Regina v Williams

CATCHWORDS : Criminal law - sentencing - HIH Insurance Limited - whether departure from standards of competence and diligence expected of Chief Executive officer - proper disclosure - withholding from prospectus of information - misleading statement - recklessness - overstating of operating profit in Annual Report - proper operation of securities market - investor faith - level of criminality - issues of general deterrence.

Corporations Act 2001 (Cth) LEGISLATION CITED : Corporations Law (Cth) Crimes Act 1914 (Cth)

ASIC v Adler and Ors (2002) 41 ASCR 72 ASIC v Adler and Ors (2002) 42 ASCR 80 Cameron v The Queen (2002) 209 CLR 339 De Simoni v The Queen (1981) 147 CLR 383 Director of Public Prosecutions (Commonwealth) v El Karhani (1990) 21 NSWLR 370 Director of Public Prosecutions (Commonwealth) v Thomas (1997) 37 ATR 296 DPP v Bulfin (1998) 4 VR 114 Johnson v The Queen (2004) 78 ALJR 616 Pearce v The Queen (1998) 194 CLR 610 R v Boskovitz [1999] NSWCCA 437 R v Brown [2002] VSCA 99 R v Corner NSWCCA 19 December 1997 CASES CITED : R v El-Rashid NSWCCA 7 April 1995 R v Ellis (1986) 6 NSWLR 603 R v Gallagher (1991) 23 NSWLR 220 R v Herrera NSWCCA 6 June 1997 R v Hodgson (2002) 84 SASR 168 R v Kearns [2003] NSWCCA 367 R v Martin (1994) 74 A Crim R 252 R v Moffat Vic CCA 15 December 1992 R v Pang (1999) 105 A Crim R 474 R v Radich [1954] NZLR 86 R v Rivkin (2004) 59 NSWLR 284 R v Thompson (1975) 11 SASR 217 R v Wall [2002] NSWCCA 42

Regina PARTIES : Raymond Reginald Williams

D J Fagan SC with M A Wigney (Crown) COUNSEL : R Richter QC with P D Crutchfield

Commonwealth Director of Public Prosecutions SOLICITORS : Arnold Bloch Leibler

• 55 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

SENTENCE 1 HIS HONOUR: The Defendant has pleaded guilty to three counts contained in an indictment dated 15 December 2004, charging that:

1. On or about 26 October 1998 at Sydney in the State of New South Wales (he) authorised the issue of a prospectus lodged under the Corporations Law in relation to securities of a corporation, namely a Converting Note prospectus issued by HIH Holdings (NZ) Ltd ("HIH NZ"), from which there was a material omission. Particulars of material omission (a) The Prospectus provided that Societe Generale Australia Ltd ("SGA"), a co-underwriter of the Converting Notes issue, would take up as a priority allocation the lesser of 30 per cent of the amount to be underwritten or A$35 million. (b) The Prospectus did not disclose that HIH Insurance Ltd ("HIH") and SGA had entered into a transaction in October 1998 known as the "Total Return Swap" the effect of which was that: (i) SGA's subscription of A$35 million under its priority allocation of Converting Notes under the prospectus was fully secured and risk free in that: (1) HIH would deposit with SGA a sum equivalent to SGA's subscription; and (2) SGA's subscription would be secured against any loss on re-sale of the Converting Notes by recourse to this deposit; (ii) the net amount available to the HIH Group of companies pursuant to the Converting Notes issue would not include SGA's subscription as it was subject to a requirement that HIH deposit a sum equivalent to SGA's subscription with SGA (s 996(1) Corporations Act).

2. On or about 9 September 1999 at Sydney in the State of New South Wales in a document required for the purposes of the Corporations Law, namely the HIH Insurance Ltd 1998/99 Annual Report ("the Annual Report"), (he) made and/or authorised a statement which to his knowledge, was misleading. Particulars of Misleading Statement (a) In the Profit and Loss Statement set out in the Annual Report the operating profit, before abnormal items and income tax, for the consolidated entities for the period 1 January 1998 to 30 June 1999 was stated to be $102 million. (b) This operating profit was overstated in the Annual Report by $92.4 million. (c) William signed the Director's Declaration regarding the financial statements and associated notes contained in the Annual Report. This Declaration stated, inter alia: "The financial statements and associated notes give a true and fair view of the financial position as at 30 June 1999 and performance of the company and economic entity for the eighteen months then ended". (d) In a section of the report titled "Chief Executive's Review" Williams stated inter alia: "Going forward, we have also taken decisive action, through the purchase of whole account reinsurance protection, in order to protect all of our businesses from claims development uncertainties including potential underwriting exposures to year 2000 losses." (e) For the subject period HIH Insurance Limited ("HIH") had entered an arrangement with Hannover Re, which purported to be two contracts of traditional reinsurance ("Hannover Re arrangements").

(f) The Hannover Re arrangements were documented in: (i) Two reinsurance slips: (ii) Four related transactions entered into by HIH Underwriting Agency Services Limited (UAS), a wholly owned subsidiary of HIH, with Hannover Re and two of its subsidiaries, namely a Letter of Credit Agreement, Letter of Credit Authority Agreement, and two Trust Agreements (the "related transactions"); and (iii) Correspondence between HIH and Hannover Re. (g) Williams signed the documents constituting the related transactions. (h) Contrary to the assertion in the Annual Report, the Hannover Re arrangements were not traditional reinsurance contracts, but were "financial" reinsurance contracts. (i) the Hannover Re arrangements were wrongly accounted for as traditional rather than financial reinsurance contracts, and this accounting treatment resulted in the overstatement of the operating profit in the Annual Report by $92.4 million. Particulars of Knowledge (a) Williams knew that the Hannover Re transactions were treated as traditional reinsurance transactions in the Annual Report. (b) Williams knew that the Hannover Re transactions were not traditional reinsurance transactions (s 1308(2) Corporations Act);

3. On or about 19 October 2000 at Sydney in the State of New South Wales as a director of HIH Insurance Ltd ("HIH"), (he) was reckless and failed to exercise his powers and discharge his duties for a proper purpose in that he signed a letter dated 18 October 2000 addressed to Noteholders, who had purchased Notes issued by FAI Insurances Ltd ("FAI"), a subsidiary of HIH, pursuant to a US$150,000,000 Domestic and Euro Medium Term Note Programme (the "MTN Programme") which contained a misleading statement. Particulars of misleading statement (a) The letter stated that it was the policy of the company that its subsidiaries be managed and operated in such a way as to meet their obligations. The letter further stated that the company followed this policy with respect to FAI. (b) At the time the letter was signed HIH had not managed FAI in such a way that it met its obligations in that FAI was in breach of the MTN Programme as: (i) Group Shareholders' Funds for FAI and its subsidiaries had fallen below the minimum requirement of A$200 million; (ii) The Auditor's Compliance Certificate for the year ended 30 June 1999 and the audited consolidated balance sheet and profit and loss account for FAI and its subsidiaries for the same year had not been provided; and (iii) The breach in respect of Group Shareholders' Funds had persisted from at least 30 June 1999 to at least 30 June 2000. Particulars of Recklessness

Williams knew that FAI and its subsidiaries: (a) had been in breach of their obligation under the MTN Programme in respect to Group Shareholders' Funds and he chose to make no enquiries prior to signing the letter as to whether FAI and its subsidiaries had increased their Group Shareholder's Funds to a sum no less than A$200 million; and (b) had obligations to produce audited consolidated balance sheet and profit and loss accounts and Auditors Compliance Certificate for the year ending 30 June 1999 and he chose to make no enquiries as to whether they had complied with that obligation prior to signing the letter; and therefore whether the statement made in the letter was not misleading.

(s 184(1) Corporations Act). 2 The pleas to these charges were entered at the arraignment of the Defendant in this Court, and he adhered to them when he appeared for sentence. 3 The facts upon which he is to be sentenced are contained in the agreed statements which were tendered . The first comprises a general statement of facts as follows: " Williams' Role in the HIH Group 1. Raymond Reginald Williams ("Williams") was the Chief Executive of HIH Insurance Limited ("HIH") from 2 December 1998 until 12 October 2000 when he announced his intention to resign upon the appointment of a successor. On 14 December 2000 Mr Randolph Wein was appointed as CEO. Williams was a director of HIH for the same period. HIH was a public company listed on the Australian Stock Exchange and was Australia's second largest general insurer. 2. Williams was a director of several other subsidiary companies within the HIH Group ("the Group") including FAI Insurances Limited ("FAI"), HIH Investment Holdings Limited ("HIHIH") and HIH Underwriting and Agency Services Ltd ("UAS"), at all relevant times. The ultimate holding company was HIH. 3. Between 2 December 1998 and 15 March 2001, Williams held as beneficial owner, shares in HIH varying in number from approximately 7 million to approximately 8.8 million. Further Williams was a beneficiary of the CEH Management Trust, a discretionary trust, which in the same period was the registered owner of a number of HIH shares varying in number from 3.3 million to 3.4 million. 4. On 15 March 2001 HIH was placed in provisional liquidation. The deficiency of the Group has been estimated to be at least $3.6 billion. Management Practice 5. As Chief Executive Officer, Williams was involved in the day to day management of the Group. 6. Williams reviewed most major transactions before such transactions were submitted for consideration by the HIH Board. 7. Major proposals were not put to the Board unless supported by Williams in the first instance. 8. Williams had a close working relationship with Dominic Fodera ("Fodera"), the Chief Financial Officer and Terrence Cassidy ("Cassidy"), the Managing Director of HIH. Both Fodera and Cassidy were directors of HIH. Fodera and Cassidy were also directors of a number of other subsidiaries including FAI, HIHIH and UAS in the relevant period. 9. An informal reporting process existed between Williams, Fodera and Cassidy with contact often occurring on a daily basis. 10. Further it was also usual practice for Williams, Fodera and Cassidy to meet and discuss issues prior to Audit and Board Meetings. 11. Usually Williams, Fodera and sometimes Cassidy met the auditors prior to Audit Committee Meetings. However, at times Williams did not attend and at other times he attended for part only of the meetings with the auditors. 12. Matters of substance relating to subsidiary companies in the Group were usually referred to the HIH Board for discussion and resolution. 13. HIH Board meetings were generally held in the boardroom that was part of Williams' office."

THE FIRST COUNT 4 The agreed statement of facts was to the following effect: " HIH NZ 1998 CONVERTING NOTES PROSPECTUS BACKGROUND 1. On 26 November 1998 HIH Holdings (N.Z.) Limited (" HIH NZ" ) issued a prospectus to raise up to $155 million by unsecured converting notes ("the Prospectus "). Raymond Williams (" Williams ") signed this prospectus. 2. The Prospectus provided that Societe Generale Australia Ltd (" SGAL "), a co-underwriter to the converting notes issue, would take up as a priority allocation the lesser of 30 per cent of the amount to be raised or A$35 million. 3. The Prospectus omitted a material fact in that it did not disclose that at the time HIH Insurance Ltd (" HIH ") and SGAL entered into a transaction in October 1998 known as the "Total Return Swap" (" TRS ") the effect of which was that: (a) SGAL's subscription under its priority allocation of converting notes under the Prospectus was fully secured and risk free in that: (i) HIH would deposit with SGAL a sum equivalent to SGAL's subscription; and (ii) SGAL's subscription would be secured against any loss on re-sale of the converting notes by recourse to this deposit; (b) the net amount available to the HIH group of companies pursuant to the Converting Notes issue would not include SGAL's subscription as it was subject to a requirement that HIH deposit a sum equivalent to SGAL's subscription with SGAL. HIH NZ 4. HIH NZ was a company incorporated in New Zealand but registered as a foreign company in Australia. It was also a wholly owned subsidiary of HIH and its directors during September and October 1998 were Williams (appointed 14 December 1995), Fodera (appointed 2 January 1996), George Sturesteps (appointed 14 December 1995, and also a director of HIH appointed 2 December 1988), Ross Chapman (appointed 14 December 1995) and Dale Donaldson (appointed 1 October 1998, ceased 19 October 1998). PROJECT VITAMIN - THE TAKEOVER OF FAI Announcement of the takeover 5. On 22 September 1998 the HIH board met and resolved to proceed with a takeover bid for another listed insurance company, FAI Insurances Limited (" FAI "), codenamed Project Vitamin. The minutes note that Williams advised the board that: " the bid would be structured at approximately 75 cents per Vitamin share to be made up of half in HIH shares and the other half in cash (which would be financed through the issue of converting notes as mentioned above) " 6. On 23 September 1998 HIH publicly announced its intention to acquire all the shares in FAI. It was also announced that HIH would raise capital through the issue of a new series of converting notes to finance the cash component of the acquisition. 7. On 24 September 1998 it was reported in the press at the time of the announcement of the takeover that Williams had said the company intended to raise $150 million. Other parties involved in the FAI takeover 8. SG Hambros Australia Limited (" SG Hambros ") was engaged by HIH to project manage the takeover. The Deputy Managing Director of SG Hambros was Colin Richardson (" Richardson "). 9. The converting note issue was co-underwritten by merchant bank SGAL and Macquarie Equity Capital Markets Limited (" Macquarie "). Representatives from SGAL included John Harvey (" Harvey "), the then Group Treasurer. 10. Minter Ellison, lawyers, were engaged to act for HIH to prepare the Prospectus and assist in the verification of the Part A takeover documents for the FAI shares. The Minter Ellison staff included Leigh Brown, partner (" Brown "). 11. Atanaskovic Hartnell, lawyers (" AH ") were retained by HIH in relation to the preparation of the Part A statement for the takeover. Due Diligence Committee 12. Prior to 1 October 1998 a due diligence committee commenced the overseeing of the preparation of the Prospectus and the takeover. At its first meeting on 2 October 1998, the Chairman (Mr Cohen) noted that both he and Mr Stitt were authorised by the Board to form the Due Diligence Committee and in accordance with that authority, the Due Diligence Committee is properly constituted. The committee included representatives from HIH SG Hambros, SGAL, Macquarie and Minter Ellison. The committee met on six occasions between 2 October and 28 October 1998. The final report of the committee was dated 28 October 1998. There is no reference in the report to the TRS. Williams was not a member of the due diligence committee. 13. The TRS was not discussed at any of the meetings of the Committee. Standard & Poors rating 14. The rating of HIH by rating agency Standard and Poors (" S&P ") was of particular interest to Williams as CEO during September and October 1998. 15. By an Information Memorandum dated 17 March 1998, HIH NZ had sought to raise up to A$125 million by a private placement of 25 million converting notes. The funds to be raised by this note issue were intended to support the HIH Group's S&P "A" Claims paying ability rating. 16. Prior to the takeover announcement, HIH was rated by S&P as "A". FAI had an S&P rating of "BBB+". Calculations were carried out within HIH in late September 1998 to determine what sum of capital was needed to be raised to justify the continuation by S&P of a rating of not less than "A-". It was determined that the amount required was approximately A$150 million. If HIH had failed to maintain at least an A-rating its ability to write certain lines of insurance would have been reduced. 17. On 24 September 1998 S&P placed HIH on a CreditWatch with negative implication due to the takeover of FAI, a lower rated entity. 18. At a meeting with S&P held on 29 September 1998 the HIH representatives, including Fodera and Richardson, informed the S&P attendees that HIH was to undertake a capital raising of A$150 million. This sum was later confirmed at a further meeting on 7 October 1998 when Williams attended. 19. On 16 October 1998 S&P advised HIH it would be given an "A-" rating. 20. S&P were not informed of the TRS prior to nominating this rating or at any time prior to the completion of the FAI takeover. Investor demand for converting notes and underwriting by Societe Generale 21. SGAL had determined early in the transaction that it did not intend to hold any of the converting notes after their issue. SGAL's strategy to minimise the risk of any underwriting commitment to HIH was to identify firm investor interest in the converting notes prior to making any such commitment. 22. In late September 1998 SGAL approached the market to identify investor interest in the converting note issue. Prior to 30 September 1998, based on these approaches, Harvey had formed the opinion that he was confident of SGAL being willing to underwrite an amount in the range of A$100 million to A$120 million of new converting notes for HIH. This remained his view throughout September and October 1998. 23. Harvey continued to update Richardson during September and October 1998 on the investor demand for the notes and repeated that the likely safe underwriting amount for SGAL was in the range of A$100 to A$120 million, that is the amount which SGAL was confident would be subscribed by others.

From about September to late October 1998, Richardson was in frequent communication with Williams. Fodera was often present. Those communications included, at least for some of the period mentioned, discussion as to fundraising and the outcome of the S&P rating review. At these meetings Williams asked what was the level of demand for the notes.

At a meeting on 30 September 1998 between Fodera, Lo, Richardson and Harvey, Fodera confirmed that HIH wanted to raise A$150 million.

Mr Harvey had, prior to the meeting, made some attempts to ascertain what sum could be raised without exposing SGAL to take any part of the issue itself. At the meeting Harvey, in response to Fodera's question as to how much SGAL could raise, had responded "approximately $100 million". In response to a question whether it was feasible for SGAL to work on raising A$150 million, Harvey replied: "I will give it some thought as to whether there are any structures or alternatives that we can consider to raise $150 million. It may be possible to use a credit derivative, such as a total return swap. "

On 1 October 1998 Harvey sent a letter to Fodera which set out a proposed structure for the acquisition by SGAL of converting notes. This proposal became the genesis of the TRS. [See SGAL letter dated 1 October 1998 barcoded SBA293684] A copy of the letter was provided to Minter Ellison.

For the remainder of the period until the relevant documents, including the Prospectus, were signed on 26 October-1998, SGAL was not confident it could raise the amount nominated by HIH and the TRS was necessary to attain that objective. SGAL required, as a condition of executing the underwriting agreement and, in particular, exposing it to a liability to subscribe to the A$35 million priority allocation, that HIH enter into the TRS.

On 26 October 1998 the TRS was formally agreed between the parties. [See SGAL letter dated 22 October 1998 barcoded SBA179817, SGAL letter dated 26 October 1998 barcoded S01010094].

Pursuant to the TRS: · SGAL was to take up as a priority allocation, the lesser of 30% of the nominated amount or A$35 million. · HIH would deposit with SGAL a sum equivalent to SGAL's subscription. · SGAL's subscription would be secured against any loss on re-sale of the Converting Notes by recourse to this deposit. · HIH would pay SGAL interest on the Converting Notes at 7.535%. · SGAL would pay interest to HIH at the same rate of 7.535% on a notional sum equivalent to SGAL's subscription. · SGAL would pay HIH interest on the A$35M deposit at the Bank Bill rate. · HIH would pay interest to SGAL at the Bank Bill rate plus 0.35% on a notional sum equivalent to HIH's deposit with SGAL.

Meeting of HIH Board on 16 October 1998 31. Both Williams and Richardson were present at an HIH board meeting on 16 October 1998. The minutes of this board meeting record that Fodera advised: · "that the Company intended to assume the investment risk on $35 million of Notes through the use of derivatives with Societe Generale as the counter party." · "HIH's reason to enter into that transaction was to capture the above average interest margin. " [See HIH board minutes 16 October 1998 barcoded SBB002531] 32. A one page discussion paper tabled during the meeting recorded as follows: "The structure of the acquisition by SGAL is proposed to be: i) SGAL to subscribe for $35 million of New 1998 Notes; ii) HIH and SGAL to enter into a Total Return Swap; iii) HIH to deposit $35 million with SGAL on the following terms.. " [See New Converting Notes discussion paper barcoded SBB208066] 33. Fodera's explanation to the Board as to why HIH was entering into the TRS was misleading. The board were not informed by Fodera that the TRS, in conjunction with SGAL's subscription for converting notes: · was cash flow neutral, save for 0.35% pa on A$35 million payable by HIH; · was necessary if HIH wanted to raise approximately A$150 million being a condition of SGAL's willingness to underwrite the converting note issue; · was a means of accommodating the shortfall between investor demand and the target amount of the raising. Williams remained silent at the meeting during Fodera's explanation of the transaction.

35. The Board was advised in the discussion paper referred to in paragraph 32 above that: "If one assumes that the New 1998 Notes become worthless the maximum loss is $35 million. " 36. Brown of Minter Ellison was present at the meeting. He commented that under the financial assistance provisions the directors have personal risk with respect to any loss arising through any giving of financial assistance. All of this was directed to the implications of the TRS for s.205 (the prohibition on a corporation financially assisting in a subscription in its own securities). Brown said nothing about the materiality or otherwise of the TRS for disclosure in the prospectus.

Meeting of HIH Board on 22 October 1998 37. On 22 October 1998 the HIH board met again. Williams and Fodera were present by telephone. A draft, derivative contract was tabled at the meeting being part of the documentation of the TRS. The minutes of this meeting do not record any other discussion of the TRS. The HIH board resolved to settle, sign and execute key documents including the TRS and approved the issue of the converting notes, the subject of the Prospectus. [See HIH board minutes 22 October 1998 barcoded SBB054815] Discussion between Williams, Fodera and Richardson on 26 October 1998 38. Prior to the HIH board meeting on 26 October 1998 Richardson had a telephone conversation with Fodera and Williams. During the conversation Richardson said: "The $35 million TRS is not without risk and because there is no guarantee or stop loss on the amount the whole $35 million is at risk and therefore in considering the TRS you need to be aware that a worse case scenario is that HIH loses $35 million. Under the financial assistance provisions the directors have personal risk with respect to any loss arising through any giving of financial assistance. Whilst the board has agreed that a loss of $10 million is not material prejudice, hypothetically the loss could be $35 million. Do you understand the risk?" To this both Fodera and Williams replied "Yes". Richardson kept a note in his daybook of the conversation.

HIH Board meeting on 26 October 1998 39. At the meeting on 26 October 1998 the minutes record that the Board was informed by Richardson that the amount to be underwritten "had been reduced to $135 million (from the previously quoted amount of $176 million) with the underwriters having the option to increase it to a maximum of $155 million". Fodera and Williams were the only executive directors present. Fodera and Williams did not give the Board any explanation for the reduction. Williams and Fodera were appointed authorised signatories of the relevant documents. On this occasion Richardson attended the meeting although no one from Minter Ellison was present. Signing of the Prospectus on 26 October 1998 40. Brown was present on 26 October 1998 when Williams and Fodera signed the Prospectus and initialled page 19, without raising any questions or concerns that required answering. A version of the opinion letter from Minter Ellison to the Due Diligence Committee dated 26 October 1998 was available when the Prospectus was signed. There is no reference in this letter to the TRS. 41. Section 3.1.3 of the Prospectus summarized the Underwriting Agreement in the following terms:

"....the Underwriters have agreed to underwrite an amount to be nominated by [HIH NZ] between A$50 million and A$135 million ("Underwritten Amount") ("Nominated Amount") for the subscription of the Notes as to 65% (Societe Generale) and 35% (Macquarie) ("Proportionate Shares"), subject to a Priority Allocation (see below) from Societe Generale (as set out below under Obligations of the Underwriters).

Obligations of the Underwriters The obligations of the Underwriters include the following on the date that applications for the [Notes] are finally lodged with [HIH NZ]: (a) Societe Generale will provide to [HIH NZ] money in respect of applications for the Notes in an amount which is the lesser of: (i) 30% of the Nominated Amount; and (ii) A$35 million, for the purpose of a priority allocation of Notes to itself...; and (b) the Underwriters will provide money in respect of applications for the balance of the [total of notes to be issued] from third parties, provided that any shortfall in applications and money received from third parties will be covered by applications from the Underwriters or their nominees in their Proportionate Shares. Payments by [HIH NZ] to the Underwriters and Brokers On the date of signing of the Underwriting Agreement, [HIH NZ] paid commitment fees... of: (i) $350,000 to Societe Generale (being 1 % of A$35 million); and (ii) $650,000 to Societe Generale and $350,000 to Macquarie (being 1 % of A$100 million in their Proportionate Shares) ".

[See Prospectus barcoded SBA293732] 42. There is no reference in the Prospectus to the other terms of the TRS, in particular the requirement that HIH place an equivalent amount on deposit with SGAL as security for the performance of the notes. The Prospectus was misleading in that it failed to refer to this requirement.

43. At the time of signing the Prospectus, Williams knew that the priority allocation was subject to this requirement.

44. Given Williams' knowledge of this requirement, he failed to make reasonable enquiries before signing the Prospectus." THE SECOND COUNT 5 The agreed statement of facts was to the following effect:

"HANNOVER RE CONTRAVENTION OF CORPORATIONS LAW, S.1308(2)

Arrangements entered into by HIH 1. In July 1999 negotiations commenced between HIH Insurance Ltd (HIH) and Hannover Ruckversicherungs-Aktiengesellschaft (Hannover Re) in relation to a proposed reinsurance arrangement. Williams was not involved in the negotiations with Hannover Re. 2. By 25 August 1999 HIH and Hannover Re entered into reinsurance arrangements. These reinsurance arrangements were essentially financial reinsurance arrangements as distinct from traditional reinsurance arrangements. 3. The arrangements were documented in the following documents: · Two Reinsurance Binders dated 19 August 1999 and 20 August 1999 respectively ("Slips" - Hannover 1 and Hannover 2) [SBA202234.SBA210593]; · A Letter of Credit Agreement ("LOC Agreement") [SBA210599]; · A Letter of Credit Authority Agreement ("LOC Authority Agreement") [SBA210600]; and · Two Trust Agreements, entitled "Agreement Re Trust Arrangement" [SBA210601, S00240768]. 4. In addition to the arrangements disclosed in those documents there were other understandings reached between the parties, which were recorded in correspondence and reports commencing 30 July 1999 and ending 24 August 1999 but were not included in any of the formal documents. [SBA210681, SBA210677, SBA210665, SBA210666, SBA210663, SBA210661, SBB201479, SBA210652] 5. The accounting treatment adopted by HIH of these financial reinsurance arrangements profoundly affected HIH's accounts for the 18 months ended 30 June 1999. By wrongly accounting for the arrangement as traditional, as opposed to financial reinsurance, the operating profit of HIH, before abnormal items and income tax, for the 18 months ended 30 June 1999 was overstated by $92.4 million. 6. This reduced the loss declared by HIH for the period to $21.2 million. Had the arrangements been properly accounted for, HIH would have declared a loss at 30 June 1999 of over $100 million.

Reinsurance 7. Reinsurance - in its traditional form - is where a contract of insurance is taken out by the original insurer (the reinsured or cedant - in this case HIH) with another insurer (the reinsurer - in this case Hannover Re) to indemnify the reinsured against liability or payments under the original or underlying contract(s) of insurance. The reinsurer, for a premium, assumes all or part of the risk undertaken by the reinsured under the underlying policies. The primary risk for the reinsurer is that it will have to pay out more in claims than it receives in premium over the life of the reinsurance contract.

8. There is an important distinction between traditional reinsurance contracts - which involve a transfer of risk from the reinsured to the reinsurer - and reinsurance that is known as financial or finite reinsurance. The latter type of reinsurance in general does not involve the transfer of risk but resembles more a financing arrangement between reinsured and reinsurer. The distinction between traditional reinsurance and financial reinsurance is particularly important because of the different way that the respective arrangements may or must be accounted for.

9. At the relevant time under Australian Accounting Standard 1023 ("AASB 1023") an insurer accounted for a reinsurance contract by recognizing as an expense premiums ceded to the reinsurer and as income reinsurance recoveries receivable from the reinsurer. Accordingly if reinsurance recoveries exceeded reinsurance premiums the difference was booked to the company's profit. A reinsurance contract should only have been accounted for in this way if there was a transfer of risk from the insurer to the reinsurer. There was no transfer of risk in the reinsurance arrangements entered into between HIH and Hannover Re and so they should not have been accounted for in this way. They were, in substance, financial reinsurance. SUBSTANCE AND EFFECT OF THE HANNOVER RE TRANSACTIONS The Reinsurance Slips 10. The substance of the arrangements as documented in the Slips was as follows: Hannover 1 - 19 August 1999 Hannover Re was to provide reinsurance cover to HIH of up to $450 million for insurance claims in excess of $2,869 million. No claims were to be paid before the expiry of 10 years. Any such claims were to be paid from a Managed Fund. HIH was to transfer $200 million to the Managed Fund, and would also pay Hannover Re a fee of $2.65 million. The Managed Fund was to be established, maintained and reported on by Hannover Re. Hannover 2 - 20 August 1999 Under the second contract Hannover Re provided an extra $100 million of reinsurance cover on top of the $450 million cover provided under Hannover 1. HIH was to pay a premium of $11 million per annum for five years to a Managed Fund and was to pay Hannover Re a fee of $650,000. This Managed Fund was also to be established, maintained and reported on by Hannover Re. 11. Accordingly, HIH could claim up to $550 million from Hannover Re under the Slips. Those claims were to be paid from the Managed Funds. The Managed Funds were "expected" to grow at a compound rate of 8.5% to enable sufficient funds to pay the claims. 12. It appeared from the Slips alone that Hannover Re carried the risk of ensuring that the Managed Funds would grow at a sufficient rate to meet claims in 10 years time, failing which Hannover Re would have to meet claims from its own pocket. The Letters of Credit 13. However, during the course of the negotiations it was agreed between the parties that HIH would effectively guarantee the performance of the Managed Funds (as referred to in paragraphs 10 and 11). In doing so it became entitled to the benefit of any growth of the Fund above the predetermined threshold of 8.5%. 14. This agreement was documented separately in the LOC Agreement and LOC Authority Agreement. The effect of these documents was that the risk that the Managed Funds would be sufficient to meet claims (which appeared on the face of the Slips to be borne by Hannover Re) was transferred to HIH. 15. Drafts of what became the LOC Agreement and LOC Authority Agreement were prepared from 30 July 1999. 16. Hannover Re required that the LOC Agreement and LOC Authority Agreement be properly authorized by HIH. These Agreements thus required the approval of the HIH Board. 17. On 16 August 1999, however, at Frederick Lo's (the Company Secretary) suggestion, Fodera proposed that HIH be replaced as the entity which would undertake to provide the letters of credit by HIH Underwriting and Agency Services Ltd (UAS) - a wholly owned subsidiary of HIH. Fodera stated to Hannover Re that it was 'much more administratively expedient for us to use UAS in this instance.' At the time there were four directors of UAS: Williams, Fodera, Terence Cassidy and George Sturesteps. 18. On or about 20 August 1999 Lo completed and signed a certificate which stated that it had been resolved that UAS enter into four agreements, being: · the LOC Agreement; · the LOC Authority Agreement; and · the two Trust Agreements The certificate stated that it was further resolved that Williams and Fodera be authorized to sign the agreements, which would be binding on the company. 19. On 20 August 1999 at 1113hrs Lo sent a fax to Williams who was at Port Stephens. The fax attached the following documents for Williams to sign and return. [R00098568]

· the LOC Agreement; · the LOC Authority Agreement; and · the two Trust agreements. 20. Williams signed the four documents. 21. The LOC Authority Agreement was a one-page document. In the recital it stated "Under an LOC Agreement between HIH and Hannover Reinsurance….HIH is required to provide Letters of Credit to cover deficiencies in the Managed Fund". 22. The LOC Agreement was a two-page document. It noted "In consideration of HRI/E+SI and HRA entering into the Contracts at the request of HIH, HIH has agreed to provide a Letter of Credit facility on the terms of this agreement". 23. The reference to "HRI/E+ISI" in the above document denotes two subsidiary companies of Hannover Re, Hannover Reinsurance (Ireland) Ltd and E&S Reinsurance (Ireland) Ltd, who entered into the Hannover 1 Slip agreement with HIH on 19 August 1999. The reference to "HRA" denotes Hannover Re (Australian branch), being the branch which entered into the Hannover 2 Slip agreement with HIH on 20 August 1999. 24. The LOC Agreement further noted that the Managed Funds required to be established under the two reinsurance Slips were expected to increase in value by an annual compound rate of 8.5 per cent. It further provided: "A Letter of Credit may only be drawn upon…..insofar as there are insufficient assets in the combined Managed Funds to meet the loss payment" 25. On 20 August 1999 at 1334hrs Williams sent a fax to Lo, attaching a copy of each of the four documents he had signed [RC 0098551]. 26. Fodera then co-signed the documents that Williams had faxed to Lo. 27. On or about 23 August, Lo obtained clean copies of these four documents, bearing no fax transmission imprints. Williams and Fodera both signed each of these four clean documents. 28. On 25 August at 0845hrs Raymond Gosling, Reinsurance Manager for the HIH Group, delivered these re-signed documents to Hannover Re and in turn collected from Hannover Re their signed slips. Accounting for the Transaction 29. The arrangements were not traditional reinsurance and should not have been accounted for as traditional reinsurance. 30. By accounting for the transaction as traditional as distinct from financial reinsurance, HIH's operating profit was increased by $92.4 million. 31. It was this difference in accounting treatment and the corresponding accounting benefit to HIH that was the reason for HIH entering into the arrangements with Hannover Re. The arrangements were not entered into for proper reinsurance needs.

The 1998/1999 Annual Report 32. By accounting for the transaction as traditional reinsurance HIH was able to publish an operating profit which was significantly larger than it was otherwise entitled to publish. 33. On 9 September 1999 at Sydney HIH released the 1998/99 Annual Report (Annual Report). In a section of the report titled "Chief Executive's Review" Williams stated inter alia: "Going forward, we have also taken decisive action, through the purchase of whole account reinsurance protection, in order to protect all of our business from claims development uncertainties including potential underwriting exposures to Year 2000 losses."

34. The Annual Report omitted to disclose the overall effect of the reinsurance arrangement with Hannover Re. 35. On 25 August 1999, HIH put out a media release quoting Williams in similar terms. 36. In the Profit and Loss Statement set out in the Annual Report, the operating profit for the consolidated entities before abnormal items and income tax, for the period 1 January 1998 to 30 June 1999 was stated to be A$102 million. 37. The operating profit was overstated in the Annual Report by $92.4 million due to the incorrect accounting of the Hannover transactions. 38. In the section of the Annual Report entitled "Directors' Report", the following statement was made under the heading "Group Results": "Consolidated loss of the economic entity for the eighteen months ended 30 June 1999 was $21.2 million after extraordinary items, income tax expense and outside equity interests. " 39. Williams signed this section of the Annual Report in his capacity as director. 40. Williams also signed in his capacity as director the following representation regarding the "Financial Statements" section of the Annual Report: "The financial statements and notes give a true and fair view of the financial position as at 30 June 1999 and performance of the company and economic entity for the eighteen months then ended..."

41. On 14 October 1999 the General Purpose Financial Report for the eighteen months ended 30 June 1999 lodged with ASIC similarly overstated consolidated profits.

Williams' knowledge of the substance and effect of the transactions 42. Williams knew that Hannover Re entered into the reinsurance contracts on the condition that HIH entered into the LOC related agreements. He knew that they were inextricably linked. 43. Williams signed the LOC Agreement and the LOC Agreement Authority. These documents show that:

· in consideration for Hannover Re providing reinsurance HIH agreed to provide a LOC facility; · the intent and expectation was for the Managed Funds to grow at 8.5% per annum compounded; · the LOCs would cover any deficiency in the Managed Funds should they not grow as expected; · UAS was bearing the risk in relation to the Managed Funds to the extent that the Managed Funds failed to achieve the "expected" compound growth rate of 8.5% per annum. UAS had the benefit of any surplus above this growth rate; and · accordingly, UAS was effectively guaranteeing any shortfall in the Managed Funds. As UAS was a wholly owned subsidiary of HIH the likelihood was that any adverse outcome would be effectively guaranteed by HIH. 44. Williams appreciated at all relevant times that the question of whether or not there was a transfer of risk in the contracts was of significance. 45. Williams appreciated that the issue of transfer of risk was relevant to a determination of whether or not a contract could properly be accounted for as traditional reinsurance. 46. Williams knew this transaction was treated as traditional reinsurance in the accounts to 30 June 1999 as published in the Annual Report; notwithstanding that he knew the transaction did not qualify as traditional reinsurance. 47. Williams knew that a significant profit was booked as a result of this accounting treatment. 48. Williams was aware that the accounting treatment of the Hannover transactions was misleading. 49. Williams was also aware that the statement he made or authorised, as published in the Annual Report, was misleading."

6 The agreed statement of facts was to the following effect: "FAI 2000 PREFERENCE SHARES CONTRAVENTION OF CORPORATIONS LAW, S. 184(1) MTN Programme entered into by FAI 1. On 30 May 1997, FAI entered into a domestic and euro medium term note programme as Issuer, with Westpac Banking Corporation as Agent (MTN Programme). The MTN Programme had a maximum aggregate face value amount of US$150 million. The MTN Programme was established pursuant to a number of written agreements. 2. The MTN Programme was subscribed to US$75 million, with unsecured Notes being issued to institutional investors in Asia. Westpac had the role of facilitating the management of the MTN Programme by receiving documents required to be produced from time to time and distributing those to each of the Noteholders.

3. The terms of the MTN Programme provided for Events of Default including in Condition 7.2(k) which in essence provided: (Financial covenants): any breach of the undertakings set out in 7.5 (Undertakings) without remedy within 7 days of FAI becoming aware of the breach, or being made aware by Notice from Westpac Hong Kong. 4. Condition 7.5 required FAI to procure at all times certain things (being the various undertakings referred to in Condition 7.2(k)), including at 7.5(a):

(Group Shareholders' Funds) Group Shareholders' Funds (including minority or outside interests) of FAI and its consolidated subsidiaries will not be less than A$200 million. and at 7.5(d): (Auditors) Arthur Andersen, or a firm of similar standing, were to be appointed as auditors of FAI and were to certify annually that FAI was in compliance with the financial undertakings in Condition 7.5 ("Auditor's Compliance Certificate").

5. No Event of Default was taken to have occurred where the undertaking in Condition 7.5(a) was breached unless FAI remained in breach for 90 days after Notice of the breach from the auditors. 6. After an Event of Default occurred, and at any subsequent time, a Noteholder could declare all moneys owing under the MTN Programme to be immediately due and payable. 7. FAI also undertook to provide copies of the audited consolidated balance sheet and profit and loss. account of FAI and its subsidiaries and the unconsolidated audited balance sheet and profit and loss account of FAI to Westpac. Westpac was required to make the accounts available to Noteholders. FAI was required to meet this obligation within 120 days after the close of the relevant accounting period.

Acquisition of FAI by HIH 8. In September 1998 HIH made a takeover offer for FAI, then a public company listed on the Australian Stock Exchange. The takeover was successful and the acquisition was completed in January 1999. 9. The MTN Programme was inherited by HIH when it acquired FAI and its subsidiaries. After the acquisition, FAI became a wholly owned subsidiary of HIHIH. HIHIH was itself a wholly owned subsidiary of HIH. 10. Following the acquisition of FAI the HIH Secretariat had responsibility for monitoring the MTN Programme and its loan covenants. Fred Lo ("Lo") as Company Secretary had responsibility for the Secretariat. Lo reported to Fodera, who in turn reported to Williams who reported to the Board. BREACH OF FAI's DEBT COVENANTS Consolidated Accounts and Auditor's Compliance Certificate for year ended 30 June 1999 11. A "Detailed Balance Sheet" prepared for FAI and its subsidiaries for the year ended 30 June 1999, dated 7 September 1999, prepared by HIH, shows that the Group Shareholders' Funds of FAI and its subsidiaries was A$80.973 million. It was therefore below the A$200 million required under Condition 7.5(a) of the MTN Programme. A Profit & Loss statement was also prepared for FAI and its subsidiaries at this time. There is no evidence as to whether Williams received a copy of the Balance Sheet or the Profit and Loss Statement. Internal emails of HIH show that Lo and Robert Kelly (the Assistant Company Secretary) who were responsible for administration of the MTN Programme, were aware of the Group Shareholders' Funds shortfall by at least 22 May 2000. 12. By early May 2000 Westpac, Hong Kong had advised FAI on a number of occasions that FAI had not provided the consolidated balance sheet and profit and loss account of FAI and its subsidiaries for the year ended 30 June 1999, and had not supplied the Auditor's Compliance Certificate. FAI did not at any time thereafter provide the necessary accounts or the Certificate. 13. On 26 May 2000 in a meeting with representatives from Westpac Sydney, Lo and Kelly falsely advised Westpac that in relation to the consolidated accounts of FAI and its subsidiaries it would be impossible to reconstruct the accounts and costly in terms of cost and time. During the meeting Lo offered to provide, inter alia, a Letter of Comfort to Noteholders under the MTN Programme. 14. For the year ended 30 June 1999, therefore, there was a breach by FAI, of the undertaking to maintain Group Shareholders' Funds above A$200 million. Further, FAI did not provide the Auditor's Compliance Certificate and did not remedy the non-compliance after notice from the Agent that the Certificate was required. This potentially constituted an Event of Default. For the year ended 30 June 1999, FAI, was therefore exposed to the risk of a Noteholder acting on the occurrence of an Event of Default and presenting the Note to Westpac Hong Kong and the Note becoming due and payable. In that event the Group was vulnerable to cross defaults in other facilities. Pre-Audit Committee Meeting, 7 September 2000 15. As at 7 September 2000, Group Shareholders' Funds of FAI and its subsidiaries, for the year ended 30 June 2000, was still below the A$200 million required under Condition 7.5(a) of the Notes, and was in fact some A$32.8 million. This was known to the HIH Secretariat and to the auditors of HIH, Arthur Andersen, by mid September 2000. 16. On 7 September 2000 Williams attended a meeting with Cassidy, Fodera, John Buttle (Arthur Andersen) and Jon Pye (Arthur Andersen) in an office on level 42 of HIH's offices. Buttle and Pye were audit partners of Arthur Andersen. Board and Audit Committee meetings, 8 and 12 September 2000 17. On 8 September 2000, a meeting of the Board of HIH commenced at 12.45pm and was adjourned at 3.45pm to resume at 2.00pm on 12 September 2000. On 12 September 2000, the Board meeting re-commenced at 2pm and adjourned at 3.15pm. An Audit Committee meeting was held at 3.20pm and concluded at 4.35pm. The Minutes of the Audit Committee meeting (S01123587) show that in addition to the members of the Audit Committee, all of the other members of the Board of HIH were also in attendance. This included Williams, Cassidy, Fodera and Lo. Also present were Buttle, Pye and other officers of HIH. 18. The Minutes of the Audit Committee meeting record that Buttle tabled a paper titled "Summary of 30 June 2000 Audit of Financial Statements", "and advised that the major audit issues, including outstanding matters yet to be resolved, were summarised therein". Copies of the paper by Arthur Andersen were distributed to those present in the meeting, including Williams (SBB023001). The last page of the paper "Summary of 30 June 2000 Audit of Financial Statements", with a heading "Outstanding Audit. Matters", refers to "Compliance with debt covenants". 19. Buttle and Pye took the persons present at the meeting through the issues identified in the paper. This included addressing the issue of compliance by FAI with debt covenants. 20. The Minutes of the Audit Committee meeting also record that Williams tabled a Financial Statements Questionnaire (SBB055964), in respect of the financial statements for the year ended 30 June 2000. The questions on this had been prepared by the Auditors. The answers to the Questionnaire were compiled by Lo from reports prepared by each group manager. Williams and Fodera signed the completed Questionnaire. This, was accepted and countersigned by Geoffrey Cohen, the Chairman of the Audit Committee. 21. On page 4 of the Questionnaire, the question "Have all debt covenants in force during the period been complied with?" was answered "Yes". Westpac Meeting 22. During October 2000 negotiations were ongoing between HIH and representatives of Westpac regarding a review of HIH's banking arrangements. 23. On 11 October 2000 Williams, Fodera and Lo met with representatives of Westpac at the offices of HIH. No mention was made at that meeting of the MTN Programme. Fodera and Lo again met Westpac on 12 October 2000 however, Williams was not present at that meeting. The meeting with Westpac on 12 October occurred after the Audit Committee meeting of that day referred to below. Audit Committee meeting, 12 October 2000 24. On 12 October 2000, an Audit Committee meeting was held preceding a meeting of the Board of Directors of HIH. The Minutes of the Audit Committee meeting (SBB054750) show that in addition to the members of the Audit Committee, the members of the Board of HIH were also in attendance, including Williams, Fodera, Cassidy and Lo. Representatives of the auditor, Arthur Andersen, (Buttle, Pye and John Fanning) and Robert Martin, HIH Financial Controller were also present. 25. Andersen prepared a presentation for the Audit Committee meeting (S01137012). The presentation document was not provided to those present at the meeting however Buttle and Pye took those present through the issues identified in the presentation. The Debt covenant breaches are dealt with on pages 0008 and 0009 of the presentation. Page 0008 of the presentation includes the following: "Facility Undertakings Breach Action $US 75m Shareholder Yes (1999&2000 Potential funds>$200m redeemable preference Shares"

The issue of the debt covenant breaches was discussed at the Audit Committee meeting of 12 October 2000 including the potential solution for the breach of the Group Shareholders' Funds covenant identified as at 30 June 2000. 26. Certain persons present at the Audit Committee meeting including Martin and Pye took notes of the Audit Committee. The notes of Martin include the following: "Debt covenant breach for FAI', "Redeemable preference shares from FAI $200m to Non-Insurance A/c's", "$200m with debt then need legal opinion", "Net asset $35M Need to be $200M [therefore] Need $170M", "Redeemable Pref. Shares - Andersen Legal & Abela". 27. Pye's note of that meeting records: " Debt covenants - FAI legal advice as to whether preference shares can be issued for a receivable." Board Meeting, 12 October 2000 28. The Minutes of the Meeting of the Board of Directors of HIH on 12 October 2000 show the Financial Statements Questionnaire, presented during the 12 September 2000 meeting, was tabled during this meeting and it was resolved that it be accepted and signed by Cohen as Chairman of the Board. 29. On 12 October 2000, following the Board Meeting, Lo sent an email [S01135028] to various persons including Fodera but not Williams which includes the following: "1. FAI US$75 MTN AA has put forward an idea to boost the net assets of the FAI consolidated accounts through the issue of redeemable preference shares by FAI Insurances Ltd to UAS. This approach his been agreed by the board subject to legal sign-off which we have asked AA to obtain from Andersen Legal. On the tax side, could you liase with Alf Capito to obtain a tax sign-off to ensure there are no major problems... I'd appreciate your advice that both 1 and 2 have been resolved ASAP as the board is anxious to finalise the accounts. "

30. On 13 October 2000, Lo sent a facsimile to Gary Ho of Westpac which included the following: "You will see from the above that the FAI business is very much alive and active well past the maturity date of the FRN's. FAI is and will be able to fulfil its obligations under the terms of these FRN's. Indeed we are in discussion with Westpac, Sydney with a view to issuing a letter of comfort by HIH to alleviate any concern that the FRN holders may have. " (FRN Holders were the Noteholders under the MTN Programme)

Legal Advice from Andersen Legal 31. Fodera received from Andersen Legal a letter of advice dated 13 October 2000 (SBB266898) on the following issue: "whether FAI Insurances Limited (ACN 004 304 545) ... is capable of issuing redeemable preference shares for consideration other than immediate payment of cash." 32. The advice from Arthur Andersen provided an analysis of FAI's capacity to issue the shares under Corporations Law. The print date on the document SBB266898 is 16 October 2000. Management representation letter to Arthur Andersen 33. Williams left Australia on 16 October 2000 and travelled to the United States. Williams returned to Australia on 19 October 2000, arriving at about 7am and departed again to the United Kingdom at about 3.30pm on 19 October 2000. Williams left the United Kingdom on 20 October 2000, arrived in Hong Kong on 21 October 2000, departed Hong Kong on 22 October 2000 and arrived in San Francisco on 22 October 2000. He departed San Francisco on 23 October 2000 returning again to Australia on 25 October 2000. 34. A letter ("the management representation letter"), dated 16 October 2000 was signed by Williams, Cassidy and Fodera, addressed to Arthur Andersen (S00069530). The fax transmission imprint on the management representation letter (S00069530) shows it was faxed from HIH at 5.25pm, 16 October 2000, and from the Ritz Carlton at 8.25am, (USA time) 16 October 2000. At the time Williams was a guest at the Ritz Carlton in San Francisco. 35. The management representation letter was drafted by Arthur Andersen and was prepared "in connection with [Arthur Andersen's] audit of the financial report of HIH Insurance Limited and Controlled Entities for the year ended 30 June 2000. The management representation letter confirmed, on the part of the signatories, "to the best of our knowledge and belief, as of the date of the letter, the following representations made to you during your audit", including: "The company and its controlled entities have complied with all aspects of the contractual agreements that would have a material effect on the financial report in the event of noncompliance. In particular, the company and its controlled entities have complied with all debt covenants and financial undertakings except as specifically disclosed to you and, in respect of the events of non-compliance communicated to you (the US$75 million FAI facility), the company and its controlled entities have been in contact with the relevant debt providers and, in the opinion of the directors, these events of non-compliance will not result in an early call for repayment of the related debt facilities. The event of non-compliance has subsequently been remedied by the subscription of $200 million in subordinated redeemable preference shares." This paragraph was drafted by Buttle on information provided by executives of HIH including Fodera and following identification of a possible solution to the 30 June 2000 breach of the Group Shareholders' Funds covenant. 36. As at the date of the management representation letter, HIH had not disclosed, and did not subsequently disclose, to Westpac Hong Kong or Sydney that Group Shareholders' Funds of FAI and its subsidiaries as at 30 June 1999 and 2000 was below A$200 million, and that FAI was therefore in breach of Condition 7.5(a). Further, non-compliance with Condition 7.5(a) of the MTN programme had not been remedied at the date of the management representation letter by the issue of redeemable preference shares.

LETTER OF COMFORT AND AWARENESS TO NOTEHOLDERS 37. The Letter of Comfort had been foreshadowed in the meeting between Lo and Kelly and Westpac Sydney on 26 May 2000 referred to in paragraph 13 above. 38. On 16 October 2000 Mr Pye met with Mr Davies and in a note recording that meeting stated ... "Debt covenants now okay subject to pref share issue. LOC's - DF letter." The reference to DF is a reference to Don Finlater of KPMG. 39. On 19 October 2000 a "Letter of Comfort and Awareness", addressed to the Noteholders and dated 18 October 2000 (S01012104), was signed by Williams and signed by Lo at or about the same date. The Letter of Comfort was then forwarded to Westpac Hong Kong, copied to Westpac Sydney, accompanied by: (a) a letter issued by HIH outlining the details of the initial acquisition of FAI and the recently announced underwriting agency agreement with Allianz Australia Limited; (b) an abridged corporate structure of the HIH Group; (c) HIH and Controlled Entities General Purpose Financial Report for the year ended 30 June 2000. At the time of signing the Letter of Comfort, Williams read the document and when Kelly sought to give an explanation, Williams stated to Kelly that he knew all about it. Williams denies making any such statement.

40. The Letter of Comfort provided the following: "We advise that [HIH] is the beneficial owner of 100% interest in [FAI]. HIH currently has no intention of diluting its interest in FAI. … We hereby advise you that in the event we propose to reduce our shareholding in FAI at any time prior to the maturity of the Notes, we will provide you with reasonable notice and, if you request, we will use our best endeavours to cause FAI to repurchase the Notes. It is our policy that our subsidiaries be managed and operated in such a way that they meet their obligations. We follow this policy with respect to FAI and we will use our best endeavours to prevent FAI from entering into any financial commitment which it cannot or could not see its way clear to fulfil." 41. On 13 November 2000, Westpac distributed the Letter of Comfort and accompanying documents to the Noteholders under the MTN Programme, with further advice that HIH was liaising with the auditors Arthur Andersen for the issue of the Auditor's Compliance Certificate for the year ended 30 June 2000, and would forward the Certificate to Westpac Hong Kong, when received from the Auditors, for distribution to the Noteholders (501131215). 42. At the time of signing the Letter of Comfort and contrary to the representation in the final paragraph of the Letter of Comfort, Williams was aware that FAI had been in breach of the MTN Programme through a shortfall in required FAI Group Shareholders Funds. ISSUE OF THE PREFERENCE SHARES 43. On or about 26 October 2000, Fodera received a further letter of advice dated 25 October 2000 from Andersen Legal regarding the issue of the preference shares. (see SBB266899). The print date on the document is "26/I0/00". Included with this advice were drafts of documents necessary to effect the issue of the preference shares. 44. FAI issued the redeemable preference shares on or about 24 November 2000 by documents falsely bearing the date 23 June 2000. IMPORTANCE OF THE FACILITY TO HIH 45. As at 30 June 2000 the FAI US$75 million MTN Programme was the largest external borrowing of the HIH Group. 46. An event of default under the US$75million MTN Programme was likely to trigger defaults in other HIH banking facilities. 47. By reason of the events set out above the Noteholders were denied the opportunity to consider whether they could, and if so would exercise their contractual entitlements and take steps with a view to demanding repayment of the whole of the amount then owed pursuant to the MTN Programme.

ISSUE OF THE ANNUAL ACCOUNTS 48. On or about 13 September 2000 HIH had advised the ASX its accounts would be lodged around the 20 October 2000. HIH had an extension to lodge accounts with ASIC to 31 October 2000. The accounts of HIH were dated 16 October 2000 although signed by Williams and Geoffrey Cohen on a later date probably 19 October 2000. 49. On or about 11 January 2001, HIH provided to Westpac for distribution to Noteholders, copies of the FAI and Controlled Entities Special Purpose Financial Report to 30 June 2000 ("FAI Financial Report"). The FAI Financial Report reflected the issue of the 200 million redeemable preferences shares as at 30 June 2000. Further, the FAI Financial Report did not contain comparative figures for 30 June 1999. Consequently, the Noteholders were not provided with information concerning the FAI Group Shareholders' Funds as at 30 June 1999.

APPOINTMENT OF LIQUIDATOR 50. On 15 March 2001, when the provisional liquidators were appointed, the Noteholders had not been repaid any monies the subject of the MTN Programme. Further Mr Alexander Macintosh, one of the liquidators, has stated as at 15 November 2004 that the prospect of the Noteholders recovering any monies is very slight."

THE SENTENCING PRINCIPLES 7 I am obliged to sentence the defendant in accordance with Part 1B of the Crimes Act 1914 (Cth), and against the background that the maximum prescribed penalties for counts one and three which were brought respectively under ss 996(1), and 184(1) are imprisonment for 5 years and/or a fine of $20,000. The maximum prescribed penalty for count two which was brought under s 1308(2) is imprisonment for two years and/or a fine of $20,000. 8 The starting point is s 16A which is in the following terms: 16A Matters to which court to have regard when passing sentence. (1) In determining the sentence to be passed, or the order to be made, in respect of any person for a federal offence, a court must impose a sentence or make an order that is of a severity appropriate in all the circumstances of the offence.

(2) In addition to any other matters, the court must take into account such of the following matters as are relevant and known to the court:

(a) the nature and circumstances of the offence; (b) other offences (if any) that are required or permitted to be taken into account; (c) if the offence forms part of a course of conduct consisting of a series of criminal acts of the same or a similar character - that course of conduct; (d) the personal circumstances of any victim of the offence; (e) any injury, loss or damage resulting from the offence; (f) the degree to which the person has shown contrition for the offence: (i) by taking action to make reparation for any injury, loss or damage resulting from the offence; or (ii) in any other manner; (g) if the person has pleaded guilty to the charge in respect of the offence - that fact; (h) the degree to which the person has co-operated with law enforcement agencies in the investigation of the offence or of other offences; (j) the deterrent effect that any sentence or order under consideration may have on the person; (k) the need to ensure that the person is adequately punished for the offence; (m) the character, antecedents, cultural background, age, means and physical or mental condition of the person; (n) the prospect of rehabilitation of the person; (p) the probable effect that any sentence or order under consideration would have on any of the person's family or dependants. … 9 Although there is no reference to general deterrence in this list, it remains a relevant factor in the sentencing of Commonwealth offenders: Director of Public Prosecutions (Commonwealth) v El Karhani (1990) 21 NSWLR 370 at 377 and Regina v Thomas (1997) 37 ATR 296 at 307. 10 In addition I am to have regard to s 17A(1) which provides: 17A Restriction on imposing sentences (1) A court shall not pass a sentence of imprisonment on any person for a federal offence, or for an offence against the law of an external Territory that is prescribed for the purposes of this section, unless the court, after having considered all other available sentences, is satisfied that no other sentence is appropriate in all the circumstances of the case. … 11 The requirement under s 16A(1) of imposing a sentence that is of a severity appropriate to all of the circumstances of the offence, means that the sentence must be one which adequately punishes the Defendant and which is not so far out of touch with the circumstances of the case as to constitute an affront to the community: R v Gallagher (1991) 23 NSWLR 220 and R v Pang (1999) 105 A Crim R 474. 12 In structuring the sentence I must also take into account the provisions of s 19AB and s 19AC in relation to the fixing of a recognizance release order or a non-parole period.

THE NATURE AND CIRCUMSTANCES OF THE OFFENCES 13 The three offences were objectively serious and involved a considerable abandonment of duty on the part of the Defendant, who as the Chief Executive Officer of HIH was in a significant position of trust and responsibility. 14 In relation to the first count there was a very serious omission involved in the withholding, from the Prospectus, of critical information, concerning the Total Return Swap arrangement, which was likely to have materially misled those who were potential investors in the large ($155 M) converting note issue. The effect of the omission was to give a most misleading impression to potential investors that SGAL was providing a greater support for the issue than in fact was the case, by taking a priority allocation of notes to the value of $35M. Additionally, while an appearance was given that notes to the value of $155M were being underwritten, that would increase HIH's capital rating, thereby ensuring a Standard and Poors rating of A-1 (which would otherwise have been at risk), the $35 M which was the subject of the return swap transaction was effectively to HIH's account, being covered by the deposit back from HIH, at a cost to it of .35 per cent per annum for so long as the notes remained on issue and the collateral deposit remained in place. 15 Senior Counsel for the Defendant advanced a submission to the effect that the criminality involved was at the lower end, in so far as it merely involved a failure to make proper inquiry of the Company's legal advisors as to whether the existence of the arrangement was a material matter for disclosure, and in so far as none of the other members of the Board, which included experienced solicitors and accountants, a Queens Counsel, and a merchant banker, had identified or mentioned the problem. Upon that basis it was contended that the Defendant's criminality involved nothing more than a failure to seek legal advice on a matter which seems not to have been apparent to anyone, and in respect of which the answer would most probably have been that there was no problem, had the question been asked. 16 I am not persuaded of that proposition. It seems to me that a moment's consideration of the transaction by anybody with any experience in corporate governance or law, would have immediately realised its materiality, and the need for disclosure. It is no part of my role to comment on whether the Board or the company's legal and financial advisors, were asleep or incompetent, or did not fully know or understand what was involved. On any view the Chief Executive Officer, who was centrally involved in the Company's affairs, and who, along with Mr Fodera, signed the prospectus, should have appreciated the significance of the transaction. It is possible that the Board was, to some degree, misled by Mr Fodera's statement that the company intended to assume the investment risk on $35M of the issue, in order to capture an above average interest margin. That was an incorrect representation of the true purpose, but it does not minimise the Defendant's criminality since he was aware at all times of the nature of, and reasons for the arrangement. 17 There is no evidence to support a finding that the omission from the prospectus involved a deliberate deception of investors by the Defendant, who is to be sentenced in the light of the concluding paragraphs of the agreed facts: "43 At the time of signing the Prospectus, Williams knew that the priority allocation was subject to this request [that is, HIH placed an amount of $35 M on deposit with SGAL as security for the performance of the notes] 44 Given Williams' knowledge of this request, he failed to make reasonable enquiries before signing the Prospectus." 18 Nevertheless the failure on his part to ensure proper disclosure was very serious, and was not excused by the fact that other members of the Board, or advisors to the Company or its own executives, may also have been exceedingly lax in the discharge of their respective duties. Nor was it excused or minimised by the fact that he may not have been the principal architect of the scheme, or that he did not stand to gain any direct personal financial benefit from the issue. 19 As the Crown submitted, it is essential for the proper operation of the securities market that prospective investors have faith in the accuracy of the information contained in any prospectus that is issued. That faith can only be maintained if an exacting standard of corporate governance, including full and accurate disclosure, is accepted by Directors. Failure to perform to that standard, as occurred in this case, must be regarded as particularly serious. 20 It is common ground that the offence involved in the second count was the most serious of the three offences charged, in so far as the way in which the reinsurance was effected and reported, had the effect of understating the operating loss of HIH, for the period 1 January 1998 to 30 September 1999, by $92.4 M from $113.6M to $21.2M and of increasing its apparent operating profit by the same amount. 21 The arrangement, which went under the euphemism of "financial reinsurance", did no more than involve a notional transfer of the risk which HIH had accrued, and retained, subject to shifting the time for payment. That arose by reason of the letter of credit documents which covered, at HIH's cost, any difference between reinsurance claims that were paid out by Hannover Re and the amount available in the management fund. 22 In truth the arrangement should have been treated as involving a capital transaction because HIH was providing the funds from which the supposed reinsurance would be paid, without any transfer of the risk. Put another way the misleading statement arose as the result of treating a financial reinsurance arrangement as traditional reinsurance. 23 Senior Counsel for the Defendant submitted that while the magnitude of the incorrect statement was of significance, it should not be regarded as determinative, in the absence of any evidence of the Defendant deliberately withholding the existence of the letter of credit agreements either from the HIH board or generally, or of him being the architect of the scheme. Further, it was submitted that had he, or the others responsible for the transaction, deliberately intended to deceive, then they could have done somewhat better and eliminated the $21M loss which was still left in the accounts. As with each count it was also contended that there was nothing to show that the transaction was designed to secure a direct personal benefit for the Defendant. 24 Again, I am not persuaded of the merit of these submissions. While there is no evidence to show fraudulent dishonesty on the Defendant's part, he clearly was aware, as a signatory of the documents by which the transaction was effected, and of the annual reports, of the nature of the transaction and he could not but have appreciated its true effect for the accounts. It is not to the point that the loss could have been "smoothed" to a greater extent. The difference for investors of a consolidated loss of $21M and $113M is obviously very significant, and the Defendant is to be sentenced upon the basis that he was aware that the accounting treatment of the Hannover Re transactions was misleading, yet he authorised the issue of accounts for the 1998/1999 year which contained a misleading statement as to the financial position of HIH. 25 It is also not to be overlooked that the Defendant made a positive assertion in the Chief Executive's Review: "Going forward, we have also taken decisive action, through the purchase of whole account reinsurance protection, in order to protect all of our business from claims development uncertainties including potential underwriting exposure to year 2000 losses"

which could only have served to reinforce the impression conveyed by the Annual Report. 26 Direct self gain was not an element of the offence, which rests upon a legislative intention to punish the making of and/or authorising misleading statements in relation to documents which are required by the Act, or which are lodged with ASIC. In this regard the Annual Report of a corporation is a most important document from which prospective and existing shareholders, and those who engage in financial dealings with it glean information as to its current financial state and prospects. 27 For the reasons identified by Debelle J in R v Hodgson (2002) 84 SASR 168, a failure to properly discharge the duties owed in respect of the preparation and release of annual reports involves serious criminality, which risks undermining the public confidence in published accounts, that is essential for the orderly conduct of financial markets. 28 In the present case there was a most serious departure from the acceptable standards of competence and diligence expected of the Chief Executive Officer of a major public company, which could not have done other than to present a most misleading picture to shareholders, policy holders, and creditors, as well as the Australian Stock Exchange, ASIC, and the Australian Prudential Regulatory Authority. I find that the Defendant's criminality fell into the upper range for the offence charged. 29 It is accepted that the offence involved in the third count was the least serious of the three charges to which the Defendant pleaded. It arises from the misleading impression conveyed by the letter of comfort to noteholders which the Defendant signed, and which confirmed that it was HIH policy for its subsidiaries to be managed and operated in such a way as to meet their obligations, and that it followed this policy with respect to FAI. 30 The letter was signed and released in circumstances where the Defendant had made no inquiries as to whether FAI had complied with its obligations to the medium term noteholders who had taken up notes to the value of $75M. The breach arose from the circumstance that the group shareholder funds for FAI and its subsidiaries had fallen below the minimum requirement of $200M, in fact by approximately $165M. This was a matter of considerable significance since, if it was not remedied within 90 days, after notice of a breach was given, it provided a trigger permitting noteholders to require immediate repayment. Any such action would have had a flow on for the other banking or credit facilities held by the HIH group. 31 It is shown by the agreed facts that the Defendant knew of the potential for default by 12 October 2000, at the very latest, and that the auditors had not yet provided, for the 1998/1999 financial year, the certificate as to compliance, which was required under the MTN programme. In this instance there was a clear failure to perform the duty which was owed to investors, who were entitled to rely on the complete and accurate discharge of that duty. 32 It was the Defendant's contention that the criminality involved in this count was minimised by the circumstance that a proposal had been developed, which was later implemented (on or about 24 November 2000), to boost the net assets of the FAI consolidated accounts through a subordinated redeemable preference share issue. That provides a partial, although not a complete, argument in favour of some mitigation of the objective criminality involved. It does not however address the proposition that the market and Westpac, which was the agent for the MTN program, remained unaware of the existence of the earlier default, and the noteholders were never provided with truthful information concerning the FAI group shareholder funds as at 30 June 1999. 33 While the failure to provide timely notification of the default is not part of the criminality alleged for this offence, the fact remains that the letter was capable of providing a false impression to noteholders that all had been, and remained, well, in relation to the issue. They were deprived of a potential opportunity to redeem their notes, of which they had been unaware and remained unaware. In the winding up, as the agreed statement of facts shows, their prospect of receiving any return is very slight, although whether the same consequence would have occurred had there been an earlier request for payment is not capable of determination upon the material placed before me. 34 The Defendant is to be sentenced for this count upon the basis of recklessness in not making any inquiries as to whether the group shareholding had been increased to a sum not less than $200M, or as to whether the Auditor's Compliance Certificate had been issued before signing and releasing the letter, rather than upon the basis of intentional dishonesty, since he was charged in terms of s 184(1)(b). That clearly is a relevant circumstance in the assessment of his objective criminality, which the Crown concedes was not in the higher range of seriousness that existed for the remaining counts. I accept that to be the case, although as with those counts there was still a serious breach of the duty which is expected of corporate controllers, and which is essential for the orderly conduct of financial and equity markets. The maintenance of faith in the due performance of that duty is of vital significance to the economy: R v Kearns [2003] NSWCCA 367 at [4] to [5] per Spigelman CJ. 35 In sentencing the Defendant for these offences there are five circumstances of relevance for an assessment of his objective criminality that must not be overlooked. 36 First, and foremost, I am to assume that the counts preferred in the indictment represent the totality of his criminality in relation to the management of HIH and its subsidiaries, and that the disposition of these matters will bring to an end all potential criminal investigations in relation to him. 37 Secondly, he is to be punished for those offences as charged and particularised, involving offences of recklessness, and material omission, giving rise to misleading statements, and not upon the basis of intentional dishonesty in the form of embezzlement or fraud, which might have supported more serious charges, either under the Corporations Act or other criminal legislation. To take any other approach would be to offend the principles in De Simoni v The Queen (1981) 147 CLR 383. 38 Thirdly, the Crown does not contend that the offences contained in the indictment caused the collapse of HIH. That, it was conceded, arose by reason of a history of mismanagement which extended over a number of years, the nature and extent of which was investigated by the HIH Royal Commission. The causes were obviously multifactorial, and there is no suggestion that all of the responsibility for it could be sheeted home to the Defendant alone. 39 Nevertheless the offences span the last three years of HIH, and I accept the Crown submission that they were likely to have contributed, to some degree, to the prolongation of its life, by facilitating the raising of further capital, and by misrepresenting the group's financial position. 40 In favour of the Defendant is the fact that he did not, at any time, seek to limit his own losses by selling any portion of the very substantial holdings in shares, convertible notes and options in HIH to which he had either a direct entitlement in his own name, or a potential entitlement through the RR Williams Superannuation Fund. Nor did he encourage members of his family to do so. While any such sale might have attracted an application of the insider trading laws, the fact that this was not necessarily the deterrent for any such action was indicated by the fact that during 2000 he acquired further shares in the company through a salary sacrifice programme. 41 Fourthly, it is not contended that the Defendant was the architect of, or solely responsible for, any of the three offences, or that they were committed for the immediate purpose of generating some personal gain for himself. Others within the company were similarly culpable for what occurred, or was allowed to occur. To what extent these events permitted the group to continue trading is incapable of determination by me. At most it can be said that they were part of a wider history and pattern of mismanagement which, in combination, eventually led to the collapse. So far as they may have helped prop up the group and the value of its shares for a time, or delayed intervention by security holders or creditors, there was no doubt some indirect, although temporary benefit to shareholders and Directors, including the Defendant. 42 Fifthly, it is important to recall the caution which was expressed in R v Rivkin [2004] NSWCCA 7 at [426] to [428] to the effect that the sentences which are to be imposed must comply with settled principles for sentencing and be proportionate to the objective criminality involved, and are not to be driven or influenced by a "sense of outrage" stemming from outside sources, whether they be the media or otherwise. 43 Notwithstanding the foregoing, the three offences involved in this case were objectively serious, and they effectively extended over a somewhat lengthy period. 44 They are such as to call for the Defendant to be sentenced in accordance with the approach to white collar or commercial crime which has been consistently confirmed. For example in R v Corner NSWCCA 19 December 1997, the court (Powell JA, Beazley JA and Sperling J) said, in a Crown appeal against leniency, brought in respect of sentences imposed for breaches of the Companies (NSW) Code (at p.9): "The seriousness with which this Court approaches white collar or commercial crime and the need for deterrence as an important consideration in the sentencing process, especially as offences of this sort are notoriously difficult to detect, is well documented. As Wood J (Carruthers J agreeing) said in Pantano (1990) 49 A Crim R, 328 at 330: "[T]hose involved in serious white collar crime must expect condign sentences. The commercial world expects executives and employees in positions of trust, no matter how young they may be, to conform to exacting standards of honesty. It is impossible to be unmindful of the difficulty of detecting sophisticated crime of the kind here involved, or of the possibility for substantial financial loss by the public… The element of general deterrence is an important element of sentencing for such offences". See also McKechnie (unreported, Court of Criminal Appeal, NSW, 1 October 1987); Yuill (unreported, Supreme Court, NSW, 14 September 1994 Dunford J); Yuill (No 2) (unreported, Supreme Court, NSW, 13 December 1995, Barr AJ); Craven (1995) 17 ACSR 368; Carter (unreported, Supreme Court, NSW, 29 September 1995, Barr AJ); Glenister [1980] 2 NSWLR 597; Hawkins (1989) 45 A Crim R 430 at 436." 45 These comments were also cited with approval in R v Rivkin [2004] NSWCCA 7 at [423]. 46 In Corner the Court also noted (at p 10) the relevance of particular and general deterrence in the sentencing process for crimes of this nature, citing the well known observation in R v Radich [1954] NZLR 86 where the Court stated at 87: "One of the main purposes of punishment…is to protect the public from the commission of such crimes by making it clear to the offender and to other persons with similar impulses that, if they yield to them, they will meet with severe punishment. In all civilised countries, in all ages, that has been the main purpose of punishment, and it still continues so. The fact that punishment does not entirely prevent all similar crimes should not obscure the cogent fact that the fear of severe punishment does, and will, prevent the commission of many that would have been committed if it was thought that the offender could escape without punishment, or with only light punishment." 47 Although said in relation to a different form of white collar crime, the observations of the Court of Criminal Appeal of Victoria in R v Moffat, Vic CCA 15 December 1992, which were cited with approval in R v Martin (1994) 74 A Crim R 252 at 256, also underline the fact that the general deterrence factor is important in this area of criminality, and may require a custodial sentence, even though the offender has an unblemished prior record. See also the observations of the Court of Appeal in R v Brown [2002] VSCA 99 at [52] as to the need for the element of deterrence, in cases such as the present, to impact both on the total sentence and the minimum term, a theme which was also taken up in DPP v Bulfin (1998) 4 VR 114 at [131] to [132]. 48 As Smart AJ also made clear in R v Boskovitz [1999] NSWCCA 437 the individual responsibility of Directors in not engaging in corporate conduct that involves dishonesty, or the making of false statements, cannot be overemphasised. His Honour observed that the decision of the Court in that case should stand as a strong warning to others: see observations to similar effect in Regina v Wall [2002] NSWCCA 42. Although it was submitted that the present case was not a suitable vehicle for general deterrence, I am not persuaded why that should be so.

Prior Good Character 49 The defendant was born on 11 June 1936, and is now aged 68 years. Apart from the matters, which bring him before this Court, he has led an exemplary life, in the course of which he has made an exceedingly valuable contribution to the community. He has no criminal antecedents and was the recipient of an award in the Order of Australia. 50 He left school at a relatively early age, and became involved in the insurance industry after a period working with the Water Board's medical branch where he had his first experience assisting injured workers, and where he acquired some familiarity with workers compensation. He joined up with Michael Payne in Payne Liability which was acquired by CE Heath, and which later became HIH. From 1991 he built HIH to the point where it became a significant general insurer. 51 Apart from being an exceedingly generous donor to a wide variety of charities in an amount exceeding $2 M over the nine financial years between 1992 and 2000, he has given up much of his personal time to hands on involvement in the activities of the Youth Centre conducted by the Holy Trinity Church at Dulwich Hill, as well as in the activities of the Young Life Australia Program of the West Ryde Anglican Church, and Father Chris Riley's Youth Off The Streets. 52 These donations it was accepted were his personal donations, although they were sourced from the income stream that he received as Chief Executive Officer of HIH. 53 Additionally he has been involved in the work of the North Shore Heart Research Foundation as a Board member and financial supporter. 54 He has involved himself heavily in the personal health of the staff of the companies with which he has been involved, in so far as he provided gymnasium and similar facilities and encouraged staff participation in corporate triathlons and fun runs, for over 20 years. The facility he financed at the Garvan Institute was also made available to other people in need of rehabilitation. He has always placed a premium on his own physical fitness and has personally been involved in a variety of endurance events, no doubt providing a positive example to others. 55 A considerable body of evidence has been placed before me either through written references, or oral testimony as to his integrity and good character, and as to the high regard with which he had been viewed in the business community and in the general community. It would be repetitive to record the views of all of those who have provided detailed information as to his record for philanthropy, particularly in relation to hospitals and other institutions or activities concerned with children, his active involvement in charitable works, and his personal integrity. It is sufficient to note that this has come from several quarters including the Reverend David Smith, Stephen Parry a solicitor who had acted for the Defendant and HIH, Glynn Henman of Young Life Australia, Craig Burton of XL Fitness, Harold Sharp of the North Shore Heart Research Foundation and the Northern Medical Research Foundation, Robert Rose of Rosecorp, Dr Peter Conrad, Consultant Surgeon, Reverend Richard Mills, Professor Mark Silink, and the Defendant's son, Stuart Williams. 56 I do however note that the Reverend Richard Mills gave evidence of his long standing interest in and support for the youth and young children who had been able to take advantage of the activities which he funded. Professor Silink confirmed the Defendant's long standing personal and financial support for the work conducted by his unit, now at the Children's Hospital, Westmead, in the fields of endocrinology and diabetes research and education, which began in 1976, and which has led to significant medical advances; and also for the International Diabetes Federation, the Garvan Institute, the McFarlane Burnett Institute, and the Deaf and Blind Institute. He spoke of the Defendant's interest in research generally in the medical field, and of his concern for the interests of children and adolescents. 57 Dr Peter Conrad also gave evidence of the Defendant's loyalty and support for various activities including the work of Father Riley, the opera, St Vincent's Hospital, and the Royal Women's Hospital, and as to his general interest in assisting others. The Defendant's son, Stuart Williams, confirmed the extent of his work ethic, his support for his family, his continuing desire to help the community, and his passion for medical research. 58 Each of these witnesses confirmed the genuine and deep personal interest which the Defendant has shown in those various activities, and in those who have benefited from them. They also confirmed that he had never gone out of his way to seek recognition, and to his satisfaction being related to the fact that he could provide assistance. 59 The evidence also showed that since the collapse of HIH the Defendant has continued to provide voluntary assistance to others, including the residents of the nursing home where his mother, to whom he is particularly close and attentive, resides. 60 Upon any view the evidence as to his character and community contribution is prodigious, and he must be given some credit for it, although as Bray CJ observed in Regina v Thompson (1975) 11 SASR 217 at [222], where the need for general deterrence is strong, the courts generally give less weight to good character. 61 As was observed in R v El-Rashid NSWCCA 7 April 1995 per Gleeson CJ at 3 and in Regina v Rivkin at [410] the existence of good character is a circumstance that normally places the offender in the position whereby he or she is in a position to commit white collar crime. As a consequence the need for general deterrence may displace, to some degree, the benefit which might otherwise attach, although for the reasons identified in Cameron v The Queen (2002) 209 CLR 339, it is not to be ignored.

Remorse and Contrition 62 The evidence concerning the Defendant's history for philanthropy and community service has an added relevance, since each of those who have spoken for him have also testified as to his shame and remorse consequent upon the collapse of HIH. It is clear from what they have said that this remorse is not confined to the loss of his empire and to his own substantial financial loss. Each of the witnesses called has confirmed the existence of his deep concern and shame for the consequences to the victims of the collapse, that is, the HIH and FAI creditors, shareholders and policy holders, many of whom will have sustained a considerable financial loss, and for his inability to continue his charitable work. 63 I am persuaded that the Defendant's remorse and contrition, the existence of which was confirmed in the pre-sentence report, and in the report of Dr Allnutt are not only genuine, but that they are considerable, and should be taken into account as a relevant factor for sentencing, although it must also be said they have been directed to the fact of the collapse, and cannot be said to be specifically or solely related to the present offences. That is a concomitant of the fact that there were many reasons for the collapse of the HIH group which were unconnected with these offences, or indeed with the conduct of the Defendant alone. It also arises from the circumstance that the Defendant's expressions of shame and remorse for those who have suffered a loss was evident well before he became aware of the current charges.

Guilty Pleas and Assistance 64 The Defendant is entitled to the benefit of his pleas of guilty which, it may be accepted, were offered at the earliest available opportunity. They are indicative of his remorse and acceptance of responsibility, and they also convey his willingness to facilitate the course of justice: Cameron v The Queen (2002) 209 CLR 339 at 343/4. They followed upon his readiness to offer assistance to the ASIC investigators who were charged with conducting further inquiries into possible criminal activity, following the delivery of the Report of the Royal Commission into the failure of HIH. 65 As the addendum to the statement of agreed facts shows, it was at the initiative of the Defendant that he met with the investigators in order to discuss the adverse findings, as a result of which he later agreed to participate in a record of interview concerning the matters charged in the first count. Again it was at his initiative that discussions took place, at Counsel level, to identify charges to which he could plead guilty in return for a closure of the investigation so far as he was concerned. These discussions led to the formulation of the charges which are now before the Court, and to the acceptance by the Defendant of the admissions statements. 66 It is acknowledged that, at the time of the guilty pleas, the investigations in relation to the first count had been completed and a brief had been provided to the Commonwealth Director of Public Prosecutions. In relation to the second count the investigations were nearing completion, while those concerning the third count were well advanced. The case is one, accordingly which, while the offences do not fall within the R v Ellis (1986) 6 NSWLR 603 category, since they were identified by the Royal Commission, nevertheless the Defendant indicated a willingness to plead before being formally arrested and before committal. 67 The Defendant's cooperation in the respects indicated, constitute a considerable measure of assistance and, without any question, it has saved the community, and the Court, considerable time and expense in the investigation and prosecution of the offences charged. 68 The Defendant is entitled to a significant benefit for his timely plea and for his cooperation with the law enforcement authorities, although this assistance has not extended to the supply of an undertaking to give evidence against the several other persons who have been charged with offences in relation to the company. He is not to be additionally punished for that, but it does mean that any allowance for assistance is less than it might otherwise have been. I propose to give a discount of 25% for his plea and assistance in relation to the sentence for each count.

Extra Curial Consequences 69 A submission, was presented somewhat forcefully on behalf of the Defendant, that he has suffered a form of extra curial punishment as a result of the collapse in relation to:

(a) the loss of the value of his shareholdings and other interests in HIH;

(b) the contingent liabilities which he faces arising out of the class action which has been instituted in the Federal Court;

(c) the claim in the sum of $646.6 M which has been foreshadowed by the Liquidators of HIH;

(d) the proceedings, which have already been instituted in the Supreme Court, for recovery of alleged undue preferences in the sum of approximately $1 M, representing his statutory entitlements upon resignation;

(e) the proceedings for contribution brought by Rodney Adler in the Supreme Court in respect of the order for compensation of approximately $9 M, arising out of the payment of $10 M by an HIH subsidiary to a company associated with Rodney Adler, which has been satisifed by the latter ( ASIC v Adler and Ors (2002) 41 ASCR 72 and (2002) 42 ASCR 80;

(f) the 10 year disqualification, under s 206C of the Corporations Act, which followed upon the declarations of contravention of ss 180 and 182 of that Act made in the last mentioned proceedings. Together with his present age of 68 years, and the two matters next identified, this has left him unemployed and unemployable without any hope of resuming any form of commercial activity;

(g) the public vilification which has been attracted to him as a result of the collapse of HIH, including the very considerable and somewhat hostile media coverage in which he has been categorised as a "corporate crook". It has left him with a permanently damaged reputation and loss of standing in the community, and it has also led to the removal of his name from the title of the "Ray Williams Institute of Paediatric Endocrinology, Diabetes and Metabolism" from the Medical Research Unit at the Childrens' Hospital at Westmead that he had endowed and supported for many years;

(h) the fact that as a result of the collapse, he has lost his substantial investment in HIH along with his expected retirement fund; is technically insolvent due to the loss of that investment and exposure to the claims earlier mentioned as well as claims for income tax, and for losses in Lloyds as an underwriting name (as disclosed in his statement of assets and liabilities); is dependent upon his wife for financial assistance, is likely to face bankruptcy; has seen his family and close friends lose significant amounts of money; and has lost the opportunity of continuing the philanthropy which was important to him and of value to the community. 70 It is true that some weight needs to be given to these consequences, in so far as the current convictions carry with them the public opprobrium which attaches to that circumstance, and also in so far as they would of themselves result in a 5 year period of disqualification from corporate governance. As I have already noted, not all of the so-called extra judicial punishments or consequences mentioned are attributable to or associated with these convictions. The more direct and immediate cause for any public opprobrium that has arisen, and for the Defendant's actual and potential financial losses, has been the collapse of the HIH group.

71 While the Defendant has demonstrated personal remorse and contrition, faces potential civil litigation which may result in orders for the repayment of monies or for the payment of damages, has paid a pecuniary penalty to ASIC and may have to give contribution in relation to the transaction which involved Mr Adler, nothing has been placed before me to show that he has, to this point, made any material reparation in relation to these offences.

Deterrence 72 I have already said all that needs to be said in relation to the general deterrent effect of the sentences, which need to be passed. Personal deterrence in this case is of little moment since it is clear that the Defendant will never be placed in a similar position of corporate authority, or responsibility. I believe it improbable in the extreme that he would reoffend in any other way. His prospects of rehabilitation are excellent, and his age, antecedents and character are each such as to operate in his favour.

Physical and Mental State 73 Nothing has been placed before me to suggest that the Defendant suffers from any significant physical or mental condition, or has any other personal attribute that would have any relevance for sentencing purposes. The report from Dr Allnutt, consultant psychiatrist, that was tendered, records that he has been prescribed Zoloft and Serepax intermittently, for assistance with his anxiety and depressed mood, arising out of the collapse of HIH and its aftermath, and that he has reported sleep disturbance, and feelings of guilt and persistent rumination about these events, although without affecting his regular regime for physical exercise or his capacity for experiencing pleasure. He claimed to be free of any current suicidal ideation, although he had for a time given consideration to that possibility, before rejecting it by the year 2002. 74 Dr Allnutt cleared him of any apparent physical illness, or of any symptoms or signs consistent with any serious mental illness or of a personality disorder. Such history that he has of anxiety with a fluctuating depressed mood, reduced motivation, irritability, social withdrawal and intermittent obsessional rumination about his circumstances resulting in insomnia, he said were " a consequence of his circumstances". He thought the Zoloft might have a prophylactic effect in maintaining his mood and anxiety, and that without it he might develop a more significant depressive or anxiety disorder. He also thought him to have well established coping mechanisms that contributed to him maintaining his emotional stability and also thought that he had a resilient personality.

Delay 75 Although a submission was made to the effect that the offences were old offences, and that allowance should be made for the delay in presenting an indictment, I am not persuaded of that submission. As I pointed out in Regina v Wall, delay in the prosecution of cases such as the present is not unusual. They are difficult to discover and usually only come to light after a corporate collapse, and investigation of the kind which occurred in this case. Once the Royal Commission finished its work, the prosecution proceeded promptly. No allowance should be made for this factor.

Consequences for Third Parties 76 While any sentence that might deprive the Defendant of his liberty would potentially work a hardship for himself, and for his supportive family, comprising his wife, four children and 16 grandchildren, nothing of an exceptional kind, justifying amelioration of sentence in accordance with the common law approach which was adopted, for example, in R v Herrera NSWCCA 6 June 1997, has been shown. 77 The fact that any term of imprisonment for the Defendant would be a first occasion of imprisonment is a relevant factor, as is the fact that he will be prevented from holding office as a company director, or from managing a corporation but each needs to give way to the necessity of maintaining a proper standard of punishment for the three separate serious offences which are here involved. 78 I note that the Defendant has been assessed as suitable for community service and for periodic detention. 79 Having taken into account all of the factors which I have listed as relevant for sentencing in this case, and having considered all possible alternatives, I state that I am satisfied, for the purposes of s 17A(1) of the Crimes Act 1914 (Cth), that no sentence other than one of imprisonment is appropriate. That follows in particular from the serious nature of the individual offences, the abject failure of the Defendant to perform the duties which were vested in him as a Director and effective head of HIH, and the need for a very strong message of general deterrence. While I have given the defendant full credit for his plea, his assistance, his remorse and contrition, his good character, his extensive record for philanthropy and community service, the consequences of the collapse of HIH for his own financial position, and the damage to his reputation and standing in the community arising from these convictions, they are insufficient to justify any sentence other than one of imprisonment. 80 The sentences which I consider appropriate for the offences are those which I will announce shortly. Before doing so, I note that I have given careful consideration to the submission that the sentences should be suspended, either wholly or in part, conditionally upon the Defendant giving security, pursuant to s 20(1)(b) of the Crimes Act. I have also given consideration to the question whether the sentences should be served by way of periodic detention under s 20AB of the Act. However, I am satisfied that the seriousness of the offences, taking into account all of the balancing considerations, means that the sentences should be ones that require full time detention, although with some reduction of the non-parole period that might otherwise have been fixed, had the Defendant's subjective circumstances not been so favourable, and also to allow for the accumulation which I consider necessary. 81 The question of concurrence or accumulation, in part or in whole, also arises for consideration in accordance with s 19(2) of the Crimes Act and with the principles expressed in Pearce v The Queen (1998) 194 CLR 610 at [45] and in Johnson v The Queen (2004) 78 ALJR 616. The case is one involving quite discrete areas of criminality, each of which was separated by a period of approximately twelve months, and which lacked any common element. As a consequence the totality principles in my view call for a full accumulation of each sentence. 82 Raymond Reginald Williams, in relation to the first count I sentence you to imprisonment for a fixed term of 2 years to date from 15 April 2005 and to expire on 14 April 2007. 83 In relation to the second count I sentence you to imprisonment for a term of 1 year and 3 months to date from 15 April 2007 and to expire on 14 July 2008. 84 In relation to the third count I sentence you to imprisonment for a term of 1 year and 3 months to date from 15 July 2008 and to expire on 14 October 2009. 85 The overall term is accordingly one of imprisonment for 4 years and 6 months commencing on 15 April 2005. I fix a non-parole period of 2 years and 9 months to date from 15 April 2005 and to expire on 14 January 2008. 86 You need to understand that the effect of that sentencing order is that you will serve a period of imprisonment of not less than 2 years and 9 months, and if a parole order is made on or after 14 January 2008, you will also serve a period in the community, called the parole period, under supervision, so as to complete the overall sentence of 4 years and 6 months. 87 If a parole order is made, it will be subject to conditions, and it may be amended or revoked. In particular it may be revoked if you fail without reasonable excuse to fulfil those conditions, in which event you may be returned into custody, pending further review and possible re-release, depending again upon your behaviour and response to any rehabilitation opportunities which may be offered while you are in custody. **********

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