ASIC v Matthews

THURSDAY, 30 AUGUST, 2001 1635/00 - AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION v Stephen Lewis MATTHEWS JUDGMENT 1 HIS HONOUR: In these proceedings the plaintiff, Australian Securities & Investments Commission (ASIC) moves the Court on its Interlocutory Process and Statement of Charge, filed on 11 May 2001, for a finding that the defendant, Stephen Lewis Matthews (Mr Matthews) is guilty of contempt of this Court for failing to comply with certain orders made by Santow J on 4 October 2000. The orders were orders 8 and 9 in a series of orders made by consent, as final orders in proceedings brought by ASIC against Mr Matthews alleging various breaches on his part of the Corporations Law. The orders were as follows:- "8. Order that the Respondent be permanently restrained from undertaking, either directly or indirectly, the business of: (a) advising other persons about securities; and/or (b) publishing securities reports, except as otherwise permitted by the Corporations Law. 9. Order that the Respondent be permanently restrained from undertaking, either directly or indirectly, the business of: (a) advising other persons about securities on the internet; and/or (b) publishing securities reports on the internet, except as otherwise permitted by the Corporations Law." 2 It may be noted that the orders relate to s 781 of the Corporations Law which provides as follows: "A person must not: (a) carry on an investment advice business; or (b) hold out that the person is an investment adviser; unless the person is a licensee or an exempt investment adviser." 3 It is alleged that Mr Matthews is in breach of these orders by engaging in the following activities: "(i) 26 February 2001, published and/or allowed the publication of, a securities report entitled "Buying opportunity in HIH" on an internet web-site known as "The Chimes" and situated at http://www.chimes.com.au ; (ii) 26 February 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "Buying opportunity in HIH" on an internet web-site known as "The Chimes" and situated at http://www.chimes.com.au ; (iii) 27 February 2001, published and/or allowed the publication of, a securities report entitled "ERG strides forth" on an internet web-site known as The Chimes and situated at http://www.chimes.com.au ; (iv) 27 February 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "ERG strides forth" on an internet web-site known as "The Chimes" and situated at http://www.chimes.com.au ; (v) 27 February 2001, published and/or allowed the publication of, a securities report entitled "broker advisers have much explaining to do" on an internet web-site known as "The Chimes" and situated at http://www.chimes.com.au ; (vi) 27 February 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "broker advisers have much explaining to do" on an internet web-site known as "The Chimes" and situated at http://www.chimes.com.au ; (vii) 28 February 2001, published and/or allowed the publication of, a securities report entitled "follow the lead of international investors" on an internet web-site known as "The Chimes" and situated at http://www.chimes.com.au ; and (viii) 28 February 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "follow the lead of international investors" on an internet web-site known as "The Chimes" and situated at http://www.chimes.com.au , in circumstances where he was not permitted to do so by the Corporations Law." 4 In argument, these activities have been conveniently and compendiously referred to as the publication of (a) the HIH report, (b) the first ERG report, (c) the second ERG report and (d) the third ERG report. More detailed reference to this material will be made later in these reasons. 5 There was no dispute that Mr Matthews was, relevantly, the publisher of the material on the occasions referred to and that he was not "a licensee or an exempt investment adviser". Apart from concessions made in this regard, the evidence tendered on behalf of ASIC clearly established these matters to the requisite criminal standard of proof. There is no need to refer to this evidence in these reasons. It was not disputed. 6 Before I turn to consider other questions in the case, it is convenient to set out the relevant principles relating to "contempt" of Court orders. Those relied upon by ASIC are to be found in Australasian Meat Industry Employers Union v Mudginberri Station Pty Limited (1986) 161 CLR 98. The following passages appear in the judgment at the pages noted: ( At p 106) " Punishment for contempt serves two function: (a) enforcement of the process and orders of the Court, disobedience to which has been described as "civil contempt"; and (b) punishment of other acts which impede the administration of justice. . ., which have been described as "criminal contempt". ( At p 107 ) "the underlying rationale of every exercise of the contempt power, (is) namely that it is necessary to uphold and protect the effective administration of justice. Although the primary purpose in committing a defendant who disobeys an injunction is to enforce the injunction for the benefit of the plaintiff, another purpose is to protect the effective administration of justice by demonstrating that the court's orders will be enforced." ( At p 107 ) ". . .contempt consists of wilful disobedience to a Court order in the sense that the disobedience is not casual, accidental or unintentional." (At p 113) " a deliberate commission or omission which is in breach of an injunctive order or an undertaking will constitute such wilful disobedience unless it be casual, accidental or unintentional." 7 It was submitted on behalf of Mr Matthews that if there was disobedience to the orders of Santow J, it was unintentional and not wilful. 8 Reliance was also placed upon a submission that Mr Matthews had an "honest and reasonable belief" as to circumstances making the acts of publication innocent. (He Kaw The v The Queen (1985) 157 CLR 523). This matter of defence relied, in part, upon two ASIC documents being an Interim Policy Statement (IPS 162) and accompanying Media Release, both of 15 August 2000. Reference will be made to these documents later in these reasons. 9 Additionally, it was submitted on Mr Matthews' behalf that the HIH and ERG publications were not relevantly advice or reports or, alternatively, that Mr Matthews believed, on reasonable grounds, that they could not be so characterised. It was also put that the activities of the defendant relied upon by ASIC could not be properly characterised as "undertaking" a "business". 10 As these matters raise, in part, questions as to Mr Matthews' subjective appreciation of what he was doing when engaging in the activities relating to the HIH and ERG reports and their consequences, it is necessary to set out in short form the background to the present proceedings. The relevant matters have been summarised in the submissions provided by ASIC. They are not disputed. It is convenient to set them out in these reasons in the form in which they were submitted with certain additions, as follows:- " 3. On 16 February 1999, the Commission commenced proceedings ("the Proceedings") against Mr Matthews in the Federal Court of Australia, pursuant to section 1324 of the Corporations Law. 4. Essentially, the Proceedings concerned the publication of "securities reports" on an internet site ("the Chimes Web Site") known as "The Chimes" and situated at www.chimes.com.au, in breach of section 781 of the Corporations Law. 5. On 19 February 1999, Justice O'Connor made a number of interlocutory orders ("the Interlocutory Orders") which included orders preventing Mr Matthews from publishing "securities reports: or allowing such publication on the internet. 6. Notwithstanding he Interlocutory Orders, Mr Matthews continued to either publish "securities reports" or allowed "securities reports" to be published on the internet. 7. On 22 March 1999, the Commission filed a Notice of Motion for Contempt ("the First Contempt Motion") in respect of the publication of "securities reports" on the Chimes Web Site between 19 February 1999 and 18 March 1999. 8. On 10 June 1999, at the hearing of the First Contempt Motion, Mr Matthews entered a plea of guilty to the majority of the charges contained in the First Contempt Motion. 9. On 16 June 1999, Justice Sackville delivered a Judgment in respect of the First Contempt Hearing wherein he accepted Mr Matthews guilty plea and imposed a penalty of 2 months imprisonment in the event that Mr Matthews further breached the Interlocutory Orders. 10. On 29 June 1999, Mr Matthews established a new web-site in New Zealand known as and situated at http://www.chimes.com.nz ("the New Zealand Site"). 11. On 14 July 1999, Mr Matthews closed, in effect, the Chimes Web Site. 12. On 15 July 1999, Mr Matthews established a company known as "Chimes.co.nz Limited" ("the New Zealand Company"). He was a director and sole shareholder. 13. On 21 July 1999, Mr Matthews sold the Business Name, "the Chimes News", the substance of the Chimes Web Site and the New Zealand Site to the New Zealand Company. Further, the New Zealand Company appointed Mr Matthews as the publisher of the New Zealand Site. He was required by the contract of sale to make five postings per week to the web-site. 14. On 26 July 1999, following the High Court's decision in Ex parte Wakim delivered on 17 June 1999, the Proceedings were transferred from the Federal Court to the Supreme Court of New South Wales. The orders included an order that the Interlocutory Orders be confirmed as orders of the Supreme Court. 15. Between 23 July 1999 and 10 August 1999 Mr Matthews, as the publisher of the New Zealand Site, published and allowed to be published various "securities reports" on the New Zealand Site in breach of the Interlocutory Orders. 16. On 12 August 1999, the Commission filed a further Notice of Motion for Contempt ("the Second Contempt Motion") in respect of various "securities reports" published on the New Zealand Site between 23 July 1999 and 10 August 1999. 17. On 23 March 2000, following a lengthy hearing of the Second Contempt Motion, Justice Windeyer delivered a written judgment in which he found that Mr Matthews was guilty of the majority of the charges contained within the Second Contempt Motion. On 4 May 2000, Justice Windeyer sentenced Mr Matthews to gaol for 3 months. 18. On 4 October 2000, at the hearing of the Proceedings before Justice Santow, Mr Matthews consented to final Declarations and Orders ("the Final Orders") being made against him in the Proceedings. 19. The Final Orders were entered on 24 January 2001 and were personally served on Mr Matthews on 5 February 2001. 11 In December 2000 and January 2001, Mr Matthews made or attempted to make certain arrangements in respect of the New Zealand company, to which reference will be made later. 12 In January and February 2001 there were discussions between ASIC and Mr Matthews in relation to his posting certain documents on The Chimes Website, it being asserted by ASIC that the publication was in breach of the Corporations Law, as well as certain other orders made by Santow J. Remedial action was requested by ASIC and undertaken by Mr Matthews, in circumstances where he denied any wrong-doing. Thereafter Mr Matthews undertook the activities in relation to the HIH report and the three ERG reports which are the subject of the present complaint, such activities, as already indicated, occurring on 26, 27 and 28 February 2001. 13 These activities were, of course, undertaken after Mr Matthews had served the sentence imposed by Windeyer J on 4 May 2000. In evaluating his contentions in the present case that any breach of Santow J's final orders were unintentional and not wilful or that the relevant activities were undertaken with an honest and reasonable belief that they were innocent, it is relevant to have regard to the nature of the material relied upon by ASIC in the contempt proceedings before Windeyer J. 14 The ultimate question before Windeyer J was whether material published by Mr Matthews on The Chimes web-site constituted, relevantly, reports about securities or advice, the publication of which would render him in contempt of the previous interlocutory orders made in the proceedings. His Honour annexed to his judgment the text of the material complained of. There were a number of individual publications which he considered separately. In respect of a large number, he held that they were "more properly described as random gossip". However, in respect of nine of the postings he held that they fell "within the description 'reports about securities'". He said of this material: "It is of course difficult to think that people could be so stupid as to take notice of those postings. . .However, the purpose of the Corporations Law is to protect those who need protection, not those who can treat this material as it ought to be treated." 15 I do not propose to set out in these reasons the text of the postings so described by his Honour. Suffice to say that, in my view, they are relevantly equivalent to the postings which are the subject of complaint in these proceedings. Mr Matthews did not appeal against the decision of Windeyer J. I have observed him in the witness box in this hearing. He is obviously an intelligent person. In my opinion, he could not have failed to be aware that the HIH and ERG material, the subject of the present proceedings, was of like nature to the material impugned in Windeyer J's judgment. He could have been under no illusion that the publication of it could amount to a breach of the orders made by Santow J, if other circumstances did not render the publication innocent. 16 Indeed, Mr Matthews conceded as much in his oral evidence. He acknowledged, in cross-examination, that the publication of the material on 26, 27 and 28 February 2001 would be in breach of orders 8 and 9 made by Santow J, unless he could properly rely upon the terms of the ASIC documents to which reference has been made earlier in these reasons and upon actions taken by him, purportedly to achieve compliance with them. As formulated in counsel's written submissions on his behalf, it was put that he had an honest belief that the ASIC IDS Policy permitted these publications to be made, with the result that no wilful breach of the orders had occurred. In these circumstances, it is necessary to consider the IDS Policy and the terms which are relied upon. 17 The ASIC Interim Policy Statement - Exposure Draft in relation to "Internet discussion sites" (IPS 162) was issued on 15 August 2000. It was, therefore, made public after the decision of Windeyer J in March 2000 and before Mr Matthews entered into the consent orders made by Santow J on 4 October 2000, which disposed of the ASIC proceedings against him, and in which the earlier interlocutory findings of contempt by Sackville J and Windeyer J had been made. I am satisfied that the Policy Statement was the subject of some discussion between the parties before the making of the orders by Santow J and that, in the discussion, Mr Matthews was advised informally, on behalf of ASIC, that he could rely upon the Policy Statement provided that, in so doing, he committed no breach of the Corporations Law. I am persuaded that he was thus put on notice that he should consider carefully the terms of the Policy Statement in relation to any activities he contemplated on The Chimes website after becoming bound by the orders of Santow J. 18 IPS 162 was issued with a media release which summarised its aims and, in part, read as follows:- The ASIC Exposure Draft released today continues the policy that a licence should not be needed to run a facility that only allows ordinary investors to swap information and talk to one another about their investment experiences. But this applies only if the site is not likely to lead investors to mistake it for a place where they can expect to get professional advice, or access professional investment services. " ASIC is seeking to strike a balance between allowing people to communicate freely with each other, inform themselves about securities and minimising the risk that sites may be used to manipulate markets, trade on inside information or take advantage of less well informed investors," ASIC Commissioner Jillian Segal, said. "ASIC will require IDSs to display prominent warnings before users can participate in the discussions on the IDS." ASIC has refined the warning that users must get before they can view postings. These warnings are designed to make sure people understand the kind of information that they get on these sites. "The sorts of warnings we suggest include that the IDS itself does not endorse or vouch for the accuracy of the postings, a statement that the postings are general information and a declaration that people who post information will be individually responsible for their authenticity and accuracy," Ms Segal said. " ASIC also suggests that sites link to ASIC's web-page www.watchdog.asic.gov.au so people can find a licensed investment adviser and get general information about investing."" 19 Mr Matthews claims that he relied upon the terms of IPS 162 as sanctioning his use of The Chimes web-site for the posting of the HIH and ERG material. He says that he took steps to comply with its requirements and believed that he had done so. 20 I gained a strong impression, from his testimony and demeanour in cross-examination, that he gave the document only scant attention. I am satisfied that he certainly did not read it closely with a view to determining, with reasonable satisfaction, whether the publications he had in contemplation could be undertaken without breach of s. 781 of the Corporations Law and would otherwise comply with the orders of Santow J. 21 It is convenient, at this stage, to refer to the HIH and ERG reports. I will not set them out in the body of these reasons but will include them in a Schedule. I shall discuss, here, only their salient features. The HIH report is headed "Buying opportunity in HIH". It was posted on The Chimes web-site by Mr Matthews, describing himself in the report as "the publisher". It commences by Mr Matthews describing his experience and success in "the insurance business". Then, after extolling the talent of Mr Larry Adler in his management of FAI Insurances, he moves on to "the buying opportunity in HIH". After discussion of the company's balance sheet and the company's current "request for a trading halt" the opinion is put forward that the new CEO, Mr Wein, was, "by frightening off the weak holders of HIH", able to "bring in a rash of short-term speculators to replace them". The report concludes "It is these short-termers who can sell their HIH stock - for a good turn - to a fresh acquirer." 22 The first ERG report is headed "ERG strides forth". It was posted by "the publisher" on 27 February 2001. It refers to a "Sydney breakfast briefing by CEO Peter Fogarty". It speaks of share analysts at the meeting "rushing back to tell the revitalised story of a company on the brink of establishing an unassailable lead in the Smartcard industry". It finishes with the words "Expect a share price rally in ERG today." 23 The second ERG report posted by "the publisher" on 27 February 2001 is headed "Broker advisers have much explaining to do." The report is somewhat lengthier than the previous one and is a sequel to it. It refers again to the "breakfast meeting" and comments that those who had previously sold their stock were definitely poorly advised. It gives reasons why in the opinion of "the publisher" a particular strategy is advantageous to ERG. The report concludes, "For me it is the critical event to vault ERG into the global big-time". 24 The third ERG report is entitled "Follow the lead of international investors". It is posted by "the publisher" on 28 February 2001. It is a lengthy document. After a long and rather, disjointed analysis of ERG's strategy in relation to the former "MOT Alliance" and what appears to be a broad ranging discussion of its prospects in the global "smartcard" industry, it speaks glowingly of the company's prospects over the next twelve months "from operations in Manchester, Rome, San Francisco" and records Mr Fogerty's forecast of "revenue growth of 20% plus over the next year." The report concludes with the words "its destiny is increasingly in the hands of the international investors who recognise a global growth story in the making. If your broker expresses caution about ERG's outlook. . .ignore her." 25 The evidence clearly establishes that "the publisher" is a pseudonym for Mr Matthews, regularly used in relation to The Chimes web-site both before and after its operation by the New Zealand company. 26 It was submitted on behalf of Mr Matthews that these postings should not be characterised as "securities reports" or as "advice about securities". It was put that I should regard them as being no more than "random gossip" posted on a web-site which, in itself, only amounted to a "chat show" of the type envisaged by IPS 162 as not requiring that the participants have licenses. The same submission was put to Windeyer J in respect of the material published by Mr Matthews in that case. Like his Honour, I am quite unable to view the present material as capable of being so characterised. 27 It was submitted that, having regard to common law principles relating to freedom of speech and also to strict construction of "penal provisions", I should view these reports as conveying no more than mere opinions and as being no more than "commentaries". As such they would not fall within the ambit of s 781 of the Corporations Law and, more particularly, of the orders made by Santow J. I am not persuaded that any such reading down should occur. I am satisfied that those whom the law seeks to protect by s 781 could well view the reports as being "securities reports" and containing "advice" in relation to the securities discussed. 28 I am also satisfied that Mr Matthews, having regard to previous experience in relation to the interlocutory orders made in the proceedings, would, subject to considerations discussed below, have been satisfied that certain types of readers could well have regarded these postings as amounting to reports on securities and conveying advice about them. 29 The fact is, of course, that despite Windeyeer J's finding that postings by Mr Matthews of a similar kind were, relevantly, securities reports and advice, Mr Matthews simply went ahead with the posting of December 2000 and the later postings in February 2001 which are the subject of this case. He did so in purported reliance on IPS 162. I am quite satisfied that, confronted with Windeyer J's decision and the orders of Santow J, to which he consented on 4 October 2000, Mr Matthews sought to utilise this ASIC document as a means of continuing his postings on The Chimes web-site, without infringing those orders or the Corporations Law. 30 In the first place he sought to convert the web-site into what was described in the media release as "a facility that only allows ordinary investors to swap information and talk to one another about their investment experiences". In other words, he wished to give it the appearance of a "chat show" rather than a medium for the provision of professional advice. 31 It is clear that Mr Matthews had regard to various provisions of the document. He obviously had regard to IPS 162.7 which permitted "a limited type of IDS to operate without a license", providing the following guidelines were complied with: " (a) the IDS is operated to enable people who are not securities market professionals to exchange information that may include opinions and advice about securities; (b) postings on the IDS are clearly identified and kept separate from commercial material on the site; and (c) people who use the IDS receive adequate disclosures and warnings including that the material posted on the IDS is not professional investment advice." 32 It may be noted that in IPS 162.8 ASIC states that: "Our policy allows this type of IDS to operate without a license provided it does not create risks for consumers or for the integrity of securities markets."

It is appropriate to remark that the HIH report, clearly encouraging investment, was published only shortly before the company collapsed. 33 It is further stated in IPS 162.23 that the guidelines apply to IDS that: " (a) provide an internet facility for people who are not securities industry professionals to display information, advice and opinions about securities (that is, to make "postings"), such as on web based bulletin boards; and (b) allow other people to "view" these postings." 34 These requirements raised an immediate problem for Mr Matthews which, in my view, has not been resolved. He could not be regarded as a mere interested investor keen to "chat" or swap information with other investors. In earlier material provided on the web-site he had been clearly described in terms which took him outside this simple category. In the original introduction to the site headed "Welcome to The Chimes", which was later withdrawn, the following statement appeared, under the heading "Key Person": "The founder and publisher of The Chimes is Stephen Matthews. As a stockmarket specialist, Stephen has researched, traded, advised in and observed the market for 20 years. In his stockmarket dealings, he has made millions for clients and companies udner his control. He has worked for Citibank, Schroders, and Bain & Co (Deutsche Morgan Grenfell). Recently, he has collaborated with Mr Ralph Wragg, provider of Australia's leading financial newswire service." 35 Mr Matthews agreed that, by that passage, he intended to convey that he was a "stock market specialist". He also testified that he currently regarded himself as such a specialist. 36 A "disclosure page" appearing on The Chimes web-site in early February 2001 and which, sometime after 8 February 2001, was removed from the web-site, stated that: " The posting of news, commentary or opinion by Stephen Lewis Matthews who posts into The Chimes Investor Forum under the pseudonym 'the publisher' does not constitute investment advice."

The same document, however, provides information as to Mr Matthew's qualifications and background, in the following way: " (c) Bachelor of Arts degree from University of Queensland - 1977. Majors in mathematics and history. Bachelor of Commerce degree from University of Queensland - 1982 Majors in accounting and economics, investor, dealer, adviser, researcher and journalist. (d) The knowledge gained in obtaining the above qualifications has been supplemented with 25 years experience in Australia's finance markets [fixed interest, futures, capital, money and stock] as investor, dealer, adviser, researcher and journalist." 37 The appearance of this material on the web-site would, in my view, despite the disclaimer, operate as an encouragement to a naive investor to place considerable weight on any views expressed by Mr Matthews. 38 IPS 162 contains provisions for "disclosure and warnings to people who view the information, opinions, and advice posted on an IDS" (IPS 162.40). In IPS 162.41 there is a requirement for "prominent warnings" to be displayed before access to the viewing of postings is permitted. The warning is to contain a number of elements designed to advise a viewer that the information contained in the postings is "not professional investment advice prepared by taking into account any individual circumstances and needs of particular investors." I will not set out the details of the provisions in these reasons. Suffice to say that the evidence indicates that Mr Matthews sought that the New Zealand company in its operation of the site comply with these requirements of IPS 162. The site displayed a copy of a warning notice, which so complied, and which was put in place in the web-site in early 2001, prior to the publication of the HIH and ERG reports. It is clear that Mr Matthews relies upon the existence of this warning as conferring IDS status upon The Chimes web-site and as exonerating him from any liability under the Corporations Law or for contempt, arising from the publication of the reports. 39 I have considered this material and the submissions in respect of it made on behalf of Mr Matthews. I regret that I cannot regard it as amounting to other than a colourable attempt on his part to create a spurious sanction for the continuation of activities which he was forbidden to undertake. His presence as a contributor to the web-site and the nature of his contributions, in themselves, were sufficient to take the site out of the IDS guidelines promulgated in IPS 162. 40 Moreover, I am satisfied that Mr Matthews did not believe that his attempt at compliance with the IPS 162 Guidelines would necessarily shield him from liability. At best, he hoped that it might have that result. In furtherance of what appears to be an obsessive desire to publish his material, he was simply prepared to take the risk of breaching the Corporations Law and the orders of Santow J. 41 One other question remains for consideration. It arises because of a difference between the restraining orders which were the subject of consideration by Windeyer J and those the subject of these proceedings. 42 In the previous proceedings the orders found to have been infringed restrained Mr Matthews only from "advising" about securities or "publishing" reports about securities. There as here, there was no issue as to Mr Matthews having published the impugned material. However, in the present case, the restraint imposed by the orders of Santow J relates to Mr Matthews "undertaking, either directly or indirectly, the business of" advising and/or publishing. Accordingly ASIC must prove, beyond reasonable doubt, that the publication on The Chime web-site of the HIH and ERG reports in February 2001 constituted, either directly or indirectly, the undertaking of a business by Mr Matthews. Mere publishing, in this case, would not, in itself, amount to a breach of the orders. 43 At the time when the orders were made, as already indicated, Mr Matthews was a director of and sole shareholder in the New Zealand company which operated The Chimes web-site. He was contractually bound to the company to provide at least five posting per week to the web-site. The operation of the web-site amounted to the carrying on of a business. It may be noted, also, that s 18 of the Corporations Law provides, in effect, that a business does not cease to answer that description if it be carried on "otherwise than for profit". 44 In these circumstances, with the consent of Mr Matthews, a declaration was made by Santow J that Mr Matthews had "breached s 781 of the Corporations Law by carrying on an investment advice business by publishing the Securities Reports and the Advice Reports in circumstances where the Respondent was neither a 'licensee' nor an 'exempt investment advisor' " 45 It seems that Mr Matthews had in mind to achieve an alteration in his relationship with the New Zealand company after his consenting to the declaration and orders of Santow J, with a view to distancing himself from the business of The Chimes web-site. Some portions of the document, Exhibit "1", being a letter from him to Mr Comerford, a co-director of the New Zealand company indicate an intention on his part that Comerford would become the sole shareholder in the New Zealand company and that Mr Matthews would become no more than a contributor to the web-site. The evidence relating to this suggested re-arrangement, both oral and written, was extremely vague. Relevant searches were put into evidence by the plaintiff which indicated that, as at 28 March 2001, Mr Matthews remained a director and sole shareholder of the New Zealand company. Indeed the whole tenor of the letter, Exhibit "1", indicates, in my view quite clearly that, whatever the contemplated future arrangements might be, it was intended that the New Zealand company would continue to be operated in accordance with Mr Matthews' wishes and directions. 46 I have no hesitation in finding that, at the time of the publication of the HIH and ERG reports, Mr Matthews was a director and sole shareholder of the New Zealand company and was in effective control of it. The series of publications, even if no profit were involved, satisfies the description of "a business". There was a systematic and regular enterprise involved, with the necessary element of continuity or repetition. (See Hyde v Sullivan (1956) SR (NSW) 113 at 119; United Dominions Corporation Limited v Brian Pty Limited (1985) 157 CLR 1 at 15). 47 I am satisfied that, when Mr Matthews published the HIH and ERG reports on The Chimes web-site operated by the New Zealand company, he was knowingly undertaking, at least indirectly, the business of publishing securities reports and advising other persons about securities on the internet. 48 Consequently, he was in breach of orders 8 and 9 made by Santow J on 4 October 2000 and the breach amounted to contempt of those orders. 49 Was this contempt contumacious? I am satisfied that Mr Matthews, as already indicated, did not believe that IPS 162, as utilised by him, could provide a legitimate method of escape from the orders of Santow J. However, the fact that he did arrange for the publication of the elaborate warning required by IPS 162 must operate to some extent in his favour; at least it prevents the contempt from being of the most flagrant kind. Nevertheless, I am satisfied that he undertook a course of conduct deliberately intended to circumvent the Court's orders. The attempt has failed and, having regard to the previous history of breaches, the contempt must be regarded as a serious one and certainly, in some degree, contumacous. Whilst there was found to be an absence of contrition on Mr Matthews' part on the occasion of the previous breaches, there is not a total absence in the present case. Mr Matthews has, at least, tendered a conditional apology, namely that if he be wrong in his reliance upon IPS 162, then he is sorry for his actions. It is not a particularly impressive apology. 50 Mr Matthews has already served the previous sentence of three months imprisonment. Clearly, a further custodial sentence would be appropriate. However, I feel some disquiet at the prospect of sending Mr Matthews to prison again, particularly as the previous sentence does not appear to have effected a change in his behaviour. Indeed, he rather gave me the impression of embracing martyrdom. I am concerned that the imposition of a necessarily greater custodial sentence might well be equally ineffective in curbing his seemingly perverse desire to publish in breach of the Court's orders. Although such punishment would be well merited, it might serve only to feed his intransigence, leading to further breaches, charges of contempt and costly and time consuming Court proceedings. This result would not, in my view, be ultimately in the public interest. In Mudginberri, there appears the following passage (at p 115), dealing with the Court's powers in relation to contempt:- " These are considerable powers, resort to which imposes a heavy responsibility upon a court confronted with a determined challenge to its authority. The propriety of their exercise cannot be measured solely by reference to the established procedures attending the prosecution of ordinary breaches of law. Contempt of court is a distinctive offence attracting remedies which are sui generis: Morris v Crown Office, [1970] 2 QB 114, at 129. It is required of the chosen remedy that it be effective, no more but no less. For, if it is not effective, serious and lasting damage to the fabric of the law may result." 51 In my opinion I should seek, in the public interest, to find, in the present case, the most effective remedy. Although Mr Matthews did not respond sensibly to the suspended sentence imposed earlier by Sackville J, it must be recognised that the sentence was, then, a relatively short one. I have formed the view that Mr Matthews is more likely to curb his fool-hardy attitude to the Court's orders, if he is under the threat of a substantial suspended sentence, to be served should he offend again. I consider the appropriate sentence to be one of twelve months imprisonment in respect of these offences. I have power under Rule 55.13(3) of the Supreme Court Rules to suspend "punishment in case the contemnor gives security in such manner and in such sum as the court may approve for good behaviour and performs the terms of the security." I propose to suspend this sentence on condition that Mr Matthews provides security in the sum of Five thousand dollars to be of good behaviour for a period of two years from to-day and performs the terms of that security. 52 I direct that ASIC, within seven days, produce a form of security for approval by the Court. 53 Mr Matthews must pay ASIC's costs of these proceedings. 54 I make the following orders: 1. The defendant Stephen Lewis Matthews is guilty of contempt of Court in that in breach of the Orders made by Justice Santow on 4 October 2000, whereby the defendant, Stephen Lewis Matthews, was permanently restrained from undertaking, either directly or indirectly, the business of:

(a) advising other persons about securities; and/or (b) publishing securities reports, except as otherwise permitted by the Corporations Law, the defendant, Stephen Lewis Matthews, on or about:

(i) 26 February 2001, published and/or allowed the publication of, a securities report entitled "Buying opportunity in HIH" on an internet website known as "The Chimes" and situated at http://www.chimes.com.au ; (ii) 26 February 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "Buying opportunity in HIH" on an internet website known as "The Chimes" and situated at http://www.chimes.com.au ; (iii) 27 February 2001, publishing and/or allowed the publication of, a securities report entitled "ERG strides forth" on an internet website known as the Chimes and situated at http://www.chimes.com.au ; (iv) 27 February 2001, advising other persons about securities by publishing and/or allowing the publication of, a securities report entitled "ERG strides forth" on an internet website known as "The Chimes" and situated at http://www.chimes.com.au ; (v) 27 February 2001, published and/or allowed the publication of, a securities report entitled "broker advisers have much explaining to do" on an internet website known as "The Chimes" and situated at http://www.chimes.com.au ; (vi) 27 February 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "broker advisers have much explaining to do" on an internet website known as "The Chimes" and situated at http://www.chimes.com.au ; (vii) 28 February 2001, published and/or allowed the publication of, a securities report entitled "follow the lead of international investors" on an internet website known as "The Chimes" and situated at http://www.chimes.com.au ; and (viii) 28 February 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "follow the lead of international investors" on an internet website known as "The Chimes: and situated at http://www.chimes.com.au , in circumstances where he was not permitted to do so by the Corporations Law.

2. The defendant, Stephen Lewis Matthews, is further guilty of contempt of the Court in that in breach of the Orders made by Justice Santow on 4 October 2000, whereby the defendant, Stephen Lewis Matthews, was permanently restrained from undertaking, either directly or indirectly, the business of:

(a) advising other people about securities on the internet; and/or (b) publishing securities reports on the internet, except as otherwise permitted by the Corporations Law, the defendant, Stephen Lewis Matthews, on or about: (i) 26 February 2001, published and/or allowed the publication of, a securities report entitled "Buying opportunity in HIH" on an internet website known as "The Chimes" and situated at http://www.chimes.com.au ; (ii) 26 February, 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "Buying opportunity in HIH" on an internet website known as "The Chimes" and situated at http://www.chimes.com.au ; (iii) 27 February 2001, published and/or allowed the publication of, a securities report entitled "ERG strides forth" on an internet website known as "The Chimes" and situated at http://www.chimes.com.au ; (iv) 27 February 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "ERG strides forth" on an internet website known as "The Chimes" and situated at http://www.chimes.com.au ; (v) 27 February 2001, published and/or allowed the publication of, a securities report entitled "broker advisers have much explaining to do" on an internet website known as "The Chimes" and situated at http://www.chimes.com.au ; (vi) 27 February 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "broker advisers have much explaining to do" on an internet website known as "The Chimes and situated at http://www.chimes.com.au ; (vii) 28 February 2001, published and/or allowed the publication of, a securities report entitled "follow the lead of international investors" on an internet website known as "The Chimes" and situated at http://www.chimes.com.au ; and (viii) 28 February 2001, advised other persons about securities by publishing and/or allowing the publication of, a securities report entitled "follow the lead of international investors" on an internet website known as "The Chimes" and situated at http://www.chimes.com.au , in circumstances where he was not permitted to do so by the Corporations Law.

3. That the defendant be imprisoned for a period of twelve (12) months. 4. That a warrant for the respondent's committal to prison for a period of twelve (12) months issue. 5. The warrant lie in the Registry to the intent that it be not executed PROVIDED THAT the defendant provide security in the sum of Five thousand dollars ($5,000) to be of good behaviour for a period of two (2) years from to-day's date and complies with the terms of that security for the said period.

6. I direct that The Australian Securities and Investments Commission, within seven days, produce a form of security for the approval of the Court and for execution by the defendant. 7. The defendant pay the plaintiff's costs of these proceedings.

SCHEDULE First Report Buying opportunity in HIH

Posted by the publisher (203.19.10.27) on 26 February 2001 at 07:16:32: I learnt many years ago that success in the insurance business was all about effective management of the asset side of the business. In my capacity as chairman of Liberty Life - founded in the mid 80s - I was exposed to the liability side of insurance also. Enough to learn that the determination of claims liability by the actuaries was an arcane science. . .which was never understood by stockmarket analysts.

The great exponent in those days of superior investment returns was the founding CEO of FAI Insurances Mr Larry Adler. Larry went to the trouble of considering many investment propositions and with sufficient success to propel FAI into the ASX-100 and $1 billion in market cap. Since his departure in 1989 the Australian insurance industry has not seen an investment manager with his talents. . .which explains the very ordinary returns from this sector over recent times.

The 30 June 2000 balance sheet of HIH reveals gross assets of $8.3bn. The actuarial determination of claim liabilities is $4.4bn. There was $1.06bn of unearned premiums in that $8bn+ of assets and net assets of $952 million.

After re-quotation of HIH ordinary shares it will be valued on ASX this week at something less than $50m I expect.

I have concluded that the company's request for a trading halt has been inspired by its new CEO Randolph Wein. This anxious period for shareholders achieves two results: 1. distancing Wein from the sins (such as they are) of previous management; 2. improving the prospects of an HIH take-over.

It is arguably the cheapest insurance company in the world where take-overs are typically concluded at 1.5 to 2.5 times net assets.

By frightening off the weak holders of HIH stock Wein can bring in a rash of short term speculators to replace them. It is these short termers who can sell their HIH stock - for a good turn - to a fresh acquirer.

Posted by the publisher (203,42.221.195) on 27 February 2001 at 09:54:27:

The gaggle of share analysts at the Sydney breakfast briefing didn't hang around after the conclusion of CEO's Peter Fogarty comprehensive briefing.

Were they running out to advise a sell recommendation after ERG cheekily decided to buy Motorola out of their 4 year old alliance?

No they were rushing back to tell the revitalised story of a company on the brink of establishing an unassailable lead in the smartcard industry.

No wonder ERG does not want to split its profits with Motorola.

Third Report Brokers advisers have much explaining to do.

Posted by the publisher (203.42.221.195) on 27 February 2001 at 13:09:06: In Reply to: ERG strides forth posted by the publisher on 27 February 2001 at 09:54:27:

The Asian portfolio manager who dumped his 2 million shareholding of ERG yesterday may well rue the day that she quit one of the world's few global smart card plenipotentiaries.

And what of the others who followed and sold another 15 million and sent the stock down 60 cents? Poorly advised? Definitely. Negligently so? Perhaps.

It was a workmanlike performance from CEO Fogarty at the Sydney Westin Hotel today (briefing commencing promptly at 7.30am. 15 analysts in attendance plus a few also rans). It is 12 months since I last spoke to Peter and 3 years since his address at the Intercontinental when the advantages of the Motorola Alliance seemed apparent to only myself.

It is now apparent that the Motorola connection became a hindrance. . .2 ERG people attend a presentation to a prospect and 27 Motorola people turn up for example. But it was the potential for conflict in what is a transit related activity that prompted ERG (says Fogarty) to buy out Motorola. Increasingly ERG is moving to exploit its undeniable lead in back end processing of smart card and transit card applications. When a banking or smart card application is then used in a transit setting Motorola was then able to claim profits on the entirety of the smart card/tolling/health card/loyalty applications. Fogarty also referred to some resistance in some countries to their American alliance partner. It is demonstrably a good deal for ERG when one considers that MOT is retrieving the net tangible asset value of the assets in the alliance (and no "goodwill") in exchange for giving up full profits, a non compete clause for 2 years, and continuity of supply of cards and cads [the device which reads the card].

". . .we don't need a big partner to win contracts" "we were big enough to look after ourselves" and ". . .why give away 50% of the profits" convinced me of ERG's bona-fide interest in buying out MOT. The fact too that MOT is suffering badly in the stockmarket as it struggles with the prospect of its first quarterly loss in a long time is significant. According to Fogarty the ERG exit is one of 17 exit strategies under active consideration by MOT to extract profits this quarter. It explains their inordinate haste in departing the ERG share register (they keep th A$75m of convertible notes).

Of course the MOT issue has been a painful distraction for the stockbroking fraternity. For me it is the critical event to vault ERG into the global big-time.

Posted by the publisher (203.42.221.195) on 28 February 2001 at 09:27:53: In Reply to: broker advisers have much explaining to do posted by the publisher on 27 February 2001 at 13:09:06:

It was the throw-away comment ". . .a barrage of contracts" made early in his presentation by Fogarty that stimulated my greatest interest. Was it a ploy to distract his audience from the real story of a worsening fundamental picture? How can he make such a bold prediction anyway? In the former MOT alliance there are 5 successful contracts (Berlin, Rome, San Francisco, Singapore and Ventura outside LA_. Yet there are 8 tendered contracts (Bangkok, Brisbane, Dallas, Montreal [AMT] and Montreal [STRSM], Seattle and Sydney) a decision on which is expected in the next 3 months for at least five of the 8. It is evident to me that ERG can properly anticipate winning all of them.

Cubic has long been held up as a serious competitor to ERG's global ambitions. But why? Because it is leading a competing bid for the very visible Sydney contract perhaps. But the telling statistic lies in the fact that Cubic has issued globally in its history a total of 100,000 transit cards. This does not compare with ERG's achievements: 6.8m in Hong Kong, 1.0m to date in Singapore and 0.9m in France.

It is in Manchester that ERG is proving the cash generating worth of its M.A.S.S. model where typically four streams of revenue are generated: 1. Licensing fee on contract execution. 2. Implementation fee on delivery. 3. Transaction fees on each customer trip and the lucrative systems integration fee for the provision of the necessary hard-won expertise to integrate the "mass" of back-end processing to the fare collection functions. This latter fee Fogarty estimated in the range of $20m to $50m.

It is the evolution of the multi application smart card system [MASS] which makes the ERG story so compelling. Fogarty focussed on Europe to elaborate the proposition recently advanced by Gartner Group that annual global smart card revenues will reach US$8.1bn by 2004 from US$2bn presently. Fogarty anticipates an average card base membership across Europe of 50% on its population = 125m cards.

The global sweep of the immediate future in automatic fare collection systems (ie not tolling, not cards, not health) has 12 prospects in Europe [notably the Rhine Ruhr where 11.8m people catch trains, trams and busses every day and night and for which a shareholder in ERG affiliate ETC. cards is the project manager], USA 5 prospects, Asia 2 and South America 3. It was at this point that Fogarty stated that EWRG had no interest in "fare-boxes" outdated coin collection contracts in which ERG technology and skills cannot be put to productive use. It was this issue which caused ERG to opt out of bidding for the London contract. . .to much consternation in the share market [similar to the present MOT rout Fogarty opined].

It is in the UK where ERG clearly intends to stake-out its claim to global hegemony. The PCL venture (including Sema Group) [the subject of a take-over bid from Schumberger], Stagecoach and First Group) has already issued 100,000 cards in Hertfordshire. The UK government is intending to spend 420 million GBP=A1.2bn on smartcard conversion technology by 2005. Seventy local councils representing 11.5 million residents are anticipated to be delivering transaction services on smart cards during this period. "No-one else is as well placed as we are" to deliver the back-end processing says Fogarty.

Over the next 12 months Fogarty predicts that ERG will realize cash of A$150m from operations in Manchester, Rome, San Francisco. He forecasts revenue growth of 20%+ over the next year. Given the dramatic increase in smart card system demand over the next 4 years and the company's announced intentions in transit tolling and health cards the present historical PE ration of 40 times could be described as too low.

Its destiny is increasingly in the hands of the international investors who recognize a global growth story in the making.

If a broker expresses caution about ERG's outlook..ignore her. **********

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