R v HODGSON No. SCCRM-02-244 [2002] SASC 349

Supreme Court of SA|2002-10-24|Before: Doyle CJ, Williams JJ, Debelle J

Judgment No. [2002] SASC 349

On Appeal from DISTRICT COURT (HIS HONOUR JUDGE BRIGHT)

(Court of Criminal Appeal: Doyle CJ, Debelle and Williams JJ)

Court of Criminal Appeal: Doyle CJ, Debelle and Williams JJ

DOYLE CJ I would allow the appeal and set aside the sentence. I would fix a head sentence of six years which I would reduce to five years and six months because the appellant has undertaking to co-operate with law enforcement agencies in future proceedings. I would fix a non-parole period of three years which I would reduce to two years and nine months, because the appellant has undertaken to co-operate with law enforcement agencies in proceedings. I agree with the reasons given by Debelle J for making those orders, and in particular with his comment that the sentence in this particular case should be seen as particularly lenient.

From February 1999 to March 2001 the appellant was the Chief Financial Officer of the Harris Scarfe group of companies. He had joined the group in 1994 as General Manager Administration and had held that position until promoted to Chief Financial Officer in 1999. He was secretary of Harris Scarfe Holdings Ltd and Harris Scarfe Ltd as well as being a director of Harris Scarfe Ltd from November 1997 until March 2001. He was the individual primarily responsible for the accounts of the Harris Scarfe group.

The appellant has pleaded guilty to 32 counts of falsely representing the profits of the Harris Scarfe group in different kinds of reports. More particularly, he pleaded guilty to 18 counts of acting in breach of s 1317FA and s 232(2) of the Corporations Act in that, being an officer of Harris Scarfe Ltd and intending to deceive members of the board of Harris Scarfe Holdings Ltd, he did not act honestly in the exercise of his powers and in the discharge of his duties in that he falsely procured the making of false entries in the books of account of Harris Scarfe Ltd thereby falsely creating an increased level of profit in the consolidated accounts of Harris Scarfe Holdings Ltd. Each of the 18 counts contains particulars of the total amount of the false entries and the particulars cover the period from 28 March 1998 to March 2000. The maximum penalty for each offence was a fine of $200,000 or five years imprisonment or both.

The appellant also pleaded guilty to six counts of breaches of s 184(2) and s 1400 of the Corporations Act in that, being an employee of Harris Scarfe Ltd, he used his position dishonestly and recklessly as to whether he might cause detriment to the company by making false entries in the books of account of the company thereby falsely creating an increased level of gross profit in the consolidated accounts of Harris Scarfe Holdings Ltd. The six counts particularise various sums of money the subject of each count at different times in the period from March 2000 to February 2001. The maximum penalty for each offence is a fine of $20,000 or five years imprisonment or both.

The remaining counts to which the appellant pleaded guilty were breaches of s 999 and s 1400 of the Corporations Act in that he had disseminated information that to his knowledge was false and was likely to induce the purchase of securities. The eight counts concerned reports to the Australian Stock Exchange detailing the sales and profits of Harris Scarfe Holdings Ltd for financial half years ending 31 January 1997 through to 31 January 2001. The maximum penalty for each offence is a fine of $20,000 or five years imprisonment or both.

The sentencing judge imposed a separate sentence in respect of each of the three groups of offending. For the 18 counts of making false entries in breach of s 1317FA and s 232 of the Corporations Act, he sentenced the appellant to imprisonment for eight years reducing the sentence to six years "for the pleas and for the co-operation". I will return to examine what he meant by that expression. For the six counts of making false entries in breach of s 184(2) and s 1400 of the Corporations Act, he sentenced the appellant to four years imprisonment reducing it to three years. For the eight counts of providing false information to the Australian Stock Exchange, he sentenced the appellant to four years imprisonment reducing it to three years. He ordered that all sentences be served concurrently and commence on 26 June 2002, the day when he imposed the sentences. He fixed a non-parole period of three years.

The appellant appeals against the sentence on the ground that it is manifestly excessive and that the judge failed to comply with s 21E of the Crimes Act 1914 (Cth).

Before examining the issues raised in this appeal, it is necessary to note the nature of the offending, the circumstances in which it occurred and its consequences. Facts relating to these matters had been placed before the sentencing judge in agreed documents.

Harris Scarfe Holdings Ltd is the holding company for the Harris Scarfe group of companies. Harris Scarfe Ltd is the trading company in that group. It operates a large retail store in the city of Adelaide and has 35 retail outlets in South Australia and in all other States in Australia. Its turnover was $406 million for the year ended 31 July 2000 and $246.7 million for the seven months ended 28 February 2001. Although the directors of Harris Scarfe Ltd did not hold regular board meetings, the directors of Harris Scarfe Holdings Ltd met monthly.

On about 27 March 2001 the appellant ceased work at Harris Scarfe Ltd. On 30 March Harris Scarfe Holdings Ltd asked the Australian Stock Exchange to suspend trading in its securities. The suspension is still in force. On 3 April 2001 administrators were appointed to Harris Scarfe Holdings Ltd and nine related companies. On 6 April 2001 the ANZ Banking Group Ltd ("the ANZ Bank") appointed receivers and managers of Harris Scarfe Holdings Ltd, Harris Scarfe Ltd and related companies.

As General Manager Administration and Chief Financial Officer, the appellant was in charge of the finance and accounting staff. His duties required him to oversee the preparation of all of the financial and accounting records of the Harris Scarfe group including the consolidated accounts of the group. His duties included the oversight of the production of financial reports for monthly meetings for the board, annual financial reports as required by the Corporations Law and the Australian Stock Exchange including the annual report sent to shareholders, and the half-yearly financial reports as required by the Corporations Law and the Australian Stock Exchange. The appellant attended every board meeting of Harris Scarfe Holdings Ltd. The appellant's fraudulent conduct caused all of these reports to misrepresent the true position.

The appellant directed staff under his control to make the false entries in the accounts of Harris Scarfe Holdings Ltd which had the effect of increasing the profit in the consolidated accounts. These false entries were made at different times in the period from 31 January 1997 to March 2001 when the appellant ceased his employment. The offending began late in 1996 and the first false document appeared in January 1997. The adjustments were timed to affect profit figures in the monthly financial reports to the board and in the half-yearly and end of year reports to the board and to the Australian Stock Exchange. The false entries were made by two members of staff at the direction of the appellant.

It is unnecessary to note the manner in which the false entries were made. In the case of the false information in the financial reports to meetings of the board, the false entries totalled in excess of $15.75 million. The false entries in the half-yearly and end of year reports to the board and to the Australian Stock Exchange totalled almost $21 million. The fraudulent conduct affected creditors, financiers and shareholders. The overstatement of profit was funded by increased debt both to creditors and to the ANZ Bank.

On 24 April 1996 the ANZ Bank offered Harris Scarfe Holdings Ltd additional finance facilities totalling over $24 million on certain terms and conditions. Those were accepted by Harris Scarfe Holdings Ltd. It is unnecessary to set out the details of those terms and conditions which were concerned with the gearing of the loans and the capacity of Harris Scarfe Holdings Ltd to repay them. The facility was subject to annual review. The false entries enabled Harris Scarfe Holdings Ltd to borrow the sum of $24 million. At 28 February 2001, the secured debt owed to the ANZ Bank totalled some $67 million.

On 4 May 1998 Harris Scarfe Holdings Ltd made a renounceable rights issue to shareholders and raised $20.3 million. On 19 May 2000 Harris Scarfe Holdings Ltd made an offer of convertible notes to shareholders and raised approximately $15 million. The financial reports made available to shareholders on each occasion contained the false information prepared by the appellant or at his direction. Plainly, those issues could not have been made but for the false reporting. In addition, dividends were declared on the basis of the false information in 1997, 1998, 1999 and 2000. The most serious overstatements of profits occurred in 1998, 1999 and 2000 as the following table shows.

Declared Operating Profit After Tax in Annual Report

Amount of Operating Profit Attributable to False Entries

Minor decrease because false entries for first half year reversed in second half

Harris Scarfe Holdings Ltd had no capacity to declare dividends in 1999 and 2000 and little capacity to do so in 1998.

The offending represents a serious breach of the trust owed, not only to Harris Scarfe Ltd and to Harris Scarfe Holdings Ltd, but also to the shareholders and creditors of those companies. It also constitutes a serious breach of the responsibility owed to the Australian Stock Exchange and to the Australian Securities and Investments Commission. The offending extended over a long period of at least four years. It was repeated and deliberate. It misrepresented the financial position of the group as being very sound. It concealed the fact that Harris Scarfe Ltd was experiencing poor trading results. The fraud was on a very substantial scale as the above table indicates. It is the kind of conduct that undermines public confidence in published accounts. It is likely to have far reaching consequences for creditors and investors, large and small. At this stage, the full extent of those consequences cannot be ascertained.

Mr Boylan, who appeared for the appellant, submitted that the offending was not as serious as the crime of fraudulent conversion which involves stealing. The contention must be rejected. The comparison is, I think, futile. While the element of direct personal gain is absent, it nevertheless constitutes a fraud, in this case a fraud on a very grand scale and, in consequence, others suffer loss which, in the case of a public company, has the consequences already mentioned. What is common to this offending and the crime of fraudulent conversion, is that there is a fraud which causes loss to others.

The appellant asserted to the sentencing judge that he had been pressured by at least one director of Harris Scarfe Holdings Ltd to act as he did. He says that he was asked to achieve certain results and that he succumbed to that pressure. He says that at least one director knew the true financial position of the group. The assertion is vague and is not substantiated. It has not been tested. The sentencing judge was prepared to act on that assertion notwithstanding that it had not been tested. He acknowledged that it might be refuted later. While this may explain the appellant's conduct, it does not excuse it. In addition, it is reasonable to conclude that had he disclosed the true position his employment would not have been in jeopardy. His role was to account for profits not to create them by retail management.

The appellant was aware of the bad state of the group's financial position, yet was prepared to misrepresent it. He said that he had a genuine belief that the group would be able to trade its way out of its difficulties but little weight can be given to that. The vagaries of the retail market are well known. His belief is akin to that of a losing gambler who believes that his luck will turn. His contention that the sentencing judge did not give sufficient weight to that fact must fail. Furthermore, his contention is belied by the fact that, in order to create the impression of successful trading, the appellant had to create higher and higher false profits.

The appellant pleaded guilty to these crimes at the first opportunity in the Magistrates Court. He affirmed his plea of guilty at the District Court. He had in fact indicated his intention to plead guilty before any charges had been made. He has assisted the relevant law enforcement agencies in investigating the matter. He has undertaken to co-operate with evidence in future proceedings.

The appellant was aged 57 when sentenced. He had arrived in Australia from the United Kingdom when aged 14 years. He has obviously worked hard and has been successful. He had no formal education. He began working with Myer Ltd, as it was then known, in Adelaide as a clerk. He remained with that company for 28 years. When he left in 1986 he was Administration Manager for South Australia. He had in effect worked his way to the top from quite humble beginnings. After other employment, he began working with Harris Scarfe in 1996.

The substance of the appellant's contention is that the sentencing judge failed to give sufficient credit for the appellant's early pleas of guilty and for his co-operation with the prosecuting authorities. The appellant contends that the judge should have allowed a higher discount for his early pleas of guilty and for his co-operation to the date of sentencing. He further contends that, in addition, the judge should have acted in accordance with s 21E of the Crimes Act and have allowed a further identified reduction for his undertaking to co-operate in the future. It is common ground that the sentencing judge intended to reduce the sentence because of the appellant's undertaking to co-operate in future proceedings but failed to act in accordance with s 21E.

The sentencing judge had regard to the appellant's plea of guilty and to the co-operation he had already given and reduced the sentence by one-quarter. In doing so, he was acting as required by s 16A of the Crimes Act. Given the intention of the sentencing judge to reduce the sentence for the appellant's undertaking to co-operate in future proceedings, he failed to comply with s 21E in that he failed to specify the reduction for that future assistance. I deal first with the submission that the judge failed to make a sufficient reduction for the plea of guilty and the co-operation to the date of sentencing.

The sentence of eight years, which the judge fixed as his starting point, was, in all the circumstances, a merciful sentence. The gravity of the offending has already been mentioned. Given the long period over which the offending occurred, its magnitude, its direct and indirect consequences, and the number of persons affected, the sentence might well have been higher. Employees of companies holding office at this level of seniority, like directors, have a social and moral obligation, as well as a statutory obligation, to act honestly and responsibly. A great trust is imposed in them by directors, shareholders and creditors alike. Their actions have the capacity to affect many, especially shareholders and creditors. It has the capacity to affect staff who may lose employment because of the false accounting. Dishonesty of this kind has the capacity to undermine confidence in published accounts and in the integrity of commercial dealings. Sentences for this kind of offending must therefore, reflect a significant element of general deterrence. The appellant was liable to a sentence substantially in excess of eight years. The judge's starting point was merciful. It is so lenient that it indicates that he has had due regard to all of the factors personal to the appellant. There is much which justifies a longer sentence but this Court cannot increase the severity of the sentence: s 353(5) of the Criminal Law Consolidation Act 1935 (SA). For all these reasons, it is quite inappropriate to interfere with the starting point.

The reduction of that sentence by one-quarter for the appellant's plea of guilty and co-operation to produce a head sentence of six years was within the discretion of the judge and nothing was advanced which justifies the court interfering with it. It must be remembered that the case against the appellant was strong and that these were very grave crimes.

Mr Boylan referred to a number of cases where reductions ranging from 30 per cent to 50 per cent had been ordered. The cases to which he referred are readily distinguishable. Most were serious drug cases where the sentence was life imprisonment or where the nature of the assistance provided has different consequences and may be given at risk to life. Others are the result of the "fast track" procedure in Western Australia. Mr Boylan also referred to the decision in Boskovitz [1999] NSWCCA 437 where the Court of Criminal Appeal in New South Wales reduced a sentence for knowingly making false statements with the intent of gaining a financial advantage contrary to the Crimes Act in New South Wales from the maximum of five years to two years and three months with an additional term of one year and nine months. The sentence in that case followed a lengthy and complex trial where the defendant had put the prosecution to proof on those facts. The trial had been hard fought. The gravity of the offending, however, was at significantly lower level than that of the appellant. It occurred over a period of about three months as contrasted with a period of over four years. While it caused significant loss to one financial institution, it did not have the widespread consequences of this appellant's offending. Furthermore, Mrs Boskovitz was not employed at the same level of seniority as the appellant. I do not think the decision assists in determining the appropriate penalty in this case.

I turn to the reduction for future co-operation. Section 21E provides:

" 21E (1) Where a federal sentence, or a federal non-parole period, is reduced by the court imposing the sentence or fixing the non-parole period because the offender has undertaken to co-operate with law enforcement agencies in proceedings, including confiscation proceedings, relating to any offence, the court must:

(a) if the sentence imposed is reduced-specify that the sentence is being reduced for that reason and state the sentence that would have been imposed but for that reduction; and

(b) if the non-parole period is reduced-specify that the non-parole period is being reduced for that reason and state what the period would have been but for that reduction.

(a) a federal sentence is imposed or a federal non-parole period is fixed; and

(b) the sentence or non-parole period is reduced because the offender has undertaken to co-operate with law enforcement agencies as described in subsection (1); and

(c) after sentence, the offender, without reasonable excuse, does not co-operate in accordance with the undertaking;

the Director of Public Prosecutions may, at any time while the offender is under sentence, if the Director of Public Prosecutions is of the opinion that it is in the interests of the administration of justice to do so, appeal against the inadequacy of the sentence or of the non-parole period.

(3) Where an appeal is begun under this section against the inadequacy of a sentence, or of a non-parole period, that was reduced because of a person's undertaking to co-operate with law enforcement agencies, the court hearing the appeal:

(a) if it is satisfied that the person has failed entirely to co-operate in accordance with the undertaking-must substitute for the reduced sentence or reduced non-parole period the sentence, or non-parole period, that would have been imposed on, or fixed in respect of, the person but for that reduction; and

(b) if it is satisfied that the person has failed in part to co-operate in accordance with the undertaking-may substitute for the reduced sentence or reduced non-parole period such a sentence, or such a non-parole period, not exceeding in length the sentence that could be imposed, or the non-parole period that could be fixed, under paragraph (a), as it thinks appropriate."

The section proceeds on the footing that the court intends to reduce the sentence because the offender has expressed a willingness to co-operate with law enforcement agencies in future proceedings. It must be read with s 16A of the Crimes Act which requires the court to take into account a number of matters, including the fact that the offender has co-operated with law enforcement agencies and the fact that the offender has pleaded guilty. By reason of s 21E, it is open to the court to have regard also to the fact that the offender has undertaken to co-operate in the future with law enforcement agencies. It is plain that one of the purposes of s 21E is to provide some kind of sanction to ensure that such undertakings are honoured. If the sentence is to be reduced by reason of an undertaking to give assistance in the future, s 21E requires the judge to specify that the sentence is being reduced for that reason and to state the sentence that would have been imposed but for the reduction. The court must also indicate if the non-parole period is being reduced and, if so, state what the period would have been but for the reduction. If the promised co-operation is not forthcoming, the Director of Public Prosecutions may appeal and the court must then, depending on what is established, substitute the sentence which would have been ordered but for the reduction or substitute another sentence not exceeding the sentence that would have been imposed. The operation of s 21E, therefore, requires the court to specify both the reduction and the sentence which would have been imposed but for the reduction. It may do so both in respect of the head sentence and the non-parole period.

I respectfully agree with the Court of Criminal Appeal in Victoria in Tan (1995) 78 ACrimR 300 at 303 that, if a sentencing judge intends to reduce a sentence for future as well as past co-operation, the judge should first take past co-operation into account along with other mitigating factors in arriving at a head sentence and then, additionally and separately, allow for future co-operations provided by s 21E. See also R v Carey [1998] 4 VR 1316 and Gladkowski [2000] QCA 352; (2000) 115 ACrimR 446, 447 - 448.

As the sentencing judge failed to act in accordance with s 21E, it is necessary for this Court to determine an appropriate deduction for the appellant's undertaking to assist in future proceedings. There are obvious benefits to the administration of the criminal justice system in general and the prosecution of commercial frauds in particular, if offenders are willing to co-operate in future proceedings. Plainly, this is one of the reasons for the enactment of s 21E. Thus, the reduction cannot be a mere token but must reflect the likely utility of the assistance to be provided. However, given the merciful starting point for this sentence and the reduction of the sentence by one-quarter, there is a real risk that any further reduction will diminish the deterrent effect of the sentence. As this sentence is already very merciful, I do not think that it is appropriate to reduce the head sentence by any more than six months. I would therefore reduce the head sentence to five years and six months. This represents a total reduction of almost 30 per cent in his sentence for his plea of guilty and for his past and future co-operation. Had the starting point been higher, it might have been possible to make a higher reduction for the future co-operation. But this sentence is already very lenient and should not become so lenient as to lose its deterrent effect.

The next question is whether the non-parole period should also be reduced. As this Court must sentence afresh to give effect to s 21E, this Court is at liberty to fix a fresh non-parole period. The non-parole period was very merciful, being one-half of the head sentence. For the reasons expressed earlier, the sentence must be such as to constitute a general deterrent. At the same time, it is necessary to avoid the reduction being a mere token. It is not possible to increase the non-parole period but reduce it to three years for the undertaking to provide co-operation in the future because that has the capacity to increase the severity of the sentence and thus offend s 353(5) of the Criminal Law Consolidation Act. Although as a general rule any reduction for future co-operation should not be a mere token, it is not realistic in the particular circumstances of this case to do other than make a fairly nominal deduction of three months. However, it is appropriate to add that this represents a deduction of eight and a half per cent of the non-parole period.

For these reasons, I would allow the appeal and set aside the sentence. In lieu thereof, I take account of the matters allowed for by the sentencing judge and fix a head sentence of six years which I would reduce to five years and six months because the appellant has undertaken to co-operate in future proceedings. I would also fix a non-parole period of three years which I reduce to two years and nine months, again because of the appellant's undertaking to co-operate in future proceedings.

It is scarcely necessary to add that the sentence in this matter should not be seen as some kind of benchmark for this kind of offending. Reference has already been made to the need for general deterrence and to the leniency of this sentence. Those factors are sufficient to indicate the particular idiosyncrasies of this matter which would mean that it does not represent a guide in future cases of this kind.

WILLIAMS J I agree with the reasons given by Debelle J and with the orders which he proposes.

I disagree with the submission made by the respondent as to the effect of s 353(5) of the Criminal Law Consolidation Act. The Director relied upon that sub-section to argue that upon passing a shorter head sentence the Full Court has power to increase the non-parole period fixed by the sentencing judge. The sub-section must be read together with s 32 of the Criminal Law (Sentencing) Act which requires the Court to "fix or extend" non-parole periods in the circumstances therein set out. It is in this sense that s 353(5) authorises "an extension" of a non-parole period but the sub-section does not permit the Court upon an offender's appeal to increase the severity of the sentence. As the Director concedes that in the application of s 21E of the Crimes Act this Court must fix an appropriate deduction in respect of the appellant's future co-operation, it necessarily follows that a merciful sentence must now be still further reduced.

Corporations Act 1999(Cth)

Criminal Law Consolidation Act 1935(SA)

Corporations Act 1999(Cth)

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