FEDERAL COURT OF AUSTRALIA

 

Australian Securities & Investments Commission v Soust (No 2) [2010] FCA 388

Citation:		Australian Securities & Investments Commission v Soust (No 2) [2010] FCA 388
Parties:		AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v MARTIN SOUST
File number:		VID 1087 of 2008
Judge:		GOLDBERG J
Date of judgment:		23 April 2010
Corrigendum:		27 April 2010
Catchwords:		CORPORATIONS – penalty hearing – breach of directors’ duties – market manipulation – disqualification from managing corporations – pecuniary penalty – Court’s discretion – no evidence of remorse – relevant principles or factors to be applied.
Legislation:		Corporations Act 2001 (Cth): ss 181(1), 182(1), 206C(1), 1041A, 1041B(1), 1317DA, 1317E, 1317G Evidence Act 1995 (Cth):  s 128(7)
Cases cited:		Australian Securities and Investments Commission v Citrofresh International Limited (No 3) [2010] FCA 292, followed Australian Securities and Investments Commission v Forem‑Freeway Enterprises Pty Ltd (1999) 30 ACSR 339, applied Rich v Australian Securities and Investments Commission (2004) 220 CLR 129, followed Australian Securities and Investments Commission v MacDonald (No 12) (2009) 259 ALR 116, considered Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80, applied Australian Securities and Investments Commission v Vines (2006) 58 ACSR 298, followed ASC v Donovan (1998) 28 ACSR 583, followed Australian Competition and Consumer Commission v ABB Transmission and Distribution Ltd (No 2) (2002) 190 ALR 169, considered Australian Securities and Investments Commission v Beekink (2007) 238 ALR 595, followed
Date of hearing:	7 April 2010
Place:	Melbourne
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	94
Counsel for the Plaintiff:	C M Caleo S.C. with J P Moore
Solicitor for the Plaintiff:	Australian Securities and Investments Commission
Counsel for the Defendant:	H R Carmichael
Solicitor for the Defendant:	Oakley Thompson & Co

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 1087 of 2008

 

BETWEEN:	AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION Plaintiff
AND:	MARTIN SOUST Defendant

 

JUDGE:	GOLDBERG J
DATE:	27 April 2010
PLACE:	MELBOURNE

CORRIGENDUM

1                     Paragraph 16 of the Reasons for Judgment delivered 23 April 2010 should read: 

            “I have already made declarations pursuant to s 1317E of the Act of contraventions by the defendant of ss 1041A, 1041B(1)(b), 181(1) and 182(1) of the Act.  A contravention of ss 1041A and 1041B(1)(b) is a contravention of a financial services civil penalty provision as defined in s 1317DA of the Act which empowers me to order that the defendant pay a pecuniary penalty of up to $200,000 if the contravention is serious.  A contravention of ss 181(1) and 182(1) of the Act is a contravention of a corporation/scheme civil penalty provision as defined in s 1317DA of the Act which empowers me to:

 

(a)        Disqualify the defendant from managing corporations if I am satisfied that disqualification is justified;

 

(b)        Order that the defendant pay a pecuniary penalty of up to $200,000 if the contravention is serious.”

I certify that the preceding one (1) numbered paragraph is a true copy of the Corrigendum to the Reasons for Judgment of the Honourable Justice Goldberg.

Associate:

Dated:         27 April 2010

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 1087 of 2008

 

BETWEEN:	AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff
AND:	MARTIN SOUST Defendant

 

JUDGE:	GOLDBERG J
DATE OF ORDER:	23 APRIL 2010
WHERE MADE:	MELBOURNE

 

THE COURT ORDERS THAT:

 

1.         The defendant is disqualified from managing corporations for a period of 10 years commencing from the date of this order.

 

2.         The defendant pay the Commonwealth of Australia a pecuniary penalty of $80,000.

 

3.         The defendant pay the plaintiff’s costs of and incidental to this proceeding, including any reserved costs.

 

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 1087 of 2008

 

BETWEEN:	AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff
AND:	MARTIN SOUST Defendant

 

JUDGE:	GOLDBERG J
DATE:	23 APRIL 2010
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

INTRODUCTION

1                     On 15 February 2010 I published reasons for judgment in which I concluded, pursuant to s 1317E of the Corporations Act 2001 (Cth) (“the Act”), that the defendant, Dr Martin Soust, contravened s 1041A of the Act by taking part in, and carrying out, a transaction that had the effect of creating an artificial price for trading in shares in Select Vaccines Limited (“Select Vaccines”) by placing an order with Bell Potter Securities to purchase $2,550 worth of shares in Select Vaccines at market price on the Australian Stock Exchange Limited (“ASX”).

2                     I also found, pursuant to s 1317E of the Act, that the defendant contravened s 1041B(1) of the Act by doing an act which had the effect of creating a false and misleading appearance with respect to the market and the price for trading in shares in Select Vaccines on the ASX by placing that same order to purchase shares in Select Vaccines with Bell Potter Securities.

3                     As a result of these contraventions I found, pursuant to s 1317E of the Act, that the defendant contravened s 181(1) of the Act in that he failed to exercise his power, and discharge his duty, as a director of Select Vaccines in good faith, in the best interests of Select Vaccines or for a proper purpose, as well as s 182(1) of the Act in that he improperly used his position as a director of Select Vaccines to gain an advantage for himself and Martin Soust & Co Pty Ltd and to cause detriment to Select Vaccines by:

(a)        placing the order to purchase $2,500 worth of Select Vaccine shares at market price with Bell Potter Securities on the ASX;

 

(b)        thereby contravening Select Vaccine’s Share Trading Policy;

 

(c)        failing to inform the other directors of Select Vaccines of his involvement in that purchase; and

 

(d)        deliberately concealing his involvement in that purchase from the other directors of Select Vaccines.

 

4                     I made declarations accordingly on that day and adjourned the further hearing of the proceeding to enable the parties to make submissions as to whether any, and if so what, orders should be made pursuant to s 206C(1) of the Act that the defendant be disqualified from managing corporations for a period that the Court considered appropriate and whether any, and if so what, orders should be made pursuant to s 1317G of the Act that the defendant pay a pecuniary penalty in respect of his contraventions of ss 181(1), 182(1), 1041A and 1041B of the Act.  I also made orders enabling the plaintiff, Australian Securities and Investments Commission (“ASIC”) and the defendant to file further evidence and submissions in relation to these matters.

5                     I do not propose to repeat all the facts, circumstances and findings set out in my earlier reasons which led to the conclusions and declarations to which I have already referred.  I incorporate those reasons in these reasons:  Australian Securities and Investments Commission v Soust [2010] FCA 68.  It is however necessary to identify and explain the further evidence filed by ASIC and the defendant.

FURTHER EVIDENCE

6                     The defendant filed an affidavit in which he said that:

(a)        his wife is the sole proprietor of the matrimonial home situated at 3 The Grange, Malvern East, its current market value is approximately $1.8 million, it is encumbered by two mortgages in favour of the Commonwealth Bank of Australia to secure the repayment of approximately $686,000 and he has guaranteed his wife’s obligations under the two mortgages;

 

(b)        he owns no real estate in Australia or elsewhere and his only personal asset is a parcel of shares in Astrum Therapeutics Pty Ltd which have no value;

 

(c)        he has personal liabilities in respect of credit card and overdraft debts of approximately $111,300 and he has guaranteed the obligations of Martin Soust & Co Pty Ltd to the Commonwealth Bank of Australia, whose present liability is $32,035.23 and whose only asset is a vehicle valued in the vicinity of $25,000 in respect of which $21,059.30 is owing to a finance company;

 

(d)        he is currently unemployed and was last engaged in employment in 2008.

The defendant made no mention in the affidavit of the terms of his late mother’s will or of the trusts created under it to which I refer hereafter.

 

7                     The defendant relied on five affidavits comprising character references sworn by Associate Professor David Anderson, Dr Ian Cooke, Mr Peter Spargo, Mr Stephen Mead and Mr Philip Carey.  Professor Anderson is a Deputy Director of the Burnet Institute.  Dr Cooke is the Chief Executive Officer of Foursight Associates Pty Ltd, was a professional colleague of the defendant as well as a former non‑executive director of Select Vaccines.  Mr Spargo is a close personal friend of the defendant.  Mr Mead is General Counsel of a major Malaysian listed public company and a close personal friend of the defendant and Mr Carey is a solicitor and a close personal friend of the defendant.

8                     These witnesses provided character references in relation to the defendant’s work in the biotechnology industry and his personal activities.  The affidavits demonstrated the defendant’s hard work ethic and professionalism in the biotechnology field, including efforts to raise venture capital to fund biotechnology opportunities, his heavy involvement in research and development that has been of great benefit to the Burnet Institute and public health in general, the intimate role the defendant played in establishing constructive communications and relationships with senior investigators at the United States National Institute of Health in the area of malaria vaccines using Select Vaccines’ technology and his support of the Burnet Institute through representing Select Vaccines at various functions. 

9                     The defendant’s involvement in athletics and his role as a sporting administrator was also outlined.  Dr Soust was previously CEO of the Australia Ski Federation (now Ski and Snowboard Australia) and Athletics Australia and was responsible for implementing major reforms in both organisations.

10                  On a personal level, the references attest to Dr Soust’s dedication to his family and the support he provided to his parents, both of whom endured chronic disabling illnesses before their death.  The references variously described the defendant as a loyal friend and a man of integrity.

11                  The character witnesses noted that they had read the reasons for judgment prior to swearing their affidavits and writing their references.  They said that the findings as to the defendant’s conduct are wholly at odds with their assessment of his character and the high personal regard in which he is held.

12                  The defendant relied upon an affidavit sworn by his solicitor Mr Stephen James Howard who gave the following evidence:

(a)        the underwriter of the directors and officers liability insurance policy of which the defendant had the benefit had paid defence costs totalling $112,115.93.  Approximately one week prior to the start of the trial the insurer’s solicitors advised that no further advance defence costs would be paid under the policy of insurance and the insurer reserved all its rights.  The defendant did not have the resources to pay legal costs then outstanding and a sponsor of the defendant paid outstanding costs;

 

(b)        on the morning of 6 April 2010, the day before the commencement of this hearing, Mr Howard sent an email to Select Vaccines’ secretary, Mr Richard Wadley confirming that the defendant’s sponsor had instructed him to send $24,500 by electronic funds transfer to Select Vaccines’ cheque account being repayment of the performance bonus paid to the defendant.  Mr Howard said this had been done about half an hour earlier.  The email stated:

“I confirm the payment is expressly made without any admission of liability to do so by or on behalf of Martin.”

 

Later in the morning Mr Wadley confirmed that Select Vaccines’ account had been credited with $24,500. 

 

13                  Subsequent to the filing and service of the defendant’s affidavit, ASIC filed an affidavit by David Anthony Quinn a lawyer in its employ whose evidence related to searches undertaken in the Vic Lands database and in the probate records of the Registry of the Supreme Court of Victoria.  Those searches disclosed that:

(a)        the defendant and his wife, Anne Louise Soust, were registered as joint proprietors of the matrimonial home situated at 3 The Grange, Malvern East on 8 March 1996, on 27 June 2008 a transfer of the defendant’s interest in the property to his wife for no consideration other than natural love and affection had been stamped as exempt from stamp duty and that such transfer was registered on 6 October 2008;

 

(b)        probate of the will of the late Mrs Bohumira Soust, the defendant’s mother, who died on 24 April 2009 was granted to the defendant on 23 July 2009;

 

(c)        two children of Mrs Bohumira Soust survived her, Sabina and the defendant;

 

(d)        under the defendant’s mother’s will her residuary estate was divided into two equal shares and into two trusts, the trustees of one of them being the defendant’s sister and the defendant and the trustee of the other of them being the defendant solely;

 

(e)        the will set out the terms of each trust, the beneficiaries of the trust of which the defendant is the sole trustee are the defendant and his children and their children, their spouses and their lineal descendants;

 

(f)         the defendant is empowered under the terms of the trust of which he is sole trustee to pay in his absolute and uncontrolled discretion the whole or any portion of the income of the trust to any of the beneficiaries including himself;

 

(g)        although the trust is to terminate one day less than eighty years from the date of death of the defendant’s mother, under the terms of the trust the defendant is empowered in his absolute discretion to terminate the trust at any time during that period and pay and distribute the assets of the trust to any of the beneficiaries, including himself;

 

(h)        one of the assets in the residuary estate was a property situated at 12 Love Street, Black Rock which had been valued for probate purposes at $1 million and had been sold pursuant to a contract of sale dated 25 July 2009 for $1.4 million, the transfer of which was stamped with duty on 4 December 2009.  It followed that approximately $700,000 was distributed into the trust of which the defendant is sole trustee and one of the beneficiaries.

 

RELEVANT LEGISLATION

14                  The application by ASIC that the defendant be disqualified from managing corporations is made pursuant to s 206C of the Act which provides:

“(1)     On application by ASIC, the Court may disqualify a person from managing corporations for a period that the Court considers appropriate if:

 

(a)        a declaration is made under

 

(i)      section 1317E (civil penalty provision) that the person has contravened a corporations/ scheme civil penalty provision; or

(ii)     …

 

(b)        the Court is satisfied that the disqualification is justified.

 

(2)       In determining whether the disqualification is justified, the Court may have regard to:

 

(a)        the person’s conduct in relation to the management, business or property of any corporation; and

 

(b)        any other matters that the Court considers appropriate.

 

(3)               …”

 

15                  ASIC’s application that the defendant pay a pecuniary penalty in respect of his contraventions of the Act is made pursuant to s 1317G(1) of the Act which provides: 

“A Court may order a person to pay the Commonwealth a pecuniary penalty of up to $200,000 if:

 

(a)       a declaration of contravention by the person has been made under section 1317E; and

 

(aa)     the contravention is of a corporation/scheme civil penalty provision; and

 

(b)       the contravention:

 

(i)         materially prejudices the interests of the corporation or scheme, or its members; or

(ii)        materially prejudices the corporation’s ability to pay its creditors; or

(iii)       is serious.”

 

16                  I have already made declarations pursuant to s 1317E of the Act of contraventions by the defendant of ss 1041A, 1041B(1)(b), 181(1) and 182(1) of the Act.  A contravention of any of these sections of the Act is a contravention of corporation/scheme civil penalty provisions as defined in s 1317DA of the Act thereby empowering me to:

(a)        disqualify the defendant from managing corporations if I am satisfied that disqualification is justified;

 

(b)       order that the defendant pay a pecuniary penalty of up to $200,000 if the contravention is serious.

 

17                  ASIC submitted that the defendant should be disqualified from managing corporations for eight years and should pay a pecuniary penalty of $100,000.

18                  The defendant submitted that he should face a disqualification period of no more than five years. 

19                  I recently considered the principles applicable to a proceeding in which contraventions of ss 180 and 1041H had been established, ss 206C(1), 1317E(1) and 1317G applied and whether any, and if so what, orders should be made pursuant to ss 206C(1) and 1317G(1) of the Act:  Australian Securities and Investments Commission v Citrofresh International Limited (No 3) [2010] FCA 292.  I propose to adopt the same approach and apply the same principles in this proceeding as I did in that proceeding.  In order that these reasons may be self‑contained I restate some passages in those reasons without further comment.

20                  Where a court is faced with an application to impose a pecuniary penalty and a disqualification from managing corporations consequent upon a finding of a contravention of the Act, it has been the practice of the Court, supported by a number of authorities, to consider the issue of disqualification before considering whether a pecuniary penalty should be imposed: Australian Securities and Investments Commission v Forem‑Freeway Enterprises Pty Ltd (1999) 30 ACSR 339 at 349‑350; Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 at 150‑151 per McHugh J; Australian Securities and Investments Commission v MacDonald (No 12) (2009) 259 ALR 116 at 164.  I propose to follow that practice.

SHOULD THE DEFENDANT BE DISQUALIFIED FROM MANAGING CORPORATIONS?

21                  There have been a considerable number of cases which have set out the principles, propositions and circumstances which should be taken into account in determining whether, and for what period, an order should be made disqualifying a person from managing a corporation.  I do not propose to analyse all those cases in any detail.  It is sufficient to note they were analysed in considerable detail and distilled into 15 propositions by Santow J in Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80. 

22                  Santow J said at 97‑99:

“The cases on disqualification gave orders ranging from life disqualification to 3 years.  The propositions that may be derived from these cases include:

 

(i)        Disqualification orders are designed to protect the public from the harmful use of the corporate structure or from use that is contrary to proper commercial standards.

 

(ii)       The banning order is designed to protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and in the suitability of directors to hold office.

 

(iii)      Protection of the public also envisages protection of individuals that deal with companies, including consumers, creditors, shareholders and investors.

 

(iv)       The banning order is protective against present and future misuse of the corporate structure.

 

(v)        The order has a motive of personal deterrence, though it is not punitive.

 

(vi)       The objects of general deterrence are also sought to be achieved.

 

(vii)      In assessing the fitness of an individual to manage a company, it is necessary that they have an understanding of the proper role of the company director and the duty of due diligence that is owed to the company.

 

(viii)     Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty.

 

(ix)       In assessing an appropriate length of prohibition, consideration has been given to the degree of seriousness of the contraventions, the propensity that the defendant may engage in similar conduct in the future and the likely harm that may be caused to the public.

 

(x)        It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the conduct.

 

(xi)       A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming.

 

(xii)      The eight criteria to govern the exercise of the court’s powers of disqualification set out in Commissioner for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 have been influential.  It was held that in making such an order it is necessary to assess:

 

–           character of the offenders;

–           nature of the breaches;

–           structure of the companies and the nature of their business;

–           interests of shareholders, creditors and employees;

–           risks to others from the continuation of offenders as company directors;

–           honesty and competence of offenders;

–           hardship to offenders and their personal and commercial interests; and

–           offenders’ appreciation that future breaches could result in future proceedings.

 

(xiii)     Factors which lead to the imposition of the longest periods of disqualification (that is disqualifications of 25 years or more) were:

 

–           large financial losses;

–           high propensity that defendants may engage in similar activities or conduct;

–           activities undertaken in fields in which there was potential to do great financial damage such as in management and financial consultancy;

–           lack of contrition or remorse;

–           disregard for law and compliance with corporate regulations

–           dishonesty and intent to defraud;

–           previous convictions and contraventions for similar activities.

 

(xiv)     In cases in which the period of disqualification ranged from 7 – 12 years, the factors evident and which lead to the conclusion that these cases were serious though not “worst cases”, included:

 

–           serious incompetence and irresponsibility;

–           substantial loss;

–           defendants had engaged in deliberate courses of conduct to enrich themselves at others’ expense, but with lesser degrees of dishonesty;

–           continued, knowing and wilful contraventions of the law and disregard for legal obligations;

–           lack of contrition or acceptance of responsibility, but as against that, the prospect that the individual may reform.

 

The difficulty with Roussi’s case is that disqualification for 10 years was ordered, as this was the period of disqualification that the ASC had sought.  Had a longer period been applied for, Einfeld J may have considered giving a longer period.

 

(xv)      The factors leading to the shortest disqualifications, that is disqualifications for up to 3 years were:

 

–           although the defendants had personally gained from the conduct, they had endeavoured to repay or partially repay the amounts misappropriated;

–           the defendants had no immediate or discernible future intention to hold a position as manager of a company;

–           in Donovan’s case, the respondent had expressed remorse and contrition, acted on advice of professionals and had not contested the proceedings.

(Citations omitted)

 

23                  It is also relevant to note that in Rich v Australian Securities and Investments Commission (supra), McHugh J said at 152 that Santow J’s judgment is the leading authority on the reasons for a Court exercising its power under s 206C or 206E of the Act.  I have included in my consideration, and adopted, Santow J’s propositions.

24                  Although considerable guidance can be derived from the principles and propositions extracted from the cases referred to by Santow J, it must be remembered that each case in which disqualification was considered turned on the particular facts in that case.  The manner in which previous courts determined that a period of disqualification should be imposed are a useful guide but they must be considered with care as the relevant and material facts in each case will vary from case to case.

25                  As Austin J pointed out in Australian Securities and Investments Commission v Vines (2006) 58 ACSR 298 at 313, the propositions expounded by Santow J in Adler must now be reconsidered in the light of the decision of the High Court in Rich v Australian Securities and Investments Commission (supra).  Austin J continued at 313:

“[35]   … The High Court’s decision, that proceedings in which an application is made for a disqualification order are proceedings for the imposition of a penalty, for the purposes of the privilege against exposure to a penalty, has very little effect on the propositions.  It directly affects only proposition (v), to the extent that a disqualification order should now be regarded as involving the imposition of a penalty.

 

[36]     The majority judges in the High Court did not directly consider the principles to be applied by the court when considering whether to make a disqualification order, and if so, the period of disqualification.  However, McHugh J considered that topic at some length.  His general thesis, expounded at [41], was that although judges frequently said that the purpose of the disqualification provisions is protective, what they did in practice was little different from what judges do in determining what orders or penalty should be made for offences against the criminal law.

 

[37]     His Honour enumerated some factors that the courts take into account, in what he referred to as a “synthesis from which the judges make a value judgment concerning whether to order disqualification and, if so, the period of disqualification that should be imposed” (at [43]):

 

–           whether the defendant now is or in future will be a fit and proper person to manage corporations;

–           the size of any losses suffered by the corporation, its creditors and consumers;

–           legislative objectives of personal and general deterrence;

–           contrition on the part of the defendant;

–           the gravity of the misconduct;

–           the defendant’s previous good character;

–           prejudice to the defendant’s business interests;

–           personal hardship; and

–           the willingness of the defendant to render assistance to statutory authorities and administrators.

 

[38]     He referred to Santow J’s 15 propositions with approval, and set them out:  at [49].  He remarked (at [50]) that some of the propositions go to the protection of the public, while others relate to considerations that reduce the period of disqualification and therefore benefit the defendant, and still others (such as propositions (v) and (vi)) recognise that the disqualification provisions also have objectives of personal and general deterrence, strongly resembling sentencing principles under the criminal law.”

 

26                  Although it follows from the High Court decision in Rich that an order for disqualification should now be regarded as involving the imposition of a penalty, there is no reason why the Court should not, in respect of a single contravention, impose a period of disqualification as well as a pecuniary penalty:  ASC v Donovan (1998) 28 ACSR 583 at 602; Australian Securities and Investments Commission v Vines (supra) at 317. 

27                  There are a number of findings in my earlier reasons for judgment which are particularly relevant to the issue whether, and the extent to which, the defendant should be disqualified from managing corporations and ordered to pay a pecuniary penalty.  These findings are:

“53      The weight of the evidence led by ASIC points to the conclusion, which I accept, that what the defendant said to Mr Wadley on 2 May 2008 was a deliberate and conscious falsehood. 

 

54        I am also satisfied that the defendant went to significant lengths to conceal his identity as the true purchaser of the shares.  Notwithstanding several discussions with various members of Select Vaccines’ Remuneration Committee and board members, the defendant did not inform them that he had any involvement in the transaction on 31 December 2007.  Indeed, he told Mr Wadley to the contrary. 

 

55        I am also satisfied that the defendant brought the Q&A document into existence for the specific purpose of concealing his identity as the buyer of the shares from ASIC. 

…

60        In my opinion, the Q&A document is compelling evidence of the defendant’s intention to mask or obscure the fact that he was involved in the trade, that he was the true purchaser of the shares and that the purpose of the trade was to bring about an increase in the market price of Select Vaccines shares at the end of trading for the calendar year 2007.

…

104      Not only did the defendant, a director of Select Vaccines, consciously and deliberately contravene the Select Vaccines’ Share Trading Policy, he deliberately and consciously lied to the other members of the Board of Directors about what he had done on 31 December 2007 and embarked on a deliberate course of conduct to conceal what he did.  The severity of his conduct and the egregious nature of his conduct was exacerbated by the preparation of the Q&A document around 26 June 2008. 

 

105      The share trade which the defendant initiated and implemented on 31 December 2007, which I have found was carried out on his own behalf and not on behalf of anyone else, was a clear breach of Select Vaccines’ Share Trading Policy.  The end result of his conduct was that Select Vaccines suffered a financial loss.  Had the share trade not been undertaken and completed, Martin Soust & Co would not have received the bonus which was available to it under the Executive Service Agreement in the event of an increase relevantly in the share price.  Further, the defendant concealed from the other directors of Select Vaccines the true situation in relation to the share trade.  If he had been honest with his fellow directors, they would not have approved or resolved to grant the bonus. 

 

106      As I have found earlier, the defendant lied to Mr Wadley when he told him after the inquiry from the ASX that it was his mother who had purchased the shares.  He consciously and deliberately concealed from Select Vaccines and its directors that he was the true purchaser of the shares.  When the matter of the bonus was discussed at the meetings of the Remuneration Committee and the Board he continued to conceal the true position.  What is more, he signed the cheque that effected the payment of the bonus.  I have no doubt that the defendant’s course of conduct on and after 31 December 2007 in relation to the share trade on that day was such that in contravention of s 181(1) of the Act the defendant did not exercise his power and discharge his duty as a director of Select Vaccines in good faith, in the best interests of Select Vaccines or for a proper purpose.  Indeed, he did so for an improper purpose.  Further, by initiating and implementing the share trade on 31 December 2007 and ultimately signing the cheque that effected payment of the bonus, the defendant made improper use of his position as a director of Select Vaccines and its Chief Executive Officer to gain an advantage for himself or at least for Martin Soust & Co and to cause detriment to Select Vaccines.”

 

28                  As ASIC submitted, the defendant’s conduct did not occur in respect of one isolated incident.  Rather, the defendant behaved in a dishonest manner repeatedly and over a period of months commencing in December 2007 and continuing thereafter up to August 2008.  In addition, ASIC submitted that there was no material before the court which would indicate any remorse or contrition on the defendant’s behalf which, when coupled with the degree of his dishonesty, was of powerful significance in the consideration of penalty – particularly any period of disqualification.  I agree with that submission.

29                  The conduct of the defendant in carrying out the unlawful share trade on 31 December 2007 was compounded by his subsequent dishonest behaviour.  He failed to disclose his involvement in the trade when asked by a company officer after an enquiry from the ASX, he breached the terms of the Select Vaccines share trading policy, he failed to disclose to his fellow directors his involvement in the trade at meetings of the Remuneration Committee and the Board, he signed the bonus payment cheque made payable to his company and created the Q&A document as an aide‑mémoire for his mother in an to attempt to avoid detection. 

30                  The defendant’s pattern of conduct constituted by each contravention of the Act individually was, and all the contraventions cumulatively were, “serious”.  Each step in the defendant’s pattern of conduct was calculated and deliberate.  The defendant’s dishonesty calls into operation Santow J’s proposition (viii) (par [22] above):

“Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty.”

I do not disregard Santow J’s other propositions but I regard this proposition of particular significance.

 

31                  I consider that this is a case where the character and the nature of the factual circumstances constituting the contraventions is the dominant integer in the equation of the sentencing process.  In Australian Competition and Consumer Commission v ABB Transmission and Distribution Ltd (No 2) (2002) 190 ALR 169 Finkelstein J said at 177:

“If one accepts, as I do, that general deterrence is the most important element of sentencing antitrust offenders, “the character of the offence, rather than that of the offender [is] the central determinant in the sentencing decision”:  D Baker and B Reeves, “The Paper Label Sentences: Critiques” (1977) 86 Yale Law Journal 619 at 622.  While I do not accept, as Baker and Reeves assert, that the individual offender’s characteristics are irrelevant, they should be relegated in importance in light of the goal to be achieved, that goal being to deter future contraventions …”

I agree, with one qualification, with his Honour’s observation and consider that it applies with equal force when considering the imposition of pecuniary penalties and periods of disqualification for contraventions of provisions such as ss 181(1), 182(1), 1041A and 1041B of the Act.

 

32                  My one qualification is that usually, or at least frequently, the need to emphasise the component of specific deterrence is not necessary or at least is not as great, having regard to expressions of contriteness, remorse and shame.  Such expressions are absent in this case.

33                  The principal focus of consideration in this case should be on the character and nature of the contraventions, and their importance within the context of the obligations cast on directors of corporations and participants in the market found in the corporations legislation, rather than on the character of the contravener and the impact and consequences of the contravener’s conduct, although both are obviously factors to be weighed in the balance.

34                  I have been troubled by the absence of any evidence by the defendant from which I could draw an inference that he was relevantly contrite or relevantly remorseful.

35                  In his affidavit the defendant explained his financial position.  Curiously, he did not attempt to explain any component of his course of conduct in respect of which I had made findings.  Nor did the defendant express any contrition, remorse or shame in respect of the various aspects of his dishonest conduct.  Further, I do not consider that his affidavit was candid, in the sense that it did not make full disclosure.  I infer that he intended the contents of the affidavit to be a full and complete list of all his assets and liabilities and his financial position.  There is nothing in the affidavit which is incorrect but the defendant did not disclose the transfer of his interest in the matrimonial home to his wife in June 2008, nor did he refer to his interest (and I use the word “interest” in a loose and non‑technical sense) in the residuary estate of his late mother or the trusts created thereunder. 

36                  I consider the lack of any explanation for his conduct and the absence of any expression of contrition, remorse or shame are matters which bear heavily upon the extent and period of any disqualification and the level of any pecuniary penalty. 

37                  ASIC submitted that I ought not to accede to the defendant’s submission that there was an explanation why there was no evidence of the defendant’s contrition and remorse and that notwithstanding this absence of evidence I should still impose a lesser period of disqualification and a lesser pecuniary penalty.  ASIC relied on the observation of Santow J in Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (supra) where Santow J said at 109, par [104] that in considering whether a disqualification order should be made:

“… it is highly relevant to know whether the director or officer is likely to contravene again as the earlier statement ([57]) of guiding factors makes clear.  Absence of contrition must therefore be a factor favouring a disqualification and moreover a lengthy period of it.  At the least, Mr Adler could not invoke contrition as a reason for a lesser period of disqualification.”

 

38                  ASIC submitted that an absence of evidence of contrition should lead to a longer period of disqualification because such absence tended to suggest that the contravener had not reached a full appreciation of the wrongful nature of his conduct and that the Court could not be satisfied that the need for personal deterrence had already been met. 

39                  I am disposed to accept this submission from ASIC.  Having regard to the material placed before me by the defendant’s character witnesses and his evidence itself, I have no doubt that the defendant has a full appreciation of the deleterious consequences of his conduct.  As against that, I have no evidence or material before me which enables me to determine whether the defendant has reached any appreciation of the wrongful nature of his conduct and the extent of his dishonesty or whether he has any regrets about it. 

40                  Counsel for the defendant acknowledged that there was no evidence or material before me from which I could form an assessment of any contrition or remorse by the defendant other than the repayment of the bonus by a third party on the day before the hearing started.  The defendant submitted that evidence of contrition and remorse was to be found in the fact of the repayment of the performance bonus which should be regarded as an acknowledgement that the sum was improperly gained and properly to be repaid.  The difficulty about that submission is that the money was not repaid by the defendant and in any event, was made without any admission of liability.  The defendant sought to explain that fact on the basis that a direct admission of liability by the defendant might involve a perfection of exposure to prosecution on other grounds, criminal and possibly civil at the suit of the insurance company.  Counsel for the defendant put the matter this way:

“The most that I am able to put on evidence that goes to the question [of contrition or remorse] is that the payment means something.  I am inviting your Honour to conclude that it means something contrite.” 

 

41                  I reject the repayment of the performance bonus as any evidence of contrition or remorse by the defendant or as a mitigating factor for a number of reasons.  First, it was not made by him personally but rather by a third party.  Secondly, it came very late in the proceeding, more than twelve months after this proceeding was instituted by ASIC.  Thirdly, it was made “without any admission of liability to do so on behalf of” the defendant.  Fourthly, there was no evidence as to whether the defendant was under any obligation to reimburse the third party who paid it.

42                  Counsel for the defendant sought to explain why there was no evidence of any contrition or remorse by the defendant on the basis that he might be subject to a further criminal proceeding.  However, that explanation rings hollow.  I am not able to accept the defendant’s submission that the absence of evidence of contrition or remorse should not be taken into account because there is a prospect of a subsequent criminal proceeding. 

43                  This issue was addressed by Santow J in Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (supra).  There, the defendant Mr Adler submitted that ASIC’s submission, relying upon an absence of contrition as a reason for lengthy disqualification, was not a factor that should be taken into account because it was a case which had the potential to be followed by a criminal prosecution.  Santow J responded to that submission by saying that although the Corporations Act placed no impediment on criminal proceedings being started against a person for conduct that was substantially the same as conduct constituting a contravention of a civil penalty provisions, s 1317P needed to be considered in context.  Section 1317P provides:

“(1)     Subject to subsection (2), criminal proceedings may be started against a person for conduct that is substantially the same as conduct constituting a contravention of a civil penalty provision regardless of whether:

 

(a)        a declaration of contravention has been made against the person; or

 

(b)        a pecuniary penalty order has been made against the person; or

 

(c)        a compensation order has been made against the person; or

 

(d)        the person has been disqualified from managing a corporation under Part 2D.6; or

 

(e)        an order has been made against the person by ASIC under section 920A (banning orders) or by the Court under section 921A (disqualification by Court).

 

(2)       Subsection (1) does not apply if:

 

(a)        an infringement notice is issued to the person for an alleged contravention of subsection 674(2) or 675(2); and

 

(b)        the infringement notice is not withdrawn under section 1317DAI.”

 

44                  His Honour considered that it was difficult to see that the likelihood of bringing a criminal proceeding would be enhanced by an expression of contrition.  His Honour also pointed to the express provisions of s 1317Q of the Act and said at 109:

“… It is difficult to see that the likelihood of bringing such criminal proceedings would be enhanced by an expression of contrition.  There are also express provisions of s 1317Q.  These essentially preclude evidence of information given being admissible in such criminal proceedings if previously given in proceedings for a pecuniary penalty order, which these are, even if they seek other relief.  This is in the situation where the conduct alleged to constitute the offence is substantially the same as the conduct that was claimed to constitute the contravention.  The only exception is a criminal proceeding in respect of the falsity of evidence so given in the proceedings for the pecuniary penalty order.  Since the court is entitled to assume that truthful evidence would be given in any civil penalty proceedings, that contingency is one which can be disregarded.  Moreover, the court retains a discretion to exclude evidence: see judgment at [503].  Then there are the procedures of a protective certificate under s 128 of the Evidence Act 1995 (NSW), though there remains the difficulty of the interaction between ss 128(7) and (8).

 

[102] While therefore such expression of contrition if constituting, or accompanied by, an admission of liability, might have rendered it unnecessary for ASIC to have had to make out its case in relation to the civil penalty proceedings before me, I do not consider that the possible sequel of criminal proceedings renders irrelevant the absence of any expression of contrition in the present context, despite the arguments dealt with below.”

 

45                  Section 1317Q of the Act provides:

“Evidence of information given or evidence of production of documents by an individual is not admissible in criminal proceedings against the individual if:

 

(a)       the individual previously gave the evidence or produced the documents in proceedings for a pecuniary penalty order against the individual for a contravention of a civil penalty provision (whether or not the order was made); and

 

(b)       the conduct alleged to constitute the offence is substantially the same as the conduct that was claimed to constitute the contravention.

 

However, this does not apply to a criminal proceeding in respect of the falsity of the evidence given by the individual in the proceedings for the pecuniary penalty order.”

 

46                  Senior Counsel for ASIC also pointed out the defendant would also have available to him the procedure of a protective certificate given by the Court pursuant to s 128(7) of the Evidence Act 1995 (Cth).  However, I doubt that procedure is available where the witness volunteers the evidence and is not asked to give the evidence and objects to giving it.

47                  The defendant submitted that a consideration of the four contraventions individually, together with a review of the four contraventions in total, did not reveal that the contraventions were of the most serious of their kind to the extent that they should be considered as aggravating factors.  The impact of the defendant’s actions on the market was said to have had little impact on market perceptions or other conduct in the market.  This insignificant impact it was submitted, rendered any artificiality so created as transparent and discernable by the market given that it was discoverable and traceable through the ASX to people connected with the defendant and was recorded as a trade attributable to the defendant.

48                  I reject this submission.  The defendant’s contraventions of ss 1041A and 1041B(1) of the Act were not apparent to the market and were only brought to light as a result of the ASIC investigation.

49                  The defendant made a number of submissions which were directed to mitigating the extent to which there should be a period of disqualification and a pecuniary penalty. 

50                  The defendant submitted that a mitigating factor on the period of disqualification and the amount of a pecuniary penalty was found in the fact that although he advanced positive facts in his pleaded defence, he gave the earliest indication he could to ASIC and to the Court after the introduction of the Q&A document into evidence that he would not call evidence in support of his defence and would not conduct a trial challenging ASIC’s evidence.  Consequently the trial was shortened enabling a reduction in cost for all parties involved, including the Court. 

51                  I do not see this as a significant mitigating factor which has a significant impact upon the period of the disqualification or the quantum of the pecuniary penalty, although I do take it into account. 

52                  The announcement by counsel on behalf of the defendant occurred on the Friday before the commencement of the trial on the following Tuesday.  The defendant’s decision not to call evidence in support of his defence and not to challenge the plaintiff’s evidence was brought about, in the defendant’s counsel’s terms in his written submissions, “following revelation and examination of the Q and A evidence”.  Any savings to ASIC, its witnesses and the Court were minimal having regard to the time at which this occurred.  There was nothing saved in the preparation of the case for hearing.  The announcement occurred after it became apparent to the defendant that his dishonesty in relation to the preparation of the Q&A document and what he expected to be the outcome of the use of that document was exposed. 

53                  Notwithstanding the fact that the defendant said he would not call evidence in support of his defence and would not challenge the plaintiff’s evidence, he still relied upon his pleaded defence that the transaction was not his.  That still remained a live issue at the trial. 

54                  The defendant submitted that there had been value to the Court in the defendant not having pressed the positive defence which his pleaded defence anticipated.  I do not accept that submission.  The defendant continued to rely upon the positive defence in paragraph 14 throughout the trial.  Although he did not call any evidence in relation to it, I was obliged to consider it and make a finding in respect of it.  As I pointed out to counsel, if I had not made a finding in relation to that positive defence and the identity of the person who initiated or procured the transaction on 31 December 2007, I would have fallen into error.

55                  Counsel for the defendant sought to explain the relevance of the defendant’s approach to this pleaded defence by saying that the defence was conducted on the instructions of the defendant.  Not only did he put ASIC to its proof, he put forward an affirmative proposition that the transaction was his mother’s.  Little public time and cost of Court time was saved.  If he had withdrawn the positive allegation in the defence – it was my mother’s trade – the situation would have been different.  Until the Q&A document emerged in evidence the defendant intended to pursue his defence that the transaction was not his but that of his mother.  After the Q&A document emerged he still relied on that defence, but did not call any evidence to support it.

56                  This analysis is relied upon by ASIC in support of its submission that there is a positive need for the aspect of personal deterrence to be taken into account in determining the period of disqualification and the amount of any pecuniary penalty.  I agree with that submission.

57                  The character evidence called on behalf of the defendant demonstrates an otherwise unblemished record and an attitude of personal integrity and I have taken it into account.  The witnesses as to character expressed great surprise at the defendant’s conduct.  In the words of Mr Carey, one of the character witnesses:

“I would not otherwise have believed that he would so knowingly or wantonly be in breach of the law, either technically or otherwise, particularly for such modest gain when so much was at stake.”

58                  In such circumstances the character evidence called on behalf of the defendant is of limited assistance to me particularly where the defendant has not sought to explain his conduct nor exhibited any contrition or remorse. 

59                  The defendant submitted that evidence of prior good character might diminish the relevance of specific deterrence and of rehabilitation but that submission is of little force in the present case having regard to the absence of any evidence of remorse or contrition on the part of the defendant. 

60                  The defendant submitted that the character evidence which he adduced was not adduced for the purpose of diverting or distracting attention from central penalty considerations, in particular, general deterrence and proper punishment for moral culpability but rather, as I understood it, to place the defendant’s contraventions of the Act and his dishonesty in the context of a person who had not been guilty of any prior misconduct and in the context of a proposition that the contraventions were an aberration and a deviation from his normal conduct which were unlikely to recur and which had already been powerfully sanctioned by market and other community forces.  I reject this submission insofar as it is intended to minimise the need for a specific deterrence component in the period of disqualification or the amount of the pecuniary penalty.  I consider there is a need for a specific deterrent component not only because of the character of the contraventions and the multiple acts of dishonesty but also because of the lack of any evidence of remorse or contrition. 

61                  The defendant submitted as another mitigating factor that the false and misleading aspects of his conduct were confined to “a very limited audience, namely the Remuneration Committee of Select Vaccines”.  That may be so, but this case is not what I called in the course of argument an “impact on market” case, rather it is a case of the commission of continued personal dishonesty.

62                  The defendant submitted that a factor pointing to a disqualification period of less than five years included the defendant’s very public fall from grace which had left him unemployable in the biotechnology field since August 2008.  This punishment, it was submitted, should be reflected in any period of disqualification that the defendant received.

63                  The defendant submitted that the period of disqualification ought to be fixed taking into account what he called the effective market sanction of disqualification from corporate office which had run from August 2008.  The defendant relied upon the evidence of Professor Anderson to support the proposition that the defendant had been effectively disqualified from obtaining further employment in the biotechnology industry from August 2008 as any further employer would want to know the circumstances under which he had left the employment of Select Vaccines.  For that reason it was submitted that any period of disqualification should run from the termination of his employment in August 2008 but certainly no later than the commencement of this proceeding in early 2009.

64                  Professor Anderson expressed the view that biotechnology was a very small industry, that it operated in an area of risk aversion and that there was no foreseeable way that he could imagine the defendant being able to gain employment without the question being raised of the circumstances of his departure from Select Vaccines.  Professor Anderson considered that the effective date of his disqualification from employment within the biotechnology industry was the time of his termination from Select Vaccines. 

65                  The defendant relied upon this evidence in support of the proposition that unlike other cases he was unable to demonstrate from employment subsequent to the termination of his employment with Select Vaccines that he had learned the error of his ways and so was unable to demonstrate the unlikelihood of future contraventions.  That may be so, but there are other ways of demonstrating expressions of remorse and contrition but the defendant did not do so.  To that extent personal deterrence is a very live issue in this proceeding. 

66                  The defendant submitted that it was not a case where personal deterrence ought to apply significantly in determining the extent of any disqualification or imposition of a pecuniary penalty.  I disagree.  I am not satisfied, because I have not had any evidence to that effect, that the defendant has reached an apprehension fully of his own conduct.  I consider that there remains a need for a significant personal deterrence component in any period of disqualification or imposition of a pecuniary penalty. 

67                  I do not accept that there was an effective market sanction commencing from the end of August 2008.  Any market sanction would run from the date of the publication of my reasons on 15 February 2010 and the orders made.  It will be recalled that when the defendant reached an agreement with the Board of Select Vaccines as to the termination of his employment in August 2008 he informed them that there was an innocent explanation for what had occurred but that under legal advice he was not to talk about it.  In short, the defendant concealed his dishonest conduct and the centrality of his role in the purchase of the shares on 31 December 2007 and that role was only exposed to the public gaze after the trial started and, in particular, after my reasons for judgment were published on 15 February 2010.

68                  I accept the submission of the defendant that viewed in totality the contraventions did not constitute a most serious case of an impact upon the market or of the proscribed conduct having such a consequence.  But that submission does not detract from the significance of the contraventions of the Act which demonstrated the defendant’s dishonesty, bad faith, self interest and a desire for personal gain and improper purpose of conduct. 

69                  The defendant accepted that the absence of explanation for the relevant conduct had an impact which I was entitled to take into account in determining the length of the disqualification and the sum of the pecuniary penalty. 

70                  The defendant submitted that little new had emerged with respect to the character of the conduct since the publication of my reasons for judgment.  That is not quite correct.  I have been given character references on behalf of the defendant, but more significantly there has been no evidence of any indication of remorse or contrition on the part of the defendant.  Counsel for the defendant sought to explain the absence of evidence of contrition or remorse on the basis that:

(a)        the defendant was not immune from criminal prosecution in respect of the same subject‑matter of this proceeding.  I have rejected the significance of that explanation;

 

(b)        an admission by way of evidence of contrition or remorse would give rise to an immediate present obligation to repay the legal costs advanced to the defendant by the insurance company under the directors and officers policy of insurance.  I do not accept that such evidence alone would give rise to such an obligation.

 

71                  I am satisfied that a significant period of disqualification is required and justified in the present circumstances.  In particular there is a significant role for personal deterrence to play for the reasons to which I have referred.  It is also important that there be a general deterrence component of the period of disqualification as it is necessary to make it clear to directors and other persons in the commercial community that personal dishonesty in acting as a director of a corporation will not be condoned by the Court and will be visited with severe sanctions.  Directors of corporations and, particularly, directors of listed public corporations must realise that they have a considerable amount of trust committed to them not only by the shareholders in their company but also by the company’s creditors, the commercial community and the public generally.  They occupy a position of trust which, if misplaced, in appropriate cases should disqualify them from further participation in the management of such corporations for significant periods. 

72                  The defendant has suffered severe financial and personal consequences as a result of his conduct, not only his initial contraventions of the Act on 31 December 2007 but also his exacerbation of that conduct subsequently in deceiving the members of the Remuneration Committee of Select Vaccines, lying to the company’s secretary in May 2008, bringing into existence a document which was designed to perpetuate his deceit and dishonesty and ultimately terminating his employment with Select Vaccines on the basis that there was an innocent explanation for what had occurred and on the basis that he would retain the performance bonus. 

73                  I do not consider that this is a “worst” case if, for no other reason, because the impact on the commercial community and the investing community was insignificant.  As I pointed out in the course of submissions to counsel, this was not an “impact” case it was a “dishonesty” case, and a very serious “dishonesty” case.  The gravamen of this case lies in the litany of personal dishonesty calculated to obtain, and maintain personal gain. 

74                  I have taken into account the character evidence given on behalf of the defendant.  Until 31 December 2007 he had an unblemished reputation which stood high in the biotechnology industry.  His conduct on that day and thereafter was aberrant but notwithstanding his previous good character I consider that for the reasons to which I have referred it is necessary to impose a period of disqualification on and from the date of the order which I propose to make for a period of 10 years. 

SHOULD A PECUNIARY PENALTY BE IMPOSED ON THE DEFENDANT?

75                  I turn to the issue whether the defendant should be ordered to pay a pecuniary penalty.

76                  In considering the imposition of a pecuniary penalty when it is also proposed to make a disqualification order it is necessary to take into account the principle of “totality”, that is to say it is important to ensure that the “aggregate amount is just and appropriate”:  Australian Securities and Investments Commission v Vines (supra) at 318.  I have taken this approach bearing in mind that although there are four separate contraventions of the Act in respect of which I am empowered to impose a period of disqualification and a pecuniary monetary payment, there are essentially two courses of conduct which lie as the factual underpinning of the contraventions.  Firstly, what occurred on 31 December 2007, and secondly, the sequence of events thereafter.  It is to these two factual courses of conduct that I have had regard in determining the period of disqualification and the amount of the pecuniary penalty.

77                  In Re HIH Insurance Limited (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (supra), as well as setting out a number of principles and propositions in relation to the exercise of the power of disqualification, Santow J also set out a number of principles and propositions in relation to the power and discretion to impose a pecuniary penalty.  His Honour said at 114‑116: 

125      It is well established that the principal purpose of a pecuniary penalty is to act as a personal deterrent and a deterrent to the general public against a repetition of like conduct (ASC v Donovan; Trade Practices Commission v CSR Ltd). In Donovan, the court said:

 

“If compliance with the appropriate standards of commercial conduct within the management of corporations by deterrents is the objective, then any penalty should be no greater than is necessary to achieve this objective. Otherwise severity above that figure would be oppressive.”

 

126      Following a review of the relevant cases, I have attempted to summarise the propositions that may be derived. I recognise that, as with banning orders, there is no simple mechanical process for quantifying the appropriate penalty but some guidance can be derived from the principles and factors that are identified below. I should add that in a context where honesty or propriety of purpose is involved, the sphere of discourse applicable to economic legislation such as antitrust law is wholly distinct from corporations law with its emphasis on proper purpose and honesty; see more generally the discussion by ALRC in “Securing Compliance - Civil and Administrative Penalties in Australian Federal Regulation” discussion paper 65, April 2002 esp. Ch 18. These propositions have guided me in the present case.

 

(i)         the pecuniary penalty has a punitive character, but it is principally a personal and general deterrent to prevent the corporate structure from being used in a manner contrary to commercial standards. The penalty should be no greater than is necessary to achieve this object: ASC v Donovan at 608;

 

(ii)        to determine whether compensation is to be paid and in what amount it is necessary to consider the prospect of the respondent paying such compensation and the hardship to the defendant from such payment. Compensation has been ordered for an amount less than that lost even though there was little prospect of any of it being recovered: ASC v Forem – Freeway at 351;

 

(iii)       the capacity of the defendant to pay is a relevant consideration in determining a pecuniary penalty: ASC v Forem – Freeway at 351‑352;

 

(iv)       in assessing a pecuniary penalty it is important to consider the consequences of an associated disqualification order for the defendant. If the making of such an order has significant consequences, they may operate as a factor in favour of a lesser penalty. Where the disqualification order does not have significant consequences for the defendant, the prohibition order is likely to be only marginally relevant: Re Tasmanian Spastics Association at 751-752;

 

(v)        it is important to assess whether the order will prejudice the rehabilitation of the defendant: ASC v Forem – Freeway at 352;

 

(vi)       the size of the penalty is a question of discretion. The circumstances of one case should not dictate the size of the penalty on another case: ASC v Donovan at 608;

 

(vii)      in ASC v Forem – Freeway civil compensation of $200,000 was ordered. This amount was lower than the losses to the company concerned. This amount was ordered, even though it was highly unlikely that the amount would ever be paid as the respondent was bankrupt. In this case it was held that precision in the amount was therefore unnecessary: ASC v Forem – Freeway at 351;

 

(viii)     a fine was not ordered in ASC v Forem – Freeway. However the ASC was given liberty to apply at a later stage in relation to this matter. The court held that the personal hardship to the respondent, the unintended punitive consequences of the other orders and the lack of capacity to pay, justified such order: ASC v Forem – Freeway at 351 – 352;

 

(ix)       factors leading to the order of a penalty in the range of $20,000 to $40,000 included:

–     Defendant was aware of impropriety of actions

–     No intention to deprive company permanently of funds

–     Amounts in question not large

–     No deliberate falsification of accounts

–     Cases classed as being serious misconduct, but not worst cases.

Re Tasmanian Spastics Association at 752; ASC v Donovan at 609

 

(x)        relevant factors leading to the court to order the lower range penalties in the range of $4,000 – $5,000 included:

–     Remorse and contrition shown

–     Efforts to repay misappropriated funds

–     Acted upon the advice of professionals

–     Did not contest the proceedings, or sought to save costs in proceedings

–     Tended to not involve dishonesty, but negligence or carelessness

–     Previous unblemished character

–     Further contraventions unlikely

ASC v Donovan at 609; ASC v Spencer (1997) 25 ACSR 143 at 144-145

(citations omitted)

I have included in my consideration, and adopted, Santow J’s propositions.

78                  I have already found that the defendant’s contraventions of ss 181(1) and 182(1) of the Act were serious. 

79                  In this context I bear in mind the observations of the Full Court of the Federal Court in Australian Securities and Investments Commission v Beekink (2007) 238 ALR 595 at 608:

“[119]   The third reason is that in recent years the courts have been more concerned with the need for the imposition of higher civil penalties to reflect community expectations of the standards to be imposed on company directors; see for example Finkelstein J in Vizard at [33].

 

[120]     This is particularly so at a time when the commercial community demands ever greater financial rewards from the benefit of public office. The expectation of such rewards must be accompanied by an expectation of higher penalties when those in office slip from the standards imposed upon them under the law.

 

80                  The defendant submitted, in substance, that his financial position was parlous.  He referred to his loss of income since August 2008 and the absence of any significant income since that time, his inability to sustain and maintain a borrowing of approximately $700,000 secured against his family home, the fact that he had considerable liabilities, that there was the issue of legal costs and the fact that he was not an owner of his family home.  That summary narrative does not disclose the complete picture.  ASIC did not contest the principle that evidence of an incapacity or a limited capacity to pay a pecuniary penalty was relevant to the exercise of the Court’s discretion in imposing a penalty.  Rather, ASIC challenged the defendant’s evidence as to the financial means available to him.

81                  Senior Counsel for ASIC accepted the proposition that evidence of an incapacity, or a limited capacity, to pay a pecuniary penalty is relevant to the exercise of the court’s discretion in imposing a penalty.  Senior Counsel for ASIC explained that the purpose of Mr Quinn’s evidence was to respond to the defendant’s affidavit as to his means and financial position.  Mr Quinn’s evidence, ASIC submitted, showed that the defendant had access to $700,000 in his capacity as trustee of the trust, and an unfettered discretion as to the exercise of his powers relating to the disposition of income and corpus of the trust because he falls within the class of a principal beneficiary and the broader class of a beneficiary under the terms of the trust and is relevantly a permissible object of the exercise of those powers.

82                  ASIC submitted that the evidence of Mr Quinn demonstrated that the reason why he did not have an interest in the matrimonial home was a direct result of his own conduct in transferring his interest to his wife for no consideration.

83                  Senior Counsel for ASIC also invited me to draw the conclusion that the defendant transferred his interest in the matrimonial home in response to the commencement of ASIC’s investigation into his conduct.  The transfer was registered on 6 October 2008, whilst the Transfer of Land document is stamped, for stamp duty purposes 27 June 2008 – one day before the creation of the Q&A document.  I would not consider whether to draw such a conclusion without giving the defendant an opportunity to respond to the submission. 

84                  ASIC pointed to two matters to which I have already referred.  The first is that to the extent to which the defendant sought to rely upon the fact that he held no interest in property, that position was brought about by his own conduct as he had transferred his half interest in the family home for no monetary consideration to his wife shortly after ASIC had commenced an investigation of his conduct and one day before he brought into existence the Q&A document.  ASIC submitted that in considering the defendant’s submission as to his lack of means I ought not to take into account the fact that his wife alone is the registered proprietor of the family home but that I ought to proceed on the premise that any equity in the family home was accessible by the defendant himself as well.  I accept this submission.  ASIC made no submission that I should make any finding as to the intent with which the transfer occurred on or about 27 June 2008 and I do not do so.

85                  The second matter is that I am satisfied that the defendant’s means include the opportunity, if the defendant wishes to take advantage of it, to access the whole or any portion of the assets of the order of $700,000 owned by the trust established under his mother’s will in respect of which he is the sole trustee.  I am satisfied that the defendant, in his capacity as trustee of that trust, has an unfettered discretion as to the exercise of powers relevant to the disposition of either income or capital from the trust and that because he falls within the class of both principal beneficiaries and the broader class of beneficiaries, he is a permissible object of the exercise of a power of appointment of income and capital.  Although he does not have an interest which has vested in respect of any part of the trust or its assets, he has the opportunity to distribute income and capital to himself. 

86                  The defendant submitted that the employment market and the biotechnology industry had effectively exacted a penalty upon the defendant by leaving him unemployed since the date he left the employment of Select Vaccines in August 2008.  There was evidence from the character witnesses called on behalf of the defendant that the likelihood of him obtaining employment in the biotechnology industry in the short to medium term was unlikely and that that position had obtained since the end of August 2008. 

87                  However, as I have observed earlier, I do not accept the proposition that I should take into account the fact that the market has exacted a penalty on the defendant prior to 15 February 2010 when I published my reasons for judgment and made orders.  At the time the defendant left the employ of Select Vaccines in August 2008 he did so on the basis of his resignation from the company.  There was no evidence that it was known outside Select Vaccines that the defendant’s resignation occurred because Select Vaccines was entitled to terminate his employment for cause.  It may be that the institution of this proceeding by ASIC may have raised a question mark in relation to the employment of the defendant thereafter but in terms of there being a public statement or public knowledge of the contraventions of the relevant provisions of the Act and the dishonest conduct of the defendant, that only occurred on and from 15 February 2010, the date of the publication of my reasons for judgment and the orders which I made. 

88                  The defendant’s punishment through loss of reputation was also submitted to bear upon any pecuniary penalty payable.  This submission was put on the basis that the defendant has endured a loss of income since August 2008, has no prospects of present or future employment, is unable to sustain and maintain borrowing of approximately $700,000 secured against the family home valued at approximately $2 million, and appears to be in a state of financial indebtedness to various financial institutions.  An unresolved dispute between the defendant and his directors and officers insurer was also said to be relevant to the imposition of any pecuniary penalty.  To this extent, the defendant submitted that the Court should have regard to the defendant’s ability to pay as well as his attempts to restore the bonus payment to Select Vaccines.  I have taken into account the defendant’s ability to pay but I have disregarded the restoration of the bonus payment for the reasons to which I have referred.

89                  I am satisfied that the defendant has available to him resources, namely, the assets of the trust established under his mother’s will in which he is the sole trustee and one of the objects of a general power of appointment, which can assist him in meeting a substantial pecuniary penalty.

90                  The defendant challenged the submission of ASIC that in considering the assets or funds available to the defendant I should take into account the fact that he was the sole trustee of a trust which had assets of the order of about $700,000 and that there were a number of objects of a general power of appointment and that he was one of those objects and that it was open to him to appoint any or all of the income or assets of the trust to himself. 

91                  The defendant challenged that submission on the basis that the date of distribution was one day less than 80 years from the date of death of the testatrix.  It was implicit in this submission that the income and assets of the trust were not available to him in the immediate future.  That submission did not take into account the fact that:

(a)        the “date of distribution” in the terms of the trust means one day less than 80 years from the date of the testatrix’s death “or such earlier day as my trustee may in his or her absolute discretion at any time during the continuation of the trusts hereby created appoint in writing”.  In short, it is open to the defendant to terminate the trust and distribute the capital and any accrued income tomorrow if he, in his absolute discretion, decides to do so;

 

(b)        further, the terms of the trust included a power of advancement whereby the defendant has the power:

“to advance the whole or portion of the income of the Trust Fund or if that income should prove insufficient the whole or any portion of the capital of the Trust Fund for all or any such purposes [being the education, maintenance benefit and general advancement in life of any of the beneficiaries] and in any such manner in such proportion as my Trustee shall in his or her uncontrolled discretion, deem proper and expedient.”

 

92                  The defendant submitted that the powers of the trustee were constrained in some sense by limitations of self interest and that any exercise of his discretion required the consent or approval of the other beneficiaries.  The trust is not couched in such terms. 

93                  The period of disqualification I propose to order will have a significant impact on the defendant’s ability to earn income.  Nevertheless it is necessary to impose the payment of a pecuniary penalty having regard, in particular, to the character and nature of the contraventions of the Act and the need for a specific deterrent component and a general deterrent component.  I repeat again the reasons earlier which motivated me to disqualify the defendant from managing corporations for a period of 10 years.  Those reasons apply equally to the amount of the pecuniary penalty.  Having regard to the totality principle, the nature of the contraventions essentially falls into two categories.  First, the conduct on 31 December 2007 and secondly, his conduct thereafter in concealing what he had done.  In these circumstances, I consider a pecuniary penalty of $80,000 to be appropriate. 

94                  The order of the Court will be:

1.         The defendant is disqualified from managing corporations for a period of 10 years commencing from the date of this order.

 

2.         The defendant pay the Commonwealth of Australia a pecuniary penalty of $80,000.

 

3.         The defendant pay the plaintiff’s costs of and incidental to this proceeding, including any reserved costs.

 

I certify that the preceding ninety-four (94) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg.

Associate:

Dated:         23 April 2010