R v Sullivan
[2014] NZHC 3201
•12 December 2014
IN THE HIGH COURT OF NEW ZEALAND TIMARU REGISTRY
CRI 2011-076-1948 [2014] NZHC 3201
THE QUEEN
v
EDWARD ORAL SULLIVAN
Hearing: 12 December 2014 Counsel:
C R Carruthers QC, N F Flanagan, P W Gardyne and
E Rutherford for Crown
P H B Hall QC, M A Corlett and K H Cook for Mr SullivanSentence:
12 December 2014
SENTENCING NOTES OF HEATH J
Solicitors:
Crown Solicitor, Auckland Serious Fraud Office, Auckland Counsel:
C R Carruthers QC, Wellington
P H B Hall QC, Christchurch
M A Corlett, AucklandK H Cook, Christchurch
R v SULLIVAN [2014] NZHC 3201 [12 December 2014]
Introduction
[1] Edward Oral Sullivan, at the age of 73 years, you appear before a criminal Court for sentence for the first time. Following a lengthy trial conducted between March and August 2014, you were convicted on four counts of making a false statement as a promoter1 (the prospectus charges) and one of obtaining an advantage by deception (the deception charge).2 I entered not guilty verdicts on one charge of making a false statement as a promoter, two of theft by a person in a special
relationship and one of obtaining by deception.
[2] I will now go through the information that I need to address before imposing sentence. That will take a little time Mr Sullivan, so I would invite you to sit while I do so.
[3] I want to refer specifically to one of the charges on which you were acquitted. That charge involved an allegation that you deliberately provided false information to the Crown in order to facilitate South Canterbury Finance Ltd’s acceptance into the Non-Bank Retail Deposit Takers’ Scheme in October/November 2008. That was the most serious of the charges levelled against you, and was the only basis on which the Crown could have trumpeted its initial claim, when charges were first laid against you and four others associated with South Canterbury’s business, of a
$1.58 billion fraud. It is important that I make clear at the outset that the offences on which you are being sentenced today do not involve anything like a fraud of that magnitude.
[4] The offence of making a false statement as a promoter carries a maximum term of imprisonment of 10 years on each charge. The deception charge has a maximum penalty of seven years imprisonment.
[5] All five charges are characterised by the law as “crimes involving
dishonesty”.3 As a result, a mandatory consequence of your convictions, quite apart from any sentence I impose today, is that you are disqualified, for a period of five
1 Crimes Act 1961, s 242.
2 Ibid, s 240.
3 Ibid, s 2(1), definition of “crime involving dishonesty”.
years from the date of your conviction (14 October 2014), from being a director or promoter of, or in any way (directly or indirectly) concerned in the management of a company, without the leave of this Court.4
[6] For someone who has been so active in corporate affairs over the period of a career that has spanned more than 50 years, that disqualification itself operates as a real sanction and as a salutatory reminder to directors and senior management of public issuers of the consequences of acting dishonestly, in the course of directing or managing a particular company’s affairs.
Facts
[7] As the trial was conducted without a jury, I delivered lengthy reasons for the verdicts that I entered.5 I do not propose to linger on the factual background, save insofar as certain findings impact on the sentence I have decided to impose. What I say today is based on the factual findings set out in my reasons for verdicts.
[8] I start from my rejection of the Crown’s assertion that you and your fellow directors operated under a “culture of concealment” in the management of South Canterbury’s business affairs. I rejected that proposition because I considered the conduct of which complaint was made was more readily explicable by reference to two market phenomena.6
[9] The first was the period of rapid growth between 30 June 2004 and 30 June
2008, during which I found corporate governance procedures and loan management procedures to be inadequate to deal with the significant increase in public moneys available for investment. During that period, South Canterbury moved from being a company with total assets of about $750 million as at 30 June 2004 to one with
almost $2 billion by 30 June 2008.7
4 Companies Act 1993, s 382(1)(b).
5 R v Sullivan [2014] NZHC 2501. They were summarised, for the purpose of presentation in
Court in R v Sullivan [2014] NZHC 2500.
6 R v Sullivan [2014] NZHC 2501, at para [16].
7 Ibid, at para [18].
[10] The second was the effect of the financial crises that afflicted many New Zealand businesses from (at least) mid 2008. I found that South Canterbury’s fragile business model could not respond adequately to the situation with which the company was then faced. By 31 August 2010, the company was placed in receivership with a deficiency of something in the order of $1.6 billion.
[11] From around June 2008, decisions that were made can properly be seen as resulting more from panic than any form of premeditated conduct designed to affect members of the investing public adversely.8
[12] My impression is that Mr Hubbard continued to believe the business would succeed throughout that period, and that you involved in the business at that stage in order to achieve that end. Other directors became nervous, but it was not until August 2009 that things came to a head. I return to that topic later.
The charges on which convictions were entered
[13] I found you guilty on the four prospectus charges arising out of Prospectuses 57, 58 and 59 because I was satisfied beyond reasonable doubt that the Woolpak lending was deliberately omitted from the list of related party lending, with intent to induce members of the public to invest in South Canterbury.
[14] Ironically, the Woolpak transaction was one that had its genesis in your attempt to help Mr Hubbard to avoid compliance with the Stock Exchange and takeovers’ regulatory requirements when acquiring shares in a company called Wool Services International Ltd. The irony is that the transaction did not come into existence as a South Canterbury transaction. You were acting as a solicitor for Mr Hubbard’s interests, rather than as a director of South Canterbury at that stage.
[15] Woolpak, I found, was established for the purpose of distancing Mr Hubbard’s interests from the acquisition of those shares. I recognise that no fraud was perpetrated on Hellaby Holdings, in the sense of causing loss. It was a willing
vendor. But it is clear that Hellaby were not willing to be involved in a transaction
8 Ibid, at paras [23] and [24].
that might trigger the provisions of the Code. That is why they wanted the
undertaking that there was no relation between the buyer and Mr Hubbard’s interests.
[16] The fourth of the prospectus charges arose out of Prospectus 60, issued in October 2009, after Mr White and Mr Nattrass had resigned as directors of the company. By that time, you and Mr Hubbard were the remaining directors. In addition to Woolpak, false representations were made through the omission of the Hyatt (also known as the Quadrant) transaction, and the Kelt transaction.
[17] Before discussing the competing submissions made by counsel for the Crown and you, I make the following findings:
(a) I accept that you are not (what the probation officer called) an “inherently dishonest” person. Your dishonest conduct in this case was completely out of character.
(b)I accept that you did not intend (or ever believe that you would) cause loss or emotional harm to any potential investor in South Canterbury, even though I have found that you made false statements with intent to induce such persons to invest. You did not believe their money was at risk.
(c) No loss was caused to qualifying members of the public who invested on the faith of the Prospectuses 59 and 60. All were paid out on receivership of South Canterbury, under the Crown Guarantee.
Competing submissions
[18] Mr Carruthers QC, for the Crown, has emphasised the need for me to focus on the sentencing goal of general deterrence, and the need, in his submission, to punish, in a meaningful way, behaviour that he submits should be regarded as a “wide departure from proper standards of commercial conduct”.
[19] Mr Carruthers submits that the seriousness of the offending, viewed in light of the funds invested in South Canterbury by members of the public, the sustained
nature of the offending, elements of premeditation and blatant dishonesty lead to a conclusion that a starting point for the four prospectus counts is one of five to five and a half years imprisonment. The Crown seeks an uplift to the starting point of 12 months imprisonment to take account of the deception charge.
[20] As the Crown does not acknowledge that any significant mitigating factors exist, the end point for which it contends must be something in the range of six years imprisonment.
[21] Mr Hall QC, on your behalf, paints a different picture of the offending. He relies on a number of comments that I made in my reasons for verdicts to suggest that the seriousness of the offending is much less than that promoted by the Crown. Mr Hall suggests that a sentence of the length suggested by the Crown is not justified on the evidence and would, if imposed, be crushing on you.
[22] In suggesting that a community based sentence might be appropriate, Mr Hall has pointed to the absence of proof of any loss (either to individual investors or the Crown) arising out of your actions, your previous good character, the extraordinary loyalty you had to Mr Hubbard which (he submits) can be seen as a cause of the offending, and the impact of the prosecution on you.
[23] Mr Hall submits that a sentence of imprisonment is not necessary to respond to the offending. Only if a sentence of two years imprisonment or less were appropriate, does the possibility of home detention come into play.9
[24] Both Mr Carruthers and Mr Hall referred extensively to other cases in which guidance has been given on the type and length of sentence to be imposed for offending such as this. With respect, I do not think it is helpful to compare individual cases in detail. The factual foundations on which Judges have sentenced differ significantly, as do the particular circumstances in which other finance
companies failed.
9 Sentencing Act 2002, ss 15A and 16. See also Graham v R [2014] NZSC 55.
[25] In cases involving dishonesty, nuanced differences in the underlying facts can sometimes lead to what appear on their face to outsiders to be inconsistent responses to similar offending. That is why the Court of Appeal has not been prepared to embark upon an exercise designed to set tariffs for offending of this type.10
[26] The approach I intend to take reflects that of the Court of Appeal in Thompson v R.11 Mr Thompson had been a director of Fortex Group Ltd and had been convicted on 12 counts of alleged fraudulent conduct in that capacity.
[27] The assessment of an appropriate sentence for commercial fraud is not without difficulty — particularly where the offending is by a person of standing in the commercial community. Some of the relevant principles were mentioned in an earlier decision of that Court. They were stated to be:12
(a) the difficulty of detection and the reliance upon the accuracy of financial reporting which is vital to a credible securities market.
(b)The amount of direct and indirect losses flowing from the offending is relevant, though quantum is not necessarily a true measure of criminality.
(c) Recourse to dishonesty because of the inability of persons of standing to confront failure has been at the heart of much commercial fraud. But it is arguable whether such motivation is any less culpable than greed.
Analysis
(a) General observations
[28] I start my discussion of the appropriate sentence with four general comments.
10 For example, see R v Varjan CA97/03, 26 June 2003.
11 Thompson v R (1996) 14 CRNZ 235 (CA).
12 Ibid, at 246.
[29] First, this case is too serious for a community based sentence to be considered. The only options are imprisonment or, if the sentence of imprisonment were to be two years or less, the possibility of commuting it to home detention.13
My reasons for taking that view will become clear.
[30] Second, the probation officer who prepared the pre-sentence report advises me that while you maintain your not guilty stance, you accept my findings. That position is somewhat contradictory. You cannot, at the same time maintain a not guilty stance, yet accept findings of dishonesty. I take the view that you remain in denial. You have not yet truly accepted responsibility for the offending. No evidence of remorse is evident. I believe you remain in denial because you find it difficult to accept that you acted in a dishonest way.
[31] Third, I shall have regard to the impact of the convictions themselves on you, having regard to your personal circumstances, and the automatic disqualification from involvement in the affairs of any company.
[32] Fourth, I also take account of the fact that a number of more serious charges were not proved at trial by the Crown. In particular, I refer to the alleged deceitful conduct which was said to have induced the Secretary of the Treasury to allow South Canterbury to enter the Guarantee Scheme. The additional stress that a charge of that magnitude undoubtedly brought about is something that I consider can go into the mix on sentencing, though it is something of a relatively modest nature.
(b) Sentencing goals and principles
[33] In this case, I consider the most important sentencing goals are to hold you accountable for your actions, to promote in you a sense of responsibility for the offending and to provide general deterrence. I am satisfied that there is no prospect that you will reoffend.
[34] In fixing a starting point for sentence I must take into account the gravity of the offending, the degree of culpability that you hold for it, the general desirability of
13 See Doolan v R [2011] NZCA 542.
consistency in sentencing and your personal background. Having done that, I am required to impose the least restrictive outcome appropriate in the circumstances.
(c) Nature of the offending
[35] The prospectus offending occurred between 29 September 2006 (when Prospectus 57 went on the market) and 10 February 2010 (when Prospectus 60 was withdrawn). Until 19 October 2009, when Prospectus 60 went on issue, the offending was linked solely with a failure to disclose adequately the Woolpak lending. Prospectus 60 also contained material omissions in relation to the Hyatt and Kelt transactions.
[36] The context in which the Woolpak offending occurred is important. The inability of Mr White, yourself, Mr Nattrass and (to a lesser extent, because he was not a director) Mr McLeod to rein in Mr Hubbard and to improve standards of governance and management of a growing company is pivotal to an understanding of this offending.
[37] You were prepared make false representations to Hellaby Holdings, as vendor of the shares, in order to assist Mr Hubbard to avoid regulatory requirements, both of the Takeovers Code and Stock Exchange. You were also involved in arranging for South Canterbury to fund the acquisition on terms, which included a necessary capitalisation of interest. The loan was made to a company that had no source of income from which to pay regular instalments of interest. There was also the extraordinary provision of an indemnity to the director and shareholder of Woolpak in respect of any liability that might attach to him.
[38] While I accept that in accounting terms, in the context of a company that had assets of more than $1 billion by the time Prospectus 57 went on the market, the amount outstanding by Woolpak to South Canterbury was not material, the nature of the transaction was. Let me ask this question. How do you think a member of the public would have responded had it been disclosed, in Prospectuses 57, 58, 59 and
60 that the lending to Woolpak had been made for the purpose of enabling Mr Hubbard’s interests to acquire shares in a company without the need to comply with regulatory requirements, and further that Woolpak had no income from which to
service the loan on which interest was being capitalised? I think the answer is clear;
and I think you know what the answer is too.
[39] What the effect of such a disclosure might have been is difficult to assess. Much may turn on the timing. Perhaps in 2006, before the financial downturn, the markets may have been more forgiving and if the loan had been immediately repaid not much harm may have been done. The problem in assessing the effect of this wrongdoing is the difficulty in fixing the time at which any public response would have emerged and whether explanations that Mr Hubbard may have given would have resonated with the public.
[40] For example, if this transaction had been disclosed at the time of the application to enter the Guarantee Scheme, it is possible that repayment would have been required, before a decision was given. Whether, given the circumstances in which the Deed was ultimately signed, as I have described in my reasons for verdicts, acceptance into the scheme would have been compromised, remains distinctly contestable.
[41] That view is consistent with my finding that the Crown did not prove beyond reasonable doubt that the Secretary was induced to allow South Canterbury to enter into the Guarantee Scheme by deception on your part.
[42] When Prospectus 57 went on the market, the amount shown as owing by related parties was understated by $690,737.26, being the amount of principal and capitalised interest owing by Woolpak to South Canterbury as at that date. You may have seen non-disclosure of that sum as a related party loan as appropriate, on materiality grounds. Two further tranches of the loan were to be paid on 3 and 31
July 2006 which made the advance much more significant and material in monetary as well as nature terms. After they had been made, and because of capitalised interest, the amount outstanding at the time that Prospectus 60 went into the market was $6,323,681.58. While that may not be a large sum in the context of a company with assets of over $1 billion, it is an amount which few of those members of the public who invested would ever likely see. To them, a loan of that size would undoubtedly have been regarded as material.
[43] I wish to say something about the submission that the amount of nearly
$7 million owing by Woolpak as at 30 June 2009 was not material. I accept that in a strict accounting sense, that is right. Leaving aside the nature of the transaction, the sum of $7 million in the context of a company with that amount of assets at that time could well have been regarded as immaterial – certainly there was evidence from Mr Hagen, an experienced chartered accountant versed in financial reporting standards, to that effect.
[44] But let me put that proposition into context. Assume one of the individual investors who wished to subscribe for securities in South Canterbury for his or her retirement had worked for 50 years at an average salary of $60,000 per annum. Leaving tax to one side, that person would have accumulated wealth of $3 million from a lifetime’s work. It is very easy to under-estimate the importance of disclosure of a sum of that magnitude to an investor who is unlikely to have access to anything like that amount of money over an entire lifetime. In many finance company failures, there has been a lack of appreciation of the yawning gap between the way in which those with stewardship view amounts of this magnitude and those of potential investors saving for retirement on the other. I hope that the need for better appreciation in that area is at least one lesson that can been learnt from the finance company failures.
[45] My perception is that you agreed to help Mr Hubbard in the belief that this would, in fact, be a short term arrangement through which the shares in Wool Services would be sold and Woolpak repaid promptly. To that extent, I consider that you regarded the false undertaking that Woolpak was not related to the purchaser’s interest as innocuous. So far as loss was concerned it was. But again questions about the integrity of those with stewardship of investors funds were different considerations if the Takeovers Panel had taken regulatory action.
[46] When the shares were not sold promptly and the loan was not repaid, the deliberate decision to omit the Woolpak lending from Prospectus 57 caught you and Mr Hubbard in a bind. Given the circumstances in which the loan had been entered into, you could hardly tell either your fellow directors or the public about what had occurred. The problem escalated as time went on and the debt increased.
[47] That is the context in which the duration of the offending must be considered. I have no doubt that Mr Hubbard impressed on you the need to assist with this transaction, particularly when Hellaby insisted on a solicitors’ undertaking that the transaction was not with a party related to his interests.
[48] While I can understand, at a human level, why you involved yourself in this transaction, the public’s inability to know about the unacceptable commercial behaviour in which you and Mr Hubbard had engaged raises the level of culpability for this offending; as does your failure to disclose the related party nature of your transaction to Mr Nattrass and Mr White when specifically asked about it.
[49] By the time Prospectus 60 went on the market, panic had set in. You had the opportunity around August 2009 to resign as a director, along with Messrs White and Nattrass. You had earlier joined in a vote of no confidence in Mr Hubbard with them. But, he managed to persuade you, I suspect against your better judgment, that you should stay. That proved, from your perspective, to be a disastrous decision.
[50] As a result of the omissions made in Prospectus 60, the investing public did not know about the unacceptable commercial conduct relating to the Woolpak transaction, the fact that a finance company owned a major hotel in Auckland, and that arrangements had been made internally to change the incidence of indebtedness to and from Southbury, through the Kelt transaction. The latter assumes importance because proper disclosure could have led the trustee and the public to realise that the single entity ratio would have been breached had the fictitious transaction not been entered into.
[51] Fortuitously for you, investors were likely to focus more on the existence of the Crown Guarantee than on other information in Prospectus 60 when making decisions to invest. It was only the existence of the Crown Guarantee that meant investors did not suffer loss when the company was put into receivership on 31
August 2010. Qualifying investors would probably not have looked much beyond the guarantee in deciding whether to invest. But even if the Crown Guarantee were not in place there was a going concern warning that had been given by the auditors which would have caused any investor to pause before investing in any event.
[52] But all of that does not mean that the public were not adversely affected by non-disclosure. Those members of the public who were likely to invest were also taxpayers. Taxpayers were put at risk through non-disclosure to the Crown. Whether the nature of the Woolpak, Quadrant and Kelt transactions might have led the Crown to consider whether to withdraw the guarantee at any time is debateable; certainly, once independent directors were brought onto the board and understood the nature of these arrangements, Prospectus 60 was withdrawn from the market.
[53] Although Mr Park was not at Treasury when the decision to allow South Canterbury to enter into the guarantee scheme was made, he was involved in monitoring of South Canterbury’s performance during the term of the guarantee. He confirmed that the Crown made a deliberate decision to extend the guarantee following the enactment of legislation permitting that which came into effect on
9 September 2009. But, it was not until 11 December 2009, that a document evidencing the extension was signed. The Crown made a decision consciously to do so and in the knowledge that it was unlikely that South Canterbury would survive, unless a significant injection of capital were procured.
[54] In my view, by September 2009, after the resignations of Mr Nattrass and Mr White, it was clear that South Canterbury could not succeed without a significant injection of capital. Despite the attempts that had been made through Operation Rome and Operation Turnkey to secure such funds, the prospect of that being achieved was very low. By that stage, the risk of significant loss to the Crown if the guarantee were called upon must have been obvious. The Crown, at this stage, was already exposed. Extension of the guarantee allowed one last gasp to recapitalise.
[55] My intuitive response is that the Crown is more likely to have required Prospectus 60 to be immediately withdrawn if it had known of the material non- disclosures. That would have given time for new directors to be installed and for better information to have been available. At that stage informed decisions could be made about whether it was appropriate to solicitor funds from the public. The existence of the later Prospectus 61, which you did not sign, tends to support that position.
(d) Assessment of starting point
[56] The starting point for sentence must reflect that conduct which is inherent in the elements of the offence and any aggravating factors that make the offending more serious. The assessment must be made in the context of the maximum penalty available. In this case I take the prospectus charges as the lead offences for sentencing purposes. They each carry a maximum penalty of 10 years imprisonment.
[57] The guilty verdicts themselves establish that you made statements in prospectuses that you knew were false in a material particular and that you did so with intent to induce investors to subscribe for securities in South Canterbury. Unpacking those elements, the two most important are the dishonesty inherent in putting a material false statement into the market and your intent to induce investors to acquire the securities on offer.
[58] The Crown cannot point to any particular loss that was caused by your actions. Your counsel put this in issue before sentencing and the Crown has elected not to lead evidence to prove that loss was suffered as an aggravating factor. There is a difference between losses evident on the collapse of a company through mismanagement or otherwise and particular loss that can be attributed to your personal actions in committing criminal offences.
[59] The Crown does not seek reparation as an independent sentence. The information available to me suggests that you have settled one civil claim against you for a substantial sum of money.
[60] Your criminal conduct on the prospectus charges lay in the absence of a proper explanation of the nature of the transactions to potential investors. The financial position of South Canterbury was, contrary to what has happened in a number of other cases, satisfactorily reported to the public in the financial statements contained in the prospectuses. As I found you not guilty on the charge that you deliberately understated the amount of impaired debt in Prospectus 60, I work on the assumption that provisioning was within reasonable bounds throughout the time that South Canterbury traded.
[61] The Crown suggests that you engaged in premeditated conduct. I do not accept that submission. It is inconsistent with the findings that I made in my reasons for verdicts. I rejected the Crown’s contention about the existence of a culture of concealment. I explained why I had done so and I have repeated that earlier.
[62] The Crown has put weight on the duration of the offending. However, I characterise that differently. All but one of the prospectus charges on which you were found guilty involved only non-disclosure of the nature of the Woolpak transaction The other, Prospectus 60, also involved the Hyatt and Kelt transactions. So far as Woolpak is concerned, that arose out of your unwavering loyalty to Mr Hubbard; the latter, namely the Hyatt and Kelt, as a result of panic and your honest, but objectively misguided and irrational belief, that South Canterbury could be saved, with no loss being suffered either by investors or the Crown.
[63] The Crown seeks an uplift on the starting point to take account of the deceit charge. In my view, your conduct in making that false representation was an integral feature of the transaction that was not disclosed. Without that initial misrepresentation, the Woolpak offending is not likely to have occurred. I consider that culpability for the offending, should treat the deception charge as part of the totality assessment in respect of all prospectus charges.
[64] A final point of some importance involves the difficulty of detection of offending of this type and the reliance of those who participate in capital markets on accurate financial reporting by those responsible for undertaking that task, the directors of a company.
[65] While the overall financial picture was accurately disclosed, the transactions that were not identified as related party transactions would, if properly described in a prospectus, have immediately had alarm bells ringing and red lights flashing from a potential investor’s point of view. The type of conduct inherent in all three of the non-disclosures would have cast considerable doubt on the integrity of those involved. Potential investors could well have been affected in their decision-making if they had known that those responsible for stewardship of their funds could act in such ways.
[66] Many of the prosecutions that have resulted from the collapse of finance companies in the period between 2007 and 2010 involved charges under s 58 of the Securities Act 1978. That is a strict liability offence, for which a maximum penalty of five years imprisonment is available. There are available defences based on an honest and reasonable belief that any mis-statement was accurate. I contrast those charges with the ones on which you have been convicted, of which deliberate dishonesty is an element. That is why the charges that you faced carry a maximum penalty of 10 years imprisonment.
[67] Nevertheless, although there is a considerable difference between the maximum penalties available, it is appropriate to compare the seriousness of the offending and the culpability of particular offenders under each provision. The same mischief is addressed in each provision, albeit at different levels. If culpability on an offence of the type for which you have been convicted is roughly the same as that on which someone has been sentenced on a Securities Act charge, that simply means that the offence is regarded at the more serious end of the strict liability spectrum but towards the lower end of the dishonest conduct range.
[68] Although no dishonest conduct was found, there are similarities between the offending in this case and by those directors who were convicted of Securities Act offences arising out of the collapse of Nathans Finance Ltd. As I presided over both that trial and this, I am probably in as good a position as anyone to consider those similarities and differences.
[69] The two most culpable directors of Nathans had significant knowledge of the position of the company and the purpose for which investors’ funds were being used. Nevertheless, they signed off on prospectuses and investment statements in 2006, and extension certificates. The guilty verdicts were based primarily on an inaccurate description of the state of the company’s financial health and the safety of investors money.
[70] The summary contained in the narrative of the investment statement was completely at odds with the true position. The reality was that investors were being asked to provide working capital to Nathans’ parent company, which was carrying on
entrepreneurial activity. The loans were made on the basis of interest being capitalised, and associated companies to which money had been lent were unable to repay their debts without selling all or some of their business units.
[71] While I found that the directors had no intent to mislead investors, I took the view that the reason why the narrative in the investment statement differed so markedly from the true position was that each director had failed to turn his mind to whether, as a matter of fact, the summary of business activities and risks truly reflected the actual position of Nathans, as they knew it to be. The directors “culpability [rested] on [their] complete failure to perform the statutory function cast on [them] as a director, namely to satisfy [themselves] that the offer documents did
not contain any misleading statements”.14 As in this case, in addressing the reality of
the situation of which they (but not investors) had knowledge, each had an honest belief that there was always “a big deal” around the corner that would salvage the position and create wealth for the company; even though all objective evidence pointed in the opposite direction.15
[72] In sentencing the directors of Nathan Finance Ltd, it was clear that there was a quantifiable loss arising from their conduct. The shortfall to secured debenture holders on receivership was in the order of $168 million, and that that could be specifically attributed to the offer statements issued in the period covered by the
charges was in the vicinity of $25 million.16
[73] In characterising their conduct as “gross negligence” I took a starting point for the two most culpable directors of three years and three months imprisonment and three years four months imprisonment respectively. On appeal, the Court of Appeal observed that those starting points, while appropriate, were “[if] anything … on the light side”.17
[74] In contrast, your offending covers a longer period. False statements were made deliberately. That is consistent with the fact that, unlike the directors of
14 R v Moses HC Auckland CRI-2009-004-1388, 2 September 2011 at para [11].
15 Ibid, at para [12].
16 R v Moses HC Auckland CRI-2009-004-1388, 2 September 2011 at para [22].
17 Doolan v R [2011] NZCA 542 at para [43].
Nathans, those involved in directing the affairs of South Canterbury were not asleep at the wheel.
[75] Another similarity with Nathans is the existence of an honest (albeit irrational) belief that the company could be salvaged. There was no motive for personal gain in either case. Nor can it be said, in any real sense, that benefits were gained. I do not regard the payment of modest directors fees as something that could, in any way, have contributed to the decision to disclose the Woolpak lending to the public.
[76] Unlike Nathans, there is no quantifiable loss that can be attributed to your actions, as opposed to the factors that led to South Canterbury’s eventual collapse.
[77] The directors in both Nathans and South Canterbury recorded the true financial position of the company. It was the failure to apprise members of the public adequately about factors that would be relevant to the trust and confidence they reposed in those with responsibility for their funds that was relevant. In many ways, statements in the narrative of an investment statement that misrepresented in almost all material respects the way in which investors funds were being used can be seen as more culpable than the conduct in which you were involved.
[78] On balance, I consider that the element of dishonesty should put the starting point at a higher level than that taken in Nathans, but not much greater. I choose a starting point for sentence of three years six months imprisonment. I take into account the deception charge in reaching that starting point. There are no aggravating factors personal to you that would justify any further uplift.
(d) Mitigating factors
[79] A number of factors advanced by Mr Hall in mitigation of the offending. Some of those are, in reality, the absence of aggravating factors. I have dealt with a number of those submissions already, in the context of aggravating conduct.
[80] Factors that can be regarded as mitigating criminal offending are identified in the Sentencing Act 2002.18 Relevantly, they include the age of the offender, whether there was limited involvement in the offence on the offender’s part and any evidence of previous good character. I am also entitled to take account of any other mitigating factor that I consider exists in the context of the particular offending.19
(i) Role in the offending
[81] While I found that you acted dishonestly, I accept that you did so out of misguided loyalty to Mr Hubbard in respect of the Woolpak transaction and a misguided desire to him, coupled with a misguided desire to keep South Canterbury afloat when Prospectus 60 was issued. At that time attempts to obtain fresh capital had failed and your fellow directors had resigned. When Prospectus 60 went into the market, I consider that you were, as Mr Hall submitted, based on one of the character testimonials I have been given, “trying to fix the unfixable”.
[82] On the evidence I heard, I am sure that Mr Hubbard was the most culpable offender in relation to all of the non-disclosures that were made; and I make that comment bearing in mind even that he has not been present to answer allegations which have arisen during the trial. First, as far as Woolpak was concerned, he gained a personal benefit to the expense of the company; while you received none. So far as Prospectus 60 is concerned, that was issued not long after Mr Hubbard persuaded you to stay on as a director, notwithstanding the resignations of Mr White and Mr Nattrass. Again, I proceed on the basis that Mr Hubbard was more culpable for those omissions. Those findings are consistent with my view that you acted out of misguided loyalty. That can also be seen by the extent to which the many people who have provided references to support you today have referred to your “loyalty” as a positive personality trait that you possess.
[83] By deliberately deciding not to disclose the nature of the Woolpak transaction, the fact that South Canterbury (indirectly) owned the Hyatt Hotel and the manoeuvring of book entries to hide the breach of the single entity loan ratio as
at 30 June 2009, you contributed to the lack of understanding of the public as to what
18 Sentencing Act 2002, s 9(2).
19 Ibid, s 9(4)(a).
was actually occurring at South Canterbury, and (at least to some degree) concealed information.
[84] Having said that, I do not ascribe any malevolent motive to you. I am satisfied you were motivated by a desire to salvage South Canterbury, and to maintain your and Mr Hubbard’s reputation in the community. As I have said, you did so in the honest but, objectively irrational belief, that South Canterbury could be saved and no loss would be suffered either by the Crown or individual investors.
(ii) Personal characteristics
[85] I turn now to discuss personal characteristics. I have been presented with no fewer than 76 character references which attest to your prior good character and your involvement in business, the law and the community. The references make impressive reading. As I said to Mr Hall when he was making submissions, I have never seen anything such as this when sentencing anyone on a charge of this nature.
[86] I am particularly touched by the good that you have done for your community over many years, whether as a lawyer, a director, or in service to your community, particularly through your extensive work with the Order of St John and your involvement in the reorganisation and operation of the Craighead Diocesan School and your association with the Bidwell hospital.
[87] The fact that you were made a Knight of the Order of St John in December
1999 is a very impressive thing. It is an objective recognition of your contribution to the community. So too is your period of some 45 years or so in private practice as a solicitor, albeit with one blemish that I put to one side.
[88] You have been either been chair or director of a number of significant companies, apart from those associated with South Canterbury. I make particular reference to your roles in entities such as the South Canterbury Electric Power Board, Alpine Energy Ltd, Ngai Tahu Pacific Fisheries Ltd and the Opuha Dam Partnership. You were involved with those entities for lengthy periods. In the case of Opuha Dam, up to 17 years.
[89] So far as community involvement is concerned, not only does your work with the order of St John go back some 42 years, during which you spent 18 years as a member of the Order of St John Priory Trust Board, but you have also been an active participants in the administration for squash rackets and ski organisations.
[90] Many of the referees attest to your honesty and integrity and the services you have rendered to the Timaru and wider South Canterbury communities over many years. Almost without exception, those who have supplied character references have found it difficult to believe that the person whom they know could commit offences of dishonesty.
[91] As I said at the commencement of my remarks, you are now aged 73 years. The stability that has underpinned your private and professional life is exemplified by your marriage, for coming up 50 years. You have four children, all of whom are a credit to you and your wife. Both you and your wife should be justly proud of their achievements. Partly, I accept, as a result of the strain under which you have been labouring since the charges were first laid, you do not enjoy good health. Your age and state of health must be taken into account, as should the impact of any sentence on a loving wife and family who have supported you throughout this ordeal.
[92] There is also an element of “fall from grace”. This concept cannot be taken too far in sentencing but it does come into play when there is a sudden and spectacular fall from grace for a person in a prominent position, particularly where it is likely to be accompanied by a loss of livelihood. Such a result can give rise to a
punitive element for which a modest allowance on sentence can be made.20
[93] In the context of this case, you are barred from acting as a director for a period of five years unless the Court otherwise orders. That extends to direct or indirect involvement in the management of a company. Your practice as a lawyer is at an end. You do not hold and do not seek to renew a practising certificate. For all practical purposes, you have lost all material sources of income and, even leaving to
one side the costs involved in defending the criminal charges,21 no doubt your assets
20 R v Fernando HC New Plymouth CRI-2004-043-2794 (Priestley J).
21 As to the inability to take a factor such as this into account, see R v Radich [1954] NZLR 86
have been depleted by the settlement into which you have already entered, and the possibility of defending other civil proceedings.
[94] My best attempt at explaining your conduct, in light of your previous good character and service to the community, is again by reference to what I termed your extraordinary loyalty to Mr Hubbard. Frankly, I would have liked to have heard an explanation about how Mr Hubbard managed to persuade you to continue as a director of South Canterbury, after Mr White and Mr Nattrass resigned and you had previously joined in a vote of no confidence in him. As I have said, that was a disastrous decision for you, given the information that was not conveyed to members of the public who were considering the offer in Prospectus 60.
[95] The probation officer explained that you possessed “a determined and assertive personality”. Perceptively, he identified the nature of your personality and significant growth of South Canterbury as having contributed to your current predicament. I think he is right.
[96] Sentencing is an art, it is not a science. It is not a mathematical exercise. It is necessary for a sentencer to balance the interests of the community in marking serious offending adequately and the particular circumstances of an offender who can point to factors that mitigate the offending.
[97] Mr Sullivan, I have not found this sentencing an easy task. You are a complex man who can function well in many different worlds and yet keep them apart when necessary. I have found it perplexing to reconcile the man of whom many referees speak with the one of whom I heard much during the course of a long trial. In saying that, I recognise that I have not had the benefit of hearing from you about what happened. I have had to form my own views from available evidence. I have no doubt that you will disagree with some of my findings but I ask you to remember that I am necessarily making them on the basis of imperfect information.
[98] Albeit by a narrow margin, I consider that it is appropriate to provide a generous credit of 18 months to recognise all these mitigating factors. Primarily, I
(CA) at 87.
rely on your prior good character and service to the community, which has not been gainsaid by anyone.
[99] I also take account of your age, the effect of a custodial sentence on you and your family, your inability to earn significant income given that your ability to act as either a lawyer or a director has effectively been curtailed and the depletion of assets available to you for retirement through the need to deal with this and other proceedings.
[100] To be transparent, it is also fair to say that within that credit there is a degree of exercise of mercy, which is usually regarded as the prerogative of a trial Judge. Part of the reason for that is your vindication on the most serious charge of being complicit in a deliberate $1.58 billion fraud on taxpayers, and on other charges of misapplying investors’ funds. The impact of the trial was clearly much greater because of the initial claim that this was the biggest fraud in New Zealand history, and you were a participant in it. So, that is the limited extent to which I acknowledge that position.
[101] In all, taking account of that credit, an end sentence of two years imprisonment would adequately mark your offending. That means I need to consider the question of home detention.
Home detention
[102] As the end sentence is two years imprisonment, I must consider whether home detention is a more appropriate sentencing response. I start with s 16(2) of the Sentencing Act 2002 enjoins the Court not to impose a sentence of imprisonment unless specified purposes of sentencing cannot be met by a sentence other than imprisonment. I would not regard imprisonment as necessary in the circumstances, provided there is an appropriate alternative.
[103] The Court of Appeal has emphasised that the creation of a discrete sentence of home detention was to reflect “a perception that society’s interests are better served in some cases by the imposition of restrictions on liberty through home
detention rather than through imprisonment”.22 The Court has emphasised the “acknowledged advantages” of home detention as a real alternative to imprisonment. Home detention is a hybrid sentence, regarded as neither custodial nor community based.
[104] Almost inevitably, a sentence of imprisonment will be required to mark offending of the type of which you have been convicted, when viewed generically. I have concluded, however, that this is one of those rare cases in which home detention will be an appropriate sentencing response, particularly if coupled with the maximum period of community work available.
[105] I see no benefit to society from imprisoning you. You are not a risk to the community. Indeed, notwithstanding your convictions, many people of standing in the South Canterbury and Timaru communities continue to support you. There is no real likelihood of reoffending. There are no rehabilitative needs that must be addressed.
[106] In light of the period I would otherwise have imposed for imprisonment, I consider the maximum period of home detention of 12 months should be ordered, together with the maximum period of community work also available.
Result
[107] Mr Sullivan, please stand.
[108] On each of the charges on which you have been found guilty you are sentenced to a term of home detention of 12 months. That sentence is to be served at the address stipulated in the Appendix to the pre-sentence report.
[109] On each charge you are also sentenced to a term of 400 hours community work. You shall report to a probation officer no later than 2pm today so that arrangements can be made for the home detention sentence to commence and
requirements provided to you for community work purposes.
22 R v Hill [2008] 2 NZLR 381 (CA) at para [33].
[110] All of the sentences I have imposed shall be served concurrently. [111] Stand down.
Addendum
[112] After completion of the sentencing in open Court, the Registrar inquired whether I had intended to impose any post-detention conditions. I directed that
conditions of that type were not part of the sentence.
P R Heath J
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