McR Collared

Australian criminal and civil consequences for bribery committed overseas

2016-11-29T09:53:00.001+10:00

Local and international media are reporting that an Australian Rio Tinto executive has been suspended and subsequently dismissed amidst a scandal involving a multi-million dollar payment to an apparent associate of the Guinean president. The exact nature of the payment is at this stage unclear, and investigations continue.

JP Morgan is also reportedly set to settle with US authorities following a long-running bribery investigation into the bank’s hiring practices in China.

It’s timely therefore to consider the potential consequences of overseas bribery. What might happen if an Australian is caught in the act?

How serious is bribery?
Revelations of bribery call a company’s corporate governance into question. It places at risk a company’s reputation and trustworthiness.

Further, foreign bribery carries significant criminal penalties and civil consequences in Australia (we explain these below).

It is important that companies take the risks posed by bribery seriously. A quick, decisive response is often the best way for companies to limit the damage caused upon the discovery of potential bribery having been committed.

The criminal offence
Bribery by an Australian citizen is a serious crime that can be prosecuted in the Australian courts – even if the bribe was made overseas to a foreign government or official.

Section 70.2 of the Criminal Code Act 1995 (Cth) outlines the relevant offence of ‘bribing a foreign public official’. It is a crime for an Australian citizen, resident or corporation to:

provide a benefit to another person
if that benefit is not ‘legitimately due’, and
where the payer provides the benefit with ‘the intention of influencing a foreign public official … in the exercise of the official’s duties as a foreign public official’.

It is important to remember that:

the crime can be committed even if the relevant benefit is provided outside of Australia (e.g. payments made overseas)
a ‘benefit’ need not be a payment – it can be any advantage and is not limited to property, and
a foreign bribery offence can occur even if a foreign public official didn’t receive the money directly.

Criminal penalties for the perpetrators
The maximum penalty for an individual convicted of the offence of bribing a foreign public official is 10 years imprisonment, or a fine of up to A$1.8 million, or both.

If a corporation commits the offence, it can also be penalised in the maximum amount of:

$18 million, or
if the value of the benefit obtained from the bribe can be ascertained – 3 times that value, or
10% of the corporation’s annual turnover.

In addition to criminal penalties, the benefits obtained through bribery may be forfeited to the Australian Government under the Proceeds of Crime Act 2002 (Cth).

Possible civil action
In addition to criminal punishment, corporations may consider civil remedies against their officers or employees who made the bribe, if it can be shown that the payment caused loss and damage to the company, and the company has a cause of action against the relevant individual.

The employer potentially can claim any or all of the following causes of action against the employee:

breach of fiduciary duty
breach of statutory duties as set out in Part 2D.1 of the Corporations Act 2001 (Cth) (assuming that the person who made the bribe can be shown to be an ‘officer’ of the employer for the purposes of the Corporations Act), or
breach of employment contract – depending on the terms of the contract and whether any applicable corporate policies prohibiting bribery are held by a Court to have contractual force.

As a member of the International Fraud Group McCullough Robertson is well-placed to assist clients with the international aspects of white collar crime, including matters involving potential foreign bribery offences and related issues considered above.

Peter Stokes

Partner

+61 7 3233 8714

pstokes@mccullough.com.au

Daniel MacKenzie

Senior Associate

+61 7 3233 8864

dmackenzie@mccullough.com.au

Continuous disclosure obligations - Who is continuously obliged?

2016-11-11T09:57:00.000+10:00

If your company breaks the law, that’s not your problem, is it? And surely if your client breaks the law, you’re in the clear?

Unfortunately it is not that simple. This article will consider who is potentially liable for a breach of continuous disclosure obligations.

Why do I have to keep disclosing?
Listed entities are required to continuously disclose certain types of information to the market.

Entities listed on the ASX are subject to the ASX Listing Rules. Rule 3.1 requires that:

Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.

It’s important to remember that not all information has to be disclosed. There are certain ‘carve outs’ in paragraph 3.1A.1 of the Listing Rules, including:

if the disclosure would break the law

the information is an incomplete proposal or negotiation

the information is supposition or insufficiently definite to warrant disclosure

the information is generated for internal management purposes, or

the information is a trade secret.

What if my company breaches continuous disclosure obligations?
The continuous disclosure obligation in the Listing Rules isn’t just a guideline; it is given force of law by section 674(2) of the Corporations Act 2001 (Cth).

Both civil and criminal consequences can flow from a company’s failure to comply with continuous disclosure requirements. Civil consequences can take the form of infringement notices, declarations of breach, or compensation or other monetary orders (see Parts 9.4AA and 9.4B of the Corporations Act). The criminal penalties for a company breaching section 674(2) can be as high as A$180,000 for each breach. Of course, breaches of continuous disclosure obligations can also potentially found shareholder litigation, including class actions.

People involved with the company can be liable as well
Section 674(2A) of the Corporations Act in effect mandates that individuals (and other corporations) must not be involved in a listed entity’s contravention of continuous disclosure requirements.

While breach of section 674(2A) is not a criminal offence, section 674(2A) is identified in the Corporations Act as a civil penalty provision. Accordingly, an individual’s breach of section 674(2A) can lead to pecuniary penalty orders or compensation orders being made against the individual.

Similarly, individuals can also be criminally liable for aiding and abetting a listed company’s criminal act in not complying with its continuous disclosure obligations.

So if a company does not keep up with its disclosure obligations, both the company and the people involved can be punished.

But what does involved mean?
Surely only executives and directors can be involved in a company’s breach of the law, because they control the company, right?

Wrong.

‘Involved’ and similar terms have been interpreted extremely widely in the past.

So, for example, in Sutton v AJ Thompson Pty Ltd (in liq), a company’s accountant was held to be ‘knowingly concerned’ (for the purposes of the Trade Practices Act 1974 (Cth)) in misleading statements made by someone else, because the accountant did not correct the statements when he knew the truth.

Even more remotely, the Court has been willing to entertain the idea that third parties could be liable in relation to a company’s breach. Thus, while in Heydon v NRMA Ltd the Court found that a company did not mislead by making certain statements in a prospectus, the Court did say that if they had found that misleading conduct had occurred, the lawyers who advised on the prospectus would have been ‘involved’ too!

Staying outside a company is not enough to insulate a person against involvement in a breach of the law.

Applying these concepts to continuous disclosure
In 2015 in Australian Securities and Investments Commission v Planet Platinum Ltd, the Victorian Supreme Court found that Planet Platinum failed to inform the ASX that a loan had been extended, that a mortgage was discharged, and that rent had not been collected, thus breaching continuous disclosure requirements. The Court found the company’s directors involved in those breaches of continuous disclosure requirements, and so breached section 674(2A).

More recently, Benjamin Kirkpatrick, the chief executive officer of Waratah Resources Limited (Waratah), pleaded guilty to aiding and abetting Waratah’s breach of its continuous disclosure obligations. Between 14 and 25 October 2013, Waratah failed to correct an incorrect market announcement concerning a financing deal with an international bank. He is due to be sentenced on 2 December 2016.

The bottom line
Corporation laws do not just apply to corporations, and do not just apply to officers of corporations. Anyone ‘involved’ in a contravention of continuous disclosure obligations is potentially liable, including accountants, advisors and lawyers. And with continuous disclosure, of course, there is a continuous risk of breaking the law.

Daniel MacKenzie

Senior Associate

+61 7 3233 8864

dmackenzie@mccullough.com.au

Patrick O'Brien

Lawyer

+61 7 3233 8529
pobrien@mccullough.com.au

Putting out the fire – cracking down on illegal phoenix activity

2016-10-24T12:55:00.000+10:00

‘We didn't start the fire
It was always burning since the world's been turning
We didn't start the fire
No, we didn't light it, but we tried to fight it’¹

The Illegal Phoenix
Illegal phoenixing is a major problem in corporate Australia. In this post we consider what illegal phoenix activity is, how the problem is affecting the Australian economy and the recent regulatory crackdown on the issue.

In Greek mythology a phoenix is a mythical bird which obtains new life by rising from the ashes of its predecessor. Illegal phoenix activity involves the intentional transfer of assets at an undervalue from an indebted company to a new ‘phoenix’ company. The old company remains with its debts and is often placed into liquidation (or is left to be wound up on the application of a creditor) – stripped of any valuable assets, with nothing left to pay creditors.

How significant is the problem?
Illegal phoenixing has been estimated to cost the Australian economy more than $3 billion a year². Employees, businesses and the Government are affected by:

unpaid wages and other entitlements
unpaid debts and unpaid tax
goods and services paid for, but not provided, and
the cost to Government of payments made to employees under the Fair Entitlement Guarantee³.

The negative economic impact of illegal phoenix activity is exacerbated by unquantifiable factors, including the unfair competitive advantage obtained by companies that avoid paying their debts.

Illegal phoenixing in the construction industry in particular lead to a Senate Inquiry, the outcomes of which were published on 3 December 2015 in the Senate Report ‘Insolvency in the Australian Construction Industry’.

Pre-insolvency advisors
The relatively recent advent of pre-insolvency advisors has undoubtedly fuelled an increase in illegal phoenix activity in Australia.

Whilst sometimes touted as a ‘guardian’ against insolvency, many are unqualified and trawl the Australian Securities and Investment Commission’s (ASIC) winding up application notices, preying on directors desperate to find a way out of the company’s financial difficulties. Debtors all too often find themselves in situations where they incur further debts, in the form of substantial pre-insolvency advisor fees, to ‘rebuild’ their company. In some circumstances this leads to a commercial resolution with creditors that avoids a formal insolvency, however, in many cases, the advice results in illegal phoenix activity.

Putting out the ashes: how is illegal phoenixing regulated?
There is no legislative definition of illegal phoenix activity, or a specific phoenixing offence. This has presented difficulties for regulators trying to target illegal phoenix activity, such as the Australian Taxation Office (ATO) and ASIC⁴. Those regulators have therefore developed indicia to spot illegal phoenixing. Central to these is an ‘intent’ by directors and company secretaries to avoid liabilities.

ASIC, the ATO, the Australian Competition and Consumer Commission and the Fair Work Ombudsman have combined forces to proactively identify, monitor and challenge suspected illegal activity, via the creation of the ‘Phoenix Taskforce’. Driven by ASIC, the Taskforce uses data matching tools to monitor behaviour, particularly where a failed entity’s directors resurface in the same pursuit under the veil of a new entity.

The Phoenix Taskforce (Taskforce) works closely with the Serious Financial Crime Taskforce which is headed by the Australian Federal Police and monitors and targets criminal behaviour, following the success of Project Wickenby.

So far the Taskforce has been focused on identifying and (hopefully in time) removing from the industry those involved in enabling illegal phoenix activity; being pre-insolvency advisors, the lawyers who work on the pre-insolvency transactions and the liquidators who willingly take the appointment as liquidators of the company shell and who fail to take any proper steps to investigate or prosecute the directors.

Much of the Taskforce’s work remains confidential; however, the Taskforce conducted two recent joint raids by the ATO and ASIC on over 13 homes in Melbourne and the Gold Coast in August of this year. The raids were conducted after investigations identified the homes as being linked to firms providing pre-insolvency advice who would encourage debt-ravaged businesses to participate in illegal phoenix activity as well as assisting businesses to avoid paying taxes on an estimated collective sum of $22 million in unreported income.

In comments following the raids, the Deputy Commission of Taxation reiterated the dangers of unqualified pre-insolvency advice and confirmed that the Taskforce was keeping a close eye on service providers in this section of the market.

Further, in a pro-active approach, ASIC have commenced a program which sees them writing to directors of companies subject to winding up applications with a view to reminding those directors of the serious consequences associated with phoenixing.

The James Nelson decision – a judicial shift?
Despite it being prevalent, the regulators have had limited success in prosecuting illegal phoenix activity.

In ASIC v Somerville & Ors (2009) 77 NSWLR 110, the New South Wales Supreme Court found eight directors of unrelated companies to have acted in breach of the Corporations Act 2001 (Cth) by engaging in what ASIC regards as illegal ‘phoenix’ activity and that their legal adviser, Mr Timothy Donald Somerville, also contravened the Corporations Act by being involved in the directors’ breaches.

The court found that Mr Somerville had devised a series of transactions, with the appearance of legitimacy, to bring about asset stripping and disadvantage to creditors. On 24 September 2009, the New South Wales Supreme Court disqualified Mr Somerville from managing corporations for six years commencing on 24 October 2009. The Court also disqualified the directors from managing corporations for a period of two years commencing on 24 October 2009.

In 2013 and 2015, following investigations by ASIC, the two pre-insolvency advisers from the Gold Coast, Graeme Dwyer and Paul Scott, were found guilty of creating and using a fictitious director in companies in order to avoid any real director potentially being liable for breaches of directors’ duties because of transactions entered into - see ASIC's media release.

However, the punishment handed down by the court (six months imprisonment, suspended upon entering in a $1,000 recognisance to be of good behaviour for a period of 12 months and eight months imprisonment, to be served by way of an intensive correction order, respectively) is unlikely to be sufficient to be a serious deterrent to others who operate on the fringes of the law and who may wish to engage in similar behaviour.

More encouragingly, in the recent Federal Circuit Court decision of Fair Work Ombudsman v James Nelson Pty Ltd & Anor [2016] FCCA 531 (James Nelson), the Federal Circuit Court of Australia ordered Ms Langridge, a sole company director and secretary, to pay around $98,000 in penalties for her involvement in facilitating illegal phoenix activity. Ms Langridge failed to pay the employees of her company their appropriate wage entitlements, in contravention of the Fair Work Act 2009 (Cth) and transferred her company’s assets to a new phoenix company.

Legislative Reform
In March 2016, the Fair Work Amendment (Protecting Australian Workers) Bill 2016 (Cth) was introduced into the Australian Senate (FWA Bill). If enacted, the FWA Bill would have enabled courts to require directors of phoenix companies to pay amounts owed by failed companies and orders disqualifying certain persons from managing corporations. It would have also given the Fair Work Ombudsman increased powers to pursue employers and directors engaging in phoenixing in their personal capacities. Following the dissolution of parliament earlier this year, the FWA Bill lapsed and it remains to be seen whether the FWA Bill will be re-introduced in the next parliamentary session.

Separately, the Australian Government’s proposed changes to insolvency laws to introduce a safe harbour for directors whilst attempting to restructure a business, may reduce the rates of illegal phoenix activity by providing better ways for troubled companies to turnaround.

Conclusion
The difficulty defining and proving illegal phoenix activity has made it hard for regulatory authorities and courts to prevent and penalise it. The Government’s investment into specialised taskforces and the Senate Inquiry reveal its prioritisation and commitment to the issue. The recent James Nelson decision may indicate that the Government’s initiatives are paying off. It will certainly be interesting to monitor the effectiveness of the Government’s initiatives over the next few years.

_____________________

[1] Chorus from ‘We Didn’t Start the Fire’ by Billy Joel, from the Storm Front Album, released 1989.
[2] Phoenix activity: sizing the problem and matching solutions, commissioned by Fair Work Australia (read the report at: http://bit.ly/2e1NNqo).
[3] Ibid.
[4] http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Insolvency_construction/Report/c05#content - ASIC, Submission 11, p. 26.

Scott Butler

Partner

+61 7 3233 8653

sbutler@mccullough.com.au

Ann Watson
Lawyer
+61 7 3233 8638
awatson@mccullough.com.au

Queensland: A fraudulent State of mind? Jail time for former Kleenmaid and Wickham Securities directors

2016-09-26T10:20:00.001+10:00

In recent months the Queensland District Court has found the directors of two former Queensland based companies guilty of fraud. This will hopefully bring a small amount of relief to those who have suffered at the hands of the fraudulent directors in question.

Kleenmaid
The first case, relating to the Kleenmaid Group of companies, is infamously one of the longest criminal trials held in Queensland.

Prior to its collapse, Kleenmaid provided retail whitegoods to an Australia-wide customer base through a series of group owned and franchise stores. Deloitte were appointed as liquidators in mid-2009 and, at the time of writing, their website notes that the Kleenmaid group has over $102 million in liabilities. Reports issued to creditors over the history of the liquidation tell a story of missing records, questionable transactions, minimal cash flow and unrecoverable inter-company loans all leading to a devastating “little chance of dividend” outcome for creditors.

It came as no surprise then, when the Commonwealth Director of Public Prosecutions, on behalf of ASIC, commenced criminal proceedings against the directors in 2012. Following the imposition of the charges, one of the directors, Gary Armstrong, pleaded guilty to 1 count of dishonestly gaining loan facilities from Westpac in 2007 and two counts of insolvent trading from 2008. Armstrong was subsequently sentenced to 7 years in prison and is eligible for parole in February 2018.

Notwithstanding Armstrong’s capitulation, fellow directors Bradley and Andrew Young vehemently denied the charges filed against them. Both were charged with 1 count of fraud under section 408C of the Queensland Criminal Code and 18 counts of insolvent trading under section 588G(3) of the Corporations Act 2001 (Cth).

The fraud allegation pertained to the acquisition of a $13 million loan from Westpac which the company obtained only months before its ultimate demise. Relying on evidence obtained by the liquidators in their investigations, including a public examination of the directors, the prosecution argued that the Youngs and the other directors knew of the company’s financial instability and egregious debt position but did not disclose this information to Westpac when applying for the loan.

After 9 days of the eventual 71 day trial, the trial against Andrew Young was adjourned to allow him to find another barrister to represent him. His trial will continue another day.

When the trial against Mr Young continued, his lawyer tendered over 60 character references with respect to his client. Unfortunately, that was of no avail as the jury found Mr Young guilty of the fraud charge as well as 17 of the 18 charges of insolvent trading.

When delivering his sentence, District Court Judge Farr commented on what he considered to be Mr Young’s ‘callous disregard’ for those who would ultimately be affected by his actions. His Honour sentenced Young to a jail term of 9 years; he is eligible for parole after six years and three months.

A trial date for the third director and brother to Brad, Andrew Young, is yet to be determined. McCullough Robertson, who have been the primary legal advisors to the liquidators on this matter since 2009, will be keeping a close eye on this matter and publish updates as it develops.

Wickham Securities
The second case considers charges against a former director for the fraudulent acquisition of funds, relates to the collapsed debenture issuer, Wickham Securities Ltd.

During its prime, Wickham Securities operated as a Brisbane-based property financier. After going into liquidation in 2013, the liquidators uncovered what can only be described, in hindsight, as a master class in ponzi-schemes. Wickham Securities’ business model saw it raise money from the general public by issuing various deposit notes to provide mezzanine loans to property developers. When the model fell apart, hundreds of mum and dad investors and self funded retirees lost tens of millions of dollars. A class action filed by a group of aggrieved investors is currently progressing through the Courts.

In the aftermath of this discovery, Wickham Securities director and chairman, Bradley Sherwin, filed for bankruptcy and, in response, ASIC banned him from financial services for two years and seven months pursuant to section 920A of the Corporations Act. In addition, ASIC then commenced proceedings against the former CEO of Wickham Securities, Garth Robertson.

In April 2015, Mr Robertson appeared in the Brisbane Magistrates Court facing 10 counts of fraudulently obtaining funds between 2010 and 2012, nine counts of giving, or permitting to be given, false information about Wickham Securities to its trustee and finally, one count of falsifying books relating to Wickham Securities’ affairs. During the period in question it was alleged that Mr Robertson obtained more than $700,000 in funds to pay off his own personal tax debts and credit card repayments.

In February 2016, the matter was set down for trial which was due to commence in August only for Mr Robertson to plead guilty to all charges in July.

On 1 September 2016, Mr Robertson was sentenced to 5 years imprisonment (to be suspended after 20 months). In delivering the sentence, District Court Judge Tony Moynihan acknowledged that Mr Robertson’s fraudulent and deceitful conduct caused his victims to suffer loss and commented that Mr Robertson lacked the moral and ethical discipline to resist the temptation to fraudulently deal with money.

Comment
Whilst the outcome of each of the above cases is largely unsurprising to some, it sends a strong message to would-be fraudsters that their conduct is always the subject of scrutiny and, where they choose to break the law, the regulators have the appetite to, and will, pursue them.

Scott Butler

Partner
+61 7 3233 8653
sbutler@mccullough.com.au

Ann Watson
Lawyer
+61 7 3233 8638
awatson@mccullough.com.au

Former fintech owner takes on Visa

2016-07-19T13:22:00.000+10:00

In September 2015, the Federal Court ordered Visa Worldwide Pte Ltd (Visa) to pay a pecuniary penalty of $18 million for engaging in anti-competitive conduct.

Visa’s exposure from this finding may extend beyond this penalty, as commercial entities allegedly affected by this conduct also take up arms against the global payments technology company.

The Federal Court ruling

Visa makes significant profit from the point of sale currency conversion from international travellers using their Visa cards. In competition to this service, rival suppliers offer dynamic currency conversion which gives a cardholder a choice to complete the transaction in their home currency at a locked-in exchange rate.

Between May to October 2010, Visa prohibited the further expansion of dynamic currency conversion on point of sale transactions on the Visa payment card network by its rival suppliers. The effect of this moratorium meant that retail stores, hotels and restaurants could not introduce dynamic currency conversion.

The Australian Competition and Consumer Commission (ACCC) brought proceedings against Visa in relation to the dynamic currency conversion ban. The Federal Court held the conduct to be exclusive dealing contrary to section 47 of the Competition and Consumer Act 2010 (Cth).

A link to the ACCC media release on the Federal Court ruling can be found here.

Claim by Daniel Lavecky

Daniel Lavecky, the founder of Pure Commerce, a dynamic currency conversion services provider, has recently commenced proceedings against Visa on the back of the Federal Court finding.

Mr Lavecky sold Pure Commerce to Euronet Worldwide Inc. in January 2013, but claims that he lost out on two higher offers from prospective buyers in 2010 due to the ban imposed by Visa.

He claims that he would have sold Pure Commerce for more had it not been for Visa acting anti-competitively.

Comment

Mr Lavecky has only recently commenced the proceedings and it will be interesting to see how Visa responds to the allegations.

It would appear though that Mr Lavecky’s case is a good example of how a plaintiff can let a regulator do the heavy lifting (i.e. proving that conduct was anti-competitive) before then commencing civil proceedings.

In this regard it also appears that Mr Lavecky got lucky, in that the ACCC’s proceedings concluded within the six-year limitation period for Mr Lavecky’s action. (Section 82 of the Competition and Consumer Act 2010 (Cth) imposes a six-year time limitation to commence any action, and it is likely that Mr Lavecky will seek relief pursuant to that section by relying on infringing conduct by Visa between May to October 2010).

The team at McR Collared will be keeping a close eye on this matter and will be providing updates as it progresses.

Daniel MacKenzie

Senior Associate

+61 7 3233 8864

dmackenzie@mccullough.com.au

Xavier Milne

Lawyer

+61 7 3233 8792

xmilne@mccullough.com.au

The validity of agreed penalties in the civil jurisdiction

2016-07-14T09:17:00.003+10:00

In October 2015 the High Court handed down its much anticipated decision in Commonwealth v Director, Fair Work Building Industry Inspectorate & Ors (2015) 326 ALR 476 (Cth v FWBII) on the validity of agreed penalties in the civil jurisdiction. For regulators such as Australian Securities and Investment Commission (ASIC), the Australian Competition and Consumer Commission (ACCC), the Fair Work Building Industry Inspectorate (FWBII) and Comcare, the stakes were high.

If the High Court held Barbaro applied to them, it would fundamentally change the way regulators police their beats and deal a major blow to many already stretched regulators.

Civil Penalty?
While civil penalties are broader than their criminal cousins, they are generally less well understood. Civil penalties are penalties that can be imposed by a court for breaking a law. Examples include:

penalties for breaching the Corporations Act 2001 (Cth), the Australian Consumer Law or the Australian Securities and Investments Commission Act 2001 (Cth)
penalties for breaking tax laws and,
penalties for breaching workplace health and safety laws.

Civil penalty cases are brought by a regulator rather than the Director of Public Prosecutions. ASIC, the ACCC, the Fair Work Building Industry Inspectorate and Comcare all apply for civil penalties as part of their regulatory role.

Barbaro v R

The agreed penalties saga began with the High Court’s decision in Barbaro v R (2014) 253 CLR 58. In that case, two individuals plead guilty to a number of serious drug offences in the Supreme Court of Victoria with an understanding that the prosecution would seek a certain penalty. The sentencing judge refused to take submissions on penalty and handed down terms of life imprisonment with a 30 year non-parole period for one offender, and 26 years imprisonment with a non-parole period of 18 years for the other. These penalties were significantly more than the individuals (and the prosecution) expected. The individuals appealed on the basis that the sentencing judge made an error by not taking submissions on penalty.

After the Court of Appeal upheld the sentencing judge’s decision, the High Court (French CJ, Hayne, Kiefel and Bell JJ) held that the prosecution submitting a penalty range to a judge is not a submission of law, but just the opinion of the prosecutor. Further, the opinion of a prosecutor is irrelevant in a courtroom. It is the job of a judge to decide penalty, not the prosecution.

Barbaro now sets the law in criminal sentencing; but does it apply to agreed civil penalties?

Cth v FWBII

After Barbaro, the Federal Court quickly referred a prosecution of the Construction, Forestry Mining and Energy Union (CFMEU) by the FWBII to its Appeal Court. The question was, could the FWBII and CFMEU agree on a set of facts about a breach of the Fair Work Act, and a penalty, and take this agreed penalty to the Court? It was a common occurrence before Barbaro, but now the practice was in doubt.

The Full Court of the Federal Court found that Barbaro applied and that it was inappropriate for the regulator to submit agreed penalty statements.

On appeal however, the High Court maintained the status quo by rejecting the reasoning of the Full Court. The High Court found that it was acceptable in the civil penalty context for parties to submit penalties. The Court held that:

‘there is an important public policy involved in promoting predictability of outcome in civil penalty proceedings and that the practice of receiving and, if appropriate, accepting agreed penalty submissions increases the predictability of outcomes for regulators and wrongdoers.’

The High Court also pointed out that:

‘…there are basic differences between a criminal prosecution and civil penalty proceedings and it is they that provide the ‘principled basis’ from excluding the application of Barbaro from civil penalty proceedings.’

The End Result

The end result of the civil penalty story is…that nothing has changed. A regulatory authority and a wrongdoer can still agree on a set of facts and the penalty that they want.

Whether this is the right legal outcome is an issue open to debate, but it does make things much easier for both the regulator and the wrongdoer.

From the perspective of the regulator, agreeing to penalties saves an enormous amount of its scarce resources by avoiding a lengthy court battle with the wrongdoer. This frees up the regulator to investigate more in their sphere of regulation.

From a wrongdoer’s point of view, it also saves time and money, as well as creating certainty of outcome. A ‘commercial’ outcome can be achieved. Of course, the wrongdoer still has the right to fight the regulator if they don’t think they’re in the wrong.

The question is though, do you want to take the risk and fight it through the Courts?

Peter Stokes
Partner
+61 7 3233 8714
pstokes@mccullough.com.au

Patrick O'Brien
Lawyer
+61 7 3233 5829

pobrien@mccullough.com.au

Freezing Orders Explained

2016-07-04T08:59:00.000+10:00

Victims of white collar crime, whether large or small businesses, can all face a real dilemma when the crime is discovered – can we get our money back?

The answer may be to obtain an asset freezing order from the Courts.
Such an order is a critical weapon in the fight against white collar crime. These orders are also known as ‘Mareva’ orders, after the 1975 English case in which such an order was first famously made.

Freezing orders substantially restrict a white collar criminal from dealing with their assets, up to a value specified by the Court. For example, a freezing order could restrict an individual from dealing with $1 million of their assets. This is regardless of whether that individual actually has total assets worth more, or less, than $1 million.

Freezing orders are therefore sometimes sought by white collar crime victims before commencing civil proceedings alleging that a white collar crime has taken place. The freezing order ensures that a white collar criminal cannot transfer or hide assets before the civil proceeding provides judgment for the victim.

Given they substantially restrict a person’s proprietary rights, freezing orders are very serious and Courts do not grant them lightly. A freezing order will be made (assuming other criteria are met) if the Court is satisfied that there is a real risk that the white collar criminal will dissipate assets. The Court will usually accept this risk exists if there is evidence of actual dishonesty or fraudulent behaviour by the perpetrator.

A party seeking a freezing order should keep the following in mind:

Act quickly. Any delay in approaching the Court to seek a freezing order – even by one day – weakens your case. For this reason, once you are on notice of a potential civil claim related to white collar crime where freezing orders may be appropriate, you should move immediately to investigate the matter, and should involve your lawyers at the earliest possible opportunity.
Be ready to go to Court urgently. This is connected with the need to avoid delay. Do not be surprised if you are in Court the same day you inform your lawyers about the possible white collar crime.
Keep it quiet. Do not inform the alleged white collar criminal that you are proposing to obtain a freezing order against them. The element of surprise is crucial, otherwise the alleged perpetrator may have time to move cash out of bank accounts or execute property transfers – exactly what your freezing order will prevent. Remember that the Court hearing for the freezing order will be ex-parte (that is, the perpetrator is not informed of the hearing and does not participate).
Third parties? Identify any other persons or companies that may control assets of the white collar criminal. This will usually be banks where the perpetrator holds accounts. Be organised so that you can put those banks on notice of the freezing order as soon as it is granted – your lawyers can assist with this process. Note though that overseas financial institutions will likely not abide by Australian Court orders. We will address ways to freeze assets overseas in an upcoming post.
Defend yourself. If a freezing order is made, the Court will also schedule a further hearing where the perpetrator will have an opportunity to object to the freeze. That hearing will usually only be a few days later. Accordingly, you should be prepared for a busy period of work after a freezing order is initially granted, as you and your lawyers prepare to defend the freezing order.

McCullough Robertson is experienced in obtaining and maintaining freezing orders in civil proceedings connected with white collar crime. Clients who consider they may need to obtain a freezing order should contact us as soon as possible to discuss their options.

Daniel MacKenzie
Senior Associate
+61 7 3233 8634
dmackenzie@mccullough.com.au

Peter Stokes
Partner
+61 7 3233 8714
pstokes@mccullough.com.au

A silk purse: how a company can recover profits from insider trading

2016-05-18T15:25:00.001+10:00

An officer or employee commits insider trading, gaining a large profit for themselves. The company discovers the wrongdoing. What to do?

Usually, this is a referral straight to ASIC. If preliminary analysis of the facts bears out the allegation, ASIC will conduct a thorough investigation, interviewing the alleged wrongdoer and possibly members of the Board.

If satisfied that the facts of the wrongdoing are made out, the alleged offender will be prosecuted, and may go to prison. So it goes. The company will suffer inconvenience and even damage to its reputation. It gets nothing out of the prosecution, and will need to foot its own legal bills during the ASIC investigation (though such an outlay is usually covered by the company’s insurance policy). It can of course rid itself of the erring employee.

But here is an interesting fact. In 1969, the Court of Appeal of New York decided that a company could recover profits made by an officer from insider trading in the company’s shares (Diamond v Oreamuno 24 NY 2d 494).

How did it do this?

After all, the company had not suffered any quantifiable damage as a result of the trading. The loss was suffered by those shareholders who had sold their shares to the officer, before the share price crashed when the inside information became public. (But this line of reasoning is weak – those shareholders were going to buy anyway, and if they had not bought the officer’s shares, they would have bought someone else’s, and still suffered their loss).

The company was able to sue the officer to recover the unauthorised profits from insider trading, by application of fairly orthodox equitable principles. I break them down below:

directors and, sometimes, high level officers owe fiduciary duties to their companies
these special duties are summed up in two rules: the ‘no profit’ rule, and the ‘no conflict’ rule
the ‘no profit’ rule says that a person must not make a profit out of a fiduciary position, except with the fully informed consent of the beneficiary
by engaging in insider trading, the director/officer makes a profit out of his/her fiduciary position, without the informed consent of the company, and
remedies for breach of the ‘no profit’ rule include an account of the profits derived.

In the 1970s, US courts in Florida and Indiana considered Diamond v Oreamuno, and decided not to follow it (Schein v Casen 313 So 2d 739 (1975), Freeman v Decio 584 F 2d 186 (1978)). Since then few, if any, further cases were run in the USA on the basis of Diamond (at least, that could be found on this author’s quick scan). The cause of action may have become unfashionable in the USA after 1975. However it is surprising that no company in Australia has mounted a similar action, to force an officer to disgorge profits made from insider trading. That may be about to change.

Paperlinx Limited v McConnell [2016] FCA 450 is a skirmish in an ongoing dispute between Mr Andrew Price, and Paperlinx Limited, his former employer. Paperlinx sought disclosure of documents on the basis that, among other things, they had a potential cause of action for a breach of insider trading provisions. The application could foreshadow an action against Price to disgorge his alleged insider trading profits.

It should be noted that the Corporations Act 2001 (Cth) provides statutory remedies which reflect, but do not displace, the equitable principles above. Section 1317H allows a Court to order a person to compensate a company for damage suffered as a result of a breach of civil penalty provision. Subsection (2) states that for the purpose of determining ‘damage’, profits derived from the breach should be included.

Thomas Ritchie

Senior Associate

+61 7 3233 8530

tritchie@mccullough.com.au

Air New Zealand embroiled in cartel operation

2016-05-18T10:26:00.000+10:00

On 10 May 2016, the Australian reported that Air New Zealand has settled a cargo cartel case from 2006 in the US for $47.4m AUD.

Put simply, Air New Zealand was alleged to have participated in price fixing, a form of cartel conduct, along with 28 other airlines, including Qantas, who allegedly formed part of the cartel in relation to air cargo fuel and security surcharges between 2000 and 2006.

Under Australian law, a contract, arrangement or understanding is prohibited if it contains a ‘cartel provision’ i.e. it contains a provision relating to:

price-fixing
restricting outputs in the production and supply chain
allocating customers, suppliers, or territories, or
bid rigging,

by parties that are or would otherwise be, in competition with each other (s 44ZZRA Competition and Consumer Act 2010 (Cth)). Breaching these provisions allows for both civil and criminal penalties to be imposed on corporations and individuals involved.

In associated proceedings in Australia, the Full Court of the Federal Court (ACCC v PT Garuda Indonesia [2016] FCAFC 42) has recently found that price fixing engaged in by Garuda and Air New Zealand in relation to the imposition of agreed surcharges on the carriage of air cargo from ports outside Australia, into Australia, breached Australian anti-cartel laws. The total fines in relation to this cartel, not counting Air New Zealand and Garuda, amount to $98.5m AUD.

In light of this recent settlement, it is pertinent for businesses to consider whether the contracts, arrangements, or understandings they are a party to, give effect to a cartel provision. This is especially so as it remains an enduring priority area for the ACCC.

Andrew Poulton

Senior Associate

+61 7 3233 8887

apoulton@mccullough.com.au

Erika-Jane Wilson

Lawyer

+61 7 3233 8547

ewilson@mccullough.com.au

Curtis’ insider trading conspiracy

2016-05-18T09:32:00.003+10:00

You are likely to have heard that investment banker Oliver Curtis is on trial this week for conspiring to commit insider trading.

Most of people are familiar with the concept of insider trading; where an investor possesses confidential information that is not available to the market and uses that information to make a profit or avoid a loss.

Interestingly, Curtis has been charged with the offence of conspiring to commit insider trading rather than the doing of the act itself. Unlike the insider trading laws, which are found in the Corporations Act 2001 (Cth), conspiracy is an offence under the Criminal Code Act 1995 (Cth).

Under the Criminal Code a person may be charged for conspiring with another person to commit an offence that is punishable by more than 12 months imprisonment. Insider trading is such an offence.
For a person to be found guilty of conspiracy:

the person must have entered into an agreement with one or more other persons
the person and at least one other party to the agreement must have intended that an offence would be committed pursuant to the agreement, and
the person or at least one other party to the agreement must have committed an overt act pursuant to the agreement.

It is alleged that during May 2007 to June 2008, Curtis conspired with convicted insider trader John Hartman, a former equities dealer at Orion Asset Management Limited (Orion), to commit insider trading.

It is alleged that Curtis and Hartman had an agreement whereby Hartman would procure Curtis to trade based on inside information possessed by Hartman about Orion’s trading intentions. In return, Curtis provided Hartman with a share of the profits from the trade.

Pursuant to this agreement, Curtis allegedly traded on 45 separate occasions and made a profit of approximately $1.4 million.

If Curtis is found guilty, he faces the same penalty as if he had committed insider trading. At the time of the alleged offence, the maximum penalty was imprisonment for 5 years and/or a fine of $220,000.

Nicole Hamrosi

Lawyer

+61 7 3233 8807

nhamrosi@mccullough.com.au

Welcome to McR Collared

2016-05-05T10:32:00.003+10:00

McR Collared is a new blog dedicated to white collar crime.

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