R v Brown [2002] VSCA 99

Court of Appeal (Vic)|2002-06-28|Before: BATT and EAMES, JJ.A. and O'BRYAN, A.J.A.

CRIMINAL LAW - Sentencing - Counts of failing to file a supplementary or replacement prospectus, and improper use of position (two counts) - Whether sentence on count 3 manifestly excessive when compared to sentence on count 2 - Whether head sentence and "minimum term" manifestly excessive - Role of general deterrence in "white collar" crime - Corporations Law ss.232(6), 1024(2), 1311(1)(b) and 1317 FA.

For the reasons given by O'Bryan, A.J.A. I agree that the appeal should be dismissed.

The appellant, who is now aged 36, pleaded guilty in the County Court to three counts in an Indictment: count 1, of committing an offence against s.1311(1)(b) of the Corporations Law in that contrary to the provisions of s.1024(2) he and others failed to lodge a supplementary or replacement prospectus relating to securities in a corporation after the corporation became aware during the application period in relation to the prospectus of a significant change, namely, the reduction of capital and the fall in the Net Asset Value of Lateral Trading Limited below 70% and counts 2 and 3, of committing offences against s.1317FA of the Corporations Law that being an officer of Lateral Trading Limited he, along with others, knowingly contravened the provisions of s.232(6) of the Corporations Law in that he dishonestly and intending to gain an advantage for another, namely Lateral Managed Futures Pty. Ltd. (and another company in the Lateral Group of Companies), made improper use of his position as an officer of Lateral Trading Limited by causing cheques totalling $990,000 to be paid to KBF Debentures Pty. Ltd. (count 2) and by causing a cheque for the amount of $300,000 to be paid to KBF Debentures Pty. Ltd. and two cheques totalling $175,000 to be paid to Lateral Debentures Pty. Ltd. (count 3).

The maximum penalty prescribed for count 1 was five years' imprisonment or 200 penalty units or both. The maximum penalty prescribed for counts 2 and 3 was five years' imprisonment or 2000 penalty units or both. Each penalty unit was $100.

Following a plea, the sentencing judge imposed a sentence of imprisonment of nine months on count 1. On count 2 a sentence of imprisonment of 12 months was imposed to be served concurrently with the sentence on count 1. On count 3, a sentence of imprisonment of 18 months was imposed. A cumulation order was made whereby the sentence on count 3 was to commence immediately following the day upon which the sentences on counts 1 and 2 expired. The total effective sentence was two years and six months. A minimum term of one year and six months was required to be served at which time the appellant was to be released on a recognisance of $2000 for the balance of the sentence, twelve months.[1]

The appellant was presented in the County Court together with co-offenders, McDonnell and Westcott. The co-offenders also pleaded guilty to counts 1, 2 and 3 and other counts in the Indictment.

Leave to appeal was given by a judge of Appeal on 19 October 2001. The Notice of Appeal for Leave to Appeal Against Sentence specified three grounds:

"1. The total effective sentence imposed on the appellant is excessive when it is compared to the total sentences imposed on each of the co-accused. As such, the learned Sentencing Judge failed to have sufficient regard to the principles of parity when sentencing the appellant. 2. The learned Sentencing Judge by imposing the sentences, failed to have sufficient regard to the effect on the appellant's family. 3. The sentences are manifestly excessive, with particular regard to: (a) the circumstances of the offending; (b) the appellant's role in each of the offences; and (c) the appellant's personal circumstances."

The Court was provided a massive amount of material describing the offending by the appellant and his co-accused. Members of the Court perused the material, but it is unnecessary to set out in great detail a description of the acts which resulted in the charges being laid by the Crown. It is enough, I consider, for the purposes of the appeal, to proceed to the sentencing remarks and to recapitulate the facts briefly from a Summary of Facts provided to the judge and the sentencing remarks.

The appellant, McDonnell and Westcott became directors of Lateral Trading Limited (LTL) when it was incorporated on 23 August 1995 and became an unlisted public company whose principal activity was to trade in futures contracts and options over futures using a "trading system" devised by the appellant.

Two other companies, Lateral Management Pty. Ltd. (LM) and Lateral Debentures Pty. Ltd. (LD) and their subsidiaries together with LTL formed the Lateral Group. LTL had two classes of shareholders, those holding ordinary shares and those holding redeemable preference shares. There were 100 ordinary shares issued in LTL of which 25 each were held by the appellant, McDonnell and Westcott. The other 25 ordinary shares were held by Frank Millington who was a director of one at least of LM and LD.

The securities offered as investments in LTL pursuant to the prospectuses issued by LTL were redeemable preference shares in LTL.

About two years after LTL commenced business it had incurred losses on futures trading and other investments of between $12 and $13 million and the Lateral Group companies had effectively ceased trading.

The companies regulator, the Australian Securities Commission (ASC), now the Australian Investment and Securities Commission (ASIC), became involved and applied to have LTL, LM and LD wound up by court order. Such an order was made on 2 December 1997. On that date LTL had cash at bank, $2,529,756 and its only other asset was a taxation refund of nearly $600,000.

The seven counts in the Indictment/Presentment resulted from findings made by ASC or the Official Liquidator.

Count 1 Failing to lodge a supplementary prospectus between 15 June and 11 July 1997

In October 1995, LTL issued a prospectus for the issue of redeemable preference shares in LTL at a subscription price of $10 each representing 20¢ par value and a premium of $9.80. The prospectus advised prospective investors LTL would invest the funds raised in the futures industry. Approximately $8 million was raised by the closing date, October 1996.

In October 1996, LTL issued a second prospectus (Prospectus 2) for the issue of further redeemable preference shares with a maximum subscription of $20 million. The closing date was October 1997. Approximately $14.6 million was raised pursuant to the second prospectus.

Prospectus 2 informed prospective investors that the funds raised would be invested in accordance with the Trading System which had been licensed by LTL from the Trading System Licensor (Lateral Management Pty. Ltd.). The Trading System was described as a Systematic protocol for trading Futures Contracts which did not rely on intuition, environmental factors or market expertise in predicting the direction of Futures Contract price. "The Trading System is a `systems' model. It makes mechanical trading decisions based on a fixed set of rules. It avoids the implementation of emotional factors."[2]

As an inducement to investors Prospectus 2 stated:

"A hedging mechanism is now in place to ensure that 70% of the capital of the company is protected at all times. This is achieved by the use of options over Futures Contracts using put options to protect long positions and call options to protect short positions."

A document called "Operation Overview" accompanied Prospectus 2. It reaffirmed that 70% of the funds invested in LTL were safe: "for additional security 70 per cent of the fund is fully hedged". Under a heading "Notes", the document stated: "As 70 per cent of investors' funds are hedged (insured) at all times, the maximum risk therefore is 30 per cent or $3 per $10 share."

The sentencing judge correctly observed in his sentencing remarks: "it (is) perfectly plain in my view that the '70 per cent/30 per cent assurance was the honey trap by which funds were attracted'."

Under a heading: Investment of the Funds Raised, Prospectus 2 stated:

"All subscription funds received will be deposited at the Company's Bank. The Company will then use the funds raised to trade Futures Contracts in accordance with the Trading System described on page 5 and this will be its prime business although a fluctuating proportion of the Fund will be held on deposit with the Bank or in fixed interest securities from time to time and earn interest as Futures Contracts are bought and sold. The Directors will be responsible for all investment decisions and implementation of the Trading Strategy and will implement investment decisions through the Principal Broker who initially will be Ord Minnett."

In addition to the representation in Prospectus 2, and Operation Overview, oral presentations made by the directors to investment advisers and prospective investors also stated that the most that could be lost was 30 per cent of their investment because 70% of shareholders' funds was protected by the 70/30 promise in Prospectus 2. Many investors were induced to invest by the representations.

LTL used the expression Net Asset Value to describe the net equity of LTL as a dollar amount when referring to the company, a dollar amount per share when referring to a LTL share and a percentage when referring to the company or a LTL share.

The "Trading System" proved to be flawed and for reasons which need not be gone into the representation that 70% of shareholders funds would be hedged or insured capital was not honoured. The Net Asset Value fell steadily, to 52.67% on 27 June 1997, because LTL was carrying large unrealised losses in its Share Price Index Futures Contracts. The directors were warned by the company's auditors and lawyers in June that the loss must be disclosed to prospective investors and further subscriptions could not be accepted while the Net Asset Value was below 70%. The warnings were ignored by the directors, disclosure was not made, a supplementary or replacement prospectus was not issued and further subscriptions were accepted by LTL.

Between 1 June 1997 and 11 July 1997, LTL accepted further investments totalling $1.18 million, at a time when the directors, including the appellant, knew or ought to have been aware that the Net Asset Value was substantially below the promised 70% figure. Had disclosure been made in a supplementary prospectus in May 1997 investors could have applied for redemption of their investment or sold their investment or sought to wind up the company. Many prospective investors would probably have shied away from LTL.

Section 1024 of Corporations Law, in 1997 required a corporation that becomes aware, during the application period of a prospectus, of a significant change affecting a matter included in the prospectus, as soon as practicable after becoming so aware, to lodge a supplementary prospectus or a replacement prospectus that contains particulars of the change.

As earlier indicated, count 2 charged that on 21 July 1997 the appellant, McDonnell and Westcott committed an offence against s.1317FA of the Corporations Law in that being officers of LTL they dishonestly and intentionally and intending to gain an advantage for Lateral Managed Futures Pty. Ltd. (LMF) and Lateral Staff Nominees Pty. Ltd. (LSN) made improper use of their position as officers of LTL to pay five cheques totalling $990,000 to KBF Debentures Pty. Ltd., an associated company of LTL within the Lateral Group considered loosely.[3]

LMF and LSN were fully owned subsidiaries of LM and formed part of the Lateral Group. As at 20 July 1997, the Bendigo Bank Ltd. (BBL) accounts of LMF and LSN were in overdraft in the amounts of $320,136.86 and $632,760.63 respectively. On 21 July BBL required the accounts to be brought back in order that day. A meeting was held between the accountants of LTL and its three directors to discuss a transaction to clear the overdrafts of LMF and LSN. The appellant was in attendance for part of the meeting. The transaction embarked upon involved a transfer of $990,000 of LTL funds by five cheques to a BBL account in the name of KBF Debentures Pty. Ltd. (KBFD), for which LTL was issued with a unit certificate representing the $990,000 investment in KBFD. Four of the cheques were signed by the appellant as a co-signatory. The directors of LTL, other than the appellant, each held a 50% shareholding in KBFD. On the same day $975,000 was transferred from KBFD to LM and LM transferred on, $340,000 to LMF, and $635,000 to LSN, which paid off the respective overdrafts.

The withdrawal of the funds from LTL for investment in KBFD was not an investment in fixed interest securities authorised in Prospectus 2 - to the knowledge of its directors, including the appellant.

Before the transaction was embarked upon the officers of the company were given professional advice that the measure proposed of transferring moneys from LTL to KBFD by way of investment and then transferring on to satisfy the overdrafts of LMF and LSN was not authorised by Prospectus 2. The professional advisers were informed that the funds being transferred were not coming from LTL but from investors who had redeemed their investment in LTL. That was untrue. Accordingly, the facts revealed that the appellant and his co-directors had acted improperly and dishonestly and gained an advantage for LMF and LSN using shareholders funds in LTL.

Count 3 Improper use of position between 23 September and 23 October 1997

As earlier indicated, count 3 charged that between 23 September 1997 and 23 October 1997 the appellant, McDonnell and Westcott, being officers of LTL, knowingly contravened s.232(6) of the Corporations Law in that they dishonestly and intending to gain an advantage for another, namely Lateral Debentures Pty. Ltd. (previously named KBF Debentures Pty. Ltd.) made improper use of their positions as officers of LTL in that they caused LTL to pay a cheque for the amount of $300,000 to KBFD on 23 September 1997 and to pay two cheques totalling $175,000 to LD on 22 and 23 October 1997.

The offending in relation to count 3 occurred on 23 September, 22 October and 23 October 1997 when the appellant and his co-directors transferred $300,000, $100,000 and $75,000 from LTL to KBFD on the respective dates. In consideration of the payment LTL received unit certificates for 300,000 units, 100,000 units and 75,000 units as investments in KBFD or Lateral Debentures Pty. Ltd. after KBFD changed its name to Lateral Debentures Pty. Ltd. on 19 September 1997. The amounts transferred were lent on by KBFD/Lateral Debentures Pty. Ltd. to Sand 30 Pty. Ltd., a fully owned subsidiary of LM. As at 30 June 1997, LM had recorded a loss of $303,605 after trading in futures using funds borrowed from associated companies. Each unit certificate issued by KBFD, or Lateral Debentures Pty. Ltd., was signed by McDonnell as director and the appellant as the secretary of the company's unit trust.

As was the position with count 2, the appellant and his co-directors had acted improperly and dishonestly in using LTL's shareholders funds to purchase units as an investment in KBFD which was not authorised by Prospectus 2 and was contrary to the earlier advice they had been given by accountants and lawyers to that effect. The appellant well knew that LTL was not authorised to invest in securities in companies associated with LTL.

In the course of the plea for the appellant counsel asked the sentencing judge to wholly suspend any sentence of imprisonment. Counsel for the Crown submitted that the appellant ought to serve an immediate custodial sentence. A number of matters in mitigation of the sentence were relied upon. They may be listed as follows:

1. An early plea of guilty which was significant because it signified genuine remorse and obviated a lengthy and expensive trial.

2. The appellant was a first offender when he was charged and had not subsequently been charged with any criminal offence.

3. Character evidence adduced showed that the appellant had always been a hard worker, had not led a "flashy" lifestyle and enjoyed a good reputation in the community.

4. There was significant delay between the offending, in 1997, and the date when he was charged, in February 2000, and during that period the appellant had not re-offended, was engaged in full-time employment, married and had a child.

Before the sentencing judge it was submitted that regard must be had to the appellant's loss of reputation as a businessman, the shame suffered, his loss of a career path and his inability to find work outside his current employment with his father.

Finally, his Honour was reminded to have regard to s.16G of the Crimes Act 1914.

The judge said he was much impressed by the evidence and testimonials of those who had known the appellant since the collapse of the Lateral Group and accepted that he was genuinely remorseful. He found that the appellant was unlikely to re-offend. His Honour did not consider that delay was undue or inordinate having regard to the complexity and breadth of the investigation that followed the collapse of the Lateral Group. I would agree with his Honour's finding in that regard and his conclusion that delay did not loom large as a significant matter.

The judge said he was obliged to give effect to the principle of general deterrence in imposing sentences on counts 1, 2 and 3 for they involved "a degree of moral turpitude".

In so doing his Honour in essence gave effect to the observations of the Chief Justice in R. v. Jamieson[4], a case concerning so called "white-collar" crime. Young, C.J., whose reasons on an application for leave to appeal against sentence were agreed in by Fullagar and Hampel, JJ., said:

"... the principal sentencing factor is general deterrence. Offences of this kind which may be said to be concerned with the `business morality' of the community are hard to detect. When they do come before the Court they are often found to have been committed by persons who have been regarded as of good character and reputation. Often they are also well-to-do. In these circumstances the offence must almost inevitably attract a custodial sentence and I think that his Honour was entirely right to impose one. I think that in cases of this kind a gaol sentence is more likely to act as a deterrent to others than in many cases that come before the Courts."

The sentencing remarks were very detailed and most helpful to the members of this Court in understanding the complex facts related to the collapse of the Lateral Group of companies and the criminality of the appellant and his co-offenders.

Mr Holdenson argued ground 3 as the principal ground of appeal. He made no separate submissions in support of ground 2 and abandoned ground 1, which was concerned with parity.

In a strongly argued submission, Mr Holdenson contended that the individual sentences, the cumulation directed and the "minimum term" fixed were all manifestly excessive. The principal thrust of his argument was that, when regard is had, on the one hand, to the offending the subject of count 2 and, on the other hand, to the offending the subject of count 3, the sentence imposed upon count 3 is manifestly excessive.

It is necessary, therefore, to compare the offending involved in counts 2 and 3 for they both allege breaches of s.232(6) of the Corporations Law and each attracts the same maximum penalty. The sentence imposed on count 3, 18 months, was 50% higher than the sentence imposed on count 2 and, Mr Holdenson contended, no justification for the significant difference in penalty is apparent, either from a perusal of the facts or in the sentencing remarks. Mr Holdenson contended that the circumstances attending the commission of the two offences do not disclose differing degrees of criminality. He further contended that it is a basic principle of sentencing law that a sentence be proportional and appropriate to the gravity of the crime constituted by its objective circumstances and where the objective circumstances are seen to be the same the sentence on each count should be the same or, at least, that on one count not be as much as 50% greater, as occurred here.

There can be no doubt that a court must take into account and weigh appropriately the circumstances attending each of the different instances of the same crime.[5] But where the differences in the circumstances attending the crimes do disclose differing degrees of criminality it will be appropriate to impose different sentences.

Mr Wiltshire submitted that the judge formed the view, correctly, that count 3 encompassed more reprehensible conduct than that covered by count 2. He relied upon a short passage in his Honour's sentencing remarks:

"The circumstances giving rise to counts two and three, particularly the latter, demonstrate the length to which you were prepared to flaunt the law and the professional advice you had been given in that regard in pursuit of that infallible system."

As I earlier observed, the sentencing judge was at pains to analyse all the circumstances of the offending and, being an experienced judge, would have known the principle of sentencing mentioned above. Nevertheless, it is desirable to examine the facts in this Court to determine whether the two offences disclose the same or differing degrees of criminality.

The first circumstance is that the offending the subject of count 2 occurred on one day, whereas the offending the subject of count 3 occurred on three days between 23 September and 23 October 1997. A second circumstance is that the offending in relation to count 2 was a sudden and unpremeditated transaction, precipitated when BBL required substantial overdraft facilities to be brought into order on the day the offending occurred. In a flurry of activity, five cheques to the value of $990,000 were drawn and used to eliminate the overdrafts. Although count 2 was said to be a "rolled-up" count, because five cheques were involved, there was but one criminal transaction constituted by the transfer of funds to satisfy the overdrafts. The gravity of the offending was that the appellant and his co-directors assured the company's accountants that the funds proposed to be transferred were not coming from LTL but from investors who had redeemed their investment in LTL.

A third circumstance is that the offending in relation to count 3 took place shortly before the Lateral Group went into liquidation, when LTL was in a parlous state financially, and a degree of premeditation was involved.

The circumstances to which I have referred entitled his Honour to find that the conduct engaged in between 23 September and 23 October 1997 was more serious than the conduct engaged in on 21 July 1997 and justified a heavier sentence. Accordingly, the sentence imposed and the cumulation order using count 3 as the head sentence were within the judge's sentencing discretion. The sentence of 18 months was not manifestly excessive, in my view. Nor was the order that the sentence on count 3 was to commence upon the day immediately following the day upon which the sentences on counts 1 and 2 expired. By fixing a period of 18 months as the period to be served before release on a recognisance, the judge moderated the total sentence and effectively fixed a finite term of imprisonment of 18 months for three offences, by no means an excessive term for significant "white-collar" crimes. Nor was the totality principle contravened.

The subsidiary, but nonetheless important, argument relied upon by Mr Holdenson was that the judge failed to accord sufficient weight to a number of matters going in mitigation of the penalty. They were earlier listed in paragraph [34]:

1. The plea of guilty at an early stage was of much significance.

2. The good character of the appellant up to the date of offending and subsequently.

3. The substantial delay between the offending and sentencing during which time the appellant had reformed his life.

All of the above were the subject of an elaborate argument.

Mr Wiltshire, in response, acknowledged that the plea of guilty was a significant matter, but contended that the judge said he accepted the plea of guilty was given within a reasonable time and had taken it into account. The judge did not accept that delay attracted a significant sentencing discount, but considered that it was a matter pertinent to the exercise of sentencing discretion. The role of general deterrence in the sentence was regarded by the judge as a significant matter to which he had to give effect for he considered the offences involved a degree of moral turpitude.

Cases such as DPP v. Bulfin[6], R. v. Jamieson[7] and R. v. Moffatt[8] indicate that the element of general deterrence is particularly significant in sentencing for crimes such as the present and should impact both on the total effective sentence and the minimum term which must be served before release on a recognisance, as in the present case, or parole.

In the present case the sentencing judge prepared a carefully reasoned sentence in which he explained why he considered it was necessary to impose a custodial sentence. He was well aware of the impact such a sentence would have on the lives of the appellant, his wife and family. All factors going to mitigation were taken into account and appear to have been accorded adequate weight. When all was said and done the corporate criminality which resulted in some investors losing their investments required the Court to impose a sentence which would be likely to have a real deterrent impact on all would-be like offenders.

For these reasons I consider that the appeal should be dismissed by the Court.

[1] Section 16G Crimes Act 1914 (C'th) requires that where a federal sentence is to be served in a State prison where sentences are not subject to remission or reduction (as is the case in Victoria: see R. v. Kokkinos [1998] 4 V.R. 574), the Court must take into account in determining the length of the sentence that the sentences are not subject to remission or reduction and must "adjust the sentence accordingly". Section 16G relates only to the head sentence (see DPP v. El Karhani (1990) 21 N.S.W.L.R. 370).

[3] KBF Debentures Pty. Ltd. was used as a vehicle for raising investors' funds.

[4] [1988] VicRp 79; [1988] V.R. 879 at 888. See also DPP v. Bulfin [1998] 4 V.R. 114 at 131-132.

[8] Unreported, Court of Criminal Appeal, 15 December 1992.

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