Findings as to Mr Fox's evidence
935 I reject Mr Fox's evidence that the management sign-off was confined to the non-financial matters for which Mr Steffey had allocated responsibility to him. First, for reasons given in section 4, I reject Mr Fox's evidence that his responsibilities were in fact restricted in the manner he contended, or that he believed at the time that they were so restricted.
936 Secondly, the management sign-off did not contain any such limitation, in its terms. On no reasonable construction could such a limitation have been implied, especially given the nature of the document as a "sign-off" in respect of predominantly financial matters. The document referred to the "business and affairs" for which Mr Robertson had responsibility up to 31 October and "for which [Mr Fox had] now assumed responsibility". Plainly enough, that was a reference to the businesses of GIO Insurance, including the whole of the reinsurance business. The period since 1 November 1998, identified in the document, encompassed claims experience in Hurricane Georges from that date, the results of the contract-by-contract analysis, the American Re contract, and the use of that contract for the purposes of the October results in the maintenance of the profit forecast. Even if he did not, the assurance contained in the sign-off that Mr Fox had drawn the attention of the DDC to all matters he considered might be material, and that he was not aware of any other such matter, was not subject to qualifications by reference to the part of the GIO Group business for which Mr Fox had assumed responsibility.
937 Thirdly, in my opinion it is implausible that Mr Fox believed, before he signed the document, that it was intended to be restricted to the non-financial matters that had been stipulated by Mr Steffey. If he had held that belief, the reasonable course would have been for him to require that such a limitation be articulated in the document, but he did not do so. In my opinion the terms of the document and the circumstances surrounding its execution overwhelmingly support the inference that Mr Fox believed, at that time, that he had full responsibility for the executive management of GIO Re, jointly with Mr Robertson. Consequently I also reject his evidence that he signed the document only after obtaining Mr Robertson's assurance that he was still happy with it.
938 Those conclusions are supported by the evidence of Mr Robertson. He said that Mr Fox did not express any surprise or complaint when he was asked to complete the relevant documents (T 3120). He said (T 3129) he did not believe the conversation recounted by Mr Fox had occurred, because he would have been extremely surprised if Mr Fox had asked him whether he, Mr Robertson, was satisfied with a letter prepared by PwC for Mr Fox to sign. He said (T 3130) it would have been absolutely extraordinary for Mr Fox to have said he had no way of checking whether the answers to Mr Robertson's due diligence questionnaire were correct, because by that time Mr Fox had all the same information as Mr Robertson had, and probably more since he had been in his role as executive director for more than a month.
939 As to the representation letter, it is in its terms a statement, in considerable detail, directed to the board of directors of GIO Australia Holdings and co-signed by Mr Fox without any qualifications, and it expressly says: "We acknowledge our responsibility for the preparation and presentation of the Divisional Profit Forecast, including the assumptions on which the Divisional Profit Forecast is based". Mr Fox did not specifically claim that he interpreted the letter consistently with his contention that he had limited, non-financial responsibility. In light of the nature of the letter and its wording, any such claim would be manifestly false. Indeed he acknowledged in cross-examination that he understood, when he signed the letter, that he was acknowledging his joint responsibility with Mr Robertson for the preparation and presentation of the divisional profit forecast; and he also understood that he was acknowledging his joint responsibility for the assumptions on which the divisional profit forecast was based (T 3884). Given the terms of the representation letter and Mr Robertson's evidence to which I have referred, it is implausible that Mr Fox would have signed the letter only after Mr Robertson gave him an assurance about it, and implausible that Mr Robertson would have given any such assurance.
3.37 Final DDC meeting and report, and board meeting approving Part B statement
940 The DDC met early in the morning on 8 December 1998 (minutes at PTB 1651). Mr Vines reported on the management sign-offs, copies of which were provided to the Committee. Both Mr Steffey and Mr Vines confirmed to the meeting that they were comfortable with the integrity of the forecast. Mr McClintock recommended that a new assumption in relation to the catastrophe portfolio be added to the Takeover Response Booklet, drafted with Mr Fox, Mr Robertson and Mr Vines, and that was approved (see also T 2749). The Committee recommended that the board should resolve to approve the Part B statement in principle and appoint a subcommittee to approve minor changes.
941 Mr McClintock told the DDC, as regards the PwC report on the forecast, that claims notified in respect of Hurricane Georges might increase to an additional $35 to $40 million over the amount that had been provided for. He said, however, that good performance in MIPI of $35 million had been included in an unders and overs schedule, which showed a total pre-tax shortfall of approximately $14 million (subsequently revised to $15 million), an amount that was not material.
942 At the meeting, Mr McClintock produced the unders and overs schedule to which he referred (the revised version is at PTB 1604). It applied to the whole of the GIO Group, and showed a net negative adjustment of $15.1 million before tax and $8.6 million after tax. Those figures were just above the minimum materiality thresholds and well below the maximum materiality thresholds. For inwards reinsurance, Mr McClintock's schedule showed a negative adjustment for catastrophe adverse performance of $35 million and a positive adjustment for MIPI of $35 million. He said in evidence (T 1554-5) that the $35 million adjustment for catastrophe adverse performance was based on an ultimate loss estimate of $60 million, a figure provided by GIO management in PwC's meeting with them on 7 December. Adverse performance in space produced a negative adjustment of $8 million but good performance in property attritional produced a positive adjustment of $7 million. There was a negative adjustment of $4 million for "assumptions re retrocession costs" and a negative adjustment of $10 million for "impact of reducing interest rates on prudential margin". Thus there was a net negative adjustment before tax of $15 million for inwards reinsurance. Small positive and negative adjustments were made in other business divisions, more or less cancelling one another out, so the net result was closely aligned to the outcome in inwards reinsurance. Mr McClintock gave evidence (T 1552) that his unders and overs schedule reflected the final view he took for the purposes of PwC Securities' report to the DDC.
943 The DDC's report to the board is in evidence (PTB 1676). It summarised the due diligence and verification processes and attached (inter alia) minutes of its meetings and management sign-offs, including those provided by Mr Vines, Mr Robertson and Mr Fox. It stated the view of each member of the Committee (subject to some qualifications in the case of PwC and the lawyers) that the due diligence system and inquiries were adequate for their purposes, that all matters relevant for inclusion in the Part B statement had been appropriately dealt with, and that nothing had come to the attention of the members of the Committee that caused them to believe that there was any materially misleading statement or material omission.
944 The DDC report was dated 8 December 1998. It was delivered to the board of directors of GIO Australia Holdings and considered by the directors on that day. The board met after the conclusion of the DDC meeting (minutes at PTB 1655). The board noted the management sign-offs and resolved to authorise the signing of the Part B statement, subject to receipt of the signed PwC report by the following morning. A draft of the PwC report was available to the directors. The Part B statement, thus approved, included the $80 million profit forecast for GIO Re.
945 The board meeting on 8 December was treated as the regular monthly meeting for December, although there were other special purpose board meetings in that month. Because the meeting was held earlier in the month than regular monthly meetings, to accommodate the schedule for the Part B Statement, financial results for November were not presented to the board. Instead, Mr Vines provided the board with "flash" figures as at 30 November. The minutes of the meeting refer to the "flash" figures which were to be incorporated into the board papers, but the document cannot now be found (PTB 1656 - minutes; T 2722). Mr Vines gave evidence that the final November results were never presented to the board, but he did not become conscious of that at the time because he was concentrating on preparation of the half-year results (T 2724). He said the absence of final November results was never raised with him by anyone and he did not consciously avoid the preparation of November figures (T 2725). I accept that evidence, for reasons given earlier.
3.38 PwC Securities' report on profit forecast
946 PwC Securities delivered its report, comprising some 28 pages and annexures and dated 9 December 1998 (PTB 1757), after having received a representation letter (PTB 1662) from Mr Vines, Mr Steffey and Mr Mortimer (chairman of directors, on behalf of the board). By that letter the signatories confirmed that, to the best of their knowledge and belief, and "having made appropriate inquiries of other directors and officials of GIO", they were not aware of anything which would lead them to believe that the forecast was incorrect or misleading in any material respect or contained any material omission". The letter also said that the directors had considered each of the assumptions underlying the forecast and believed them to be appropriate, and specifically, the directors believed that, notwithstanding the position with respect to Hurricane Georges, no adjustment to the forecast result of the reinsurance division was required.
947 The PwC report concluded that, based on their review (the scope of which was described in the report), nothing had come to their attention causing them to believe that the directors' assumptions were not a reasonable basis for preparation of the forecast, or that the forecast had not been properly compiled on the basis of the underlying assumptions and presented consistently with the accounting principles used by GIO and with the accounting standards and other mandatory professional reporting requirements.
948 As to inwards reinsurance, the report drew attention to the assumption that there would be no major catastrophes (events with a market loss in excess of US$10 billion) impacting on GIO during the remainder of the year to 30 June 1999, and the forecast of a 33% profit on net catastrophe premiums, on that assumption. PwC commented that the 33% profit margin for the full year might not be appropriate, because the first quarter's results showed a profit on catastrophes of only $7 million leaving a shortfall of $15 million for the quarter. However, PwC relied on Mr Robertson's memorandum of 4 November 1998 and in particular, his view that the performance of the catastrophe book over the remainder of the year would improve given that property catastrophes tend to be concentrated in the first quarter (July-September) and aviation catastrophes are concentrated in the northern hemisphere summer holiday period, together with GIO's intention to shed a large part of the catastrophe exposed business by non-renewal on 1 January 1999.
949 Under the heading "Matters for consideration by the Due Diligence Committee", the report said:
"76 We consider that the full year budget for the space portfolio will be difficult to achieve given the prior period error of $8.1 million recognised in the first quarter. Further, the first quarter results for the catastrophe portfolio assumed that GIO's exposure to Hurricane Georges would be 0.6% of the then market loss estimate of US$2.55 billion, i.e. $25 million. To 30 November 1998, we understand that claim notifications for Hurricane Georges have increased to $60-65 million and that the ultimate expected loss falls within this range. The increase in notifications with respect to Hurricane Georges suggests that the 33% profit assumption used for the catastrophe portfolio is no longer appropriate.
77 Management have advised us that losses on Hurricane Georges in excess of $15 million (up to $55 million) are protected by a retrocession policy entered into in November 1998 with American Re. Our review of this contract however has led us to conclude that, amongst other things, whilst the policy will allow GIO to claim for Hurricane Georges, additional premiums payable under the policy for claims experience mean that no benefit from the policy can be recognised in the Forecast.
78 Whilst management have not accepted his view, they point to positive development in the MIPI contracts in the period to date in 1999 to demonstrate that no adjustment to the Forecast is required. Our report to the Board Audit Committee for the 1998 year highlighted potential overstatements of provisions for MIPI and positive experience in this account since 1 July 1998 would support management's view that the Forecast is still achievable.
79 We also acknowledge, that:
the attritional property book has performed well in the first quarter 1999
changes in retrocession arrangements under consideration could alter the risk profile of the business at lower cost given the current 'soft' market."
950 Mr McClintock gave evidence (T 1552) that he obtained the information in para 76 about the level of notifications to date and the expected ultimate loss, in the range of $60-65 million, from Mr Fox at the meeting on 7 December.
3.39 AMP's bid increase, and publication of the profit forecast
951 Mr Vines said that after the board's approval of the Part B Statement on 8 December, he was involved in two principal activities. The first was preparing a proposal to the board, considered in mid-December, for payment of a special dividend, which was to be paid to shareholders after the close of the bid by AMP. He said that this proposal required quite a bit of planning because it involved approximately a $200 million reduction of the capital base of the Group. The other ongoing activity was associated with GIO's response to the bid, specifically because, just as the Part B Statement was being signed off, AMP raised its bid price (T 2725).
952 At approximately 10 a.m. on 9 December, AMP announced an increase in its takeover bid consideration to $5.35 in cash or one AMP share for four GIO shares. The bid had become unconditional. Then the board of GIO met to consider the revised offer. It confirmed its view that the bid was inadequate, notwithstanding the increase in consideration, and should be rejected, and it directed Macquarie Bank to amend the takeover response documentation to delete parts no longer relevant in view of the increased offer. The board also noted that minor changes would be needed to the independent expert's report by Grant Samuel. Then the DDC reviewed the takeover response documentation and reported that, subject to verification, no further action or recommendation was required by the Committee (PTB 1674).
953 The profit forecast was announced to the market on 10 December 1998 (PTB 1869). The media release said that the forecast result would be founded on a dramatic improvement in operating profits from GIO's core businesses, including reinsurance. Mr Steffey was quoted as saying that the forecast figures were consistent with the $88 million profit before tax and abnormals for the first four months, the underlying trend being very strong. He was quoted as saying that the GIO board would send out the Part B Statement in the following week. He urged shareholders to consider that document and to reject AMP's inadequate revised bid.
3.40 The Part B statement in final form, and the announcement to the market
954 GIO's Part B statement, and consents by Grant Samuel and PwC Securities to the inclusion of their reports, were lodged with ASIC on 16 December 1998 (PTB 1899). On the same day GIO released a statement to the market (PTB 1896) in which it announced that Grant Samuel, as independent valuation expert, had found that GIO shares had a mid-point acquisition value of $6.19 (16% above AMP's revised cash offer and 21% above the AMP share alternative) and that AMP's takeover offer was neither fair nor reasonable. The media release noted that Grant Samuel had referred to the prospects for substantial improvement in GIO's reinsurance business. Mr Steffey was quoted as saying that GIO's profit forecast for the year to June 1999 had been reviewed by PwC. The media release proceeded to attack the AMP bid and to urge GIO shareholders to reject it.
955 GIO's takeover response documentation, as sent to GIO shareholders (PTB 1903), comprised two booklets, which together constituted the Part B statement. The first booklet contained the board's recommendation to reject the bid and the reasons for that recommendation, answers to commonly asked questions, an explanation of the importance of the shareholders' decision to the future of GIO, and additional statutory information. The second booklet contained a full copy of the Grant Samuel report.
956 The profit forecast was a fundamentally important component of the reasoning throughout the takeover documentation. The first reason for rejecting AMP's bid, according to the GIO directors, was that GIO's shares were worth much more than the bid price. In making that assertion, the directors relied on Grant Samuel's report. Grant Samuel, in turn, relied on the profit forecast in the manner described below. The fifth numbered reason given by the directors was that GIO had a blueprint to enhance shareholders' wealth. In developing this reason, they made reference to the plans of Mr Steffey and GIO's management team, which (they said) incorporated a forecast profit before tax and abnormals of $250 million for the 1998/99 financial year and a return on shareholders' funds of 12%.
957 The profit forecast was Appendix 1 to the first booklet . The forecast ran to over eight pages, in which numerous general and division-specific assumptions were stated. The overall operating profit before tax and abnormal items was $250 million, and the figure for inwards reinsurance and corporate insurance was $69 million, comprising an estimated profit of $80 million for reinsurance and a loss of $11 million for corporate insurance. A sensitivity analysis showed that an increase of one percentage point in the loss ratio would reduce the forecast after-tax profit by 5.2%. The loss ratio was defined as claims incurred over earned premiums after allowance for reinsurance. A note explained that there were reinsurance arrangements protecting GIO from catastrophes and other significant events, which would have to be taken into account.
958 Under the heading "Inwards reinsurance and corporate insurance", the following text appeared:
"There are inherent difficulties in forecasting the results of the inwards reinsurance portfolio given that profits can be significantly influenced by relatively small variations between assumed and actual experience. Factors which can materially impact profits include actual versus expected developments of long tailed classes of business and unpredictable events such as earthquakes, hurricanes, storms, freezes, floods, fires, tornadoes and other man-made or natural disasters.
"The result for the 1999 year for the reinsurance division is expected to improve significantly from that reported in 1998. The result for 1998 was impacted by revisions to the valuation model used to estimate outstanding claims and changes in accounting policies in relation to the recognition of earned premiums and the estimation of outstanding claims. Changes in accounting policies reduced profits before tax for 1998 by approximately $79 million. The 1998 result also included losses incurred in the aviation and marine classes.
"The change in accounting policy in relation to the estimation of outstanding claims for inwards reinsurance has the effect of increasing the prudential margins established for certain classes of business for the most recent underwriting years until the development of those years is known with a greater degree of certainty.
"Significant assumptions used in the preparation of the Forecast comprise:
· a decrease in gross written premiums of 15%
· no major catastrophes (events with a market loss in excess of US$10 billion) impacting GIO in the remaining period to 30 June 1999
· an improvement in the loss ratio by approximately 66 percentage points after adjustment for the changes in accounting policies noted above
· the performance of the catastrophe portfolio in the year to date has been adversely affected by Hurricane Georges. This adverse experience has been offset to a large extent by favourable experience in other classes in the year to date. For the remainder of the year it is assumed that the catastrophe portfolio will incur no further significant losses. The assumption is based on the fact that the Caribbean hurricane season has ended, that exposures to losses will be significantly reduced as a result of the non-renewal of certain contracts at 1 January 1999 and as a result of revisions to retrocession arrangements
· the investment portfolio supporting outstanding claims and other insurance reserves is matched with outstanding claims and other reserves in both currency and duration."
959 Attached to Appendix 1 was a short report from PwC Securities dated 9 December 1998 (PTB 1942 - in contrast with the longer report provided by PwC Securities to the GIO board, summarised above). In the short report, PwC Securities explained that they had reviewed the forecast and that nothing had come to their attention causing them to believe that the directors' assumptions did not provide a reasonable basis for its preparation, or that the forecast had not been properly compiled in accordance with accounting principles.
3.41 The Grant Samuel valuation report
960 The Grant Samuel report, comprising the second booklet distributed to GIO shareholders, ran for 177 pages plus appendices (PTB 1976), together with a 19 page summary letter (PTB 1957). Grant Samuel valued GIO shares in the range $5.66-6.71 per share. They said that the valuation reflected, inter alia, the prospects for a substantial improvement in GIO's reinsurance business, which had been consistently profitable with the exception of the 1998 financial year. The valuation range for the reinsurance business was $1,050-1,300 million, out of a total Group value of $3,516-4,171 million.
961 Their principal approach to valuation of the reinsurance business was by discounting projected underwriting cash flows. Grant Samuel were responsible for the assumptions in the cash flow models that they used in relation to future underwriting profitability, and were responsible for the selection of discount rates. To the value thus ascertained, Grant Samuel added the value of the cash flows from investments that represented shareholders' funds supporting the reinsurance business. Those valuation conclusions were reviewed by reference to the multiples of net tangible assets and earnings implied by the share prices of comparable listed companies.
962 One of the checks of the valuation was to consider the earnings multiple produced by the valuation per share. For this purpose Grant Samuel had regard to the 1999 after-tax forecast, which produced an earnings multiple of 20-23.8. Grant Samuel expressed the view that this relatively high multiple was justifiable having regard to some special features of GIO, including its strategic value to a potential acquirer. Particular attention was given to GIO's forecast of a considerable improvement in performance for the year ending 30 June 1999, and the profit forecast was expressly set out both in the summary letter and the full report. In the full report (at PTB 2070) a number of major assumptions underlying the 1999 profit forecast for GIO Re were set out, including the assumption that a deterioration in GIO Re's catastrophe business as a result of the impact of Hurricane Georges would be offset by better-than-expected performance in other classes of business, and it was noted that GIO Re's management considered that the profit forecast remained realistic despite GIO Re's exposure to Hurricane Georges. The full report made it plain that Grant Samuel relied on information received from senior executives of GIO (see, for example, at PTB 2153).
3.42 Events after board's approval of Part B statement
963 At the GIO Insurance management committee meeting on 16 December 1998 (PTB 1884 (agenda); PTB 1893A (minutes)), Mr Schneider presented a Technical Services report in which he noted that determination of the reinsurance business profit as at November had been delayed, due to preparation associated with the 31 December 1998 valuation. He said a full revision of the MIPI assumptions would be undertaken at the half-year end and that work was proceeding to streamline the underlying process. As noted above, Mr Fricke presented a report on reinsurance claims, in which he commented that Hurricane Georges losses on property claims had increased considerably.
964 The board of directors of GIO Australia Holdings met on 17 December 1998 (PTB 2178 - minutes). Mr Vines made a presentation on the GIO Group's capital requirements and capital position and after receiving legal advice, the board noted that the Group's capital requirements had been under review since May 1998, and resolved to return excess capital of 38 cents per share to shareholders on the record on Monday 18 January 1999, subject to final clearance by the company's tax advisers. The board also resolved to bring forward the payment of the interim dividend normally declared in February and paid in April, and resolved accordingly that an interim dividend of 12 cents per share be paid, fully franked, in respect of the year ended 30 June 1998.
965 Mr Fox gave evidence (first affidavit, para 217) that he left Sydney on 21 December 1998, spending 24 hours in Singapore and then visiting his family in London, returning to Sydney on 10 January 1999. He said he did not access his e-mail while in London.
966 It does not appear, on the evidence, that Mr Vines did anything after 8 December to monitor the continuing development of Hurricane Georges, or to ascertain whether the representations he and other GIO Re executives had made concerning the maintenance of the profit forecasts had been eroded by later events.
3.43 Close of the AMP bid, and subsequent recognition of the impact of Hurricane Georges losses
967 AMP made an announcement to the market on 4 January 1999 that its offer would close on that day, as scheduled, expressing confidence that by the end of the day it would have reached a satisfactory level of acceptances (PTB 2236A). At the close of the bid, AMP had received acceptances for shareholders representing 57% of the shares.
968 During the period from January to March 1999 significant changes were made to the composition of the board and senior management team. By and large, existing officeholders were replaced, apparently (I infer) by AMP nominees. Peter Corrigan became the chief executive officer of GIO Australia Holdings, replacing Mr Steffey. Mr Vines left the company, but Mr Fox remained as executive director of GIO Insurance. In the half-yearly report to December 1998, published in March 1999, Mr Robertson was described as one of the executive management team, having the title "Executive Director" (PTB 2924), but he tendered his resignation as a director of GIO Insurance by a letter to the directors dated 3 March 1999 (Exhibit P23). By circular resolution (Exhibit P22) signed by each of the then current directors of GIO Insurance on 5 March 1999, Mr Corrigan was appointed a director and became chairman of GIO Insurance, and the resignations of Mr Vines and Mr Robertson as directors were accepted.
969 On 7 January 1999 Mr Robertson sent an e-mail to Mr Steffey, copied to Mr Fox and Mr Vines, on the current outlook for GIO Insurance. He referred to Mr Vines' "flash numbers". He expressed the opinion that the two divisions of GIO Insurance would still be able to deliver their planned full-year business forecasts of $80 million profit for reinsurance and $11 million loss for corporate insurance, in the absence of any unforeseen adverse claims experience in the ensuing six months. But attainment of the planned reinsurance result might not be possible, he said, if the expected new retrocession arrangements were not in place with retrospective effect for the full year. He said that Mr Vines was familiar with the issues involved (PTB 2239). Mr Robertson explained in his affidavit (para 227) that when he wrote this memorandum he still thought that the American Re contract was effective. He said his reference to retrocession arrangements having "retrospective effect for the full year" was a reference to retrocession recoveries which GIO Re was expecting for Hurricane Georges claims for the period up to 31 December 1998.
970 Mr Vines gave evidence that when he prepared the flash numbers, he had not been informed that claims for Hurricane Georges had reached about A$100 million (T 2673). He said he learned that claims on Hurricane Georges were up to about A$100 million at a meeting with Mr Steffey and the executive team, including Mr Robertson, on the morning of 7 January 1999 (T 2673-4).
971 Mr Fox prepared a position paper, which he sent to Mr Vines on 1 February 1999 (PTB 2247). In the paper he said that Hurricane Georges had lifted the loss ratio for 1998/9 from 63% to 89%, compared with an average loss ratio of 71%. He said that "without this exceptional loss the result for the year to date would have been $49m towards the $80m planned for the financial year". Without stop-loss or reserve reduction the business result to December 1998 before tax would be, according to Mr Fox, a loss of $73 million for GIO Re. The business result to December 1998 subject to a stop-loss arrangement and with full Hurricane Georges recovery would be a profit of $66 million. He said that the reporting of a loss would seriously damage GIO Re's ability to trade and put in doubt its continued survival in view of AMP's previously expressed views. He commented that the payback element to stop-loss reinsurers in respect of Hurricane Georges would severely eat into future profitability. He recommended stop-loss arrangements with partial Hurricane Georges recovery, which would lead to a profit to December 1998 of $10 million, but said that there would need to be full auditor approval of the construction of the arrangement.
972 There is an undated document headed "Hurricane Georges Impact on Results" at PTB 2250, which indicates that the gross Hurricane Georges loss was $150 million, less marine insurance recovery of $20 million and extra reinstatements not in the accounts of $8 million, producing a net Hurricane Georges loss in the accounts of $122 million. Mr Vines said he saw that document late in January 1999, in preparation for a meeting held on about 1 February 1999 with Mr Fox, Mr Corrigan and others, to consider some alternative approaches that might be taken to reserving as at 31 December (T 2674-5).
973 Mr Robertson gave evidence (affidavit para 229) that he met with Mr Corrigan on about 1 February 1999, and in that meeting Mr Corrigan told him the new management wanted Mr Robertson to stay for a while because he was a calming influence, and his presence would reassure a lot of nervous GIO people. Mr Robertson said he agreed to stay, on the basis that he would subsequently be made redundant. For the next six months, he said, he carried out a few small projects for various parts of the GIO Group, with only very limited involvement in the reinsurance business. However, he attended some meetings at which Mr Schneider's valuation results as at 31 December 1998 were discussed, and Mr Corrigan asked him to assist by explaining the valuation process to the Board Audit Committee. When Mr Robertson suggested to Mr Corrigan that Mr Schneider's figures might not be right, Mr Corrigan said it would not be necessary to check them (Mr Robertson's affidavit, para 233).
974 On 11 February 1999 Mr Robertson provided a memorandum to the GIO Australia Holdings Board Audit Committee, copied to Mr Fox, with respect to outstanding reinsurance claims as at 31 December 1998 (PTB 2253). In it he commented upon Mr Schneider's valuation of GIO Re as at 31 December 1998, which had produced a business loss for the first half of 1998/99 of $73.3 million. Mr Schneider's figures included half-year losses of $10.8 million for property attritional, $50.3 million for marine attritional, and $31.3 million for space. Most significantly, Mr Schneider calculated a half-year loss for property/marine catastrophe of $72.3 million.
975 Mr Robertson commented that he was generally "not unhappy" with the results of Mr Schneider's valuation. He said that the results for the attritional classes were not surprising given the state of the international reinsurance market (in which premium rates had been softening continuously for several years) and the known condition of GIO Re's book of business. He continued:
"By far the most significant unexpected contribution to the half-year results came from Hurricane Georges. This event is currently estimated as likely to cause us a gross loss of $167 million, and a net loss of $130 million, $8 million in the marine account and $122 million in property. Only a small amount of the loss has come to us from our own direct reinsurance, as we have found unattractive the premium rates in the Caribbean where Georges did most damage. The major part of our loss has come from retrocession provided to other insurers and Lloyds syndicates. We are no longer accepting business of the kind which gave us the worst of these losses."
976 Mr Robertson then commented on the MIPI reserve. He pointed out that the MIPI plan was completely redesigned in 1992/3 to become less problematic, and GIO had greatly strengthened its reserves, so that in recent years it had consistently demonstrated better claims experience than forecast. He recommended that MIPI should be put into the basic valuation model rather than being treated separately. He said that Mr Schneider had calculated that if this were done as at 31 December 1998, reported profit for the half-year would be increased by $65 million.
977 Mr Robertson also commented on prudential margins, saying that the current approach used by GIO Re was counterintuitive and should be changed to a new basis, which would generate profits for the half-year of $8.7 million. Coupled with his recommended approach to MIPI, the half-year result to 31 December 1998 would be converted from a loss of $73.3 million to a profit of $0.4 million.
978 Mr Robertson gave evidence that his instructions, when preparing the memorandum, were to write as if the results were his own valuation results, and he was told it would not be helpful to say that he had not checked the figures, or to express any doubts about them (affidavit para 235). Mr Robertson said (affidavit para 236) that after completing his memorandum, he received a copy of an e-mail from Mr Schneider to Mr Corrigan dated 15 February 1999, which said that the previous valuation result of a $73 million loss was incorrect, and altered the result to a loss of $110 million. Mr Robertson said he obtained detailed figures from Mr Schneider and incorporated the revised figures in a second version of his own memorandum, which was dated 15 February 1999. He said Mr Schneider then told him that the numbers he had given Mr Robertson as central estimate of outstanding claims were in fact the overall provisions including potential margins. Mr Robertson then prepared the third version of his memorandum, dated 16 February 1999. He said he did not sign any of the three versions of the memorandum because he took them to be drafts for someone else's use which did not reflect his own professional opinion (affidavit para 237).
979 Subsequently Mr Corrigan contacted him to say he could not send Mr Robertson's memorandum to the Board Audit Committee because Mr Robertson had no standing in GIO Insurance, and he asked whether Mr Robertson would mind if Mr Fox re-wrote the memorandum (Mr Robertson's affidavit para 238). Mr Robertson said he did not mind.
980 Mr Fox's memorandum to Mr Corrigan, copied to Mr Robertson, was dated 18 February 1999 (PTB 2260). The content of the memorandum is noticeably similar to Mr Robertson's memorandum, except that the projected loss figure is different. The loss derived from Mr Schneider's valuation had become $91 million, as a consequence of new currency/investment income information, although the figures for the contributions from each class of business were the same. Mr Fox's comment about the unexpected Hurricane Georges loss was virtually identical with Mr Robertson's comment. His substantive recommendations in respect of MIPI and the prudential margin were very similar to Mr Robertson's. On Mr Fox's calculations, the additional profit produced by adjustment to the prudential margin would be $21.5 million, and the adjusted result for the half-year to 31 December, bearing in mind the higher gross loss figure, was a loss of $4.5 million.
981 Mr Corrigan sent Mr Fox's memorandum to the Board Audit and Compliance Committee with a statement that he supported Mr Fox's conclusions (PTB 2266).
982 Mr Fox gave evidence (first affidavit, para 218) that the changes from the memorandum which is in Mr Robertson's name to the memorandum in his name were not made by him, and that he saw a copy of the memorandum only at some time after his return from London on 18 February 1999. ASIC submitted (written submissions (Fox), para 262) that the court should find it is improbable that any officer of GIO Re would have sent the memorandum in Mr Fox's name without giving him the opportunity to read it before it was sent. But it is not so implausible that Mr Robertson's memorandum might have been "re-badged" in Mr Fox's name by someone in the new management when it was discovered that Mr Robertson had no standing in GIO Insurance, and I therefore do not think it would be justifiable to find that Mr Fox's evidence on this point is untrue.
983 Perhaps the most significant thing about the memorandum of 18 February 1999 is not the question of who wrote it, but the fact that it says nothing to suggest that anything extraordinary had occurred after 7 December 1998 to cause the 31 December 1998 results for Hurricane Georges to be dramatically different from what was in prospect at 7 December.
984 Mr Fox also gave evidence (first affidavit, para 219) that in February or March 1999 Mr Schneider told him that the contract-by-contract analysis for Hurricane Georges had overlooked the "B Account", which consisted of old, long-term contracts not picked up by the COGEN system, and he added that losses were now going over $100 million. Mr Fox said that was the first time Mr Schneider had ever said anything to him to the effect that losses from Hurricane Georges might exceed $100 million. Consistently with my earlier findings, I reject this evidence.
3.44 GIO's results for July-December 1998
985 On 5 March 1999 GIO Australia Holdings, under its new management headed by Mr Corrigan, announced the Group's half-year results to 31 December 1998 (PTB 2921). It reported a loss for GIO Re of $19.6 million. It is striking that a business division for which the forecast on 16 December 1998 was a profit of A$80 million for the full year had, less than three months later, announced a loss for the half-year to December 1998 of such a large amount.
986 The half-yearly report commented as follows (PTB 2931):
"GIO Re produced a loss from business activities of $19.6m before tax for the half-year. The most significant contributor to this disappointing half-year result was GIO Re's exposure to claims as a result of Hurricane Georges. Our current estimated net loss for this event is $120 million.
Only a small part of the Hurricane Georges loss came from GIO Re's traditional reinsurance activities as premium rates in the Caribbean, where Georges did most damage, had been considered unattractive. Most of the loss came from retrocessional business accepted from other reinsurers and Lloyd's syndicates. Early in 1998, GIO Re decided to restrict acceptance of this kind of business but was unable to withdraw from yearly contracts entered into in the January 1998 renewal period. Additional retrocessional protection has now been put into place to protect GIO Re from the severity of any similar future losses."
987 Mention was also made of the softening of premium rates in the property and marine reinsurance markets in recent years, and GIO Re's adoption of a more stringent approach to premium pricing and the writing of business where rates would not adequately reflect the underwriting risk.
988 It appears that Mr Schneider was unhappy with some press reports concerning the deterioration of GIO Re's financial position. On 13 May 1999 he sent an e-mail to Mr Fox (PTB 2275) referring to the press reports and in particular, comments that the loss was a function of a review by Ernst & Young which indicated a requirement to strengthen reserves by $200 million. Mr Schneider's concern was that the press reports would have an impact on his standing in the reinsurance industry, because it was well known that he was responsible for recommending reserves and the press reports implied that he had made a horrible mistake. He said it was not known publicly that management had ignored his advice on numerous occasions. He noted that he was not asked to produce recommendations in November and December and that his recommendation for October was overruled, as was his view about the size of Hurricane Georges. Mr Fox replied on the same day, seeking to reassure Mr Schneider that he had not been criticised within the company.
4. THE RESPONSIBILITIES OF MR ROBERTSON AND MR FOX FROM 5 NOVEMBER 1998
4.1 Further evidence concerning transfer of responsibilities from Mr Robertson to Mr Fox
989 I touched upon some of the relevant evidence in section 2.1. Mr Fox gave accounts (first affidavit, paras 12, 22 and 35) of three conversations he claimed to have had with Mr Steffey about his role (on about 31 August 1998, during his visit to Sydney from 19 to 22 September 1998, and on his first day in the office, which he said was 4 November 1998). On each occasion, according to Mr Fox, Mr Steffey told him Mr Robertson would stay on to work on financial matters and the takeover response, and in the second and third conversations Mr Steffey said, according to Mr Fox, that Mr Robertson would handle these aspects and that Mr Fox was to concentrate on other matters, implying that Mr Fox was not to be responsible for the "financials" and the response to the AMP bid.
990 Mr Robertson gave evidence that Mr Steffey never described his ongoing role at GIO Insurance in this fashion (T 3117). In his affidavit (para 99), Mr Robertson recounted a conversation he had with Mr Steffey on 2 October 1998. Mr Steffey told him that Mr Fox was to be appointed to succeed him at GIO Insurance. Mr Robertson claimed that during the conversation, Mr Steffey told him that he had some ideas for a new position for Mr Robertson but in the meantime, it was necessary to sign off on the Part B statement, and the directors would not be happy with leaving the sole responsibility for doing so to Mr Fox. Therefore, according to Mr Robertson, Mr Steffey said Mr Robertson would have to sign off with Mr Fox, on the basis that Mr Robertson would take responsibility up to 1 November and Mr Fox would sign off for everything after that time.
991 Mr Vines said no-one ever told him about any such arrangement, and that from his perspective, Mr Robertson remained involved in the preparation of the Part B Statement after Mr Fox arrived (T 2732).
992 In his e-mail to staff announcing Mr Fox's appointment (Exhibit P 21) Mr Robertson said he would stay on for some months to introduce Mr Fox and familiarise him with GIO Re and its style of operation, and that he would progressively move into a strategic role which Mr Steffey had in mind for him in GIO's other corporate activities.
993 Mr Robertson gave evidence, considered later, about some meetings that he had with Mr Fox and others on 5 November 1998. He said (affidavit para 168) he considered that after those meetings he had handed over responsibility for the ongoing assessment of GIO Re's profit forecast and its achievability to Mr Fox, although he remained available to deal with any queries Mr Fox might have. He said his understanding was that he had been responsible for the profit forecast until Mr Fox arrived, and that after Mr Fox arrived the achievability of the profit forecast became Mr Fox's responsibility and he remained available to provide support, assistance and advice.
994 Mr Robertson said (affidavit para 168) he told Mr Fox on 5 November that there was a profit forecast of $80 million for the reinsurance division, and that declaring the year-end profit would be Mr Fox's responsibility, so he should review the profit forecast and decide whether he was happy with it. He said he told Mr Fox:
"As you know, we have to sign off on the profit forecast for the company, for the purposes of our defence against this AMP bid. It would seem a bit unreasonable to throw you into the deep end of this and leave you alone. So we will both sign off on the forecast with me taking responsibility up to now and you taking responsibility from now on."
995 On 4 December 1998 Mr Fox sent a memorandum to Mr Vines headed "November Highlights - GIO Re" (PTB 1572). He reported that "Tim Fox arrived on the 3rd November, 1998 and has taken up his responsibilities as Executive Director". At the meeting of GIO's due diligence committee held on 6 December 1998 it was noted that "Tim Fox has assumed responsibility for the areas for which Frank Robertson was formerly responsible" (PTB 1594). It was resolved that Mr Fox be required to execute a formal sign-off and that the sign-off by Mr Robertson be suitably amended to take account of the change in the control of his area of responsibility and the date on which that change occurred.
996 The "Management Sign-Off" signed by Mr Robertson on 7 December 1998 asserted that he had responsibility for the part of the GIO Group business covered by the answers to his due diligence questionnaire up to 1 November 1998 (PTB 1622). Mr Fox's "Management Sign-Off" of the same date (PTB 1623) referred to the part of the GIO Group business and affairs for which Frank Robertson had responsibility up to 31 October 1998, "for which I have now assumed responsibility", and declared that the sign-off was given only in respect of matters arising in respect of that part of GIO Group business for which he had assumed responsibility, and only in respect of the period since 1 November 1998. These documents imply an acknowledgement, on the part of both Mr Fox and Mr Robertson, that Mr Fox took over executive responsibility for that part of the GIO Group business and affairs for which Mr Robertson had been responsible up to 31 October 1998, as from 1 November 1998, and that Mr Robertson ceased to have that responsibility as from that time. I do not read Mr Fox's sign-off as acknowledging that the transfer of responsibility occurred only on the date of the document, namely 7 December 1998.
4.2 Mr Fox's responsibility as executive director
997 Mr Fox's evidence conveyed the general idea that, although he was appointed to the position of executive director of GIO Insurance, he was not responsible for financial forecasting for the reinsurance business, or for contributing information for the purposes of the draft Part B statement or to the DDC, and was therefore not in any way responsible for the $80 million profit forecast, or the potential impact of Hurricane Georges on it, or for the protection of the profit forecast from the impact of Hurricane Georges through retrocession arrangements. It may be that Mr Steffey instructed Mr Fox to give some attention to management improvement and the relocation of the business, but I do not accept that there was any qualification placed on Mr Fox's responsibility so as to exclude responsibility, or joint responsibility, for these matters, or otherwise to limit Mr Fox's responsibilities as executive director.
998 In my opinion Mr Fox's assertions, to the extent that they imply that he had no responsibility for these matters, are contrary to the weight of evidence. First, there is no such limitation of responsibility in any of the documentary terms of his employment. The letter written to him by Mr Yeoland, Human Resources Director for the GIO Group, on 15 September 1998 said that Mr Steffey and the directors were looking forward to the opportunity to meet Mr Fox "to pursue closure on your taking responsibility for the Company's Reinsurance activities" (Exhibit D13). Mr Steffey's letter of offer dated 22 September 1998 describes the position as "Executive Director Reinsurance" (PTB 529A).
999 Mr Fox attended Mr Steffey's regular executive meetings (T 2622), chaired the management committee meeting for GIO Re on 25 November 1998 (PTB 1278), and chaired meetings of the reinsurance committee of GIO Insurance on 16, 23 and 30 November, which Mr Robertson did not attend. This would be an odd level of involvement if Mr Fox had no financial responsibility.
1000 Mr Vines gave evidence that neither Mr Steffey nor Mr Fox, nor Mr Robertson, ever said to him that Mr Robertson rather than Mr Fox was responsible for takeover and financial matters (T 2622-3). I accept this evidence. It is consistent with what he wrote in his answers to the due diligence questionnaire, when he said, without qualification, that Mr Fox had assumed responsibility for reinsurance since early November (PTB 0909). That is of some significance because of Mr Vines' position as chief financial officer and his central role in the preparation of the Part B statement. One would have thought that any subdivision of financial responsibility and responsibility for the profit forecast, between the former and new executive directors of GIO Insurance, would have been communicated by the chief executive or by one of them to a person in Mr Vines' position. Mr Vines said that, while he understood that Mr Fox knew little about the operations of GIO Re when he commenced and it would take him time to come to grips with the situation, he expected that if Mr Fox expressed an opinion about anything it would be based on sound reasons. On the other hand, Mr Robertson had become a man without portfolio whose day-to-day responsibility was not entirely clear, but Mr Vines presumed that he would have a continuing involvement in the Part B statement and the forecast (T 2623).
1001 ASIC drew attention to evidence showing that various GIO executives communicated with Mr Fox on the basis that he had executive responsibility of a general financial kind. I agree that this evidence, though inconclusive, points against Mr Fox's evidence of his limited responsibility. Thus:
· Mr Vines and Mr Schneider both sent e-mails to Mr Fox concerning the Part B due diligence questionnaire, on 11 and 10 November 1998 respectively (PTB 940 and 939);
· the Status of Registered Events report of 5 November 1998 was addressed to Mr Fox as well as Mr Robertson and others (PTB 792);
· Mr Fox attended the meeting of 11 November 1998 to discuss the October results;
· Mr Schneider's e-mail dated 12 November 1998, concerning Mr Vines' "direction" to uplift the October profit result by $15 million, was copied to Mr Fox (PTB 984), and his memorandum dated 2 December 1998, enclosing the October valuation of claims and premiums, was sent to Mr Fox and Mr Wright although by that time Mr Robertson had returned from overseas (PTB 1452);
· the e-mails attaching the Hurricane Georges register were sent by Mr Fricke to Mr Fox, copied to others (PTB 2460-2543).
1002 Importantly, when he had a telephone conversation with Mr McClintock on 24 November 1998 discussing the effect of Hurricane Georges and (according to Mr McClintock) whether the $80 million profit forecast could be maintained (Mr McClintock's file note is at PTB 1206), there appears to have been no suggestion that these issues were not Mr Fox's responsibility and that Mr McClintock should be talking to Mr Robertson. That is consistent with Mr Fox's letter to Mr Murray of PwC dated 23 November 1998, describing his role as "to assess fully both the underwriting and the reinsurance needs going forward" (PTB 1187).
1003 Another part of the evidence fits into this pattern, once Mr Fox's explanation of it is rejected. This is the evidence that Mr Fox asked Mr Schneider to look into "areas of conservatism" in the profit projection, and Mr Schneider then sent Mr Fox his "Particular Areas of Conservatism" memorandum (PTB 1467). Then, later on the same day, a facsimile expressed to be from Mr Fox was sent to Mr Hammond, attaching Mr Schneider's memorandum "as discussed in our telephone conversation" (T 1466). I have rejected Mr Fox's evidence that his secretary, Ms Irvine, sent the facsimile to Mr Hammond without Mr Fox's authority. The consequence is that Mr Fox was, on 2 December, involved in the development of a defence of the profit forecast, to the extent of obtaining Mr Schneider's opinion on areas of conservatism and passing those on to Mr Hammond.
1004 It is of particular significance that Mr Fox signed a management sign-off and representation letter on 7 December 1998, because those documents constitute strong evidence that Mr Fox had assumed plenary executive responsibility for GIO Re.
1005 Mr Fox's management sign-off (PTB 1623) was expressed to be given only in respect of matters arising in that part of the GIO Group business for which he had assumed responsibility and only in respect of the period since 1 November 1998. But nothing was said to indicate that financial responsibility in respect of the reinsurance profit forecast for the Part B statement was excluded. The representation letter (PTB 1618) was signed by both Mr Robertson and Mr Fox under the title, "Executive Director". It contained specific representations with respect to the GIO Insurance component of the profit forecast for the Part B Statement and the impact of Hurricane Georges, without any qualification to convey lack of responsibility on the part of Mr Fox. I have given reasons for rejecting Mr Fox's evidence that he signed these documents only after receiving Mr Robertson's representation that he was satisfied with them, and for rejecting his contention that the wording of the documents should be read down to reflect his allegedly limited responsibility (see section 3.36).
1006 My conclusion, on the basis of this evidence, is that Mr Fox became the sole executive director of GIO Re from at least the time that he arrived in his new position (5 November 1998), with the full responsibility of a reinsurance manager. In a sense, he was chief executive of the reinsurance business, although that concept is qualified by the fact that he was required to report to the chief executive of the parent entity. His responsibility commenced as from 1 November, but that did not mean he was entitled to disregard events that had occurred before that date where they impacted on the ongoing business or had the potential to do so (such as the developing claims experience for catastrophe events that occurred before 1 November).
1007 The role of Mr Robertson ought not to be ignored for the purpose of determining Mr Fox's liability and in particular, applying to him the words "in like position". But the evidence, including in particular the evidence considered in this section and section 4.3, does not establish that Mr Robertson was given exclusive responsibility, after Mr Fox's arrival, for any particular ongoing aspect of GIO Insurance's financial accounting or the response to the AMP takeover bid.
1008 Two of the more difficult factual questions in this case are whether, and if so to what extent, Mr Fox was entitled to rely on Mr Robertson, and whether, and if so to what extent, Mr Robertson was entitled to rely on Mr Fox. I shall consider the first question here and the second question in section 4.3.
1009 It seems to me that Mr Robertson's 4 November memorandum is the key piece of evidence here. He said he regarded it as a "sign-off" on the matters it covered at the point of transfer of responsibilities. In my opinion that evidence was reinforced by the way the 4 November memorandum was received and dealt with within the GIO Group. It was a significant document, taken to represent Mr Robertson's considered opinion on the subjects addressed. It was central to the discussion with Mr Lange and others, attended by Mr Fox, on the following day. In my opinion it was open to Mr Fox to regard it as an assumption of responsibility by Mr Robertson for the opinions he expressed, of a kind that Mr Fox could rely upon for his ongoing work upon taking up his new position. But it was not open to Mr Fox to rely on Mr Robertson in respect of matters which, according to or by implication from the 4 November memorandum, required some form of continuing attention.
1010 Importantly, the 4 November memorandum identified concerns and made predictions, which had the effect of drawing the reader's attention to the relevance of certain post-4 November developments, including developments in catastrophe experience. That meant that Mr Fox was not able to rely on Mr Robertson in respect of the subsequent factual development of Hurricane Georges or the assessment of the financial impact of that factual development. Mr Fox's position was not such that he could abdicate in favour of Mr Robertson any of the responsibilities attaching to the position of executive director as from 1 November, including responsibility to monitor and assess the financial consequences of the claims development of pre-November catastrophes.
1011 ASIC submitted (written submissions (Fox), para 117) that even if Mr Fox was entitled to believe that Mr Robertson was exercising some overall responsibility for the "financials" and the response to the AMP bid, he ought to have understood that Mr Robertson required input from him on the quantitative aspects of outstanding claims for Hurricane Georges. The question strictly does not arise because I have concluded that there was no basis for Mr Fox to believe that Mr Robertson had anything more than joint responsibility with him for some aspects of the management of GIO Re. But if that finding were wrong, I would agree with ASIC's submission, bearing in mind the evidence concerning Mr Fox's involvement in procuring the Hurricane Georges register updates and his admissions concerning responsibility for monitoring Hurricane Georges claims and providing specific loss information to PwC.
4.3 Mr Robertson's continuing responsibilities after the arrival of Mr Fox
1012 Clearly enough Mr Fox assumed a substantial part of the role of Mr Robertson when he commenced work on 5 November. It may be, as suggested by the terms of Mr Robertson's e-mail of 2 October 1998 (Exhibit P21) that the handover of responsibility was progressive or in stages after that time. What matters in the present case is whether Mr Robertson retained a role in relation to GIO Re's financial performance and the profit forecast.
1013 I agree with ASIC's submissions (written submissions (Robertson), para 10) that there are four matters that confirm that Mr Robertson retained some responsibility in respect of the profit forecast after 5 November.
1014 First, he filled out and returned his due diligence questionnaire (PTB 0917), and a "senior management sign-off" letter (PTB 0928), from a hotel room in Boston, on 10 November, that is five days after Mr Fox had arrived. In his covering memorandum (PTB 0905), Mr Vines had made it clear that it was necessary to include in the answers material changes in the financial position of GIO since 30 June 1998 and any other material information, and I infer that Mr Robertson understood that such disclosure was required. Therefore he was reporting as at a time after Mr Fox had become executive director. It appears that at the time, Mr Robertson expected to remain in the due diligence process (affidavit para 174), and there was nothing in his answers to indicate that he was responding only in respect of the period before Mr Fox's appointment took effect.
1015 Secondly, Mr Robertson attended the important meeting of 7 December 1998 with Mr Vines and Mr Fox. His evidence did not suggest that he was participating in some limited role. He gave evidence (affidavit para 212, quoted in section 3.35) that he reaffirmed the $80 million profit forecast in firm language without any indication that his opinion was confined to the pre-November period. On the contrary, he specifically affirmed his opinion by reference to "the information which is now available to me".
1016 Thirdly, he signed the representation letter with Mr Fox on 7 December 1998, under the title "Executive Director" (PTB 1618). That document referred specifically to the claims experience in respect of Hurricane Georges in a period extending after 5 November, and expressed opinions, as at 7 December, about a number of matters including whether management believed that an adjustment to the reinsurance forecast of $80 million was necessary in view of the deterioration in the performance of the catastrophe portfolio.
1017 Fourthly, Mr Robertson signed his management sign-off on 7 December 1998. As indicated in section 3.36, in that document Mr Robertson certified that to the best of his knowledge, information and belief the answers in the due diligence questionnaire were true and correct "in respect of that part of the GIO Group business and affairs" for which he had responsibility to 1 November, and it added:
"For the avoidance of doubt this sign-off is given only in respect of matters arising in respect of that part of the GIO Group business for which I had responsibility in the period up to 1 November, 1998."
1018 ASIC submitted (written submissions (Robertson), para 11) that these words, on their proper construction, conveyed that Mr Robertson was only signing off in respect of that part of the GIO Group business to which he was responsible up to 1 November 1998, namely GIO Re, and he was not signing off in respect of that part of the GIO Group business for which he had responsibility after that date, namely the management reviews and other duties that had been assigned to him. In other words, the wording of the management sign-off identified the GIO Re business but it did not impose a time limit on the period of responsibility.
1019 In my opinion, this construction is correct. The word "only" in Mr Robertson's sign-off literally governs matters arising in respect of the business for which Mr Robertson was responsible, that is, GIO Re. The words "in the period up to 1 November 1998" are a part of the description of that business, rather than a separate condition imposing a time limit. If Mr Robertson or the drafter of the sign-off documents had wanted to say that Mr Robertson was to have no responsibility in respect of matters occurring in the GIO Re business after 1 November, it would have been easy enough to say so. That is what happened in Mr Fox's sign-off, in which there is a double "only" - that is, only in respect of matters arising in the business for which he had assumed responsibility, and only in respect of the period since 1 November. It is significant that this wording was not used for Mr Robertson's document. Moreover, the construction that I prefer is consistent with the way Mr Robertson acted, in completing the due diligence documentation of 10 November, participating in the meeting with PwC on 7 December, and signing the representation letter, without on any of those occasions insisting on delimiting his responsibility for events and developments occurring after Mr Fox arrived.
1020 Mr Robertson's evidence in cross-examination seems to me to support the conclusion that after 5 November he retained responsibilities in respect of the profit forecast. He conceded that in giving the sign-off of 7 December 1998 he was verifying the profit forecast based on information that he had or could reasonably have been expected to obtain (T 3232). He said that to obtain information he would have had to seek Mr Fox's permission, but he accepted that he had no reason to believe it would be refused (T 3232). In effect, the only difference between his responsibilities before and after 5 November with respect to the profit forecast seemed, from his evidence, to be that his formal ability to obtain information had become more limited (T 3232).
1021 Since I have held that Mr Fox acquired responsibility as executive director for general management of GIO Insurance including financial matters such as the profit forecast, my conclusion about Mr Robertson's role has the effect that they both were responsible for financial aspects of the Part B statement relating to GIO Insurance and in particular, the divisional profit forecast.
1022 James Morgan, an insurance underwriter with 44 years' experience in the international insurance and reinsurance industry, principally as a chief underwriting manager or chief executive of the companies where he had been employed, gave expert opinion evidence on behalf of Mr Robertson. He said in his affidavit (para 14) that on the basis of the assumptions he had been given, his opinion was that from the time of Mr Fox's arrival, Mr Robertson was not acting as reinsurance manager. ASIC pointed out (written submissions (Robertson), para 13) that one of the assumptions Mr Morgan was given was that from 5 November 1998 Mr Robertson no longer had "the responsibilities for management at [GIO Insurance] which he previously had" (Mr Morgan's affidavit, para 10(b)(iv)). That is, he assumed the critical factual question. Further, there seems to have been some inconsistency in Mr Morgan's evidence. In cross-examination, he agreed (T 3667-8) that he had assumed that Mr Robertson no longer had any responsibility in relation to the profit forecast after Mr Fox arrived. But in re-examination he said he was not assuming that Mr Robertson had no relevant role in the Part B statement or the profit forecast (T 3670).
1023 In the end, I have gained no assistance on the present question from Mr Morgan's evidence. Assuming that Mr Robertson ceased to act as a reinsurance manager when Mr Fox arrived, he nevertheless occupied an important executive position, making him an executive officer for the purposes of s 232(4) (see section 7.2), by virtue of his special role with respect to the profit forecast. The applicable standard of care and diligence is ascertained by reference to a reasonable person in a like position, that is in a position with special responsibilities of the kind in fact held by Mr Robertson, regardless of whether his position was properly designated as "reinsurance manager". The "like position" was a position with continuing responsibility for the divisional profit forecast, occupied by a person who had recently performed the role of reinsurance manager, having the knowledge and expertise gained in that position.
1024 In his written submissions (para 26), Mr Robertson provided an extensive list of items of evidence which indicated, he said, that after Mr Fox's arrival he was no longer the reinsurance manager of GIO Re's business. In my opinion the evidence shows that Mr Fox became "the new Executive Director" on his arrival (for example, as Mr Fricke said, affidavit made 2 October 2002, para 8), and in that sense Mr Robertson was "replaced" by Mr Fox (Mr Schneider, first affidavit, para 12; Mr Vines: T 2815). It is unnecessary for me to enumerate all the examples of evidence of that kind. But I do not agree with Mr Robertson that in light of this evidence, I should conclude that he was no longer performing any managerial functions. He may have been, as Mr Vines said, "a man without portfolio" (T 2623), but for the reasons given above, he retained substantial executive responsibility, concurrently with Mr Fox, in respect of the profit forecast. Indeed, Mr Robertson accepted (written submissions, para 28) that he retained some responsibility for the profit forecast.
1025 Mr Robertson gave evidence (T 3179; T 3232) that when Mr Fox arrived, his responsibility in respect of the profit forecast changed from a "proactive" role as the person who created and was monitoring it, to a reactive role of providing such advice, counsel and assistance as Mr Fox, Mr Vines and Mr Steffey wanted in relation to the profit forecast. He said (T 3178) "it was no longer my responsibility to continue working on the profit forecast", and later he said (T 3232) he believed that after Mr Fox arrived he was entitled to rely on Mr Fox to give him information. I do not accept this evidence, either as evidence of his factual responsibility or as evidence of his belief that the time. It seems to me to be inconsistent with the four principal matters to which I have referred, namely his signing of the answers to the due diligence questionnaire on 10 November, his attendance and conduct at the meeting with PwC on 7 December, his signing of the representation letter with Mr Fox, and his signing of the December management sign-off - "inconsistent" in the sense that they point to the conclusion that there was no such limitation to his executive role in respect of the profit forecast.
1026 The evidence indicates that Mr Robertson's day-to-day involvement in the due diligence process was reduced substantially when Mr Fox arrived, and he had no significant role in the negotiation of the American Re placement slip. He was in the United States from 6 to 17 November and, as noted in section 3.28, when he returned he attended to only a limited number of specific tasks relating to due diligence. That does not mean, however, that he had been exonerated from responsibility in respect of the profit forecast, or his responsibility had been discounted. The contrary was demonstrated by the events of 7 December. Whether or not he could be described as a "reinsurance manager" for any general purpose, he purported to discharge executive responsibility at the level of a reinsurance manager on 7 December, thereby inviting those who observed his conduct to rely on his representations as representations carrying the weight of authority of such a person.
1027 The consequence of my findings about Mr Robertson's responsibility is that, within the sphere of the profit forecast, it is relevant to consider whether he met the standard of care and diligence of a "reasonably competent reinsurance manager", though it must be borne in mind that he was not in fact a reinsurance manager in any general or overall sense and the "like position" to which s 232(4) directs our attention was a very special and idiosyncratic executive position in his case.
1028 ASIC contends that the duty of care and diligence of the three defendants in respect of the profit forecast continued after 7 December. Mr Vines and Mr Fox remained in their positions for some time after 7 December, but the facts concerning Mr Robertson are different. The documents that he signed on 7 December did not contain any express promise by him to continue to monitor the profit forecast, and nothing was implied other than what could be extracted from the fact that he signed the representation letter as "Executive Director". But that did not create an implied representation that he would continue to monitor the forecast, because it was plain, considering together the representation letter and the management sign-offs by Mr Robertson and Mr Fox, that Mr Robertson was the outgoing executive director, and so the reader was not entitled to assume that he would continue in that role.
1029 As noted in section 3.28, after the events of 7 December, including the signing of the representation letter and management sign-off, Mr Robertson ceased to have any involvement whatever in GIO Re, and confined his attention to the special projects given to him by Mr Steffey. He was not involved in the redrafting of the American Re agreement or in Mr Schneider's attempts to use the new valuation model to produce the profit result for November. He went on holidays on 18 December and was away until 3 January. That was the day before the close of AMP's takeover offer, and therefore the day before the currency of the Part B statement as a document capable of influencing decisions by GIO shareholders came to an end. In my opinion these facts indicate an acceptance by those with whom Mr Robertson dealt at GIO Re, evidenced by their not involving him any more in the reinsurance business, that his responsibilities at GIO Re had effectively come to an end.
5. SOME LEGAL ISSUES
5.1 The statutory provisions
1030 Against all three defendants, ASIC alleges contraventions of the substance of s 232(4) of the Corporations Law, as it stood during the second half of 1998, when the conduct and omissions alleged against the defendants occurred. Against Mr Fox, it also alleges contraventions of the substance of s 232(2). I say "the substance of" because, as explained below, these provisions of the State-based national co-operative legislative scheme have subsequently been repealed and replaced by provisions of the Corporations Act, a Commonwealth law which preserves the substance of the former provisions.
1031 The relevant provisions of the Corporations Law in the period from 1 July 1998 to 31 December 1998 (without amendment during that period) were as follows:
"232(1) In this section:
'Officer', in relation to a corporation, means:
(a) a director, secretary or executive officer of the corporation;
….
(2) An officer of a corporation shall at all times act honestly in the exercise of his or her powers and discharge of the duties of his or her office.
….
(4) In the exercise of his or her powers and discharge of his or her duties, an officer of a corporation must exercise the degree of care and diligence that a reasonable person in a like position in the corporation would exercise in the corporation's circumstances.
(4A) A reference in subsection (2) or (4) to the exercise of powers, or the discharge of duties, of an officer of a corporation is a reference to the exercise of those powers, or the discharge of those duties:
(a) in any case - in this jurisdiction; or
….
(6B) Subsections (2), (4), … are civil penalty provisions as defined by section 1317DA, so Part 9.4B provides for civil and criminal consequences of contravening any of them, or of being involved in a contravention of any of them.
…."
1032 The word "corporation" was defined in s 57A(1) to include any body corporate and a company. As seen above, the word "officer" was defined in s 232(1)(a), in relation to a corporation, to include "a director, secretary or executive officer of the corporation". "Executive officer" was defined in s 9, in relation to a body corporate, to mean "a person, by whatever name called and whether or not a director of the body or entity, who is concerned, or takes part, in the management of the body or entity".
1033 Section 232 of the Corporations Law was repealed, with effect from 13 March 2000, by the Corporate Law Economic Reform Program Act 1999 (Cth) ("the CLERP Act"). The CLERP Act inserted a new Part 2D.1, which dealt with the duties and responsibilities of officers and directors. Approximately speaking, s 180 replaced s 232(4) as the statutory duty of care for officers of corporations, although the new provision was significantly different from its predecessor. There was no direct equivalent in the new law of the statutory duty of honesty in s 232(2), but there was a statutory duty of good faith in s 184(1). The CLERP Act replaced the provisions of Part 9.4B of the Corporations Law, which provided for civil penalty proceedings to be brought for contraventions of s 232 (2) and (4), with a new statutory civil penalty regime. However, the operation of the former Part 9.4B in respect of civil penalty breaches that occurred before 13 March 2000 was preserved by s 1473(1).
1034 Subsequently the Corporations Law was wholly repealed and replaced by the Corporations Act 2001 (Cth), an enactment by the Commonwealth Parliament relying on a referral of power from the States. The Corporations Act took effect on 15 July 2001. The liabilities and obligations imposed by s 232 and the former Part 9.4B, in the form in which they operated in 1998 and as preserved by the transitional provisions of s 1473 of the Corporations Law, were in turn "carried over" into the Corporations Act by ss 1400 and 1401. The latter provisions have the effect that the new Corporations Act applies to the liabilities and obligations of the defendants in respect of the events of the second half of 1998, as if it were in force at that time and contained provisions equivalent to s 232 and Part 9.4B in the form in which they stood in the second half of 1998. The legislative device of applying the new law to pre-commencement matters, while modifying the new law in its application to those matters so as to equate the new law with the law then applying, appears to have been designed to avoid any constitutional weaknesses arising out of the co-operative federal nature of the old law: see Forge v ASIC (2004) 52 ACSR 1, at [24]-[72].
1035 While the provisions now applicable to the defendants are provisions of the Corporations Act modified to correspond with the relevant provisions of the Corporations Law in force in 1998, I shall for convenience refer to the old Corporations Law provisions as if they were directly applicable, without making expressly the qualification that arises from this historical analysis.
1036 Three issues have arisen concerning the application of s 232(2) and (4) to the instant facts, namely:
(a) What is "an executive officer"?
(b) What is the content of the duty of statutory duty of care and diligence?
(c) What is the content of the statutory duty of honesty?
5.2 " Executive officer"
1037 The statutory definition, set out above, refers to a person "who is concerned, or takes part, in the management of the body". There are two components to this, namely the meaning of "management", and the degree of participation necessary to attract the definition (that is, the meaning of "concerned, or takes part, in"). The case law dealing with these issues is not entirely clear, because of uncertainty about the status of Commissioner for Corporate Affairs v Bracht [1989] VR 821, in which Ormiston J took a wide view with respect to both issues, and uncertainty about the application of that decision (if correct) to the definition of "executive officer" for the purposes of s 232.