Pecuniary penalties
71 At paras 38-44 of its written submissions, ASIC offers the following summary of the considerations relevant to the imposition of a pecuniary penalty:
38. Although the pecuniary penalty has a punitive character, its principal purpose is to act as a personal deterrent and a deterrent to the general public against a repetition of like conduct. The deterrent effect is aimed at preventing a corporate structure being used in a manner which is contrary to proper commercial standards to the detriment of the company, its shareholders, creditors, investors and others dealing with it. Any penalty should be no greater than is necessary to achieve this deterrent effect.
39. The capacity of a person to pay a pecuniary penalty, any hardship occasioned to that person by a pecuniary penalty and whether the order will prejudice the person's rehabilitation are relevant in determining whether a penalty should be ordered and, if so, the amount of the penalty.
40. General deterrence remains an important factor in determining a pecuniary penalty, notwithstanding the detriment suffered by the respondent.
41. The likely consequences of a disqualification order are relevant considerations. Where the disqualification order does not have significant consequences for the defendant it is likely to be only marginally relevant. On the other hand, in ASIC v Beekink, the Full Court of the Federal Court halved the amount of the pecuniary penalty it would have ordered to account for the impact of a one year disqualification imposed on a solicitor.
42. The size of the penalty is a question of discretion. The circumstances of one case should not dictate the size of the penalty in different circumstances in another case.
43. In ASIC v Beekink, the Full Court of the Federal Court identified three difficulties in attempting to classify the amount of a pecuniary penalty by reference to common factors in other cases. Firstly, the breaches tend to take a wide variety of forms. Secondly, the value of money erodes over time. Thirdly, in recent years the courts have been more concerned with the need for the imposition of higher civil penalties to reflect community expectations of the standards to be imposed on company directors.
44. Here again, the balance to be struck by the Court in approaching the exercise of the discretion to impose a pecuniary penalty should favour the protection of the public interest. While the process of fixing the quantum of a penalty is, of course, not an exact science it has been said that in determining the appropriate amount the Court should not leave room for any impression of weakness in its resolve to achieve the deterrent objective of the imposition of a civil penalty.
(Footnotes omitted.)
72 In these circumstances, I should impose a penalty of some substance. The maximum penalty is $200,000 for each contravention. In Markarian v R (2005) 228 CLR 357 at [30]-[31] (Gleeson CJ, Gummow, Hayne and Callinan JJ) said:
30 Legislatures do not enact maximum available sentences as mere formalities. Judges need sentencing yardsticks. It is well accepted that the maximum sentence available may in some cases be a matter of great relevance. In their book Sentencing, Stockdale and Devlin observe that:
"A maximum sentence fixed by Parliament may have little relevance in a given case, either because it was fixed at a very high level in the last century … or because it has more recently been set at a high catch-all level … At other times the maximum may be highly relevant and sometimes may create real difficulties …
A change in a maximum sentence by Parliament will sometimes be helpful [where it is thought that the Parliament regarded the previous penalties as inadequate]."
31 It follows that careful attention to maximum penalties will almost always be required, first because the legislature has legislated for them; secondly, because they invite comparison between the worst possible case and the case before the court at the time; and thirdly, because in that regard they do provide, taken and balanced with all of the other relevant factors, a yardstick. That having been said, in our opinion, it will rarely be, and was not appropriate for Hulme J here to look first to a maximum penalty, and to proceed by making a proportional deduction from it. That was to use a prescribed maximum erroneously, as neither a yardstick, nor as a basis for comparison of this case with the worst possible case. ...
(Footnotes omitted.)
73 ASIC submits that the imposition of a pecuniary penalty is primarily for the purpose of deterring the offender and potential offenders from similar misconduct. In this case, the desired effect is to deter the use of a corporate structure in a way which is contrary to proper commercial standards. ASIC accepts that in fixing the amount of any penalty, I should have regard to the respondents' respective capacities to pay and any hardship which may be caused to them by such imposition. It may also be necessary to take into account the financial consequences upon the respondents of any other orders. Any penalty must reflect the circumstances of the relevant infringement and should be consistent with penalties previously imposed for broadly similar misconduct. However I accept that it is frequently difficult to draw meaningful comparisons.
74 I accept that the respondents played dominant roles in designing the Storm model and closely supervising its execution. I accept that in not recognizing the risks to vulnerable clients, they failed to discharge their duties as directors. I also accept that quite apart from the effects of their conduct on Storm's interests, at least some of the relevant investors suffered significant loss. I infer from the primary Judge's reasons that the respondents focussed on managing Storm's profitability and paid too little attention to the interests of vulnerable investors. I act upon the primary Judge's finding that there were probably vulnerable investors other than the 11 relevant investors. However I am unable to say any more than that. It follows that the respondents cannot be heard to assert that the 11 relevant investors were the only adversely affected investors. On the other hand, ASIC cannot rely upon any other demonstrated examples of the respondents' misconduct which caused loss.
75 ASIC contends that the respondents' lack of admissions, contrition or insight led to the extended nature of the proceedings. However it seems to me that ASIC must bear its own share of responsibility for that matter, having regard both to the earlier defective pleadings and the prosecution of aspects of the case upon which it was eventually unsuccessful. Nonetheless, the respondents' refusal to accept the seriousness of their misconduct demonstrates a lack of insight and contrition which may weigh against them in the imposition of penalties and in the formulation of other orders.
76 ASIC also submits that "Mr and Mrs Cassimatis' previous earnings and current lifestyle are such that they cannot claim that they will suffer hardship as a result of the imposition of a penalty" of $70,000 each, the pecuniary penalty sought by ASIC. The basis for this submission is that since Storm went into liquidation, the respondents have travelled overseas on a regular basis. Apart from this allegation, and a suggestion by the respondents' solicitor that they do not have the money to fund an appeal from Edelman J's decision, I have little or no information about the respondents' current financial circumstances.
77 The respondents submit that the absence of actual dishonesty is a mitigating factor. It is probably more useful to focus on the actual characteristics of the relevant conduct than upon the absence of characteristics. The absence of dishonesty should be seen as absence of a possible circumstance of aggravation. The respondents submit that the case is unusual in that only breaches of s 180 have been established. Again, it may be better to focus on the conduct as it was, rather than as it was not.
78 At para 43 of their submissions, the respondents identify a number of other considerations said to go in mitigation of the seriousness of their conduct and the penalties imposed. Apart from matters previously discussed, those considerations include:
ASIC's conduct in investigating and dealing with the respondents' misconduct;
that ASIC would not, in any event, have taken any serious action against Storm;
that ASIC could and should have dealt with the respondents' conduct by giving a "strong warning"; and
that Storm had adequate insurance in place in respect of any claims by relevant investors.
79 The first consideration seems to have two aspects. The respondents assert that ASIC took steps to deter customers and potential customers from investing with Storm. In my view, any criticism of the way in which ASIC performed its functions in this regard cannot be relevant to penalty, at least in the absence of actionable misconduct. The respondents do not raise any such case. This Court cannot properly be asked, in proceedings of the present kind, to assess the way in which ASIC performed its functions, other than in connection with the trial of the substantive issues and these present proceedings.
80 The second aspect relates to the way in which ASIC commenced and conducted the proceedings. First, it is said that ASIC alleged that the respondents were, in effect, guilty of dishonesty or serious misconduct. Secondly, ASIC claimed that Storm had committed offences against the Act, as opposed to contraventions, resulting in pecuniary penalties. As to the assertion that ASIC had alleged dishonesty on the part of the respondents, ASIC certainly alleged that their conduct demonstrated that they did not care whether particular statements were true, or ought reasonably to have known that statements were false in material particulars, or were materially misleading. These matters may be relevant to costs, but not to penalty.
81 The second consideration is the assertion that ASIC would not, in any event, have taken, "any serious action" against Storm. The submission is primarily based upon a "regulatory guide" concerning enforceable undertakings, which guide was issued by ASIC. It suggests that ASIC would, in many cases, accept an enforceable undertaking not to continue the relevant misconduct, or recommence such conduct in the future. There is no suggestion that Storm ever offered such an undertaking. Whilst it was open to ASIC to suggest such a course, I see no basis for assuming that it should, or would have proceeded in that way. Nothing in the regulatory guide suggested that in any particular case, it would so proceed. The submission is, in effect, an invitation to the Court to review ASIC's conduct. I see no basis for doing so. Further, to the extent that the respondents submit that Storm's conduct deserved only "[mild] administrative action", they again overlook the seriousness of the consequences of such conduct for the relevant investors, and therefore for Storm. I see no basis for inferring that had ASIC dealt with Storm, it would have sought only an enforceable undertaking. Similar comments apply to the third consideration, that any action by ASIC would have involved only a "strong warning".
82 The fourth consideration is that Storm had substantial insurance cover, which cover would have been sufficient to meet any claims by the relevant investors. The adequacy of such cover may have depended upon whether or not there were other claims. In any event, it in no way mitigates the seriousness of the respondents' conduct that Storm had insurance cover, presumably for loss incurred as the result of contraventions of the Act. A claim under such a policy might, itself, have prejudiced Storm's interests, in that it might have resulted in higher premiums and/or reputational damage. The obtaining of such insurance cover was a proper exercise of the directors' duties. However it did not excuse or mitigate breaches of other duties. The respondents' submission boils down to the assertion that a director's breach of duty is less serious if the company is insured against loss brought about by such breach. Nothing in the Act supports such a proposition and, as a matter of policy, it is unacceptable.
83 I do not accept the assertion in para 43(p) that this case is "singularly unsuitable" for the imposition of a pecuniary penalty. Such a submission cannot be supported by reference to the terms of the Act.
84 Many of the submissions made in paras 44-53 repeat, or are based on earlier submissions which I have, in general, rejected. In effect, the respondents submit that traditional purposes of judicial punishment such as retribution, deterrence, rehabilitation and community protection have little or no relevance in this case. I do not accept that submission. It is essential that any significant infringement of the law be properly identified and condemned. It is more important that offenders and potential offenders be deterred from similar misconduct. If there is a chance that they may again be involved as officers of companies, steps should be taken to ensure that in such an event, they will not again fail in their duties. This objective is, in part, achieved by rehabilitation and in part by deterrence.
85 The respondents submit that the absence of contrition is irrelevant, given that they do not accept the primary Judge's decision but cannot afford to appeal against it. Whilst that may explain their lack of contrition, it does not follow that they should be treated as if they were contrite.
86 Although the respondents said very little about it in their submissions as to penalty, it is clear that Edelman J considered that the respondents had made significant efforts to assist some of the persons who suffered loss as a result of Storm's conduct. See the judgment at [820]-[834]. I take that matter into account, as well as the orders of disqualification which I propose to make pursuant to s 206C and s 206E of the Act.
87 ASIC has helpfully provided references to decisions involving breaches of s 180 and/or associated provisions of the Act. In particular, it has referred to cases arising out of the involvement of the Australian Wheat Board ("AWB") in the supply of wheat to Iraq (the "AWB cases") and to the cases concerning James Hardie Industries Ltd and its officers (the "James Hardie cases") in connection with its asbestos compensation fund. In each case the litigation concerned misconduct which has become notorious. The present case is notorious, but perhaps not quite so notorious. It is a little difficult to compare the seriousness of the conduct in this case with that in the AWB cases and that in the James Hardie cases. The AWB cases primarily involved harm to Australia's standing as a trading partner. The James Hardie cases involved the possibility that victims of asbestos-related disease might not be compensated for their injuries. Any such comparison would be an entirely subjective exercise. Further, many of those cases involved agreed facts and/or agreed proposed penalties.
88 The decision in Australian Securities and Investments Commission v Ingleby (2013) 39 VR 554 concerned payments made by AWB, ostensibly for inland transport. In fact, the amounts were largely to go to members of the Iraqi government, contravening the United Nations Oil-for-Food Programme. Ingleby was the Chief Financial Officer of AWB. He was accused of failing to act with due care and diligence in co-authorizing certain payments. Ingleby's conduct was not contrary to any Australian law, save for s 180 of the Act. He agreed to a statement of facts and joined in submissions which provided for a pecuniary penalty of $40,000 and a 15 month disqualification. The Judge at first instance imposed a pecuniary penalty less than the agreed figure. The Court of Appeal considered that the agreed facts were inadequate and inconsistent with Ingleby's actual involvement. The agreed statement said nothing about any harm caused, including to Australia's reputation as an ethical partner in international trade. The Court of Appeal took a more severe view of the misconduct than was demonstrated by the agreed statement. The members of the Court seemed to doubt the appropriateness of the agreed figure but were reluctant to go beyond it. Hence the penalty was increased to $40,000. This decision suggests that a penalty significantly above $40,000 would be appropriate in the present case.
89 In Australian Securities and Investments Commission v Lindberg (2012) 91 ACSR 640, Lindberg, the Chief Executive Officer and Managing Director of AWB, admitted to four contraventions of s 180(1). One contravention involved the failure to make proper enquiries. The other three involved failure to inform the Board of various matters. Lindberg had no knowledge of the relevant unlawful conduct. His contraventions were negligent, not involving deliberately wrongful acts, dishonesty or other moral turpitude. Although AWB had suffered detriment as a result of the conduct of some of its officers, it seems that Lindberg's conduct was not shown to have caused harm. He was rather dealt with on the basis that his misconduct was serious. The parties proposed an agreed pecuniary penalty of $100,000 and an agreed period of disqualification of three years.
90 In my view, the respondents' misconduct was more serious than that of Lindberg. Their conduct brought about Storm's unlawful conduct. Lindberg's conduct did not bring about AWB's unlawful conduct. Robson J imposed a pecuniary penalty of $100,000 and disqualified Lindberg from managing corporations for a period of two years. His Honour seems to have accepted the agreed disqualification period of three years but reduced it to reflect delay in the Court's dealing with the matter. The distinction between the pecuniary penalty imposed on Ingleby and that imposed on Lindberg must be attributable to the latter's more senior position in the organization.
91 As to the James Hardie cases, the relevant decisions are Gilfillan v Australian Securities and Investments Commission (2012) 92 ACSR 460 and Morley v Australian Securities and Investments Commission (No 2) (2011) 83 ACSR 620. The decision in Gillfillan has a rather complex history. The original decision was upset by the Court of Appeal of New South Wales in Morley v Australian Securities and Investments Commission and Shafron v Australian Securities and Investments Commission, (both reported at (2010) 81 ACSR 285) and Morley v Australian Securities and Investments Commission (No 2) and Shafron v Australian Securities and Investments Commission (No 2) (both reported at (2011) 83 ACSR 620). The decisions of the Court of Appeal in the Shafron matters were upset by the High Court on appeal. The matter was remitted to the Court of Appeal for further consideration. See Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345. It was reconsidered in Gillfillan.
92 The James Hardie cases involved the repeated breach of stock exchange disclosure requirements by the issue of misleading statements. In Morley (No 2), the Court of Appeal ordered that Morley pay a pecuniary penalty of $20,000 and be disqualified from involvement in corporate management for a period of two years. Morley was the Chief Financial Officer of James Hardie. He was found to have contravened in one respect, in that he had failed to inform the Board of the limited nature of reviews of a cashflow analysis conducted by external accountants. The results of the reviews were used to demonstrate that the relevant Hardie foundation had sufficient funding. The Court of Appeal considered that Morley's conduct departed to a high degree from the standard of care prescribed by s 180(1), even if explained as negligent or an honest mistake. The Court treated his misconduct as serious.
93 As to disqualification, the Court said at [125]-[128]:
125 Accepting that the need for personal deterrence is low, nonetheless general deterrence is in our view an important consideration given the nature and significance of the cash flow analysis contravention. As well, it is necessary that relief be granted appropriate to mark significant failure in performance of the duties of a senior executive of a large public corporation and to maintain public confidence in the law's upholding of corporate standards.
126 In a picturesque phrase, in Re One.Tel (In liquidation); Australian Securities and Investments Commission v Rich [2003] NSWSC 186; (2003) 44 ACSR 682 at [26] Bryson J observed that "[n]o-one should be sacrificed to the public interest". That was taken up in Australian Securities and Investments Commission v Beekink at [113]. Protection of the public, including by general deterrence, is at the heart of disqualification orders, and a delinquent officer against whom a disqualification order is made is not sacrificed. The phrase is a reminder that the public interest and the need to protect the public from repeated conduct or like conduct of others is balanced against the hardship to the officer. In our view, the balance requires a period of disqualification.
127 Mr Morley drew attention to the warning by Santow JA, in Vines v Australian Securities and Investments Commission at [202]-[203], that excessive pecuniary penalties could lead to "self-protective defensive postures" by officers, deleterious to undertaking measured commercial risk. In the context of his submissions, Mr Morley transposed the warning also to disqualification. We see no question of measured commercial risk in Mr Morley's contravention.
128 In our opinion, a disqualification order should be made, but not for the period of the judge's order. The judge's order should be set aside, and Mr Morley should be disqualified from managing corporations for a period of 2 years. That period should date from 27 August 2009, when the judge's order came into effect.
94 In Gillfillan, on remittal from the High Court, the Court of Appeal considered the orders to be made against five Australian non-executive directors, two American non-executive directors and the Company Secretary and General Counsel, Shafron. The misconduct of the Australian non-executive directors involved reliance on management in deciding to release the relevant documents. The American non-executive directors approved the documents without asking for copies and not abstaining. The Australian non-executive directors were each ordered to pay pecuniary penalties in the amount of $25,000. They were each disqualified for three years, although this period was to be treated as served, or to be served in ways which reflected the consequences of the delay in the appeal process. Each of the American non-executive directors was ordered to pay a pecuniary penalty of $20,000 and was disqualified for a period of one year and 11 months, such period expiring about three years and three months after the original orders.
95 Shafron had contravened the Act on three occasions, each contravention involving a failure to advise the Board of matters relevant to its consideration of the draft announcements. He was ordered to pay a pecuniary penalty of $75,000 and was disqualified for a period of seven years.
96 I was also referred to the decision of Australian Securities and Investments Commission v Macdonald (No 12) (2009) 259 ALR 116. However the pecuniary penalty there imposed and the period of disqualification far exceed anything suggested in the present case. The other cases to which I have been referred also offer little assistance.
97 In my view the pecuniary penalty imposed upon Shafron and that imposed in Lindberg offer the best guidance for present purposes. Both cases involved conduct by senior officers, but no findings of dishonesty. In Lindberg's case, there seems to have been no allegation of actual knowledge on his part. Shafron's misconduct was failure to bring matters to the attention of the Board. If Lindberg in fact had no knowledge of the relevant misconduct, then the pecuniary penalty and period of disqualification imposed on him reflect his overall responsibility for the affairs of AWB and his failure to have mechanisms in place to prevent or identify misconduct. Save for Lindberg's senior position in AWB, Shafron's misconduct was more serious. Shafron was presumably a lawyer, giving advice based upon his legal knowledge and understanding. It seems that in Lindberg's case, a high premium was placed on deterrence.
98 In my view the respondents' misconduct was more serious than that of either Lindberg or Shafron. It continued over a lengthy period of time, was entirely initiated by them and executed under their supervision. I am inclined to think that the penalty sought by ASIC is on the low side, having regard to the cases to which I have been referred. However there are only a handful of them. In those circumstances, it is better that I adopt the figure as suggested by ASIC. In the case of each respondent I impose a pecuniary penalty of $70,000.