Austin J found in favour of controversial entrepreneur Jodee Rich against ASIC, the national corporations regulator, in litigation that followed the demise of the One.Tel telecommunications group. That demise involved failure of One.Tel Ltd (a large Australian-listed company that had attracted major investment from the Murdoch and Packer families) and its local subsidiaries, accompanied by the collapse or on-sale of overseas subsidiaries. It was depicted in Paul Barry's Rich Kids (Sydney: Bantam 2002), which historian Bridget Griffen-Foley described as a tale of "breathtaking greed, self-aggrandisement, mismanagement, ineptitude and duplicity".
Following the collapse, seen by some as emblematic of the dot-com bubble, ASIC brought civil penalty proceedings for breach of the statutory duty of care of company directors and officers. The proceedings were initially brought by ASIC against three executive directors and the non-executive chairman of One.Tel. Action against joint managing director Bradley Keeling and non-executive Chair John Greaves was settled in 2003, with Keeling agreeing to a ten-year disqualification from acting as a director and liability to pay compensation of $92m and Greaves accepting a disqualification from being a director for four years and liability to pay compensation of $20m.
ASIC alleged that the defendants did not disclose the true financial position of the company to the board, and that they knew or should have known the true position.
Argument in court centred on whether ASIC had proved its case as to the true financial position in the first quarter of 2001. The judge concluded that -
ASIC has failed to prove its pleaded case against either of the defendants. Therefore judgment should be entered for Mr Rich and Mr Silbermann in the proceedings.He indicated that -
ASIC's contentions have a superficial appeal, but time and again they were shown to be unpersuasive when the underlying financial detail was investigated. When Mr Carter's evidence was largely excluded, ASIC presented what it described, frequently, as a documentary case. Although there were many categories of documents, three categories were particularly significant, so much so that the defendants described them as the "three pillars" of ASIC's case (T 14952): management accounts, aged creditors reports and collection profile summaries. When those documents were scrutinised in detail, they were found to be, wholly or in part, too unreliable to form the basis for financial findings: the Australian fixed wire/service provider management accounts at 20.3, Australian aged creditors reports at 11.2.5, and collection profile summaries at 4.8.6. The difficulties encountered with those documents might have been overcome, wholly or in substantial part, if ASIC had brought forward witnesses to explain the documents and give evidence as to their status, witnesses such as Mr Holmes or Ms Nassif for the fixed wire/service provider management accounts and Australian aged creditors reports, and Mr Basman for the collection profile summaries. But that evidence was not forthcoming and so the unexplained problems with the documents added up to a serious flaw in ASIC's case. No evidentiary presumptions are needed for the court to get to that conclusion, but some are available as discussed in Ch 3.The judge also commented that -
To the extent that ASIC's case rested on other documents of less uncertain meaning, and on the evidence of its witnesses such as the UK witnesses, Ms Randall and Ms Ashley, the defendants were able to advance alternative plausible explanations for what had occurred, and ASIC failed to prove its case to the appropriate civil standard, having regard to the presence of those alternative explanations.
An additional problem with ASIC's case has been the extent to which it has strayed outside its pleading. The problem areas are identified in para 2.3.6. I have not expressly correlated the findings made in para 2.3.6 to the substantive discussion of the submissions found in the body of the judgment. However, in cases where I have considered a submission by ASIC in the body of the judgment and rejected it on its merits, and I have also found at 2.3.6 that the submission is impermissibly outside ASIC's pleading, my intention is that the submission is rejected on both the substantive ground and the pleading ground.
This judgment and the verdict to which it leads are the product of civil legal proceedings conducted in accordance with our adversary system. Under that system the issue for determination is whether the plaintiff has proven its pleaded allegations, by the evidence that is before the court. The question for determination is not the larger issue of how it happened that a rising corporate group supported by two well-resourced investors came to fail, in spectacular circumstances. The court has not been asked to determine, at large, who was to blame for the disaster, as amongst the defendants, other executives, non-executive directors, major shareholders and advisers. The proceedings are not a Royal Commission. Notwithstanding the huge amount of effort that has been devoted to these proceedings by the parties and their advisers, and by the court, many questions about the failure of One.Tel are left unanswered. That was inevitable, given the nature of the proceedings and the questions placed before the court for resolution.
One of the unanswered questions is whether One.Tel would have survived if, in May 2001, PBL/CPH and News had maintained their support for the company and implemented their plan to underwrite a deeply discounted rights issue to raise $132 million. The tendered evidence has led me to reject ASIC's figures as to the financial circumstances of One.Tel at the end of February, March and April 2001, and to prefer the figures set out in Chs 11, 13 and 15 respectively. If those figures are right, a fundraising of $132 million accompanied by continuing support by the major shareholders would probably have been enough to address the company's cash requirement until November 2001, by which time, according to the business plans, the company's businesses would have been generating more healthy Group cash flow. The withdrawal of that support, and the abandonment of the rights issue, may well have ensured that the company could not survive.
Throughout my judgment there are criticisms of ASIC's submissions and of aspects of its conduct of this case. Amongst the more serious are my views that:Ian Verrender in The Age today reflected on the judgement, commenting that
• the scope of the case, endeavouring to prove the financial circumstances of a large multinational corporate group over each of four months, was far too wide and produced an excessively long and burdensome proceeding;
• in a substantial number of significant ways, ASIC's final submissions were outside its pleaded case;
• ASIC chose not to call any witness to explain certain tendered documents, instead inviting the court to draw inferences from the documents notwithstanding their ambiguities and other grounds for doubting their reliability; and
• ASIC's engagement of Mr Carter to provide expert evidence in the proceedings gave rise to substantial difficulties, in circumstances where Mr Carter had previously prepared a detailed report to assist the Commission to decide what course of action to take, with unfettered access to documents and witnesses, and he was told when his forensic report was at a mature draft stage that he was to exclude information he had obtained from individuals who would not be called to give evidence.
The time has come to bite the bullet. Disband the Australian Securities and Investments Commission and start all over again. For if there is one thing that has come of yesterday's mammoth Supreme Court judgment it is this: ASIC, even though it is run by lawyers, seems incapable of putting together a decent case to present to the courts.ASIC has responded to the judgement, indicating that -
Given it already has a less than impressive record when it comes to the investigation of corporate malfeasance and white collar crime in general, this embarrassing episode should hammer home the final nail in its coffin.
Yesterday's 3000 page judgment by Justice Robert Austin is a damning indictment on the ability of our corporate regulator.
The case against the One.Tel founders was ill conceived, poorly conducted and riddled with errors at almost every step. ASIC's arguments to the court were embellished and exaggerated, its evidence and analysis of the company's financial situation deeply flawed and it failed comprehensively to convince the judge of the fundamental basis of its case - that the defendants misled the board and the market.
ASIC Chairman, Mr Tony D'Aloisio said the case should provide important guidance to executives and directors on the exchange of information between the board and management.
Additionally, the case has shed light on several important legal issues, notably the additional responsibilities of the chairman of a public company, particularly one with a finance/accounting background and considerable experience on public boards. It also identified the right of defendants in civil penalty proceedings not to give discovery or file witness statements until the conclusion of evidence by ASIC's witnesses.
'The case has also provided important guidance to ASIC on how to run similar matters in the future'
