The Queen v Eide
[2004] NZCA 215
•8 September 2004
IN THE COURT OF APPEAL OF NEW ZEALAND
CA77/04
THE QUEEN
v
JAMES CHAPMAN EIDE
Hearing:4 August 2004
Coram:Hammond J
William Young J
Chambers JAppearances: L A Andersen and W H Henderson for Appellant
M J Grills and J L Mullineux for Crown
Judgment:8 September 2004
JUDGMENT OF THE COURT DELIVERED BY WILLIAM YOUNG J
Table of Contents Paragraph Number INTRODUCTION [1] BACKGROUND [4] THE JUDGMENT OF THE DISTRICT COURT JUDGE [18] OVERVIEW OF THE CASE [23] THE NATURE OF THE INVESTMENT SCHEME SOME GENERAL COMMENTS [26] STEP ONE – INTELLECTUAL PROPERTY RIGHTS ARE
ACQUIRED[29] STEP TWO – THE ON-SALE TO FCML [30] STEP THREE – THE FORMATION OF THE JOINT VENTURE [32] STEP FOUR – THE “CREATION” OF ANOTHER 50 PARTS [35] STEP FIVE – THE PRIVATE OFFER MEMORANDUM [36] SOME LOOSE ENDS [41] TAXATION CONSIDERATIONS [42] REPRESENTATIONS MADE BY THE PRIVATE OFFER MEMORANDUM AS TO THE ANTICIPATED FLOW OF FUNDS [44] WAS THE PRIVATE OFFER MEMORANDUM FALSE? [47] DID THE APPELLANT ACT DISHONESTLY? [59] APPEAL AGAINST SENTENCE THE JUDGE’S SENTENCING REMARKS [79] THE ARGUMENTS FOR THE APPELLANT [82] RESPONDENT’S REPLY [85] DISCUSSION [87] RESULT [98] Introduction
[1] In February this year Judge Saunders, sitting without a jury in the District Court at Dunedin, found the appellant guilty on a count laid under s 229A of the Crimes Act 1961 alleging the use of a document (namely a private offer memorandum dated 2 December 1996) with intent to defraud. The Judge acquitted the appellant on an alternative count laid under s 250 of the Crimes Act in relation to the same document and a further count of attempting to obstruct the course of justice.
[2] Judge Saunders subsequently sentenced the appellant to two years and three months imprisonment.
[3] The appellant now appeals against his conviction and sentence.
Background
[4] This case arises out of the proposed development of a smart card. The idea was to promote a card which could be used to make purchases with participating merchants and which would result in a proportion of what was paid being credited to the card holder’s account with a superannuation fund. The scheme was to be carried out by a joint venture.
[5] The appellant is a former solicitor. At all material times, he was an undischarged bankrupt. Despite this disadvantage, he was able to participate in an active way in the promotion of the joint venture. Also heavily involved in the scheme were two other people, Mr Brent Gilchrist, an accountant and Mr Gordon Stewart, a practising solicitor and experienced company director. We note that Mr Gilchrist was also an investor in the scheme.
[6] The legal structure associated with the joint venture meant that Mr Stewart had primary legal control. He was the sole director of Future Card Management Limited (FCML) which was designated as manager of the joint venture. The evidence, however, showed that on issues which were fundamental to this case, Mr Stewart acted on the instructions of the appellant. Mr Gilchrist’s involvement was primarily as to the taxation implications of the scheme.
[7] We will discuss the detail of the scheme shortly. At this point in the judgment it is sufficient to note that FCML entered into an agreement to acquire software and other assets from New Zealand Super Card Company Ltd (which was also known as New Zealand Sharp Card Ltd and to which we will refer as “NZSCL”) for $39,500,000 and other intellectual property for $500,000. The purchase price was payable on deferred terms. It was anticipated that this transaction would result in an input tax GST credit of approximately $4,400,000 which, after payment of fees, would leave around $4,000,000 available for working capital purposes and that another $3,000,000 would be obtained from investors who would receive substantial tax benefits.
[8] The scheme was marketed from late 1996 or early 1997 pursuant to the private offer memorandum of 2 December 1996. This private offer memorandum sought investments totalling $3,000,000 in the scheme. In return for their investments, investors were to become members of the joint venture. The appellant was actively involved in this marketing exercise and used the private offer memorandum for this purpose.
[9] Investors would appear to have been primarily interested in taxation benefits (which, as promoted, would have been spectacular) and this meant that there was less focus than might otherwise have been expected on the underlying commercial merits and indeed the legal structure of the scheme. However, one of the investors, Mr Robert Warburton, a solicitor who had acted for the appellant in relation to his bankruptcy, did take the trouble to work through the details of the scheme and to discuss his understanding with the appellant.
[10] In the end, a little under $1,000,000 was obtained from investors. Approximately $650,000 of this money was applied for the benefit of entities or parties that the appellant was associated with. There may be scope for debate whether all of this money should be regarded as having been applied for the personal benefit of the appellant, but much of it was. For instance, $330,000 was applied to discharge a mortgage over the house in which he and his wife lived. This house was owned by a trust associated with the appellant. The rest of the money obtained from investors was dissipated in fees charged by others involved, particularly Mr Gilchrist (who was paid around $230,000) and Mr Stewart’s company (which was paid $130,000).
[11] The mechanism by which the appellant obtained payment was simple enough; he gave directions to Mr Stewart which Mr Stewart complied with. The first tranche of money totalling approximately $340,000 was obtained in this way on 7 February 1997. The appellant used the bulk of this money ($330,000) to repay the mortgage which we have mentioned.
[12] The claim for the GST refund was made by a return dated 27 November 1996. The claim was for $4,388,888.89 (and was in relation to $39,500,000 of the purchase price payable by FCML to NZSCL). The Commissioner of Inland Revenue decided to review the claim and steps were taken to prevent automatic payment. FCML was notified of this by letter of 29 November 1996. By mistake, however, the Commissioner issued a cheque to FCML for $4,464,642,31 (being the amount claimed and interest) and this cheque was presented by FCML on 4 June 1997.
[13] It is fair to infer that the appellant recognised that the cheque had been paid by mistake and that, the Commissioner would in due course appreciate his mistake and seek to recover the money. Mr Gilchrist was paid a “success fee” in relation to the payment of the refund and steps were put in place to have the balance of the money transferred to the Channel Islands. As it turned out, the Commissioner was able to stop this transfer and eventually was able to extract from FCML $4,447,884.84, ie nearly all of the money which had been mistakenly paid over.
[14] The scheme was a complete disaster. As noted, the GST refund, although initially obtained, was required to be refunded. All the money obtained from investors was either mopped up in fees or paid away to entities which were associated with the appellant. None of this money was ever repaid. It transpired that NZSCL had not acquired any relevant software or intellectual property. For this and other reasons, the Commissioner of Inland Revenue disallowed all deductions claimed by investors who have also been subject to substantial penalties.
[15] For some years attempts were made by Mr Warburton, among others, to salvage something from this mess. He continued to be associated with the appellant. There is no need to record in this judgment the detail of what happened save to note that from time to time, and particularly in October 1999, Mr Warburton and others made inquiry of the appellant as to what had happened to the investors’ money. The appellant’s responses were obfuscatory.
[16] The gravamen of the case against the accused is that he marketed the scheme using the private offer memorandum in a way which fraudulently misrepresented the intended and actual cash flows associated with the investors’ money. The Crown case was that the private offer memorandum represented that the intention of the promoters of the scheme was that the money raised from investors would become the working capital of the joint venture whereas what was intended was that the money contributed by investors would be diverted to the benefit of entities associated with the appellant.
[17] If the appellant made a statement to the Serious Fraud Office by way of explanation of the allegations against him, it was presumably under s 9 of the Serious Fraud Office Act 1990 as it was not produced. He did not give evidence at trial. Accordingly the case fell to be determined on the basis of the primary facts proved by the Crown and, particularly, the inferences which were available from those facts.
The judgment of the District Court Judge
[18] The appellant’s trial started on 16 February this year and did not conclude until 26 February. The Judge delivered his judgment on 27 February.
[19] The judgment was in short form and this has caused us some problems in dealing with the appeal.
[20] We recognise that a trial Judge hearing a criminal trial without a jury will usually deliver judgment in the style which was seen as appropriate by this Court in R v Connell [1985] 2 NZLR 233. This Court indicated (at 237-238) all that is generally required is:
… a statement of the ingredients of each charge and any other particularly relevant rules of law or practice; a concise account of the facts; and a plain statement of the Judge's essential reasons for finding as he does. There should be enough to show that he has considered the main issues raised at the trial and to make clear in simple terms why he finds that the prosecution has proved or failed to prove the necessary ingredients beyond reasonable doubt. When the credibility of witnesses is involved and key evidence is definitely accepted or definitely rejected, it will almost always be advisable to say so explicitly.
Those remarks were made, as the Court recognised at 238, at an early stage “in the history of Judge-alone jurisdiction in trials on indictment in New Zealand” and were not “meant to be exhaustive or the last word on the subject.” Underpinning the approach then taken were two inter-related considerations: first, a Judge’s decision in such a case is technically a verdict; and, secondly, the rights of appeal in relation to such a decision are the same as those which apply to jury verdicts. It may be that these considerations do not justify current practice and this Court may have to consider whether the Connell approach continues to be appropriate.
[21] The problems with short-form judgments are particularly acute in fraud prosecutions. The parties (ie the prosecutor and accused) are obviously entitled to know the key elements of the Judge’s reasoning. In a case of any complexity, this will not be possible unless the Judge provides an adequate survey of the facts. As well, in this context a Judge is addressing an audience which is wider than the prosecutor and accused. If the verdict is guilty, the Judge should explain clearly the features of the particular scheme which he or she finds to be dishonest. There is a legitimate public interest in having the details of such a scheme laid out in comprehensible form. Similar considerations apply if the verdict is not guilty. Further, some regard should be had to how the case will be addressed on appeal. A judgment which is so concise that some of the key facts in the case are required to be reconstructed by this Court on appeal is too concise. We will indicate shortly a particular aspect of the present case that illustrates the problem. All of this points to the need for a judgment to be able to be read as a stand-alone document.
[22] Because of the way in which the case was argued it is convenient for us to address the Judge’s reasoning as we consider the various questions which are raised by the appeal.
Overview of the case
[23] It is undisputed that the appellant used the private offer memorandum. It is equally undisputed that it was a document capable of being used to obtain a pecuniary advantage and was used for that purpose. The only real question in the case therefore is whether the appellant used this document fraudulently.
[24] It is apparent from what we have said that this question was resolved by the Judge against the appellant.
[25] In order to assess the challenges made to the Judge’s finding, we propose to address the following topics:
1.The nature of the investment scheme.
2.Representations made by the private offer memorandum as to the anticipated flow of funds.
3.Whether the private offer memorandum was false.
4.Whether the appellant acted fraudulently.
The nature of the investment scheme
Some general comments
[26] An unsatisfactory feature of the case from our point of view is that we were not provided with a complete analysis of the investment scheme. Such an analysis does not appear in the judgment under appeal and likewise was not provided by counsel at the hearing of the appeal.
[27] We have necessarily had to provide our own analysis. It is not appropriate that we should have been required to do this at this stage in the case, particularly since the dynamics of the process mean that our conclusions are untested by argument. It is this problem which prompted our comments in para [21] above. But we see no alternative but to carry out this exercise if we are to fairly evaluate the criticisms made by Mr Andersen for the appellant of the decision under appeal.
[28] In this section of the judgment we will therefore analyse as best we can the key features of the investment scheme.
Step one - intellectual property rights are acquired
[29] On 16 July 1996, NZSCL, a company associated with the appellant (among others), acquired (or perhaps more accurately purported to acquire) the software and intellectual property associated with the proposed development of the smart card. The price to be paid was US$2,000,000.
Step two – the on-sale to FCML
[30] By agreement of 31 October 1996, NZSCL sold all its assets to FCML for $40,000,000. Of this, $80,000 was payable on 28 November 1996 and the balance on a deferred basis. $500,000 of the $40,000,000 related to intellectual property and was regarded as not subject to GST.
[31] This transaction was anticipated to produce a GST input tax credit of approximately $4,400,000 for FCML (being one-ninth of $39,500,000) but no corresponding output tax liability for NZSCL. It also appears that the promoters of the scheme did not consider NZSCL to have a tax liability on the difference between the cost price of its assets and the on-sale price.
Step three – the formation of the joint venture
[32] In acquiring the assets of NZSCL, FCML was acting as nominee for the Future Card International Joint Venture (to which we refer throughout this judgment as “the joint venture”). This was formed pursuant to an agreement entered into on 31 October 1996 between FCML (then called Prudential Services Limited) and three other companies. We will refer to the three investor companies, along with two other parties which we will shortly mention, as “the initial venturers”.
[33] The joint venture agreement provided for FCML to act as manager of the joint venture and for the capital of the joint venture to be divided into 350 “parts”, all of which were allocated to the three investor companies. Two of these (which held 348 of the parts) were associated with the appellant.
[34] The capital contributed (or to be contributed) by the three investor companies was $20,200.
Step four – the “creation” of another 50 parts
[35] On 21 November 1996 another 50 “parts” were issued to the appellant’s wife (to whom six parts were allocated) and the AI and JC Eide Family Trust (to whom 44 parts were allocated). This was in consideration for a transfer by those parties to NZSCL of assets which were accepted in discharge of a payment of $80,000 due by the joint venture on 28 November 1996. For ease of reference in relation to the discussion which follows, we will treat Mrs Eide and the AI and JC Eide Family Trust as included in the expression “initial venturers”.
Step five –the private offer memorandum
[36] The private offer memorandum was an invitation to potential investors to join the joint venture. The maximum investment sought was $3,000,000 represented by 300 parts at a price of $10,000 each. The joint venture was to operate through Future Card International Pte Limited, based in Singapore which was to be the master licensee of the technology owned by the joint venture.
[37] The private offer memorandum can only sensibly be read on the basis that payments made by investors would become part of the working capital of the joint venture (in the sense of being intended to be advanced to Future Card International Pte Ltd for use as working capital). We say this for the following reasons:
1.The application form (which was part of the private offer memorandum) recorded that:
I, the Investor shown below (or the duly appointed officer of/or agent to the investor including the agent for a company in the course of incorporation) hereby accept the offer to join the Future Card Investment JV in consideration for the investment shown below, pursuant to the joint venture agreement of 31 October 1996 constituting the Future Card Investment JV, and the private offer memorandum dated 2 December 1996.
2.Cheques were to be made payable to FCML.
3.Investors were required to sign what was said to be a “Supplementary Deed”. Under this deed investors joined the joint venture on these terms:
The Manager and the New Venturer agree that by entering into this Supplementary Deed the New Venturer acquires from the Manager (on behalf of the existing Venturers) an undivided share of the assets and liabilities of the Venturers pursuant to the Future Card Investment JV at the date of this deed, together with future Profits on those assets.
4.Wiring diagrams which formed part of the private offer memorandum showed:
·In “Chart 1”, the money from the investors going straight to FCML with the added words “For Future Card Investments JV” with no diversion to the initial venturers.
·In “Chart 2” a $8,000,000 “working capital” line from the joint venture to Future Card International Pte Limited. The source of that $8,000,000 is not clear. It presumably includes the $4,000,000 from the proposed GST refund and the investors’ $3,000,000. Investors might have supposed that the $3,000,000 they were contributing in relation to the 300 parts which were to be sold under the private offer memorandum would be matched by $1,000,000 by the holders of the remaining 100 parts, although this is not consistent with the cash flow models which were also part of the private offer memorandum. In any event, it is hard to see where the $8,000,000 in “working capital” was to come from if it did not include the investors’ $3,000,000.
5.The directors’ assumptions for cash flow financial model stated:
FCML is funded by investor contributions totalling $3,000,000 and a GST refund of $4,000,000 to be received in the first quarter.
6.Cash flow documents for FCML and Future Card International Pte Limited show a flow of $3,000,000 associated, in the first instance, with investors’ contributions to FCML of $3,000,000. These cash flows are inconsistent with any theory other than that the investors’ contributions would be used for working capital purposes.
[38] The appellant’s case, as advanced by Mr Andersen, was that money which came in from investors was for the purchase from the initial venturers of their parts in the joint venture. On this theory the money which came in belonged to those entities and could be dealt with by them as they (in effect the appellant) directed. Mr Andersen suggested that the initial venturers would have corresponding obligations to ensure that, as and when required, the money they received would be lent to the joint venture.
[39] There are two reasons why this argument does not fit with the scheme as promoted in the private offer memorandum:
1.There is nothing in the private offer memorandum to suggest that the money contributed by the investors would be paid by FCML to the benefit of the initial venturers. Rather, the only sensible reading of the private offer memorandum is that the money paid by investors would be used for working capital purposes.
2.The initial venturers’ supposed “obligation” to put the joint venture back in funds as and when required is elusive. It could not sensibly be regarded as an obligation to lend the money because any loan would have been matched by corresponding repayment and interest obligations and such repayment and interest obligations are not reflected in the five year cash flows which formed part of the private offer memorandum. It would be expecting too much of potential investors to allow for the possibility that loans were to be made and then repaid outside the five year period covered by the cash flows, when absolutely no indication that this was intended was provided for in the private offer memorandum. If the obligation was in the nature of a requirement to pay the money back as capital, then this, in substance, is inconsistent with any intermediate entitlement of the initial venturers to the money.
[40] We think that the only sensible way of reading the private offer memorandum was that the money paid by the investors would form the capital of the joint venture. We have no doubt that this is the way in which it would have been read by investors who sought to understand the structure which was described.
Some loose ends
[41] There are some possible areas of uncertainty in relation to the investment scheme. We will mention these:
1.The private offer memorandum does not deal with the status of the 100 parts in the joint venture which were not to be sold to investors. The appellant’s position presumably would be that these parts remained with the initial investors and that they had no obligations to make any capital payments to the joint venture.
2.As we have noted, the make up of the $8,000,000 in “working capital” shown in Chart 2 of the wiring diagrams is not clear. It could be taken as implying that the holders of the unsold 100 parts would be contributing $1,000,000. As we have noted, this is not consistent with the cash flow models which were part of the private offer memorandum.
3.The GST refund was referred to in the cash flow models as being $4,000,000 when in fact the amount claimed and paid was $4,400,000. Presumably the difference is accounted for by fees to Mr Gilchrist and Mr Stewart’s company which were to be funded from this payment.
4.The way the cash flow models are prepared does not allow for the transaction (see step four above) associated with the creation of the additional 50 units. The payment of the $80,000 (effected by transfer of assets) does not appear in the cash flow model. Nor do the cash flow models make any allowance for the initial capital of $20,200. It may well be that investors would have had no cause for complaint if the initial venturers had, from the money paid by the investors, recouped themselves in respect of any initial capital contributions. This could have been effected without any inconsistency with the financial models. This point, however, is of no moment, because the payments insisted on by the appellant on behalf of the initial venturers went far beyond recoupment of capital actually contributed to the joint venture.
Taxation considerations
[42] The investment scheme was heavily driven by tax considerations. In the first place, the working capital of the joint venture was to be substantially provided by a GST refund on the transaction between NZSCL and FCML (see step two above). As well, the price paid by NZSCL for the intellectual property it purported to acquire from NZSCL created (or so it was thought) very substantial deductions for investors totalling in excess of $100,000 for every $10,000 invested.
[43] As we have indicated, the taxation advantages of the scheme did not materialise.
Representations made by the private offer memorandum as to the anticipated flow of funds
[44] In his judgment the Judge concluded that the private offer memorandum represented that the investors’ contributions of $3,000,000 were to be lent to Future Card International Pte Ltd as working capital.
[45] This aspect of the decision does not appear to have been challenged, at least directly, by Mr Andersen in his submissions. He asserted indeed, that the private offer memorandum:
… actually required the New Venturers’ funds to be applied to the Joint Venture.
[46] As will be apparent from what we have just said, we are of the view that the private offer memorandum can only sensibly be read in the way in which it was interpreted by the Judge.
Was the private offer memorandum false?
[47] In his judgment the Judge concluded that the private offer memorandum was false.
[48] The Judge reached this view primarily on the basis that the private offer memorandum continued to be used to obtain funds after the appellant had begun to divert money to entities which were associated with him. In this respect he focused particularly on the appellant’s dealing with Mr Warburton which were in March 1997 and thus after the first tranche of money (ie the $340,000 approximately of which $330,000 was used to repay the mortgage) had been diverted away from FCML.
[40] I have reached the clear view that at the time the Private Offer Memorandum was circulated and produced for Mr Warburton to make his investment decision that the accused knew that new investors’ contributions were not being applied for the benefit of the investors as indicated in the cash flow statement, and that Eide family interests were benefiting from funds being advanced. The document being circulated (the POM) did, in my assessment of it, create a clear impression or belief that was wrong.
[41] Accordingly I accept the Crown argument that within the timeframe alleged the accused has been proved to have made or circulated a statement, or account, namely the Private Offer Memorandum, which he knew to be false in a material particular with intent to induce persons to advance money to Future Card Management Limited.
[49] The Judge, however, does not appear to have regarded the criminality as being confined to the transaction involving Mr Warburton. We say this because, later in his judgment, he said:
[65] In summary I accept that by his actions the accused used the Private Offer Memorandum between the dates alleged for the purposes of obtaining for himself and others, namely his wife and the Eide Family Trust, a monetary advantage.
[66] I have found on the evidence that he did not have an honest belief that he was justified in using this document to gain pecuniary advantage and that during the period particularly from February until September 1997 he was acting dishonestly.
[50] If the appellant knew from the outset the money raised from the investors was to be used for the private purposes of the initial venturers, it follows from what we have said above that the private offer memorandum was false in that it made a representation as to the intended flow of funds which did not represent the intentions of the promoters of the scheme.
[51] Further, in respect of any use made of the private offer memorandum after money paid by the investors was first diverted by the appellant to his own interests, the private offer memorandum was plainly false. This is in two related respects. First, the private offer memorandum, when used, implicitly represented that money already received from investors had been applied in the manner depicted. Secondly, the actual diversion of investors’ funds was telling evidence of the appellant’s intention not to apply future money received in accordance with the private offer memorandum.
[52] The conclusion that the private offer memorandum was false in the respects mentioned in paras [50] and [51] seems to us to have been inevitable:
1.There is a memorandum in the handwriting of the appellant dated 28 January 1996. This document made it clear that some of the “parts” which were to be sold to the investors were held by the “AI and JC Eide Family Trust”. The terms of that memorandum, as a whole, make it clear that the appellant intended that the initial venturers (and not just the AI and JC Eide Family Trust) would be disposing of parts at a profit.
2.The appellant continued to use the private offer memorandum after 7 February 1997 and thus after he had diverted the first tranche of investors’ money.
[53] As is apparent from the passages from his judgment which we have cited, the Judge relied primarily on the consideration referred to in para [51]. On the other hand, his eventual conclusion that the document was used dishonestly between February and September 1997 would appear to have been referable to the first of the considerations ie that identified in para [50]. If so, the hand written memorandum of 28 January 1996 provided ample evidential justification for that conclusion. The lack of clarity in this part of the judgment, however, while not relevant to the conviction appeal, was heavily relied upon by Mr Andersen in relation to the sentence appeal and we will revert to this point when we come to address the sentence appeal.
[54] The Judge’s conclusions on this aspect of the case were challenged by Mr Andersen. He claimed that the Judge’s decision was:
… logically inconsistent as it both finds the POM [ie, the private offer memorandum] to be false in a material particular and suggests that the POM required the Initial Venturers to advance the sale of the units to JV.
[55] The argument which Mr Andersen was endeavouring to make is that the private offer memorandum created an obligation on the original venturers to lend the proceeds of sale of their units to the joint venture to provide working capital and that, since that obligation was thereby created, the private offer memorandum was necessarily not false.
[56] This argument is not only circular but also misconceived.
[57] The falsity of the private offer memorandum as found by the Judge did not lie in a misdescription of the relevant legal obligations. Rather, it was an implicit misrepresentation of the intentions of the promoters as to how the investors’ money was to be, or was being, applied. The private offer memorandum represented to investors that the promoters intended to deal with their money in the manner depicted in that memorandum. If that was not the intention of the appellant (who, for this purpose, was the scheme’s promoter) the memorandum was false.
[58] Mr Andersen also argued that if the initial venturers had an obligation to lend the proceeds of sale of the units back to the joint venture, the diversion of money to those entities did not depart from what was represented in the private offer memorandum. We see this argument as untenable essentially for the reasons already given above, see para [39]. The financial structure contemplated by the private offer memorandum was inconsistent with the working capital of the joint venture being provided to it by way of loan from the initial venturers.
Did the appellant act dishonestly?
[59] The Judge’s reasons for his conclusions as to dishonesty appear in two separate sections of his judgment.
[60] The first relevant passage appears in the part of the judgment dealing with the count laid under s 250 of the Crimes Act:
[36] Notwithstanding the close professional relationship which developed between the accused and Mr Warburton, the fact that funds advanced pursuant to the Eide request Vol 10/222 and 223 was never made known to Mr Warburton.
[37] Had Mr Eide been genuinely trying to assist Mr Warburton to understand where the funds had been invested, or how they had been disbursed during 1997, he would have surely advised him that Mr Stewart had released $340,200.00 in accordance with a signed authority. I believe Mr Warburton when he said in evidence that the first time he became aware of this was when shown in Court the document at Vol 10/222, 223.
[38] Again, had the accused genuinely believed that he was entitled to these funds, which he clearly knew had come from the new investors purchasing parts, he should have had no difficulty in the meetings in October 1999 asserting that the application for these funds was legitimate and that Mr Stewart carried the responsibility for calling on the funds to be re-advanced once any loan to the International Company was required.
[39] The fact that such a significant sum was applied for and used to repay a mortgage on the residential property he occupied could hardly be seen as an oversight.
[40] I have reached the clear view that at the time the Private Offer Memorandum was circulated and produced for Mr Warburton to make his investment decision that the accused knew that new investors' contributions were not being applied for the benefit of the investors as indicated in the cash flow statement, and that Eide family interests were benefiting from funds being advanced. The document being circulated (the POM) did, in my assessment of it, create a clear impression or belief that was wrong.
[61] The second relevant passage came when the Judge dealt with the count laid under s 229A:
[54] … I am entitled to look at all the facts and statements in the evidence from which inferences as to the accused's honesty or belief may be drawn.
[55] In this regard I have had reference to what various investors have said in their evidence about any representations the accused made, the Private Offer Memorandum document itself, and the conduct of the accused in early 1997.
[56] In respect of this Count I again turn to the evidence of Mr Warburton, the accused's solicitor at that time. I have already made reference to this in more detail in dealing with Count 1.
[57] In looking at the evidence available from investors, coupled with the actions of Mr Eide in promoting and soliciting funds for the joint venture along with the subsequent utilisation of the funds for payment of expenses and debts associated with Mr Eide's family interests, I conclude that the accused was acting dishonestly in March 1997 when he dealt with Mr Warburton. By that time the accused had already instructed Gordon Stewart to release funds totalling $340,000.00 to Mrs Eide and to the Eide Family Trust. Those funds had been directed to the repayment of the mortgage over the Thane Road property in Wellington.
[60] In assessing the overall reliability and credibility of Mr Eide in the period of December 1996 to September 1997 I am entitled to look also at actions of the accused once the Inland Revenue cheque was received. Mr Eide's apparent delight at securing the refund cheque for $4,000,000.00, coupled with his immediate instructions to Mr Stewart to have it deposited off-shore and the reasons for this, are entirely unconvincing.
[61] According to Mr Stewart at page 44 of his brief, the reason for this was to commercialise the Future Card intellectual property.
[62] There is scant evidence of Mr Eide's efforts to commercialise the intellectual property and I am entitled to draw the inference that this was simply another step in Mr Eide's deception of Mr Stewart which ultimately resulted in the relationship breaking down.
[63] It is not accepted by me that the accused can deflect any criticism from himself to Mr Stewart based upon the submission that Gordon Stewart had the right to decline any request from Mr Eide as to the utilisation of the funds in Future Card Management Limited.
[64] It is apparent from the evidence that Mr Eide was the driving force behind this scheme and despite the fact that he took care not to place himself in the actual role of a manager of director, he was, to all intents and purposes, promoting the scheme he had devised.
[65] In summary I accept that by his actions the accused used the Private Offer Memorandum between the dates alleged for the purposes of obtaining for himself and others, namely his wife and the Eide Family Trust, a monetary advantage.
[66] I have found on the evidence that he did not have an honest belief that he was justified in using this document to gain pecuniary advantage and that during the period particularly from February until September 1997 he was acting dishonestly.
[67] For the reasons given I reject the defence argument that there was no fraudulent intent and that the new ventures obtained what was promised in the Private Offer Memorandum
[62] We accept that the conclusion that the private offer memorandum was false does not necessarily mean that the appellant acted dishonestly. If he genuinely believed that his intended or actual course of conduct was not inconsistent with the representations in the private offer memorandum, it would follow that he did not act dishonestly. On the other hand, if he did recognise that inconsistency, it would likewise seem to follow (and it was open to the Judge to conclude) that he acted dishonestly in raising that money, essentially by false pretences as to what was to happen to that money.
[63] The primary and most obvious problem for the appellant on this line of argument is that he was primarily responsible for the drafting of the private offer memorandum and presumably knew better than anyone else what it meant. Further, he is a former solicitor. On the basis of what the appellant proposed to do, there was a $3,000,000 hole in the middle of the scheme, right where the working capital of the joint venture was meant to be. There is no one to whom this would have been more obvious than the appellant. It is implausible in the extreme to imagine that the appellant would not have recognised the inconsistency between what he was selling and what he intended to provide.
[64] Further, the appellant did discuss the cash flows associated with the scheme in detail with at least Mr Robert Warburton. As we have already noted, Mr Warburton analysed the private offer memorandum in some detail and prepared his own notes to record his understanding. On his evidence he then discussed those notes with the appellant who confirmed that his understanding of the cash flows was correct. By the time that this discussion occurred, the appellant had already diverted approximately $340,000 of the money paid by investors to entities or parties associated with himself, including the $330,000 which was paid to discharge the mortgage over the house he lived in. On the basis of Mr Warburton’s evidence as accepted by the Judge, the appellant must have appreciated that Mr Warburton assumed that the scheme involved investors’ money becoming the working capital of the joint venture. If he truly believed that this was not the way the scheme was being represented in the private offer memorandum, he could fairly be expected to have made this clear to Mr Warburton. On the Judge’s findings of fact, he did not do so.
[65] Further, the suggestion that the appellant genuinely believed that he had acted properly does not sit easily with his obfuscatory behaviour in October 1999 which was also referred to by Mr Warburton in his evidence.
[66] As apparent from the passages which we have cited from the decision of the Judge, he was particularly influenced in his conclusions as to the dishonesty of the appellant by the evidence of Mr Warburton.
[67] Given the inherent implausibility of the theory that the appellant could have misinterpreted the private offer memorandum and the lost opportunities to explain such “misinterpretation” to Mr Warburton both before Mr Warburton invested in March 1997 and later, in October 1999, there was a formidable evidential basis upon which the Judge could fairly infer dishonesty.
[68] Mr Andersen challenged the Judge’s conclusions as to dishonesty on what we see as two arguments:
1.There was a substantial basis for the view that the appellant believed throughout that the initial investors were entitled to the proceeds of the sale of the “parts” in the joint venture.
2.Some of the reasons advanced by the Judge for his finding of dishonesty were inappropriate or wrong.
[69] The first submission was largely premised on the basis that others involved in the scheme knew what the appellant intended to do and raised no objection and that later, Mr Stewart, who acted on the appellant’s instructions as to payment, apparently saw no problem in the appellant diverting cash contributed by investors to the initial investors. Further, some of the investors (particularly Mr Gilchrist and another accountant, a Mr Curtis) seem to have appreciated that this would happen.
[70] The factors relied on by Mr Andersen support the defence case. But they are hardly controlling considerations. Given the structure of the scheme, the appellant needed the assistance and co-operation of other people to achieve his ends. To do so, he had to assume an air of entitlement. All of the people who knew or guessed that some of the cash flow was to be diverted to the appellant’s entities were, to a greater or lesser extent, insiders. Messrs Stewart and Gilchrist particularly stood to obtain benefits from their involvement in the scheme and would not necessarily be astute in comparing the appellant’s conduct with the representations in the private offer memorandum. As is apparent from what we have said, we think it impossible to reconcile that conduct with those representations. Mr Stewart sought to justify in his evidence his willingness to approve payments as instructed by the appellant on the basis that the parts sold belonged to the initial venturers and that he assumed that the appellant would ensure that the money was repaid as and when it was required. Yet there is remarkably little evidence that this was ever contemplated or, given the appellant’s status as an undischarged bankrupt, ever likely to be achieved.
[71] There is a sense in which this whole line of argument may be beside the point. If the appellant recognised that the private offer memorandum made representations as to how the money was going to be dealt with which were false (in that they did not reflect his own intentions) then he was, in effect, obtaining money by false pretences. On these assumptions, the concept of an “entitlement” to money fraudulently obtained in this way seems very artificial.
[72] While there may have been arguments both ways as to fraud, this is not particularly material on appeal. Those arguments were, primarily, for the Judge to consider. It is not for us, in this Court, to re-try the appellant.
[73] We turn now to address the second of the two lines of arguments referred to in para [67]. The factors mentioned by the Judge which Mr Andersen challenged seem to us to have been of limited significance in terms of the finding of dishonesty that was made (which was referable to the inconsistency to what was represented and what was intended) but they were, with one possible exception which we will address separately, open to the Judge. The comments made by the Judge to which Mr Andersen has taken exception related particularly to the GST incident and the apparent absence of any efforts to carry forward the business of the joint venture. On the appellant’s case, he was acting bona fide throughout. Of some relevance to that defence was the question whether the appellant was really attempting to drive the scheme forward in a genuine way or simply attempting to gather in money. The comments made by the Judge seem to us to have been relevant to whether the latter interpretation of events is correct.
[74] There is one error in the judgment which Mr Andersen did identify. When Mr Warburton agreed to become an investor it was on the basis that fees owed by the appellant to Mr Warburton would be applied to the investment. Pursuant to this arrangement the appellant arranged for the AI and JC Eide Family Trust to pay the amount of the fees to FCML. The Judge wrongly asserted in the judgment that this did not happen. It is unclear whether the Judge saw this as directly relevant to his dishonesty finding.
[75] We are satisfied that there was a sound evidential basis for the Judge’s conclusions. The issue arose in the context of a false document created essentially by the appellant and used by him to obtain substantial sums of money which were then applied for the benefit of entities with which he was associated. An inference of dishonesty was always highly likely to be drawn. In this case that inference was strengthened by the evidence of Mr Warburton to which the Judge referred and to a more limited extent by the other considerations which he specifically relied on. Does it matter, in that context, that there was a mistake of fact in his judgment on a point which might have been of peripheral relevance to his conclusion as to dishonesty?
[76] Our approach to this appeal is dictated by s 385(1) of the Crimes Act which provides, as grounds of appeal:
(a) That the verdict of the jury should be set aside on the ground that it is unreasonable or cannot be supported having regard to the evidence; or
(b) That the judgment of the Court before which the appellant was convicted should be set aside on the ground of a wrong decision on any question of law; or
(c) That on any ground there was a miscarriage of justice; or
(d) That the trial was a nullity.
Unless we are satisfied that one or other of those grounds have been made out, we must dismiss the appeal.
[77] We must apply those criteria - mutatis mutandis of course because Judge Saunders sat without a jury. It is important to recognise that the fact that Judge Saunders sat without a jury does not widen our appellate jurisdiction; a point made very clearly in Connell.
[78] It is apparent from what we have said that we are not persuaded that the decision of the Judge was unreasonable or cannot be supported having regard to the evidence. Nor do we see any wrong decision on a question of law or miscarriage of justice. We think that the conclusion of the Judge was well open to him and was particularly supported, as the Judge concluded, by the evidence of Mr Warburton. The mistake made by the Judge which we have mentioned seems to us to have been too limited insignificance to warrant the allowing of the appeal.
Appeal against sentence
The Judge’s sentencing remarks
[79] In his submissions in the District Court on sentence, Mr Andersen sought to persuade the Judge that the finding of guilt was confined to the Warburton transaction. The Judge did not accept that contention. Because this issue also loomed large at the hearing of the appeal, it is necessary to set out in some detail the Judge’s approach:
[5] Mr Andersen, in his submissions today, has effectively asked me to focus on what appears to be quite a narrow compass of factual findings relating to the Warburton transaction. I believe that an analysis of the decision would show that the Warburton investment occurred at a time after you had withdrawn the funds that had been made available by investors and which you had asked Mr Stewart to release to you.
[6] There have been other investors, identified by Mrs Grills today in relation to volume 13, that also made investments after that date. The reason I focused on that particular transaction with Mr Warburton was that he impressed as a person who was somebody who would not be easily duped into a scheme. He said that he though he was quite clever when he analysed the whole structure of the way in which the investment was set up. You and he had clearly established a strong accord because of the way in which he had acted as your counsel on the bankruptcy appeal. You had clearly given him the confidence that you knew what you were doing in this particular matter, and that he felt confident in making that commitment to the investment. Clearly you did not tell him that you had already withdrawn $340,000.00 of the funds to pay off your house mortgage, and when confronted with documents in Court when I asked him specifically about those documents, he indicated, on that day, that was the first he knew of those documents.
…
[12] … I did make the finding, at paragraph 66 of my decision, that there was then a dishonest intent at the time alleged from February to September of 1997 and that certain losses occurred as a result of that.
[13] The Crown have pointed, today, specifically to volume 13, pages 286 and 287, to show the total money paid to Eide Interests and the investors that made investments after that time. It is fair to say that it does not relate solely to Mr Warburton, which is where the focus of Mr Andersen’s submissions were in writing and orally today. As I have indicated, Mr Andersen has sought to limit the responsibility down to the time that you used the document with Mr Warburton and really based that around the findings I made to establish culpability for the particular offence under s 229.
…
[28] There was, to some extent, a degree of sophistication about the way in which you acted, but that is not to the level of premeditation in that I do not find that you started off with this scheme with dishonest intent and tried to then milk the investors for what they were worth for your own particular benefit. You were, however, by February clearly deciding to then apply funds that had come into the Joint Venture Company towards your own purposes rather than to the purposes of the scheme.
[80] Mr Andersen also advanced in the District Court the extremely bold submission that the appellant should be discharged without conviction. Understandably, the Judge rejected that suggestion.
[81] In his sentencing remarks, the Judge discussed the facts and the appropriate sentencing principles. He then went on to explain the reasoning which led to the sentence which he imposed. We will set out the key passages in his sentencing remarks recognising, as we do, that this involves repetition of para [28]:
[25] The view that I have formed in matters such as this and having regard to the loss I find has occurred as a result of your offending, and I believe I am entitled to find that there was effectively a loss of $340,000.00 to the overall scheme as a result of the withdrawal of the funds in February, the appropriate starting point is in the range of three years’ imprisonment.
[26] I cannot deduct from that starting point the credit that might otherwise be extended for an early guilty plea, remorse that is shown, or ability to minimise the loss through payment of reparation. I can, however, extend some credit on the basis of your age and the lack of previous convictions. I accept, also, that you did save through instructions through your counsel considerable hearing time by the way in which the trial itself was conducted and the fact that there was not the expense of a Jury trial as such, that you were prepared to accept being tried by a Judge alone. In relation to those mitigating factors I have mention some deduction is able to be made from the starting point I have nominated of three years.
[27] The Crown have accepted the lack of remorse is now not be looked at as an aggravating feature and I accept that is an appropriate concession. There is, of course, no reparation able to be realistically made and while I do not necessarily regard that as an aggravating feature, it is one of those matters that is taken into account in reaching the starting point of three years.
[28] There was, to some extent, a degree of sophistication about the way in which you acted, but that is not to the level of premeditation in that I do not find that you started off with this scheme with dishonest intent and tried to then milk the investors for what they were worth for your own particular benefit. You were, however, by February clearly deciding to then apply funds that had come into the Joint Venture Company towards your own purposes rather than to the purposes of the scheme.
[29] The discount that I am prepared to give you is nine months in terms of the mitigating factors that have been mentioned. That leaves me with a final decision of two years and three months which is, in my view, the appropriate sentence in respect to this matter. I have taken into account the cases and the various factors that have arisen in relation to those matters, but as the Court of Appeal has been clear to say, cases largely turn on their own particular facts and there is no particular bench mark and that each case must be looked at in light of the personal factors that apply to that particular case. The nett result is that the appropriate sentence is one of two years and three months’ imprisonment.
The arguments for the appellant
[82] Before us, Mr Andersen contended that the Judge sentenced the appellant for offending which was more serious and extensive than the offending for which he had been found guilty. He also argued that the starting point of three years imprisonment was manifestly excessive.
[83] Mr Andersen correctly noted that the offending involved the dishonest soliciting of funds for the joint venture. Pointing to the significance placed by the Judge in his findings of fact on the Warburton transaction (which was in March 1997) he argued that the money paid out in February (which included the $330,000 applied to the mortgage) ought not to have been taken into account. The money actually diverted from the joint venture from the time of (but including) the Warburton transaction was only $70,000 and some of that was contributed by Mr Gilchrist who was aware of the way in which the appellant was operating. So Mr Andersen contended that the offending should be seen as confined to, at the most, obtaining $70,000 by fraud.
[84] Mr Andersen also claimed that the sentence was manifestly excessive even on the Judge’s approach to the scale of the offending. He said that there was no breach of trust as, to use his words, “the appellant had no control over the money raised”. He said that the money in any event belong to the initial venturers. Further, it is not clear that investors who contributed money to the scheme would not have done so if they had known how that money was to be dealt with. Their losses were, he said, for reasons unrelated to the diversion of funds which occurred. The appellant at all time acted in conjunction with advisers who did not seek to persuade him from dealing with the investors’ money in the way in which he did.
Respondent’s reply
[85] In her argument for the Crown, Ms Grills addressed in some detail what was said by Judge Saunders when he convicted the appellant and also in his sentencing remarks. She maintained that the judgment in which he found the appellant guilty could not be read as indicating that the offending commenced only with the offer to Mr Warburton. She pointed to evidence (including the memorandum of 26 January 1997) which supported the Judge’s expressed conclusion that the offending started in February 1997.
[86] She also contended that the starting point of three years imprisonment was well open to the Judge.
Discussion
[87] There are some infelicities in the way in which the Judge expressed himself when sentencing the appellant and also in his judgment convicting the appellant.
[88] It was important for the Judge to identify when the offending began. In both his primary judgment and in his sentencing remarks, the Judge identified this as being in February 1997.
[89] The basis upon which he did this is not readily apparent from what he said. It may be that he simply assessed the overall honesty of the appellant by reference to what happened in relation to the Warburton transaction. The appellant’s dishonesty in March 1997 with Mr Warburton supported the inference that he had been acting dishonestly earlier in respect of his use of the private offer memorandum. The Judge, however, did not explicitly mention this consideration. Nor did he refer specifically to what seems to us to be unanswerable evidence as to the appellant’s intentions, namely his hand-written memorandum of 28 January 1997 to which we have already referred. As we have said, that document makes it perfectly clear that the appellant, at that time, intended to appropriate money paid by the investors for the benefit of the initial venturers.
[90] So we accept that the Judge did not, in his primary judgment, spell out in detail the reasons for his conclusion that the offending starting in February 1997. But the fact remains that the Judge did make it clear that this was his conclusion. The absence of reasons is of no moment providing we are satisfied that there was an appropriate evidential basis for the conclusion. On the basis of the material we have referred to, we are well satisfied that there was just such an evidential basis.
[91] There is something to be said for the view that the diversion of money from the scheme involved the offence of theft by failing to account contrary to s 220 of the Crimes Act in that it is arguable that the investors’ money was paid on terms requiring it to be dealt with in terms of what was proposed in the private offer memorandum. Indeed, at times the case was argued as if this was the basis upon which the appellant was being tried.
[92] In that context, it is important to recognise that the fraudulent conduct for which the appellant was convicted was not the illegitimate extraction of money from the scheme but rather obtaining investments by fraudulent representations. When viewed in this way, the measure of the offending is not necessarily confined to money diverted by the appellant to the initial venturers. We say this because the investors lost not only the money that the appellant diverted but also the money which went in fees and was generally dissipated. Further, they have suffered significant losses associated with penalties imposed by the Commissioner of Inland Revenue.
[93] We accept, however, that it is not possible to attribute fairly all such losses to the appellant’s fraud. Some investors were plainly influenced only by the tax benefits promised by the scheme. Further, given the “too good to be true” nature of the tax benefits offered, investors were perhaps the authors of their own misfortune in relation to the tax penalties which they have incurred.
[94] We see the benefits derived by the appellant as providing the least controversial basis for assessing the scale of his offending. Those benefits plainly include payment of the $330,000 in relation to the mortgage over the property which he occupied as a house. We accept that this is not exactly the same approach as that taken by the Judge. He treated the offending as involving losses inflicted on the investors of at least $340,000 (primarily made up of the $330,000 used to repay the mortgage). We instead treat the offending as involving an illegitimate gain of $330,000, at least. But that said, our approach is close enough to that of the Judge for us to reject the argument that the appellant was sentenced on erroneous factual premises.
[95] We see nothing wrong with the Judge’s starting point of three years.
[96] Our views of most of the submissions advanced by Mr Andersen in relation to sentence (see para [84] above) are apparent from the general tenor of this judgment. We should, however, address here the contention made by Mr Andersen that there was no “breach of trust”. This is absolutely wrong. Money was obtained pursuant to a private offer memorandum which was functioning effectively as a prospectus. Investors left it to the promoters to deal with their money in the manner represented. For these purposes the appellant must be seen as being the driving force behind the scheme as Mr Stewart acted effectively on his instructions. In this context we see the appellant’s conduct as involving a very serious breach of trust and as warranting a significant prison sentence.
[97] According we regard the sentence imposed as well within the range available to the Judge.
Result
[98] In those circumstances, the appeal against conviction and sentence is dismissed.
Solicitors:
Crown Law Office, Wellington
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