Executives should tell the truth;  					Directors should ask questions

Cases

Executives should tell the truth; Directors should ask questions

The NSW Supreme Court has sentenced Rodney Adler and Ray Williams to over fours years each in jail for failing in their duties as executives and directors in relation to the collapse of HIH Insurance Ltd.

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The NSW Supreme Court has sentenced Rodney Adler and Ray Williams to over fours years each in jail for failing in their duties as executives and directors in relation to the collapse of HIH Insurance Ltd.

In the Adler case, pleas of guilty related to disseminating false information likely to induce purchase of securities, the obtaining of money etc by false or misleading statements and acting dishonestly as a director.

In the Williams case, sentences were imposed for departing from standards of competence and diligence expected of as Director and Chief Executive officer, lack of proper disclosure, withholding information from a prospectus, misleading statements and recklessness plus other related offences. There was no evidence to show fraudulent dishonesty on William's part.

Adler case

Rodney Adler pleaded guilty respectively to two counts of disseminating information on 19 and 20 June 2000 knowing they were false and were likely to induce the purchase by other persons of shares in HIH Insurance Limited (HIH) and other related offences.

In sentencing Adler, Justice Dunford drew attention to the obligation to disclose relevant information and not to mislead:'By making the statements he made on 18 and 19 June, the offender disseminated information which he knew to be false, that he had purchased shares in HIH with his own money which information was likely to induce other persons to purchase shares in HIH ...

designed to mislead

Not only were the statements which he made to the journalist, and which were therefore likely to be reported, likely to induce other persons to purchase shares in HIH, but I am satisfied that such was his intention so as to cause a rise in the share price ...

He provided no adverse or negative information about the investment or about the financial position of BTS, although aware that such information was relevant to the Board’s deliberations.

In particular, he failed to disclose specifically or generally, any of the facts previously referred to, including that he had failed to disclose to Williams the financial situation of BTS ...

All these matters would have been material to the Board’s decision, which was to ratify the transaction. ...

lack of commercial morality

The offences are serious and display an appalling lack of commercial morality.

The dissemination of false information concerning the real purchaser of the HIH shares and the source of the funds for such purchase had the potential to, and I am satisfied did in fact, distort the market in HIH shares and I have no doubt that the statement “I am putting my money up which shows I believe in the industry” coming as it did from a director of the company with a reputation for shrewd investment, would have induced people, particularly small investors, to purchase HIH shares. Many, if not all, of such people would have lost their money when the company collapsed. ...

The BTS matters are equally serious. They also display a lack of commercial morality and the telling of lies for business purposes …[including] false representations and then to attend a Board meeting and compound the earlier offence by not disclosing the misrepresentation or the deterioration in BTS’ position ...'

Williams case

The Chief Judge at Common Law, Justice Wood, concluded that the offences committed by Williams 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:

'… 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. …

prospectus must be accurate

… 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.

... 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.

no personal gain submission

It is common ground that the offence involved in the second count was the most serious of the three offences …

...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 … that there was nothing to show that the transaction was designed to secure a direct personal benefit for the Defendant.

… 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.

… 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. ...

failure to inquire

...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 ...'

Regina v Williams [2005] NSWSC 315 - Wood CJatCL - 15/

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