Australian Securities & Investments Commission v Hawley

Federal Court of Australia|2008-09-16|Before: Perram J

Application 1 This is an application by the Australian Securities and Investments Commission ("ASIC") for orders pursuant to s 1323(1) of the Corporations Act 2001 (Cth) ("the Act") effectively restraining Mr Hawley from leaving Australia until 5 December 2008. Mr Hawley has been subject to an investigation by ASIC since 23 December 2005 into possible contraventions by him of, inter alia, provisions of the Act. That investigation has now largely, but not completely, run its course. A brief has been delivered by ASIC to the Commonwealth Director of Public Prosecutions for the purpose of allowing that office to decide whether to prosecute Mr Hawley for offences which it is thought he may have committed whilst working for two financial services firms, Ord Minnett Ltd ("Ords") and Patersons Securities Ltd ("Patersons"). The Director of Public Prosecutions has not yet made a decision as to whether to charge Mr Hawley or not. The evidence does not indicate when it is expected that that decision will be made. 2 ASIC's concern is that the pendency of possible charges against Mr Hawley increases the risk that he may seek to flee the country.

Power to make orders sought 3 Section 1323(1) provides (relevantly): Power of Court to prohibit payment or transfer of money, financial products or other property (1) Where: (a) an investigation is being carried out under the ASIC Act or this Act in relation to an act or omission by a person, being an act or omission that constitutes or may constitute a contravention of this Act; or (b) a prosecution has been begun against a person for a contravention of this Act; or (c) a civil proceeding has been begun against a person under this Act; and the Court considers it necessary or desirable to do so for the purpose of protecting the interests of a person (in this section called an aggrieved person) to whom the person referred to in paragraph (a), (b) or (c), as the case may be, (in this section called the relevant person), is liable, or may be or become liable, to pay money, whether in respect of a debt, by way of damages or compensation or otherwise, or to account for financial products or other property, the Court may, on application by ASIC or by an aggrieved person, make one or more of the following orders: … (j) if the relevant person is a natural person - an order requiring that person to deliver up to the Court his or her passport and such other documents as the Court thinks fit; (k) if the relevant person is a natural person - an order prohibiting that person from leaving this jurisdiction, or Australia, without the consent of the Court. 4 As a matter of statutory construction, the power in s 1323(1) is enlivened when one of the three matters mentioned in subsection (a)-(c) is present and the requisite opinion set out in the central paragraph is formed by the Court. In that regard, the decision of the Full Court of Western Australia in Connell v National Companies and Securities Commission (1989) 2 WAR 121 at 127, 129-130 per Malcolm CJ that there are two jurisdictional prerequisites to that power arising appears to be preferable to the decision of the Full Court of South Australia in Corporate Affairs Commission v Lone Star Exploration NL (No. 2) (1988) 50 SASR 24 at 28 per King CJ, Jacobs and von Doussa JJ to the effect that there is only one. However, the difference between the two approaches is not, in this case, material. 5 Here there is an investigation by ASIC into breaches of specified provisions of the Act. Accordingly, the pre-condition in sub-section (a) is present. Before the discretion arises, however, the Court must form the required view about necessity or desirability. 6 It is tolerably plain that s 1323(1) is directed to the protection of the interests of aggrieved persons (so defined). If the purpose for which the order is made is not for that purpose then the provision does not authorise the making of an order. The purpose of keeping Mr Hawley within the jurisdiction to ensure that he is present if and when the Director of Public Prosecutions decides to prosecute him is not the purpose of protecting the interests of the aggrieved persons. It follows that orders under s 1323(1) cannot be made for that purpose. 7 That, however, is not to say that the imminence of a decision by the Director of Public Prosecutions is irrelevant. Such imminence may well increase the risk of flight and that may, in turn, adversely affect the interests of aggrieved persons.

Nature of function 8 French J has described the function to be performed under s 1323(1) as essentially one of risk assessment and management: see Australian Securities and Investments Commission v Carey (No. 3) (2006) 232 ALR 577 at 587 [26] and 588 [30]. It, therefore, involves balancing the interests, on the one hand, of the aggrieved persons referred to in s 1323(1) and, on the other hand, the interests of a respondent in avoiding undue interference in his or her affairs. Where, as here, it is sought to interfere with a person's freedom of movement, it is to be borne in mind that such a step is not lightly to be undertaken: see Australian Securities and Investments Commission; in the matter of Richstar Enterprises Pty Ltd v Carey (No. 19) (2008) 65 ACSR 421 at 427 at [32] per French J (and the authorities therein).

Aggrieved persons 9 The process of risk management naturally invites an examination of the interests of the persons aggrieved which, in turn, necessitates their identification. ASIC submitted that the aggrieved persons, for the purposes of s 1323(1), were Ords and Patersons, the Commonwealth, and former clients of both firms. It is useful to deal with each of these in turn.

Ords 10 A deed tendered during the hearing showed that Ords had entered into an agreement with Mr Hawley under which, for reasons not presently material, it had released him from any liability arising out of his alleged misconduct. Ords cannot, therefore, be a person with an actual or a potential claim against Mr Hawley. That being so, it cannot be an aggrieved person within the meaning of s 1323(1).

The Commonwealth 11 The Commonwealth's only entitlement to receive moneys in this case would be if Mr Hawley were ordered to pay a civil penalty to ASIC on the Commonwealth's behalf: s 1317G(2). The payment of a civil penalty is, however, punitive in nature. By contrast, the kinds of liability to which s 1323(1) is directed are liabilities to pay moneys "whether in respect of a debt, by way of damages or compensation or otherwise or to account for any securities or other property". A civil penalty would fall within what is contemplated by that provision only if the expression "or otherwise" is capable of embracing it. However, in the context in which that expression appears it seems reasonably clear that it cannot connote the imposition of a monetary punishment. That conclusion can be reached because, first, the surrounding context of s 1323(1) shows that the provision's focus is on the interests of aggrieved persons rather than on the punishment of "relevant" persons (so defined); secondly, there is much to be said for the view that the words "by way of damages or compensation" are two species of liability which together permit the identification of a single genus to which they both belong, namely, civil liability: cf. Deputy Commissioner of Taxation v Clark (2003) 57 NSWLR 113 at 142-144 [125]-[132] per Spigelman CJ with whom Handley and Hodgson JJA agreed. It follows that the Commonwealth cannot be an aggrieved person in this case.

Former clients 12 Many of the former clients of Ords and Patersons have reached settlements with those firms. However, there are some who have not. It is also possible that from amongst the class of those who have settled there may be those who have yet the right to pursue Mr Hawley to make good any shortfall in their settlements. It is impossible to avoid the conclusion that this class of persons are aggrieved within the meaning of s 1323(1).

Patersons 13 Patersons has settled a large number of claims against it arising from Mr Hawley's alleged misconduct. Either by way of contribution or by direct action Patersons has potential claims against Mr Hawley for reimbursement for its own losses. It must, therefore, be an aggrieved person.

Assessment of the interests of the aggrieved persons

Former clients 14 This class consists of those who have not yet made a claim, those whose claims, though made, are not yet settled and those whose claims are settled but who nevertheless wish to pursue Mr Hawley for any deficiency in the settlement reached. It is to be noted that nothing in the evidence suggested that Ords or Patersons were about to cease settling the claims arising out of Mr Hawley's alleged misconduct. 15 The interests of those clients who have either not yet made a claim or who have not yet settled with Mr Hawley's former employers really only require protection if those firms refuse or are unable to meet the claims made upon them. There is no evidence to suggest that either of those outcomes is likely to occur. Accordingly, I would regard the interest of those clients in Mr Hawley's presence in the jurisdiction as minimal. 16 The interests of those clients who may seek to recover the gap between any settlement they have reached with Mr Hawley's employers and Mr Hawley is more tangible. But there, however, it is legitimate to take into account that ASIC has not pointed to the existence of any such person. In a sense, the interest of this class is more tangential than those of the other former clients.

Patersons 17 Patersons may wish to recoup their losses from Mr Hawley. Ordinarily that interest in recoupment would be an interest whose protection might be "necessary or desirable" within the meaning of s 1323(1). Mr Kunç SC, who appeared for Mr Hawley, suggested that those interests were satisfactorily protected as Mr Hawley has always agreed not to remove his Australian assets from the jurisdiction. However, it might be thought that in the event that judgment were obtained against him, Patersons, as a judgment creditor, or a trustee in bankruptcy might seek to examine Mr Hawley to ascertain the extent and location of any other assets he might have. Mr Kunç submitted that this risk was theoretical. However, I do not think that it is. Indeed, on one view it is the very thing likely to occur where the amount Patersons has had to pay out so far exceeds Mr Hawley's stated assets by many millions of dollars.

Conclusion on power 18 In these circumstances, I would not describe the making of orders under s 1323(1) as "necessary" for the protection of either Patersons or Mr Hawley's former clients' interests. However, notwithstanding that conclusion, the protection of those interests could be described as "desirable". In the case of Patersons, there is little difficulty in reaching that conclusion, although the interest is not an overwhelming one. In the case of the former clients, the desirability is at the lower end of the scale but extant nevertheless. In my view, since the formation of the opinion by the Court in the central paragraph of s 1323(1) is an essential jurisdictional prerequisite to the power arising, it is appropriate to record for the purposes of s 1323(1) that the Court is of the opinion that it is desirable to protect the interests of former clients and Patersons.

Exercise of discretion 19 The power to restrain Mr Hawley in the way for which ASIC contends, therefore, is enlivened. In the exercise of that power there are a number of relevant discretionary matters. First, I take into account the extent of the desirability of protecting the relevant interests. Although I have concluded that their protection is desirable, I do not think that the interests are strong ones. Secondly, ASIC's investigation is essentially at an end. It is appropriate, therefore, that I be satisfied that ASIC has something approaching a prima facie case against Mr Hawley: Australian Securities and Investments Commission v Lee [2007] FCA 508 at [12] per Finkelstein J. That is an illustration of the commonsense proposition that with ASIC's investigation basically at an end, it would be inappropriate to restrain Mr Hawley from leaving the country if I were of the view that its case had little merit. 20 ASIC's case is that Mr Hawley engaged in unauthorised discretionary trading on behalf of clients and that he falsified records to make it appear that the trading was authorised. If made good, these allegations would involve breaches of s 184(2) (dishonest use of officer's position), s 1041G (dishonest conduct in relation to financial products) and s 1307 (falsification of books). ASIC does not suggest that he is to be prosecuted for discretionary trading simpliciter and, indeed, I was taken to no provision of the Act which would make such conduct criminal. 21 It is useful to emphasise the criminal aspect of the matter because ASIC did not suggest that its investigation was directed at anything but criminal process. In particular, that current emphasis is to be contrasted with the early stages of its investigation when compensation was a part of its consideration. It is a critical step in that criminal case that Mr Hawley falsified records to make it seem that he had authority from clients which he did not, in truth, have. One way to prove that may be to call the clients to show that they had not given their authority. Other ways may be imagined. However, whatever method is used, evidence of that kind will be necessary. Before this Court, ASIC called a senior investigator, Mr Connor, to say that the brief sent by ASIC to the Director of Public Prosecutions included seven statements from former clients. It may be that those statements contain denials from clients that they authorised Mr Hawley to engage in discretionary trading. However, it is difficult to discern whether this is so because the only evidence before the Court, was Mr Connor's evidence at paragraph 46 of his affidavit sworn 2 July 2008 to the effect that: ASIC's view is that Mr Hawley concealed his unauthorised discretionary trading from both Ord Minnett and Patersons by making false statements in the order records. Some of Mr Hawley's clients did not give him prior instructions to conduct individual securities and options transactions. However, according to the order records kept by Ord Minnett and Patersons, all orders were placed on the instruction each client. These false statements enabled the orders to be processed and executed while concealing from Ord Minnett and Patersons the fact that Mr Hawley had engaged in unauthorised discretionary trading on a wide scale. 22 In an ordinary proceeding, this could not be admissible evidence of the serious allegation that Mr Hawley had falsified the clients' records. However, given what was said by French J in Australian Securities and Investments Commission v Carey (No. 3) (2006) 232 ALR 577 at 588 [31] it seems that such statements of opinion can be received on an application under s 1323(1). Be that as it may, there are real difficulties in assessing the strength of ASIC's case against Mr Hawley because no direct evidence has been placed before the Court as to how ASIC makes good this allegation. 23 Of course, it is understandable why that kind of proof might not be available at the outset of an investigation. However, in the present case the investigation has been on foot for nearly three years and an extensive brief is already with the Director of Public Prosecutions. Given that the brief is not before the Court, it is difficult to see how one could properly infer that it makes out a stronger case against Mr Hawley than that which flows from Mr Connor's opinion. Given Mr Connor's expertise and experience, I am prepared to assume, however, that there is some kind of case but, in all the circumstances, it is difficult to say much more than that. 24 Thirdly, it is relevant thatthe investigation has been on foot for approaching three years and Mr Hawley has been kept in this country since January 2006. The restraint now sought is not new and Mr Hawley has already suffered a significant interference in his affairs. Section 1323(1) is not properly to be seen as authorising the restraint of a person no matter how long an investigation takes. The orders made under s 1323(1) have to be such as to interfere with the right to freedom of movement no more than is necessary. That necessarily carries with it a requirement that where the power in s 1323(1) is utilised for the purpose of interfering with movement that those invoking it move with reasonable dispatch. 25 Fourthly, ASIC only seeks Mr Hawley's restraint until 5 December 2008. This is a curious position. If the protection of the interests of the aggrieved persons requires Mr Hawley to be restrained then there is no reason to think that those interests are any different on 6 December 2008 to that which they would be on 5 December 2008; certainly, no difference was suggested. On the other hand, the evidence does not permit one to conclude that that date was selected by ASIC to permit time to allow the Director of Public Prosecutions to charge Mr Hawley. As I have said, that would be an illegitimate purpose in any event. In the end, the arbitrary nature of the date of 5 December 2008 tends to undermine the importance of the protection of the interests of aggrieved persons. 26 Fifthly, I take into account the risk that Mr Hawley, if permitted to travel, may not return to Australia. This risk is, it seems to me, real. Mr Kunç submitted that if Mr Hawley had been likely to flee it would have been at the start of the investigation and the evidence showed that he had travelled overseas since then and returned even though the investigation was on foot. It followed, he submitted, that the risk was even less now than it had been then. I do not think this submission should be accepted. The personal risk to Mr Hawley of incarceration is much greater now than it was at the start of the investigation because a brief suggesting Mr Hawley's prosecution has been sent to the Director of Public Prosecutions for consideration. 27 Indeed, the reasons which Mr Hawley advanced for wanting to travel themselves contribute to a distinct sense of unease about his intentions. He wishes to travel to the US to visit friends and then to visit a property owned by him in Montreux in Switzerland. In that village he owns a cottage known as the Chalet Bel Air. Swiss law apparently requires the replacement of a boiler at the cottage. Quotes for its replacement have been obtained but Mr Hawley believes they are too high. He wishes, therefore, to arrange the quotes himself. He would also like to carry out basic improvements on the cottage. 28 His desire to travel in the near future is driven by two factors: first, he is nearly 63 and is of the view that he will not be fit for travel for very many more years; secondly, he believes that the Swiss law which requires the replacement of the boiler requires that replacement within a two year period. The evidence about when this two year period will expire is unclear. Mr Hawley heard about it from his former partner about a year ago when he visited the cottage. The partner, in turn, had heard it from the Swiss neighbours who had a similar problem with their own non-complying boiler. It is impossible to deduce from that material that the two year period expires at the end of this year. Further, there is no evidence before the Court as to what the consequences of not replacing the boiler within the requisite period might be. 29 Neither of the proffered reasons for Mr Hawley's travelling is compelling. I do not think Mr Hawley's ability to travel in the near future is likely to be impinged upon by the proximity of old age and infirmity. Even assuming that, at 63, his travelling days were nearly over, it is far from clear why they will be nearly over by 5 December 2008 when ASIC has indicated it will no longer seek his presence in Australia. 30 Similarly, without much clearer evidence about the Swiss law relating to the replacement of boilers, it would be unsound to rate the interests of those protected by that law above those with whom s 1323(1) is concerned. 31 There is, therefore, a real risk that Mr Hawley wishes to leave Australia with a view to avoiding criminal process. As I have said, that is not directly relevant but it shows that the interests of the aggrieved persons are threatened by the real risk that Mr Hawley will leave (albeit for a reason to which s 1323(1) does not speak). Their interests in recoupment and examination are threatened. 32 Sixthly, I take into account Mr Hawley's legitimate interests in being allowed to travel and the very substantial interference with his personal affairs that the investigation thus far has involved. 33 Seventhly, I take into account the fact that a brief has been with the Director of Public Prosecutions since 11 September 2007, that is, more than one year ago. That brief has been supplemented on a number of occasions, including recently. However, on any view the matter appears to be dragging. 34 Finally, there are a group of issues about which comment should be made. Ms Pritchard, who appeared for ASIC, put that it was in the interests of the former clients, Ords and Patersons, that Mr Hawley remain in Australia to assist Ords and Patersons in settling the claims. However, I do not think s 1323(1) can be used for that purpose, because there is to be found no additional power in s 1323(1) by which such co-operation could be assured. However, even if s 1323(1) does authorise orders for such purposes, in this case those interests seem to me quite remote. 35 Ms Pritchard also argued that Mr Hawley had failed to co-operate with ASIC and this provided an additional reason why the orders should be made. The failure to co-operate was said to consist in a dilatoriness in responding to a demand from ASIC on 20 February 2006 that Mr Hawley lodge his passport with his solicitors. At that time, there was in place an undertaking from Mr Hawley that he would give ASIC two weeks' notice of any intention to travel. Mr Hawley's solicitors replied on 14 March 2006 and indicated an intention to travel on 6 April 2006. ASIC thereafter applied for the orders which were ultimately made by consent by Emmett J on 28 March 2006. I do not think this shows any misconduct on Mr Hawley's part. He had given an undertaking with which he complied. It is true that his solicitors did not reply to a letter for some weeks but that does not, without a great deal more, amount to a failure to co-operate. 36 ASIC also submitted that an answer given by Mr Hawley at the end of an examination on 16 February 2006 showed that he was not co-operating. It seems plain that Mr Hawley said, at the end of that examination, that he was proposing to travel in the middle of the year. In fact, an itinerary received by him dated the same day showed that he was planning to travel in April. I would draw no adverse inferences from this. It was not shown that Mr Hawley was aware of the contents of the letter when he made the statement. Indeed, it might be expected that a letter dated 16 February 2006 would not arrive that day. Even if the letter was received, however, I do not think that describing April as the middle of the year is beyond the range of the possible. That is particularly so when regard is had to the facts both that Mr Hawley had nothing to gain by making the statement and that it was made at the end of a s 19 examination which, it may reasonably be inferred, was not stress free. 37 Both Mr Kunç and Ms Pritchard emphasised certain payments made by Mr Hawley and the extent of his contacts in Australia. I have already concluded that Mr Hawley does represent a flight risk. His personal situation did not particularly advance that proposition one way or the other. He has some, but not all, of his assets in Australia. He has a cottage in Switzerland to which it might reasonably be supposed he could flee and set up a base. His mother lives here but he has no children (although he has two elderly dogs). Taken together, those matters did not increase the risk of flight beyond that which I have already concluded. 38 As to the payments, Mr Hawley unquestionably made what appear to be very substantial gifts to clients before the trading came to the attention of ASIC in November 2005. Mr Hawley points to them as showing that he is not a venal man and is not afraid of meeting his obligations. ASIC says they show he was trying to buy the clients' silence. The current proceedings do not present an appropriate occasion for resolving that debate.

Outcome 39 The uncertainly of ASIC's case against Mr Hawley and the length of time it has taken to get the matter to the stage it has provide reasons for refusing ASIC's application. However, given the flight risk that Mr Hawley presents and the real, although not particularly impelling interests which require protection, it is appropriate to continue the orders. However, the orders must be limited as to time. The point has been reached where a line has to be drawn under the investigation. I propose to make orders restraining Mr Hawley from leaving Australia for 20 days as of today's date, that is, until midnight on Monday 6 October 2008. 40 Orders restraining Mr Hawley from leaving Australia and from disposing of his assets were made by consent by Emmett J on 28 March 2006. By consent those orders have been repeatedly renewed until Mr Hawley recently signalled his desire to travel overseas. ASIC has sought an extension of the orders until 5 December 2008. Mr Hawley consents to the extension of the asset preservation orders until 5 December 2008 but resists the orders interfering with his ability to travel. I will make the asset restraint orders until 5 December 2008 and the travel restraint orders until 6 October 2008. In the meantime, there remains the question of what should happen with these proceedings and what order as to costs should be made. I will list the matter for further directions on Tuesday 7 October 2008 when those issues may be disposed of. The orders of the Court will be as follows: 1. The respondent Eric Hawley be restrained, by himself, his servants or agents from taking or sending out of Australia money of the respondent Eric Hawley, whether solely held by him or jointly held by him in a bank account with Glen Weston, without the consent of the Court until midnight on Friday 5 December 2008. 2. The respondent Eric Hawley be restrained, by himself, his servants or agents, from taking, sending or transferring out of Australia financial products or other property of the respondent Eric Hawley, whether in his own name or not, and whether solely held by him or jointly held by him with Glenn Weston, without the consent of the Court until midnight on Friday 5 December 2008. 3. The respondent Eric Hawley by himself, his servants or agents, deliver up all passports held by him in his name, to his solicitor Ric Lucas of Colquhoun Murphy Barristers and Solicitors, such passports to be held by Ric Lucas until midnight on Monday 6 October 2008. 4. The first respondent Eric Hawley be restrained from leaving Australia without the consent of the Court until midnight on Monday 6 October 2008. 5. The matter be listed for further directions at 9.30 am on Tuesday 7 October 2008. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.

Associate: Dated: 16 September 2008 Counsel for the Plaintiff: S Pritchard

Solicitor for the Defendant: R Dearn of Colquhoun Murphy

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