Lo's knowledge of pledged assets, securities and the minimum solvency requirement
23. As Group Accountant and then Company Secretary, Lo had a responsibility to oversee the Group's compliance with its statutory obligations, including those imposed by the Insurance Act. Lo had been the primary liaison between HIH and both APRA and its forerunner, the Insurance and Superannuation Commission ("ISC"), over many years.
24. At the beginning of 1999 Lo assumed responsibility for signing the returns for all HIH licensed entities as required under the Insurance Act. Lo had by that time developed considerable experience in reviewing the licensed entities' ISC/APRA returns, having shared the responsibility for the pre-lodgement review process from the late 1980s through to the early 1990s. The requirements of section 30(1) of the Act did not change between that period and 1999.
25. Lo was familiar with and understood the provisions of the Act including the minimum solvency requirement, the need to lodge quarterly and annual returns and the need to disclose and exclude assets charged for the benefit of third parties. Major compliance issues which arose within the Group were routinely referred to Lo, who took those matters up with APRA on behalf of HIH. Lo had corresponded extensively with the ISC/APRA over a number of years in seeking permission under section 30 of the Act to treat various intercompany assets as the assets of a licensed insurer for the purposes of the minimum solvency calculation, and in seeking permission under section 30(2) of the Act to not treat subordinated loans from related companies within the Group as liabilities of a licensed insurer for the same purpose. In 1997 Lo was the author of a short paper entitled "General Insurance - Regulatory Environment" (S01119145) in which, inter alia, he stated "Of importance are the various statutory quarterly and audited annual financial returns and accounts which all authorised insurers must lodge with the Commissioner for his examination. An authorised insurer is required to maintain at all times specified solvency margins... Section 30 of the Act specifies what may or may not be treated as assets for the purpose of the authority to carry on insurance business."
26. Further, Lo was aware that a licensed insurer which failed to comply with the financial standards, including the minimum solvency requirement, could be required to cease writing insurance business.
27. By 1998 Lo was experienced in considering the effect of assets pledged, to support Letters of Credit on an authorised entity's solvency margin. Lo had been involved in negotiating a Letter of Credit arrangement with Westpac in 1996, and had sought legal advice from Mallesons at the time in relation to that Letter of Credit. On 6 November 1996 Lo had signed a power of attorney on behalf of C&G, in relation the execution of certain documents concerning the 1996 Letter of Credit.
28. Further, on 6 November 1996, Lo attended a board meeting of HIH C&G at which this Letter of Credit was discussed. The minutes, compiled by Lo as Company Secretary, record amongst other things that the Board noted that "the above facility will be secured by pledges or mortgages given by the Company to Westpac from time to time over, inter alia, certain Australian Government and semi Government bonds though Austraclear and RITS clearing systems". These terms of the 1996 Letter of Credit, relating to the pledging or mortgaging of assets to Westpac in the Austraclear or RITS systems, were in fact incorporated into the terms of the Cotesworth Letter of Credit issued by Westpac in November 1998.
29. The assets of CIC pledged to secure the Letters of Credit were charged via the system provided by Austraclear Limited ("Austraclear"). Austraclear, a wholly owned subsidiary of the Sydney Futures Exchange, provides a service to members by which debt securities may be sold and on sold within the financial market. Austraclear holds those debt securities for its members, registers, encumbers and transfers those securities within the system, and provides a settlement procedure for transactions involving the transfer of those securities. This procedure is one with which Lo had some familiarity. Lo was not involved on a day to day basis with the operation of the Austraclear system. When a security is encumbered within the Austraclear system, Austraclear transfers the entitlement to the security to the encumbrancee, while maintaining the registration of the security in the name of the encumbrancer. While the encumbrance is registered, Austraclear recognises the encumbrancee as being solely entitled to transfer the security or uplift it out of the Austraclear system: that is, the encumbrancer loses for the life of the encumbrance its unilateral right to deal with the security. This procedure is inconsistent with the concept of such securities being subject to a negative pledge.
30. Lo was familiar with financial arrangements involving negative pledges and understood the characteristics of a negative pledge. He was involved in a number of financial transactions during the 1990s in which negative pledges were variously given over the assets of subsidiary companies or required by subsidiary companies over the assets of third party borrowers to secure loans provided by the subsidiaries.
31. From time to time the ISC and APRA issued circulars and guidelines to general insurers to provide guidance on their various obligations under the Insurance Act, including their obligations in relation to the minimum solvency requirements and the application of section 30 of the Act to the assets of licensed insurers. These circulars and guidelines were generally sent by the ISC/APRA to HIH. On occasion Lo circulated and discussed the contents of these circulars with other senior HIH officers. One such circular dated November 1995 located in a file in Lo's office, confirmed that placing assets with custodians such as Austraclear and the Reserve Bank Information Transfer System ("RITS") would result in licensed insurers being required to exclude those assets from their minimum solvency calculations, unless those assets remained under the direct control of the insurer and could be dealt with by the insurer without recourse to third parties.[2]
32. Lo was one, of a number, of CIC's authorised signatories to Austraclear. He was also one, of a number, of the Group's authorised signatories to RITS, which allows members to, inter alia, mortgage the assets deposited by corporate entities within the system.
Cotesworth Letters of Credit - negotiations and documentation
33. HIH commenced negotiations in early November 1998 with Westpac and SG to secure Letters of Credit to support the underwriting obligations of Cotesworth in the UK. As early as 4 November 1998, HIH had advised SG that it required an £88 million standby Letter of Credit.
34. Lo and William Howard ("Howard"), HIH's General Manager Finance, had responsibility, subject to direction and authorisation of Mr Fodera, for negotiating on behalf of HIH the financial arrangements concerned with the issue of the Letters of Credit. Lo had discussions during this period with Fodera, Cassidy and Howard concerning the financial arrangements involved with the Letters of Credit and their possible implications for the solvency requirements of the authorised insurers.
Westpac
35. In early November 1998, various HIH personnel, including Lo, commenced negotiations with Westpac and Societe Generale to secure Letters of Credit to support the underwriting obligations of Cotesworth in the UK. Lo and Howard were primarily responsible for negotiating with Westpac.
36. On 4 November 1998, Howard approached Stuart Johnson ("Johnson") of Minter Ellison to obtain legal advice about pledged assets and the ISC/APRA solvency rules. (S01006824) Johnson advised Howard, orally, later that day that depending on the actual documentation, a 'charge' may include a deposit of securities or pledge, and that assets subject to a charge are excluded from an entity's assets for the purposes of solvency calculations. Johnson further advised Howard that, in practice, APRA should be consulted prior to the pledging of any assets to avoid any arguments at a later time (SBA325076).
37. On 13 November 1998, Lo had a telephone conversation with Craig Parker of Westpac concerning the prospective Letter of Credit. Following that conversation, Lo wrote a memo to Fodera in which he advised Fodera that he had discussed with Parker the possibility of the secured bonds/notes being registered in HIH's name in the CHESS system, with Westpac as a sponsor. CHESS is a clearing house system for securities, run by the ASX. Registration of securities in the CHESS system would allow the original owner of the securities (for example, CIC) to retain its control of those securities and would thus allow those securities to be admissible for the original owner's ISC/APRA solvency calculation purposes. Lo advised Fodera in this memo that, by adopting this course, HIH could "alleviate the potential problem with the Insurance Commissioner". Lo further advised that he did not propose at that time to meet with or divulge any information on the Letters of Credit to the Insurance Commissioner. (SBB158311)
38. On 16 November 1998, Lo and Howard attended a meeting with Parker and Michael Gearin ("Gearin") of Westpac. Gearin's handwritten notes record that the issue of assets lodged with Lloyd's having to be deducted for APRA purposes was discussed in the course of that meeting. (S01168040)
39. The next day Lo wrote to Parker and advised him that SG had not yet been able to get approval from its French Head Office on the unsecured portion of the Letter of Credit, but that " naturally the secured portion was not a problem ". Lo accordingly instructed Westpac to commence putting in place its Letter of Credit on the basis of £30 million secured and £30 million unsecured, and agreed that, in the event that SG approval was not forthcoming, the secured portion could be increased to £45 million. (SO1006844)
40. Westpac advised HIH by a letter addressed to Lo of 23 November 1998 that it had approved the provision of a £60,000,000 Letter of Credit on behalf of the Cotesworth Group Limited. The letter to Lo specified that: "Facility is to be secured by a pledge over at least GBP35m in cash and/or qualified securities to be held in RITS or Austraclear.... as discussed the bank requires that the unsecured amount of this facility is not to be more than GBP15m as soon as possible. This may be achieved by increasing the secured portion of this facility...." As well as requiring that the facility be secured by a pledge over at least £35,000,000 in cash or qualified securities to be held in Austraclear or RITS, Westpac required indemnification.
41. On or around 5 November 1998, in a then unrelated transaction, Lo and Cassidy had signed a Guarantee and Indemnity to Westpac on behalf of HIH Underwriting and Agency Services Limited and HIH Insurances Limited, guaranteeing the obligations of HIH America Insurance Services Inc, HIH Underwriting and Agency Services Limited, and HIH Insurance Limited. That Guarantee and Indemnity concerned a USD14,000,000 Floating Rate Term Loan provided by Westpac to HIH America Insurance Services Ltd (RC0016945 to RC0016958) Under the terms of the Cotesworth Letter of Credit arrangement, C&G was required to complete a third party indemnity specific to the Cotesworth transaction. Rather than creating new guarantees for the Cotesworth transaction, HIH Underwriting and Agency Services Limited and HIH agreed in writing to amend the earlier agreement so as to include a guarantee of C&G's liability under the Cotesworth indemnity.
42. Lo, Fodera and Cassidy attended a meeting of the board of directors of HIH Underwriting and Agency Services Limited on 24 November 1998 regarding the proposed Cotesworth transaction (Fodera attending by telephone). The minutes, prepared by Lo as Company Secretary, record that the board resolved to authorise Cassidy and Lo to sign Westpac's offer letter of 23 November 1998 and to execute all relevant ancillary indemnity and guarantee agreements to give effect to the acceptance of the Cotesworth Letter of Credit and to enable the issue of that Letter of Credit.
43. Lo, Fodera and Cassidy further attended a meeting of the board of directors of C&G on 24 November 1998 regarding the proposed Cotesworth transaction (Fodera attending by telephone). The minutes record that the board resolved to authorise Cassidy and Lo to sign Westpac's offer letter of 23 November 1998 and to execute all relevant ancillary indemnity and guarantee agreements to give effect to the acceptance of the Cotesworth Letter of Credit and to enable the issue of that Letter of Credit.
44. On or around 25 November 1998 Lo and Cassidy duly signed the relevant documentation, accepting Westpac's Letter of Credit offer and amending the 5 November 1998 guarantee and indemnity. The Westpac offer accepted by Lo and Cassidy reflected the fact that Westpac charged HIH higher fees for the unsecured portion of the facility than for the secured portion: the fee for the unsecured portion was in fact double the fee for the secured. The terms of this agreement were obviously inconsistent with the characterisation of the securities as being subject to a mere negative pledge.
SG
45. On 6 November 1998, John Harvey of Societe Generale Australia Ltd ("SG") wrote to Howard enclosing an indicative term sheet for a Letter of Credit for £88 million to be partly secured (£40 million), and partly unsecured (£10 million). SG advised that, if required, it would look to underwrite the full unsecured amount with a view to syndicating £38 million. As an alternative, SG advised that it would split the deal with Westpac. (SBB000016)
46. On 23 November 1998 SG wrote to Lo and offered HIH finance which was described as a performance guarantee facility for £30 million, comprising £15 million to be secured and £15 million unsecured.
47. The terms of the offer required HIH to provide acceptable security, defined as including Australian government or state government securities, or cash deposited with SG. In the event that HIH provided Australian government securities as acceptable security, SG required HIH to execute mortgage documentation in favour of SG. HIH was also required to execute a letter of deposit and set off, and pledge documentation in form and substance satisfactory to SG relating to SG's possession and control of the acceptable security. The offer could only be accepted by HIH delivering to SG a cheque representing the establishment fee, and documentation satisfying the conditions precedent. The provision of cash security was not an option for HIH.
48. On 20 November 1998, Lo sought legal advice from Johnson of Minter Ellison as to the difference between a pledge with a power of sale, and an equitable mortgage. (501006817, SBA331392). Later that day, Johnson consulted Paul All ("Ali"), a Minter Ellison solicitor with expertise in the area, who advised that there was no difference between the two, as a pledge effectively created an equitable charge. (S01006815) Johnson's handwritten notes record a telephone call out to Lo later that day in which Lo was told in words to the effect, "In the case of Australian Government Bonds and Austraclear and Chess securities, there is no real difference between granting an equitable charge and a mortgage and the pledging of assets with a power of sale. Granting a pledge with a power of sale is effectively creating a charge. There is no real distinction between the two unless it is over land. This is not the case as Austraclear involves the pledging of bonds." Lo was also told, "You are effectively creating a charge or mortgage. There is no real difference between the two types of security."
49. After being given this advice Lo then stated in words to the effect, "The bank wants an equitable mortgage and 1 understand that there is no real difference between the 2 types of security." Lo did not pass the advice from Minter Ellison on to Cassidy or to Howard, neither of whom was aware that he had sought such legal advice.
50. On 23 November 1998 Lo forwarded the SG performance guarantee documents to Ali, and asked him to "carry out a quick review and let me know if there are any exposure areas that I should be aware of. Ali prepared a draft reply that included a paragraph relating to the exclusion of assets charged for the benefit of another person from an entity's solvency calculation pursuant to s 30(1)(c) of the Act, stating that "the Acceptable Securities will not be taken into account for valuation of HIH's assets" (S01050030). There is no evidence that Lo saw this draft reply.
51. Between 11am and 11.30am on 25 November Ali discussed the contents of the draft reply with Lo by telephone. He then forwarded an amended version of the advice to Lo by facsimile at 11.30am (S01500029). A number of matters contained in the original draft were deleted from the version forwarded to Lo. Ali's usual practice was to make such alterations only on instructions from the client. One of the paragraphs deleted from the final version is the paragraph which relates to the Insurance Act and contains the passage extracted above:
52. On 25 November 1998, Lo wrote to SG regarding the SG letter of offer of 23 November 1998 for a Standby Letter of Credit for £30 million. (S01042601 to S0104605) Lo attached various documents including:
- duly signed Deposit and Set-Off
- duly signed Issue Notice
- cheque for the Establishment Fee
- company records as required by SG; and
- drafting amendments suggested by Minter Ellison (Annexure A).
53. Lo and Cassidy signed the letter of deposit and set off on 25 November 1998. (S01042603). Pursuant to that agreement, Lo and Cassidy agreed to establish an account and to deposit the initial deposit of £16 million by 27 November 1998. They further authorised SG to appropriate the whole or part of the deposit balance towards satisfaction of the liabilities. Liabilities were defined to include any liability or obligation owed to SG by HIH under the performance guarantee facility provided to the Company pursuant to the letter of offer of 23 November 1998. This documentation thus stated that SG was at liberty, in the event of a default, to apply the charged funds to discharge Cotesworth's liabilities. Again the SG documentation recorded that the fees to be charged for the unsecured aspect would be greater than for the secured aspect. The terms of this document are obviously inconsistent with the characterisation of those funds as being subject to a mere negative pledge.
54. Cassidy signed the issue notice on 25 November 1998, thereby giving SG notice that HIH required a Letter of Credit to be issued on behalf of Cotesworth Capital Limited on 27 November 1998 to the value of £30 million. (SO1042605)
55. The pledge documentation was subsequently signed on 5 January 1999 by Fodera and witnessed by Lo. Fodera signed pursuant to powers of attorney executed by the directors of HIH C&G and CIC. (S01042420)
Pledging of securities in November 1998
Westpac
56. On 24 November 1998, Parker advised Lo that HIH needed to pledge to Westpac approximately $62 million of additional security to cover the Cotesworth Letters of Credit. The $62 million was in addition to $31.6 million excess security currently held by Westpac. The $31.6 million excess security was part of Cotesworth Letters of Credit cover. (SBB158277).
57. On 26 November 1998 HIH advised Westpac of the securities C&G and CIC had currently pledged to Westpac for existing Letters of Credit, and the securities it would pledge to Westpac for the Lloyd's Letter of Credit. The amount of securities to be pledged to Westpac totalled $53 million. (S01006868)
58. On 26 November 1998, CIC pledged $48 million of securities, encumbered in Austraclear, to Westpac for the Cotesworth Letter of Credit. (S01143008)
59. On 26 November 1998, C&G pledged $5 million of securities, encumbered in Austraclear, to Westpac. (S01143008)
60. On 27 November 1998, Westpac issued a standby Letter of Credit to Lloyd's on behalf of Cotesworth to the value of £54,157,500. (SBB000046)
SG
61. On 27 November 1998, CIC pledged a total of $36 million of fixed interest securities, encumbered in Austraclear, to SG. (S01143008).
62. As at 27 November 1998, CIC had pledged a total of $84 million of fixed interest securities, encumbered in Austraclear, to support the Cotesworth Letters of Credit.
63. Between December 1998 and June 1999, requirements by Westpac for the amount pledged to be increased caused this figure to rise to $129 million.
HIH Board Meeting 2 December 1998
64. On 2 December 1998, Lo attended a Board meeting of HIH. The package of papers presented to each of the directors for this meeting contained a paper prepared by Lo entitled "Letters of Credit - Cotesworth Capital Limited". (SBB025157) Lo's paper noted that Letters of Credit were issued by Westpac and SG on 27 November 1998 for and on behalf of Cotesworth, and that HIH needed to provide a performance guarantee in the event that the Letters of Credit were drawn down and Cotesworth was unable to indemnify the banks. Lo's paper set out the amount of securities secured to support the Letters of Credit from Westpac and SG. Lo's paper also noted "security on the secured commitment was provided through the pledge by HIH of a portfolio of government and semi-government securities acceptable to the issuing banks".
65. The minutes of the 2 December 1998 Board meeting record that Fodera advised that Letters of Credit in favour of Lloyd's totalling £84.16 million had been issued by Westpac and SG for and on behalf of the company and that the Letters of Credit were required as a security deposit to support Cotesworth Capital Limited's underwriting operation in line with its business plan. The Board resolved to ratify the action of management in securing the Letters of Credit. (SBB054802)
Subsequent Dealings with Financial Institutions regarding the Letters of Credit
66. On 1 May 1999, Parker wrote to Lo requiring further security be pledged to Westpac. (SBB158286). The requirement for further security was a condition precedent of Westpac's Letter of Credit offer of 23 November 1998. In this letter Parker reminded Lo that HIH was required to reduce the unsecured amount to £15m as soon as possible and therefore Westpac required additional security immediately. On 18 May 1999, additional security was pledged to Westpac. (S01426792)
67. On 3 June 1999, Lo sent an email to Bill Howard advising that HIH's major concern was to reduce the portion of "SECURED LOC". (SBA174555) Lo further advised in that email that: "we'll be happy to talk to any body who can offer LOC on an unsecured basis as my impression is that SG and Westpac would be reluctant to reduce their security further as they are heavily exposed to us in other areas."
68. On 12 July 1999 Lo wrote to Hong Kong Shanghai Bank Limited in the context of HIH seeking to replace the existing Letters of Credit issued by Westpac and SG (RC0167689). In that letter Lo noted that HIH were looking to minimise the secured amounts of the Letters of Credit because "... they are solvency unfriendly in the context of an insurance company's regulatory environment."
69. In September to December 1999 Lo was involved negotiations and signed documentation on behalf of CIC and FAIG relating to amendments to the Westpac Letter of Credit.
70. On 16 November 1999 Lo and Fodera met John Harvey and Peter Edwards of SG and were advised, amongst other things, that SG wished to move to a fully secured position in respect of the Letters of Credit. Edwards file note of the meeting records that the following comment was made during that meeting by either Fodera or Lo: "Security granted by H/H comes out of assets for solvency"
71. On 22 November 1999 Lo sent an email to Ballhausen advising of SG's requirements: "The unsecured portion of the SG LOC (for the purpose of Cotesworth and currently standing at stg15M) will need to be secured as SG is of the view that it is overexposed to H1H...this news is hardly surprising as SG met with Dominic and / last weekend told us as much." Lo noted in that email that "generally security would have to be in the form on cash or tiered one government securities, and of a larger amount (say plus 5%) to provide a safety margin." Lo further advised that HIH was about to commence negotiations with HSBC to secure another Letter of Credit for Cotesworth and expected that half the amount would require security. (SBA174496).
72. On 26 November Lo wrote to SG seeking a refund in fees paid for the unsecured portion of the facility as SG now required a fully secured arrangement.
Conversations with other HIH officers
73. Lo and other HIH officers had, at different times, adverted to the possible exclusion of the assets of the authorised insurers that secured the Cotesworth Letters of Credit.
74. From at least 1996 onwards Lo regularly met with Fodera, Howard and other HIH officers to discuss ISC/APRA and Standard and Poors solvency issues on an ongoing basis. During these meetings, the group discussed ISC/APRA solvency calculations for each licensed entity on an individual basis.
75. Lo also attended solvency meetings with the same participants which were convened on an ad hoc basis to discuss the solvency implications of proposed acquisitions. One of these meetings was held to address concerns about the solvency implications of the proposed Cotesworth acquisition.
76. Lo was involved in an ongoing review with Fodera and Howard of the issue relating to alternative assets which might be used to support the Cotesworth Letters of Credit, because of the possible solvency impact of providing bonds or fixed interest assets.
77. Howard had also informed Fodera of the content of Minter Ellison's advice of 4 November 1998. Fodera stated that he held a different view: namely that the pledges were in fact contingent liabilities in that the assets supporting the Letters of Credit would only be called on if losses occurred, and so HIH would have the opportunity of funding the loss in alternate ways. Fodera stated that as the pledges were only contingent liabilities, they did not affect solvency, and that he had directed Lo to look further into the matter.
78. Howard discussed Fodera's view with Lo in early November 1998. Lo stated to Howard that he supported Fodera's view that the pledges were contingent liabilities.
79. In November 1998 Cassidy had conversations with Fodera and Lo and was told in each case that "the Letter of Credit is a form of negative pledge". Cassidy was surprised by the explanation, and asked Lo again in 1999, either when signing CIC's APRA Quarterly Return for the three month period ending 30 June 1999 (signed on 19 August 1999) or when signing CIC's APRA Annual Return for the period ending 30 June 1999 (signed on 22 November 1999), about the nature of the encumbrance. Cassidy expressed surprise to Lo that the encumbrance could be described as a negative pledge, but chose to make no further enquiries before co-signing those returns with Lo. Lo failed to inform Cassidy of the content of the verbal advice he had received from Minter Ellison on 25 November 1998.
80. Paul Abela ("Abela") HIH's Group Tax Counsel was involved in the review of the 31 March 2000 APRA returns. During this review, Abela spoke to Lo who told him that the security interests held by banks that had issued the Cotesworth Letters of Credit were in the style of negative pledges. Abela understood from this that the assets did not need to be disclosed in the APRA returns.
81. The view that the pledging of assets in support of the Letters of Credit created an interest in the nature of a negative pledge was inconsistent with Lo's own knowledge as to the security required by financial institutions for Letters of Credit and with Lo's understanding of the nature of a negative pledge; it was also inconsistent with the documentation Lo had signed on behalf of HIH on 25 November 1998. It was inconsistent with the advice Lo had received from Minter Ellison. It was also inconsistent with Lo's subsequent dealings with Westpac and SG regarding variations to the security arrangements relating to the Letters of Credit, including SG's requirement in November 1999 to move to a fully secured position.
82. Lo adverted to the possibility that the view that both he and Fodera expressed may have been wrong. However, he made no further enquiries to satisfy himself as to the accuracy of that view including seeking the advice or assistance of APRA, as he had done in relation to other issues arising under the Act.
83. When signing CIC's APRA Quarterly Return for the three month periods ending 31 March 1999, 30 June 1999, 30 September 1999, 31 December 1999 and 31 March 2000 and when signing CIC's APRA Annual Return for the period ending 30 June 1999, Lo was aware of the possibility the assets pledged by CIC had to be excluded for solvency purposes and were not a negative pledge or created only a contingent liability. However, despite his advertence to the possibility that the view expressed by Fodera was wrong, and to the consequence that CIC's assets may not have been admissible for regulatory solvency purposes, Lo chose to proceed on each occasion to sign the APRA Returns.
Lo's state of mind in the relevant period
84. In addition to Lo's state of mind as identified in paragraphs 73 to 83 above, Lo was aware at the time of signing the Quarterly and Annual returns that the proper classification of the securities pledged was necessary to the licensed insurer's ability to meet the minimum solvency requirement. He knew that in each case there was no disclosure of and exclusion of assets pledged by CIC to support the Cotesworth Letters of Credit.
85. Lo signed both the Westpac and SG documentation that imposed the requirement that securities be pledged in Austraclear to support the Cotesworth Letters of Credit. Lo knew that CIC had pledged securities in support of the Letters of Credit provided to Cotesworth by Westpac and SG.
86. Lo was aware that the pledges constituted the secured component of the transactions with Westpac and SG.
87. Lo appreciated that the exclusion of the pledged assets meant excluding assets, that had a very considerable value (in fact between $108 million and $129 million); and that this was very likely to affect the solvency of the company or companies pledging the assets.
88. Lo understood the quarterly and annual return had a significant role in the assessment by the regulator of the long term viability of the licensed insurer
89. Lo understood the regulatory solvency requirements were applied to each general insurer entity within the HIH Group on an individual basis.
90. Lo was aware that a failure to meet the minimum solvency requirement raised the real risk that CIC may have been required to cease writing insurance business.
Other matters
91. APRA was not informed, as it should have been, of the parlous financial position in 1999 of the authorised insurer CIC. CIC continued to carry on business as an insurer until the collapse of HIH in March 2001. Under the terms of the Act, CIC was in breach of the conditions required for continuing authorisation to conduct insurance business.
92. On or about 30 November 2000 CIC's Special Purpose Financial Report for the year ended 30 June 2000 (SBB027855) was lodged with ASIC. This Report discloses, inter alia, the amount of insurance business written by CIC during that twelve month period.
93. Page 13 of that Report states that, for the year ended 30 June 2000, CIO's gross written premium was $517,873,000. An insurer's gross written premium quantifies the total premiums on insurance underwritten by that insurer during a specific period, before deduction of outwards reinsurance claims.
94. In continuing to write insurance business while in fact in breach of the regulatory solvency condition, CIC contributed to the ever worsening financial position of the HIH group. At the winding-up of HIH on 27 August 2001, the deficiency of the group was estimated to be between $3.6 billion and $5.3 billion, making it one of the largest, if not the largest, corporate failure that Australia has experienced.
Personal circumstances
95. Lo is 57 years old. He has no prior convictions.
96. Lo, through his legal advisors, offered to plead guilty to this offence following the offering of a record of interview but prior to the laying of any charge."