The Queen v Connolly
[2006] NZCA 338
•6 December 2006
IN THE COURT OF APPEAL OF NEW ZEALAND
CA472/05
CA473/05
CA474/05
CA475/05THE QUEEN
v
PETER MICHAEL CONNOLLY
JOHN DONALD CURRIE
JOHN ANTHONY REID AND
PETER WILLIAM RUSSELHearing:7 and 8 August 2006
Court:Ellen France, Gendall and Heath JJ
Counsel:J A Farmer QC, M J Ruffin and J Mullineaux for the Crown
H Fulton for P M Connolly
P F Wicks for J D Currie
M A Gilbert and G R Kayes for J A Reid and P W Russel
Judgment:6 December 2006 at 2.30 pm
JUDGMENT OF THE COURT
A The appeal is allowed. The orders made in the High Court are set aside.
BThe applications for costs brought by Messrs Reid and Russel are dismissed.
CThe awards of costs made in favour of Messrs Connolly and Currie are varied by substituting a global sum of $50,000 (inclusive of disbursements) in favour of each of them.
D No order as to costs on the appeal.
____________________________________________________________________
REASONS OF THE COURT
Gendall and Heath JJ [1]
Ellen France J (dissenting) [122]
GENDALL AND HEATH JJ
(Given by Heath J)
Table of Contents
Para No
The appeal [1]
The costs appeal: Legal principles [8]
The nature of the charges [35]
Competing submissions in outline [63]
The Judge’s approach to the costs decision [74]
Did the Judge err in exercising his costs discretion? [94]
Re-exercise of cost discretion [110]
Result [120]The appeal
[1] Between 12 September and 14 October 2004 Messrs Connolly, Currie, Reid and Russel were tried in the High Court at Auckland on two counts of conspiracy to defraud and 19 money laundering charges. The two conspiracy charges focussed on a scheme offered to members of the public to invest in Digitech Communications Ltd (Digitech) and New Zealand Investments Ltd (NZIL).
[2] The trial was conducted before Fogarty J, sitting without a jury. On 14 October 2004, after the accused had elected not to call evidence and the Judge had heard some closing addresses, Fogarty J pronounced verdicts of not guilty on both conspiracy charges. Because of a prosecution concession, verdicts of not guilty were entered on each of the money laundering charges. The Judge gave full reasons for entering those verdicts on 22 October 2004, in a form that complied with this Court’s observations in R v Eide (Note) [2005] 2 NZLR 504 (CA).
[3] Following their acquittal, all four accused sought costs under the Costs in Criminal Cases Act 1967 (the Act). Their applications were heard by Fogarty J on 3 and 4 August 2005. In a judgment delivered on 1 December 2005, the Judge awarded costs in favour of each accused. The Crown appeals against the costs orders.
[4] The quantum of the costs awarded has not yet been settled. The remaining dispute focuses on the applicable Crown rate. The original claims total well in excess of $1,000,000. While, on the information available to us, the fiscal consequences of the order remains unclear, our best estimate is that not less than $500,000 would be payable by the Crown as a result of the orders made.
[5] The Judge differentiated among the accused in making his costs orders. He found that both Mr Connolly and Mr Currie were involved in risk taking activities, which materially affected the judgment of the Crown in bringing the case against them. However, Fogarty J made a positive finding that “there was no proof at all” against those accused. On the other hand, the Judge found that the Crown had a prima facie case against Messrs Reid and Russel which “was so severely critiqued by Mr Gilbert for Mr Reid that the Crown case collapsed”. That assessment was referable to a particular “limb” of the Crown case, to which we shall refer later.
[6] The Judge considered that it was just and reasonable that all accused receive an award of costs. Mr Reid and Mr Russel obtained a contribution to their costs while Mr Connolly and Mr Currie received an award of solicitor and counsel’s costs for part of the proceeding: see paras [94]–[96] of the costs judgment which we set out at [93] below.
[7] A useful summary of cases determined under the Act from June 1996 until May 2000 is set out in Appendix C of the Law Commission’s report, Costs in Criminal Cases (NZLC R60 2000) at 45-52. To our knowledge, the costs awarded in this case represent the highest award made under the Act.
The costs appeal: Legal principles
[8] Section 379CA of the Crimes Act 1961 provides the jurisdictional source for the appeal. That section was inserted into the Crimes Act, as from 3 June 1998, by s 5 of the Crimes Amendment Act 1998. Until s 379CA was enacted, no appeal lay against an order for costs made in criminal proceedings.
[9] Section 379CA provides:
379CA Appeal against order in respect of costs
(1) Where before, during, or after any trial the Court makes an order for the payment of costs or declines to make an order under the Costs in Criminal Cases Act 1967, any person affected by that decision may appeal against it to the Court of Appeal or, with the leave of the Supreme Court, to the Supreme Court.
(2) The Court of Appeal or the Supreme Court may—
(a) Confirm the decision; or
(b) Vary the decision; or
(c) Set aside the decision; or
(d) Make any other order it considers appropriate.
(3) Subject to subsection (4), where a person seeks leave to appeal to the Court of Appeal under this section, that person's application must be filed as directed by the rules of Court within 10 days after the decision has been made, irrespective of whether the formalities associated with that decision have been completed or whether reasons for it have been given.
(4) The Court of Appeal may extend the period specified in subsection (3) within which notice of application for leave to appeal to it may be filed.
[10] There is an apparent inconsistency between s 379CA(1) and (2) and the later subsections (3) and (4). That inconsistency was noted in an earlier decision of this Court, R v Buxton CA317/03 10 December 2003 at [2]:
[2] Although the point has no materiality for present purposes, we draw attention to the inconsistency between ss (1) and (3). Subsection (1) implies that an appeal can be brought as of right, whereas ss(3) speaks of the dissatisfied person seeking leave to appeal. …
We emphasise the need for legislative consideration of this issue. As in Buxton, we proceed on the basis that s 379CA(1) confers a right of appeal.
[11] Costs, whether originating in the criminal or civil jurisdiction of the Court, are discretionary in nature. Consistent with general principles involving discretionary decisions, an appellate court should not interfere unless satisfied that the Judge who made the order acted on a wrong principle, or failed to take into account some relevant matter, or took account of some irrelevant matter, or was plainly wrong: Shirley v Wairarapa District Health Board [2006] 3 NZLR 523 (SC) at [15]. Delivering the judgment of the Supreme Court in Shirley, Anderson J added at [16]-[17]:
[16] But although the costs jurisdiction is discretionary, it is not unprincipled, or else it would be unacceptably arbitrary. As Lord Halsbury LC pointed out in Sharp v Wakefield [[1891] AC 173 (HL) at 179, cited in Cates v Glass [1920] NZLR 37 at 57-58]:
“… when it is said that something is to be done within the discretion of the authorities …that something is to be done according to the rules of reason and justice, not according to private opinion …according to law, and not humour. It is to be, not arbitrary, vague, and fanciful, but legal and regular.”
[17] The discretion in respect of costs is no exception. The Court of Appeal has held on several occasions [for example Glaister v Amalgamated Dairies Ltd [2004] 2 NZLR 606 (CA) at [19]] that the discretion is to be exercised generally in accordance with RR 47-48G. Rule 47(a) applies the general principle that:
(a) The party who fails with respect to a proceeding or an interlocutory application should pay costs to the party who succeeds.
…
[12] In the context of an order for costs arising from a criminal trial, the discretion falls to be exercised against the scheme of the Act. That scheme creates a different starting point from that identified in Shirley, at [17].
[13] Section 4 of the Act sets out the circumstances in which a successful prosecutor might obtain an order for costs against a defendant. The term “defendant” is defined in s 2 of the Act in a manner that includes an accused in a criminal trial. We use the term “accused” in this judgment.
[14] Section 4(1) of the Act provides:
4 Costs of the prosecutor
(1) Where any defendant is convicted by any Court of any offence, the Court may, subject to any regulations made under this Act, order him to pay such sum as it thinks just and reasonable towards the costs of the prosecution.
….
[15] We contrast the broad discretion conferred by s 4 with the terms of s 5(1) and (2) of the Act, which set out the circumstances in which an acquitted accused may apply for costs. Unlike s 4, s 5 contains an elaborate framework of factors for a Judge to consider before deciding whether to make an order for costs in favour of an acquitted accused. Section 5(1) and (2) provide:
5 Costs of successful defendant
(1) Where any defendant is acquitted of an offence or where the information charging him with an offence is dismissed or withdrawn, whether upon the merits or otherwise, or where he is discharged under section 167 of the Summary Proceedings Act 1957 the Court may, subject to any regulations made under this Act, order that he be paid such sum as it thinks just and reasonable towards the costs of his defence.
(2) Without limiting or affecting the Court's discretion under subsection (1) of this section, it is hereby declared that the Court, in deciding whether to grant costs and the amount of any costs granted, shall have regard to all relevant circumstances and in particular (where appropriate) to—
(a)Whether the prosecution acted in good faith in bringing and continuing the proceedings:
(b) Whether at the commencement of the proceedings the prosecution had sufficient evidence to support the conviction of the defendant in the absence of contrary evidence:
(c) Whether the prosecution took proper steps to investigate any matter coming into its hands which suggested that the defendant might not be guilty:
(d)Whether generally the investigation into the offence was conducted in a reasonable and proper manner:
(e) Whether the evidence as a whole would support a finding of guilt but the information was dismissed on a technical point:
(f) Whether the information was dismissed because the defendant established (either by the evidence of witnesses called by him or by the cross-examination of witnesses for the prosecution or otherwise) that he was not guilty:
(g) Whether the behaviour of the defendant in relation to the acts or omissions on which the charge was based and to the investigation and proceedings was such that a sum should be paid towards the costs of his defence. (our emphasis)
[16] In addition, s 5(3) expressly provides that there shall be no presumption for or against the granting of costs in any case. Surprisingly, a counterpart provision does not appear in s 4.
[17] Finally, s 5 contains two additional directives for the Court. First, no accused shall be granted costs by reason only of the fact that he or she has been acquitted or discharged: s 5(4). Second, no accused shall be refused costs by reason only of the fact that the criminal proceedings were properly brought and continued: s 5(5).
[18] The Act also deals with costs on appeal. An appellate Court may make “such order as to costs as it thinks fit”: s 8(1). However, no defendant or convicted defendant shall be granted costs by reason only of the fact that the appeal has been successful (s 8(2)) or shall be refused costs by reason only of the fact that the appeal was reasonably brought and continued by another party to the proceedings (s 8(3)). Where an appeal involves a difficult or important point of law the appellate Court may order the costs of any party to the proceeding to be paid by any other party, irrespective of the result of the appeal: s 8(6).
[19] The background to these legislative provisions is set out in the Law Commission report, Costs in Criminal Cases, the unpublished report of the Committee on Costs in Criminal Cases of 12 September 1966 (to which the Commission refers) and an earlier Law Commission issues paper, Costs in Criminal Cases (NZLC MP12 1997). It was the report of the 1966 Committee that led to the passing of the Act.
[20] The 1966 Committee identified the issues for its consideration and the perceived need for legislation:
25. We think everyone would agree that if a prosecution is brought either maliciously or unreasonably the defendant should receive his costs. On the other hand none of us consider that a defendant should expect costs merely by virtue of his acquittal; nor do we think this would commend itself to legal or public opinion generally. There is a substantial class of cases where in the popular phrase the accused is “lucky to get off” – the prosecution has not quite clinched the case or the exacting standard of proof in criminal cases is not quite satisfied. Alternatively the accused may by his misconduct or lack of candour contribute to his own misfortune – he has “brought it on himself”. In our opinion it would ordinarily be wrong to award costs in these sorts of cases.
26. There is however a middle group and it is here that the application of the present law can give rise to criticism. We refer to cases where, although the police (if it is a case of a police prosecution) were diligent and acted reasonably in bringing a charge in the light of the facts as they knew them, the defendant has nevertheless shown his innocence or the probability of his innocence. He has “cleared himself” either by discrediting the prosecution case or showing its insufficiency or by bringing credible witnesses of his own who have thrown a different light on the circumstances.
[21] After considering various policy factors, the 1966 Committee concluded, at paragraphs 38 and 40:
38. It is our view that the law and practice with regard to the award of costs to successful defendants in criminal cases should be based on the principle that ordinarily costs should be granted where in one way or another the defendant has shown his innocence, and of course in cases where the prosecution has for one reason or another been brought improperly or negligently. The most difficult part of our task however has been to suggest a way in which this principle can be accorded legal effect without making the award of costs an almost general consequence of acquittal. As we have said we think this would be undesirable.
. . .
40. What we recommend is that there should be written into the legislation some principles to guide Judges or Magistrates in determining applications for costs, and to encourage them to use their discretion more liberally. (our emphasis)
The Committee’s recommendation was followed in respect of s 5, but not in respect of s 4.
[22] In its 2000 report, the Law Commission attempted to identify the underlying reasons justifying an order for costs under the Act, whether following conviction or acquittal. When discussing costs applications made by successful defendants, a number of factors, all linked to the criteria identified in s 5(2) of the Act, were articulated:
(a)People accused of criminal offences can be put to a great deal of expense in defending themselves. Unlike defendants in civil actions, they cannot simply compromise their positions because their liberty, reputation and pocket may all be at risk: see Acuthan v Coates (1986) 6 NSWLR 472 at 480.
(b)If a prosecution has been brought for a malicious or improper reason, the defendant should receive costs.
(c)It is reasonable that, if a prosecution has been conducted in a negligent manner (for example if the facts have not been properly investigated) that the defendant should receive costs.
(d)Costs should not be awarded simply because a defendant has been acquitted. This arises because of the “lucky to get off factor” as well as because the verdict is expressed negatively as “not guilty”.
(e)In cases where the prosecution has been reasonably conducted, but the defendant has been able to show he or she is definitely or probably innocent by showing a deficiency in the prosecution case or bringing credible witnesses to shed a more favourable light on the circumstances, it will be reasonable for a costs award to be made in favour of a defendant.
See the Law Commission report at 8-9, paragraph 24.
[23] Solicitor-General v Moore [2000] 1 NZLR 533 (CA) emphasised the broad terms in which the s 5(1) discretion is framed. The Court considered that the introductory words in s 5(2) add to those matters identified in the list of factors that follow: Moore [32]. Moore also echoed observations of Hardie Boys J, in R v Margaritis HC CHCH T66/88 14 July 1989 who, after referring to the factors identified in s 5(2) said that the Court had “to do what it thinks right in the particular case”: Moore [33]. In our view, the observations of Hardie Boys J in Margaritis must now be read subject to the general observations on the exercise of the costs discretion articulated by the Supreme Court in Shirley.
[24] R v Rust [1998] 3 NZLR 159 (CA) was an earlier decision of this Court that was referred to in Moore without criticism. In Rust, costs were sought by an accused in respect of an appeal that had led to a retrial at which he had been found not guilty. The trial at which he was acquitted was his third. At the first trial the jury could not agree. At the second trial the accused was convicted. At the first and second trial the Judge refused leave to cross-examine the complainant. On appeal against conviction, this Court held that the prohibited cross-examination should have been allowed. For that reason it ordered a new trial, at which the accused was acquitted.
[25] This Court saw no distinction between costs for an appeal (s 8 of the Act) and costs of successful defendants. Delivering the judgment of the Court, Robertson J said, at [162]-[163]:
In general the principles to be applied are not in dispute. In R v Leitch (Court of Appeal, Wellington, CA 195/97, 22 December 1997) Richardson P in delivering the judgment of this Court said at p 1:
“There is no presumption for or against granting of costs and so costs are not to be granted merely because the appeal has succeeded. An application for costs is invoking the Court’s discretion and must show good grounds why the discretion should be invoked in the applicant’s favour . . . ”.
Further, in R v Kerr (Court of Appeal, Wellington, CA 60/91, 15 April 1992) this Court observed at p 2:
“The matter is thus one of discretion, and the section provides little by way of guidelines. The mere fact that a defendant succeeds is not enough to justify an award.”
Thus, although an award is discretionary there must be good grounds for making it. Mr Toogood was unable to point to any particular factor which would support an award. The Judge who presided at the second trial was required to make a ruling under legislation which required the refusal of leave unless that course would be contrary to the interests of justice. This Court took a different view as to the relevance of the proposed cross-examination. As is frequently the case in such a situation, the issue was one requiring a balancing exercise. The Crown’s opposition at trial, and again on the appeal, was justified. The appeal did not involve any novel issue and there was nothing to take it out of the ordinary category where there has been a wrong decision on a question of law or a misdirection which has resulted in the quashing of a conviction and the ordering of a new trial. It was not a case such as Collector of Customs v Athfield [1979] 2 NZLR 272, where costs were awarded [to] an unsuccessful respondent on a second appeal brought by leave on an important point of law. On examination, the only ground for an award which is discernible here is the fact that the appeal was successful. As the legislation stands, that is insufficient. (our emphasis)
[26] The Court refused to make an order for costs, saying at [164]:
Under our system Mr Rust commenced the process with the presumption of innocence. His acquittal at the third trial meant that such position eventually was restored. The submission is made that it is inappropriate that he should be out of pocket as a result of what happened. With respect to counsel’s argument that is a matter for Parliament. The present legislation in its plain words and in the consistent judicial interpretations of it for more than three decades, does not permit such an approach to the granting of costs.
[27] In our view, there are two competing policy considerations that underlie the various factors identified in s 5(2). They are:
(a)First, a significant award of costs against a prosecution agency could have the unintended consequence of acting as a disincentive for that agency to bring similar prosecutions in the future.
(b)Second, the possibility of an adverse costs order being made is likely to operate as an incentive for prosecuting agencies to keep standards of investigation and prosecution at an appropriately high level.
[28] We consider that those factors are “relevant circumstances” to which the Court should have regard in exercising its discretion under the Act. Jurisdiction to consider factors of that type can be found in the opening words of s 5(2). While those considerations are likely to have particular weight in cases of serious crime, it may not be necessary to refer to them at all when dealing, for example, with costs on a summary prosecution brought in the District Court.
[29] There is a greater public interest in ensuring that serious crime is prosecuted without fear of significant adverse costs orders. However, in many cases, an adverse order for costs might be required to ensure standards of investigation and prosecution are maintained at an appropriately high level.
[30] We understand that Ellen France J takes the view that it was unnecessary for the Court to consider specifically those policy factors, as they are inherent in the specific factors set out in s 5(2). Respectfully, we differ from that view. It seems to us that in cases of serious crime the Judge ought to take into account specifically those public policy factors, the more so when the order is significant in monetary terms. Such an approach is consistent with the views of the 1966 Committee (set out at [20] and [21] above) and Rust (see [24]-[26] above).
[31] While the two policy factors assume importance in all cases of serious crime, they have particular significance in cases of complex fraud. We discuss later (see [101]-[104]) the particular difficulties involved in the prosecution of serious or complex fraud which led to enactment of the Serious Fraud Office Act 1990. In addition, we recognise that substantial costs necessarily attend the defence of any prosecution alleging complex fraud.
[32] If the s 5(1) discretion were exercised, in a case involving serious crime, without reference to those policy considerations there is a risk that the discretion to order costs in favour of a successful accused could be exercised in an unprincipled or inconsistent manner through an over-mechanical application of the criteria set out in s 5(2). Our approach ensures that s 5(2) is given a purposive interpretation, as required by s 5 of the Interpretation Act 1999.
[33] Because both the s 5(2) factors and the policy considerations we have identified are internally inconsistent criteria, care must be taken to avoid what could amount to an arbitrary decision after reviewing relevant criteria. In our view, what is required is the identification of a criterion or criteria that, for a specified reason, has influenced the Judge in awarding or not awarding costs. Those factors that are articulated are then open to appellate scrutiny. Such an approach is consistent with the principles identified in Shirley and operates to promote consistency of approach to like cases.
[34] We point out that little assistance can be gained from Australian authority because the New Zealand legislation has a different focus from rules applied in Australia: cf Latoudis v Casey (1990) 170 CLR 534 (HCA), particularly the observations of Mason CJ at 542-544.
The nature of the charges
[35] Fogarty J’s substantive judgment of 22 October 2004, in which he gave reasons for acquitting the accused, is now reported as R v Connolly (2004) 21 NZTC 18,844. The background to the trial is set out fully in that judgment. Our summary will, necessarily, be incomplete. Reference should be made, for full background facts, to the acquittal judgment.
[36] The four accused were charged with conspiracy to defraud and money laundering. The two conspiracy charges alleged can be found in the acquittal judgment at [5]:
1. The SOLICITOR-GENERAL charges that between the 30th of September 1994 and 1 April 2000, at Auckland and elsewhere, PETER MICHAEL CONNOLLY, JOHN DONALD CURRIE, JOHN ANTHONY REID and PETER WILLIAM RUSSEL conspired by deceit, falsehood and other fraudulent means, to defraud both members of the public investing through a loss attributing qualifying company and the Commissioner of Inland Revenue, in relation to an investment in DIGITECH COMMUNICATIONS LTD.
2. The said SOLICITOR-GENERAL further charges that between the 21st of March 1996 and the 1st of April 2000, at Auckland and elsewhere PETER MICHAEL CONNOLLY, JOHN DONALD CURRIE, JOHN ANTHONY REID and PETER WILLIAM RUSSEL conspired by deceit, falsehood and other fraudulent means, to defraud both members of the public investing through a loss attributing qualifying company and the COMMISSIONER OF INLAND REVENUE in relation to an investment in New Zealand Investments Ltd.
[37] The Crown accepted, at trial, that the money laundering charges could only succeed if the accused were convicted on a relevant conspiracy charge. For that reason, the Judge focussed his reasons for finding the accused not guilty on the two conspiracy charges.
[38] With the benefit of hindsight, the way in which the conspiracy charges were drawn caused the case against the accused to be over complicated. Both conspiracy charges referred to an agreement to defraud both members of the public and the Commissioner of Inland Revenue. However, the case was put to Fogarty J on the basis that the accused agreed to make false representations to members of the public so that they may invest in the two investment schemes, with any fraud on the Revenue arising unwittingly from consequential steps taken by investors when returning their income.
[39] The way in which the two distinct allegations of fraud were elided in the indictment was a major source of the problem the Judge experienced in understanding the true nature of the Crown allegations. In an endeavour to simplify the issues, what follows is our analysis of the real nature of the charges brought.
[40] The Crown case was based on the fundamental premise that the four accused were promoters of investment schemes that were marketed to members of the public on the attractive basis that they would operate to minimise the investor’s tax obligations. NZIL was the holding company of Digitech. Members of the public were invited to subscribe for shares in Digitech and NZIL. Both were real companies with real businesses.
[41] Digitech was developing products to be used by people who leased circuits from telephone companies. NZIL owned several assets, including a product that had been invented with the aim of extending the life of car batteries. It was common ground that the financial prospects of both Digitech and NZIL turned on whether their products succeeded in their respective markets.
[42] A complicated scheme was devised to attract investors to acquire shares in each company. Like the trial Judge, we concentrate on the Digitech scheme in order to explain the nature of the arrangement offered.
[43] Each investor bought shares in Digitech. The shares were acquired over a 10 year period. Most of the purchase price was deferred, becoming payable in year 10.
[44] Each investor also acquired a loss of profits insurance policy. A non‑recourse loan was made to the investor on the security of a mortgage over the purchaser’s rights to the shares and the proceeds of the insurance policy. The documentation suggests that this policy was intended to compensate the investor if the shares had not reached a particular value by the time the final payments were to be made.
[45] Each investor entered into the transaction through a loss attributing qualifying company (LAQC) incorporated for the purpose. Specific provision is made for such companies in the tax legislation.
[46] The capital of each LAQC was $100. The purpose of acquiring shares through such a company was to take advantage of taxation advantages available to those who use a LAQC.
[47] On the conspiracy charge, the Crown focussed its attention on the money paid by each investor, through the LAQC, to acquire the insurance policy. The premium for each policy was $1,000,000 payable at the time the investor agreed to purchase the shares. Four percent ($40,000) of that cost was funded by the investor in cash, while the balance of $960,000 was funded through the non-recourse loan from the financier.
[48] The loan bore interest, with the consequence that, by year 10, the total indebtedness to the financier would be $2,800,000. The investor assigned to the insurer the right to complete the purchase of the shares in year 10, as well as the benefit of the insurance policy. In return, the lender promised not to sue the investor in the event that the securities did not cover the amount of the indebtedness.
[49] Over 70 investors elected to take advantage of this scheme. Few gave evidence at trial. For wholly understandable reasons, the Judge found that the scheme was uncommercial. In the costs judgment under appeal, R v Connolly (2006) 22 NZTC 19,844, Fogarty J said:
[10] The Crown’s case was that these astute people would not enter into transactions for tax advantage unless they were going to be effective. Effective here means withstanding scrutiny from the Inland Revenue Department, so that the transactions would not be identified as tax avoidance, [148]. To that end such commercial people wanted transactions which were or looked commercial, involved real money, and were not circular.
[11] However, what also should not be forgotten that in such transactions the dominant purpose is to reduce tax liability. Often the participants do not wish to take any investment risk other than an argument with the tax man. In other words, they are not intending to risk their capital in a commercial business venture. If they were, they would have no reason to be concerned about tax avoidance. No participant for risk free tax advantage can realistically expect the transaction to be in fact commercial. What the participant wants is for such transaction to look as though it is commercial. Risk free ‘investments’ usually require back-to-back deals, ie circularity, see Lord Templeman’s judgment in Challenge Corporation Ltd v CIR [1986] 2 NZLR 513, 562, [84].
[12] Like many of the schemes for tax advantage, Digitech and NZIL offered a magical result. For a payment at the end of the financial year of about $135,000, tax liability of the order of $300,000 disappeared overnight, see [22]. To put it another way, that meant that the would be taxpayer had in his or her hand about $160,000 odd in cash that he or she would not have had if he or she had simply paid tax and not entered into this arrangement. This was achieved by subscribing to shares in a highly speculative company, with almost all the purchase price postponed for ten years, supported by two quite extraordinary benefits. One was a loan of $1 million to the participants’ LACQ Company, of no worth, on a non-recourse basis, the lender taking as security the shares in the speculative investment and the benefits of an insurance policy. The second extraordinary contract was of a company issuing an insurance policy which promised a payment of about $3 million in ten years time should the speculative investment fail, setting as the premium a $1 million payment. See [8]-[16].
[13] Commercially it is very unlikely that a bank would place money at risk on such a transaction, nor do insurance companies usually take a bet on a speculative investment. Given the commercial improbability of the package it did not take much reflection to work out that there was likely to be a tie up between the loan and the policy. On the back of an envelope, one can work out that it is simply not commercially possible to prudently provide for the risk of the policy maturing by investing the premium of $1 million so as to accumulate $3 million within ten years from after tax earnings. One of the investors identified this unlikelihood with ease, see [153], [155].
[14] Finally, on the general context, I found that the participants were entering into transactions for tax advantage, [23]. That was a predictable finding. Such persons know that tax driven transactions tend to be very complex, if not mysterious, and are usually designed by experts. Most of the participants in the Digitech and NZIL schemes had also been investors before in an earlier and closely related scheme called Salisbury. This had been earlier promoted by Gosling Chapman, [121]. It is most unlikely that such participants would expect a promise or guarantee that the tax driven deal would be effective.
The square brackets used in Fogarty J’s costs judgment refer to the relevant paragraph of his acquittal judgment. Similar references to the acquittal judgment are made in other parts of the costs judgment which we set out later.
[50] The Crown case was that the whole arrangement was a “sham” because the arrangements were inherently fictitious and the cash contribution of 4% ($40,000 per investor) was obtained under false pretences.
[51] Initially, the schemes were marketed directly to partners of Gosling Chapman, a firm of chartered accountants based in Auckland. That firm had been involved in other schemes designed to provide similar tax advantages to clients. Notwithstanding its involvement in the marketing of the schemes, it was the firm of Gosling Chapman itself that made the complaint which led to the criminal investigation and the charges which followed. The Judge thought that the complaint may have been triggered by a perception by partners of the firm that they could be exposed to claims by their clients if loss was suffered by them in consequence of any decision of the Commissioner of Inland Revenue to set aside the deductibility of the insurance premium: see the acquittal judgment at [47].
[52] At the relevant time, Mr Russel was a partner of Gosling Chapman. As anticipated, Gosling Chapman introduced the scheme to their clients, with presentations of Digitech’s commercial products taking place in January, February and March 1995. Clients were taken to Milloy Reid Tong & Co Ltd, of which Mr Reid was a principal, for a presentation of Digitech’s commercial products.
[53] The Digitech investment was also introduced to clients of Gosling Chapman through a letter signed by Mr Russel, a partner in that firm. That letter enclosed some documentation and an opinion from Denham Martin & Associates, solicitors, Auckland on the taxation consequences of the scheme.
[54] The tax advantage promised was explained by Fogarty J in his acquittal reasons. His Honour said:
[22] … The tax advantage from this typical $1 million deal is that the shareholder of the LAQC is entitled to claim in year 1 an expenditure of $1 million in his tax returns. At the then prevailing tax rate of 33% it followed that if that person would otherwise have had an assessable income of $1 million and a tax liability of $330,000, his annual income would reduce to nil and thereby his tax liability vanish. In cash terms he would have expended $135,000 in year 1 to get into the scheme but avoided having to pay tax of $300,000 and so his cash position would be improved in the sum of $165,000. I was left in doubt as to whether this was explained as a tax timing difference, for the proceeds of the insurance policy would be taxable. But a number of the investor witnesses expected they could leave the policy with the lender and walk away if it was not worth their while to complete the purchase.
[55] The Judge found that all investors were, by definition, high income earners. Each was able to assess the value of the scheme or, at least, to obtain astute advice on it. Quite rightly, Fogarty J concluded that, without the promised tax advantage, the arithmetic made nonsense of the insurance policy. It is plain that each investor was acquiring the shares in Digitech in order to gain a tax advantage. No other purpose is plausible.
[56] In those circumstances, only two conclusions are open. The first is that the promoters of the schemes falsely led the investors to believe that the 4% contribution would be used to pay for the insurance premium. The second possibility is that the investors realised, because of the circuitous transactions represented by the documentation, that the 4% contribution represented nothing more or less than the price they expected to pay to obtain the tax advantage. If the latter proposition were correct, the investors must have intended that the promoters would receive the benefit of the $40,000 each paid.
[57] The accused were not charged with using a document with intent to defraud. Rather, they were charged with conspiracy to defraud. The crime of conspiracy is complete upon an agreement being reached among all accused (or some of them) to defraud one or more persons. Generally, see R v Gemmell [1985] 2 NZLR 740 (CA).
[58] If the investors were falsely led to believe that their 4% contribution would, in fact, be used to pay for an insurance premium and it could be proved beyond reasonable doubt that two or more of the accused were both promoters and parties to that agreement, the conspiracy charges could have been proved. But, if it were clear that the 4% contribution was the price to be paid to obtain the tax advantage, whatever the documentation may have revealed, there could be no conspiracy to defraud.
[59] The evidence led to support the money laundering charges demonstrated that significant amounts of the investors’ cash contributions were used for the personal benefit of some or all of the accused. On the Crown case, that was done deceptively whereas, on the alternative view, the investors must have realised that the promoters would gain personally from what was paid.
[60] However, as Fogarty J said, the Crown case was not put on so simple a basis. The Judge considered that the Crown case separated into three separate contentions. In [68] of his acquittal judgment, the Judge summarised those contentions as follows:
1.That the insurance and loan transactions were entirely fictional, because they were circular and were not real loans and real premiums. The meticulous and intricate documentation was a deliberately manufactured paper trail made to pretend that the structures underlying the template were legitimate and real and being implemented as required by the template.
2.The insurance and loan transactions were entirely fictional because the instruments used to settle the loan were defective or did not exist.
3.Members of the conspiracy made dishonest representations to the investors that the underlying loan and insurance transactions were real:
(a) The representations were made in letters, memoranda and by concealing the truth; and
(b) Were made in the contractual terms of the agreements executed by the investors.
In each case (a) and (b) so that the circular transactions without using real funds was dishonest conduct.
[61] Having read the opening and closing submissions of counsel for the Crown at trial, we agree with the Judge’s summary of the Crown case, as put to him.
[62] Although we have articulated an alternative basis on which the Crown case could have been formulated, we make it clear that we are not saying that such a case would, necessarily, have succeeded. All we are saying is that a prosecution based on that premise would have been brought reasonably, based on the investigations that the Serious Fraud Office had undertaken.
Competing submissions in outline
[63] Mr Farmer QC and Mr Ruffin, for the Crown, submitted that the Judge both erred in principle and gave excessive weight to factors favouring an award of costs. No issue was taken with Fogarty J’s approach to the exercise of the discretion, at least so far as his approach to the s 5 discretion was concerned.
[64] Mr Farmer submitted that the Judge failed to deal adequately with issues of disentitling conduct. He submitted that the Judge’s discretion was tainted by errors of law, particularly, as we apprehended it, by subdividing the Crown case into three propositions when the Crown obligation was to prove beyond reasonable doubt whether an agreement to defraud had been entered into by the accused. On Mr Farmer’s contention, to the extent that the Judge found that there was, at least, a prima facie case of dishonest misrepresentation, the accused’s conduct ought to have disentitled them from an award of costs.
[65] Mr Ruffin contended that the Crown’s appeal against the costs judgment ought not to be seen as a collateral attack on the acquittals entered by the Judge. In making that submission, Mr Ruffin emphasised that this Court ought not to be too timorous about reviewing the Judge’s costs decision having regard to the limited opportunity available to the Crown to appeal against the entry of verdicts of not guilty. As Mr Ruffin correctly submitted, a Crown appeal is limited to reservation of a point of law. The Crown had no ability to appeal on factual findings. For that reason, Mr Ruffin contended that a broader view of the appellate jurisdiction could be justified.
[66] In any event, both Mr Farmer and Mr Ruffin submitted that the focus was on the reason for awarding costs rather than on the reasons for acquitting each accused.
[67] Mr Gilbert carried the substantive burden of argument on behalf of all accused, while tailoring his submissions specifically to the position of Mr Reid.
[68] Mr Gilbert emphasised the advantages enjoyed by the trial Judge in exercising his discretion as to costs. The trial took place over about seven weeks. During that time the Judge gained a deep appreciation of the detail of the transactions, both from the voluminous documentary evidence and the oral evidence given. Those advantages cannot be replicated on appeal. Mr Gilbert also submitted that we ought to take care in revisiting factual issues on which the Judge relied in his costs judgment, as they were but selective extracts from the evidence to support a specific finding.
[69] Having made those introductory comments, it is fair to say that Mr Gilbert’s submission was, primarily, that the Judge reached the right decision on costs for the right reasons. In particular, Mr Gilbert relied on the Judge’s findings of inadequate investigation and the counter-intuitive nature of the Crown submission on the effect of the transaction, having regard to the overall purpose of marketing a tax mitigation scheme to investors.
[70] Mr Fulton, for Mr Connolly, adopted the legal submissions of Mr Gilbert. On factual points, he referred to Mr Connolly’s role as that of a “letter writer” with restricted knowledge of the overall effect of the transaction. Mr Fulton adopted passages from Fogarty J’s costs judgment to support those propositions.
[71] Mr Fulton submitted that the evidence was not sufficient, having regard to the quality of the investigation, to justify charges of conspiracy to defraud involving Mr Connolly.
[72] Mr Wicks, for Mr Currie, adopted, where applicable, the submissions made by both Mr Gilbert and Mr Fulton. He emphasised that any observations made by the Judge in relation to a prima facie case referred only to Mr Reid and to Mr Russel. He submitted that Mr Currie was not a promoter but purely a functionary in an off‑shore jurisdiction. The costs award in favour of Mr Currie should, in his submission, stand.
[73] Mr Russel was not specifically represented on appeal. Mr Russel is now bankrupt. Mr Gilbert conveyed to us that Mr Russel supported submissions in opposition to the appeal made by other counsel.
The Judge’s approach to the costs decision
[74] The Judge began his reserved judgment on costs by referring fully to s 5 of the Act. He also mentioned a number of judgments that suggest that it can be “a mistake to try to force particular circumstances” into one of the criteria set out in s 5(2): eg Solicitor-General v Moore.
[75] Fogarty J said:
[6] Hardie Boys J in R v Margaritis, High Court, Christchurch Registry, T66/88, 14 July 1989 said at p 8:
The various criteria in s 5 really come down to two questions: was the prosecution reasonably and properly brought and pursued; did the accused bring the charge on his own head.
And at p 2:
All this really means is that the Court has to do what it thinks right in the particular case.
[7] As the argument developed in this hearing the truth of Hardie Boys J’s propositions in Margaritis came home. Nonetheless, I do not read any of these authorities to displace the plain words of s 5(2), which impose a duty on the Court to have regard to the considerations set out in those paragraphs where appropriate. The case law emphasises that it is important for the Court not to lose sight of the fact that it is subs (1) of s 5 which gives the Court the power to make an order and provides that this power is discretionary. Before the Court can make the order the Court must be satisfied that any order be just and reasonable. The criteria in subs (2) follow a logical sequence. Broadly they proceed chronologically. They are intended to provide a structure of analysis to be adapted by the Court to the particular circumstances of the particular case.
[76] Next, the Judge considered relevant criteria set out in s 5(2). He made it clear that there was no allegation that the proceeding was conducted in bad faith, so it was unnecessary to address s 5(2)(a).
[77] The Judge considered together the s 5(2)(b), (c) and (d) factors. This discussion reduced to an analysis of the Serious Fraud Office’s investigation of the complaint and the quality of the evidence available to it when the charges were laid.
[78] It is necessary to set out in some detail the reasoning process that the Judge employed.
[79] By way of introduction, Fogarty J said:
[9] The consideration as to whether the prosecution had sufficient evidence to support conviction, in the absence of contrary evidence, is central to any application for costs. It is important to appreciate the context. The accused were being charged with a conspiracy to defraud a large number of successful commercial and professional people of the sum of $18.4 million. The setting of the case was in the world of wealthy persons who were seeking to enter into transactions for tax advantage so as to reduce their tax. At the heart of the conspiracy allegation was the proposition that there was a common intention among the accused to dupe these astute people.
[10] The Crown’s case was that these astute people would not enter into transactions for tax advantage unless they were going to be effective. Effective here means withstanding scrutiny from the Inland Revenue Department, so that the transactions would not be identified as tax avoidance, [148]. To that end such commercial people wanted transactions which were or looked commercial, involved real money, and were not circular.
[11] However, what also should not be forgotten that in such transactions the dominant purpose is to reduce tax liability. Often the participants do not wish to take any investment risk other than an argument with the tax man. In other words, they are not intending to risk their capital in a commercial business venture. If they were, they would have no reason to be concerned about tax avoidance. No participant for risk free tax advantage can realistically expect the transaction to be in fact commercial. What the participant wants is for such transaction to look as though it is commercial. Risk free ‘investments’ usually require back-to-back deals, ie circularity, see Lord Templeman’s judgment in Challenge Corporation Ltd v CIR [1986] 2 NZLR 513, 562, [84].
[80] The Judge focussed on inquiries made by both the Inland Revenue Department and the Serious Fraud Office in considering the quality of the investigation and the sufficiency of evidence. Fogarty J observed that the Serious Fraud Office had taken a different view of the revenue consequences than had the Inland Revenue Department, the latter’s position being evidenced by a Notice of Proposed Adjustment which had been scanned into Serious Fraud Office records on 16 April 2002.
[81] It is clear that the correspondence between particular accused and the Inland Revenue Department that led to the Notice of Proposed Adjustment caused the Judge some concern when he evaluated the quality of the prosecution investigation. His Honour said:
[27] The SFO seemed to have ignored the developments in the IRD position from the time that they began to pursue their investigation. Indeed, Mr Ruffin’s written submissions dispute Mr Gilbert’s argument that the original IRD and Gosling Chapman complaints constituted the basis of the charges. He said they did not, that the basis of the charges was the SFO investigation. I conclude that the SFO having begun its investigation kept it in-house and did not subsequently seek the assistance of the IRD.
[28] One can understand SFO investigators, not being tax experts, thinking they were looking at a fraud. But contrived artificial transactions created for tax advantage are full of pretence. Although said colourfully, Lord Templeman’s description of tax avoidance as a play scripted in advance is true, see reasons for judgment [83]. Such arrangements typically involve pretence, [84]. Under tax law there is a critical distinction drawn between tax avoidance and tax evasion. Transactions which are real are usually identified as avoidance rather than evasion. Transactions which are fictional are always identified as evasion. Because of the benign interpretation of s 99, [136]–[138], tax practitioners and their clients at that time knew that they could create artificial transactions for the purpose of obtaining tax advantage, with an element of pretence [139], but which would be tolerated by the Commissioner, [140].
[29] The investigators put a great deal of energy into tracing and proving control by Mr Reid of all the entities used in the transactions. Yet entities dealing with each other can be ultimately owned by a common person, without the transaction being other than avoidance at best or alternatively treated as legitimate. Company A, owned by X, can deal with company B also owned by X, ad infinitum, so long as the real and artificial persons intend to create legal rights and obligations. Schemes for tax advantage have been common place in New Zealand. It is naïve to assume that the transactions in the offshore legs are not meticulously planned and controlled back here in New Zealand.
[82] The Judge was also concerned with the failure to investigate adequately the significance of a notorised document which, at trial, the prosecution contended was fictitious. This document was central to the insurance issue. The submission that the document was “somehow manufactured by Mr Reid, Mr van der Rhee [a principal of the Dutch based insurer] merely being a pliant pawn” was described by the Judge as “a proposition flying in the face of the evidence”.
[83] The Judge described as “bold” the proposition that, from the outset, the intricate documentation used to facilitate transactions were “just a paper trail”.
[84] Having traversed those issues the Judge found that there was “plenty of evidence of deceptive correspondence between Mr Reid and Mr Connolly, in the name of various entities”. Further, the Judge found that “Mr Reid was going to considerable lengths to hide his ultimate ownership and control of the whole structure” and that there were “some rather unusual” transactions repatriating the proceeds of the insurance policy that were paid in cash from the ultimate corporate owner of the company issuing the policy, back to the accused”. However, the Judge did not place weight on that evidence because the “façade of correspondence in repatriation of funds was not before the investors when making their decision to invest”.
[85] Reflecting the view we have expressed about the nature of the fraud alleged, Fogarty J said:
[43] The case might have succeeded if the SFO could sustain the proposition that the scheme, even if technically real, had been misrepresented by one of the accused as to the participation of a bank, an insurance company, and the absence of circularity.
[44] The private façade correspondence and repatriation of funds should have been examined carefully in the context of considering whether or not that documentation was prepared in order to deceive the Commissioner of Inland Revenue, and ironically to help protect the taxpayer participants in the schemes. But the case was never focussed that way and as observed in the reasons for judgment, the SFO deliberately elected to present the case as a fraud on these participants and only consequentially upon the Commissioner.
[86] In relation to s 5(2)(b), (c) and (d) considerations the Judge concluded:
(a)The prosecution did have sufficient evidence to consider seriously asserting dishonest representations, including concealment of material facts. In that sense, the third limb of the prosecution case (see [59] above) was “on its own a prima facie case, but just”.
(b)The other two limbs, also set out in [64] above, on which the prosecution placed primary weight were both counter-intuitive and not supported by the Inland Revenue Department. Accordingly, in respect of those two limbs, Fogarty J inferred that the Crown did not take proper and sensible steps to check the theory of the case with the Inland Revenue Department. He considered that, had it done so, a more focussed approach was likely, based on the dishonest representation limb.
(c)Had the Serious Fraud Office carried out a more detailed investigation, in conjunction with the Inland Revenue Department, closer scrutiny might have been placed on the role of partners of Gosling Chapman. The Judge was impressed with the cross-examination of one of the Gosling Chapman partners, by Mr Gilbert on behalf of Mr Reid, that exposed deficiencies in the Crown case so far as the knowledge of partners of Gosling Chapman (the complainants) was concerned. Nevertheless, the Judge thought that, “treating the [Serious Fraud Office] tenderly, a reasonable investigation [on that issue] may not have exposed the facts with the clarity achieved by Mr Gilbert in his cross-examinations”.
[87] Next, the Judge considered whether the charges were dismissed because the defendant established, by cross-examination of witnesses, that he was not guilty: see s 5(2)(f). After discussing the role of Gosling Chapman and the participation of one of their partners (the accused Mr Russel), the Judge expressed the following views:
[52] There is no doubt that the cross-examination of witnesses for the prosecution by Mr Gilbert for Mr Reid, destroyed the prosecution case, inasmuch as it rested on dishonest representations to Gosling Chapman. See [118]-[182]. By cross-examination Mr Gilbert established numerous points, of which the following stand out as being probably the most critical:
· That a partner of Mr Russel, Mr McGrath, had in February 1995, before the transactions were entered into, been in the offices of Insinger de Beaufort [the insurer] and likely knew that the insurance company was not an established institution and would likely be a paper company, see [128]-[133].
· Internally Gosling partners were discussing the insurer’s identity and one of their partners, Mr Walker, had identified as a critical question to ask MTR for an assurance that there would be no circularity in cashflows. There was no evidence that Gosling Chapman asked the question, see [134]; [156]- [158] and [177].
· The tax lawyer, Mr Sidnam, (at that time an employee of Denham Martin) who wrote the opinion of Denham Martin, knew before the transaction was done, probably around the time the opinion was written, that there was likely to be a relationship between the insurance company and the bank. See [149]-[152] and [206].
As a result of these points being established during the trial, it became unlikely that Gosling Chapman as a firm were being or had been duped.
[53] Mr Gilbert also exposed that Gosling Chapman had an incentive to sell the scheme to the investors, deriving commission from the sales, worth in the end $1.2 million [125].
[54] Given that the prosecution case for deception essentially depended on proving beyond reasonable doubt that the accused deceived all the partners of Gosling Chapman except Mr Russel (who was one of the accused), as a result of these points being established the case for deception of the investors collapsed.
[88] The Judge then considered whether the behaviour of a defendant in relation to the acts or omissions on which the charge was based was such that a sum should be paid towards the costs of defence: s 5(2)(g). Two propositions were advanced before Fogarty J on this issue. The first was that the evidence available to the Serious Fraud Office justified prosecution in the first instance. The second was that the accused brought the prosecution upon themselves by their own conduct.
[89] The Judge was partially persuaded by the first proposition. However, he regarded the prejudicial character of the evidence adduced as depending upon its use to buttress the argument that all documentation was a paper trail, including the transactions themselves. The Judge thought that when the first two limbs of the prosecution case fell away, the private façade material lost impact.
[90] While accepting that there may have been a case for using this material to lay charges directed to deceiving the Commissioner of Inland Revenue rather than the investors, the prosecution elected deliberately to lay charges on the basis that the accused deceived the investors and, only consequentially, the Commissioner of Inland Revenue.
[91] The Judge took the view that, at least to some extent, the accused brought the prosecution on their own heads. We refer to [65] of the costs judgment which we set out in [92].
[92] After, the Judge stood back to assess whether an award of costs was “just and reasonable” in terms of s 5(1). Ordinarily, we would summarise the Judge’s reasons for holding that an award of costs was justified. However, as we are differing from the Judge, we consider it preferable to set out his reasons at length:
[61] I do not think that the prosecution was reasonably and properly pursued. Had it been, I do not think that the SFO would have pursued a case contrary to the position being taken by the IRD. However, the case could have been refocused solely onto the third limb. This case would have been much simpler. It would have been contending that whether or not the transactions were valid, they were not the sort of transactions promised to the investors. It would not have been necessary for the Crown to argue that the transactions were a paper trail, or otherwise fictitious. Rather, the argument would have been that the transactions put in place were not the transactions promised. Such a case could have been presented in a shorter period of time.
[62] All that said, had the Crown focused the case in this way it is likely that the investigators would have put more energy into examining the relationship between Mr Reid’s firm, Milloy Reid Wong and Gosling Chapman and then to the investors. By contrast [an SFO investor’s] energy appeared to be largely devoted to pursuing proof that the entities used in the transaction were always under the control of Mr Reid. An IRD investigator would have been able to tell him this was probably going to be the case anyway. As already noted, that is not a reason for finding that the transactions were fictitious.
[63] Messrs Russel and Reid could have revealed their argument involving Mr McGrath to the SFO, prior to trial. In a real sense the prosecution case was ambushed by Mr Gilbert. The Crown case seemed to have been caught by surprise, not having picked up the clues from the IRD Helvita SOP.
[64] Mr Gilbert would have had his reasons for not exposing pre-trial the McGrath issue, and then the related significance of Mr Sidnam’s interview of the IRD and Mr Walker’s internal questioning. He may have reasoned that the SFO were committed to pursuing the case, whatever information he gave them. I allow also for the possibility that the detail of this argument may only have been assembled by Mr Reid and Mr Gilbert in preparation for the case.
[65] In the absence of a failure to intervene in this respect (I keep in mind that Mr Reid certainly intervened by detailing to the SFO the technical character of the transactions), all the accused to an extent brought the case on their heads.
[66] Mr Reid went to considerable lengths to conceal his control of the entities and to manufacture correspondence between the entities. Such correspondence is unnecessary for tax compliance, as the IRD at the time would have been focussing on whether or not the transactions were actually put in place. Mr Reid gave as his reason that he wanted to protect himself from possible litigation by disappointed investors some time in the future. That was a concession relied upon by the prosecution in the trial. But it did not, either alone, or in combination with the other events, prove fraud. Participation by any taxpayer in an arrangement which has the principle purpose to obtain a tax advantage is always a high risk exercise. Taxpayers run the risk of incurring penalties. Promoters of such arrangements, in a kind of retail environment as here, must always be wary of some investors being disappointed if the risks they have taken mature. That can happen independently of any deceit. The correspondence that Mr Reid put in place disguising his control of the entities and creating the appearance that some of the entities were independently managed by Mr Connolly, was not obviously correspondence written for the eyes of the investors. In a real sense the correspondence could be presented, and was, as a back-up play to be utilised should some of the investors get disgruntled in the future.
[67] Mr Russel was intimately involved in the decision by Gosling Chapman to pass on the Salisbury template to Milloy Reid Wong and signed the letter of 25 January. He accepted that he received a $600,000 payment by secret payments which were concealed from Gosling Chapman and the Inland Revenue Department. To a degree Mr Russel brought the litigation on himself. To his credit he gave two voluntary interviews to the SFO in July and November of 2001. He obviously knew the main character of the transactions and the fact that the settlements would take place in Hong Kong. He admitted that he was involved in some deception in repatriating proceeds back to New Zealand.
[68] Mr Connolly also took significant risks in writing letters at the dictation of Mr Reid. He must have known that a lot of the content of that correspondence was to a degree deceptive. Like all the accused he would have known at the very least that he was involved in a complex structure for tax advantage and as such there are always risks of investigation by the authorities. That said, there was no proof at all that he was aware that he was participating in a fraud of the investors.
[69] Similarly in the case of Mr Currie, he knew he was putting in place transactions for tax advantage, an exercise inherently risky vis-à-vis the Inland Revenue Department, for the participating taxpayers. However, there was no proof that he could have thought he was involved in a scheme which was dishonestly deceiving these taxpayers and thereby putting their assets at risk. The Crown say they had inadmissible evidence that he had advised Mr Reid that he did not think the transaction would be tax effective. Even if he did say that, that was his opinion as a functionary in Hong Kong. That does not make him a co-conspirator. It does not prove a common intent to deceive. Transactions having no commercial purpose except for tax advantage are always in peril of being set aside by the Commissioner. Everybody knows that. The functionaries know that somewhere along the line there will have been a judgment call made by experts involved as to whether or not it will work. Or, perhaps more materially, whether or not it will be sufficiently defensible as to protect the taxpayers from penalties in the event that it is set aside. See reasons for judgment [148].
[70] Had the Crown case focused on the third limb, and been pursued with that focus, it is less likely that Mr Currie would have been arrested and charged as a co-accused. In that sense, of all the accused he least brought the charge on his head.
“Just and reasonable assessment”
[71] As noted in paragraph [5] above, in Moore the Court of Appeal per Keith J warned that it is a mistake to try to force the particular circumstances into one of the paragraphs of s 5(2). I have followed the method of considering each one of these paragraphs. I note here that I have considered subs (e) as to whether or not the acquittal was technical. It should be obvious that I am of the view that it was not. The exercise of considering each particular circumstance is to my mind mandated by s 5(2). But it is difficult to consider the particular circumstances separately. Ultimately one returns back to s 5(1), to a decision as to what is just and reasonable.
[72] In forming this judgment it is important to keep in mind subss (3), (4) and (5). There is no presumption either way. The defendant does not get costs only by reason of the fact he has been acquitted or discharged and, perhaps most significantly here, no defendant shall be refused costs under this section by reason only of the fact the proceedings were properly brought and continued.
[73] Having found that the Crown did have a prima facie case under the third limb, I have considered whether or not thereby the defendants should be refused costs. I place particular weight on subs (5) in saying that that of itself is not a reason for refusing costs.
[74] As this judgment has indicated, I am troubled by the decision of the SFO to pursue this case independently of the developing position within the IRD. I think that was not appropriate, and that the SFO has put the accused to unnecessary cost. It made the case needlessly more expensive, because it led the SFO and the accused to pursue and master a great deal of detail as to the transactions, which was unnecessary.
[75] The accused, to a degree, kept their powder dry until the trial. That is, to a degree, understandable, given that their liberty was at stake, not to mention their professional reputation. Although their professional reputation was earlier tarnished when they were arrested and charged.
…
[89] With all these cautionary thoughts in mind, I am of the view that it is just and reasonable that the accused obtain a contribution to their legal costs. This is principally because the SFO elected to pursue a case without regard to the developing views of the IRD on the same subject matter. (our emphasis)
[93] The Judge explained the basis upon which he proposed to make orders for costs. While we have summarised those views earlier we set out below what the Judge said:
[94] In these proceedings on costs I have found that both Mr Connolly and Mr Currie were involved in risk taking activities, which materially affected the judgment of the Crown in bringing the case against them. On the other hand, at the conclusion of the trial I found positively that there was no proof at all against Messrs Connolly and Currie, see [206]. I consider that both those accused are entitled to retain the benefit of that finding. Their conduct gave rise to scrutiny, but it should not have led to them being charged with the other two accused. Accordingly, I think it is just and reasonable that they recover their solicitor and counsel’s costs for the whole proceedings, except the admissibility issue, at the Crown rate, according to the Crown standards for allowance and assessment of time engaged. If there is a Crown limit on preparation hours that limit applies. The principle is that the Crown rate and method of calculation governs the calculation. I will return to the calculation at the end of the judgment.
[95] Turning to Messrs Reid and Russel, the Crown had a prima facie case on the third limb against both of them, which was so severely critiqued by Mr Gilbert for Mr Reid that the Crown case collapsed. That critique, however, relied on a grasp of the detail of what had happened which was not disclosed by Mr Reid in respect of third limb matters prior to the hearing, nor by Mr Russel.
[96] I think it is just and reasonable that Messrs Russel and Reid obtain a contribution to their costs by reason of the Crown pursuing limbs 1 and 2 of the case inappropriately. Treating that as half the proceedings, I think they should recover a sum calculated using the Crown rate, for half of the time which the Crown method of calculation would allow for the whole. Second, in respect of limb 3, Messrs Russel and Reid should recover half of the sum calculated aforesaid in respect of limbs 1 and 2. Both calculations should exclude the admissibility issue. (our emphasis)
Did the Judge err in exercising his costs discretion?
[94] In our view, the Judge erred in exercising his discretion in two ways:
(a)First, by subdividing the Crown case into three limbs, he changed the focus of his inquiry from whether prosecution of the conspiracy charges was justified to whether the Crown could have succeeded in proving the charges on each theory of the case.
(b)Second, the Judge failed to take account, in making what was a significant order for costs, the public interest in not inhibiting prosecution of serious crime through disproportionate adverse costs orders.
The first error, in our view, amounted to an error in principle, while the second was a failure to take account of a relevant factor. Both errors, applying the principles identified in Shirley, justify appellate intervention.
[95] On the issue of principle, the Judge referred, on a number of occasions, to the Crown “pleading” certain allegations, a term which is not particularly apt in a criminal case. Rather, the Crown’s case contained a number of limbs, in an evidential sense. The Judge divided the Crown case into three component parts, reflecting those evidential limbs.
[96] The Judge’s approach reflects the way in which costs might be determined in a civil case. Often, consideration will be given to particular causes of action pleaded and whether they succeeded or failed. On occasion, even though a plaintiff may have succeeded overall, some costs will be disallowed on the basis that a particular cause of action could not have succeeded or was unnecessary duplicitous, resulting in wasted time and cost. That approach is not appropriate in a criminal proceeding in which costs do not generally follow the outcome.
[97] The Crown charged each accused with two counts of conspiracy. What the Crown had to do was to prove, beyond reasonable doubt, that each of the accused agreed to defraud the investors. This reflects the inquiry under s 5(2)(b), which is directed at the sufficiency of the evidence to support “the conviction” rather than the avenues pursued to obtain a conviction. That inquiry, although one of degree, is not qualified or restricted in such a way as to permit the division of the Crown case into separate “stand alone” limbs. Nor does it permit an assessment of the evidential sufficiency of each individual limb in isolation.
[98] Put another way, had the Judge convicted the accused on the basis of the allegations summarised in his third limb (see [60] above), there would have been no jurisdiction for the Judge to make a costs order in favour of the accused for wasted time on the first and second limbs. That is because s 5 applies only to a successful defendant. A conviction based solely on arguments advanced in relation to limb three would have precluded an application for costs based on failure to prove other particulars on which the charges were brought.
[99] Our second concern is that the Judge failed to consider whether an order for costs would act as an incentive or disincentive to appropriate prosecutorial behaviour. This, in our view, was an important aspect of the exercise of the discretion, particularly because of the involvement of the Serious Fraud Office.
[100] The Serious Fraud Office’s role is to investigate and prosecute serious or complex fraud. If a significant order for costs were likely to result in too cautious an approach being taken in respect of future investigations, the public interest in the detection, investigation and prosecution of serious or complex fraud would not be advanced.
[101] The Serious Fraud Office Act 1990 was enacted to create a specialist organisation to investigate and prosecute serious or complex fraud. It was passed amidst widespread concerns about the standards of corporate governance and financial reporting following the October 1987 sharemarket crash. Its provisions make it clear that extensive powers are reposed in the Director of the Serious Fraud Office to facilitate compliance with the objectives set out in the Long Title to the Act.
[102] The Long Title to the Serious Fraud Office Act emphasises that the Act was passed to “facilitate the detection and investigation by the Serious Fraud Office of cases of serious or complex fraud” and “to enable proceedings relating to such fraud to be taken expeditiously”.
[103] The term “serious or complex fraud” is expressly defined in s 2 of the Serious Fraud Office Act to mean:
Serious or complex fraud includes a series of connected incidents of fraud which, if taken together, amount to serious or complex fraud.
[104] By its very nature, serious or complex fraud is likely to require thorough investigation. The convoluted nature of documentation, which (in a case like this) purports to record in commercial language what are, in fact, artificial and uncommercial arrangements designed to secure tax advantages, causes problems to the best fraud investigators. Ultimately decisions to investigate further or to prosecute will turn on an evaluation of whether evidence of intent can be drawn by inference from proven facts. Those who are alleged to have been engaged in a conspiracy are unlikely to have written down the terms of their agreement. Often, the nature of any agreement reached can only be proved by inference from other established facts.
[105] In those circumstances, there is a need to take care to ensure that a significant order of costs does not inhibit the prosecutorial function. It is in the public interest that serious or complex fraud be identified and prosecuted, notwithstanding the difficulties of proof in many cases.
[106] An analogy can be drawn with the Court’s approach to other cases involving serious crime in which the prosecution has proceeded to trial. Costs are rarely ordered in such cases. By way of example, we refer to R v Sotheran HC PN T31/00 2 May 2002 at [34] and [42], in which an application for costs by an airline pilot acquitted on a charge of manslaughter was refused.
[107] At a conservative estimate the award of costs to the respondents in the present case is likely to exceed $500,000. In relative terms, the award is significant. The Annual Report of the Serious Fraud Office for the year ended 30 June 2005 (the year during which the present prosecutions were brought) discloses budgeted expenditure for the investigation and prosecution of complex and serious fraud at approximately $4.8 million. The significant dollar amount of the award combined with the expenditure incurred by the Serious Fraud Office in preparing and presenting its own case is likely to have a considerable economic impact on the Office. There is at least a risk that the Serious Fraud Office’s prosecutorial discretion would be inhibited. In light of that risk, careful consideration must be given to the need for an award of costs (or the quantum of any award) given the principle that acquittal alone does not justify an order: s 5(4).
[108] For those reasons, we find that the possibility of a significant award of costs inhibiting that important public interest function was a relevant factor that was not, but ought to have been, considered in determining whether an award of costs was a proportionate response to the Judge’s concerns about the adequacy of the Serious Fraud Office’s liaison with the Inland Revenue Department.
[109] We add, for the sake of completeness, that had the exercise of the discretion been justified, it would have been open to the Judge to apportion costs based on wasted time.
Re-exercise of costs discretion
[110] Having held that the Judge erred in principle in the manner set out in [90], two options are open to us. Either we could remit the costs issues to Fogarty J to reconsider or we could exercise the discretion afresh.
[111] As in Moore, we prefer to exercise the discretion rather than to remit. Certainty and finality is required.
[112] In our view, the positions of Messrs Reid and Russel differ significantly from that of Messrs Connolly and Currie.
[113] Even though we have held that the Judge erred in principle, we recognise the undoubted advantages he enjoyed in presiding over a lengthy trial. So far as Messrs Currie and Connolly are concerned the Judge, while taking the view that they were involved in risk taking activities, found positively at the end of the trial that there was no proof at all against them. That finding was one which was expressly recognised by the 1966 Committee (see [21] above) as justifying an award of costs.
[114] We are not prepared to disagree with the Judge’s view that there was no proof against those accused. Nor are we prepared to differ from his view that they should receive some costs. In our view a fixed sum should be ordered, representing both costs and disbursements, to ensure that all issues are finally resolved.
[115] We have taken into account the factors identified by Fogarty J and also the need to avoid the possibility of inhibiting the exercise of proper prosecutorial function. We regard the latter factor as weighty in this case, particularly having regard to the budgetary issues identified in [107]. We take the view that both Messrs Connolly and Currie are entitled to receive a global contribution towards their costs and disbursements of $50,000 each. In our view, that order reflects adequately the findings made by Fogarty J in respect of their alleged involvement and, in terms of the policy factors we have identified, operates to remind the Serious Fraud Office of the need to have adequate evidence to implicate an accused in an alleged crime.
[116] The position is different so far as Messrs Reid and Russel are concerned. The Judge took the view that only limbs one and two were pursued inappropriately as against them. We do not consider that that view justified an order for costs in their favour as, implicitly, the Judge found that it was appropriate to prosecute on the basis of the third evidential limb identified.
[117] It was only the cross-examination of counsel for Mr Reid that led the Judge to the view that the Crown case against them on the “third limb” collapsed. Further, the Judge took the view that they could have revealed their argument prior to trial and, in a real sense, the prosecution case was ambushed by cross-examination: see [63] and [95] of the costs judgment.
[118] In our view, in a real sense, both Mr Reid and Mr Russel brought the charges on their own heads. Further, an award of costs in their favour could, inappropriately, lead to greater caution being exercised in the investigation and prosecution of alleged serious and complex fraud, something that we do not regard as in the public interest. In those circumstances, we conclude that neither Mr Reid nor Mr Russel should receive costs.
[119] We add one final general observation. In all cases of serious crime it is important that the Courts take a consistent approach to the exercise of the costs discretion. In each case the discretion must be exercised based on relevant factors. There can be no presumption that cases in which an accused necessarily incurs significant costs to defend a prosecution will more readily give rise to an adverse order against the Crown. Such an approach would be inconsistent with s 5(3) and (4) of the Act.
Result
[120] The appeal is allowed. The costs orders made by Fogarty J are set aside. In lieu thereof, the application for costs made by Messrs Reid and Russel is dismissed. On the applications of Messrs Connolly and Currie a global award of costs, in the sum of $50,000, is made in favour of each of them.
[121] We make no order as to costs on the appeal.
ELLEN FRANCE J
[122] I take a different view from the majority as to the outcome of the appeal. I consider that the decision to make an award of costs was one open to the Judge and there has been no error in the approach to the exercise of the discretion under s 5 of the Costs in Criminal Cases Act 1967.
[123] Fogarty J essentially gives two reasons for his decision. The first of these is that the way in which the Crown approached the prosecution was unduly complex and so unduly costly. This was not a question of good faith but rather of taking the wrong route in the context of a prosecution. The particular concern highlighted by the Judge was the focus on all of the transactions rather than pursuing the rather more simple proposition that what the investors got was not what they signed up for or alternatively, the Judge suggests, an allegation of fraud on the Commissioner of Inland Revenue.
[124] It is in this context, as I apprehend it, that the majority criticises the reference by Fogarty J to “pleadings” and to the “limbs” of the Crown case. The majority says that the Judge has approached the matter in a manner akin to civil cases.
[125] I consider that the Judge has essentially made an assessment about the level of complexity engendered by the prosecution’s approach. The position the Judge was in, after a lengthy hearing of a complex matter, has enabled him to differentiate between aspects of the Crown case in the way he does. Viewed in this way, the reference to the “pleadings” or to the three “limbs” of the Crown case does not reflect any fundamental error.
[126] The second reason given by the Judge for the costs award is that the Crown did not have regard to the changing position of the Commissioner in a case where the allegation was that a tax scheme was a fraud and the Commissioner was moving to the view that the scheme was tax effective.
[127] The Crown on appeal is critical of the evidential basis for the conclusion that the Commissioner’s view was changing and questions the relevance of that view. The Judge saw the relevance of the Commissioner’s view as two-fold. First, he considered it would have opened up additional lines of inquiry and drawn out facts that did not otherwise become apparent until the cross-examination by Mr Reid’s counsel of Crown witnesses. The Judge gives specific examples of this. Second, Fogarty J took the view some reference to the Commissioner’s approach would have assisted in narrowing the focus of the prosecution. Again, the reasons for that are explained.
[128] I do not see any reviewable error in the Judge’s assessment of the merits of these inquiries.
[129] Finally, I do not agree that the Judge has erred in this case in omitting specific reference to the disincentives of a costs award on the prosecution function. The Judge does say there is a need to treat the Serious Fraud Office “tenderly”. That reference picks up a submission made by the Crown in the costs hearing that “the courts have recognised that, because prosecutions are brought in the public interest, they should be treated “more tenderly” from a costs point of view…”. The adoption of the Crown rate and the decision not to award any costs for the pre-trial hearing are also consistent with an appreciation of the public interest. More importantly, it is implicit in the consideration the Judge gave to the s 5 factors that the public interest aspect has been taken into account. Why else would the Judge give weight, for example, to his belief there was a basis for investigation?
[130] I add that I do not consider that the approach in Shirley v Wairarapa DistrictHealth Board [2006] 3 NZLR 523 (SC) alters the settled approach to the scope of the discretion under s 5.
[131] In my view, the decision under appeal is a careful and reasoned judgment by a trial Judge who has treated the question of costs as a related but fresh and separate issue from the acquittals. I would dismiss the appeal.
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