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[2014] VSC 175
Supreme Court of Victoria
2014-04-17
MACAULAY J
Original judgment source is linked above.
SENTENCING - counts of theft, false accounting and obtaining property by deception contrary to ss 74, 82 and 83(1) Crimes Act 1958 (Vic) - count of submitting a false document to ASIC contrary to s1308(2) Corporations Act 2001 (Cth) - 'white collar crime' - whether family hardship amounts to an exceptional circumstance - parity with sentence imposed on co-offender - plea of guilty - total effective sentence of 6 ½ years' imprisonment with non-parole period of 3 ½ years.
1 Russell Andrew Johnson, on 9 October 2013 you pleaded guilty to three counts of false accounting,[1] two counts of theft,[2] one count of obtaining financial advantage by deception,[3] and one count of submitting a false document to the Australian Securities and Investments Commission (ASIC).[4] Other than the last mentioned count, which is charged under the Commonwealth Corporations Act 2001, all other counts are charged under the Victorian Crimes Act 1958.
2 The maximum penalty for false accounting is 10 years' imprisonment; the maximum penalties for theft and for obtaining financial advantage by deception are also 10 years' imprisonment. The maximum penalty for the offence charged under the Corporations Act is five years' imprisonment or 200 penalty units.
3 Two of the false accounting counts and the two theft counts (ie. charges 1, 2, 4 and 5), each involve at least one transaction of property with a value of $50,000 or more. In those circumstances s 6H of the Sentencing Act 1991 applies so that you fall to be sentenced as a continuing criminal enterprise offender in respect of those counts, potentially liable to twice the maximum prescribed penalty: 20 years' imprisonment rather than 10 years' imprisonment.[5] In your case, however, the Crown has not submitted that in sentencing you I should increase your sentence commensurately by that factor.
4 The counts to which you have pleaded guilty arise out of your role as the sole director of Sonray Capital Markets Pty Ltd (Sonray), now in liquidation. Your offences occurred in a period spanning two and a half years, from 6 December 2007 to 22 June 2010.
5 Sonray was established by you in April 2003. It operated as a non-market participant securities broker/adviser offering a range of financial products to investors including traditional equities but also financial derivative products. Amongst the species of financial derivative products with which it dealt, one of Sonray's specialties was trading in Contracts for Difference ("CFD's"). Sonray was a relatively small trader finishing up with some 4,500 client investors.
6 The CFD financial products were issued by Sonray and backed by Saxo Bank (Saxo), a bank regulated in Denmark. The investor's investment in a CFD was not in a traditional security as such (like a company share) but, for example, in a contract to transact large quantities of such securities which, in total, were worth many times more than the cost of the investment in the contract itself. This meant that the investor's potential for gain or loss, depending upon the price movement in the underlying assets relative to the contracted price for them, was magnified (i.e. leveraged). It was this characteristic of the financial products with which you were dealing that, along with your offending and mixed with a number of external factors which I will mention, produced the massive financial "hole" I am about to describe.
7 You appointed external administrators to Sonray in June 2010 and its creditors voted to wind it up on 27 October 2010. According to the administrators, at the time of their appointment Sonray had gross client positions[6] of $76.85 million, gross client holdings of $30.15 million and therefore a shortfall of approximately $46.7 million.[7] Ultimately, the size of the deficiency may well have been larger. On 3 November 2011, Ferrier Hodgson, the liquidators, announced to the markets that a settlement had been reached with Saxo Bank and Sonray's auditors each of whom it had sued as a result of the collapse. The settlement resulted in an agreed contribution by those parties of $38.5 million in the form of cash and shares. The reported potential return to investors of 69 cents in the dollar implied a final deficiency of around $55 million.
8 Whether that be the figure or not, the deficiency was of a very high order.
9 You, and interests associated with you, controlled about 60 to 65 percent of the issued shares in Sonray. The remainder were held by interests associated with Scott Kenneth Murray (Murray). Murray is your brother in law and was the chief executive officer of Sonray.
10 Murray was also charged with a similar, but not entirely identical, range of charges to those with which you were charged. Like you, he pleaded guilty to those charges. But, for reasons I will explain, his plea was heard in July 2011. He was sentenced on 14 October 2011 by Lasry J. Murray received a total effective sentence of five years' imprisonment with two and a half years minimum term to be served before being eligible for parole. But for his plea of guilty, which Lasry J said was inextricably linked to his significant level of cooperation with the authorities, he would have been sentenced to a term of imprisonment of 10 years with six years to be served before eligibility for parole.
11 The central thrust of the plea put on your behalf by Mr Cahill of counsel has been directed to the principle of parity in sentencing. In substance, Mr Cahill argued that for a range of reasons the total effective sentence and non-parole period which I should impose on you - which he rightly concedes must be a custodial sentence - should be less than the sentence given to Mr Murray.
12 For reasons I am about to explain the total effective sentence I will impose upon you for the counts to which you have pleaded guilty is six and a half years imprisonment with a non-parole period of 3 and a half years.
13 You graduated from Latrobe University in 1994 with a Bachelor of Commerce. You began work at Macintosh Futures shortly thereafter and trained as a futures advisor. You have remained in the securities industry since: after Macintosh you were a futures and securities advisor with Bell Commodities until 2001; then a senior futures advisor and co-head of the Melbourne Dealing Desk for Fimat SNC (a branch of Societé Generale Bank); then for CMC Australia on the dealing desk between 2002/2003. It was in early 2003 that you set up Sonray. By that stage you had been trading in derivative financial products for some time.
14 Along the way you obtained post-graduate qualifications: Diploma of Applied Finance and Investments (1996); Diploma of Technical Analysis (1996); Diploma of Financial Services (2002).
15 It was during the period when you were working at Fimat SNC that you met your wife Jill Murray. You also met her brother Scott who you employed as a trainee futures advisor at Fimat. When you decided to set up your own business Scott Murray came with you.
16 Not long after its commencement in business, in December 2003 Sonray entered into various agreements with Saxo to enable it to trade in certain financial products for its clients. Because Sonray was not, itself, a licensed security trader, it used the trading platforms of third party financial licensees to gain access to markets for its clients. Saxo was such a third party. It provided Sonray access to various markets for derivative trading, including trading in CFDs. For that purpose, Saxo made available to Sonray its own trading platform which was "white labelled", meaning that Sonray could re-badge it as its own. It was called the "Sonray Trader Platform". The platform was an electronic interface between Sonray, Saxo and the various trading markets.
17 Via this trading platform, Sonray could lodge trades in particular financial products with Saxo. Saxo would be the market participant that placed the actual trade for Sonray, on behalf of the client.
18 Accordingly, it was necessary for there to be a means by which Sonray put Saxo in funds for the purpose of placing trades on its clients' behalves. On top of that, Saxo required Sonray to lodge an additional amount as buffer (or margin) to cover the risk to Saxo for carrying the trade, particularly if the market moved adversely. This combined value was termed "collateral". The collateral lodged by the client could be in the form of cash or market securities. Without adequate collateral, Saxo could, if it chose, close out the clients' position with respect to the security meaning that a loss or gain would be crystallised without the client's involvement.
19 Initially, Saxo required the collateral to be actually transferred to it. Although the transfer could be performed electronically, in the context of volatile and rapidly changing markets the consequence of delay between ordering a trade, transferring the collateral and the placement of the trade, proved to be disadvantageous to clients. Their positions were being closed out despite adequate margin being held by Sonray although not by Saxo.
20 This problem was resolved by Saxo relaxing its requirement that it must hold the collateral itself. The solution that was adopted involved Saxo agreeing to be satisfied about the level of margin (collateral) being held by Sonray on behalf of clients in a particular method which I will come to in a moment.
21 Sonray deposited its clients' funds into one of two bank accounts kept with the ANZ Bank and HSBC, known as the Client Segregated Accounts. For convenience I will refer to them collectively as the 'Client Account'. The Client Account was kept separate from Sonray's operating bank account from which business operating expenses (wages, rent, etc,) were paid. But clients' funds were not kept separate from one another in the Client Account: they were pooled together.
22 Lying between Sonray and Saxo was an electronic portal called the Client Configuration Manager (CCM). The CCM was software that, amongst other things, enabled Sonray to record client account details and the deposit and withdrawal of client monies into and out of the Client Account. It was software supplied by Saxo to its white label partners, providing that partner with a back-office accounting system. Entering a record in the CCM did not affect the Client Account itself; the CCM was, in part, only a replica of the Client Account.
23 From its end, Saxo had a certain level of visibility of the information recorded in the CCM. That is, from its end, it could see the total amount held in the Client Account, as posted on the CCM by Sonray employees. Saxo could also see amounts held in the sub-accounts identified only by a number: it had no knowledge of the identity of Sonray's clients.
24 Significantly, Saxo had no visibility of or access to the Client Account itself.
25 The solution to the trading delay problem I mentioned earlier - brought about sometime between 2006 and 2007 - was that Saxo agreed to be satisfied if it could see on the CCM that Sonray held in the Client Account adequate margin at an omnibus level to cover all the positions of its client base at a given point in time.
26 Whether or not the CCM accurately recorded the overall balance held in the Client Account, or the true component of that balance attributable to a particular client's account (identified only by number), entirely depended upon the reliability of the information entered by Sonray staff into the CCM. In other words, if for example a staff member erroneously entered an inflated amount on the CCM when recording a deposit into the Client Account, it would have the effect of making the Client Account appear, so far as the CCM recorded it, to be larger in value than it actually was.
27 Only certain authorised Sonray staff had access to the CCM: you and Murray had full access at all relevant times.
28 These features of the trading arrangement Sonray had with Saxo since 2006/2007 are important to understand. They are important because they provided the opportunity and the means for most of your offending when events occurred that placed stress on the business.
29 By approximately 2007 your's and Murray's roles at the business were different. While it was Murray who was primarily managing (and operating) day to day trading functions, your role was more removed from the dealing side. You were more involved in business development: that is, both in seeking out new business, and also in the development of what has been described as an innovative trading platform for Sonray's use. The significance or otherwise of the different roles you performed is a matter I must consider when assessing your moral culpability for the offending.
30 Several things occurred in 2007 and 2008 that placed heavy and enduring financial pressure on Sonray.
31 First, in early 2007 Murray made a simple but costly error: he entered a "buy" trade twice instead of once, causing a $700,000 loss to a client which somehow the business had to cover.
32 Secondly, during early 2008 a particular employee trader at Sonray engaged in unauthorised trading on behalf of clients. This trading resulted in losses to clients as the effects of the global financial crisis began to bite in early 2008. Again, Sonray had to cover those losses. The actual size of the loss is unclear. The administrator's report mentions one version of the loss at nearly $6million but its own investigations assess the loss to be more like $1.5 million. Murray said that the business had tried to plug a hole of between $3 million and $4 million. Whatever the exact size of the deficiency caused by the "rogue trader", it contributed with other factors to create a deficiency.
33 Thirdly, in early 2007 you began a project (Project Mojo) to develop a new trading platform for Sonray that would be independent of third parties like Saxo. Estimated initially to cost $500,000 for development, the costs of Project Mojo soon well exceeded that figure and began to contribute to the strain on the business operating account. The business operating account was the account into which Sonray's commission income, earned on placing trades for clients, was paid. As mentioned, out of that account were paid all expenses including salaries, rent etc. Costs associated with project Mojo were also meant to come from that account.
34 Of course, monies belonging to clients in the Client Account should not have gone into the business operating account to fund Sonray's business expenses. But, as we will see, they did.
35 On top of these three factors, the global financial crisis emerging in late 2007 and into 2008, which I have already mentioned, also contributed as another factor to put pressure on the business over this period.
36 The factors I have mentioned, together with methods you and Murray adopted to try and cover the rogue trader loss, the trading error and your burgeoning business expenditure, meant that the omnibus level held in the Client Account fell below the margin level that Saxo required for continued trading. So, from mid2008, through 2009 and into 2010 Saxo increasingly issued margin calls to Sonray to provide more collateral in the Client Account. The method you and Murray adopted to stave off these margin calls provides the background to a number of the counts with which you were charged.
37 I will explain those when I come to detail the charges specifically.
38 In 2009 ASIC commissioned a solvency review of Sonray. It did so not because it had specifically identified Sonray at that stage as being suspicious, but because it was concerned to gain more information about those businesses trading in particular derivative financial products. You engaged PricewaterhouseCoopers (PwC) for the purposes of conducting that financial review. On 27 August 2009 you submitted the solvency report provided by PwC to ASIC. The steps you took to cover up the deficiency in Sonray's capital which existed at that point forms the basis of one of the charges to which you have pleaded.
39 Saxo had begun to make some pointed inquiries of Sonray in early 2009 about the levels in the Client Account; but it did not persist with them very vigorously. In late 2009 and early 2010 internal concern about the size of the deficiency at Sonray also began to emerge. Investigations by your internal chief financial officer, by Saxo, and by ASIC all began to home in on the alarming deficiency in the Client Account.
40 Around the same time, in early to mid2010 you began efforts to sell Sonray's client base to Saxo. Representatives of Saxo met with you in Sydney in early April to discuss that acquisition. In late May you travelled to Singapore to meet them. At that time you informed the Saxo representatives of a "hole" in Sonray's accounts although your appreciation of its dimension was ill informed. Nevertheless you continued discussions with them in an endeavour to sell the business. By that stage a sale of the business was seen as the only way of saving the clients. A flurry of meetings occurred in mid-June but by then Saxo was sufficiently alarmed by what it had learned of your trading practices to decline to proceed further.
41 When it was obvious that Saxo would not buy the business you resolved to place Sonray into external administration. What you had initially feared to be a deficiency in the order of $15M by then appeared to be more than double that amount. Even that was not the whole of it.
42 Rather than deal with the counts in the order in which they were listed on the indictment I will endeavour to deal with them in a roughly chronological order.
43 (Count 4: theft). Sometime before November 2007 you and your wife had borrowed $441,000 from your wife's father, John Murray, to assist in the purchase of your family home in Toorak. In November 2007, John Murray wrote saying that he wanted the loan repaid by 10 December so he could settle on a property purchase of his own. You did not have the money to repay it.
44 You discussed with Scott Murray how the loan could be repaid. As a result, you caused a false entry to be made in the CCM against account SKM128[8], an account in the name of Palray Consulting Pty Ltd. Palray was operated by John Murray.
45 The false entry in the CCM purported to record a deposit for that company in the Client Account - that is, as I have described, the actual bank account for client funds - of $441,000. But no actual funds were deposited into the Client Account. This form of dummy entry came to be called "uploading" or making an "unfunded deposit".
46 Believing that you had deposited real money of your own into his company's account, John Murray requested that you transfer the $441,000 from the Palray account to a bank account controlled by him. You directed your back office staff to make the transfer, and they did. On 7 December 2007, $441,000 was paid into a Bankwest bank account in the name of the Murray Family Trust. That sum was paid from the Client Account.
47 The effect of that transaction was to misappropriate $441,000 held by Sonray in the Client Account on behalf of clients to be applied for your personal benefit: i.e. to repay a personal debt.
48 (Count 1: false accounting). As mentioned previously, the costs of Project Mojo began to put a strain on Sonray's business account. In mid to late April 2008 it was constantly overdrawn, by amounts fluctuating between $40,000 and nearly $90,000. In that month you and Murray discussed what to do about it. The outcome of your discussion was that you both agreed to use a "friendly account" as the conduit through which to shift money from the Client Account to the firm's business operating account to help meet its expenses.
49 About a year earlier, two accounts had been opened in the CCM in the name of Carey Anderson, an old school friend of Murray's: SKM200 and SKM200USD. These two accounts had remained dormant over that time. The method employed for shifting the money from the Client Account to the business account, using these 'friendly accounts', was as follows:
50 Murray made all of the relevant transactions or he caused them to be made. He said you more or less proposed the scheme by saying, in effect, "you'll need to find an account to drag money out of to pay Sonray's outstanding expenses and costs including Project Mojo's costs". You denied this version of events. You said that you and he agreed to use a 'friendly' account to pay Sonray's expenses which included Project Mojo costs. Further, you claimed you did not become aware of precisely which account was being used for the purpose until about October 2008 whereas Murray says you knew by July of that year. He claims you had a discussion about needing to "fix the hole" with you saying to Murray, "Ok, I'll fix it". He alleges you had that sort of discussion several times. You deny it.
51 There is not much that you dispute about the Crown's summary of the facts surrounding the whole of your offending as presented at your plea hearing. But you dispute the words attributed to you by Murray on these occasions, putting forward an alternative account. The somewhat subtle differences in accounts give rise to an issue about the comparative roles of either direction or subservience that you each respectively played in the various offending: i.e., the engineer v the collaborator; the operator v the acquiesce-or; the dominant v the submissive.
52 Despite such variations in the narrative, the prosecutor and Mr Cahill each agreed, in final submissions, that the accurate way of describing your respective roles in the offending was as 'two principals in a joint enterprise'. You did each have different roles in the business, as I have described. But the fact that Murray was the person who generally transacted business and made the actual entries in the accounts to give effect to the schemes you both agreed to undertake does not diminish your responsibility or enlarge his. Characterising you both as 'principals in a joint enterprise', in my view, properly recognises that despite your different functions, you were both equally responsible for and involved in the criminal conduct with which you were respectively charged.
53 (Count 5: false accounting). As I have already alluded to, the withdrawal of funds from the Client Account in the fashion just described, along with some other factors, meant that the margin or collateral levels in the account dropped, provoking the issue of automatic margin calls by Saxo. Lack of adequate margin threatened the closing out of existing trades and jeopardised Sonray's ability to place new trades for clients.
54 In the latter part of 2008, in a discussion at your holiday house in Sorrento, you and Murray decided upon a means of addressing this problem. Initially it was just to buy some temporary breathing space; over time it became an entrenched modus operandi in part because the method you adopted ended up causing the deficiency to get bigger not smaller.
55 If the market price for an underlying asset for a CFD moved against a particular client, the notional loss under that contract, at that point of time, contributed toward sending the overall level in the Client Account below the Saxo margin line. A way of counteracting that effect, is to lodge an equal but opposite position by a new trade: a commercial strategy known as hedging. That is, the opposing gain in the hedge trade neutralised or counteracted the loss caused by the particular client trade. You and Murray decided to place some hedging trades, initially for just 48 hours.
56 To do so, you needed an account through which to make the hedging trades. You suggested that, if necessary, Murray use two accounts associated with you: RAJ1 and RAJ2.[9]
57 Furthermore, in order to trade, those accounts needed funds. Since you had no funds of your own to deposit, once again the method of 'uploading' or making 'unfunded deposits' was used to give the appearance of funds against the account in the CCM with which to place the trades. $100,000 was uploaded into RAJ1 on 14 August 2008. From January 2009 the process of uploading funds to support these hedging transactions gained momentum. $1 million was uploaded to RAJ2 on 26 January 2009. Between that date and 30 June 2009 a total of $6.85 million was 'uploaded' into these accounts.
58 The previously mentioned Anderson accounts, SKM200 and SKM200USD were also used for this purpose. There was some uncertainty about when you first became aware Murray was also using Anderson accounts for unfunded hedging: whether it was late 2008 or sometime in 2009. It seems clear that you were aware of the use of Anderson accounts at least by 18 May 2009 when you responded to Murray's email that day. He asked, 'Margins off for SKM 200, currently 101%. Do I throw in cash?' You replied, 'Yes, can always take it out'. He then wrote that he had 'put in' $250,000.
59 Once again, it was Murray who actually recorded the false deposits or caused them to be recorded. As well as using the RAJ accounts and the two Anderson accounts, Murray also used accounts associated with himself, SKM1, SKM2 and SKM3. In total, the amount of unfunded deposits uploaded to the CCM for the 3 Murray accounts, to facilitate hedging, was $2,414,000.
60 Even though Murray made the majority of hedging transactions using the unfunded deposits, you made some yourself. Mostly, that was when Murray was unavailable for some reason and you received the margin call to deal with. You personally used only the RAJ2 account and the 'friendly' Anderson accounts, SKM200 and SKM200USD for such hedge trading.
61 It was in the midst of this period of 'uploading' to facilitate hedging, that Saxo made enquiries, in February and again in March 2009, for 'a complete explanatory description of where and how the client funds not held at Saxo Bank [were] held and in what form', including asking for documents from the banks and custodians in which the collateral assets were held. You and Murray successfully evaded answering that request at that time and Saxo did not persist with it again for over 12 months.
62 In short, you and Murray falsified the CCM accounting record to enable hedge trades to be made to attempt to avoid Sonray falling below the required level of margin.
63 (Count 7: obtaining financial advantage by deception). There was a consequence of the hedging trades placed by Murray and yourself using the unfunded deposits that was even more directly favourable to Sonray.
64 Saxo paid Sonray a commission for trades it executed on its behalf. Commissions were fixed according to the particular type of financial product traded. But all commissions were paid on the basis that the trades were actually funded. Saxo would not have executed the trades or paid the commissions had it known the accounts used to trade were not in fact funded by money held in the bank for the proprietors of the relevant trading accounts.
65 From 13 February 2009 until the appointment of administrators, commissions totalling $5,312,559 were received by Sonray for hedge trading in accounts RAJ2, SKM200 and SKM200USD. As explained, they were all hedge trades made without there being any actual funds in the bank belonging to the proprietors of the trading accounts. You had some personal involvement in trading each of those accounts to generate that commission.
66 Despite what appears to be the obvious benefit to Sonray of being paid these commissions - after all, commissions were its prime source of income - it appears to be accepted by ASIC's investigator, Mr Price, that the earning of the commission was not the motivation for undertaking the unfunded hedge transactions. Rather, the commissions were a 'by product' of the conduct designed to avoid margin breach. When conducting the coercive s 19 examination[10] of you on 17 August 2010, Mr Price seemed at pains to make that concession, when he put to you:
...I think we've already established before, and I'll put it on record, that the commissions wasn't the aim of this...And that the aim really, or the motivation was the hedging and the commissions...just happened to be the by product I think?[11]
67 Not surprisingly you agreed with that characterisation of your motivation.
68 Arguably, there were some indications to the contrary in the evidence. The prosecutor drew attention to an email from you to Murray on 3 April 2009 in which you describe having 'knocked around $20m in the raj account to get numbers up'. Another was an email on 6 July 2009 in which you appear to say that earning commissions on the unfunded accounts would have to be 'the answer going forward'.
69 But, the investigator's opinion is important. In order to regard greedy motive as an aggravating factor for your offending, I would need to be persuaded of that beyond reasonable doubt. In the face of conclusion reached by ASIC's principal investigator, despite there being some grounds to suspect that motive, I am unable to reach that degree of persuasion.
70 (Count 2: false accounting). In addition to the method you adopted to transfer money from the Client Account to the operating account to meet business expenses, the subject of count 1, a further opportunity presented itself in May 2009 to help address the continuing lack of funds in the operating account. By mistake, $1.99 million intended to be deposited in the Client Account for use in investment for Asian Pacific Building Corporation Pty Ltd (APBC) was in fact deposited in the business operating account.
71 When that occurred, on 4 May 2009, the operating account was $68,284 overdrawn.
72 APBC was a company associated with William Deague, an old school friend of Murray. You knew before the money was deposited by APBC that it was expected. Murray sent you an email on 5 May to tell you it had been received, although not, at that stage, that it had been mistakenly deposited to the operating account.
73 Nevertheless, the APBC money remained in the operating account and was drawn upon to meet business expenses. You admitted in your s19 examination that you became aware of that later.[12] You took steps, as I will explain below in connection with another count, to conceal the fact that the APBC money had been appropriated to pay for business expenses.
74 (Count 6: theft). As well as the misappropriation of client funds to enable you to repay $441,000 to your father-in-law in December 2007, count 4, there was one other chain of offending from which you personally benefited.
75 Apparently, the salary you were being paid by Sonray was not enough to meet your domestic expenses. Your complete gross salary package was in the order of $172,217, a sum described by your counsel, probably fairly, as not being lavish by professional standards. In any event, over a period of 11 months from April 2009 to March 2010 you instructed Sonray staff from time to time to transfer funds from the balance held against RAJ1 or RAJ2, as shown in the CCM, to ANZ bank accounts in the names of yourself and your wife. A credit balance existed in those accounts because of the uploading that was occurring to enable the hedge trading I have described (count 5).
76 There were 18 such transfers. Amounts ranged between $1,000 and $45,000; the total over the period was $301,649. Even with this influx of money your accounts were still regularly overdrawn.
77 It appears that monies in your personal bank accounts, supplemented by the money stolen from the Client Account, was paid out to meet domestic expenses: e.g., paying off credit card debt; store payments; mortgage repayments; utility charges; and private school fees.
78 (Count 3: submitting false document to ASIC). The influx into the Sonray business operating account of
gave rise to a problem: how was this money to be explained, and how was it to be characterised in the company's books of accounts?
79 When Murray had initially posed the question about how to explain the source of funds the subject of count 1, you had suggested he should say the money was from family and friends for the investment of shares in the business. If asked for a specific name, he was to say it was from Geoff Lord, your godfather. You also gave consistent explanations when speaking to the chief financial officer, Tony Worland, and the executive general manager, Jan Macpherson, at later points in time.
80 When PwC was conducting the solvency review of Sonray in mid 2009, as requested by ASIC, Mr Worland provided the PwC staff with information for that purpose. No doubt because of what he had been told, it is evident that Mr Worland explained that issued capital in Sonray had increased from the previous financial year by $5,205 million: representing a little less than the combined sums of the $3.675 million and the $1.99 million the subject of counts 1 and 2.
81 You received drafts of PwC's solvency review report which made mention of that substantial 'equity injection', approved them and forwarded drafts and updates to ASIC mentioning that capital injection. The final version of the PwC report which you approved and sent to ASIC said this:
Based on our review of unaudited management information at May 2009 the company is solvent. The group's solvency position improved significantly in the 2009 financial year following an equity injection of $5.2m. In order for the group to address its on going (sic) solvency issues the group must become profitable.
82 A previous letter written to you by Mr Lewis of PwC had stated:
Without these capital injections there would otherwise have been significant uncertainty as to whether the Group could continue as a going concern.
83 That 'uncertainty' was clarified by the 30 June 2009 balance sheet and cash flow statements appearing in Sonray's financial report. With the injection of the $5.2m of funds, represented as capital, there was total equity of only $4.036m and net cash inflow of only $4.643m. But for the 'injection' there clearly would have been a capital deficit and negative cash flow.
84 Had ASIC been told the true story and not given a false picture, Sonray may very well have had to stop trading there and then.
85 The crimes to which you have pleaded guilty are commonly called 'white collar crime'. The courts have made many statements about the seriousness of such crime, and it has frequently been noted that it is a feature of such offending that offenders are likely to have no prior convictions, to be of good character and to have good prospects of rehabilitation. It is often unlikely that the white collar criminal will reoffend.
86 From these observations a number of important sentencing considerations follow.[13]
87 First, in such cases, the most significant sentencing consideration becomes general deterrence. Specific deterrence is often not so prominent. Secondly, the previous good character of the offender is not generally regarded as significant a mitigating factor as it is in other cases. Thirdly, rehabilitation prospects are commonly favourable, so the rehabilitation purpose is not so important. For the same reasons, protection of the community does not rank as highly as a sentencing objective as it does for other crimes. Finally, because of the significance given to the sentencing purpose of general deterrence, it is generally seen that fixing an unduly short nonparole period, relative to the head sentence, is subversive of that purpose.
88 In my view, the principal sentencing objectives in your case are those of general deterrence, punishment and denunciation.
89 On your behalf it has been urged that I should take into account several things in particular. One is your plea of guilty and evidence of remorse. Another is the hardship which your imprisonment will cause to your family, amounting to an exceptional circumstance. And another, importantly, is the principle of parity having regard to the sentence which has been imposed upon your cooffender, Scott Murray.
90 As reflected by the maximum penalties available for them, the crimes of which you have been convicted are serious crimes. The Crown submits that the conduct in which you engaged is a serious example of those serious offences. I agree. You committed the offences over a period of 30 months. Your crimes were committed with a sophisticated degree of orchestration and planning. Selfevidently, they involved massive sums of money causing, in the first instance, a loss spread over 4,500 investors of something in the order of $47 million. It may be regarded as fortunate that those investors can expect a recovery of something in the order of 69 cents in the dollar. Nevertheless, the global loss is still very high indeed.
91 I have not received individual stories from investors who have suffered loss as a result of your offences. But I believe I can reliably imagine the typical effects, particularly on small investors who might have entrusted their savings to you. Your own sister and brother, about whom I did hear, are examples of investors who have been caused great hardship because of the losses they have sustained in Sonray.
92 Further, not only do I have regard to the fact that you have inflicted losses on many people, but the gravity of your offending is heightened to the extent that you used some of your clients' money for your own direct personal benefit: the $441,000 you used to pay your debt to your fatherinlaw, and the $301,000 transferred to your domestic bank accounts. Against that, I take into account that you have allowed the liquidator to sell your family home and holiday home to recover a sum in the order of $1.2 million. Strictly speaking, they were not assets available to the liquidator.
93 Your offending also entailed misleading ASIC about the true source of funds into the company's operating account. That deception made Sonray appear to be solvent when it probably was not. Not only was that conduct serious because it involved frustrating the corporate regulator in undertaking its important task on behalf of the community, but it probably perpetuated the life of Sonray for many months. In that time, it is likely that the extent of the losses to your clients grew.
94 That leads me to a consideration of your motive for engaging in the offending conduct. I have already stated my views specifically in relation to the hedge trading that generated commissions for Sonray. More generally, it was urged on your behalf that I should find that your motive was to save the company for the benefit of employees and clients. Consistently with that view, it was pointed out that there was no evidence of you having a lavish lifestyle, or accumulating assets that could be expected to accompany conduct motivated by greed. So much might be true.
95 But motive is a complex thing. It is likely there was an element of you wanting to avoid the personal and business embarrassment of failure. Also, for a time, you were endeavouring to sell Sonray to Saxo for a very significant sum of money. Had you sold it for that sum you probably would have made a profit. During the sale negotiations with the Saxo representatives in May 2010, you handed them a valuation of Sonray for between $32.8 million and $63.7 million.[14] That was at a time when you believed that the financial hole in the accounts of Sonray was in the vicinity of $15 million.
96 Nevertheless, I accept that as time went on you were prepared to sell Sonray for no profit at all. You explained to Mr Price in your s 19 examination that when you went to the Singapore meeting with Saxo you were 'sick of it all'. You did not want to live your life with the pressure anymore, and even if you did not get a cent out of the sale 'just wanted it fixed' and for it 'to go away.'[15] You described an email you received from Saxo on 21 May 2010, requiring another $5 million collateral, as 'the best email that was sent' because it brought the whole issue to the surface.[16] It became the catalyst for events resulting in the discovery of the real extent of the 'uploading' of false deposits and, eventually, to voluntary administration.
97 In the final analysis I accept Mr Cahill's characterisation of your motivation for the offending. He submitted that against the background of the three factors I described earlier that created stress on your business, together with the global financial crisis, you were faced with a dilemma. Should you close the business with the result that investors lose their funds and employees lose their jobs? Or should you take advantage of the latitude that Saxo had unwittingly given you, namely, to trade on client accounts without funds actually being deposited, to try and trade out of the problems? The path you took was a dishonest one, and for that you will be punished. But I accept, generally, that it was not motivated by personal greed.
98 What I have just said, however, draws attention back to the very important role of general deterrence as a sentencing consideration in your case.
99 The problem that you faced was not a unique one. Many businesses in difficult times face the prospect that closure is going to cause clients and employees much grief. The temptation for the business manager or the professional to try and salvage the situation by dishonest means arises not infrequently. So, although the circumstances of your offending are not aggravated by the crass pursuit of personal gain, the need to impose a sentence that has a deterrent effect on others facing a similar temptation remains.
100 You pleaded guilty to the seven counts on 2 October 2013 when a fresh indictment was filed in substitution for an indictment that contained 24 counts. You were first charged on the 24count indictment on 22 September 2011.
101 You were ordered to stand trial in this court on those 24 charges after a threeday committal in August 2012. After several directions hearings in late 2012, the court was informed in January and February 2013 that you had resolved with the prosecution to enter a plea on a proposed new indictment containing seven counts. The matter was listed for plea hearing in March 2013. The proposed seven counts were the same as the counts to which you later pleaded guilty on 2 October 2013. A major difference between the sevencount indictment and the 24count indictment was that the 19 individual transfers of money to your personal bank accounts, the subject of the current count six, were formerly charged as individual counts.
102 Shortly before your scheduled plea hearing in March 2013, the court was informed that you had changed legal representation and that the trial was proceeding as a contest on 21 of the 24 counts.
103 You entered a guilty plea on the 3 counts that, in substance, related to (1) transferring $3.79 million from the Client Account to Sonray's business account (now, count 1); (2) submitting false solvency review to ASIC (count 3); and (3) agreeing with Murray to upload dummy deposits to various trading accounts to perform hedge trades and so avoid Saxo margin calls (count 5). You did not, however, plead guilty at that stage to those counts which related to the methods by which you personally appropriated client funds to your own bank accounts.
104 Mr Cahill argued that the lengthy period of time between the initial laying of the charges in September 2011 and you pleading guilty to the seven counts in October 2013 should not prevent me from concluding that you displayed true remorse. He contended:
105 I read carefully the transcript of the s 19 examination, particularly the parts said to contain your admissions of the offending conduct. Although you go a certain distance in admitting to your offending, I would not characterise your admissions as a wholesale volunteering of your role and culpability. For example, you frequently distinguished Murray's direct actions with your more removed position. You also sought to characterise the thefts for your own personal benefit as a failure to record director's loans.
106 Although I accept, of course, that you were entitled to rely upon legal advice at various points in time, you cannot completely shield yourself from the responsibility for the course you took.
107 But, I bear in mind that the genesis of your acceptance of responsibility for wrongdoing began when you placed Sonray into voluntary administration. Even before that you had instigated an enquiry within Sonray to try and discover just how big the deficit really was. I believe you were truthful when you told Mr Price that you were glad when Saxo asked for more margin because that would bring things to a head, and that by trying to sell Sonray you just wanted to fix things, to get out and to stop living with the deception.
108 I think that, consistent with that background, your cautious approach to making admissions and to obtaining legal advice was not so much an endeavour to obfuscate or to delay. More likely, it was to ensure that what you were ultimately held criminally responsible for was properly based and something to which you could genuinely admit. So much is your right and entitlement.
109 Family and friends spoke of the real concern you hold for your former clients and employees. That is, you have displayed genuine empathy for those who were the victims of your offending.
110 In the final analysis, despite the long delay in this matter coming to the court as a plea and, although you could have done more, from an early stage you did, mostly, admit your wrongdoing, accept responsibility for your actions and display genuine remorse.
111 That is to be taken into account in your favour.
112 Details about your personal circumstances have been provided to the court by a variety of means: a report by psychologist Jeffrey Cummins dated 29 November 2013, which outlines your family and personal background; oral evidence from a number of character witnesses, some of whom have known you for a very long time and have been able to provide the court with a picture of your personal and family background; some written testimonials; a medical report from Armadale Family Clinic dated 15 November 2013; and a report of treating psychologist Dr Elyse Julien dated 24 November 2013 concerning counselling both before and after your offending.
113 You are now 41 years of age (born 29 June 1972). You are married with two children, Emma aged nine, and Sam aged seven, both primary school students.
114 The overwhelming picture of your background is of a happy and stable family life as a child, raised in the Dandenong North area, excellent school student, involved in all forms of sport including playing football for the Dandenong VFA team, and successfully completing tertiary education as I have already mentioned. You were married to your wife, Jill, in early 2003.
115 On 15 December 2006, your wife Jill was diagnosed with a brain tumour. You described this event to Mr Cummins as one that changed your life forever. At that time, you and Jill both consulted Dr Elyse Julien for counselling to deal with the shock. Dr Julien describes you as being extremely supportive of Jill and her situation.
116 Jill underwent neurosurgery on 24 March 2007. The tumour was apparently wrapped around her carotid artery and pituitary gland. Only 20 per cent of it could be removed. Over the next six weeks Jill underwent a very invasive form of treatment called stereotactic radio therapy. She underwent further neurosurgery in April 2008. She now wears an SOS bracelet and takes hydrocortisone twice daily.
117 In addition, Jill has suffered heart palpitations since Easter of 2012. For that condition she has consulted a cardiologist, Dr Bruno Martin, whose two reports dated 22 January 2013 and 1 May 2013 have been tendered. Her arrhythmias have been controlled by various means, including medication. Apparently an ECG was normal and there is no structural heart disease. The more recent report stated that she felt better since commencing a betablocker and had not had further arrhythmias. Mr Cummins reported you told him she may require cardiac surgery. Her GP, Dr Lapin, said much the same in her report of 15 November 2013.
118 Because you have been unable to obtain employment as a result of the collapse of Sonray and the harm it did to your personal and business reputation, your wife has had to work to earn money for the family. The family has moved from the home you once owned to rented accommodation of much smaller dimension in the Toorak area.
119 From the evidence given by your friends and family members who appeared before me, it is more than apparent that you are a very devoted and caring father of your children. The pressure upon you and Jill since Sonray has collapsed has understandably been immense. Witnesses spoke of Jill's strength of character and the mutual support you have given to one another. Despite the great strain that your wife Jill must be under and the ongoing medical issues that she faces, it appears that she is a very resilient person who has a strong network of friends.
120 In saying that I do not underestimate the difficulties that she and the children will face in your absence. It has been put to me that the hardship which your family will endure because of your imprisonment amounts to an exceptional circumstance which I ought to take into account as a mitigating factor when sentencing you.
121 Quite recently, a fivebench Court of Appeal in Victoria has reiterated the principles applicable to having regard to family hardship as a sentencing consideration.[17] The Court reiterated the following principles: first, there has always been a place in sentencing for the exercise of mercy where the court's sympathies are reasonably excited by the circumstances of the case. But, secondly, it has long been the position that unless the circumstances were shown to be exceptional, family hardship was to be disregarded as a sentencing consideration.
122 Whether or not in a particular case family hardship gives rise to exceptional circumstances is a question of fact and degree. That criterion was developed because it is almost inevitable that imprisoning a person will have an adverse effect on that person's dependants. Yet the primary function of the sentencing court is to impose a sentence commensurate with the gravity of the crime. To treat family hardship as the basis for the exercise of leniency would produce a paradoxical result that a guilty person benefited in order that innocent persons would suffer less. So, to treat an offender who had needy dependants more leniently than one equally culpable cooffender who had none, would defeat the appearance of justice and be patently unjust. Therefore it is only in an exceptional case - where a plea for mercy is seen as irresistible - that family hardship can be taken into account.
123 In my view, the combination of circumstances which have been put on your behalf do not amount to an exceptional circumstance. I accept that the circumstance of your wife's illnesses and that she will now be the sole parent of your two children, represents significant hardship. But, as stated, it is a matter of fact and degree in each case. I am not persuaded, on the facts presented as to your wife's capacities and the impact of your incarceration on the family, that they amount to an exceptional circumstance where a plea for mercy is to be seen as irresistible.
124 The law also makes it clear that if the family predicament does not amount to an exceptional circumstance, that predicament does not otherwise attract some kind of 'residual mercy' as a mitigating factor.
125 What I have just said applies only in relation to the sentence I pass in relation to the State offences. In relation to the Commonwealth offence, I do have regard to the probable effect that a term of imprisonment will have on your family.[18] Apart from that, as the Crown accepted, I am able to (and do) take into account your family circumstances as one factor among many in the synthesis of factors that inform my sentencing disposition on all counts.
126 The medical evidence also reveals that you have suffered depression as a result of your wife's illness, your offending and Sonray's collapse. You have been on medication for it since about 2011. I have also taken that into account. There was some fleeting suggestion made that a depressive reaction after the diagnosis of your wife's illness may have had some causal bearing on your offending. But Mr Cahill, properly in my view, did not seek to advance any reliance upon the principles in the case of R v Verdins either to suggest that your depressive condition reduced your moral culpability for the offending, or that the depressive condition means that a given sentence will weigh more heavily on you than it would on a person in normal health.
127 Other than the behaviour which brings you before the court, you are undoubtedly a person of good character. You have no previous criminal convictions. Many witnesses testified, and I accept, that you have been a person of good reputation, strong values and a person who has cared for others. For those reasons, I am quite confident that you are highly unlikely ever to reoffend. In your case, rehabilitation is not a significant sentencing consideration. Nor is specific deterrence.
128 An effect of your conviction for the count charged under the Corporations Act is that you will automatically be disqualified from managing a corporation for a period of 5 years.[19] Of itself that is a penalty which I take into account in sentencing you in respect of it.
129 I come now to the issue of parity: that is, the principle that there should be consistency when sentencing offenders.[20]
130 In submitting that you should receive a lesser sentence than Murray received, Mr Cahill relied on five main arguments:
(1) Murray's offending was greater and wider in compass than yours;
(2) Murray actively performed most of the criminal acts, whereas you primarily acquiesced in them;
(3) You actually took charge of and accepted responsibility for the problem when, in 2010, you appointed people to investigate the size of the financial hole in Sonray's accounts and actively tried to sell the business to save the clients;
(4) You made substantial reparation to the liquidators ($1.2 million) whereas Murray only repaid $190,000;
(5) Your family's hardship amounts to an exceptional circumstance, a factor not in Murray's favour.
131 To an extent I have already dealt with a number of these matters.
132 I am not persuaded that your different role to Murray constitutes any significant point of difference in your favour. For my part, I conclude that despite your different functions, your culpability was commensurate with his. At least I do not find, as the Crown's summary had a tendency to imply, that yours was worse. On the evidence before him, Lasry J was prepared to accept that you were the dominant personality as between yourself and Murray. His Honour appears to have regarded your relative positions as a mitigating factor in Murray's favour. In any event, based upon my own conclusions, I do not think that you deserve to be compared more or less favourably than Murray in terms of your culpability for the offending.
133 For reasons I have explained, I do not regard family hardship as a distinguishing factor in sentencing you.
134 On the other hand, I accept that you made greater reparation than did Murray, and that you did so from assets that may not have been available to the liquidator had you not volunteered them.
135 In relation to taking responsibility and making admissions, it is clear that Lasry J was strongly influenced by Murray's cooperation with the authorities and his level of remorse. In addition to undergoing the coercive s 19 examination with ASIC, as you did, Murray also participated in a record of interview over two days on 27 and 28 September 2010. Lasry J describes Murray's cooperation in these terms:
In that record of interview and in your subsequent statements made on 14 July 2011, you effectively did work for the investigators and, I accept, provided those investigators with a candid account of what you had done in conjunction with Russell Johnson.
...
Your cooperation with the authorities was also highlighted by the evidence of Andrew Price who is the Senior Management Financial Services Officer with ASIC and the principal investigator. He agreed that he had volunteered to give evidence and part of the reason for that was that the speed with which the investigation was able to proceed given your cooperation was unprecedented. Mr Price is convinced of the truthfulness of what you told the investigators. He also expressed the strong view that you have shown remorse at all times in your conversations with him and he was satisfied that you were being truthful.
...
Your cooperation in this matter to date has been exceptional. It displays remorse, a willingness to accept responsibility for your actions and a desire to rectify that which you can in the circumstances.[21]
136 Murray waived the opportunity to have a committal and proceeded directly to a plea in this Court. He pleaded guilty at the first opportunity. But for his guilty plea which, Lasry J said, was inextricably linked to Murray's "very significant level of cooperation", his Honour would have sentenced Murray to 10 years' imprisonment with a minimum of 6 years before eligibility for parole.
137 I have explained that, to an extent, your failure to plead guilty at the first opportunity needs to be set in a context. You began to take responsibility for what had occurred in certain ways even prior to the administration. You made certain admissions in the s 19 examination although, it must be remembered, those admissions could not be used against you in court proceedings. You exercised your right to dispute the charges and to have a committal proceeding. You provided a written apology to creditors at a mediation in a civil proceeding in mid 2011. You took legal advice at different points in time which meant that the Crown had to proceed against you. You also cooperated in another way.[22]
138 Although generally helpful to you, that context does not warrant a description of your post-offence conduct as amounting to an "unprecedented" or "a very significant level" of cooperation with the authorities, as did Murray's. In my view there is a marked difference between the level of cooperation which you gave to the authorities, and the extent to which I can be confident of your level of remorse, compared to that of Mr Murray.
139 That leaves for consideration the extent and breadth of your respective offending. Mr Cahill pointed out that Murray pleaded guilty to ten charges whereas you pleaded guilty to seven. I have compared the two sets of charges.
140 I accept that, in addition to being charged with the same seven counts (in substance) that you were charged with, Murray was charged with 3 additional false accounting charges. Those charges involved (1) uploading false deposits to the William Deague accounts in order to pay the Deague family, (2) making other payments through the Deague accounts to some of his clients, and (3) using some of Murray's own accounts (SKM 1, SKM 2 and SKM 3) to undertake substantial hedging trading with which you were not involved and of which you had no knowledge. In combination, these extra offences involved quite a lot of money.
141 In that sense, I accept that Murray was sentenced for a range of offending which, to a degree, was wider in compass than yours. Additionally, I also accept that it seems that some of Mr Murray's offending was targeted to assist particular clients of his which might be thought to be designed to engender favour towards him.
142 Like you, Murray was otherwise a person of good character and reputation. Lasry J was equally confident he was unlikely to reoffend.
143 In the result there are similarities and differences between you. Some of those differences are favourable to you; some are unfavourable.
144 It seems to me that Murray's additional offending would reasonably justify him being sentenced to a longer term of imprisonment than you before a discount was given for his guilty plea. But the weight of his contrition and the related issue of his cooperation with the authorities would reasonably justify Murray receiving a more substantial discount for his plea of guilty than one which you would deserve.
145 My sentencing disposition aims to reflect these conclusions in so far as the principle of parity is to be applied.
146 Having regard to all the circumstances, I consider the appropriate sentence to impose is as follows:
148 The result is a total effective sentence of six years and 6 months imprisonment. I direct that you serve a minimum term of three years and six months before being eligible for parole.
149 The Commonwealth Crimes Act requires that I state why I think that only a sentence of a term of imprisonment is appropriate in relation to count 3.[23] Only such a sentence is appropriate, in my view, because of the degree of criminality involved in the offence and the associated offending, the sentencing objectives of general deterrence and punishment,[24] and the combined effect of the sentences on each of those State counts, in relation to which the offence charged in count 3 is closely connected and which are to be served concurrently with the sentence on count 3
150 Given that the sentence I have imposed on you in respect of count 3 is a sentence of one year imprisonment, s.19AC of the Crimes Act 1914 (Cth) would generally require that I make a recognizance release order on that count. However, I am of the view that such an order is inappropriate given the "nature and circumstances of the offence".[25] Those factors are the same as those I have already stated as the basis of my view that only a term of imprisonment is appropriate. For those reasons, I will not make a recognizance release order in respect of count 3, and I direct that that fact and those reasons be entered in the record of the Court.
151 Pursuant to s 6AAA of the Sentencing Act 1991 (Vic) I declare that but for your plea of guilty in relation to the State Offences, the sentence I would have imposed on you would have been a sentence of 9 years imprisonment with a minimum of six years to serve before being eligible to apply for parole.
[1] Contrary to s 83(1)(a) of the Crimes Act 1958 (Vic).
[2] Contrary to s 74 of the Crimes Act 1958.
[3] Contrary to s 82 of the Crimes Act 1958.
[4] Contrary to s 1308(2) of the Corporations Act 2001 (Cth).
[5] Section 6H and 6I and Schedule 1A Sentencing Act 1991.
[6] That is, the total value of all receivable (long) and payable (short) market positions in respect of securities held in the various trading markets on behalf of Sonray's clients.
[8] The complete designation for this account was SKM0000128, but I will shorten it, and other accounts referred to below, but omitting the zero's after the prefix.
[10] Examination conducted by ASIC pursuant s 19 of the ASIC Act. Such examinations are compulsory, but the examinee's statements are not admissible in any criminal proceedings against the examinee: s 68(3).
[13] See generally: DPP v Bulfin [1998] 4 VR 114, 131-132; DPP v Page & Ors [2006] VSCA 224, [37]; and DPP v Gregory [2011] VSCA 145, [53].
[14] Statement Kazuaki Takabatake (TAK.002.001.0001) [47].
[15] Section 19 transcript 8 July 2010, page 26.
[16] Section 19 examination 21 July 2010, page 60.
[17] Markovic v R [2010] VSCA 105.
[18] Crimes Act 1914 (Cth), s 16A(2)(p).
[19] Section 206B Corporations Act 2001.
[20] R v Lowe[1984] HCA 46; (1984) 154 CLR 606 and R v Postiglione [1997] HCA 26; (1997) 189 CLR 295.
[21] R v Murray [2011] VSC 513 [61], [66], and [68].
[25] Section 19AC(4) states that "the court may decline to do [make a recognizance release order] if, having regard to the nature and circumstances of the offence or offences concerned...the court is satisfied that such an order is not appropriate."
The Queen
Johnson [2014] VSC 175
(1984) 154 CLR 606
(1997) 189 CLR 295