1.1.1 Acting honestly
25Mr Morley submitted that the finding in the last sentence of PJ [191], that he "must have known that to make the statement he did conveyed the impression that PwC and Access Economics had given their imprimatur to the Cash Flow Model", should be set aside. He submitted that the finding of knowledge was tantamount to a finding of dishonesty, but that dishonesty on his part had not been pleaded and had been disavowed by ASIC; further, that he had given evidence and it had not been put to him in cross-examination that he knew that the impression of imprimatur would be conveyed. He submitted that it did not follow from saying that PwC and Access Economics had found the cash flow model to be logically sound and technically correct that he knew, when he so said, that it would give a false impression. Rather, he said, the evidence which he gave in the penalty hearing and which was not challenged was that he did not intend to mislead and did not realise he was misleading.
26Mr Morley submitted also that our reference at AJ [1120] to his presentation as capable of giving the impression that an unlimited review had been conducted, and at AJ [1118] to his words being "not clearly restrictive of the nature of the review", supported rejection of knowingly conveying an incorrect impression. This submission is misconceived. Capacity to give a false impression is entirely consistent with knowledge that the false impression will be given, and that Mr Morley's words were not clearly restrictive of the nature of the review is a statement of their capacity to give a false impression.
27As we will explain, we do not think that the last sentence of PJ [191] is a finding that Mr Morley knowingly made a false statement to the board. But so far as Mr Morley's complaint rested on failure to plead dishonesty, it also is misconceived. ASIC did not plead dishonesty on Mr Morley's part, and it was not necessary that it do so. The question of honesty was nonetheless raised by Mr Morley's reliance on ss 1317S and 1318 of the Act.
28It would have been open to ASIC to submit that a finding of dishonesty should be made, destructive of the claim to relief from liability, see Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 46 ACSR 504 at [748]. ASIC did not submit to the judge that he should find dishonesty on Mr Morley's part. It was necessary that the court reach a positive satisfaction that Mr Morley had acted honestly, and ASIC submitted to the judge that he should not reach that positive satisfaction; as recorded by the judge at PJ [188], it submitted that "while Mr Morley gave evidence, the court could not be positively persuaded that he acted honestly when contravening s 180(1) because he gave no evidence that he had acted honestly in do doing". As we have said, his Honour did not accept that evidence from Mr Morley that he had acted honestly was necessary. But he said at PJ [192] that he was not persuaded that he should make the positive finding of acting honestly.
29Particularly when it is understood in this context, we accept ASIC's submission that the last sentence of PJ [191] was not a finding that Mr Morley knowingly made a false statement to the board. "Given imprimatur to the Cash Flow Model" is not specific; it could be by verification of logical soundness and technical correctness, and plainly imprimatur to that extent was conveyed and must have been known by Mr Morley to have been conveyed to the board. There was no dishonesty in Mr Morley knowing that imprimatur to that extent was conveyed. The vice lay in his failure to say more, and to make known the limited nature of the reviews, and at PJ [191] the judge highlighted the key variable of the investment earning rates which was in fact outside the imprimatur. The judge declined to make the positive finding of honesty in the absence of explanation by Mr Morley of how he came not to make the limitations known, but we do not think he found dishonesty in failing to make known the limited nature of the reviews.
30Mr Morley then submitted that this Court should make the positive finding of acting honestly which the judge had declined to make. He referred to his evidence that he understood the phrase "logically sound and technically correct" to mean "that the spreadsheet was constituted properly, that the functions in the spreadsheet did what they said they could do, and that the addition, subtraction, and multiplication functions were correctly", and to the evidence he gave in an affidavit read in the penalty hearing, on which he was not cross-examined -
"25. I have given careful consideration to his Honour's findings. I confirm that it was never my intention to mislead the board in any way, nor to hide anything from it. At no time did I intend to create the impression in board members' minds that PwC and Access Economics had conducted an unlimited review of the cashflow model, or that they had verified the key assumptions adopted by the cashflow model as identified [by] his Honour (being fixed investment earnings rates, litigation and management costs and future claims costs).
26. Had I appreciated at the time that any of the directors may be acting under any sort of misapprehension that PwC and Access Economics had verified these assumptions or had conducted an unlimited review I would certainly not have wished for that misunderstanding to continue and would have taken steps to correct it.
27. Having carefully considered the judge's reasoning and taking into account his conclusions that what I said was capable of giving a misleading impression, I regret that I did not elaborate further on the PwC and Access Economics reviews. I have always prided myself on my openness and thoroughness in ensuring that all relevant information is made available to those who require it in a professional context, whether that is to board members, investors, regulators and so on. Accordingly, I deeply regret that I conducted myself in a way that has been judged by a Justice of the New South Wales Supreme Court as falling short of the standards of care and diligence expected of a reasonable CFO in like position."
31Mr Morley submitted that the explanation for the cash flow analysis contravention was simply negligence, without any dishonesty, and that it should be seen as an honest mistake.
32ASIC submitted that it remained that Mr Morley had not explained how he came not to mention the limitation in the PwC and Access Economics reviews, and that no error had been shown in the judge declining to make the necessary positive finding that Mr Morley had acted honestly in failing to advise the board of the limitation in the reviews. It submitted also that our acceptance at AJ [963], in connection with Mr Shafron's knowledge of the limitation in the reviews, that at the meeting with proposed directors of the Foundation on 13 February 2001 Mr Morley said to the effect that PwC was to confirm the model and Access Economics was to comment on the reasonableness of the assumptions, made it -
"... that much harder for [Mr Morley] to positively satisfy the onus he bears that he acted honestly when addressing the board on the same topic the next day [sic] without specifically advising them of the restrictions placed on the reviews by Access Economics and PwC."
33We go first to ASIC's reliance on AJ [963]. As explained elsewhere in the submissions, ASIC meant that it was harder for Mr Morley because he had made a misleading statement to the proposed directors of the Foundation.
34Mr Morley submitted that the finding at AJ [963] should not be used against him. He gave a number of reasons for this, including suggesting that other evidence cast doubt on the finding, to which reasons ASIC responded. This generated many pages in the submissions. We do not think it necessary to deal in detail with the reasons and the response.
35If Mr Morley made an honest mistake on 13 February 2001, that does not seem to us to make it materially harder for him to establish that he acted honestly on 15 February 2001. If he deliberately misled the proposed directors of the Foundation, as was the flavour of ASIC's submissions, it would less readily be found that he acted honestly two days later; but deliberately misleading the proposed directors would be dishonest, and to reason in that manner would be contrary to ASIC's disavowal of a case of dishonesty. ASIC pointed out that it was put to Mr Morley that on 13 February 2001 he was "happy to say something which wasn't true". That was followed, however, by putting to him that two days later he was "happy to say the very bare minimum about the PwC and Access Economics review [sic]", which on ASIC's stance was not an allegation of dishonesty. It would be unfair to Mr Morley to use the finding at AJ [963] in the manner for which ASIC contended.
36Mr Morley's evidence of what he understood by the phrase "logically sound and technically correct" does not explain why he confined himself to that phrase. He did not give an account of his thinking when he used it but did not go further to make known the limitation in the reviews, and in that sense did not explain how he came not to mention the limitation. But explanation of a negligent failure often can not be given beyond the fact of the failure, and that was the thrust of Mr Morley's evidence set out at [30] above. His para 26 amounted to saying that he did not appreciate that the directors may be acting under a misapprehension that PwC and Access Economics had verified the assumptions or conducted unlimited reviews. In our view, this was (if accepted) an explanation of how he came not to mention the limitation in the PwC and Access Economics reviews.
37The judge accepted Mr Morley's evidence in many respects, although not in relation to 13 February 2001. He did not comment on Mr Morley's paras 25 and 26, on which Mr Morley was not cross-examined, and plainly accepted para 27 as genuine contrition. We consider that paras 25 and 26 should be accepted. Mr Morley failed to exercise the degree of care and diligence required by s 180(1) of the Law but, in respectful disagreement with the judge, it appears to us that he acted honestly as that is found in ss 1317S and 1318.