Regina v Frawley

Cribb (unreported) WA District Court 9 June 1998 R v Doff [2005] NSWCCA 119 Cameron v The Queen (2002) 209 CLR 339 Hannes (2002) 173 FLR 1 R v Kearns [2002] NSWCCA 367 CASES CITED : Kin Lang Teh (unreported) Victorian County Court 2 September 1991 Regina v Rivkin [2004] NSWCCA 7 Sweetman (unreported) District Court Queensland 17 December 2004 R v Wall [2002] NSWCCA 42 R v Williams [2005] NSWSC 315

Regina PARTIES : Richard James Frawley (Accused)

L P Robberds QC / A Wigney (Crown) COUNSEL : T Game SC / M Thangaraj (Accused)

Cth DPP SOLICITORS : Morgan Lewis Attorney (Accused)

IN THE SUPREME COURT OF NEW SOUTH WALES CRIMINAL DIVISION

JUDGMENT 1 BELL J: On 30 May 2005 the offender entered a plea of guilty to a charge that he purchased securities, being 253,500 ordinary shares in JNA Telecommunications Limited (the securities), while in possession of information concerning JNA Telecommunications Limited that was not generally available, being information which a reasonable person would expect to have a material effect on the price of the securities if it were generally available, and being information which the offender knew, or ought reasonably to have known was not generally available and if it were generally available, might have a material effect on the price of the securities. 2 The offence is provided by s 1002G(2)(a) and s 1311(1)(a) of the Corporations Act 2001 (Cth). It carries a maximum penalty of five years imprisonment or a fine of $200,000 or both. 3 The offence is particularised as taking place between 21 May and 15 July 1998 and as involving twenty-one purchases of shares parcels that varied between 41,300 and 2000 shares. 4 JNA Telecommunications Limited (JNA) was at the material time a public company listed on the Australian Stock Exchange (the ASX). It was in the business of supplying networking and telecommunications systems and services to industry. 5 From late 1997 until mid-1998 JNA was searching for a "strategic partner" to help market a new product. The product, known as the "the Opal product", was a voice/data access platform. It was expected to make a successful entry into the growing voice communications market. 6 A preliminary information memorandum (the memorandum) was distributed to a limited group of potential strategic partners. The memorandum stated the need for confidentiality. Expressions of interest from potential partners were sought by 30 November 1997. 7 The discussions between JNA and potential partners were conducted on the basis of strict confidentiality.

8 The memorandum made clear that the preferred basis for the strategic partnership was the purchase of significant equity in JNA. By 1998 JNA was engaged in confidential negotiations with Lucent Technologies Inc (Lucent) and Cisco Systems Inc (Cisco). Both were major telecommunications businesses incorporated in the United States. Negotiations involving JNA, Lucent and Cisco continued until 8 July 1998. 9 The offender worked for Cisco in its London office. His brief was to seek out new developments in the field of technology that might benefit Cisco. He reported to Mr Fremantle, who conducted a number of the negotiations on Cisco's behalf with Peter Davies, who was the Managing Director of JNA. 10 Cisco and JNA had a pre-existing business relationship. In or about January 1998, Mr Davies travelled to London and met the offender, Mr Fremantle and other Cisco staff in connection with an unrelated project. 11 Cisco's Director of Marketing, Mr Littlewood, had been involved in discussions with JNA concerning the strategic partner search as early as December 1997. He communicated the content of these discussions to the offender and Mr Fremantle. Mr Littlewood, Mr Fremantle and the offender were all Australian and they formed an informal group within Cisco. It was their wish to ensure that the possible acquisition of JNA by Cisco was fully considered and that JNA was given a fair hearing. Mr Littlewood regularly exchanged emails with the offender in which the proposed strategic partnership with JNA, the potential equity investment and what were seen to be the advantages for Cisco, were discussed. 12 On 20 May 1998 the offender telephoned Kevin Fernandez of JNA saying that he needed market information on the Opal product in order to put a business case to an influential group within Cisco. 13 Mr Fernandez reported his discussions to Mr Davies. On 21 May Mr Fernadez advised the offender by email that Mr Davies would contact him direct. At 3:20 pm that day the offender had a telephone discussion with Mr Davies and Graeme Williams, JNA's Chief Financial Officer and Company Secretary. During the course of the conversation, either Mr Davies or Mr Williams confirmed that JNA was negotiating with another party and that: "JNA's current market capitalisation on the ASX should be ignored as the Australian stock market significantly undervalues JNA. If JNA was listed on the NASDAQ it would be worth $US 300 million."

The offender asked what Mr Davies was wanting for the company. He was told: "We are not in a position to state that, however we are giving a very clear signal that JNA's current share price should be ignored, and the only time that a significant volume of shares have traded, and the last time the Director's of JNA sold any shares, was at $3.05. We are expecting offers well above that level." 14 On 21 May JNA shares were trading at $1.35 per share.

15 The offender's first buy order for shares in JNA was placed through his broker, Pru-Bache Securities, at 3:57 pm on 21 May. This was a little over half an hour after his telephone discussion with Mr Davies and Mr Williams. The order was for 41,300 shares. A further buy order for 33,000 shares was made by the offender through his broker, Pru-Bache Securities, at 9:53 am the following morning. 16 On 1 June 1998, in a further discussion, Mr Davies told the offender that there was another offer on the table, but that JNA was delaying its response. The offender said that he and Mr Fremantle were strongly in favour of working with JNA and that he would keep the pressure building slowly within Cisco.

17 On Friday 19 June 1998 Mr Fremantle sent an email to the offender telling him that Cisco's Mergers and Acquisitions Business Development Group was in negotiations with JNA. The following Monday the offender resumed his acquisition of shares in JNA. He placed two buy orders each for 10,000 shares. Further buy orders were placed in the following days. 18 Between 21 May and 8 July 1998 the offender purchased the total of 253,500 shares in JNA. He paid from about $1.39 to about $2.15 per share. His total outlay was $458,580.24. He placed twenty-one separate buy orders by telephone with client advisers at Pru-Bache. The orders were placed over a total of nine days. On some days he placed multiple orders.

19 On 20 July 1998 the ASX announced that Lucent Technologies had made an offer to acquire JNA at a price of $3.75 per share.

20 Between 20 and 21 July 1998 the offender sold all of his JNA shares through Pru-Bache. The proceeds of the sale totalled $938,372. The profit in his trading in JNA shares between 21 May and 21 July 1998 was approximately $479,789. 21 The offender had an account with Pru-Bache Securities dating back to 1996. Prior to 21 May 1998 he had not purchased JNA shares.

22 At the time the offender purchased his shares in JNA he was possessed of the following information: (a) Senior officers of Cisco were giving consideration to Cisco offering to acquire all of the shares in JNA and confidential discussions were taking place between representatives of JNA and other senior officers of Cisco in that regard; and (b) negotiations were taking place between representatives of JNA and another corporation, which was a major corporation and rival of Cisco, about whether that corporation would offer to acquire all the shares in JNA; and (c) JNA was expecting offers well above $3.05 per shares for its shares. 23 The offender obtained this information as a result of a series of confidential communications, both oral and email, with officers and employees of JNA and of his employer, Cisco, including the telephone discussion with Mr Davies and Mr Williams on 21 May 1998. 24 Documents were tendered in the offender's case with a view to demonstrating that there was other information in the market place of a similar kind to the information that he had, although admittedly not of the same quality. It was submitted that these documents tended to show that there was information in the market place to the effect that JNA was undervalued and likely to be the subject of a takeover, and that this information was having some influence on its share price. The relevance of the fact that other similar information was said to be available was submitted to be twofold. First, it bore on the offender's culpability: the less generally available and the more material the information an insider possesses, the greater his or her culpability. Secondly, the existence of the information went to contrition: the Crown case was said not to have been as strong as it may at first have appeard, and the offender's plea was to be seen as a true demonstration of his contrition. 25 I am not of the opinion that the documents tendered in the offender's case materially affected the strength of the Crown case. To my mind the documents do not show that there was similar information available in the market place. In any event I am of the view that the offender's culpability is not to be assessed as lower, even if it were the case that similar, less specific, information was in the marketplace. 26 The offender described his position with Cisco as being that of "an individual contributor", which he explained was akin to being an internal consultant. It was his role to report on technology and the directions that Cisco might take in product development. However his position is characterised, the fact is that by virtue of it he had knowledge of the highly confidential negotiations between Cisco and JNA. His position was such that he had access to Mr Davies, from whom he obtained the information. He went into the market immediately after so doing in order to take advantage of it. His offending conduct was not isolated. It took place over a period of nearly two months. The pattern of his buy orders is eloquent of his understanding that the information was not generally available and, if it were, that it might have a material effect on the price of the shares. He outlaid a substantial sum on the purchase of JNA shares and secured a substantial profit.

27 Insider trading has the capacity to undermine the integrity of the market in public securities and for that reason is an offence that is viewed as serious: R v Doff [2005] NSWCCA 119 at [56] and Regina v Rivkin [2004] NSWCCA 7. 28 The offender is aged forty-seven years. He has no previous convictions. He has been married for twenty-three years and is the father of a seventeen-year-old son and a fourteen-year-old daughter. He has a close and loving relationship with his wife and children. He is also a caring son who supports his widowed mother. 29 The offender has engaged in charitable activities, including raising substantial funds for the Royal Flying Doctor Society. 30 The offender gave evidence at the sentence hearing and acknowledged his understanding of the wrongness of his conduct. He said, and I accept, that since being charged with this offence he has experienced intense feelings of shame and embarrassment. He has expended a sum of the order of $400,000 on legal fees in connection with these proceedings. 31 The offender suffered from depression and developed symptoms including sleep disturbance and palpitations after he was charged with this offence. In December 2002 he sought the assistance of a clinical psychologist, Ms Fischer. Since that time he has attended a large number of counselling sessions and has obtained very considerable benefit from this therapy. Tendered in his case is a report prepared by Ms Fischer. At the time of his first consultation she considered that he met the diagnostic criteria for an adjustment disorder with mixed anxiety and depressed mood (in DSM IV). By the end of the first year he appeared to have recovered. He persisted with counselling after the resolution of his mood disorder and has succeeded, in Ms Fischer's opinion, in achieving remarkable personal development. I accept this to be the case. 32 The offender left Cisco for reasons unconnected with this offence. He is self-employed and works with an associate in a small information technology consultancy. He is presently working on the preparation of a system for a corporation, Selectv Pty Limited, which is seeking to establish a new satellite television platform. James Blomfield, the Managing Director of Selectv, provided a written reference and gave oral evidence at the sentence hearing. He describes the offender as possessing unique talent in the design and implementation of complicated computer systems.

33 In addition to the reference from Mr Blomfield to which I have referred, references from Jacob Bloom, John Dalton and David Yuile were tendered on his behalf. Mr Bloom has been on close terms with the offender and his family for many years. He and the other referees give an account of the offender as a talented and hardworking individual with a strong commitment to his family. I am satisfied that this is so. 34 The plea was entered on the morning fixed for trial in the face of a powerful Crown case and in circumstances in which the offender says that he understood his guilt from the time he was charged. I am not persuaded that the plea demonstrates contrition other than by way of his willingness to facilitate the course of justice. However on that account it is a matter to be given weight in his favour.

35 The Crown submitted that it is appropriate that a degree of leniency be extended to the offender because of the passage of time since the offence was committed. The Crown noted that there had been a lengthy interval between the offence and 17 October 2002 when the offender was charged. The Crown submitted that there will necessarily be a degree of delay due to the complexity of investigations in these cases, but acknowledged that the delay in this instance had been greater than it should have been. The Crown pointed out that on two previous occasions the trial had been vacated through no fault on the offender's part. The delay is a factor to be taken into account and entitles the offender to an added element of leniency. 36 The Commonwealth Director of Public Prosecutions is seeking, and the offender has indicated that he will consent to, a pecuniary penalty order pursuant to s 116 of the Proceeds of Crime Act 2002 (Cth). The pecuniary penalty amount is $586,000.77. The offender has consented to an order in the terms of Exhibit D. The orders take effect upon payment of the sum to the Official Trustee on or before midday on 4 July 2005. 37 Section 320(d) of the Proceeds of Crime Act provides that I must not have regard to any pecuniary penalty order relating to the offence. The Crown contended that I might take into account the offender's cooperation in resolving action taken against him pursuant to the Proceeds of Crime Act in accordance with the provisions of s 320(a). This was submitted to be a further demonstration of the offender's willingness to facilitate the course of justice. I have regard to the offender's evidence that he intends to make a payment to the Official Trustee as contemplated by paragraph 4 of the consent orders before midday 4 July 2005 and I take it into account in the way the Crown invited me to do. 38 I turn now to the considerations to which Pt 1B of the Crimes Act 1914 (Cth) directs attention. Section 17A provides that a court shall not pass a sentence of imprisonment in respect of a Federal offender unless, having considered all other available sentences, it is satisfied that no other sentence is appropriate in the circumstances. 39 It is necessary for me to have regard to the matters to which s 16A(2) directs attention to the extent that they are relevant and known. Thirteen factors are set out therein. I have already referred to a number of them in the course of these reasons. I do not propose to recite them all. It is important to note that they are not an exhaustive statement of the factors to be taken into account in sentencing federal offences. Section 16A(2) does not refer to general deterrence. It is a factor to which weight must be given in this case, having regard to the nature and seriousness of the offence. 40 I am required to consider the deterrent effect that any sentence may have on the offender. I am not of the opinion that personal deterrence is a factor that requires particular emphasis in this case. I consider that the offender has good prospects of rehabilitation. This is not a case in which consideration of the probable effect that any sentence may have on any of the offender's family or dependents is one to which it is appropriate to give weight. 41 I have concluded, after considering all other available sentences, that no sentence other than one of imprisonment is appropriate. 42 The Crown provided me with a schedule detailing the sentences imposed in other cases involving insider trading: Rivkin [2004] NSWCCA 7; Doff [2005] NSWCCA 119; Hannes (2002) 173 FLR 1; Cribb (unreported) WA District Court 9 June 1998; Williams (unreported) NSW District Court 4 October 1996; Kin Lang Teh (unreported) Victorian County Court 2 September 1991; Sweetman (unreported) District Court Queensland 17 December 2004. In my view this offence is of lesser objective seriousness than was the case in Hannes. The Crown acknowledged so much. By way of contrast, it is to be observed that the offender in this case made no effort to disguise his trades in JNA shares. It is to be noted that the sentence imposed in the case of Hannes was one that reflected s 16G of the Crimes Act. Rivkin and Doff were related offences and are both are objectively less serious instances of insider trading than is the present case. The schedule provided by the Crown is useful but ultimately each case stands to be considered on its own facts.

43 The Crown submitted that a substantial sentence of imprisonment was called for. It acknowledged that an order that the sentence be served by way of periodic detention was within the range in the circumstances. I have determined that it is appropriate to impose a sentence that is to be served by way of periodic detention. I have taken the plea of guilty and the delay into account in determining that the sentence should be served in this way.

44 Because I have decided that the sentence may be served by way of periodic detention, I am required under the Crimes Act to explain (or cause to be explained) to you the sentence, its purpose and effect and the consequences that may follow in the event you fail, without reasonable cause or excuse, to comply with it before I pronounce it. 45 You will be sentenced to a term of two and a half years imprisonment to be served by way of periodic detention. You will be required to report to the Periodic Detention Facility on the day and time specified in the order. In the event you fail to attend for a detention period, or you are late in attending, your sentence may be extended. The Parole Board may revoke your periodic detention order in circumstances, including where it is satisfied that you have failed to comply with your obligations under it. In the event of revocation, you may be required to serve the balance of your sentence in fulltime custody. The sentence that I propose will be the subject of a recognizance release order. You will be released at the completion of twenty months upon entering the recognizance order. Richard James Frawley I sentence you to a term of two and a half years' imprisonment to be served by way of periodic detention. You are to report to the Officer in Charge of the Periodic Detention Centre at Parklea on Saturday 2 July 2005. Your sentence will commence on that day.

I direct your release on security on a recognizance release order after you have served twenty months of the sentence. *******

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