The Sydney Morning Herald

ASIC case unravelled


November 19, 2009

JUSTICE Robert Austin has delivered a stinging rebuke to the corporate regulator for almost every step of its long, expensive case alleging breach of directors duties against One.Tel's managing director Jodee Rich and finance director Mark Silbermann.

The judge criticised the Australian Securities and Investments Commission's decision on which directors to pursue, the breadth and complexity of its allegations, its choice of witnesses and the way it ran the case.

''It is noteworthy that ASIC's proceedings were brought against the non-executive chairman and three of the four executive directors, and not against any of the other directors,'' Justice Austin said.

The underlying concept of its statement of claim was that executive directors carelessly failed to keep the board informed of the company's financial position.

''That leaves open the question, not before the court in the present proceedings, whether the other directors were careless in failing to find out,'' the judge said.

However, he did not accept the argument put forward by lawyers for Mr Rich and Mr Silbermann that there was ''an unholy alliance'' between ASIC on the one hand and, on the other, One.Tel's largest shareholder, Publishing & Broadcasting Ltd, and its representative on the One.Tel board, James Packer.

The evidence was ''very thin'' to support the defence claim that when ASIC realised it would need to rely on Mr Packer as a witness, ''a blind eye was turned to Mr Packer jnr's deficiencies in his conduct as a director''.

Justice Austin did not make any adverse findings about Mr Packer's credibility, but said he misunderstood the role of a witness.

''It seems to me that he attempted to avoid giving direct answers because of his perception that his role in cross-examination was to put his side of the case, and therefore to spar with counsel when dealing with matters that did not help his case,'' he said.

Mr Packer's co-director, Lachlan Murdoch, gave ''hazy and unspecific'' evidence.
''My view is that there was a significant problem of lack of recollection in Mr Murdoch jnr's evidence, which undermined its credibility,'' Justice Austin said.

In contrast, the judge was impressed by Mr Rich's demeanour in the witness box and, to a lesser extent, Mr Silbermann's.

''Having presided over trials in the Equity Division for over 11 years, my comparative assessment of Mr Rich's evidence in cross-examination is that he was one of the best prepared party/witnesses that I heard in that time, with a very good level of recollection of detailed facts in the witness box,'' the judge said.

On many occasions, he reached the conclusion that ''the internal logic of the defendants' evidence, particularly the evidence of Mr Rich, is compelling and consistent with external circumstances''.
The judge said there were some inconsistencies and mistakes, along with memory lapses, in Mr Silbermann's evidence.

''As with Mr Rich, it goes without saying that Mr Silbermann was an interested witness, fighting for his commercial survival, and so his evidence must be assessed with caution,'' he said.
''His demeanour was somewhat more circumspect than Mr Rich's, though I formed the impression that he was trying to answer the questions that were put to him to the extent of his knowledge.''
ASIC's summary of Mr Rich's performance founded another criticism of its approach.
''It is somewhat unsettling that ASIC's assessment of Mr Rich as a witness, reflected in its submissions, is so sharply at odds with my own assessment. But its critique of Mr Rich is, unfortunately, consistent with the general tendency of its submissions to exaggerate its case.''
The judge's harshest words were directed at ASIC's strategy. There ''is a real question whether ASIC should ever bring civil proceedings seeking to prove so many things over such a period of time as in this case'', he said when explaining why the case had run from 2004 until 2007, and why it had taken 27 months from the final hearing day until the delivery of his judgment.

''A case might have been brought focusing attention on One.Tel's financial condition at a particular point in time, for example by invoking a cause of action based on the allegation that a particular One.Tel media release was misleading''.

The judge noted that such a case was brought by the regulator against the directors of James Hardie. That case, which the regulator won, took 44 hearing days, compared with One.Tel's 232.
''I do not mean to express an opinion about the likely outcome of such a case, if ASIC had brought it, and I note that if such a case had been brought it might have been against a differently constituted group of defendants, perhaps the board as a whole,'' the judge said.

''Instead, we have had a case which seeks to prove the financial condition of a large multinational corporate group with various businesses, some in start-up mode and some more established, over a period of four months, with a view to establishing not one but many breaches of the statutory duty of care and diligence. I wonder whether that is beyond the bounds of reasonable scope of civil litigation.''

The chief reason ASIC lost the case was its failure to prove the ''true financial circumstances'' of One.Tel between February 2001 and May 2001, when the board called in administrators.
Justice Austin was scathing about some of the tactical decisions made by the regulator's legal team. For example, a central plank of ASIC's case was that One.Tel's liquidity declined drastically during that time.

It tried to prove this by relying on evidence solely about the Australian operations, although One.Tel's liquidity was measured and managed on a group basis, including international operations.

''That is like trying to establish that the available water supply in the Sydney basin is diminishing, by proving declining water levels in every dam except the Warragamba,'' the judge said.
''It may be shown that the water levels in the other dams are falling to dangerously low levels, but (hypothetically) it is possible that Warragamba is full to overflowing.''

In addition to this ''fundamental flaw'', ASIC's case on liquidity was overstated because it failed to prove One.Tel's provisions for doubtful debt were inadequate.

When ASIC tried to prove that One.Tel was running out of cash, the documents it put forward were ''wholly or in part, too unreliable to form the basis for financial findings''.

''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,'' Justice Austin said.

He nominated several One.Tel executives who were not called by ASIC to give evidence.
''But that evidence was not forthcoming and so the unexplained problems with the documents added up to a serious flaw in ASIC's case.''

The defendants, who did not bear the onus of proof, were able to advance plausible alternative 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''.

For example, Mr Rich was entitled to believe that sufficient financial support would be forthcoming from One.Tel's largest shareholders, News Ltd, PBL and PBL's parent company, Consolidated Press Holdings, the judgment says.

''It seems to me there was every reason for Mr Rich to believe, on the basis of Mr Packer jnr's words and conduct, that PBL/CPH would support One.Tel through any temporary liquidity issues, and also that Mr Packer jnr could persuade News to join in providing any such support,'' Justice Austin said.

''On the basis that this is the correct assessment of the level of support available to One.Tel from its two major shareholders until late April or May 2001, it seems to me there was a reasonable foundation for Mr Rich's belief that further financial accommodation could be obtained from Toronto Dominion, if that were to be regarded as the most effective funding option.''
This situation changed when the late Kerry Packer ''formed the view, at some time around 19 April, that One.Tel would run out of cash''.

Another problems with ASIC's case was the extent to which it strayed beyond its formal statement of claim. It is 27 months since Justice Robert Austin reserved his judgment, after 232 hearing days.

As one year's wait for the decision turned into a second and the beginning of a third, those close to the case began to wonder whether the delay was an indicator that ASIC had lost its big, long, expensive pursuit of Mr Rich and Mr Silbermann.

In his closing address, Mr Rich's barrister, David Williams, SC, described it as ''a case of duelling documents''.

A single report summarising overdue bills tendered to the court was 24,020 pages long.
With ASIC bearing the onus of proof, it became an insurmountable task.
At the time, Justice Austin commented it had become ''a very unusual case in the extent to which the court is invited to make findings of a financial kind on the basis of financial documents''.
ASIC will now have to hope it remains an unusual case.

Its chairman, Tony D'Aloisio, had little comment yesterday beyond saying he would review the 3105-page decision in detail.

''The case has also provided important guidance to ASIC on how to run similar matters in the future,'' Mr D'Aloisio said.