R v Rau [2010] VSC 370

2 You met Graeme Hoy a year or two earlier at a share trading course and became friends. You had little formal or informal education to prepare you for a career in managing other people's money. You had failed Year 12 and then trained as a radio technician. You worked for a decade for the Country Fire Authority as a fireman and then a fire officer. You started a fire protection business in the mid 1990s and commenced trading in the share market on your own account a couple of years later.

3 You have been married twice and have fathered ten children. Both marriages failed and you have commenced another relationship since the commission of these offences.

4 You have pleaded guilty to the following offences:

Charge 1 Carrying on a financial services business without holding an Australian Financial Services Licence (s 911A Corporations Act 2001 (Cth) (the Act)).

Charges 2-5 Engaging in dishonest conduct in carrying on a financial services business contrary to s 1041G of the Act.

Charge 6 Making a false document contrary to s 83A (1) of the Crimes Act 1958 (Vic).

Charge 7 Using a false document contrary to s 83A (2) of the Crimes Act (Vic).

Charge 8 Obtaining property by deception contrary to s 81(1) of the Crimes Act (Vic).

5 It is important to observe at the outset that, with the exception of Count 8, you are not charged with the dishonest appropriation of any funds from Chartwell investors. It is necessary, however, to provide a summary of the events at Chartwell leading up to and including the offending period in order that the context of your offending can be understood.

6 Chartwell carried on a financial services business as defined by s 761A Corporations Act 2001 (Cth). Chartwell held itself out as possessing an expertise in the investment of funds. Potential investors were informed that their funds would be pooled with other funds. This, so Chartwell said, allowed them access to Australian and global financial markets where the money would be used for trading in commodities, currencies, futures and options. Most of these representations were made to investors by Graeme Hoy. Hoy made grand profit predictions to investors promising astronomical returns, in some cases as high as 80% per annum. The scale of Chartwell and the grandiosity of Hoy's predictions increased exponentially as time went by. During the offending period (8 January 2007 to 23 April 2008) a total of nearly $22m was received from investors into various accounts operated by Chartwell.

7 Chartwell evolved into a classic "Ponzi" scheme. Monies received were used to pay "interest" on earlier investments. Hoy adopted an extravagant lifestyle. Of the $21.852m received in the offending period, a total of $449,139 was invested in the markets.[1]

8 Your role within Chartwell was characterised as director of trading. You acquired a staff of approximately 40 analysts by January 2008. They studied trends and graphs and made predictions. Charts were displayed on the walls. Prospective investors were allowed access to this hive of financial activity. They were told the methodology of W D Gann was employed to generate profits not available to others and that sophisticated risk management systems were in place.

9 It was all smoke and mirrors. You and your team of 40 had nothing to trade. Hoy passed on approximately 2% of investors' funds received for trading, during the last 14 months of Chartwell's purported trading.

10 You and Hoy had no formal agreement as to the terms of your remuneration. Your substantial house in Retreat Road, Geelong, was financed by Chartwell. Several hundreds of thousands of dollars of renovations were paid for by Chartwell investors through the agency of a further Chartwell loan. Substantial deposits were made on an irregular basis into your bank account or your wife's. By April 2008 your "loan account" with Chartwell was $2.56m. You are not charged with any offences relating to this remuneration and I include it in these reasons to provide part of the background to your offending.

11 Mr Regan for you took me to a selection of evidence from the committal proceedings. By and large those pieces of evidence demonstrated the proposition that your normal activities at Chartwell were "backroom" activities. I accept without reservation that Hoy was the "the front man" for Chartwell, its driving force and responsible for directing funds once they had been received by Chartwell. I also accept that you had little understanding of the administrative side of the business. By the middle of 2006, you were advised that many millions of dollars were owed to investors.[2] You maintain, and I accept, that you approached Hoy about this in August or September 2006. Hoy was upbeat and simply told you to go back to work "developing and strengthening... trading plans". The fact that you did so, and later actively propagated the fraud, is in my view astonishing. Equally astonishing is the fact that by 2007, 40 analysts were employed, apparently diligent hardworking people, to plot investment strategies that were never carried out.

12 It is common ground that Hoy controlled the flow of funds and was the point of contact with investors. Mr Regan submitted that you were unaware of Mr Hoy's activities. I have some difficulty accepting that. Whilst I have no doubt that you were unaware of the precise application of all monies received, I consider that you must have become aware by at least mid 2006 that monies invested for trading were in fact not being used for that purpose. You must have asked yourself the question. "If we we're not trading, how is interest being paid?" The most charitable explanation available is that you "buried your head in the sand" as Mr Regan put it, and hoped Mr Hoy would sort it out. I am satisfied that by the offending period (1 January 2007 - 23 April 2008) you knew at least the following:

• Chartwell through Hoy had made extravagant promises to investors about anticipated returns.

• The trading section was simply not trading with sufficient profitability or in sufficient amounts to provide any sensible return to investors, let alone the extravagant returns promised.

• Chartwell was receiving large amounts from investors for the purposes of investment through trading in the markets but virtually none of that money was coming through to the trading department.

• Existing investors were being paid what purported to be income from trading on their investments when in fact the source of that "income" could not have been from trading.

• Hoy enjoyed an extravagant lifestyle including the maintenance of a yacht and a Rolls Royce.

13 This is no more than a brief summary of the operations of Chartwell and I have recited it to provide a context to your specific offending. A fuller summary was tendered by the prosecution at your plea (Exhibit 1) and I annex it to these reasons.

14 You have pleaded guilty to carrying on a financial services business as defined in s 761A of the Act whilst not being the holder of an Australian Financial Services Licence. Chartwell is the principal offender and your liability is accessorial via s 11.2 of the Commonwealth Criminal Code. In substance, Chartwell provided through Hoy, and sometimes you, financial product advice[3], as a result of which people invested money with it. The purpose of this legislation is to protect the investing public from unskilled or unscrupulous advisers. Chartwell was both. By your actions you aided and abetted Chartwell to conduct its business whilst unlicensed. You were, in effect, a 50% shareholder in Chartwell. You knew that it was required to be licensed and that it was not. In November 2007, Chartwell purchased PGM (a holder of the relevant licence). Hoy emailed investors at that time advising them that a reason for this purchase was so that Chartwell could come within the "regulated umbrella"(sic). Chartwell also referred to this purchase in this context in a Newsletter (with a covering letter from you) dated 18 December 2007 and you made statements to this effect at a dinner held for investors on 12 December 2007. I regard this as a serious example of this offence. You assisted Chartwell to practice without a licence at a time when you must have known that the affairs of Chartwell were highly irregular. The very people this legislation aims to protect were the targets of Chartwell's blandishments and inducements.

15 Each of charges 2-5 involves conduct by you late in the offending window. By December 2007 Chartwell was obviously insolvent. It had probably been so for a year. Between December 2007 and the end of February 2008 you made several dishonest representations to Chartwell investors aimed at deflecting their legitimate interest in Chartwell's affairs. Hoy had suffered what he described as a mini-stroke in late 2007. You were persuaded to take over his role as spokesperson for the company.

16 From December 2007 onwards investors raised concerns as to the status and security of their investments. A dinner was held at Hoy's restaurant, Riviera on Yarra. You, in Hoy's presence, gave an oral and PowerPoint presentation. A witness says you were nervous at first but warmed to your task. You assured the investors, amongst other things, "the future looks great", Chartwell had a "(d)isciplined approach to the use of highly leveraged trading platforms", and practised "secure money management" with a "(c)onsistent track record of company growth." You concluded your dishonest monologue by assuring the investors that "(i)n short.......the future looks great ... and we'd love to share it with you." Late payments of "interest" were dismissed as "growing pains". One only has to consider the true state of affairs set out earlier to appreciate the breathtaking dishonesty of your conduct. Even if you did not appreciate the full extent of Chartwell's position, you must have known enough to appreciate the dishonesty of your conduct. By your plea you admit it.

17 Julie Anne Godfrey had invested funds with Chartwell both on her own behalf and on behalf of her brother. On 11 January 2008 she met with you. You assured her that the trading arm of the Chartwell business was very successful and that there would be "no problem with the full return of her brother's capital." You gave Ms Godfrey a tour of the trading area and boasted of your 40 market analysts. What you did not tell her was that Chartwell had barely traded for 12 months.

18 Kenneth Muller was another Chartwell investor. He was concerned at delays in receiving his "interest" payments. On 22 January 2008 you met with Mr Muller and advised him that returns of 70-80% were unsustainable; you further advised him, dishonestly, that Chartwell would be back on track over the next three weeks. As a result of this representation and those made at the dinner at Riviera on Yarra he invested a further $40,000.00. (see Count 8).

19 By February 2008 Frederick Houte and his family had $5.7m invested in Chartwell.[4] He met with you on 21 February 2008 to discuss his concerns about late payments. You dishonestly advised him that his $5.7m investment was safe. Eight days later you wrote to him and stated that the opening balance of his account was $5.7m and that you agreed to pay annual interest on this sum of 55%. You must have known by this stage that there was no realistic prospect of Mr Houte recovering his capital, let alone any interest on that sum.

20 Charges 6 and 7 relate to false documents you generated and used to appease increasingly nervous Chartwell investors. These offences were committed by you in contravention of s 83A Crimes Act 1958 (Vic).

21 A group of investors requested, on or about 17 December 2007, that they be permitted to examine the Chartwell accounts. You falsely advised the group that legal advice prevented you from permitting this course. After some negotiation, it was agreed that an independent accountant be permitted access to those accounts. On 4 January 2008 you proceeded to create what purported to be live trading screens from the brokers PGM and CMC which indicated there was more than $24m in free equity in the trading accounts of Chartwell. In fact, the screens were a fiction and the real free equity balance of the trading account was $17,300.00. In an email sent to the independent accountant you attached these false screen dumps and falsely summarised the Chartwell equity position in the body of the email. This false information was conveyed to the investor group. Charge 6 relates to the creation of these false documents and Charge 7 relates to the use that you made of them.

22 The facts surrounding this offence should be read with the facts surrounding Charges 2 and 4. As a result of your dishonest representations at the Riviera on Yarra dinner on 12 December 2007, and your further dishonest representation on 22 January 2008 that Chartwell would be back on track within three weeks, Mr Muller invested a further $40,000.00 on 28 February 2008. He did not recover that amount. After the first hearing day of your plea I invited further submissions from counsel as to the relationship between Charges 2, 4 and 8 on the indictment. I did so because I considered there was substantial overlap in the criminal conduct that underpinned these three charges. I have received those submissions, thank counsel for them, and will mark them as Exhibits on the plea. I take the view that the dishonest representations relied upon in support of Charge 8 are totally subsumed by those alleged in Charges 2 and 4. The only remnant criminality that relates to charge 8 is the product of those representations: namely the handing over by Mr Muller of $40,000 to Chartwell. This money did not come to you. The charge is put on the basis that by your conduct it enabled another, Chartwell, to obtain $40,000. I regard the remnant criminality attaching to Count 8 as relatively insignificant insofar as you are concerned. I consider the real vice in your conduct is already captured by your pleas to Counts 2 and 4. That is not to say there is no 'remnant criminal conduct' and you will be convicted and sentenced to a term of imprisonment for it, but the term imposed will be totally concurrent with the sentences I impose on other counts and of considerably less duration than it would otherwise be.

23 There are a number of matters that can be stated in your favour on the issue of sentence.

24 You have pleaded guilty at a relatively early stage. You were originally the subject of a large number of individual charges. You conducted a contested committal and it was only after that that negotiations bore fruit and an indictment was framed in something resembling its current form. By your plea you have saved the community the cost and resources of a contested trial. I do not regard your plea as existence of remorse as I doubt you had any real alternative but to take the plea offered.[5] I have, however, found existence of contrition from other sources. I accept that your cooperation with authorities evidences this as does your preparedness to give evidence in Mr Hoy's trial. The shame you experienced and the contrition you now exhibit is captured in your daughter's letter to the court. It is also manifest from the references of Angus Brown, Kaye Halligan and Tanya George, your now partner.

25 You have agreed to give evidence for the prosecution in the trial of Hoy. To that end you have signed a witness statement and entered into an agreement under s 21E of the Act. You are entitled to, and will receive, a discount of your sentence for this.[6] Mr Hoy has pleaded not guilty to numerous counts of misappropriating investors' funds and his trial is listed to commence on 31 January 2011. I have read your statement carefully. Mr Regan frankly conceded that the statement is not the " 'magic bullet' value type statement that conclusively clinches the prosecution." Mr Gurvich put that it was of limited value and read more as a "part confessional, part character reference for Mr Rau." I consider the statement is of a little more use than that. It is a fact that you profess ignorance of a great many of Hoy's activities and when involved in dishonest activity yourself you maintain that Hoy proposed that you act in that way. This, I accept, is probably the truth and your activities in late 2007 and early 2008 will no doubt be the subject of a good deal of evidence at Hoy's trial. I accept that if Hoy's trial proceeds, your evidence, including cross-examination, will take a considerable period of time. I also consider that your evidence will assist the jury at Hoy's trial to understand the corporate dynamics of Chartwell, its total lack of proper corporate organisation and accountability and the manner in which Hoy conducted the business. Whilst these matters may be able to be proved by other evidence, no one dealt with Hoy more often than you. Mr Regan also submits that the very fact that you are giving evidence makes it more difficult for Hoy to mount a defence that sheets the blame at you. There is some substance to this.

26 Overall, I consider that your evidence will be of some real assistance to the prosecution at Hoy's trial and I propose to reflect this in the sentences imposed.

27 A psychological report prepared by Mr Ian Joblin was tendered on your behalf. He saw you on 18 May 2010 and 21 June 2010. He had been provided earlier with the indictment, previous psychological reports, the liquidators' summary of Chartwell Enterprises and your statement made to ASIC dated 12 May 2010. He opined that you were not suffering from any mental illness that engaged the Verdins principles, although when he saw you Mr Joplin thought your depression was obvious. He considered you had a dependent personality which, in fact, explained your relationship with Hoy.

28 You were sexually abused as an adolescent by another male. This was an appalling experience which no doubt has left a significant psychological legacy. A link you made to Mr Joblin when discussing these events was that you believed this was another example of your compliant personality impairing your capacity to stand up for yourself. I am prepared to accept that this is so, but beyond that I cannot see any sensible nexus between your experiences as an adolescent and your behaviour whilst with Chartwell.

29 After Chartwell collapsed you sought treatment for depression and anxiety from a Queensland psychologist and a diagnosis of a Major Depressive Disorder of moderate severity was made. Given the circumstances of your leaving the Geelong area, this diagnosis is hardly surprising. Your depressive illness, however, I consider to be a reactive condition to your predicament, rather than a condition that can be linked to your offending. I accept, however, that it will make any period of incarceration more onerous.

30 Your have fathered ten children from two marriages and have now commenced a new relationship. Your daughter, Jessicah Brown, was present at court and has provided a written letter to the court that has been tendered as part of Exhibit 1. She describes in moving terms her relationship with you and the influence she believes Hoy held over you. She also describes the trauma that you encountered after the Chartwell collapse including the public humiliation, the losses of your house, career, dignity and ultimately your marriage. From your daughter's perspective, she believes that you have come to terms with these losses and are now looking forward again.

31 I accept that you have suffered significant punishment already. You will be disqualified from holding corporate office (s 206B Corporations Act ). Your humiliation has been widely publicised, your marriage has been destroyed and your career is in ruins. You are effectively destitute, although at 47 you are young enough to make a meaningful contribution to the community in the future. I have been impressed by the letters of support tendered on your behalf, although perhaps understandably, they largely come from people who have met you since the collapse of Chartwell. I regard your prospects of rehabilitation as high.

32 You have no prior convictions. It is often stated that in "white collar" cases that fact has a lesser significance than in other types of cases.[7] That is because it is this type of offenders' good character that allows him or her to be the repository of the very trust that they have breached. Whilst it is of lesser weight than otherwise it would be, prior good character remains a relevant sentencing consideration. It informs aspects of personal deterrence, rehabilitation and the concept of adequate punishment.

33 Although the concept of general deterrence is absent from s 16A (2) of the Crimes Act , it is an important sentencing consideration in this matter. I am prepared to accept that your conduct throughout most of 2007 was the product of a domineering business partner, your passive personality and perhaps a wilful blindness to the realities that surrounded you. Your conduct in late 2007 and early 2008, however, in positively misleading investors with false promises and creating and using false documents to support your lies cannot be adequately explained by the dynamics of your relationship with Hoy. You were highly dishonest. I consider your conduct during this latter period of offending as disgraceful. I consider that general deterrence must be given significant weight in the sentencing mix as must the need for adequate punishment. These objects cannot be achieved without imposing terms of imprisonment with some portion to be served immediately. I do not regard specific deterrence as a significant factor in this sentence.

On Count 1 you are sentenced to 12 months imprisonment.

On Count 2 you are sentenced to 9 months imprisonment. I direct that 5 months be served cumulatively with the sentence on Count 1.

On Count 3 you are sentenced to 5 months imprisonment. I direct that 3 months be served cumulatively with the sentences on Counts 1 and 2.

On Count 4 you are sentenced to 5 months imprisonment. I direct that 3 months be served cumulatively with the sentences on Counts 1, 2 and 3.

On Count 5 you are sentenced to 6 months imprisonment. I direct that 4 months be served cumulatively with the sentences on Counts 1,2,3 and 4.

Total effective sentence on the Commonwealth Counts of 27 months.

On Count 6 you are sentenced to 16 months imprisonment.

On Count 7 you are sentenced to 16 months imprisonment to be served wholly concurrently with the sentence imposed on Count 6.

On Count 8 you are sentenced to 4 months imprisonment to be served wholly concurrently with the sentences imposed on Counts 6 and 7.

That means I have imposed an effective maximum sentence of 16 months imprisonment on the State offences. I direct that the sentence on the State counts commence on 19 November 2011, that is 12 months before the expiry of the Commonwealth sentences. That means, Mr Rau, I have imposed as maximum sentences 27 months on the Commonwealth offences and 16 months on the State offences and I have allowed for a 12 months concurrent effect on the State offences, meaning that I have set an effective aggregate maximum term of 31 months imprisonment.

In relation to the Commonwealth sentences, I direct that you be released after serving 18 months upon you entering into a recognisance release in the sum of $500 to be of good behaviour for a period of 2 years.

In relation to the State offences, I direct that you serve a minimum period of 3 months before becoming eligible for parole. That minimum term will have been served 18 months from now.

In other words, I have intended that you serve 18 months actual imprisonment before you are released on a recognisance release and before you are eligible for parole.

Commencement of parole eligibility and operation of RRO

Total effective Commonwealth Sentence 27 months imprisonment commencing today and to be released after serving 18 months upon entering into a Recognisance release order.

16 months imprisonment, 12 months effectively concurrent with Commonwealth sentences on Counts 1 to 5

16 months imprisonment wholly concurrent with Count 6 ( and effectively also wholly concurrent with Counts 1 to 5)

4 months imprisonment wholly concurrent with Counts 6 and 7 (and effectively also wholly concurrent with Counts 1 to 5

Total effective State sentence 16 months imprisonment to commence 15 months from today. Parole eligibility after serving 3 months of the State sentence.

34 Section 6AAA Sentencing Act 1991 (Victoria).

Section 21E Crimes Act 1914 (Cth).

If the above juxtaposition of State and Federal sentences were not sufficient to render completely oblique a process which, presumably, is intended to lead to greater transparency, I am further required to articulate specific discounts that I have made in the sentencing process. Section 6AAA of the Sentencing Act 1991 (Vic) requires me to quantify the sentencing discount I have allowed for Mr Rau's guilty plea for the State offences. The Commonwealth Act does not so require me but I am encouraged to do so by Mr Gurvich. Section 21E of the Crimes Act 1914 (Cth) requires that I quantify the reduction in sentence that I have allowed by reason of Mr Rau's agreement with Federal authorities to give evidence at Mr Hoy's trial. Section 21E applies only to the Commonwealth counts on the indictment. There is no such State requirement, although the fact of a sentence reduction for an undertaking to assist must be announced and noted in the court records.

35 I consider that it is artificial and confusing to approach the State and Federal offences differently. I propose to articulate the discounts that I have allowed for

as they bear upon the total effective aggregate sentence and effective minimum term that would have been imposed for all offences both Federal and State.

36 Had the accused neither pleaded guilty nor undertaken to give evidence, I would have imposed an aggregate sentence of 5 years imprisonment with an effective minimum term of 3 years 3 months. Had the accused pleaded guilty but not undertaken to give evidence, I would have imposed an aggregate sentence of 3 years 9 months with a minimum term of 2 years 3 months.

Rau Enterprises Pty Ltd ACN 098 112 791 ("Rau Enterprises") was formed and registered on 10 September 2001 [M01357203]. At the time Ian Stuart Rau ("Rau") was the sole director and company secretary of Rau Enterprises.

On 8 May 2002, Rau Enterprises changed its name to Chartwell Enterprises Pty Ltd ("Chartwell"). On that day, Rau ceased to be the director of Chartwell, but continued in his role as the company secretary. Graeme Ronald Hoy ("Hoy") became the director.

Chartwell conducted a financial services business in Geelong. Hoy was generally responsible for attracting investors and liaising with them, whereas Rau was generally responsible for trading.

The shareholders of Chartwell were Black Swan Holdings Pty Ltd ACN 007 394 354 ("Black Swan"), a company in which Hoy was its sole director and equal shareholder with his ex wife, and Uzzi Pty Ltd ACN 007 357 799, a company in which Rau was the sole director and shareholder. [M01357204 & M01357205]

The registered office of Chartwell was 18 Eastern Beach Road, Geelong. Its registered place of business was level 1, 229 Ryrie Street, Geelong and this was where it was based and conducted its financial services business.

Chartwell was placed into voluntary administration on 22 April 2008. On 28 May 2008 Chartwell was placed into liquidation. Mr Bruno Secatore and Daniel Juratowitch of Cor Cordis Chartered Accountants were appointed Administrators and later as liquidators. In a report to creditors dated 20 May 2008 [M01376008] the administrators advised that as at 22 April 2008 Chartwell owed approximately $80.6m to various entities, including $68.19m to investors. Total assets were estimated to be $21,966.04.

The business activities of Chartwell involved the receipt of funds from investors who had normally entered into a loan agreement with Chartwell or Black Swan prior to providing funds. Investors were informed and understood these funds would be pooled with other funds which would then be used to trade on the financial markets in the expectation of generating profits. For Chartwell to trade on the financial markets it utilised the services of licensed brokers, namely Peter G. Moloney & Associates Pty Ltd ("PGM") and CMC Markets Asia Pacific Pty Ltd ("CMC").

ASIC FINANCIAL RECONSTRUCTIONS OF BANK ACCOUNTS

1. Chartwell and Black Swan operated a number of bank accounts into which investor funds were deposited and then withdrawn. Both Hoy and Rau were authorised signatories to the Bendigo Bank accounts principally utilised by Chartwell to receive funds and make payments- account nos. 12092997 and 115027617. George Apostolos, Senior Financial Investigator, ASIC, conducted a number of financial reconstructions in relation to investor deposits through the bank accounts. In the period 8 January 2007 to 23 April 2008 a total of $21,852,062.18 of investor funds was received into the various accounts operated by Chartwell, Black Swan and a related entity Delaware Corporation Pty Ltd, a company in which both Hoy and Rau were directors [statement of Apostolos at p.6 and Investor Schedules M0129577 & M01295783]. Of those investor funds, only a small proportion was used to trade on the financial markets on behalf of the investors.

• - $349,139.00 net was paid to CMC Markets Asia Pacific Pty Ltd ('CMC');
  • - $330,000 was paid to Peter G Moloney & Associates Pty Ltd ('PGM'), which included the $250,000 to purchase PGM. [Apostolos statement at pp. 54-56, M01295790 & M01295752].

Apostolos also produced a number of graphs and schedules of investor deposits and payments to brokers [Apostolos statement at pp. 57-58], namely:

M01295792 - Total monthly investor deposits and payments to brokers 8/1/17 - 24/4/08;

M01295793 - Summary of Investor deposits 8/1/07 - 24/4/08;

M01295794 - Summary of Investor deposits 8/1/07 - 24/4/08

M01295795 - Schedule of Payments to CMC 5/2/07 - 5/2/08;

M01295796 - Schedule of Payments to CMC 5/2/07 - 5/2/08

M01295797 - Schedule of Payments to PGM 23/11/07 - 29/1/08

1. PGM is an Australian Financial Services Licensed company that provides financial broking services to clients wanting to access financial instruments such as options and the foreign and futures exchange markets.

2. On 23 July 2003 Hoy and Rau executed a Client Agreement with PGM that authorised PGM to place and execute financial trades on behalf of Chartwell. Once the agreement was signed, PGM opened an account and traded on Chartwell's behalf.

3. In the normal course of events, when executing trades on behalf of clients, PGM would receive instructions from its clients usually by telephone or email. PGM would execute those trades using an online platform it maintained with the Macquarie Bank.

4. When trading on behalf of Chartwell, the usual practice involved Rau contacting (by telephone) PGM and providing verbal instructions about which trades Chartwell wished PGM to place and execute. Once the trades were executed, PGM would contact (by telephone) Rau and verbally confirm the trade/s had been executed. Once the trades were executed, Macquarie Bank would generate and electronically send Chartwell and PGM daily statements to confirm the trade/s. At the end of each month, PGM would reconcile all the trading activity, and generate and electronically send Chartwell a monthly statement.

1. CMC is an Australian Financial Services Licensed company that provides 'over the counter' contracts for difference in the Australian retail market.

2. On 3 June 2003 Hoy and Rau, on behalf of Chartwell, opened an account with CMC. In the years thereafter, Chartwell opened a number of other accounts with CMC. Financial trades that were executed on behalf of Chartwell were conducted using a CMC online trading platform called 'Marketmaker'. Like PGM, after financial trades were placed and executed by CMC on behalf of Chartwell, CMC generated a daily statement, which was electronically sent to Chartwell, to confirm the trade. At the end of each month, CMC would generate and provide Chartwell with a monthly statement that detailed every trade executed during the month.

1. Chartwell raised funds from clients in two ways.
   1. Syndicate Leaders - Chartwell engaged so-called 'Syndicate Leaders', who acted as intermediaries to raise funds, usually from family members, friends, associates or referrals. On the instructions of Hoy, Syndicate Leaders (in most cases) were required to execute a Loan Agreement with Chartwell or Black Swan. Hoy advised Syndicate Leaders that they should also execute Loan Agreements with their respective investors. This arrangement was known as a back-to-back loan arrangement. Until late 2007, when Hoy was absent due to illness, Rau had relatively minimal direct involvement with investors. Hoy was responsible for dealing with investors, and Rau was responsible for trading of investor funds on the financial markets.

Under this arrangement, Chartwell would have an agreement with the Syndicate Leaders about the interest rate that it would pay to the Syndicate Leader on the capital invested. Once the interest rate had been negotiated, Syndicate Leaders could then determine what interest rate they could offer and pay to their respective investors. Usually, but not on every occasion, the interest rate negotiated between Chartwell and the Syndicate Leader was higher than what the Syndicate Leader offered his or her respective investors. The difference in the two interest rates was the margin or profit made by the Syndicate Leader. The interest rate offered to investors was also specified in the loan agreement that was executed between the Syndicate Leader and their respective investors.

1. Direct Investors - In many cases investors wanting to utilise the services of Chartwell bypassed investing through Syndicate Leaders and invested directly with Chartwell. The main reason for investing directly with Chartwell was that the interest rate offered by Chartwell was usually higher than that which was offered by Syndicate Leaders. Similar to investments that were made through the Syndicate Leaders, Chartwell executed loan agreements with the direct investors.

1. Whilst the loan agreements specified that Syndicate Leaders and direct investors were loaning funds to either Chartwell or Black Swan, based on the representations made by Hoy all the investors believed that they were investing in Chartwell and its business activities.

2. The loan agreements, amongst other things, generally:

1. Named the lender, which was either the Syndicate leader or the direct investors; 2. Named the borrower, which was either Chartwell or Black Swan;

1. Specified that Hoy had personally guaranteed the loan; 2. Specified the term of the loan (which was usually for a 12-month period); and 3. Specified the interest payable to the lender.

1. Before investors (Syndicate Leaders or direct investors) committed to making an investment in Chartwell, most first met and spoke with Hoy. On most occasions Hoy essentially made the same, or substantially similar, verbal representations about the business activities of Chartwell and how it would use the investor's funds to generate a profit. Hoy told investors that Chartwell would pool their funds with other investors and then use those funds exclusively for the purpose of making financial trades on the Australian and global financial markets by trading in commodities, currencies, futures and options.

2. Hoy explained that Chartwell had developed sophisticated trading systems, and used the trading methodologies of WD Gann, to generate high profits for its investors, regardless of whether the financial markets were going up or down. Hoy made verbal representations that the trading systems used by Chartwell allowed it to make profits that were not generally available to others. In many cases Hoy told investors that Chartwell had sophisticated risk management systems that identified when investments would be affected. It was asserted that these systems allowed Chartwell to take evasive action to minimise the prospect of making a loss on the trades.

3. In the majority of cases Hoy explained to investors that Chartwell would pay a fixed interest rate on their investments, which would be paid either monthly, quarterly or yearly. However, in some circumstances Hoy offered to pay investors a variable return based on the performance of the trading activity. Alternatively, investors could also roll over their interest payments so that interest they received on their investments was compounding. Hoy also represented that interest was paid on a sliding scale and was indexed according to the level of investment. That is, the more invested the greater the interest rate.

4. In addition to the verbal representations made by Hoy, most investors were also shown the business operations of Chartwell. That usually included a tour of the Chartwell office in Geelong, where numerous staff (around ten employees in January 2005 and around 40 employees in January 2008)[8] were employed as market analysts and where numerous charts were displayed on walls depicting the financial markets in which Chartwell had purportedly invested. This tour reinforced the representations made by Hoy and influenced the decision to invest in Chartwell.

s.911A - carry on a financial services business without holding an Australian financial services licence ('AFSL') - charge 1

1. Chartwell carried on a financial services business, as defined in s. 761A of the Corporations Act 2001 (Cth) ("Corporations Act") [ie financial services business means a business of providing financial services]. It did not hold an AFSL. It is alleged that Rau, as an officer of Chartwell, had accessorial liability via s. 11.2 of the Commonwealth Criminal Code ("Criminal Code").

2. A person provides a financial service if they "provide financial product advice" (see s. 766A of the Corporations Act).

3. Financial product advice is defined in s. 766B to mean a recommendation or a statement of opinion, or a report of either of those things, that:

(a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or

(b) could reasonably be regarded as being intended to have such an influence.

1. Financial product is defined generally and specifically. The general definition in s. 763A includes a facility through which, or through the acquisition of which, a person makes a financial investment or manages financial risk.

2. Section 763B provides that a person makes a financial investment if:

(a) the investor gives money or money's worth (the contribution) to another person and any of the following apply:

(i) the other person uses the contribution to generate a financial return, or other benefit, for the investor;

(ii) the investor intends that the other person will use the contribution to generate a financial return, or other benefit, for the investor (even if no return or benefit is in fact generated);

(iii) the other person intends that the contribution will be used to generate a financial return, or other benefit, for the investor (even if no return or benefit is in fact generated); and

(b) the investor has no day-to-day control over the use of the contribution to generate the return or benefit.

1. Chartwell provided financial advice and persons invested funds with those companies. Correspondence to investors clearly refers to 'investments'. For example:

1. A receipt dated 1 September 2007 signed by Hoy and sent to J Kovess in which Hoy stated 'The sum of $250,000, being for investment in our pooled fund as per Loan Agreement' [M01289045]; 2. a 2007 Newsletter [M01056853] which referred to a decision made in 2001 to 'produce a club-style investment company' and thanking readers for 'being one of our valued investors';

1. Hoy signed some correspondence in the capacity of 'CEO, Investment' [eg M01289117 (5 November 2007); also see M01357140 (1 April 2008)];

1. The 2007 Business Summary [M01376014]: 1. was pitched at 'So who should invest?'; 2. stated that the primary aim of Chartwell was 'to operate a managed fund that maximises capital growth through exposure to a globally diversified portfolio of stocks, currencies, commodities, treasuries, and indices listed on international stock exchanges'; and 3. provided contact details for those who 'simply wish to become an investor'.

2. Rau was aware of the requirement to hold an AFSL:

1. Between 1 November 2005 and 12 May 2006 Chartwell had been an authorised representative of Sonray Capital Markets Pty Ltd [M01357212; extract is M01357210]; 2. Part of the purported reason for the purchase of PGM in November 2007 was to acquire the licence so as to come within the 'regulated umbrella' over time [email to investors from Hoy M00673727] and to take advantage of the fact PGM already held an AFSL;

1. In a newsletter with covering letter from Rau issued on 18 December 2007 there was a reference to the requirement of specific industry licences and the acquisition of PGM, a licensed futures broker [M01285183, M01285184];

1. Andrew McRitchie stated that at a dinner held at the Riviera restaurant on 12 December 2007 'Rau made comments along the lines that they needed to acquire a business with a licence in efforts to comply with regulatory requirements'.[9] 2. Mark Wheeldon stated that at a meeting with Hoy and Rau on 3 April 2008 they indicated that until then Chartwell had been 'trading outside' and had just bought a licence.[10]

(See too evidence of liquidator Bruno Secatore at p217-218 of the committal transcript).

1. It is very unlikely that Chartwell would have been granted an AFSL if it had applied for one due to its inability to satisfy ASIC's Regulatory Guidelines ('RG') for licensing.

RG 1.3: ASIC assesses applications for AFS licences as part of our role as regulator of the financial services industry. When we assess a licence application we consider whether you:

(a) are competent to carry on the kind of financial services business you are applying for;

(b) have sufficient financial resources to carry on the business you are proposing - unless you're regulated by the Australian Prudential Regulation Authority (APRA); and

(c) can meet your other obligations as a licensee if we grant you a licence.

RG 1.10: Licensees have obligations under s912A and 912B of the Corporations Act requiring them to:

(a) operate their business efficiently, honestly and fairly;

(b) maintain the organisational competence to provide the financial services covered by their licence;

(c) ensure their representatives are competent and adequately trained to provide the financial services;

(d) have adequate financial, technological and human resources to provide the financial services;

(f) have arrangements in place for managing conflicts of interest;

(g) have dispute resolution systems and compensation arrangements for retail clients;

(h) comply with the financial services laws and ensure their representatives comply with them; and

(i) comply with the conditions on their AFS licence.

RG 1.11 If we grant you an AFS licence, you must comply with each of these obligations from day one in relation to all of the financial services and products covered by your licence. You need to have systems and processes in place that will enable you to comply with these obligations at the time you apply for your licence. When you complete your application form, you'll be asked to make declarations and certifications to this effect.

1. A number of former Chartwell employees referred to the inadequate accounting systems and lack of an automated database to record and produce monthly reports for investors. Clint Sanders, Operations Manager stated that he complained to Hoy about the lack of such systems and Hoy told him that he used a calculator to prepare quarterly reports to be sent to investors. Sasha Melnik referred to the monitoring of investments as 'appalling' (committal transcript p124, line 10).

2. Whilst Rau's role vis a vis obtaining investor funds was initially limited, when Hoy became ill in late 2007 Rau became more directly involved. Wayne Hutchinson, who was employed at Chartwell to liaise with investors and to create an improved accounting system, gave evidence at the committal hearing [at t/t/ p. 61-62] that both Hoy and Rau obstructed him in his efforts to ascertain the true financial status of Chartwell, and in late 2007 one of Hoy, Rau or Susan Goodchild, in the presence of the others, advised him that there was approximately $30m in the trading accounts. Despite being well aware that Chartwell was in dire financial trouble, and that he was engaged in only minimal trading, Rau advised investors that whilst returns of 70-80 % were unsustainable, they would receive a return of their capital and also interest payments.

FALSE INFORMATION PROVIDED TO INVESTORS - charges 2 - 5

1. From December 2007 onwards a number of investors raised their concerns with Hoy and Rau as to the status and security of their investments. A dinner was held at Hoy's restaurant, Riviera on Yarra, on 12 December 2007, which was attended by a number of the syndicate leaders/key investors. Rau, in the presence of Hoy, gave an oral and Powerpoint presentation, titled 'Chartwell & Beyond' [M01357218] which portrayed a false and misleading overview of Chartwell's financial position and the cause of delays in interest payments. For example, it asserted 'the future looks great', and that Chartwell had a 'Disciplined approach to use of highly leveraged trading platforms', 'Secure money management through Futures & Options strategies', and a 'Consistent track record of company growth, 'In short...the future looks great....and we'd love to share it with you'.

Attendees state that Rau provided excuses for late payment of interest payments - such as being 'a temporary growing pain caused by the purchase of PGM, that there had been two underperforming months of trading, changes to the superannuation laws which resulted in a large capital withdrawal of investor funds'[11]; and that Rau explained the importance of acquiring PGM.[12]

1. Julie Anne Godfrey first became aware of Chartwell in 2002 through an associate. In September 2002 Godfrey met with Hoy at the offices of Chartwell where Hoy explained to her the business activities of Chartwell. At the time Hoy's business was not called Chartwell, but shortly after Godfrey came to know the business as Chartwell.

2. After meeting with Hoy, Godfrey made a number of investments in Chartwell. Godfrey initially invested in Chartwell through a Syndicate Leader, but later invested directly through a company she registered called Layardpark Investments Pty Ltd. The interest on her investment was not specified but rather paid on a 'best endeavours' basis based on the trading performance of Chartwell.

3. Looking to make additional investments in Chartwell, Godfrey again met with Hoy on 13 May 2007 who reiterated previous representations. Godfrey made the following investments in Chartwell through Layardpark Investments Pty Ltd into CEBB 617 a/c and BSMB 520 a/c:

20 August 2007 $75,000.00 deposited into CEBB 617 a/c [M01295231]

1. Godfrey met Rau on 11 January 2008 to discuss the return of part of her capital, advised him that she had cancelled her surgery following the late payment of interest for the September quarter. According to Godfrey, Rau told her that he was a director of Chartwell, explained that he had not had much to do with investor clients, and said words to the effect of 'I was the investment arm of it, and I left that to Hoy, and it should've been my responsibility to keep more into what was actually going on - I should've taken more responsibility'. Rau also showed Godfrey around the office, and in reference to the trading area he said words to the effect of 'I have created this fourfold since that last time you were here and I have 40 analysts'.[13]

2. Rau agreed to repay $40,000 to Godfrey by the next day, but failed to do so. Godfrey then attended the office on 13 January 2008 and demanded to see Rau. He assured her that $40,000 would be paid the next day, but it was not.

3. Godfrey again met Rau on or about 17 January 2008. Rau explained that Hoy was ill, assured her that the trading part of Chartwell was very successful, and that there would be no problem with the full return of her brother's capital and return of late interest payments. Godfrey received $40,000 capital and $2,835 interest owed for the September quarter on 24 January 2008.

4. A financial reconstruction by the ASIC Financial Accounting Practice of the banking records of Chartwell [M01295761] and Black Swan [M01295738] and evidence obtained from PGM and CMC shows that the money invested by Godfrey was not used in accordance with the representations made by Hoy.

Charge 4 - information to Kenneth Ross Muller/Clydesdale Enterprises Pty Ltd

[and charge 8 - investment of $40,000 on 28/2/08 - s. 81(1) Crimes Act 1958]

1. Kenneth Ross Muller made a number of investments in Chartwell (in the names of Clydesdale Investments Pty Ltd and Rellum Investments Pty Ltd), based upon representations by Hoy. Up until 22 January 2008 Muller had only a limited dealing with Rau, having met him on 5 December 2007 when he attended a meeting between himself and Hoy. At that meeting Hoy had explained delays in interest payments as being due to liquidity issues arising from the long investment positions Chartwell had adopted in its investment strategy and the cost of purchasing PGM.

2. On 22 January 2008 Muller met with Rau and Wayne Hutchinson. Rau advised that Chartwell had drawn a line on interest rates of 70-80%, which were not sustainable, provided explanations as to the recent large withdrawals of funds from Chartwell and asserted that 'Chartwell will be back on track over the next three weeks' [charge 4].

3. Post attending the dinner on 12 December 2007 at Riviera on Yarra, Muller made a further investment in the sum of $40,000.00 on 28 February 2008 [charge 8].

4. A financial reconstruction by the ASIC Financial Accounting Practice of the banking records of Chartwell [M01295761; M01295779] and Black Swan and evidence obtained from PGM and CMC shows that the money invested by Muller was not used in accordance with the representations made by Hoy. In relation to the $40,000 invested on 28 February 2008, immediately prior to that deposit into Chartwell's Bendigo Bank account 115027613 the account was $2,455.33 in credit. By 1 March 2008 the account was $4,546.96 in debit, following various payments including a payment of $42,465.75 to C & J Goddard Investment Pty Ltd and CM & GL Pederson (p57 of M01295761).

1. Frederick Houte first became aware of Chartwell in mid 2005 through an associate. In July 2005, Houte met with Hoy at the offices of Chartwell where Hoy explained to him the business activities of Chartwell, including that Chartwell invested clients' funds in the ASX. After meeting with Hoy, Houte made a number of substantial investments in Chartwell.

2. On 21 February 2008 Houte arranged to meet Rau as he was concerned about late payments, and wanted to have a contact with Rau since Rau was now 'at the helm'. He wanted Rau to acknowledge the fact that Houte and his family had invested $5.7m with Chartwell.[14] Rau advised Houte that his investment was safe.

3. On 29 February 2008 Houte received a letter on Chartwell letterhead from Rau agreeing to pay 55% interest on further investments, and attaching an account statement that recorded Houte's opening balance as $5.7m. [M01056928] This information was false.

CHARGES AGAINST RAU RE FALSE DOCUMENTS PROVIDED TO ALAN DONGES - charges 6 & 7 - s. 83A Crimes Act 1958

One of the syndicate leaders, Pat Sciarrone participated in a number of meetings with Rau and a group of Chartwell investors ("the Group"). Included in the Group was the investor Andrew McRitchie. Also present during these meetings was Suzanne Goodchild. The Group had called these meetings as they were concerned about the financial position of Chartwell and its inability to meet its interest and capital payment commitments to the Group on time.

On or about 17 December 2007 the Group asked Rau and Goodchild if the Group could examine Chartwell's trading accounts.

The Group were subsequently advised falsely by Rau that on legal advice they could not view Chartwell's trading accounts and other options were discussed between Rau, Goodchild and the Group to satisfy themselves about the financial position of Chartwell.

It was agreed that an independent accountant would be engaged to examine the trading accounts and report back to a nominated spokesperson of the Group. The nominated spokesperson was Pat Sciarrone.

As it was to take some time to organise an independent accountant it was agreed between Sciarrone, Rau and Goodchild that Rau would show Goodchild the trading accounts and she would convey the figures in the trading accounts back to Sciarrone.

On 19 December 2007 Goodchild provided figures for the Chartwell trading accounts on a piece of paper to Sciarrone whilst he was driving her to the airport. The total figure Sciarrone recalls was about $37.4 million.

Goodchild subsequently engaged an accountant, Alan Donges, to review the trading account figures of Chartwell.

Donges agreed to participate in a telephone hook up on 4 January 2008 with Rau and Sciarrone.

On the morning of 4 January 2008 Donges received a telephone call from Rau who introduced himself. Rau confirmed that he wanted Donges to review some print screens which he would send Donges. Rau further told Donges that during the telephone hook up later in the day he wanted Donges to tell Sciarrone what the print screens revealed.

On 4 January 2008 at 11.10 am Donges received an email from Rau [M01056944] which had attached to it what Donges understood to be two print screens which Rau had referred to in their earlier telephone conversation. [M01056945 - 46]

The print screens purported to be live trading screens from the brokers PGM and CMC and indicated that there was in excess of $24 million in free equity in the trading accounts of Chartwell.

In the body of the email from Rau to Donges the following was stated:

Firstly thank you for assisting us during your holidays. I have made this simple as possible for you by totalling the figures in answer the specific questions.

1. There are four Chartwell accounts presented
2. The total cash is $37,872,011
3. The total margin required is $13,023,845
4. The total free equity is $24,848,163

The information on the email and attachments was false. As at 4 January 2008 the accounts held by Chartwell with PGM and CMC held in free equity a total amount of approximately $17,300.00.

At approximately 3pm on 4 January 2008 a telephone hook up was held between Rau and Sciarrone in Sciarrone's office in Geelong and Donges in Tenterfield NSW.

During the telephone hook up Donges stated what he understood the print screens to represent. Donges did not seek to provide any audit of the figures or obtain any independent confirmation of the figures.

As agreed with Rau, without disclosing to the Group what amounts were specifically held in the Chartwell trading accounts, Sciarrone did tell the Group that there were significant amounts of money in the Chartwell trading accounts. This gave Sciarrone comfort that everything was financially okay with Chartwell and that there was enough money to meet the commitments to the Group.

An analysis of the Chartwell computers reveals that the two attachments to Rau's email dated 4 January 2008 were created on 3 January 2008, and the author was Rau [M01379001, M01379002]. The figures contained in the attachments were false. P Martin of CMC and P Moloney of PGM provide evidence of the true account figures, which were substantially less than the figures set out in the documents provided by Rau to Donges. For example, the Chartwell end of October 2007 PGM statement disclosed that the Chartwell account had a net liquidation value of $1.41 [M01357013], and Chartwell did not trade with PGM after October 2007. In addition, the accounts held with CMC had a total maximum value of approximately $22,865.52 at the end of December 2007.

• - $129.15 total equity in account 1104861 [M01273187];
  • - $22,213.58 total equity in account 1019695 [M01273112];
  • - $522.79 total equity in account 1131473 (inoperative from December 2006) [M01273143].

1. On 21 April 2008 Fred Houte attended a coffee shop near the offices of Chartwell where he spoke to Rau. Rau told him that 'Hoy has fucked me over', and commented that money raised by Hoy had not been provided to him for trading. Wayne Hutchinson also spoke to Rau at the coffee shop, and states that Rau said that he only received about $150,000 to trade in the last 12 months.

2. On 12 May 2010 Rau signed a witness statement [M01503344], pursuant to which he will seek a sentencing discount under s. 21E of the Crimes Act 1914.

1. There was no formal agreement between Chartwell and Rau as to the terms of his remuneration. In 2004, Rau purchased a home in Retreat Road, Geelong. Hoy arranged finance and a mortgage through Chartwell. Substantial renovations to the home were arranged between Hoy and Rau. Furthermore, other substantial deposits were made into Rau's Uzzi Pty Ltd account and Rachael Rau's bank account on an irregular basis. Several hundreds of thousands of dollars were disbursed on renovating this house (part of a purported $2.56 million loan to Rau from Chartwell[15]).

[1] $344,149 was paid to CMC Markets Asia Pty Ltd. $100,000 (net) to Peter S Maloney & Associates.

[2] By Mr Melnik see Rau Statement paragraph 35.

[3] Defined in s 766B ; see also s 763B.

[4] At least some of this was the product of reinvesting "interest" payments due to him from his earlier investments.

[5] Mr Regan, on your behalf, described the indictment as "merciful"

[6] The s 21E undertaking and the statement are Exhibit 3.

[7] R v El Rashid (Unreported NSWCCA, 7 April 1995) Rivkin (2004) 59 NSWLR

[8] Pages 121, 141, 175, and 208 of Committal transcript

[9] Statement of A McRitchie, M01273035 at [54].

[10] Statement of M Wheeldon, M01357136 at [9(c)].

[11] Statement of B Bennett, M01273512 at [119]

[12] Statement of A McRitchie, M01273035 at [53-57]

[13] See Godrey evidence at committal p 93-96.

[14] Houte evidence at committal hearing - t/t p 24