ASIC v Rich [2005] NSWSC 256 | Case summary

5934/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V JOHN DAVID RICH & ORS JUDGMENT (Ex tempore; revised 23 March 2005) 1 HIS HONOUR: In my reasons for judgment published on 7 March 2005 (ASIC v Rich [2005] NSWSC 149) I reached the conclusion (at [426]) that the Carter Report dated 31 May 2002 was inadmissible as a whole and, if that were not so, I would exercise my discretion to exclude the report from evidence, as a whole, under section 135 of the Evidence Act. 2 My principal ground for reaching that conclusion was that, having regard to Mr Carter's prior involvement with ASIC, it was more likely than not that his opinions on material matters were based upon assumed facts that had not been articulated in the Report and therefore the requirements set out by Heydon JA in Makita (Australia) Pty Limited v Sprowles (2001) 52 NSWLR 705 at [85] had not been satisfied. 3 In the Makita case and in the submissions of counsel for the defendants, reference was made to the prospect of an expert who was giving opinion evidence also giving primary evidence of observed facts. In my reasons for judgment I made the point (at [269]-[272]) that sometimes evidence of this kind may be based on "lay" observations and sometimes it may be based on expert observations. 4 Evidence based on expert observations is a well-recognised phenomenon in the case of a scientific expert, but I observed (at [272]) that a forensic accountant who makes complex financial calculations in his report is, to that extent, giving evidence of fact rather than opinion evidence (since his calculations do not rely on inferences or questions of judgment), although his propositions are analytic mathematical propositions rather than propositions based on external observation. 5 Applying these observations to the Carter Report I said (at [390]): "I do not believe there are any propositions in the Report that are properly to be characterised as 'scientific facts' in the sense described by Phipson (or, more precisely, 'analytical facts' arrived at by that expert process of calculation). Normally there is an element of judgment or inference in what is said, rather than purely observations/calculations." 6 On reflection, it appears that the word "normally" in the second sentence of this paragraph was not well chosen because it may be taken to imply that there are abnormal cases in the report in which the converse is true. I did not mean to convey that implication. The best way to avoid any further confusion is for me now to correct my use of that word. I therefore now replace the word "Normally" in the judgment with the words "Viewing the report as a whole". 7 I indicated in my reasons for judgment (at [5]) that I would give ASIC the opportunity to make further submissions as to whether any of the other evidentiary material produced by Mr Carter should stand on a different footing from the Carter Report. I did not make any orders on the evidence at that stage. 8 In a letter to the defendants' solicitor dated 17 March 2005, copied to my associate and now marked AS56, ASIC indicated that it would apply to me for a ruling that the view I expressed in the first sentence of paragraph [390] of the judgment was not applicable to the material identified in appendix B to the letter and that this material should therefore not be rejected. The letter said that ASIC proposed to ask me to deal with the application on Monday, 21 March 2005 and it did so. 9 I have no difficulty in allowing this application to be made. I have not acted on my reasons for judgment. Although the issue of expert evidence of fact was squarely before the court, I have endeavoured in my judgment to clarify the circumstances in which the phenomenon arises in the case of a forensic accountant's report in a manner that makes it appropriate, in my view, to receive further submissions on the application of the principles to the Carter Report. 10 In my view, the circumstances before me now bear no significant resemblance to the position confronted by McLelland J in Brimaud v Honeysett Instant Print Pty Limited (unreported, New South Wales Supreme Court, 19 September 1988), to which I was referred by the defendants. 11 Appendix B to AS56 comprises two tables running to just over six pages. The first table is headed "A. Calculations and analytical facts in appendices to 31 May report of Mr Carter" and the second table is headed "B. Calculations and analytical facts in the Carter Report". The two tables are introduced by the following paragraph: "None of the calculations and analyses set out below are tendered as evidence of the relevance or appropriateness of the calculations or analyses. Rather, they are relied upon as mathematically correct calculations and analyses which are accurately based on the references identified." 12 At yesterday's hearing I conveyed my concern that the hearing of the application should be directed towards the application of relevant principles and in my view it would be possible to avoid a detailed investigation of all of the references to the appendices and the Carter Report set out in appendix B to AS56. It seemed to me, on a consideration of the principles adopted in my judgment of 7 March 2005, that there was a probability that the attempt by ASIC to identify and tender, in what I have referred to as a disembodied fashion, parts of the Carter Report and appendices would, in all probability, fall foul of the general Makita principles. 13 In order to allow the application to proceed efficiently and with a focus on the principles to be applied, I delivered what counsel referred to as a preliminary judgment (T3606ff). I said that to present the disembodied material in the appendices of the Carter Report would leave the court quite profoundly uncertain as to whether and to what extent there were assumed facts or asserted facts given in connection with that material in a fashion satisfying the Makita test (T3607.6-T3607.10). I indicated that this was a provisional view. 14 In the circumstances, Senior Counsel for ASIC proposed to put his case by reference to the first of the appendix references to the Carter Report contained in appendix B to AS56 and he said: "If your Honour's provisional view remained after I have put what I wanted to put in relation to that passage, then it would be unnecessary for me to go further." (T3607.31 -T3607.34). ASIC's submissions then proceeded on that basis. 15 The first item in table A of appendix B to AS56 identifies the whole of appendix L to the Carter Report and gives as the basis on which that evidence should be admitted the following: "Evidence that in each table such of the figures for revenue, costs of goods sold, gross margin, operating expenses and EBITDA for the One.Tel businesses identified are as cross-referenced to documents identified at page 12 of appendix L (being either Carter exhibits or other appendices) are sourced from those documents and all calculations in the table are mathematically correct." 16 It will be seen that the tender of appendix L is for the purpose of establishing two things: first, that the calculations in the tables are mathematically correct; and second, that the figures identified in the various tables in appendix L are as cross-referenced to the identified documents and that the sources are as stated. 17 It appears to me that the first of these matters falls within the observations that I made at [272] of my judgment, but the second is not evidence based upon analytical propositions of a mathematical kind. The second aspect is either evidence of, as it were, lay observation of the documents and their sources or else it is evidence in the nature of or encompassing opinions relating to the appropriateness of use of the documents. 18 What is striking about the submission concerning appendix L, when viewed as a whole, is that by this submission ASIC is seeking to take material prepared for the purposes of the opinion evidence given in the body of the Carter Report and to use it for a different and more limited purpose. Prima facie, one would be concerned that there would be a risk in such use of confusion potentially leading to an undue waste of time. 19 When one looks in more detail at appendix L and the manner in which it is proposed to be used, that prima facie concern is, in my opinion, fully realised. Appendix L is headed "Comparison of reported earnings between flash reports and management accounts (unadjusted)". Page 1 of appendix L gives figures for such matters as revenue, gross margin and EBITDA on a group operations basis. The ensuing pages give the figures with respect to the Australian digital and fixed-wire business unit, the Australian One.Tel business unit, the Australian One.Card business unit, Australian (ex Next Generation) operations, Next Generation operations, international fixed-wire business unit, international ISP business unit, international GWUK business unit and international other business units, with page 11 giving the figures for international operations as a whole. 20 In each case it is noteworthy that comparative figures are given by reference to a column entitled "(overstatement)/understatement". That, it seems to me, represents a matter of inference and judgment and, therefore, an opinion. The problem could be cured if it were understood that those columns were simply statements of differences without the judgment involved in the description as overstatements or understatements, but, as expressed in the table, it seems to me the column titles which run throughout appendix L present a problem. 21 The second difficulty relates to the notes which identify sources for various figures in appendix L. 22 In some cases the notes refer in a precise and unobjectionable way to materials which are, in turn, sourced in documents for which the provenance is reasonably well established. I have in mind documents located according to ASIC's provenance evidence in a version of the I-drive of One.Tel. 23 In other cases, however, documents are sourced according to the notes in various places where the identification of the source appears, to me, to involve matters of inference and judgment; indeed, in some cases, inference and judgment of quite controversial kinds. 24 In submissions yesterday senior counsel for the defendants identified a substantial number of examples of this phenomenon (T3653.7 - 3656.39, 3657.40 - 3658.10). I do not intend now to go through every such example, but in my view each of the examples identified by senior counsel for the defendants was a correct illustration of the point now made. 25 Note 41 on page 12 deserves special mention because it was referred to by both sides. It identifies paragraph 335 of the substantial report relating to additional unbudgeted prepaid marketing and, in addition, a reference to an exhibit in the Carter exhibits relating to operating expenses. When one turns to paragraph 335 one sees the following statement: "The flash reports do not state whether the additional unbudgeted prepaid marketing related specifically to one or more of the group's operations. However, based on the group's source documentation used to prepare the flash reports, I have identified the break down of the expense for the months February to April 2001 as follows: [and there follows some tables]". 26 What is worthy of note is that when one seeks to trace the source for matters stated in appendix L, one finds in the end an assertion said to be "based on the group's source documentation used to prepare the flash reports", with no other specification. 27 In my view, appendix L is a good illustration of the problem that I referred to throughout my judgment of 7 March 2005: that is to say, the problem that by virtue of a history of involvement with ASIC over a period of some months Mr Carter was exposed to a wide range of information which he was told to disregard for the purposes of his expert witness report after the preparation of that report had reached a mature stage. Rather than identifying an area of detachable evidence that might be tendered without giving rise to the difficulties identified in my judgment, in my opinion ASIC has, in identifying appendix L, provided a further specific illustration of the difficulty. 28 It follows, in my view, that to allow appendix L disembodied from the Carter Report to be adduced in evidence would be to give rise to the Makita problem identified in my judgment of 7 March. It would also lead to confusion and potential waste of time, in my view. In all probability, the tendering of that evidence would lead to further cross-examination of Mr Carter where problems which were briefly touched upon by senior counsel for the defendants at yesterday's hearing would be explored in fuller detail. That process is to be avoided, in my view, by rejecting the application now made by ASIC so far as it relates to appendix L both on the Makita principles and, to the extent that it is necessary to rely on discretionary grounds, the discretionary grounds in section 135. 29 My conclusion is only reinforced by the fact that one sees at the bottom of every page of appendix L the statement "to be read in conjunction with the report of Paul Carter dated 31 May 2002". I take that to be a warning that to disembody the appendix from the report is to create the substantial risk (likely to be realised, in my view) that the statements in the appendix will be misunderstood. 30 My reasons for judgment are not meant to convey that there is nothing in appendix L falling within the description in paragraph [272] of my reasons for judgment of 7 March, nor to deny the possibility that Mr Carter might give what would, in effect, be evidence by observation as to the source of documents in circumstances where no judgment was involved. The problem is that in appendix L he has not limited himself to evidence of those kinds. It may be that the cost and time involved in having Mr Carter source documents and make calculations could be utilised if appendix L were to be recast by reference to evidence clearly stating all of the assumed facts and exposing the nature of the appendix as a series of calculations based upon source documents, but that is not the application before me now. **********

ASIC v Rich

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