DPP v O'Reilly [2010] VSC 138

2 The shorthand description of your conduct is that you acted as an insider trader. By your plea you admit that you possessed information not generally available which if it were so available could reasonably be expected to have a material effect on the market price of shares in a company known as Indophil Resources.

3 Further by your plea you admit that you knew that this information was not generally available, and that it could reasonably be expected to materially affect share prices in that stock. It was possessed with that knowledge that on 13 May 2008 you purchased 50,000 Indophil shares.

4 Lion Selection Limited is a resource investment company listed on the Australian Securities Exchange. One of Lion's assets in 2008 was a significant investment in Indophil Resources. As at 13 May 2008 you were a non executive director of Lion. You were a director of Indophil until 31 December 2007, and effectively acted as one of Lion's representatives on that board. At the beginning of 2008 Lion held approximately a quarter of Indophil's issued capital.

5 By early April 2008 Lion directors wished, if possible, to realise its investments in Indophil at a profit to Lion. Confidential discussions were held between Lion and Xstrata Queensland Limited concerning the sale of Lion's Holding in Indophil to Xstrata.

6 Throughout April and into May 2008 these negotiations between Lion and Xstrata gathered momentum. As a non executive director you were regularly updated on the progress of these negotiations by 7 May 2008 you were advised in a confidential memorandum to Lion's directors that Xstrata was prepared to offer Lion $1 per share for its Indophil holding. This was a substantial premium over the then market price. Over the course of the next few days you continued to receive updates on the proposal, all of which confirmed the likelihood that the sale to Xstrata of the Indophil securities would proceed.

7 None of this information was available to the market until 15 May 2008 when Xstrata issued an announcement to the Australian Securities Exchange, stating it intended to make an all cash takeover offer for Indophil at a premium of 28 per cent to the last closing price of Indophil. On the same day, Lion issued an announcement to the Australian Securities Exchange, disclosing its arrangement with Xstrata. Thus the information became public on 15 May 2008.

8 On 14 May 2008, Indophil closed at 78 cents per share. On 15 May 2008, it opened at 110 cents and closed at 109 cents per share. The market value of Indophil shares had jumped 40 per cent overnight.

9 On 8 May 2008, one week before the information became publicly available you instructed Bell Potter Securities to purchase 50,000 Indophil shares on your behalf. Bell Potter have operated a share trading account for you for some years previously. On that day Bell Potter bought 50,000 shares in Indophil at an average price of nearly 77 cents per share. Settlement in the sum of $38,880.00 was to occur on 13 May 2008 and in fact did so. It ought be observed that you already held nearly 188,000 ordinary Indophil shares prior to this purchase.

10 During June and July 2008 you sold your entire holding in Indophil, including the 50,000 shares, the subject of your offending.

11 Based on the average sale price of your holding, at $1.35 per share, the profit from your offending can be calculated at approximately $29,000. It is necessary further to observe that in March 2008 Indophil in fact announced a hostile takeover bid for Lion. As a Lion director you are obliged to disclose your shareholding in Indophil, and on 24 April 2008 you completed that disclosure correctly. A footnote to the questionnaire disclosure form advised you not to deal in either Lion or Indophil Securities without first contacting Mr Maloney, a senior Lion manager. You did not do so when you purchased the impugned parcel of shares. As part of the process of Lion resisting the Indophil takeover bid, Lion was required by s.633 of the Corporations Act to prepare a target statement in response to the Indophil bidder's statement. That target statement was lodged with the Australian Securities Exchange on 23 May 2008. It disclosed your original holding of nearly 188,000 Indophil shares, including 166-odd thousand acquired by the exercise of options in April 2008. What it did not disclose was the acquisition of the 50,000 acquired in May 2008.

12 The various drafts of this document were also prepared after acquisition of those shares and were all sent to you for comment. At no time did you bring it to the attention on any Director or the board that you had purchased the shares. You were party to a unanimous resolution passed by the Directors that the target statement be lodged in substantially the form in which it appeared when tabled at that meeting. This board meeting, which you attended by telephone from the United Kingdom, took place only nine days after you had settled on the 50,000 Indophil shares.

13 By your conduct you have misled your fellow directors, acted in contravention of Lions Security Trading Policy, misled your shareholders and the Australian Securities Exchange, and undermined the integrity of the securities market. You resigned as a Director of Lion in November 2008. I turn to the general principles that apply to this type of offending.

14 The maximum penalty for a contravention of s.1043A(1) of the Act is imprisonment for five years or a fine of $220,000, or both. A number of general principles can be stated that bear in greater or lesser degrees upon the offence of insider trading, depending upon the particular circumstances of the case under consideration.

15 First, general deterrence, despite its absence from s.16A(2) of the Crimes Act 1914, must ordinarily assume significant weight in the mix of sentencing factors that have to be balanced. That weight will be determined by the objective gravity of the offending and may be counter-balanced by factors personal to the offender subject to the qualifications expressed below.

16 Secondly, the character and antecedents of the offender remain relevant to sentencing in this type of case. It is true, and has often been observed, that this type of offending is rarely committed by people with a criminal history and that it is their good character that enables them to be the repository of the very trust that they have breached. See for example, R v Rivkin [2004] NSWCCA 7, R v El-Rashid (unreported, NSWCCA, 7 April 1995), R v McCoid [2009] EWCA Crim 1301.

17 This does not mean that prior good character is overwhelmed or swept aside in the sentencing function. It informs the aspects of personal deterrence, rehabilitation, what is adequate punishment for the individual the subject of the charge, and the genuineness of any asserted contrition. Having said that, I accept that general deterrence in this type of case must be an important consideration. The objective gravity of the offending will impact upon just how important it is.

18 The objective gravity of the offending will depend on factors such as the position of the accused; if the accused is a true insider he will be viewed more seriously than the recipient of a "hot tip." It will depend on whether elaborate steps have been undertaken to disguise the identity of the purchaser or otherwise disguise the transaction. The amount invested is a relevant factor, as is the anticipated gain. Similarly, the impact upon any victim is a relevant factor.

19 In insider trading cases I consider there are at least two victims; the seller or sellers of the stock at the lower price and the public, whose confidence in the integrity of the market must be diminished. The impact upon public confidence in the market is an important factor. The securities markets could not survive and flourish without the confidence of those who elect to invest in it. That extent of that impact of course will depend on the previous factors that I have cited above.

20 In this case I have been invited by Dr Lyon to characterise your conduct as serious and not at the lower end of the scale. Mr Richter of Her Majesty's Counsel accepted that in certain respects your offending was correctly characterised as serious but said that in other respects it fell short of whatever that adjective truly means. In the end he submitted it was not so sufficiently serious as in all the circumstances to warrant a sentence of immediate custody.

21 I take the view that the objective gravity of your offending can only be understood by an appreciation of all the aspects of it. In this case there are a number of aspects that I consider go to the evaluation of the objective gravity of your offending.

22 First, I consider that you are a true insider. You were a Director of Lion and by dint of that position you were kept constantly appraised of market sensitive information. The market, your fellow Directors and your company shareholders placed their trust in you and you breached it. I consider this the most troubling aspect of your conduct.

23 Secondly, I accept that your purchase of the impugned parcel of shares was not accompanied by any attempt at subterfuge. The shares were purchased under Bell Potter Securities Limited Nominee account, but the transaction was readily traceable to your cash management trust account held with Bell Potter. I consider that the difficulties in detection of offending that often loom large in cases of this nature are less of an operating factor in this case. It may also be that this relative lack of sophistication from a sophisticated man is some evidence that your judgment was clouded at this time of your life. I shall return to that aspect.

24 Thirdly, I do not regard the nature of the trade, the amount invested or the anticipated profit as falling into a particularly grave or serious category. The trade was simply an outright purchase, uncamouflaged in the way that I have described. There are, as was observed in discussion with counsel, ways in which a sophisticated investor can ramp up returns when investing on a sure thing. Contracts for Difference spring readily to mind. You did not seek to multiply your anticipated profit by choosing an exotic method of trading, nor did you invest a really large sum of money. The anticipated and actual profits were modest. If calculated at the opening of trading after the announcement on 15 May your profit would have been $16,500 approximately, excluding brokerage.

25 Your actual profit derived from the average of sales of all your Indophil shares in June and July 2008 was $29,045, a figure whilst larger, I still regard as modest. I regard the fact that this was one trade only as significant. In similar cases cited by both Dr Lyon and Mr Richter very often the offending was constituted by a persistent course of conduct involving multiple trades. The assertion that this was a moment of madness in an otherwise exemplary life is more easily sustainable where the conduct is confined to an isolated act.

26 Doing the best I can to weigh these competing considerations I regard your offending as a mid-range example of a serious offence. The legislation provides, as I have said, for a maximum of five years imprisonment and/or for a fine of not exceeding $220,000. The question is whether the objective gravity of your offending demands a sentence of immediate custody. Other factors, of course, must be considered.

27 You are now 65 years old and ought be living out a life of comfortable and fulfilled retirement in the United Kingdom with your loving family and extended family. Instead you face the prospect of imprisonment on the other side of the world. Your wife has health problems which she elaborated upon in evidence. No doubt your family would suffer emotional hardship and perhaps some physical inconvenience if you were absent for a period.

28 However I am unable to conclude that such hardship could properly be categorised as exceptional, as contemplated in R v. Matthews 130 FLR 230. That is not to say, however, that I ought regard the fact that you are a resident of the United Kingdom as irrelevant. I accept that any term of actual imprisonment imposed upon you would be made more onerous, perhaps considerably so, by virtue of the absence of any real emotional support in this country.

29 Up until the offending you had led an accomplished life. You are a metallurgist by training and have worked in the international mining industry for over 40 years. From 1987 to 2006 you worked for Rio Tinto and were an integral part in the corporate success of Lihir Gold. You have been a president of the Mineral Industry Research Organisation of the United Kingdom and you have served as a director of numerous companies. You have been married for 38 years. You have two adult children and two grandchildren. I accept that you are devoted to your family. Numerous testimonials have been tendered on your behalf and oral character evidence has been called. All speak of your drive, your competence and your integrity.

30 I accept that you have been in possession of highly market sensitive information over the course of your career and I further accept that if you had a predisposition to this type of conduct, it would have manifested itself well before the age of 64. Your general health is good, although I accept as a broad proposition that a term of actual imprisonment for a 65-year old would be more onerous than one for, say, a 35-year old.

31 On your behalf it was put that this offence occurred at a time of great stress in your life. There was a suspicion that you may be suffering from prostate cancer. Medical reports tendered demonstrate that this suspicion was extant at precisely the time that you offended. At that time a close friend of yours was dying of the same illness.

32 These stresses are said to have arisen against a background of your acrimonious departure from Indophil. You had initially resigned from their board effective from September 2008. You were persuaded to stay on. One of the factors used to persuade you was the promise of a further tranche of Indophil options to be made available to you in the last quarter of 2008. Those options did not materialise and you left with a sense of grievance.

33 On balance I accept that these factors were operating upon your mind in May 2008. Whilst as Mr Newton, forensic psychologist, hypotheses on your behalf they may have clouded your judgement, I consider they do little to excuse your conduct. Illness and the loss of dear friends are parts of the human experience and do not provide an immunity from the consequences of unlawful behaviour. I do accept, however, that your misconduct was an aberration and that you almost certainly will not re-offend in this or any other way.

34 I do not believe that personal deterrence has any real part to play in the sentencing process. I also accept that your prospects for rehabilitation are overwhelmingly good. You will be disqualified from holding corporate office, which is a penalty in itself, see Rich v ASIC [2004] HCA 42; (2004) 220 CLR 129, and at the age of 65 this is effectively a disqualification for life.

35 Mr Richter has directed me to various press articles which demonstrate the public humiliation which no doubt will reach its peak in tomorrow morning's press. Whilst this is a factor I am entitled to take into account as a punishment already suffered, I do not consider it ought be accorded significant weight.

36 The public humiliation you have suffered is no more than a by-product of your offending, given bite by your accomplished and exemplary prior history. Informal public shaming in the media in my consideration can never be a substitute for the formal expression by society through its courts that a member of that society has committed a wrong. See ASIC v Vizard (2005) 145 FLR 57, at 66. Those who commit this type of offence can expect the same level of scrutiny as you have suffered. If your public humiliation acts as a disincentive to those considering offending in this way, then perhaps a small measure of general deterrence is achieved.

37 I accept that you present now as truly remorseful for your actions. This remorse was not immediate. As I have observed earlier you failed to disclose your purchase of the Indophil shares in Lion's target statement lodged with the Australian Securities Exchange on 23 May 2008, nor in any of the drafts prepared shortly before that.

38 Whilst you voluntarily attended an ASIC interview on 26 September 2008, I consider that your answers were self serving and at times evasive. I consider that true contrition was certainly present by February 2009 when you telephoned Mr Sanders of ASIC from the UK, and expressed a wish to sort the issue out. A couple of days later you wrote to him confessing, in effect, your misconduct. Since that time your conduct bespeaks not only of contrition, but also of significant co-operation with the prosecuting authority.

39 In short you have bypassed your right to a committal proceeding. You have consented to the payment of a pecuniary penalty order, thus forfeiting not only your profit but also your initial stake, and you have entered a plea of guilty at an early stage. These are all matters that operate significantly to mitigate the sentence that I must pass.

40 In particular your plea of guilty must be given its proper weight. This type of case is not easy to prosecute. There is a utilitarian value to your plea in that you have assisted in the administration of justice, and as I have observed it also evidences your contrition.

41 I have given this matter my really anxious consideration. It is effectively common ground that I must impose a term of imprisonment. The issue is whether some part of it must be served immediately.

42 Ultimately I have concluded that whilst the aspects of general deterrence and adequate punishment for your offending demand a term of imprisonment, I am not satisfied that immediate imprisonment is the only appropriate sentence in all the circumstances that I have identified. Would you stand up please, Mr O'Reilly.

43 On the count of contravening s.1043A(1) of the Corporations Act 2001 you are convicted, and I sentence you to a term of imprisonment of 10 months.

44 I order that you be released immediately upon your own recognisance in the sum of $500 to be of good behaviour for a period of 18 months.

45 I further order that you be fined the sum of $30,000.

46 But for your guilty plea my sentence would have been imprisonment for 13 months with a recognisance release order allowing for your release after a period of five months. The fine would have remained at $30,000. Are you prepared to enter into the recognisance in the terms that I have proposed?

47 Mr O'Reilly, the effect of the orders that I am about to make is that you will be released forthwith. You will be released, in effect, upon a recognisance to be of good behaviour for a period of 18 months. What that means is that if you offend in any substantial way in the next 18 months, it may be that your recognisance has been breached and you will be called before me to serve the term of imprisonment that I have imposed. The recognisance of $500 would also be payable in the event that you breach that recognisance. As you will have observed, I have expressed some confidence that you will not indulge in any sort of conduct that might constitute a breach of that recognisance. Do you agree to be bound by an order of the type that I have proposed?

48 What I endeavoured to explain to you, Mr O'Reilly, is at the moment you have a term of ten months' imprisonment hanging over your head. You breach the bond, and you will end up serving the full sentence.