Australian Securities and Investments Commission v Macdonald [2008] NSWSC 1169 | Case summary

1490/07 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v PETER DONALD MACDONALD & ORS (NO 5) EX TEMPORE JUDGMENT 1 The plaintiff, the Australian Securities and Investments Commission (ASIC) seeks to tender 4 document groups obtained by a search of the laptop of the 2nd defendant, Peter James Shafron, other than as set out in the Logica protocol that replaced the Volante protocol as the basis for such searches. 2 The Volante protocol was brought into existence to protect privileged, confidential and irrelevant material on laptops and other digital storage equipment from disclosure. Volante Pty Ltd was retained by ASIC to carry out searches of key word and phrase supplied to it by ASIC. The results were provided to the solicitors for James Hardie Industries Ltd (JHIL), now called ABN 60 Pty Ltd, and James Hardie Industries NV (JHINV) for review of those documents falling within the terms of an ASIC discovery order. When Volante was placed in receivership, ASIC retained Logica. Under its protocol there were two changes from the Volante protocol. Searches were not restricted to key word or phrase and the results of searches did not have to be vetted by any representative of JHIL or JHINV before being provided to ASIC, it acknowledging that it had a duty not to disclose any confidential information. 3 ASIC submits that the document groups are highly relevant in that there has emerged during the proceedings an issue as to the accuracy of the minutes of the meeting of the board of directors of JHIL of 15 February 2001 in its discussion of a draft ASX announcement. It is claimed by ASIC that the document groups show that there was a discussion of the ASX announcement at the meeting and the board determined there would be a telephone conference to discuss the aftermath of the ASX announcement. At least the non-executive director defendants say that the issue was squarely raised on the pleadings and did not emerge as a new issue at trial. 4 The document groups may be described as follows: 5 First, there is an email from the 1st defendant, Peter Donald Macdonald, to the 8th defendant, Geoffrey Frederick O'Brien, of 20 February 2001 headed "Foundation Announcements" acknowledging a message that Mr O'Brien would miss "the Director's update teleconference call"; stating that things had gone better than hoped; stating that media, union and government interest had subsided to the point that it was almost non-existent; and stating that the JHIL share price had risen. 6 While that email is headed "Foundation Announcements" it says nothing about any discussion of the terms of an ASX announcement at the 15 February 2001 board meeting and any arrangement at that meeting to hold a teleconference after separation of James Hardie & Coy Pty Ltd and Jsekarb Pty Ltd from JHIL and their transfer to the Medical Research and Compensation Foundation Trust (MRCF Trust) is explicable in terms of a desire to ascertain market reaction to separation announcements generally by JHIL rather than any reaction to the particular terms of the announcement to the ASX. That announcement was followed by a press conference. 7 Secondly, there is an email from Mr Shafron copied to the 3rd defendant, Phillip Graham Morley, of 8 February 2001 headed "Urgent: Life of Fund", advising Stephen Harman, financial controller of the James Hardie Group, that Trowbridge Deloitte Limited would email a revised cashflow that night; asking him to re-run his spreadsheets urgently with the new data; enquiring whether on the new numbers: "will we be able to say that at 12.5% and on Berry medium the thing lasts forever? Very important point. Also, on the next version, put berry medium first and remove the 10% earning column." 8 That does not advance ASIC's argument that there was discussion of a draft ASX announcement and an arrangement to convene a teleconference to discuss the reaction to it at the board meeting of 15 February 2001. 9 Thirdly, there were emails between 3rd parties and Mr Shafron of 21, 22 and 23 February 2001 headed "Asbestos Separation" stating that formal separation had taken place and the reaction had been slightly better than expected: "some media criticism but not a firestorm by any means". The response said that was good news asked about the stock price and said: "I take it Monday's call will be our plan of attack for the restructuring?" Mr Shafron's answer was that the stock price was up around 20 cents and: "yes, it will be a quick call confirming that we are looking to put the Dutch restructure in place." 10 That does not address what took place at the 15 February 2001 board meeting and does not tie the teleconference to any analysis of the reaction to the announcement to the ASX as distinct from any other statement on the topic. 11 Finally, there were emails between Mr Macdonald and Mr Shafron of 15, 16 and 17 February 2001 headed "Board Hook Up Tuesday 9am". Mr Shafron asked if Mr Macdonald would like him to ask Susan to arrange it. Mr Macdonald replied in the affirmative and said: "Just a conference number to dial in to - no physical attendance possibility. We can finalize tomorrow morning." Mr Shafron then emailed Susan Stevenson asking her to organise a board (not Sir Llew) teleconference for Tuesday 9am Australian time with the following message to directors: "At the last meeting it was agreed that there would be a teleconference set up for Tuesday morning Australia time so that interested directors could hear a report on the aftermath of the separation announcement. Accordingly, a call has been arranged as follows: Aust time: Tuesday 9am. US time: Monday 2pm. Etc pls cc me and Phil and Baxter (Peter Mac should be in the "to" box)." 12 Again, that says nothing about board consideration of the terms of any announcement to the ASX and while it does record an agreement to hold a teleconference to discuss the aftermath of the separation announcement, that should not be restricted to the ASX announcement. The press conference held on the same day also constituted separation announcements. In my view, any agreement to hold a teleconference is not tied to any discussion at the board meeting of 15 February 2001 of the terms of any ASX announcement. 13 John Patrick Chambers, a senior lawyer with ASIC said he believed that permission had been given to search Mr Shafron's laptop otherwise than in terms of the protocol under the same arrangements as with the laptop of Gregory John Baxter, senior vice president corporate affairs of JHIL. But the email of 8 October 2008 from Mallesons Stehpen Jaques, the solicitors for JHINV, to Clayton Utz, the solicitors for ASIC, was limited to Mr Baxter's laptop. 14 It was preceded by another email from Mallesons to Clayton Utz of that date clearly limited to Mr Baxter's laptop. The penultimate paragraph read: "We sent our proposed amendments to the amended draft protocol to your client for comment yesterday morning which included permission (clause 6) for it to initiate searches by Logica on its behalf of the image of Mr Baxter's laptop and to obtain the results of those searches directly from Logica. Assuming your client agrees to the amended protocol, it would not need a copy of the image as such, as it would be able to conduct whatever searches it wished to of that image through Logica." 15 The response from Clayton Utz was also limited to Mr Baxter's laptop. The 2nd paragraph read: "I understand that ASIC will revert to nick in relation to the protocol alter this morning. While the protocol will entitle ASIC to instruct Logica to undertake searches of the image of Mr Baxter's laptop, in circumstances where a copy of the image has been provided to a party, our client wishes to be in the ( sic ) same position and to be able to view a copy itself. Accordingly, it would like to also receive a copy of the image, outside of the protocol." 16 In that context the consent of Mallesons in the 8 October 2008 email that followed was so limited. The 2nd paragraph was in the following terms: "If (which was not clear to us from last Friday's letter) all ASIC wishes to do is to confirm it may use the image for the purposes of this proceeding, then our client consents to this subject to the usual implied undertaking about use of documents in proceedings and otherwise subject to the provisions of s. 127 of the ASIC Act." 17 Section 138(1) of the Evidence Act 1995 states: "Evidence that was obtained: (a) improperly or in contravention of an Australian law; or (b) in consequence of an impropriety or of a contravention of an Australian law; is not to be admitted unless the desirability of admitting the evidence outweighs the undesirability of admitting evidence that has been obtained in the way in which the evidence was obtained." 18 Impropriety is the quality of being improper. There is some discussion of its meaning in the authorities. In Ridgeway v The Queen [1994] HCA 33, (1994-1995) 184 CLR 19 in discussing the common law discretion to exclude prosecution evidence, the High Court at 36-37 concluded that the discretion extended to evidence improperly, although not unlawfully, obtained in circumstances where conduct that is not criminal is quite inconsistent with the minimum standards that a society such as ours should expect and require of those entrusted with powers of law enforcement. 19 In Robinson v Woolworths Ltd [2005] NSWCA 426, (2005) 64 NSWLR 612 at [22]-[23] the Court of Appeal pointed out that since the term "impropriety" is not defined in the Evidence Act there is no necessary intention on the part of the legislature to vary the principles collected in Ridgeway and they should apply: "It follows that the identification of impropriety requires attention to the following propositions. First, it is necessary to identify what, in a particular context, may be viewed as "the minimum standards which a society such as ours should expect and require of those entrusted with powers of law enforcement". Secondly, the conduct in question must not merely blur or contravene those standards in some minor respect; it must be "quite inconsistent with" or "clearly inconsistent with" those standards. Thirdly, the concepts of "harassment" and "manipulation" suggests some level of encouragement, persuasion or importunity in relation to the commission of an offence: thus, in describing the first category of cases the joint judgment in Ridgeway (at 39) referred to offences procured or induced." 20 That was a case of an alleged offence under a statute prohibiting the sale of tobacco products to minors. The law enforcement officer procured two under-aged girls to enter a shop and buy cigarettes. It was that conduct that was said to be improper. 21 In this case we are concerned with alleged civil penalties and the test of impropriety may not be so concerned with aspects of inducement or manipulation that the High Court highlighted in Ridgeway at 36-37 and 39. 22 Thus in Taylor v Burgess [2002] NSWSC 676 at [34], Barrett J observed that notwithstanding that s 138 was designed to deal with things such as confessions procured by threats, fingerprints obtained by deception and physical items obtained through illegal search, a breach of contract leading to damages or, in some circumstances, equitable relief is an impropriety, so that evidence obtained in breach of contract may be evidence obtained improperly. 23 This is not a case of mere breach of contract. Minimum standards that our society should expect of ASIC require it, in exercise of its wide powers of discovery, to ensure that it acts within the terms of any protocol with which it has agreed to comply when given direct access to digitally stored information. Otherwise essential privileges against self-incrimination, client legal privilege and privilege against exposure to penalties are at risk. 24 This is not a case of minor contravention. The documents were obtained in breach of the protocol where no variation of it had been agreed. 25 There is no basis to conclude that the breach was wilful or reckless, but that does not, in my view, exclude the situation from a breach of minimum standards demanded by the public. In my view, s 138(1) is engaged. 26 Section 138(3) provides: "Without limiting the matters that the court may take into account under subsection (1), it is to take into account: (a) the probative value of the evidence; and (b) the importance of the evidence in the proceeding; and (c) the nature of the relevant offence, cause of action or defence and the nature of the subject-matter of the proceeding; and (d) the gravity of the impropriety or contravention; and (e) whether the impropriety or contravention was deliberate or reckless; and (f) whether the impropriety or contravention was contrary to or inconsistent with a right of a person recognised by the International Covenant on Civil and Political Rights; and (g) whether any other proceeding (whether or not in a court) has been or is likely to be taken in relation to the impropriety or contravention; and (h) the difficulty (if any) of obtaining the evidence without impropriety or contravention of an Australian law." 27 In my view no preponderance is ascribed to any one of these matters over others. Each, if applicable, is to be weighed in the balance in favour of exercising the discretion or against it. 28 In my view the probative value of the 4 documents is so low as to render the documents of no more than peripheral significance. They lack importance in the proceedings. These are civil penalty proceedings in which the gravity of the impropriety is serious. These matters are to me of greater weight than the absence of any suggestion that the impropriety was deliberate or reckless. The remaining matters specified in s 138(3) do not apply to the present circumstances. 29 In my view, the desirability of admitting the 4 documents does not outweigh the undesirability of admitting the evidence. In matters such as this, agreements by ASIC as to the manner in which it may exercise its discovery powers by direct access to digital information while at the same time maintaining the important privileges to which I have referred are highly significant. It is undesirable to admit evidence obtained in contravention of such arrangements. 30 Pursuant to s 138 of the Evidence Act 1995, I do not admit in evidence the digital content of the documents numbered OBRG.002.001.0033, JHAB.L006.040.0001, JHAB.L006.040.0002 and JHAB.L006.040.0003. I order that the digital content of my reasons for judgement be entered upon the court record database after its inclusion in Caselaw.

Australian Securities and Investments Commission v Macdonald

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