ASIC v Adler & 4 Ors

Supreme Court of NSW|2001-12-14|Before: Santow J, Hely J

INTRODUCTION 1 What follows are my reasons for the orders that I foreshadowed at the conclusion of argument on 13 December 2001. The question for determination was whether the Plaintiff, in seeking to rely on certain affidavit evidence, was impermissibly splitting its case. 2 The effect and basis of the foreshadowed orders can be summarised as follows:

(a) the Plaintiff, without impermissibly splitting its case, is permitted to rely on the later of two affidavits by its expert, Mr Paul Carter, dated 11 December 2001 with his accompanying report, insofar as such affidavit is in reply to an affidavit of the Defendants' expert Mr Paul Woods filed on 7 December 2001, after the Plaintiff had closed its case on 6 December 2001, but

LEGAL PRINCIPLES 5 The principles applicable in civil cases are conveniently stated in "Cross on Evidence" by D Byrne and J D Heydon, para [17720], which I quote below: " [177201] In civil cases the law is somewhat different. The general rule is similar, namely, that evidence in reply must normally be confined to rebutting the defendant's case rather than merely confirming that of the plaintiff:921 such evidence must be "strictly in reply".922 A similar principle applies where it is the defendant who bears the onus on an issue and seeks to reply to the evidence called by the plaintiff in answer to the defendant's case on that issue.923 Hence, where the issues on a claim and on a counter-claim are identical, the plaintiff cannot call evidence on the counter-claim which could have been called in support of the plaintiff on the claim.924 But the rules are likely to be applied less strictly in civil cases.925 As in criminal cases, the court in civil cases has a discretion, but one which will be more liberally exercised. "When a party has closed its case, he often asks, and is allowed, to supply a deficiency."926 The unforeseeability of the issue on which the plaintiff seeks to call evidence in reply -- the extent to which the plaintiff is surprised -- is relevant, as where the plaintiff was permitted to call a witness in reply to defence witnesses on an issue first raised by them and not put to the plaintiff's case.927 The rule against case splitting is thus reinforced by the rule in Browne v Dunn928 in the sense of "the rule of practice that counsel should fairly put his own case to the relevant witnesses called by his opponent".929 921 Roe d Trimlestown v Kemmis (1843) 9 Cl & F 749 at 781; 8 ER 601 at 613 (HL); Jacobs v Tarleton (1848) 11 QB 421 at 424; 116 ER 534 at 535 (QB). 922 Gilbert v Comedy Opera Co (1880) 16 Ch D 594. 923 Penn v Jack (1866) LR 2 Eq 314 at 318. 924 Green v Sevin (1879) 13 Ch D 589 at 597. 925 Shaw v R (1952) 85 CLR 365 at 383 per Fullagar J. 926 Wright v Wilcox (1850) 9 CB 650 at 657; 137 ER 1047 at 1950 (CP) per Maule J. 927 Wright v Wilcox (1850) 9 CB 650 at 658; 137 ER 1047 at 1050 (CP) per Cresswell J; Bigsby v Dickinson (1876) 4 Ch D 24 (CA); Rogers v Manley (1880) 42 LT 584; Obradovich v Lake View and Start Ltd [1968] WAR 170 (FC). 928 (1894) 6 R 67 (HL). 929 Downs Irrigation co-op Association Ltd v National Bank of Australasia Ltd [1983] 1 Qd R 130 at 138 per Connolly J (FC). 6 The relevant principles emphasise these matters:

(i) modern formulations of the rules make clear that the principle is discretionary;

(ii) discretion is guided by the proposition that the exceptional circumstances in which the discretion will be exercised in favour of the prosecution (or plaintiff in civil cases) do not include instances which "would have been covered if the prosecution case had been strictly proved" ( R v Chin (1985) 157 CLR 671 at 684-5 per Dawson J (Mason J agreeing);

(iii) the test depends on reasonable foreseeability rather than events which no human ingenuity could foresee; and

(iv) the rule is not a technical one, but one based on fairness; R v Chin (supra) per Dawson J at 685-6. 7 It was common ground that apart from the circumstance that the first mentioned of the two Carter affidavits being the later in point of time was filed after the Plaintiff's case closed, none of the specific exceptions to the general rule in civil cases applied. Put simply, the Plaintiff's case was that each of the Carter affidavits was indeed merely a rebuttal of the Defendants' case rather than confirming that of the Plaintiff, such that the evidence could be said to be "strictly in reply" in each case. The Plaintiff also points to the fact that the rules are likely to be applied less strictly in civil cases, though it be the case that the Corporations Act may not have abrogated the privilege against self-incrimination which exists at common law; see most recently, Australian Securities and Investments Commission v ABC Fund Managers Ltd [2001] VSC 92 per Warren J. 8 That said, I do accept the Defendants' contention that the Plaintiff, being ASIC must act in the public interest rather than self-interest in pursuing civil penalties of this sort, with the corollary that the Court's discretion must necessarily take that factor into account as it must the overriding requirement of fairness in what is essentially a civil prosecution. As was said in ASC v AS Nominees Limited (1995) 13 ACLC 1,822 by Finn J at 1843: "As a matter of obligation in our system of government the ASC, like all other agents of government, is required to act in the public interest within its spheres of responsibility." 9 It will be appreciated that the rule against splitting thus has a public interest dimension in terms of prosecutorial fairness which still leaves such discretion as the Court has to be more liberally exercised than in criminal cases but nonetheless with a proper regard for the seriousness of the civil penalties involved. Such an approach is indeed wholly consistent with that applied by Warren J in Australian Securities and Investment Commission v ABC Fund Managers Limited (supra) when dealing with the safeguards that the common law provides preserving the privilege against self-incrimination; see in particular paragraphs 4, 5, 8, 9 and 14 of that judgment.

FACTUAL ELABORATION AND REASONS 10 Before dealing with the application of these principles to the case of the two affidavits, I need to provide some additional factual background. The First Defendant has from the outset placed the Plaintiff on notice that he would object to Mr Paul Carter's supplementary report of 21 November 2001 being relied upon other than in chief. It also made clear ("the lateness issue") that the First Defendant considered that even relied upon in chief, it had been filed too late; see correspondence collected as D1X1 being fax of 28 November 2001 by solicitor for the First Defendant (Gilbert & Tobin) to ASIC, reply by ASIC of 30 November 2001 to Gilbert & Tobin, and Gilbert & Tobin's further reply of 2 December 2001 to ASIC, para 4. 11 ASIC in its letter of 30 November 2001 first stated, "We do not agree that Mr Carter's supplementary reports are not in reply, but to avoid argument about the matter we shall read them in chief. If you object to that course, we shall read them in reply." 12 To that, Gilbert & Tobin replied in effect that the proposed course did not address the difficulty of filing Mr Carter's evidence at "such a late stage" so that "we accordingly affirm that we will object to this evidence being read". 13 The Plaintiff contends that this left it no alternative but to rely upon the affidavits in question in reply since there would be no consensual basis for presenting that evidence in chief. 14 However, I agree with the First Defendant's contention that the proper course for ASIC would have been to deal with the lateness issue when its case was still open, that is prior to closing it on 6 December 2001, so that issue could have been resolved at the outset. On the material before me I would have allowed the later affidavits to be read in chief, there was no conceivable objection to the second on that ground and no real prejudice to the First Defendant identified in regard to the first, or at least which could not have been catered for by appropriate terms. 15 On 4 December 2001 the First Defendant stated that he would object to the reading of any report from Mr Paul Carter that was not read in chief, while not resiling from the position that the affidavit was in any event too late; see T, 406.3 -- .16. That simply bears out that this was the time to resolve the lateness issue, while the Plaintiff's case was still open. 16 It is necessary that I now turn to deal with the specific subject matter of the two Carter affidavits and what appears to have prompted them in the evidence of Mr Woods and Mr Marcolin.

The first Carter affidavit of 28 November 2001 annexing report of 21 November 2001 17 The first affidavit of Mr Carter, dated 28 November 2001, is expressed to be responding to the affidavits of Mr Marcolin dated 26 October 2001 and the affidavit of Mr Woods dated 27 October 2001. The report relates to the valuation of a company called Planet Soccer Pty Limited, which company had been acquired on 25 August 2000 by a company "PEE" as trustee for a trust "AEUT", being one of the impugned transactions. It follows Mr Carter's earlier principal report dated 27 September 2001. As the transcript makes clear (T, 409.26 -- .30 and at .33) this report values Planet Soccer as at 31 August 2001, that is to say necessarily relates to matters of quantum of damage rather than liability, where what would be material would be the price at which earlier purchased, compared to its then value. Mr Carter's subsequent report of 21 November 2001 annexed to the affidavit of 28 November 2001 expressed to be responding to the affidavits of Mr Marcolin of 26 October 2001 and Mr Woods of 27 October 2001, is really directed at the value of Planet Soccer as at that earlier date pertaining to liability, namely May 2000. The report of 21 November 2001 takes issue with the valuation methodology in Mr Woods' affidavit as well as some of the matters in Mr Marcolin's affidavit bearing upon value. But inescapably it goes to confirming ASIC's case on liability, which necessarily must be part of ASIC's case, "strictly proved". 18 While therefore Mr Carter's report and accompanying affidavit are framed by way of rebuttal, they also deal with a critical aspect of the Plaintiff's case. That is, whether in truth Planet Soccer had no material value as well as the appropriate methodology of valuation which produces that result, being as at May 2000 though also later. That contention bears directly upon liability. 19 The Plaintiff contends that it was entitled to keep that evidentiary material to its case in reply amongst other reasons because it did not know whether the affidavit of Mr Woods and Mr Marcolin would be read at all. However, as the transcript of 4 December 2001 makes clear, at T, 420, and subsequently on 6 December 2001, at T, 515, the First Defendant had identified witnesses he would be relying upon and their order. It is true two witnesses were subsequently dropped but neither of these were Mr Marcolin or Mr Woods. The First Defendant contends that it was open to the Plaintiff simply to ask whether the evidence of Mr Woods and Mr Marcolin would be relied upon. Its failure to do so could not be fairly invoked as justifying holding back the Carter affidavit of 28 November 2001 and accompanying report for the case in reply, in case the Plaintiff did not need to respond. I agree with that submission. 20 Thus the affidavit of Mr Carter dated 28 November 2001 did not require the Plaintiff, as it contends, to anticipate the First Defendant's case and then to frame a rebuttal. The First Defendant's case as dealt with by the affidavit of 28 November 2001 was in no way unforeseeable in terms of the issue or issues which the First Defendant's case raised - those issues were clearly apparent from the affidavits of Mr Marcolin of 26 October 2001 and Mr Woods of 27 October 2001. However, I emphasise that this foreseeability had a very different aspect when it came to the later affidavit of 11 December 2001 as I will explain shortly. 21 I should at this point record that the hearing started on 26 November 2001 and the relevant affidavits of Mr Marcolin and Mr Woods comfortably pre-dated that by close on a month. In those circumstances the greater latitude or liberality accorded to civil proceedings could not avail the Plaintiff as regards Mr Carter's affidavit of 28 November 2001. Its subject matter in substance constituted an important part of the Plaintiff's case in chief, though also prompted no doubt by a desire to take issue with the methodology and valuation result in the affidavits of Mr Marcolin and Mr Woods of 26 October 2001 and 27 October 2001 respectively. The Plaintiff has always had to establish a disparity in value of Planet Soccer compared to the price paid for it by PEE at the time of its purchase and this affidavit of 28 November 2001 goes to that, though it be in form framed as a rebuttal. The First Defendant could not fairly be asked now to alter the forensic choices that it made on the premise that this material, if admitted at all, should be part of the Plaintiff's case in chief. That indeed is sufficient to refute any argument for admission based on the First Defendant not being caught by surprise, in that he knew the content of the Carter affidavit of 28 November 2001 from that date.

The second Carter affidavit of 11 December 2001 annexing report of same date 22 I turn now to the second affidavit of Mr Carter dated 11 December 2001. That affidavit is accompanied by a report dated the same day and is expressed to respond to the further affidavit of Paul Woods dated 7 December 2001, that is to say an affidavit dated the day after the Plaintiff had closed its case. That affidavit of Mr Carter bears a different aspect when viewed in its forensic context and taking into account its subject matter. 23 The affidavit of Paul Woods of 7 December 2001 purports to correct his earlier affidavit of 27 October 2001 as regards his valuation of Planet Soccer described at paragraphs 53 to 56 of that earlier affidavit as "a net cash flow valuation of Planet Soccer". He explains that the calculation he performed in the May 2000 financial model upon which that was based was a valuation of the net present value of 40% of the forecast dividends of Planet Soccer. He says that the purpose of the calculation "was to determine the value of an investment in 40% of the issued shares in Planet Soccer as at May 2000."; see paragraph 3 of Mr Woods' later affidavit of 7 December 2001. 24 He then corrects paragraph 53 of his first affidavit substituting an entirely new paragraph followed by corrections to paragraphs 54 and 56 where he applies a 25% discount rate said to yield a net present value of the projected dividends of approximately US$39 million of which 40% is US$15.6 million. 25 While Mr Woods' original affidavit of 27 October 2001 contained both modes of valuation, that is to say also included a valuation based upon discounted cash flow, the Plaintiff argues, correctly, that it could not have anticipated or reasonably foreseen that after the Plaintiff closed its case, the First Defendant's principal expert witness Mr Paul Woods, would seek to correct a critical aspect of his earlier affidavit. It will be recalled that Mr Woods' earlier affidavit at paragraph 56 applied discounted cash flow valuation with a 25% discount rate to produce a net present value of US$15.6 million. That was a value considerably less than the US$25 million at which Planet Soccer was purchased, such that the Plaintiff could see this as supporting its own case. 26 It could be said that inferentially it was open to the Plaintiff to work out that such an error had been made as Mr Woods belatedly corrects. But it is not for the Plaintiff to have to do that. The Plaintiff is entitled to rely upon the case put by the First Defendant without having to make corrections to the First Defendant's own affidavit. The bald statement in paragraph 56 of Mr Woods' original affidavit of 27 October 2001 that "on the basis of this valuation the net present value of Planet Soccer as at May 2000 was approximately US$15.6 million.", presented the Plaintiff with the First Defendant's case. Forensic choices made by the Plaintiff when it closed its case at 6 December 2001 were based on the First Defendant's known case at that time. It was entitled by the further affidavit of 11 December 2001 to deal by way of rebuttal with what was not reasonably to be foreseen in the way of the additional evidence now contained in the affidavit of Mr Woods of 7 December 2001. There is no unfairness to the First Defendant of the kind precluding splitting in permitting Mr Carter's affidavit of 11 December 2001 to be relied upon, insofar as it is by way of rebuttal of the affidavit evidence of Mr Woods of 7 December 2001. That recognises that Mr Woods' further affidavit has to be read in the context of his earlier affidavit of 27 October 2001, as must therefore the rebuttal.

OVERALL CONCLUSION 27 Mr Carter's first affidavit of 28 November 2001 with accompanying report may not now be relied upon, as the Plaintiff would impermissibly be splitting its case. Mr Carter's second affidavit of 11 December 2001 with its accompanying report omitting those parts identified in my orders, may be read in rebuttal, such that there is no impermissible splitting in so ordering. That result is consonant with the less strict approach applicable in civil cases, albeit a civil case requiring the level of stringency in any exercise of discretion connoted by the fact that the Plaintiff seeks substantial civil penalties in what is essentially a civil prosecution brought by a party required to act with prosecutorial fairness in the public interest.

Last Modified: 12/17/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

CITATION : ASIC v Adler & 4 Ors [2001] NSWSC 1168 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 2753/01 HEARING DATE(S) : 13/12/01 JUDGMENT DATE : 14 December 2001

R B S Macfarlan QC/ P Durack (Plaintiff) COUNSEL : B W Walker, SC/ I M Jackman (First and Fourth Defendants) J E Sexton, SC (Third Defendant) Jan Redfern, Solicitor for ASIC (Plaintiff) SOLICITORS : Gilbert & Tobin (First and Fourth Defendant) Dibbs Barker Gosling (Third Defendant) CATCHWORDS : EVIDENCE - Procedure -- Plaintiff ASIC -- Splitting case not permitted -- Relevant considerations -- Implications of fact that this a civil penalty prosecution. LEGISLATION CITED : Corporations Act s1317L ASC v AS Nominees Limited (1995) 13 ACLC 1,822 CASES CITED : Australian Securities and Investments Commission v ABC Fund Managers Ltd [2001] VSC 92 R v Chin (1985) 157 CLR 671 Williams v Keelty (2001) 39 ACSR 127 DECISION : See paragraph 27.

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