SENTENCE
1 HIS HONOUR: Rodney Stephen Adler has pleaded guilty to 2 counts of disseminating information on 19 and 20 June 2000 respectively knowing it was false in a material particular and which was likely to induce the purchase by other persons of shares in HIH Insurance Limited (HIH) contrary to s 999 Corporations Act 2001 (Cth), one count of obtaining money by false or misleading statements, contrary to s 178BB Crimes Act 1900 (NSW), and one count of being intentionally dishonest and failing to discharge his duties as a director of HIH in good faith and in the best interests of that company contrary to s 184 (1)(b) Corporations Act 2001 (Cth).
2 It is important to note at the beginning of these Remarks that he has not been charged or convicted of being a director of a large public company which went broke resulting in large losses to shareholders and creditors, including a large number of insurance claimants, whose claims could not be met and others such as building owners who could not get their work done or completed because insurance for buildings ceased to be available. As he has not been charged or convicted of any of those things, he cannot be sentenced or punished for them in these proceedings. It has not been suggested, and cannot be, that the conduct alleged in these 4 counts and to which the offender has pleaded guilty caused or significantly contributed to the collapse of HIH in 2001 with debts of $5.3b.
3 Each of the offences carry a maximum penalty of imprisonment for 5 years, and/or in the case of the offences under the Corporations Act, an additional fine of $20,000.
4 In addition, ordinary sentencing principles require that the maximum penalty be reserved for the worst cases of a particular offence where there are no mitigating subjective circumstances such as prior good character; and that sentences for offences which are closely related in content or point of time should generally be made wholly or partly concurrent with each other.
5 The facts relied on by the Crown are set out in the Crown's Statement of Facts (Ex A). The offender also gave evidence in which he attempted to explain and justify, at least partially, his actions, and two of the Crown witnesses were cross-examined on his behalf.
6 Following the death of his father in 1989, the offender became Managing Director and Chief Executive of Fire and All Risks Insurance Limited (FAI) until it was taken over by HIH in 1998, after which he became a non-executive director of HIH. He was unhappy with the manner in which HIH was being run and believed he could do a better job if he were Chief Executive.
7 In June 2000, he arranged with Ray Williams, the then Chief Executive Officer of HIH for that company to lend $10m to a company of his, Drenmex Pty Limited for venture capital and share trading. He said in evidence that his object was to demonstrate that he could manage investments more successfully than those currently doing so on behalf of HIH. The arrangement was subsequently changed so that instead of the money being advanced to Drenmex, it was paid to Pacific Eagle Equities Pty Limited (PEE) of which the offender was sole director and secretary and a trust was set up, the Australian Equities Unit Trust with PEE as trustee.
8 At the time, he had a prominent media profile as a director and shareholder of HIH and as an experienced, active, successful and large scale investor with a diverse array of investment interests spread across property, retail, e-commerce, mining, insurance, financial services, biotechnology and communications. In January 2000, shares in HIH had been trading on the Stock Exchange as high as $1.49 but by 14 June they had fallen as low as $0.94 and on that day they closed at $0.95 a share.
9 On 15 June 2000, through Foster Stockbroking, the offender purchased 1,873,661 shares in HIH in the name of PEE at an average price of $1.0062. The purchase represented 38 per cent of the HIH shares traded that day on which the shares opened at $0.97 and closed at $1.02.
10 On 16 June, again on behalf of PEE, he purchased 951,339 shares at an average price of $1.0192. These purchases represented 42 per cent of the shares traded on that day on which the shares opened at $1.01 and closed at $1.03.
11 Then on 19 June, he purchased 425,000 shares at an average price of $1.018. On that day the shares opened and closed at $1.02. The funds for all of these purchases were provided by HIH Casualty and General Insurance Pty Limited, a subsidiary of HIH on 15 June 2000 (Ex 10).
12 On 7 July 2000, the Trust Deed establishing the Australian Equities Unit Trust was executed and PEE thereafter held the shares it had acquired in HIH, other investments made from the $10m, and the balance of the $10m, on the terms of the Trust Deed.
13 On 12 July, HIH Casualty and General Insurance Limited applied for 1 "B" class unit at $10m, and thus became the sole beneficiary of the Trust, subject only to 10 per cent of all distributable income for the holders of "A" class units, which it was intended would be held by the offender and represent his commission.
14 On 19 June, the offender caused a notice under s 205G of the Corporations Act to be sent to the Australian Stock Exchange Limited for the purchase of the shares on 15 June, and on 20 June, a further notice was sent relating to the purchase of 16 June. The notices did not specify who the purchaser was but merely reported that the offender being a director had a "relevant interest" in the shares purchased.
15 Following the first s 205G notice, he was contacted by Morgan Mellish, a journalist with the Australian Financial Review who assumed wrongly, but reasonably, that Adler had purchased the shares on his own behalf. The offender did nothing to correct Mr Mellish's misunderstanding but fostered and encouraged it by statements such as "I think there will be a weakness for another week or two and that will give me a chance to get some volume."
16 The following day, he read Mr Mellish's report in the Australian Financial Review headed "HIH director goes on buying spree" which stated inter alia that the offender had "topped up" his holding in the company by the purchase. However, when Mr Mellish contacted him later that day following the receipt of the second s 205G notice, he chose not to correct the inaccuracies in the article (T 84) and went even further and specifically said:
"I want people to know I'm a committed insurance person. People think I sold out and I've got my money and gone. That's not true. I'm making a number of statements by buying these shares. I believe in the company. I'm putting my money up which shows I believe in the industry. I think the company can be a billion dollar company again."
17 In that conversation, he also discussed "off the record" his criticisms of the existing management of HIH including the Chief Executive, Ray Williams, and the way in which the company was being run. However, when asked by Mr Mellish whether he could be quoted on any of the conversation, he said that although what he had said about Ray Williams was completely off the record and he did not want to be quoted about anything he had said in that regard, when asked "What about you just buying shares and your commitment to the industry" he replied, "I'm happy to be quoted about that". The following day, Mr Mellish caused to be published another article, which quoted the passage I have set out above.
18 By making the statements he made on 18 and 19 June, the offender disseminated information which he knew to be false, that he had purchased shares in HIH with his own money which information was likely to induce other persons to purchase shares in HIH; hence counts 1 and 2 in the indictment.
19 Not only were the statements which he made to the journalist, and which were therefore likely to be reported, likely to induce other persons to purchase shares in HIH, but I am satisfied that such was his intention so as to cause a rise in the share price, as in fact it did, rising as high as $1.21 on 11 July 2000 before commencing its final decline.
20 The offender stood to benefit from a rise in the share price in 2 ways; firstly, successful trading through PEE on behalf of the Trust would enable him to demonstrate to Ray Williams and to the Board of HIH that he could manage the company's investments better than the current team, and thus help to position him to succeed Williams as Chief Executive, and secondly, it would increase the value of the shares in HIH held by him, including those transferred to him from his company, Adler Corporation, on 14 June 2000. He said in evidence that one of his objects in speaking to the press and making himself approachable was to position himself externally as well as internally to take over a more senior managerial role in the company (T 76); and these discussions with Mr Mellish were part of that process.
21 He claimed in evidence that he was caught unawares on 19 June when he realised that Mr Mellish was assuming that he was purchasing the shares with his own money and on his own account, but he did nothing to correct the misapprehension and having seen the article published the following day, his misrepresentation that day was more blatant and more direct in specifically asserting that he was "putting up" his own money for the purchase of the shares and authorising its publication. Not only was this statement totally untrue, but it was the type of statement most likely to induce other investors to purchase HIH shares.
22 In evidence, the offender said that he did not want to disclose at that stage that the shares were being bought with HIH's money as such disclosure would create a "false impression"; that HIH was financing the purchase of its own shares (T 82,134,135); but such disclosure (i.e. that HIH money was being used for the purchase) would not have created a "false impression" but rather a "true impression", because that was exactly what was happening.
23 As to the third count, in the latter part of the year 2000, Business Thinking Systems Pty Limited (BTS), a company in which Adler interests held an effective 35-38.5% of the share capital and HIH interests (on account of its take over of FAI) an effective interest of 15-16.5%, was desperately short of money and needed additional capital to survive. A plan to raise $8m on the open market through Foster Stockbroking had been unsuccessful and the proposal had been modified to an attempt to raise $5m, but as at 3 October 2000, that proposal had been equally unsuccessful and no money had been raised.
24 At the end of September 2000, the company had accumulated losses of $1.3m, current assets of just over $1.17m and current liabilities of over $2m. Cash flow projections indicated that to meet its current liabilities, it needed $1,455,000 without allowing for contingencies and $2,045,000 allowing for contingencies. Its cash flow difficulties were such that it was unable at all times to remain within its overdraft limit and was under pressure from its bank. The offender was the non-executive chairman of directors of BTS.
25 On 29 September 2000, the offender sent a facsimile to Ray Williams stating that BTS was in the process of raising funds through Foster Stockbroking and was $2.5m short of finalising the raising. He went on to request that HIH invest $2m and said that he would put in another $500,000 to finalise the raising.
26 This facsimile contained two statements which were materially false to the knowledge of the offender: firstly, the company was not $2.5m short of finalising the raising but, as no money had been raised, it was $5m short of the intended raising, and secondly, he had no intention of investing another $500,000. He spoke to Ray Williams apparently on the evening of 4 October and subsequently, Williams approved the investment of $2m by HIH in return for shares in BTS.
27 In the meantime, on 9 or 10 October, the offender received a letter from John Vamos, the owner of the balance of the shares in BTS acknowledging the receipt of $500,000 from Adler on the previous Friday (6 October) and on 10 October, Adler sent to Williams and to John Ballhausen (Chief Investment Officer of HIH) copies of John Vamos' letter knowing that the statement in it that he, Adler, had provided $500,000 on the previous Friday, was false.
28 The $2m from HIH was paid on 11 October and was promptly disbursed. $200,000 was paid to Westpac to bring the company's account to order for payment of wages and $400,000 was paid to retire an existing loan to Pacific Mentor Pty Limited, a part owner of BTS and in which HIH interests held 30 per cent of the shares and Adler interests held 70 per cent. In addition, following remarks made by the offender to Michael Vamos about his entitlement to a brokerage fee for obtaining the $2m, $50,000 was paid to Adler Corporation which was recorded in the books of BTS as a brokerage fee.
29 The offender subsequently realised that he was not entitled to a brokerage fee and called Mr Ballhausen and asked him to "fix it up" which the latter purported to do by re-allocating the money to what was described as a "rental bond". This was sought to be justified as a payment for past and future rent of office space occupied by BTS in the premises of Adler Corporation. The only evidence was that BTS agreed to pay rent to Adler Corporation as and when it could, but that there was no set amount agreed on either a weekly, monthly or other basis, and I am satisfied that this payment was in fact intended as a brokerage fee for the offender for organising the investment by HIH of the $2m.
30 The misrepresentations of the offender relied on by the Crown to constitute the offence charged in the third count are:
1) The statement in the facsimile to Ray Williams on 4 October that BTS had raised all but $2.5m of its fund raising when it had not raised any funds and was $5m short of its projected fund raising.