

[3]      Your offending, carried out in collusion with at least two co-offenders, fell into three distinct but related categories.  It is particularly notable, in my view, that the first offence to which you pleaded guilty occurred at the very beginning of your involvement with Belgrave in July 2005 and that your offending continued until April 2008, only one month before the company was placed in receivership.

[4]      The Crimes Act charges of making false statements as a promoter and the count under the Securities Act of making an untrue statement in an advertisement represent the means by which you and your co-offenders dishonestly procured investment funds from members of the public.  The 19 counts of theft in a special relationship represent the dishonest means by which you abused the position of trust you held on behalf of investors in using the funds provided to you in a manner which you knew was unlawful.  Principally, the dishonesty lay in making loans to related parties in circumstances which created obvious conflicts of interest and which you knew to be in breach of Belgrave’s obligations under the trust deed.

[5]      The third category of offending, being the representative count of making a false  statement  to  the  trustee,  represents  the  dishonest  means  by  which  you concealed the theft and the other dishonest dealings from the trustee whose role it was to provide protection for those who had entrusted you with their investments.

[6]      The  prolonged  dishonesty  involved  in  procuring  funds  from  the  public, misusing them and deliberately concealing the wilful breaches of your obligations resulted in losses to the investors totalling some $18.4 million, $13.2 million of which is attributable to the related party loans forming the basis of 16 of the theft charges.  Having regard to the nature of your offending, the duration of it, and the losses which resulted, this was very serious offending of this kind.

[7]      The serious consequences of your offending cannot be overestimated. As one of the receivers has pointed out, the significant majority of Belgrave’s investors were retirees who were dependent on interest income to supplement their incomes from pensions or other fixed income sources. Those investors have lost 90 percent of their investment in the debenture stock.

[8]      You are the third of the persons involved in the governance and operation of Belgrave to have been dealt with by the Court as a result of the failure of the company’s loan book and its collapse.  Raymond Schofield, although not named as a director, was undoubtedly a shadow director and a man with a significant degree of control over the plans put in place for the operation of this company and over the running  of  it.    He  is  terminally  ill  and  an  order  has  been  made  staying  the proceedings against him.   Your fellow director, Shane Buckley, pleaded guilty in about August 2012 to the same charges to which you have now pleaded and he was sentenced to three years’ imprisonment.  Mr Buckley was the Managing Director of the company; you were Chairman of the Lending Committee and it is clear from the summary of facts and from your pleas that you were deeply involved in the criminal behaviour which characterised the operation of the company.

[9]      The summary of facts, which you have signed as an acknowledgement of its accuracy, runs to 25 pages.  It is neither necessary nor desirable for me to refer to the

circumstances  of  each  of the 25  charges,  but  some  further  explanation  of  your offending is appropriate.

[10]     In April 2005, Raymond Schofield commenced negotiations to acquire shares in Belgrave with a longer term view of purchasing all of the shares in the company. His purpose was to obtain access to the funds invested in the company in order to finance his own ventures in breach of the trust deed with the trustee company.  This aim was to be achieved by a corporate structure which hid Mr Schofield’s involvement  in,  and  control  of,  Belgrave  from  the  investors  and  the  trustee. Mr Buckley and you were recruited by Mr Schofield, for whom you had previously worked in both New Zealand and Australia over several years on and off.  While I accept  that  you  may  not  have  been  involved  with  the  initial  planning  of Mr Schofield’s takeover of Belgrave, it is clear that you knew from the time you became  involved  in  the  company  that  the  corporate  structure  was  designed  to disguise Mr Schofield’s involvement.

[11]     The shares in Belgrave were acquired by a company of which you were a director and in which you held a five percent shareholding effectively.  Mr Buckley held 15 percent of the shares and the balance was owned by a trust associated with a member of Mr Schofield’s family.   The purchase price for the Belgrave shares of

$3.175 million was provided by loan from a group of Australian finance companies. Not only was the scheme deceitful in the manner in which Mr Schofield’s interest was disguised, but the investors and the trustees were further duped and the investors put at risk by an arrangement for Belgrave to guarantee the loan by which its shares were purchased; thus, the risk for the acquisition fell ultimately upon the investors. Despite this, you dishonestly misled the trustee and investors into believing that you had put your own money into the company and intended to invest more.  Later on, other guarantees were provided by Belgrave in breach of the trust deed.

[12]     The remaining 16 charges of theft by dishonestly misusing funds in a manner contrary to the terms on which they had been entrusted to you concerned wilful breaches of the trust deed’s requirements concerning permissible transactions designed to protect the interests of investors.  The purpose of the trust deed was to restrict the use that Belgrave could make of the investors’ funds.  These restrictions

included providing limits on related party transactions and prohibitions upon exceeding  prescribed  loan  advance  exposure  limits  without  the  consent  of  the trustee.  Plainly it was in the interests of investors to ensure that the risks of lending invested  funds  were  not  unduly  concentrated  in  a  few  borrowings.     Further protection was intended to be provided by mandatory reporting requirements which included giving of assurances by the directors as to compliance with the financial limitations and other obligations under the trust deed; assurances as to changes in circumstances which might materially alter adversely the security created by the trust deed; full lists of particulars of all related party transactions; and details of exposure amounts which exceeded limits on loans to any one debtor.

[13]     By your pleas  you have acknowledged that as Chairman of the Lending Committee  you  were  primarily  responsible  for  Belgrave’s  loan  book  and  the oversight of the 16 related party loans which breached the trust deed.  You were the one responsible for carrying out the due diligence.  As well as that, you became a party to the successive guarantees Belgrave unlawfully provided in August 2005, March 2006 and January 2007.

[14]     You were also directly involved in the dishonest means by which the funds were acquired from the public.   You signed two false prospectuses and were a director of the company when two false investment statements were issued, each of the documents containing a number of material statements which you knew to be deliberately false and which misled investors into providing their funds.  You were also a director of the company when six advertisements soliciting funds were issued containing wilfully untrue statements designed to entice investment.   The last of those was issued only a month before the receivership.

[15]     You also signed a number of directors’ quarterly reports which you knew falsely represented that Belgrave had performed all of its obligations under the trust deed.  The effect of these false statements was to mislead the trustee.  Had the true position been known, the trustee would have appointed receivers at a much earlier stage and so prevented at least some of the losses which resulted.

[16]     In determining the appropriate sentences to be imposed on  you for your offending, I am required to have regard to the need to make you accountable for the harm done to your victims and the community; to hold you responsible for that harm and to denounce this type of offending; and to deter you and others from offending of this kind.  I recognise that it is unlikely that you would be in a position to offend again in this way and I accept that you represent a low risk of reoffending.  But in cases such as this deterrence must be a prominent factor among sentencing considerations.

[17]     The investing public is highly dependent upon the truth of disclosures made by those soliciting funds.  The making of untrue statements when investment funds are sought directly undermines the integrity of a regime of protection, under the Securities Act, which imposes obligations of timely and honest disclosure of information by those who have it to those from whom investments are solicited.

[18]     I accept the submission on behalf of the Crown that wilful failure to comply with the obligations under the Securities Act undermines confidence on the part of investors generally and damages the New Zealand investment market.  The courts have a role to play, in dealing with those whose offending so damages the New Zealand debt market, in restoring confidence by imposing deterrent sentences intended  to  discourage  directors  and  those  involved  in  the  management  of investment companies from offending of the kind which has brought you here.

[19]     Members of the public interested in investing in the debt market are entitled to be fully informed as to the risks and the true nature of any investment.  Those who invested in Belgrave, misled as they were by the dishonesty of your co-offenders and you,  have  suffered  not  only  financial  loss.    As  Mr Graham,  the  receiver,  has observed, the majority of them were retired people on fixed incomes; many of them placed their life savings in Belgrave; they have suffered physically and emotionally through the deprivation of funds they could ill afford to lose.  None of them has a prospect of recovering more than a few thousand dollars.  Some, nearing retirement, have been forced to continue to work.   Others face financial insecurity for the remainder of their lives.   The sentences to be imposed on you must make you accountable for those consequences.

[20]     I  am  also  required  to  pay  regard  to  the  desirability  of  consistency  in sentencing by taking into account sentences imposed in other cases of offending of this kind and, in particular in this case, to ensure that there is an appropriate relativity between the sentences I impose upon you and those imposed upon your co-offender Mr Buckley by the District Court.

[21]     That is an issue upon which I have received diverging submissions from Ms Gordon on behalf of the Crown and Mr Bonnar on your behalf.  Ms Gordon submits that  it  is  appropriate  to  regard  Mr  Buckley and  you  as  being  equally  culpable notwithstanding that your involvement in the events which constituted the offending may not have been identical.   While it is true that Mr Buckley had added responsibilities as managing director, there is force in the Crown’s submission that as Chairman of the Lending Committee you were more directly involved in the 16 lending decisions which breached the trust deed.

[22]     Mr Bonnar submits, however, that Mr Buckley had a significantly greater role in the control and management of Belgrave than you did, and there is evidence to suggest that he was very much a hands-on manager.   He argues that Mr Buckley had an involvement in strategic decision-making for the company in which you were not involved.

[23]     I am not in a position to determine whether there are any fine distinctions between Mr Buckley and you in terms of culpability because of your respective positions.  But the overwhelming impression I get from the summary of facts is that you were intimately involved in all of the decisions and all of the actions which constituted the offending.  You had the knowledge and experience to know that what you and your co-offenders were doing, right from the outset, was wrong.   What occurred  over  the  nearly three  years  of  your  offending  was  in  the  nature  of  a common enterprise in which each of you had a different but an important role to play.  It makes little difference, in my view, that you owned fewer shares in IEL and therefore may have stood to benefit from any profitability to a somewhat lesser degree than Mr Buckley.

[24]   I have also referred to the sentencing authorities discussed by counsel respectively in their written submissions.   Comparisons in these cases are always difficult to make because of the infinitely various roles, responsibilities and culpability of offenders and the varying consequences.  I accept the submission on behalf of the Crown, which by implication I understand Mr Bonnar not to dispute, that Judge Fraser’s starting point of six years’ imprisonment for Mr Buckley was appropriate in comparison to cases arising from other finance company failures.  I do acknowledge that the Crown had made a submission Judge Fraser that the starting point should have been higher.   But given that I accept that Mr Buckley and you, though in different ways, were equally culpable for the offending which occurred here, I consider that to be the appropriate starting point in your case also.

[25]     In reaching that view, contrary to the submission of Mr Bonnar, I have had regard to the factors which aggravate the seriousness of your offending including the extent of the losses suffered by the victims; the fact that the offending involved gross abuses of position and trust; the fact that the deceitful way in which the funds were sought and then misused, and the deception involved in covering up your breaches of the trust deed, rendered your victims vulnerable to the consequences of your continued offending.  I take into account the degree of premeditation from the time you first became involved in the company to the receivership some three years later.

[26]     Bearing those factors in mind, I would have put the starting point somewhat higher  than  the  six  years’ imprisonment  than  Judge  Fraser  did.    You  are  the beneficiary,  Mr  Smith,  of  what  might  be  said  to  have  been  a  lenient  sentence imposed upon Mr Buckley.

[27]      It is difficult to find any mitigating factors in your offending itself.   The lower  level  of  decision-making  in  which  you  were  involved  in  comparison  to Mr Buckley,  the  lower  shareholding,  the  narrower  sphere  of  influence  over  the company’s operations as a whole, in my view, do not mitigate your offending when compared to the extent to which you took part in each one of the transactions which constituted the offending.

[28]     I have noted in the pre-sentence report your statement that you were unaware that your actions as a representative of Belgrave were illegal or against the law, and that when you questioned the practices the company had adopted you were told by the company’s legal adviser there was no problem.  Having regard to your pleas of guilty to the allegations of dishonesty inherent in each of the 25 charges upon which you have been convicted, I simply cannot accept that you did not know at the time that what you were doing was wrong.

[29]     As is appropriate, Mr Bonnar has urged on me the need to take into account mitigating features which apply to you personally rather than to the offending.

[30]     You have no previous convictions and the testimonials submitted on your behalf suggest that you are a good family man and friend and a contributor to your community.   You have been successful in business and you were obviously well regarded in your past roles as a senior bank manager.  But to a significant extent your co-offenders and you exploited your good name in order to encourage investors to place their trust in you.  The serious nature of your offending over a lengthy period tends also to negate what benefits you might otherwise have enjoyed because of your unblemished  past.    I am  prepared  to  make  some  allowance,  but  not  much,  for previous good character.

[31]     The victim impact statements make disturbing reading.  I am inclined to put into the category of victim also the members of  your  family who have plainly suffered greatly from your prosecution and will continue to suffer through the deprivation of your company while you serve an inevitable period of imprisonment. You alone are responsible for those consequences but  I regard as genuine  your acknowledgement of that responsibility and the remorse you have expressed to your family for having let them down so badly.

[32]     I also accept that you are now genuinely remorseful for the consequences of your offending suffered by the other victims - the investors.  You have offered what you describe as sincere personal apologies to the investors in Belgrave for your actions and how those actions contributed to the investors’ losses of capital.  I accept that  that  is  a  sincere  expression  of  apology.    Because  of  your  direct  personal

involvement with many of them, as you acknowledge, you were aware how closely they guarded their investment funds and of the uses to which they wished to put the returns on those investments.  You say, and I accept, that it was not your intention that any of those investors would suffer loss.  But from the victims’ points of view that will be of little comfort.

[33]     You have also said that to show your genuine remorse and the level of your commitment to Belgrave you invested a large amount of your own money in the company in its last six months before the receivership.  You say that you had hoped that those actions would save the company and the investors in what you described as the financial carnage occurring all around you in 2008.

[34]     I accept for present purposes that $400,000 or approximately that sum of your family’s money was put into the company at that time, but I do not accept that you did that for altruistic reasons.  If you had genuinely wanted to act in the interests of the investors who trusted you, you should have gone to the trustee and disclosed the full extent of the deception which had taken place and the true nature of Belgrave’s risk profile.   I see the money you put into Belgrave in those final stages as being motivated far less by concern for the investors than by a desperate attempt to prevent a financial collapse which you knew would inevitably result in your criminal behaviour coming to light.

[35]     So far as remorse is concerned, therefore, I pay little regard to that $400,000 personal loss, although I acknowledge that it makes your family victims of your offending as well.   Nevertheless I accept that you are genuinely mindful of and apologetic for the consequences of your offending on others and I take that into account as a mitigating factor; that is because it marks the start of your rehabilitation from your offending.

[36]     From the starting point of six years, therefore, I am prepared to provide a discount of 12 months’ imprisonment on account of those mitigating factors before considering what discount you should receive for your guilty pleas.

[37]     Consistently with the approach urged on me by Mr Bonnar and endorsed by the Crown prosecutor, I take into account, in regard to the allowance for plea, the mitigation by you of the seriousness of your offending by your co-operation with the authorities since you pleaded guilty to these charges.  I note that you have indicated a willingness to give any evidence in any future trial and I take that into account also. It may be, as Mr Bonnar suggested, that Mr Buckley got in first, but that is the point, Mr Smith, it was not until Mr Buckley admitted his involvement and admitted the extent of what had gone on that you then acknowledged your responsibility to the Serious Fraud Office.

[38]     The timing of your pleas, the extent to which they involve an acceptance of responsibility; the strength of the Crown’s case and the inevitability of a conviction, the extent to which the pleas were attributable to amendments to the indictment; and the saving to the State of the cost of a prosecution, are all factors to be considered in this regard.  No precise mathematical assessment can be made and the appropriate discount is one for judgment taking account of all of the circumstances.  I note that your pleas came some months after Mr Buckley returned from Australia to acknowledge his guilt in his interviews with the SFO and to provide a detailed brief of evidence for use by the Crown at your trial.  I am prepared to allow you a further discount of one year’s imprisonment on account of your guilty pleas and co- operation.

[39]     That  will  result  in  a  total  reduction  of  one-third  from  the  starting  point

sentence of six years’ imprisonment.

[40]     The disparity between the effective end sentence produced in that way and the sentence of three years’ imprisonment imposed upon Mr Buckley is attributable to his earlier guilty plea and the greater extent to which he co-operated with the authorities at an early stage.  He acknowledged his responsibility in the first of his three interviews.  You did not.  Prior to your guilty pleas, you sought to excuse your conduct.

[41]     Although the charges under the Crimes Act of making false statements as a promoter carry the heaviest penalty, I am inclined to regard the 19 charges of theft in

a special relationship as being equally serious because of the scale and duration of that offending.  I also regard the offending under the Companies Act which, to put it bluntly, involved lying to the trustee, as being of similar culpability.   However, in respect of the charges under the Companies Act and the Securities Act I have to take into account the maximum penalties of five years’ imprisonment available on those counts as opposed to the maximum of seven years and ten years respectively on the other charges.

[42]     I think the appropriate end sentence in this case can be achieved by imposing concurrent sentences.

[43]     Would you please stand Mr Smith.

[44]     On the four counts of making a false statement as a promoter under s 242 of the Crimes Act you are sentenced to four years’ imprisonment.  On the representative count  of  making  an  untrue  statement  in  an  advertisement  brought  under  the Securities Act you are sentenced to three years’ imprisonment.  On each of the 19 counts of theft in a special relationship under s 220 of the Crimes Act  you are sentenced  to  four  years’ imprisonment.    On  the  representative  count  under  the Companies Act of making a false statement to the trustee you are sentenced to three years’ imprisonment.  All of those terms are to be served concurrently, meaning that the effective end sentence is one of four years’ imprisonment.

[45]    I do not make any order for suppression of the fact that you provided information to and co-operated with the authorities.  It is not appropriate to do that in this case.  As I explained to Mr Bonnar in argument, it is important that members of the  public  should  know  that  those  who  co-operate  in  these  difficult  cases  are receiving some discount and that is also important in terms of the deterrent nature of the sentences.

[46]     You may stand down.

............................................

Toogood J