Author: Rozenes, M. and Davidson, G. Date: 31/10/1996 Venue: AIJA Seminar on The Courts and Corporate Law, Melbourne Business School, Melbourne University, 31 October 1996
Since 1 January 1991 the Commonwealth Director of Public Prosecutions has prosecuted, on a national basis, offences against both the Co-operative Scheme Codes and the Corporations Law. This function was given to the DPP by the Corporations Act 1989 and the Corporations Acts of the various States and the Northern Territory. The responsibility for investigating corporate offence rests with the Australian Securities Commission and with the exception of minor regulatory matters the ASC refers investigations to the DPP for prosecution action. The ASC, as corporate regulator, has a variety of mechanisms to enforce compliance by company officers where their conduct is judged to fall short of being criminal. The hierarchy of civil remedies available to the regulator range from administrative action to civil action including injunctive relief and actions for damages through to civil penalty proceedings. While these remedies are important and no doubt a worthy topic for discussion they are beyond the range of my comments today. The criminal law has a limited, although important role to play in the enforcement of the standards of corporate governance. It provides the method by which the most severe sanctions to deal with corporate misconduct can be imposed upon those minded to abuse the system. Its force as providing an effective deterrent to criminal behaviour should not be underestimated. If the only sanction available to deal with corporate misconduct is civil action designed to disgorge illegally obtained benefits then the corporate criminal will simply factor the likelihood of being caught and penalised into the cost of doing business. It becomes a fairly straight forward mathematical equation to estimate the risks involved and the likely penalty. On the other hand if there is a real chance of going to gaol then this introduces another factor into the equation. Whatever you may have heard and read gaol is not a nice place to be and the thought of going to gaol is a real deterrent to the white collar criminal. Combined with the possibility of civil action or action under the Proceeds of Crime legislation to recover the illegal gains, the criminal law can and does perform a real function in the enforcement of corporate behaviour. It is axiomatic that an essential part of any true enforcement system involves prosecution action. However for the effect of general deterrence to operate, there must be an effective and workable system to deal with corporate crime. The system has to be able to operate both fairly and efficiently in the interests of all those with a stake in the system. There must be fair and appropriate ways to introduce and deal with the often voluminous documentary evidence, to reduce the complexity of the case and ensure that valuable court time is directed to the real issues in the case. The essence of my talk today will touch briefly on our experiences to date in relation to prosecuting corporate misconduct.
It is probably not necessary for me to delve to greatly into the background behind the DPP. You will be aware that the Office was established by the Director of Public Prosecutions Act 1983 with the Office beginning operations in 1984. The fundamental principle behind the creation of the Office was to separate the role of the prosecutor from that of investigator and give the prosecutor independence from the political process. The purpose is to inject a degree of objectivity into the prosecution process. The system is designed to ensure that decisions in relation to prosecutions, at least so far as Commonwealth offences are concerned, are made objectively and independently of any preconception or bias that may be perceived to exist on the part of the investigators. The fact that the DPP considers matters for prosecution and makes a decision in relation to the sufficiency of the evidence and the public interest in prosecuting a matter introduces a discipline into the process that is designed to ensure both an appropriate outcome as well avoiding unnecessary expenditure and court processes on unmeritorious cases. That at least is the objective. Sometimes people would argue that we get it wrong either in not prosecuting or deciding that proceedings ought to be instituted against particular defendants. There will always be that controversy and there is not a great deal I can say about it at this stage. Nevertheless the internal procedures within my Office are such that prosecution decisions in relation to corporate misconduct are taken at an appropriately senior level by those fully informed as to the evidence, the nature of the activity and the regulator's view as to the criminality of the conduct.
Lessons we have learnt
What I would like to touch on now are some aspects we have learnt in the 5 years we have been prosecuting corporate crime. An initial comment I should make is that prosecuting large complex fraud cases is not for the faint hearted. The cases are large and invariably document intensive. The documents that do exist may not tell the story and indeed may be deliberately misleading. Often the documents are not complete and require months of painstaking work to reconstruct. It is usually rare to find direct evidence against the alleged defendants and often allegations are proved circumstantially and through inference. It is rare to find a "smoking gun" or other indicia of recent crime. The crime may be discovered years after the event when the liquidator has been called in to administer the last rites to the victim, the corporation. Usually there is no direct complainant although shareholder groups may occasionally blow the whistle. The cases usually take a considerable time to investigate and by the time a prosecution is launched the memories of the witnesses have faded. It is often hard for the witnesses to recall events and conversations even when the amounts involved equate roughly with parliamentarians' superannuation payouts. The court system does not help. Lengthy committals are hard to book in and the listing of a substantial fraud trial when the accused is on bail is just as troublesome. It is not a exaggeration to say that on the whole some 2 to 3 years are routinely lost in the waiting process. That is if there are no collateral review proceedings that can throw even greater spanners into the workings of the court clock. These are the difficulties we face in prosecuting corporate crime. Thankfully all of the problems do not occur in every case but occasionally all the sorts of considerations I have mentioned do appear in some of the cases. I think the experience of the DPP and ASC has enabled us to get smarter and better in our approach to these cases and I would now like to offer a few thoughts on a number of related issues.
An examination of the Corporations Law1 reveal that nearly every failure to comply with the requirement of the law or every contravention of a requirement of the law is potentially a criminal offence. Obviously all of those breaches are not prosecuted. To attempt to do so would clog up the court system entirely and the social worth of such an exercise would be questionable. Generally minor regulatory offences are considered by the ASC and if they consider it appropriate, and in accordance with the Prosecution Policy of the Commonwealth, proceedings are instituted and conducted by the ASC for those offences. The type of offences I am talking about involve failing to lodge an annual return or failing to provide a statement of affairs to the liquidator. In general these offences have a monetary penalty as the maximum punishment that can be imposed by a court. However the Corporations Law also contains other offences which are punishable by up to 5 years imprisonment and/or a fine of up to $200,000. These are substantial offences. However unlike serious offences that may be contained for example within State Crimes Acts. some of these offences do not require the proof of dishonesty (the traditional hallmark of criminal behaviour). The offences are serious and deserving of censure but at the end of the day may not involve a fraud or a taking or an appropriation of property. The area to which I am referring is breach of directors' duties. These offences may be equated for present purposes with a breach by the director of his/her fiduciary duty to the company.2 In determining whether or not a director has improperly used his or her position the courts have said that an objective standard is to be applied. The specific intent that the prosecution needs to prove is that the act constituting the breach of duty was carried out intending to gain an advantage for oneself or another3. The relevance of this particular offence is that it applies to conduct that occurred in the 1980's. You will have heard the expression "excesses of the 1980's". As with most labels this expression can be misleading but it can be used as a convenient label for alleged criminal activity that took part in the mid to late 1980's allegedly by certain well known entrepreneurs. S229(4) is a provision which this Office has used frequently when preferring charges against alleged offenders where a breach of their duty is involved. The slow gestation period often involved in the investigation and prosecution of complex corporate fraud offences means that many of these alleged offences are now before the courts. S229(4) does not require the prosecution to prove dishonesty. By dishonesty I mean that concept espoused in Ghosh4. While not an element of the offence many of the cases investigated by the ASC and prosecuted by the DPP demonstrate dishonesty in the traditional sense. If dishonesty can be demonstrated in the case there are a number of effects. First the jury is better able to understand the reason why they are being asked to consider the events. If they can see a fraud or a taking of property in circumstances that are not honest they are better able to understand and relate to the case. On the other hand if the case turns on a legal question of a breach of a directors' duties where the jury cannot see what was wrong or believe that the defendant thought he/she was acting honestly but has been caught by a technicality then they will tend to be bemused by the proceedings. Further a jury may feel sympathy for the defendant and in these circumstances acquit. Secondly even if there is a conviction the trial judge will no doubt be influenced by the lack of dishonesty and the sentence imposed will reflect this. This may not provide the regulatory effect sought by the ASC. As a general rule of thumb where the essence of the allegation is a breach of directors' duties the DPP has tended to examine the case closely to see whether the case demonstrates moral culpability which is recognisable. This approach accords with the legislative amendments made to the Corporations Law by the Corporate Law Reform Act 1992 which decriminalised breach of directors' duties per se and provided that in order to constitute a criminal offence the acts must have been committed knowingly, intentionally or recklessly and either dishonestly and intending to gain an advantage for the defendant or someone else or intending to deceive or defraud someone. These provisions are now found in s1317FA of the Corporations Law.
Focusing the Prosecution
On past occasions I have spoken about the undesirability of trials that extend 12 to 18 months. Clearly trials of that length do not serve the criminal justice system nor any public purpose. It is almost inconceivable how a juror could assimilate material for that length of time. Yet to prove some of the more complicated and difficult cases of corporate misconduct would take such a length of time. If one looks at some of the major civil cases currently being litigated in Australia it is clear that if those cases are run to their termination the time taken to conduct the litigation will be measured in years rather than months. In civil cases the availability of settlement as an appropriate end to the litigation often prevents the litigation from going its full term. Clearly in these major cases compromise rather than death by attrition is an appropriate outcome. The same sort of solution is not available in criminal cases. Further under our present system of justice, generally in Australia there is no requirement upon a defendant to specify what areas are potentially in conflict or dispute and what are admitted. While economic pressure may produce such an outcome a well resourced defendant may feel no need for such a compromise. Accordingly the prosecution must prepare and present its case in the expectation that all matters will be contested. Herein lies the dilemma. To prove the entire criminality of the alleged illegal activity may take in excess of 12 months court time. Yet to do that is not in the public interest and indeed it is questionable whether a true and valid verdict could be returned by a jury after such a length of time. If a jury does return a guilty verdict after such a trial there would be great doubt whether such a verdict could survive on appeal. Accordingly it has been the practice of the DPP and one I have encouraged, for prosecutors to scope cases in terms of identifiable chunks of criminality which can be proved in a resource efficient way within an appropriate time frame. This will mean that not all of the suspected and perhaps provable criminality will be before the courts. If convicted the defendant will not be sentenced for all the alleged criminal behaviour. These are outcomes that do not sit easily with the prosecutor but must be accepted as an inherent limitation of the judicial system as presently composed and funded. As far as appropriate we try to avoid laying large conspiracy charges tending rather to target specific instances of identifiable criminality. There will always be those cases where conspiracy is the appropriate charge and will be laid. The dangers in prosecuting large conspiracy cases are well known and need not be repeated here today.
Sentencing Corporate Offenders
In the area of corporate crime the issue of sentencing is not easy. In part the difficulty is exacerbated by the absence of relevant sentencing precedents. That appears to be due to the lack of a concerted effort prior to the formation of the ASC to prosecute corporate criminals. The efforts of the ASC and DPP in investigating and prosecuting cases has turned around that situation although it is only recently that appropriate sentencing patterns have started to emerge. One consideration that should be borne in mind is that the mere fact of conviction is likely to have a devastating effect on a director's life and livelihood. Another is that conviction will in some cases automatically bar a person from acting as a director for the period of 5 years. A conviction will often lead to the loss of membership of professional associations and the stigma may be socially devastating for the offender. These considerations will invariably be put to a sentencing judge. The fall from grace is often far greater for the high flier. I suspect that there is a growing awareness both articulated in journals and writings and in the media of the damage that is caused by corporate misconduct. We are constantly regaled with figures estimating the costs of white collar crime to the community. A recent estimate put the cost over 10 billion dollars. I do not how these figures are calculated nor their reliability however it seems safe to assume that the cost to the Australian community is large indeed. While it is not universal I can discern the beginning of a trend within the court system to impose heavier sentences on corporate criminals. I would like to think that part of the contribution to this trend is the expertise of both the DPP and the ASC in putting together and prosecuting cases of corporate misconduct. In the 12 month period between 1 July 1995 and 30 June 1996 24 of the 59 defendants convicted were sentenced to a term of imprisonment. The sentences ranged from fully suspended to 5 years. While these statistics may not be startling it must be remembered that the vast majority of corporate offenders have no prior convictions, usually have strong subjective factors in their favour and may have an impressive history of community and charitable works. However the damage that is caused to both business and Australia's international reputation as a place to do business by criminal conduct is probably unquantifiable. It is that damage and the element of general deterrence that the DPP submits must be considered carefully by the courts when sentencing.
Sometime ago I expounded the merits of the "Rottweiler" Judge. A more felicitous expression is the interventionist judge. Our experience time and time again has shown the benefit of a strong and firm judge in relation to the prosecution of large complex corporate fraud matters. This is not to say the prosecution is favoured by the judge in any way. Rather the judge is concerned to keep the trial moving, to ensure that red herrings and extraneous matters do not preoccupy the courts time, to provide rigid timetables in respect of prehearing matters, to determine interlocutory matters and rulings in a prompt and decisive way and to ensure that the trial has an appropriate degree of continuity. These attributes do not detract from judicial impartiality or fairness. They are attributes of good management, good resource use and an appreciation of the proper role of the judicial officer. While our system strives for fairness there are obvious signs that some feel the system not to work satisfactorily. No doubt many of the perceived deficiencies in the system could be corrected if the interventionist judge was the norm. To allow cross examination for days in an attempt to wear down the witness, to allow the argument of preliminary points over lengthy and disjointed periods, to uncritically allow the examination of prosecution documents at the beginning of the trial when it could have been done months before and allow fishing expeditions in the absence of legitimate forensic purpose are examples of the behaviour that should be curtailed.
CLARITY is the acronym given to the DPP's Courtroom Presentation System. The idea behind the Courtroom Presentation System is not difficult. Essentially documents which will be tended as exhibits are imaged onto computer disc and this is then used in the courtroom and displayed on large monitors for both counsel, the judge and the jury. Diagrammatic representations of complex commercial transactions can be displayed on the monitors to assist the jury to understand the prosecution's case. The idea has been taken further in some civil cases through animation of car accidents in order to demonstrate to the jury the dynamics of a particular incident. Similarly in large corporate misconduct cases we hope to be able to clarify and simplify intricate and complex transactions to enable the jury to understand what went on. We have used the CLARITY system in a number of trials. It was used in the matter of Growth Industries and Crowl in New South Wales, it was used in the matter of Bond in Western Australia. CLARITY has also been used in numerous committal proceedings. While we have been encouraged by the use of CLARITY in the trials we have run, in those cases the defence were cooperative, at least in the main, as to the use of the system and the benefits it provided. Even if one looks at the time saved when tendering documents the use of CLARITY had the potential to save weeks of hearing time5. CLARITY does however require a new and fresh approach. The introduction of the system is not without its difficulties or legal issues. For example, if the prosecution proposes to use CLARITY should it also provide a computer system and training for the defence team?, what are the procedures and protocols in relation to use of the system in court?. Even the physical location of monitors in court can be an issue. This problem relates to the difficulty of fitting 20th century technology into 18th century courtrooms. One might well question why the defence would be interested in allowing technology into the courtroom that may assist the jury to understand the prosecution's case. However when the system has been used it has been proved to be both advantageous and effectual for both the defence in attempting to make their points or produce their exhibits as much as it has for the prosecution. In those cases where defence counsel have objected to the use of the system, or were generally uncooperative in relation to its use, the consensus has been that the effectiveness of the system is very much reduced. Again the prosecution should not be given any unfair advantage however in present times when budgets and allocations are diminishing more efficient use of available resources and court time must be sought and achieved. It is a myth to assert that the resources of the prosecution are without limit. I can assure they are not. Again it is an area where the trial judge and defence counsel will need to consider carefully their approach.
I hope in the limited time available I have been able to give you some idea of the DPP's present approach to the prosecution of corporate misconduct. I firmly believe that prosecution is an essential part of any regime of corporate regulation. However there must be careful consideration given to the likely effectiveness and appropriateness to the institution of proceedings for serious criminal offences. Cases must be carefully focussed and tightly run on appropriate charges. The advantages of the use of technology must be carefully considered and utilised where appropriate. We must get smarter and more efficient in both our approach and attitude. If we fail to heed the warning signs then a number of scenarios may follow. The view may be taken that these cases are too hard and we simply give up or reforms will be implemented that may be regarded as simply unpalatable. The choice as always is ours.
1 or indeed the predecessors of that legislation which were contained in the various Company Codes of the States and Northern Territory 2 By way of example s229(4) of the Companies [Name of State] Code creates an offence of a director improperly using his position with intent to gain an advantage for himself or herself. 3 R v Chew (1992) 173 CLR 626 and R v Hopwood and Byrnes (1995) 17 ACSR 551. 4  3 WLR 110, Under this test a jury must first of all decide whether according to the ordinary standards of reasonable and honest people what was done was dishonest. If not then the prosecution fails. Secondly if it was dishonest by those standards then the jury must consider whether the defendant must have realised that what he was doing was by those standards dishonest. 5 By way of illustration In the trial of Crowl it was estimated that two weeks of court time were saved. The trial lasted for 7 weeks. In the Growth Industry matter it was estimated that while it was too difficult to quantify the time saved there was no doubt it was considerable. In that case the main advantage of using the system was the ability to show to the entire court at the one time the document/ page or paragraph in question. The system greatly improved the communication to the jury and hence its ability to understand the case.