R v Fodera

R v Fodera - [2007] NSWSC 1194 - NSWSC 2007 case summary — Zoe

[10]

The particulars of the offence are that the offender failed to inform the directors of HIH and the auditor of HIH of the true terms and effect of all of the understandings and contractual arrangements proposed to be entered and entered into between HIH and its subsidiary and related companies on the one part and Hannover Ruckversicherungs-Aktiengesellschaft, Hannover Reinsurance (Ireland) Ltd and E+S Reinsurance (Ireland) Ltd (the Hannover Re companies) on the other. 2 The offence to which the offender pleaded guilty is provided by s 232(2) and s 1317FA of the Corporations Law as carried over into the Corporations Act 2001 by s 1400 and s 1401 of that Act. The maximum penalty for the offence is imprisonment for a term of five years. 3 The facts upon which the offender is to be sentenced are contained in an agreed statement. 4 At the time of the offence the offender was the Chief Financial Officer of HIH and its second most senior executive. He was a member of the Board of Directors of HIH and of a number of its subsidiaries including HIH Underwriting and Agencies Services Limited (UAS). 5 In the period July to August 1999 with the assistance of other officers of HIH, who were acting subject to his supervision and direction, the offender negotiated a complex reinsurance transaction with the Hannover Re companies. As the result of these negotiations two reinsurance slips were entered into between HIH and Hannover Re and its subsidiary and related companies, which were referred to as Hannover 1 and Hannover 2. 6 The offence relates to Hannover 1 and to its accounting treatment for the period ending 30 June 1999. Hannover 1 related to two classes of business; Section 1 the "lost portfolio transfer" and section 2 the "Accident Year Cover". Under section 1 cover was provided to HIH of $400 million, to increase to $450 million on 1 January 2000, for claims paid in excess of $2,869 million in respect of business written prior to 31 December 1998 and arising from insured events occurring before that date, and which were unpaid as at that date, net of collectable reinsurance. 7 Under the Hannover 1 slip payment of claims was to be staggered. Paid losses would be deemed not to have reached the retention point of $2,869 million until at least 30 September 2009, at which time the amount of paid pre-31 December 1998 losses would be deemed not to exceed $3,150 million, giving potential recoveries of $281 million. The balance of potential recoveries $169 million could not be payable before 30 September 2010. 8 The structure of the Hannover 1 arrangement provided for HIH to put $200 million into a managed fund which would be invested so that by 30 September 2009 it would be available to commence paying claims above HIH's retention (or excess) of $2,869 million. 9 Section 2 of Hannover 1 made provision for Hannover to require HIH to take up cover at any time for any of the accident years from 1999 to 2000 and 2001 to 2002 and was the subject of the understanding reached between Hannover Re and the offender on behalf of HIH that is set out in paragraph 25 of the agreed facts (the understanding).

[11]

10 The Hannover 2 reinsurance slip made provision for a further $100 million protection beyond the cover provided by Hannover 1. 11 The Hannover 1 and Hannover 2 agreements when read in isolation from any other agreements suggested that the risk that the managed funds would not grow sufficiently to meet the claims that might be paid out by HIH to its policyholders and then claimed from Hannover was a risk borne by the Hannover companies. 12 Between 20 and 25 August 1999, in exchange for the delivery of Hannover 1 and Hannover 2, Hannover Re was provided with an envelope which contained four undated agreements (the LOC agreements). Each of the four agreements was signed by the offender and Raymond Williams, the Chief Executive of HIH, on behalf of UAS. The LOC agreements comprised: (i) An agreement entitled "LOC agreement" between Hannover Reinsurance (Ireland) Ltd and E+S Reinsurance (Ireland) Ltd and UAS (the LOC agreement); (ii) The "LOC Authority Agreement" between Hannover Re and UAS (the LOC Authority agreement); (iii) An agreement entitled "Agreement re trust arrangement" between Hannover Reinsurance (Ireland) Ltd and E+S Reinsurance (Ireland) Ltd and UAS; and (iv) An agreement entitled "Agreement re trust arrangement" between Hannover Re and UAS. 13 The LOC agreement recited that the managed fund(s) required to be established under Hannover 1 and Hannover 2 were expected to increase in value by an annual compound rate of 8.5 per cent. UAS agreed that if by 31 August 2006, 2007 and 2008 the aggregate level of the combined managed funds had not reached the specified levels then UAS would provide an unconditional letter of credit from a bank in favour of the Irish Hannover subsidiaries sufficient to bring the managed funds up to the required level. 14 Under the LOC authority agreement, Hannover Re (the counter party to Hannover 2) agreed that the issue of a letter of credit in favour of the Irish subsidiaries (the counter parties to Hannover 1) would be taken to have been issued in favour of Hannover Re itself, and any drawdown under the letter of credit would be treated as if the drawdown had been made in favour of Hannover Re, it would satisfy obligations under Hannover 2 as well as Hannover 1. 15 The two agreements re trust arrangements provided for the establishment of a jointly owned trustee to act as joint trustee of the managed fund(s). The agreements recorded that the reinsured (one or more insurance underwriters being wholly owned subsidiaries of UAS) were entitled to the net income and capital gains of the trust fund. UAS was to ensure that the reinsured (licensed insurers within HIH) contributed capital amounts equal to the trust income to which they were entitled so that monies would remain in the trust fund as capital until the trust terminated. 16 The LOC agreements altered the effect of Hannover 1 and Hannover 2 concerning the management of the managed fund(s) and who assumed the risk of the Fund(s) not growing sufficiently to meet the claims that the reinsured might make on them in the concluding years of the contracts. Hannover 1 and Hannover 2 suggested that Hannover Re would bear that risk, whereas the LOC agreement provided that in substance the risk would be borne by UAS. Under the totality of these arrangements Hannover Re and its related companies assumed either minimal risk, or substantially less risk than was suggested by the Hannover 1 and Hannover 2 reinsurance slips. 17 The accounting treatment for the recoveries and premium to be booked under the Hannover 1 contract was set out and explained in a position paper. The proposed accounting treatment in the position paper provided for Hannover 1 to be accounted for as a reinsurance contract involving a transfer of risk from HIH to the Hannover companies in the accounts of HIH for the period ended 30 June 1999. 18 The overall profit and loss impact of the accounting treatment of Hannover 1 as reinsurance for the period ended 30 June 1999 was the booking of an additional $92.8 million to HIH's operating profit before abnormal items and income tax. HIH's operating profit for the period before abnormal items and income tax was booked as $102 million. HIH's operating loss after abnormal items, income tax and outside equity interests was recorded as $21.2 million. 19 In the period leading up to the adoption of the accounts, the offender attended a number of meetings with other directors of HIH and with the auditors of HIH, including: (a) The meeting of the HIH Reinsurance Committee on 24 August 1999; (b) the meeting of the HIH Board on 25 August 1999; (c) the meeting of the HIH Audit Committee on 25 August 1999; and (d) the meeting of the HIH Audit Committee on 9 September 1999. 20 During these meetings the other directors and/or the auditors were presented either by the offender or in his presence with various documents which referred to or described the effect of the Hannover 1 and/or Hannover 2 contracts. None of these documents advised of the existence and terms of the LOC agreements and the understanding.

[19]

30 Mr Tobin QC, who with Mr Castaldi appeared on the offender's behalf, submitted that the evidence did not rise above the offender's admission of recklessness which is encompassed by his plea. There was said to be sufficient countervailing evidence to preclude a finding of deliberate dishonesty made on the criminal standard. The matters on which Mr Tobin relied are detailed in written submissions (subparagraphs 5.1 - 5.12). 31 The first matter to which Mr Tobin referred is that it is not asserted that the offender was the architect of the Hannover transactions. That is so. It remains that the negotiations which led to the Hannover transactions were conducted primarily by the offender. He had earlier been engaged in discussions with representatives of the Gerling Global Insurance Company of Australia Pty Ltd and of Gerling Global Financial Products Inc in relation to HIH obtaining whole of account reinsurance protection. On 7 July he commenced negotiating with representatives of Hannover Re and later that month he travelled to Germany to meet with them. On 28 and 29 July while he was in Germany, Hannover agreed to the proposal involving the top up of a managed fund by HIH. Thereafter a component of the negotiations concerned a proposal for the "top up" of the managed funds to be maintained by HIH under the reinsurance contracts. The offender was involved in the preparation of these agreements. 32 Mr Tobin pointed to the evidence that the negotiations with Hannover Re involved a range of HIH personnel including Mr Gosling, Mr Lo, Mr Ballhausen, Mr Abela, Mr Simpson and Mr Martin. Mr Gosling was also involved in the negotiations with Hannover. The offender supervised other staff in connection with the transaction: he had Mr Gosling look after the reinsurance contracts, Mr Lo look after the LOC agreements, Mr Ballhausen look after the investment aspect, Mr Abela look after the tax aspect and Mr Simpson and Mr Martin look after the accounting aspect. The fact that staff working at the offender's direction were assigned to handle discrete features of the finalisation, research and documentation of the transactions does not to my mind detract from the inference of knowing failure to disclose the true effect of the transactions to the Board and to the auditor of HIH. 33 In Mr Tobin's submission the fact that it was Mr Lo, the company secretary, who advised that it would be administratively expedient for UAS to be the counter party to the LOC agreements weakens the inference that the Crown seeks to draw from the fact that a full Board meeting was not convened to execute the LOC agreements. I do not accept that is so. On 19 August the offender received a facsimile from Hannover Re which made clear that Hannover Re required the LOC Agreement to be signed by Mr Williams and the offender as a condition of signing/handing out the reinsurance slips. The following day the offender was advised of the need to have the LOC agreements referred to a Board meeting of UAS. He did not convene a meeting of the Board nor did he speak to Mr Cassidy or Mr Sturesteps, who were the other two directors. The offender spoke to Mr Williams and he and Mr Williams resolved to execute the LOC agreements. 34 A further circumstance that was relied upon as tending against any finding of deliberate dishonesty is that the LOC agreements and the understanding were disclosed to Mr Williams, the Chief Executive Officer of HIH. In the absence of any assertion that the offender and Mr Williams were parties to a common design to mislead the Board of HIH and the auditor, the inference of deliberate dishonesty on the offender's behalf was submitted to be improbable since his superior had been made aware of the full facts and was present at the meetings on 25 August and 9 September. Mr Tobin referred to evidence of the relationship between the offender and Mr Williams. I will return to this. For present purposes I note that Mr Duffy commented on the offender's high regard for Mr Williams and described their relationship as being one in which Mr Williams adopted a paternal attitude to the offender. In Mr Duffy's opinion, the offender was overly loyal to Mr Williams. I accept that there was a close relationship of the type described by Mr Duffy. To my mind this does not serve to weaken what I consider to be the powerful inference of deliberate conduct in withholding the material from the Board and the auditor of HIH. I accept that the offender's high regard and feelings of personal loyalty to Mr Williams may have influenced him to act in the way that he did. 35 Mr Tobin relied on the absence of an applicable Australian Accounting Standard with respect to the treatment of the risk transfer in reinsurance contracts. The Crown case is not that the HIH accounts for the period ended 30 June 1999 were false but that the LOC agreements and the understanding were material to any assessment of the proper accounting treatment of recoveries and premiums under Hannover 1 and Hannover 2 for the accounting period. The offender knew that the proposed accounting treatment which included booking the profit of $92.8 million was likely to be the subject of further consideration by the Board and close scrutiny by the auditor if either the Board or the auditor were aware of the existence and effect of the LOC agreements and the understanding.

[22]

41 The offender is presently serving a sentence of imprisonment imposed by Latham J on 7 June 2007, following his conviction at trial for an offence contrary to s 996(1)(b)(ii) of the Corporations Law of authorising the issue of a prospectus from which there was a material omission (the Soc Gen prospectus offence). Her Honour summarised the factual basis of the offence as follows (at [3]): In brief terms, the prisoner, who was the Chief Financial Officer and a Director of HIH Insurance Ltd (HIH), authorised a prospectus by a subsidiary of HIH, HIH Holdings (NZ) Ltd, that sought to raise $155m by the issue of converting notes. The strategy behind the converting note issue was to raise sufficient funds to allow for the takeover of FAI by HIH. The prospectus disclosed that an underwriter of the converting note issue, Societe Generale Australia Limited (SG), had taken a priority allocation of $35m of the converting notes, thereby leading potential investors to believe that SG had sufficient confidence in the strength of the securities to invest on the same terms as any other investor in the financial marketplace. The prospectus did not disclose that SG and HIH had entered into a financial arrangement, whereby HIH placed $35m on deposit with SG at a net cost to HIH of 0.35 % per annum, known as the "Total Return Swap" (TRS) and Collateral Deposit. This transaction was a material omission (as the jury's verdict clearly established), in that the decision of the reasonable investor to invest in the securities was likely to have been affected or influenced by the knowledge that SG was not bearing any risk in relation to its apparent investment in $35m of the converting notes. 42 The offender was sentenced to imprisonment for three years to date from 10 May 2007 and to expire on 9 May 2010. Her Honour ordered the offender's release on 9 May 2009 upon him giving security in the sum of $10,000, without surety, by way of recognisance that he would be of good behaviour during the balance of his term. 43 I turn now to the evidence led on the offender's behalf. 44 A pre-sentence report dated 4 May 2007 was prepared by Mr Pearse, District Manager of the Dee Why Probation and Parole Service. A copy of that report was tendered at the sentence hearing before me. 45 The offender is aged 48 years. He is the elder of two brothers. His parents separated when he was aged seven years and he was raised by his mother. He had a close and supportive relationship with his younger brother. By his late teens he had re-established contact with his father and maintained contact with him. He continued to be close to his mother until her death. In the absence of his father the offender developed a keen sense of responsibility at an early age. He made many friends during his formative years and earned respect for his application to study and his involvement in rugby league. 46 The offender is a committed Christian who has been active in church activities since his late teens. He met his wife through his church activities. They married when they were young and have four children who are aged between 12 and 18 years. Before the collapse of HIH the offender is described as having a lifestyle based upon quality family relationships, quality eduction, participation in church activities and a very comfortable material standard of living. 47 The publicity associated with the collapse of HIH and the various legal proceedings that followed along with the criminal charges preferred against the offender have all served to impose considerable strain on the family. 48 The offender supported himself through university by working part-time. After completing his degree he obtained employment as an accountant and progressed to becoming a partner of the firm. During this time he supported his mother as well as his wife and children. He has always sought to confine his work to weekdays and to devote the weekends to his family life. 49 Captain Carter, the Anglican Chaplain attached to the Silverwater Correctional Centre, provided a report setting out his contact with the offender over the past four months. The offender attends chapel regularly and has completed a demanding course in Christian development called KAIROS. Captain Carter states that he has spoken openly and honestly about the effect of the offender's actions on others. He says that the offender indicated to him on several occasions during their discussions his distress at his powerlessness in addressing the damage to others resulting from his conduct, especially in relation to the Hannover charge. Captain Carter expressed his belief that the offender has shown remorse for his part in the affair. 50 The Reverend Simon Manchester, Rector of St Thomas' Anglican Church, North Sydney has known the offender and his family since the late 1990's, when they started attending services at St Thomas' church. The family were regular in their attendance and were also involved in a bible study group. Reverend Manchester describes them as a loving, quiet, united family. He said this of the character of the offender (T 14.14-19): I believe him to be, as best a pastor can work out, I believe him to be a sincere, genuine Christian capable of the exceptional failing, but not that that would be a typical behaviour. He's been a humble member of the congregation and relates well to the rest of the congregation. 51 Reverend Manchester considered that the offender had expressed contrition with respect to "these matters" (T 14.55). The discussions in which the offender expressed his contrition occurred at a time when he was proposing to defend the prospectus count and the present matter. Reverend Manchester explained that the discussions had related to the effects of the collapse of HIH on a range of people, including the offender's family. 52 Pastor Martin Duffy, also gave oral evidence on the offender's behalf. He had previously been pastor of the Mosman Baptist Church. In the years 1996 to 2000 the offender and his family attended Pastor Duffy's church. The offender was active in the activities of the church and hosted bible study at his home on Tuesday evenings. Pastor Duffy referred to the offender's generosity in supporting various ministries of the church. He formed a view of the offender as a person of real integrity, reliability and honesty. 53 Pastor Duffy had worked in the finance industry in the 1980s before he undertook his religious training. For a short time in the mid-1980s he had worked in the same building which housed HIH. He observed a certain extravagance and bravado about the corporate culture of HIH. He had subsequently had occasion to see the relationship between Mr Williams and the offender, which appeared to be more like father and son that CEO and Finance Director. In his opinion the offender's conduct was explicable in part as the result of his loyalty to Mr Williams in a context which included the somewhat reckless culture that prevailed at HIH.

[27]

61 The Crown submitted that its case was a strong one in that (i) there was never a real issue that the LOC agreements were material to an understanding of the Hannover transaction; (ii) it was clear that the offender was involved in the negotiations with Hannover; and (iii) there was no issue that the LOC agreements had not been disclosed to the Board or the auditor. In the Crown's submission the offender's plea involved a realistic recognition of the cogency of the case against him and did not evidence significant contrition. 62 The offender did not give evidence. 63 The evidence of Reverend Manchester, Pastor Duffy and Captain Carter does not persuade me of the offender's contrition for his offence as distinct from his sincere regret over the collapse of HIH and the associated loss occasioned to many members of the community. I do not find that the plea evidences contrition to a significant degree. It remains that it is a factor to be taken into account and that it demonstrates his acceptance of responsibility and his willingness to facilitate the course of justice. 64 Ms Jacobs, the offender's solicitor, set out a chronology of events leading to the entry of the plea in her affidavit that was sworn on 22 October 2007. She says she had not appreciated that a plea on a single count under s 232(2) and s 1317FA would be accepted by the Crown (with the averment of knowing or reckless conduct offered in the alternative) prior to discussions which took place in August 2007. The offender's decision to enter a plea was communicated in early September. His trial was fixed for 8 October. The plea was signified at a relatively late stage. In coming to this conclusion I take into account the correspondence between Ms Jacobs and the Crown (annexures "C" and "D" to the affidavit). It remains that it has resulted in significant saving in court time. I propose to discount the sentence by 15 per cent to reflect the plea. 65 The Crown noted that the Soc Gen prospectus offence occurred before this offence and submitted that he is not to be sentenced as a person of unblemished character. I am mindful that the prospectus offence, while a discrete offence, occurred in the context of the management of HIH and the offender's close relationship with and loyalty to Mr Williams. Prior to the commission of the prospectus offence, the offender was a person of conspicuous good character. In addition to being a responsible, loving father and husband and having led a productive working life, he has been active in church activities and generous in making charitable donations. The offender's otherwise good character is a factor that I take into account. However for reasons to which I will come it is not a consideration that is to be given significant weight.

[29]

68 The Crown and Mr Tobin made submissions concerning the sentence imposed by Wood CJ at CL in R v Williams [2005] NSWSC 315; 152 A Crim R 548. Mr Williams pleaded guilty to three offences: (i) the Soc Gen prospectus count, which was preferred under s 996(1) of the Corporations Act for which he was sentenced to two years' imprisonment; (ii) the Hannover transaction count which was preferred under s 1308(2) of the Corporations Act for which he was sentenced to a sentence of fifteen months' imprisonment accumulated on the sentence imposed on count one; and (iii) the misleading statement in a letter to Noteholder count which was preferred under s 184(1) of the Corporations Act for which he was sentenced to imprisonment for fifteen months accumulated on the sentence imposed on count two. The overall term of the sentences was one of four years' and six months' imprisonment with a non-parole period of two years and nine months. 69 The charge preferred against Mr Williams arising out of the Hannover transaction under s 1308(2), is one that carried a maximum penalty of imprisonment for two years. The offence to which Mr Williams pleaded guilty involved the reckless making or authorising of false or misleading statements in a document (the director's declaration for the HIH Annual Report), which included the $92 million profit attributable to the Hannover transaction. Mr Williams was sentenced on the basis that the effect of the LOC agreements was that the Hannover 1 transaction could not be treated as reinsurance and that HIH's operating profit was overstated by $92.4 million rendering the Annual Report false. The offence for which I am sentencing the offender is one with a substantially higher maximum penalty, albeit the factual basis of the allegation made by the Crown is, in the respect that I have identified, of a less serious character in the present case. Against this latter consideration is the finding that the offender's conduct involved deliberate dishonesty. It is also to be noted that the sentences imposed on Mr Williams reflected his early plea of guilty and assistance to the authorities. Considerations of parity were not submitted to arise given that the offences to which each offender pleaded guilty are distinct. 70 The events which are the subject of the Soc Gen prospectus count occurred in the latter part of 1998. There are no common elements between that offence and the present offence. I have determined that an appropriate sentence for this offence, after allowance for the discount to which I have referred, is three years and four months' imprisonment. In order to reflect considerations of totality I propose to direct that this sentence be partly concurrent with that imposed by Latham J. 71 Section 19AE of the Crimes Act provides: 19AE Persons already subject to recognizance release order (1) Where: (a) A person is subject to a recognizance release order (in this section called the existing recognizance release order ) made in respect of a federal sentence or federal sentences; and (b) before the person is released under the order, the court imposes a further federal sentence on the person; This section applies. (2) Where this section applies, the court must, after considering the relevant circumstances, including: (a) The existing recognizance release order; and (b) the nature and circumstances of the offence or offences concerned; and (c) the antecedents of the person; do one of the following things: (d) make an order confirming the existing recognizance order; (e) make a new recognizance release order in respect of all federal offences the person is to serve or complete; (f) where, as a result of the further federal sentence being imposed, the person is to serve or to complete a federal life sentence or federal sentences the unserved portions of which, in the aggregate, exceed three years and the court decides that it is appropriate to fix a non-parole period - fix a single non-parole period in respect of all federal sentences the person is to serve or complete; (g) where the court decides that, in the circumstances, neither a recognizance release order nor a non-parole period is appropriate - cancel the existing recognizance release order and decline to make a new recognizance order. (3) Where, under paragraph (2)(e), the court makes a new recognizance release order, that order: (a) Is to be treated as having superseded the existing recognizance release order; and (b) must not be such as to allow the person to be released earlier than would have been the case if the further sentence had not been imposed. (4) Where, under paragraph (2)(f), the court fixes a single non-parole period, it: (a) Is to be treated as having superseded the existing recognizance release order; and (b) must not be such as to allow the person to be released on parole earlier than he or she would have been released if the further sentence had not been imposed. (5) Where, under paragraph (2)(g), the court declines to make a new recognizance release order, the court must: (a) State its reasons for deciding that neither a recognizance release order nor a non-parole period is appropriate; and (c) cause the reasons to be entered in the records of the court. 72 I propose to direct that the sentence for the present offence commence on 9 November 2008. The sentence will expire on 8 March 2012. It is a sentence to which the provisions of s 19AE(2)(f) applies. I propose to fix a single non-parole period in respect of both the sentences which the offender is to serve or complete. The non-parole period will supersede the existing recognizance order. The aggregate sentence to which the offender will be subject is one of four years' and ten' months imprisonment. I propose to fix a single non-parole period of three years.

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