Court of Appeal (WA)|1999-05-31|Before: Commissioner Kenneth

Macleod v Australian Securities Commission [1999] WASCA 35 (31 May 1999)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : MACLEOD -v- AUSTRALIAN SECURITIES COMMISSION [1999] WASCA 35

Corporations law - Misleading statement - Likelihood - Future statement - Prediction - Causation - Non expert opinion - Ultimate issue rule - Admissibility of opinion evidence - Accomplice - Re-consideration of reasons - Ostensible bias - Recording of reasons for decision

Respondent : Commonwealth Director of Public Prosecutions

Australian National Industries Ltd v Spedley Ltd (In Liquidation) (1992) 26 NSWLR

Bond Corp Holdings Ltd v Grace Bros Holdings Ltd (1983) 8 ACLR 61

Burwood Municipal Council v Harvey, unreported, CA NSW; CA40269 of 1993;

Callaghan v The Queen [1952] HCA 55; (1952) 87 CLR 115

Chamberlain v The Queen ) (No 2) [1984] HCA 7; (1983) 153 CLR 521

Croft v Peterson, unreported, SCt of Vic; 24 May 1994

Dickason v Edwards [1910] HCA 7; (1910) 10 CLR 243

Fencott v Muller (1983) 152 CLR 570

Franklun v Minister of Town and Country Planning [1947] UKHL 3; [1948] AC 87

Galea v Galea (1990) 19 NSWLR 263

Gantry Acquisition Corp v Parker & Parsley Petroleum Australia Pty Ltd (1994) 123

Gas and Fuel Corporation of Victoria v Wood Hall Ltd [1978] VicRp 41; [1978] VR 385

Georgianni v The Queen (1985) CLR 473

Given v Pryor 24 ALR 442

Goktas v GIO (1993) 31 NSWLR 684

Haldane v Chegwidden (1986) 41 SASR 546

Hinton v Mill (1991) 57 SASR 97

Humphrey v Wills [1989] VicRp 42; [1989] VR 439

Kennedy v Sykes (1992-93) 24 ATR 546

Laws v Australian Broadcasting Tribunal [1990] HCA 31; (1990) 170 CLR 70

Livesey v NSW Bar Association [1983] HCA 17; (1983) 151 CLR 288

Nickelseekers Ltd v Vance [1985] 1 Qd R 266

Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191

Pontello v Giannotis (1989) 16 IPR 174

Preston v Carmody [1993] FCA 377; (1993) 44 FCR 1

R v Essex Justices; ex parte Perkins [1927] 2 KB 475

R v Kelley; ex parte Ansett Transport Industries (Operations) Pty Ltd (1990) 64 ALJR

R v Lilydale Magistrates Court; ex parte Ciccone [1973] VicRp 10; [1973] VR 122

R v Thompson Holidays Limited (1974) 1 All ER 823

R v Watson; ex parte Armstrong [1976] HCA 39; (1976) 136 CLR 248

Re Maurice; ex parte Attorney-General (Northern Territory) (1987) 17 FCR 422

Re Rossfield Group Operations Pty Ltd [1981] Qd R 372

Taco Co of Australia v Taco Bill [1982] FCA 136; (1982) 42 ALR 177

Thompson v Riley McKay Pty Ltd [1980] FCA 24; 29 ALR 267

Versteeg v R 14 ACLR 1

Vrisakis v Australian Securities Commission (1993) 9 WAR 395

Webb and Hay v R (1994) ALJR 582

Wright Heaton Pty Ltd v PDS Rural Products Ltd (1982) 7 ACLR 140

1 The defendant, Malcolm MacLeod was charged by a complaint issued by the Australian Securities Commission ("The Commission") on 19 January 1998. The complaint concerned alleged conduct of the defendant on or about 16 December 1993, which was said to constitute an infringement of s 999 of the Corporations Law read together with s 1311(1)(a) of that Statute.

2 In respect of the first count, it was contended that Mr MacLeod had made a statement contained within a document entitled "Exploration Results for Cambridge Gulf Exploration NL" and which was materially misleading and likely to induce the purchase of securities in Cambridge Gulf Exploration NL ("Cambridge Gulf"). The aspect of the statement said to be materially misleading, to the knowledge of Mr MacLeod, was the assertion that "Six carats of diamonds were recovered at the rate of 0.4 carats to the tonne". The complaint asserted that this statement did not take into account the "overburden" which had to be penetrated and removed in order to recover diamonds.

3 A second count within the same complaint relates to the same document. It was contended that Mr MacLeod made a further statement that was also materially misleading and likely to induce the purchase of securities in Cambridge Gulf. It was contended by the complaint that Mr MacLeod ought reasonably to have known such statement was materially misleading in that:

"The statement contained a representation with respect to a future matter namely that it predicted an annual profit for Cambridge Gulf Exploration NL in the sum of US$1,374,000,000.00 and there were no reasonable grounds for making that representation, contrary to s 999 of the Corporations Law read together with s 1311(1)(a) of the Corporations Law".

4 Mr MacLeod pleaded not guilty to both counts raised by the complaint, and his trial before a Magistrate in the Court of Petty Sessions was held at Perth between 14 to 21 September 1998. On 29 October 1998 the learned Magistrate published written reasons for his decision. In respect of the first count, by his reasons, he concluded that the prosecution had failed to establish that the particular statement in question was materially misleading. In respect of the second count, the published reasons of his Worship of 29 October 1998 concluded:

"I accordingly find that each of the elements of the offence with respect to Count 2 have been made out.

I find that the prosecution has proved its case with respect to Count 2 but has failed to prove its case beyond reasonable doubt as to Count 1."

5 The covering page of his Worship's written reasons contains the following:

6 What transpired on 29 October 1998 before his Worship entered court is not entirely clear. It seems that his Worship, prior to entering court, had made available his reasons for decision to counsel for the complainant (Ms Fogliani - who also appeared as counsel for the Commission as respondent on this appeal), and counsel for Mr MacLeod (Mr Harris - who also appeared as counsel for the appellant on the hearing of the appeal before me).

7 The transcript for 29 October 1998 commences from the time his Worship entered court. By then it is obvious that both counsel had received and studied a copy of his Worship's written reasons.

8 Both counsel drew his Worship's attention to p 34 of his reasons concerning remarks made as to the effect of statements upon the average shareholder. His Worship had there considered the use by witnesses of the word "might" in addressing the issue of the likely impact of such statements on the average shareholder. He referred to the New Shorter Oxford Dictionary meaning of "might" as meaning "a possibility". His Worship then said:

"The word `likely' should be interpreted as a possibility. If the word `likely' is interpreted to mean possibility then there is evidence which goes to establish the third element of the offence that the statement was likely to induce the purchase of securities by others".

9 Counsel for Mr MacLeod drew his Worship's attention to the decision of the High Court of Australia in Boughey v R [1986] HCA 29; (1986) 161 CLR 10, especially at pp 14 and 20. Mr Harris submitted:

"Sir, in their opening and in their submissions, and in my submissions we referred you to the High Court, that the word `likely' has been interpreted by the High Court as `probably', not as `a possibility'. I draw that attention with the concurrence of my friend ..."

10 Although it is not entirely clear from the transcript, the nub of the submission which both counsel seem to have made was that his Worship had applied an erroneous legal test in expressing a conclusion based on the lesser threshold of possibility, rather than on a higher standard of probability, as required by the High Court in Boughey's case. His Worship's response was:

"Yes. Allright. Now, in view of that, is there a requirement for further submissions to be made or further addresses to be made to me?"

11 Counsel for the Commission requested, and counsel for Mr MacLeod did not oppose, the matter being stood-over, so that the parties would have the opportunity to review their respective positions. The matter was then adjourned until the following day.

"I have inverted the testing effect, although being aware of Bowie [sic], I have taken the lesser standard rather than the higher standard".

"And, I think, that's the end of the matter, sir; that there is no alternative but to acquit and reopen it at this stage would be unconscionable, sir".

14 However, counsel for the Commission submitted to the contrary:

"My understanding is that a conviction has not at this stage been entered, and accordingly there is no final determination that has been made by the court. As such, your Worship is entitled to hear submissions in connection with this point and the complaint, in fact, has submissions that it wishes to make upon the test for probability, and those submissions relate to the evidence and to the way in which opinion evidence can be assessed together with other matters that your Worship is entitled to take into account".

"Well, after a very considered evaluation of the situation and taking advice, I would say that it is all over; that there is no precedent for this or authority for this. Your decision as handed down has now been - well, not officially - but published. You have found possibility not probability, and an invitation for it to back and look at the evidence once again and find probability would be unsustainable, sir. ..."

"Now, the position is clearly that when I considered this matter, although mindful of Bowie, [sic], for some inexplicable reason it inverted the test, and have looked at the matter at the ... in a situation where I have considered the evidence on the lower standard required. That is how I have considered the evidence as clearly so. I haven't gone further to say that the higher standard has not been met. I have simply considered the matter on the lower standard which is clearly not appropriate.

Now, I haven't entered a judgment with respect to these matters, or with respect to this matter as yet. I have not proceeded through to a dismissal or a conviction. In my view, I am not functus officio. The matter is still open and I cannot see any reason why I could not review the evidence with a view to seeing whether the higher standard, which is the proper standard, has been met, and in my view that is what ought to occur, and I am prepared to receive further submissions as to whether the evidence as it stands would enable the higher test to be made out. Because, quite frankly, I have not considered the higher test. I simply left it at the lower inappropriate test, and if that is the case, clearly, the position is that I should have considered the higher test and that is what I intend to do."

17 Counsel for the Commission then handed to his Worship further written submissions contending that the case was still sustainable against Mr MacLeod on count 2, applying the correct threshold test in accordance with R v Boughey. Counsel for Mr MacLeod then responded. During the course of those submissions, his Worship said:

"I just want to make it clear that I didn't say, and my reasons, I believe, don't say that I have found there was possibility not probability. I never approached the issue of probability at all. I never came to that higher standard. I left it at the point that possibility had been established, and I simply didn't take it that one step further. I want to make that clear."

His Worship then adjourned the matter until 3 November 1998.

18 At that date, his Worship, in the presence of counsel, delivered further oral reasons. I refer to the following:

"Now that the matter has been brought to my attention, it is appropriate that I consider the evidence with respect to the third element to determine on the higher standard whether it was likely that an average shareholder would be induced into purchasing securities in the company by reason of the materially misleading statement made by the defendant. In that regard I invoke the authority in Bowie [sic] and the Queen that the word `likely' means `probable' and not `possible'."

19 His Worship referred to certain portions of the evidence of two witnesses, Mr Newing and a Mr Furlong. These gentlemen appear to have been called by the Commission to give "opinion" evidence about the likely reaction of an average shareholder to the relevant statement. Referring to the evidence from Mr Furlong, his Worship said:

"Mr Furlong expressed the view that average shareholders would be encouraged by the camp. `Encouraged' means sufficiently confident or bold as to do a specified action. In the context of the evidence before me, it is clear that each of Mr Newing and Mr Furlong were referring to the fact that camp was such as to make the average shareholder sufficiently confident to buy shares."

20 His Worship then referred to questions asked of Mr Furlong in the following terms:

"Q. And what in your opinion from your experience as a mining analyst would the ... I think you've been asked this question but I'll ask ... (reads) ...?

A. He might consider the company would be worth a lot of money.

[In passing, I draw attention to the word "might" in the response of Mr Furlong.]

The response from Mr Furlong was, "AND buy shares accordingly."

"Without reciting his evidence (His Worship is now referring to Mr Newing), it simply suffices to say that he took the view that, by reason of the camp, average shareholders would be encouraged about the potential for shares in the company. I accept the opinion evidence of both Mr Furlong and Mr Newing and take it into account in each instance in arriving at my own conclusion with respect to this particular element.

People in the share market seek to make profits and are motivated by the same. If someone was going to buy shares would they buy it because of the information in the camp? Is it probable that they would be buying because of the written material in the form of the camp in the marketplace? Clearly the camp predicted huge profits and was the latest information available to the market. It was the latest information and was very encouraging - indeed, unduly so.

When that is considered in the light of the whole of the evidence it seems to be inescapable that an average shareholder would probably purchase shares as a consequence of the information expressed in the camp which was materially misleading. The third element is proved beyond reasonable doubt, even applying the highest standard previously not considered. The supplementary reasons are to stand together with the written reasons that I have already made available to counsel on Thursday last.

Accordingly, I find that count 1 has not been proved and that count 2 has been proved beyond reasonable doubt and I will now record my findings of not guilty as to count 1, and guilty as to count 2."

21 His Worship then heard submissions from each counsel in relation to penalty. He imposed a fine of $2,500 in relation to the offence found proved under count 2. In respect of the dismissed count 1, his Worship awarded Mr MacLeod costs, fixed in the sum of $5,000. In respect of count 2, his Worship ordered costs of $5,000 to the Commission.

22 This appeal raises a number of challenges to the conviction found proved against Mr MacLeod under count 2. Not the least of the matters raised was a challenge to whether his Worship, having published written reasons for judgment, but accepting that those reasons were deficient to support his conclusion of conviction on count 2, could then go back, consider the matter further, and deliver further oral reasons which as matters transpired, ultimately expressed the same conclusion in respect of count 2.

23 But before considering this and the other grounds of appeal, it is appropriate that I set out the relevant provisions of two sections of the Corporations Law which bear most materially upon this appeal. Those sections are s 999 and s 765, as those provisions read in December 1993, being the relevant time at which it was alleged Mr MacLeod infringed the Corporations Law.

"999. A person must not make a statement, or disseminate information, that is false in a material particular or materially misleading and:

(aa) is likely to induce other persons to subscribe for securities; or

(a) is likely to induce the sale or purchase of securities by other persons; or

(b) is likely to have the effect of increasing, reducing, maintaining or stabilising the market price of securities;

if, when the person makes the statement or disseminates the information:

(d) the person knows or ought reasonably to have known that the statement or information is false in a material particular or materially misleading."

25 Insofar as count 2 against Mr MacLeod is concerned, it can be seen that the averment in the complaint concerned a statement attributed to Mr MacLeod which was:

(i) attacked as being `materially misleading', rather than contended to be false in a material particular;

(ii) invoked subparagraph (aa) in relation to a suggested likely inducement of "other persons" subscribing for securities;

(iii) invoked subparagraph (d) of s 999, raising reliance upon the concept of deemed knowledge through the phrase "ought reasonably to have known";

(iv) insofar as the element of "materially misleading" was concerned, relied upon a characterisation of the statement as being one with respect to a "future matter" on the basis that it "predicted an annual profit for Cambridge Gulf Exploration NL in the sum of US$1,374,000,000.00.

26 Reference to `future matter' in the complaint concerning count 2 invoked s 765 of the Corporations Law which was in the following terms:

"765(1) [Future matters] When a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the person does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.

(2) [Burden of proof] For the purposes of the application of subsection (1) in relation to a proceeding concerning a representation made by a person with respect to any future matter, the person shall, unless the person adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.

(3) [Meaning] Subsection (1) shall be deemed not to limit by implication the meaning of a reference to a misleading representation, a representation that is misleading in a material particular or conduct that is misleading or is likely or liable to mislead."

27 It will be observed that s 765 deals with representations, not statements. However, by s 9 of the Corporations Law, "statement" is defined as: "'Statement', in Chapter 7, includes matter that is not written but conveys a message". Accordingly, the term "statement" would extend to embrace a "representation".

28 Section 765 bears close parallels to the terms of s 51A of the Trade Practices Act. The evidentiary effect of s 765(2) is, in the face of a proven representation as to a future matter by s 765(1), to require that there be reasonable grounds established to justify such a representation. In the absence of reasonable grounds being demonstrated, such a representation is deemed, by the statute, to be misleading.

29 Moreover, where there is a representation as to a future matter, s 765(2) requires as a matter of evidence that a person be deemed not to have had reasonable grounds for making a representation as to a future matter, unless the person has adduced evidence to the contrary. Assuming therefore, that a statement for the purposes of s 999 could be a representation, the terms of s 765 can then be relied upon to require the maker of the representation as to the future matter to provide evidence of the existence of reasonable grounds. In the absence of reasonable grounds, such a representation by reason of s 765(1) is to be taken to be misleading, although not necessarily meeting a description of "materially misleading" for the purpose of s 999 Corporations Law.

30 Having discussed the relevant law, I now proceed to recount in some further detail the factual background to the complaint. I do so with a degree of brevity, upon the basis that only the second count of the complaint is relevant scrutiny, whereas the learned Magistrate was considering evidence in relation to both counts. Furthermore, the learned Magistrate's factual summary between pp 3 and 13 of his first tranche of written reasons was comprehensive and hardly challenged at the hearing of the appeal before me. What follows is, in effect, my repetition (with some refinement) of the Magistrate's findings as to the facts as set out between pp 3 - 13 of his first reasons.

31 Mr Macleod was an experienced consulting geologist. In April 1993, he was engaged by Cambridge Gulf to prepare independent reports to be included in a prospectus with a view to Cambridge Gulf being listed on the Australian Stock Exchange. Cambridge Gulf was in fact listed in July 1993. Prior to listing, Cambridge Gulf had entered into an agreement to acquire certain offshore Mineral Exploration Permits ("MEPs") in Joseph Bonaparte Gulf in Western Australia. Those permits were granted under the Minerals (Submerged Lands) Act 1981.

32 The MEPs were considered to have prospective potential for marine alluvial diamond occurrences similar to those off the coast of South Africa and Namibia. The marine alluvial diamond mining industry had been established in South Africa and Namibia. Technology for the exploration and processing of alluvial diamonds had reached an advanced stage. Alluvial diamonds mined and recovered from the marine alluvial sediments off the south-west coast of South Africa and Namibia are predominantly of gem quality.

33 One of the Cambridge Gulf's directors, Professor A H Gans, had been a key participant in the discovery of marine alluvial diamonds in South Africa in the late 1960's. Professor Gans had theorised that similar diamond bearing deposits might be found off the Kimberley coast in the northern part of Western Australia.

34 Prior to listing, Cambridge Gulf had undertaken seismic surveys which delineated a number of river channels containing significant volumes of alluvial material. Cambridge Gulf proposed that following its listing, it would undertake an extensive bulk sampling programme to evaluate diamond and other alluvial materials. The exploration programme involved Cambridge Gulf and a joint venture partner, Gal Marine Pty Ltd, which was an active participant in the South African marine alluvial diamond mining industry.

35 At the material time Cambridge Gulf's executive chairman was Brian Conway, now deceased. Its other directors were Professor Gans, Igor Prosin, Grey Roughan, Adam Conway, Stephen Mann and William Cotterell. The chief executive officer of Cambridge Gulf was Peter Jones.

36 Michael Furlong became the company's secretary in 1993. Mr Furlong's evidence for the prosecution at trial supported that of Mr Prosin (also called by the prosecution) and established that Mr Brian Conway took the attitude that he was running Cambridge Gulf. Conway routinely made decisions unilaterally, without consulting the board of directors, and without resolutions.

37 Jean-Michel Graindorge, an experienced senior geologist, who at material times was employed as a geological and geotechnical consultant in Snowden and Associates, was contracted to Cambridge Gulf. Graindorge was significantly involved in the seismic surveys carried out. Called as a prosecution witness, he said that the area surveyed was what he believed to be an extension of the Ord River, off shore from the Cambridge Gulf. The purpose of the survey was to locate gravel believed to be diamondiferous. The survey identified several layers of gravel accumulations. The gravel accumulations were identified as being located 10 to 40 metres below the sea bed. Above the gravels was overburden comprised of layers of material that had been deposited at different times. The depth of the ocean varied from zero near the islands to 60 metres. As a result of the seismic survey Mr Graindorge recommended 31 sites for sampling in the initial phase of exploration.

38 On 15 October 1993, Brian Conway announced to the stockmarket, on behalf of Cambridge Gulf, that the purpose-built marine alluvial diamond sampling ship, "Lady S", had arrived on location in the Joseph Bonaparte Gulf in the north west of Western Australia that it and had commenced bulk sampling on Cambridge Gulf's tenement areas. The stockmarket was informed at this time that the ship was approximately 65 metres in length and had on board sophisticated bulk sampling equipment. The stockmarket was also told that the Lady S had been released from De Beers offshore alluvial diamond recovery activities off the Namibian and South African coast.

39 The sampling programme involving the Lady S experienced significant difficulties from its commencement. The main problem was that the suction head at the end of the airlifter pipe was unable to penetrate the overburden. The problem was caused by a combination of factors, including tidal movements and the nature of the overburden. A considerable period of time was wasted trying to penetrate the overburden at the first sampling site. What had been expected to take a few days to complete, took over a week, and was ultimately unsuccessful.

40 As a consequence of such difficulties, the criteria for sampling were re-evaluated by Cambridge Gulf and different sites were selected for sampling, resulting in only one of the original thirty one identified sampling sites being sampled.

41 Further attempts were made to sample sites based on fresh criteria for drilling. The fresh criteria were that water depth had to be at least 25 metres and that the overburden had to be a maximum of 20 metres in thickness, with underlying gravel having to be at least 5 metres in depth. It was thought that these fresh criteria would establish a more efficient method of airlift drilling to achieve penetration of the overburden and production of gravel samples.

42 A second attempt at affecting a sampling program was made based on the fresh criteria. That too proved to be unsuccessful. The Lady S was then moved a short distance and a third attempt was made. That proved to be successful in getting through 19 metres of overburden to the underlying gravels. Only 2 metres of gravel out of an expected 10 metres was airlifted from the third site before the attempt again failed. The Lady S shifted location some kilometres away for a fourth attempt, which also failed to penetrate the overburden. The ship was then returned to a position very close to the third location and succeeded in recovering 2 metres of gravel.

43 The gravel from the two sites amounted to only 15 tonnes. The gravel was screened down to plus 1.5 mm and minus 12 mm for processing through the heavy media plant on board the Lady S. From that, 3 tonnes of concentrate was extracted and taken onshore to Cambridge Gulf's sortex plant at Wyndham. A total of 0.4 carats per tonne of gravel dredged was established. Those diamonds were later independently valued at an average of $US 131 per carat. Some gold, platinum and palladium were recovered from random samples taken from the overburden.

44 In November 1993, Cambridge Gulf announced to the stockmarket that gem quality diamonds and precious metals had been recovered.

45 The initial exploration phase came to an end in late November 1993. By then only 5 sites had been sampled, and considerable difficulty had been experienced with the airlift drilling programme.

46 The very limited work done confirmed, to some degree, a geophysical interpretation of the location, the extent and nature of the gravels, and the fact that the gravels contained gem quality diamonds. To that extent, the sampling undertaken was considered to be successful. However, considerable hurdles had to be overcome with respect to future exploration. A re-evaluation of the necessary equipment was required. Furthermore, because of the small size of the sample, the grades and values achieved were close to being meaningless. It was clear that much more work was required.

47 By early December 1993, there were rumours in the stockmarket about the company's results. There were rumours, for example, that Cambridge Gulf had found diamonds "as big as golf balls". Cambridge Gulf's find received a considerable degree of publicity, including articles published in industry magazines. Cambridge Gulf's share price, which had already been rising steadily since listing, jumped appreciably in the first few days of December 1993.

48 On 7 December 1993, the ASX wrote to Cambridge Gulf, noting the upward fluctuation in share price, sought information as to any reason which might reasonably be expected to have had a material affect on the market activity. On the same day Cambridge Gulf responded to the ASX enquiry, indicating that exploration results would be announced in the company's quarterly report for the quarter ended 31 December 1993. In its letter to the ASX, Cambridge Gulf said:

"A statement in regard to the initial results achieved by the exploration programme was released to ASX on 10 November 1993. Until such time that CGE is satisfied that the results of the exploration programme are completely accurate and representative, it is considered that any further comment may be potentially misleading.

2. CGE is not aware of any information which, if generally available to the public, might reasonably be regarded as an explanation for the recent trading in the securities of the company."

49 As a result of the letter no immediate action was taken by the ASX. However, the share price of Cambridge Gulf's securities, continued to rise.

50 On 8 December 1993, a resource briefing for institutional investors was released by County Nat West Securities Australia Ltd. A copy of the briefing was provided to the ASX, and was available for viewing by investors. The briefing was bullish. It forecast, subject to various caveats, substantial earnings by the company. Cambridge Gulf's shares were recommended, "as an excellent speculative situation within the diamond exploration sector".

51 Cambridge Gulf's share price continued to rise appreciably in ensuing days.

52 On 9 December 1993, Mr MacLeod attended a briefing conducted by Cambridge Gulf concerning the then "current exploration programme", and planning for the future. Apart from Mr MacLeod, others to attend the briefing were: Brian Conway; Peter Jones; the company's in-house solicitor Mark McNamara; Professor Gans; a mining engineer Bruno Sceresini; head geologist of Malaysia Mining Corporation Yip Foo Wen; a geologist with Dalmin Corporation Dallas Davies; and Mal Wardle, then in charge of a work boat servicing the Lady S.

53 During that meeting a number of different issues were discussed, including conceptual forecasts as to recovery and grade of diamonds and other precious metals. Also discussed was the need for the adoption of an alternative drilling programme.

54 The share price of Cambridge Gulf had risen from a low of $00.88 on 1 December 1993 to a high of $2.05 on 14 December 1993. On 14 December a Mr Walsh of the ASX contacted Mr Furlong and told him that if the company did not voluntarily suspend itself from quotation, the ASX would suspend it. In a face-saving exercise Cambridge Gulf on the same day sought a voluntary suspension from official quotation. The market was thus advised by the ASX that the securities of Cambridge Gulf would be suspended, pending release to the market of a statement concerning the results achieved from the first phase of the company's 18 month bulk sampling programme.

55 On 15 December 1993 Mr MacLeod was called to Cambridge Gulf's offices by Brian Conway. He was requested to write a summary report on exploration for immediate release to the ASX. He was told that there had been rumours circulating in the market that Cambridge Gulf had recovered diamonds as big as "golf balls". Cambridge Gulf wanted to scotch such rumours.

56 Furthermore, Cambridge Gulf was aware of a report put out by County Nat West discussing the possibility of cash flows of $1.7 billion. Such reports had heightened speculation.

57 The report to be written by Mr MacLeod needed to contain exploration results ahead of the quarterly report due for release at the end of the year. The purpose of the MacLeod report was to inform the market and to quell rumours with a view to the suspension being lifted. Brian Conway told Mr MacLeod that there was a degree of urgency in preparing the report. Cambridge Gulf wanted reinstatement to official quotation as soon as possible.

58 In order to prepare himself for the compilation of his report, Mr MacLeod had to be briefed. He was briefed by Brian Conway, Peter Jones, and Anton Gans. The defendant gave evidence that Mr Prosin, Christopher Codrington (the company's public relations consultant) and Mr Graindorge were also involved. He said that the in-house solicitor, Mr McNamara, was to have vetted the report to ensure that all legal requirements had been met.

59 On 15 December 1993, Mr MacLeod set about drafting his report in long hand, whilst seated in the boardroom of Cambridge Gulf. Once prepared, the report was checked, typed and signed. It contained a formal consent by the defendant pursuant to ASX Listing Rule 3M (7). That consent indicated that the report was prepared by an independent and competent person.

60 The report consisted of a cover page, a substantive three page report, two pages of graphs supplied by Peter Jones and adopted by the defendant, a declaration as to competency and independence, and the consent previously referred to. This three page report comprised an introduction of about half a page, geological exploration results comprising half a page, conceptual alluvial mining plan (camp) comprising one and a half pages, and a conclusion comprising half a page. The camp comprised fifty percent of the written report.

61 In his introduction, Mr MacLeod outlined that the work done by Cambridge Gulf was the initial phase of scientific evaluation and offshore bulk sampling. He went on to describe the purpose of the work carried out.

62 In a section of the report headed "Geological Exploration Results", he reported that a sample of 3 tonnes of concentrate was extracted from 15 tonnes of gravel from selected sites. He continued:

"... Six carats of diamonds were recovered at rate of 0.4 carats to the tonne.

These stones are gem quality diamonds and were valued by a Government valuer at an average of $US135 per carat.

It should be noted for comparison purposes, that Argyle produces approximately 6 carats to the tonne at an average price of some $US10 per carat.

Cambridge Gulf has previously stated that it is profitable at 0.1 carat to the tonne at a valuation of $US67 per carat, with a capital cost of $300m.

The overburden continued to assay positive to gold, platinum and palladium at approximately 0.6 grams per tonne of the above combination."

63 The camp which followed in the report was mainly based on conceptual figures provided by Peter Jones. I shall set out the camp in full, as it appeared in the report, (although I have identified by bold print some particularly important components therein):

The marine alluvial diamond industry is a new industry and this formula is provided to give shareholders a better understanding of a mineable resource in relation to marine alluvial diamonds.

Total tonnage treated per annum is 28,000,000 tonnes

If 0.1 carats is recovered in each tonne of ore and the value of the diamonds is $US67 per carat -

At 0.4 carats recovery for each tonne of ore treated with the value of diamonds at $US135 per carat -

This does not take into account gold, platinum or palladium, however, assays continue to be positive and, for example, 0.6 of a gram of the above combination would add a further $US174 million of income and add $US8 million to production costs.

Using the following combination of gold, platinum and palladium.

"It is important to stress that whilst these results are most encouraging, considerably more evaluation work is necessary."

64 He also went on to outline in the conclusion that a further 1000 drill holes were planned.

65 On 16 December 1993 Mr MacLeod's report was sent to the ASX with a covering letter, wrongly dated 15 December 1993. Initially, on 16 December 1993 the ASX announced to the market, following receipt of the report, that the securities of Cambridge Gulf would be reinstated. However, very soon after that announcement, following independent advice received by the ASX, it further announced that the securities of Cambridge Gulf would remain suspended pending clarification of certain matters raised by the ASX.

66 ASX requisitioned further information from Cambridge Gulf. Consequently, Mr MacLeod prepared two further supplementary reports in answer to specific issues raised by the ASX.

67 On 22 December 1993 the securities of Cambridge Gulf were reinstated to official quotation. Upon reinstatement the share price continued to rise, peaking at $4.10 on 24 December 1993.

68 By 21 December 1993 a comprehensive "confidential" progress report detailing the exploration results was completed by Mr Graindorge and distributed in-house by the company. The report was extremely detailed and highlighted difficulties experienced in the initial phase of exploration.

69 On 28 January 1994, Cambridge Gulf released its quarterly report for October-December 1993 to the market.

70 As I have already mentioned, the first count to the complaint was dismissed. That count related to a statement in the report that "six carats of diamonds were recovered at the rate of 0.4 carats to the tonne". The statement was challenged on the basis that it did not take into account the overburden which had to be penetrated and removed in order to recover the diamonds. In concluding that count one was not proved, his Worship said:

"It is apparent that there were no hard and fast rules, policies or customs concerning whether or not a grade obtained at the exploration stage should be qualified by reference to the overburden to be penetrated and removed. The area is not free from doubt. It seems that the defendant's failure to refer to the nature and extent of the overburden may well have been justified. It is not therefore possible to conclude beyond reasonable doubt that the failure to include a qualifying statement as to the overburden constituted an omission which rendered the statement materially misleading."

71 In respect of count 2, I have already set out the terms of the camp in full. It is not contended that there was any materially false statement of fact within the camp. Rather, the contention of count 2 was on the basis that the statement was "materially misleading". Count 2 is also predicated upon an absence of reasonable grounds for what is said to be a "prediction" as to the annual profit of Cambridge Gulf in the sum of US$1.374 billion.

72 At the outset then I must consider the Commission's contention that words identified within the camp, used in reference to profit of US$1.374 billion, amounted to a "prediction", or representation as to a future matter.

73 For a prediction, obvious questions to ask are: prediction as to what and when? Next, how does one measure the accuracy or inaccuracy of the so-called prediction? What are the temporal characteristics of the prediction at issue? Is the prediction made for 2, 5, or even 50 years hence?

74 In the first sentence of the camp under the heading "Conceptual Alluvial Mining Plan", there is reference to a "formula". It is a formula expressly stated to be provided to give shareholders a better understanding of "a mineable resource in relation to marine alluvial diamonds". The formula referred to and used in the Conceptual Alluvial Mining Plan is not contended to be erroneous or misleading per se.

75 What follows in the camp are calculations based upon different assumed scenarios, i.e. 4,000 tonnes per hour, 80% plant availability, cost of plant, amortisation over 10 years, yearly operating costs etc. None of these selected scenarios themselves are challenged as being erroneous or misleading.

76 Next follows an application of the stated formula in relation to a rate of 0.1 carats per tonne of ore at an hypothesised value of diamonds at US$67 per carat. A profit figure is eventually derived from application of the formula resulting in an end reference to a profit of US$50 million. This whole reasoning process is plainly seen as an arithmetical one, based upon distinct premises, i.e. 28 million tonnes x 0.1 carat per tonne x US$67 per carat.

77 The essence of the grievance raised against Mr MacLeod by count 2 arises from his use of what was unambiguously stated to be a formula (which formula, I reiterate, was not itself impugned as an unreliable, erroneous or misleading) to a figure of 0.4 carats recovery per tonne of ore treated. Again, the end profit result generated, to my mind, results from the arithmetical process through application of the formula.

78 The Commission contends, in effect, that it was irresponsible of Mr MacLeod to have used the figures he did in the camp in applying the formula in this way, especially by use of a rate of 0.4 carats recovery per tonne. The Commission's particular concern is that there is a link between use in this formula of 0.4 carats per tonne, and the earlier statement in the report, which had been the subject of count 1, i.e. "... six carats of diamonds were recovered at rate of 0.4 carats to the tonne".

79 In effect, it is put by the Commission that the amount of sampling that had taken place was so small and so unrepresentative that a suggestion that Cambridge Gulf might ever, at any stage in future (presumably even 100 years hence!), achieve a 0.4 carats recovery rate for each tonne of ore treated, was quite irresponsible and misleading. It contends that the premise used in the camp (being 0.4 carats recovery per tonne), when applying the formula was effectively a "prediction" that wholly lacked any reasonable grounds.

80 To my mind however, there was no prediction. Certainly no time-frame (even in a loose sense!) can be pointed to at which these statements in the camp may be said to have had some predictive reference. All that occurred in the report, I think, was the application of a formula (not impugned) to different figures on different scenarios leading to different profit results. I do not think that the camp can fairly be read, however loosely, as suggesting that such profit result figures were ever likely to be achieved at any time in the future. That being so, there was fundamentally, I think, no basis to ever require Mr MacLeod to adduce reasonable grounds to justify a prediction. He was not making any prediction. Nor was he making a representation about any future matter. Once that conclusion is reached, it is plain that the case against him on count 2 must also fail.

81 I would uphold ground 6(a) of the appellant's grounds of appeal, which in effect challenges the learned Magistrate's finding that the impugned statement in the camp was materially misleading. In my view it was not misleading, and the appeal is to be allowed on this basis alone. That conclusion renders it strictly unnecessary for me to consider the other grounds of appeal, but in deference to the considered arguments put by both Counsel, I shall briefly do so.

82 Amongst the other grounds of appeal there is specifically raised the issue of whether the Magistrate's conclusion in his second tranche of reasons, to the effect that the statement was likely to induce the purchase of securities by others, can be sustained. In this regard I have already mentioned the need, accepted by the Magistrate, to fortify his first reasons by reference to the higher standard of proof which he recognised was applicable, by reason of R v Boughey. It is now undisputed that in reaching any conclusion as to proof beyond reasonable doubt, the standard in R v Boughey needed to be satisfied.

83 In finally expressing the required degree of satisfaction by his second tranche of reasons, the learned Magistrate is there seen to rely very much upon evidence of persons (Messrs Furlong and Newing) whom he referred to as "experts". As a matter of principle however, I see considerable difficulty in reaching a conclusion, in the present circumstances, that "expert" evidence was ever admissible to answer what was essentially a disputed issue of fact, i.e. per the words of s 999 Corporations Law, (and now making the hypothetical assumption that a materially misleading statement had been proven) - that the impugned statement was likely to induce (s 999(a)) the purchase of securities by other persons.

84 It is not in dispute, as a matter of fact, that at the time of the release of Mr MacLeod's report on 16 December 1993 the shares of Cambridge Gulf remained under suspension (imposed on 14 December 1993). There was no evidence of any on or off-market share trading at the time of suspension that might have been causatively ascribed to Mr MacLeod's report, let alone evidence of securities trading that was proven to be causatively linked to a particular statement within that report.

85 No evidence was led at trial from any witness who had been induced to purchase securities, based either on Mr MacLeod's report, or upon particular statements therein.

86 Nor, was there evidence led at trial from any person to the effect that, but for the suspension from trading of the shares in Cambridge Gulf, that they would have purchased or were poised, or even tempted to purchase shares in Cambridge Gulf by reason of the US$1.374 billion profit statement.

87 What was called for, I think, as part of the process assessing the likely effect of this statement (said to be materially misleading), was a careful causative evaluation by the learned Magistrate of all the evidence. Such a causative evaluation must necessarily have considered other potentially causative factors existing in the market at this time tending towards a purchase of securities. For instance, the resource briefing for institutional investors released by County Nat West Securities Australia Limited on 8 December 1993, had recommended shares in Cambridge Gulf as "an excellent speculative situation within the diamond exploration sector", and needed to be causatively evaluated. And it was not enough to merely consider in a global sense the causative effect of Mr MacLeod's report. What had to be precisely looked at was the particular statement in reference to the likely causative effects of that statement therein. Satisfaction of s 999(a) Corporations Law calls for a causative evaluation of the precise statement said to be materially misleading, i.e. here, a particular statement as to US$1.374 billion profit. Here I am not satisfied that these requirements were addressed sufficiently by the learned Magistrate to justify a conclusion that this causative element of the alleged offence was satisfied beyond reasonable doubt.

88 Proper application of the standard imposed by **Boughey'**s case required, I think, that the learned Magistrate be satisfied beyond reasonable doubt of the probability of this particular impugned profit statement having the effect of being likely to induce a purchase of shares in Cambridge Gulf. This was not a matter for speculation or global evaluation by reference to the content of the document as a whole.

89 An analysis of the learned Magistrate's supplementary tranche of oral reasons suggests to me that he placed almost total emphasis upon the evidence of two persons, Mr Newing and Mr Furlong, who were allowed at trial to express their subjective `expert opinions' as to the likely effect of the impugned statement upon persons. As will be seen, I also have reservations about the proper admissibility of this "opinion" evidence. But even accepting its admissibility for the moment, it obviously was of the most marginal weight in any event.

90 There is, in my view, undue reliance in the learned Magistrate's second tranche of reasons upon one word used by Mr Furlong, i.e. "encouraged". Questions were asked of Mr Furlong at trial as to his opinion, based upon his "experience as a mining analyst". See also the reference I have already made to the word "might" in relation to the company being worth a lot of money. The word "might" suggests speculation, this time by Mr Furlong. The learned Magistrate in his supplementary reasons is driven I think in somewhat strained fashion to interpret, via dictionary, the word "encouraged" as used by Mr Furlong in relation to average shareholders - as somehow meaning "probable".

91 The learned Magistrate said that he accepted opinion evidence of both Mr Furlong and Mr Newing, and took it into account in arriving at his own conclusion with respect to this element of the offence.

92 But what other evidence was there to satisfy this limb of the offence concerning the likelihood of shares being purchased, in accordance with the Boughey standard? His Worship said:

"Clearly the camp predicted huge profits and was the latest information available to the market. It was the latest information and was very encouraging - indeed, unduly so."

93 For reasons which I have articulated, there was, I think, no prediction at all within the camp. There certainly was a reference to, and a following use of a formula, the credibility of which was not impugned. There were also calculations based on two premised factual scenarios applying the formula. There was no prediction of huge profits for any discernible future time period.

94 Upon this basis, the learned Magistrate's conclusion that "... it seems to be inescapable that an average shareholder would probably purchase shares as a consequence of the information expressed in the camp ..." constitutes, I think, only bare speculation as to likely future human behaviour in relation to a purchase of shares caused by the impugned statement.

95 That leaves just the `opinion' evidence of Mr Newing and Mr Furlong which was admitted at trial without objection. I was told by both counsel that there was no objection to such opinion evidence, based upon a view being taken at trial that the admissibility of such evidence followed the decision of the Full Court of the Supreme Court of Victoria in R v Wright [1980] VicRp 56; [1980] VR 593. That was a case concerning a conviction in respect of an offence against s 110 of the Securities Industries Act 1975 - a statutory provision bearing close similarity to, and which appears to be the predecessor of s 999 Corporations Law.

96 In R v Wright, the charge concerned a dissemination of information said to be misleading in a material particular, and which was likely to have the effect of raising "the market price of securities". Hence, the charge in R v Wright is, I think, more akin to a charge that would now be formulated under s 999(b), rather than s 999(aa).

97 There is, I think, a key distinction to be drawn firstly between attempting to assess likely causative effects of a statement upon the "market price of securities", and secondly, assessing likely causative effects of a statement as to likely future behavioural conduct "of persons" in regard to the purchase of securities. Whilst the first issue relates to an assessment of the effect upon likely market price, the second, relates to an assessment of the effect upon likely future human behaviour.

98 In R v Wright, Young CJ in the Full Court of the Victorian Supreme Court rejected two grounds of appeal based upon challenges to the reception of such opinion evidence. The first challenge raised was that the subject matter of the opinion was inadmissible, as it was not outside the common knowledge of a jury. The second basis of challenge was that the opinion evidence infringed the so-called "ultimate issue test".

Macleod v Australian Securities Commission [1999] WASCA 35

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (242 paragraphs)

Macleod v Australian Securities Commission [1999] WASCA 35 (31 May 1999)

Parties

Cases Cited (33)