Legal research series the challenge of corporate law enforcement in australia



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To Punish or Persuade, above n 10.

63 Ibid.

64 See ibid, pp 32-33 where Ayres and Braithwaite make this important empirical claim that business actors tend to put their best foot forward in regulatory interactions so that they, the regulator and the researcher observing them, are all likely to regard as the ‘responsible’ citizen. Ayres and Braithwaite make the same claim regarding individuals, who are also likely to put their best self forward in regulatory interactions.

65 Ibid, p 26.

66 Ibid.

67 See earlier discussion at nn 28 – 32.

68 Ayres and Braithwaite, Responsive Regulation, above n 22, pp 26-27.

69 Ibid, p 27.

70 Ibid.

71 Ibid, p 30.

72 See J. Handler, The Conditions of Discretion: Autonomy, Community, Bureaucracy, Russell Sage Foundation, New York, 1986, p 4. This is generally the case with securities regulation in Australia, involving as it does a continuous relationship between ASIC, the ASX and those regulated. See also Dellit and Fisse, above n 18, p 573. Those who act as corporate officers or brokers or who raise funds from the public usually regard themselves as repeat players in the market. Moreover, even though a breach committed by an employee of a securities dealer may perhaps be a “one-off” from the perspective of the employee, the incident may trigger internal disciplinary action and other organizational responses where the management are aware of the value of maintaining good relations with ASIC.

73 Ayres and Braithwaite, Responsive Regulation, above n 22, p 30.

74 R. Baldwin and J. Black, “Really Responsive Regulation” (2008) 71 Modern Law Review 59.

75 Ibid, pp 62- 63. See also earlier discussion, n 17.

76 Ibid. See also Dellit and Fisse, above n 18, p 577.

77 It should be noted that academic opinion on the deterrence value of non-monetary sanctions continues to be divided. While there is the view that monetary penalties provide effective deterrents against the profitability objectives of regulated firms, are cheaper to administer and preferable from a social position since they generate revenue: see R. Posner, “Optimal Sentences for White Collar Crimes” (1979-1980) 17 American Criminal Law Review 409, the author favours the approach of Ayres and Braithwaite and other academics, including Coffee: see J. Coffee, “Corporate Crime and Punishment: A Non-Chicago View of the Economics of Civil Sanctions” (1979-1980) 17 American Criminal Law Review 419 and Gordon: see R. Gordon, Business Leadership in the Large Corporation, Brookings Institute, Washington, 1945, that non-monetary sanctions serve as deterrents against their other objectives, such as the desire for power or prestige. In Responsive Regulation, Ayres and Braithwaite argue further that the importance of adverse publicity directed at wrongdoing is not just its deterrent effect, but more importantly, its effect in constituting consciences, in moral education.

78 Ibid, pp 41-44. See also Dellit and Fisse, above n 18, p 578.

79 Ibid, p 43-44. Ayres and Braithwaite argue that the ‘stick and carrot’ nature of super-punishment encourages cooperation of the punished firm and even self-punishment because by cooperating, the punished firm can more quickly move from the more painful ‘stick’ to the less painful ‘carrot: “Super-punishments may be of use to agencies seeking regulatory compliance. By engendering a firm’s cooperation in its own punishment, agencies can radically reduce the costs of punishing. This increases the fiscal feasibility of costly super-punishments in the most extreme cases. This is illustrated by the use of plea bargaining. By cooperating with punishment on one charge, the defendant may get the carrot of immunity from further prosecution on other, more serious, charges. If defendants ‘take their medicine’, they can more quickly move to the carrot period of reintegration. If they do not, instead of stick-carrot, they get stick and more stick – an escalation up the pyramid”.

80 Ibid, p 44.

81 See earlier discussion at n 21.

82 See Ayres and Braithwaite, Responsive Regulation, above n 22, p 35. This pyramid appears as Figure 2.1.

83 Ibid, p 36. The pyramid shown as Figure 1, for instance, might be appropriate for occupational health and safety or nursing home regulation, but it may not be suitable for banking regulation.

84 See J. Braithwaite and T. Makkai, “Testing an Expected Utility Model of Corporate Deterrence” (1991) 25 Law and Society Review 7.

85 See Ayres and Braithwaite, Responsive Regulation, above n 22, pp 35-8.

86 See discussion above, nn 10 – 12. See also author’s previous work for a discussion of the structural weaknesses in the enforcement pyramid under the original Pt 9.4B regime, which it has been argued played a significant role in the failure of that regime to operate as an effective enforcement measure (In the six years from 1993 to 1999, research showed that ASIC commenced only 14 civil penalty applications: see Gilligan, Bird and Ramsay, Research Report: Regulating Directors’ Duties, above n 18, pp vii, 23-24), which led to the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act) repealing it and enacting a new Pt 9.4B in March 2000: V. Comino, “The enforcement record of ASIC since the introduction of the civil penalty regime” (2007) 20 Aust Jnl of Corp Law 183 at 190-193. The author discussed that the pyramid supporting the original regime differed from that proposed by the Cooney Committee, most notably that criminal and civil penalties were placed on the same level instead of civil penalties occupying the middle level between civil remedies and criminal sanctions: see discussion above n 15. This meant that criminal and civil penalties competed. The CLERP Act reformed the civil penalty rules to address weaknesses identified in the original regime, which included placing criminal and civil liability on separate levels on the enforcement ladder overcoming the issue of penal competition and creating an enforcement pyramid that more closely resembles the model advanced by the Cooney Committee. Thus, the author argued, Pt 9.4B is a more cogent structure and ASIC is better placed to regulate corporate misconduct. The author also argued that this largely explains why in recent years ASIC has been successful in using the civil penalty regime, particularly in dealing with directors involved in high profile cases: see also discussion below, nn 89 – 93.

87 See also Dellit and Fisse, above n 18, p 580.

88 Ibid, p 593.

89 In February 2007, ASIC filed civil penalty proceedings in the Supreme Court of New South Wales relating to disclosure by James Hardie Industries Limited (JHIL, now called ABN 60 Pty Ltd) in respect of the adequacy of the funding of the Medical Research and Compensation Foundation (MRCF) for asbestos victims. The action also sought declarations that JHIL and James Hardie Industries NV (JHINV) made misleading statements and contravened continuous disclosure requirements. In addition, ASIC alleged that JHINV failed to act with the requisite care and diligence concerning its then subsidiary, JHIL. ASIC also commenced civil penalty proceedings against a number of former directors and former officers of these companies, seeking pecuniary penalties and orders banning them from acting as company directors: see ASIC, “ASIC commences proceedings relating to James Hardie”, Media Release 07-35, 15 February 2007. On 23 April 2009, Gzell J in the New South Wales Supreme Court upheld ASIC’s civil penalty proceedings against the entire board of James Hardie: see ASIC, “James Hardie proceedings” , Media Release 09-69, 23 April 2009; and Australian Securities and Investments Commission v Macdonald and Others (No 11) (2009) 256 ALR 199; 71 ACSR 368; [2009] NSWSC 287; BC200903649. On 20 August 2009, rejecting the defendants’ pleas for exoneration, the court also imposed penalties and banning orders. Former non-executive directors, including high profile professional directors, Meredith Hellicar and Peter Wilcox, for example, were banned from managing a company for five years and fined $30,000 each: see ASIC, ‘James Hardie civil penalty proceedings’, Media Release 09-152, 20 August 2009; and ASIC v Macdonald (No 12) [2009] NSWSC 714; BC200907531.

90 In December 2007, ASIC commenced civil penalty proceedings against six former AWB employees, including former Managing Director, Andrew Lindberg, and former Chairman, Trevor Flugge, pertaining to the $290 million rorting of the United Nations oil-for-food program by the wheat exporter. Those proceedings (with the exception of the civil penalty proceedings against Lindberg) have since been stayed until and unless ASIC, the Oil-for-food Task Force or the DPP advise the defendants that no criminal proceedings will be instituted against them: see ASIC v Flugge (2008) 252 ALR 566; 68 ACSR 374; [2008] VSC 473; BC200809901.

91 In HIH Insurance Ltd (in prov. Liq); Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; 20 ACLC 576, ASIC obtained pecuniary penalties, banning orders and compensation against Rodney Adler, a former director of HIH, and Ray Williams, its former Chief Executive Officer, as well as, pecuniary penalties against Dominic Fodera, its former Chief Financial Officer. Adler, for instance, was disqualified for twenty years and ordered to pay approximately $7 million compensation, jointly with Adler Corporation Pty Limited and Williams, in addition to a pecuniary penalty of $450,000. On appeal, the NSW Court of Appeal upheld the disqualifications, pecuniary penalties and compensation ordered against the defendants: see Adler v ASIC (2003) 46 ACSR 504; 21ACLC 1810.

92 In the subsequent criminal proceedings issued against the defendants, Adler , eg, was sentenced to four-and-a-half years imprisonment with a non-parole period of two-and-a-half years, while Williams was also sentenced to four-and-a-half years, but with a non-parole period of two years nine months: see R v Adler (2005) 53 ACSR 471 ; and R v Williams (2005) 216 ALR 113; 53 ACSR 434.

93 In ASIC v Plymin and Others (2003) 46 ACSR 126; (2003) 21 ACLC 700, ASIC obtained banning orders, pecuniary penalties and compensation against Bernard Plymin, John Elliott and William Harrison in relation to their conduct as directors of Water Wheel and its subsidiary Water Wheel Mills Pty Ltd in allowing the companies to incur further debts after they became insolvent.

94 While Graeme Samuel, chairman of the Australian Competition and Consumer Commission (ACCC), said that the $38 million penalty imposed on the late Richard Pratt and Visy Industries resulting from the civil penalty action it launched in December 2005 for alleged cartel conduct in the corrugated fibreboard container market was the “high watermark” in the enforcement of competition, he conceded that it was a light touch compared to jail time: see M. Drummond, “Jail them, says ACCC”, The Weekend AFR, 3-4 November 2007, p 3. There may also be the perception that civil penalties exist as a revenue raising device for the government, which is a common complaint about most fine regimes.

95 See discussion below, The need for the criminal law. The author also acknowledges, however, that concerning contraventions of a civil penalty provision where pecuniary penalties are being sought, the case law suggests that to satisfy the test of “seriousness” under the Corporations Act, s 1317G, so as to enable the court to order payment of such penalties, the defendant’s conduct must involve a measure of moral wrongdoing: see, eg, ASIC v Adler (No 5) (2002) 21ACLR 1810; 42 ACSR 80. See also discussion by Finkelstein J in ASIC v Vizard (2005) 54 ACSR 394 at [27], [29] and [44]. Even though Finkelstein J states that: “Sections 232 and 183 [Corporations Law (now Corporations Act, s 183)] can on one level be regarded as prohibiting conduct that is not regarded as serious” (He says this since the maximum penalty that can be imposed for the contravention of these and other civil penalty provisions is only $200,000 noting that a contravention holds great potential for profit and may cause extensive harm), he also believes that these provisions have another important purpose. “They seek to establish a norm of behavior that is necessary for the proper conduct of commercial life and so that people will have confidence that the running of the market-place is in safe hands. For this reason a contravention of ss 232 or 183 carries with it a degree of moral blameworthiness. There is moral blameworthiness because a contravention involves a serious breach of trust.”

96 These are arguments, which Welsh makes in her work: see Welsh, above n 16, pp 22- 23. In its 2002- 2003 Annual Report, eg, three of the five ‘key’ enforcement results identified concerned civil penalty proceedings it had issued, including those against the directors of Water Wheel: see ASIC Annual Report 2002-2003, p 24.

97 For the purposes of this article, the term ‘corporate crime’ is used simply to refer to serious corporate misconduct or wrongdoing. It is not used in a technical sense. Nor is it used to make the distinction often found in the academic literature between ‘corporate crime’ (violations of the criminal law) and ‘illegal corporate behaviour’ (violations of administrative and civil law): see, eg, M. Baucus and T. Dworkin, “What is Corporate Crime? It is not Illegal Corporate Behaviour”(1992) 13 Law & Policy 231.

98 See, eg, J. Braithwaite, “The limits of Economism in Controlling Harmful Corporate Conduct”, (1981-82) 16 Law & Society Review 481.

99 ALRC, Securing Compliance Discussion Paper: Civil and Administrative Penalties in Australian Federal Regulation, Discussion Paper 65, April 2002 at [17.39].

100 See M. Jacobs, “Jail corporate crooks: prosecutor”, AFR, 10 June 2009, p 12.

101 See Baucus and Dworkin, above n 97, pp 237-238. This view is also consistent with the recommendations made by the Cooney Committee, above n 4, p 80. The Committee argued that civil penalties, with the benefit of the civil standard of proof and without the draconian consequences of criminal enforcement such as the stigma of criminal conviction, be available as a ‘complementary approach’’ to take enforcement action in relation to misconduct by directors where ‘the conduct falls short of a criminal offence’.

102 But note that there is a school of thought that the most effective form of punishment for white collar offenders is shaming (a “process by which citizens publicly and self-consciously draw attention to the bad dispositions or actions of an offender, as a way of punishing him for having those dispositions or engaging in those activities”: see D. Kahan and E. Posner, “Shaming White Collar Criminals: A Proposal for Reform of the Federal Sentencing Guidelines” (1999) 42 Journal of Law and Economics 365 at 368), which is discussed by Finkelstein J in ASIC v Vizard (2005) 54 ACSR 394 at [38]- [40] 404 in the course of his determination of appropriate penalties to be imposed on Vizard. According to Kahan and Posner, shaming is a direct expression of moral condemnation, the equivalent of imprisonment as a symbol of disapprobation. It is their belief that shaming penalties will deter white collar crime, because if the offence is publicised in a way that excites revulsion, people will not deal with the offender. They will not hire them or socialise with them. In short, they argue that shaming creates strong economic and sociological disincentives against future unlawful conduct. Certainly, although it must be acknowledged that as a result of the civil penalty proceedings ASIC brought against Vizard and the penalties imposed, he has received his fair share of shaming with his counsel, Mr Judd QC, arguing that “the damage to his (the defendant’s) reputation has been public and complete”, the author maintains that the consequences of criminal enforcement such as the stigma of a criminal conviction would serve as a greater deterrent.

103 J. Coffee, “Paradigms Lost: The Blurring of The Criminal and Civil Law Models- And What Can Be Done About it?” (1992) 101 Yale Law Journal 1875.

104 Ibid, pp 1888 -1890. According to Coffee, the publicity resulting from a successful criminal case can lead to the regulator gaining the reputation or image of a tough enforcer: see also later discussion, ‘Image of Invincibility’, which he explains is desirable since the regulator may be able to obtain more funding to increase its resources, including the recruitment of new staff as well as the maintenance of staff morale.

105 J. Bentham, An Introduction to the Principles of Morals and Legislation with an introduction by Lafleur LJ, Hafner Publishing Co, New York, 1948.

106 The author is not denying that deterrence does not also play a role with respect to civil penalties: see, eg, discussion below, n 159. The argument is that criminal enforcement provides a greater deterrent.

107 But note that SEC enforcement also heavily relies on encouraging settlements, undertakings, and consent injunctions, which approach has become an established and generally admired feature of its regulation.

108 See R. Guy, New York, “Jury’s still out on Enron’s impact”, The Weekend AFR, 27-28 May 2006, p 29.

109 On 23 October 2006, Skilling, 52, was sentenced to twenty-four years and four months imprisonment and ordered to forfeit $45 million of illegal gains made during his time at Enron: see R. Guy, New York, ‘Skilling sentenced for Enron collapse’ and A. Barrionuevo , New York, ‘Enron scandal stalks Skilling’, AFR, 25 October 2006, pp 19 and 68. Although Skilling’s co-defendant, Lay, was convicted of 10 counts of conspiracy and fraud, those charges were vacated and the indictment against him dropped after he reportedly died of a heart attack on 5 July 2006. Besides Skilling, other shamed former chief executives who have suffered the ignominy of jail time after falsifying accounts, lying to shareholders and plundering the corporate treasury for their personal enrichment, include WorldCom chief executive Bernie Ebbers who will probably die in jail after being sentenced to twenty-five years, John Rigas, founder of cable group Adelphia, sentenced to fifteen years and former Tyco chief, Dennis Kozlowski who will spend a minimum of eight years in jail. Kozlowski was sentenced to eight1/3 to twenty-five years imprisonment and ordered to pay almost $US170 million ($222 million) in fines and restitution for stealing from his former company: see J. Bayot, New York, ‘Tyco chief jailed, fined $222m’, AFR, 21 September 2005, p 13.

110 Losses from Madoff’s Ponzi scheme could run as high as $US50 billion.

111 For a discussion of the criminalising of the corporate control process in the United States, as well as, a critical examination of that process: see S. Simpson , Corporate Crime, Law, and Social Control, Cambridge University Press, New York, 2002.

112 The federal government in July 2009 enacted the Trade Practices Amendment (Cartel Conduct and Other Measures) Act 2008 (Cth), which amends the Trade Practices Act 1974 (Cth) (TPA) and criminalises serious or hard-core cartel conduct. Under the new criminal regime, the penalties are a term of imprisonment for ten years and a fine of $220,000 for individuals and a fine for corporations that is the greater of $10 million or three times the gain from the contravention or, where the gain cannot be ascertained, 10 per cent of the annual turnover of the body corporate and all of its interconnected bodies corporate (if any).

113 See Simpson, n 111, p 2. She explains that while corporate sanctions often include a criminal element, research shows that in the past, civil and administrative remedies have been the preferred method of pursuing corporate violators, eg, Posner’s study in the antitrust area for the period 1890 to 1969: Posner R, “A Statistical Study of Antitrust Enforcement” (1970) 13 Journal of Law and Economics 385. In Australia before 1993, all breaches of the corporations legislation carried criminal sanctions.

114 Broadly speaking, sociological theories of regulation explore regulation as an ongoing social process involving many participants. Keith Hawkins’ 1984 study of the enforcement of regulation by British water pollution control agencies is an example of such a study: see Hawkins, Environment and Enforcement, above n 25.

115 See earlier discussion at n 17. See also Hawkins, ibid, pp 12-13. According to Hawkins, lack of a “moral mandate” for regulatory offences is a major problem for regulatory agencies and their staff, because “their authority is not secured on a perceived moral and political consensus about the ills they seek to control”, which he argues threatens the legitimacy of the regulator as an enforcement authority. He compares water pollution control, the subject of his study, with that of the police to make the point that, in pollution control work “there is none of the sacredness of the policing of the traditional code” and also that, “it is more difficult to dramatise the threat of pollution than to portray the symbolic assaults on the community from criminals, addicts, vandals, and others on the fringe of the moral order”. Despite this problem, however, in the United States, there has been a shift towards criminalizing a number of environmental statutes to increase both the number of criminal cases pursued by the Environmental Protection Authority (EPA) and to achieve more punitive outcomes: see discussion above, n 111.

116 See Welsh, above n 16, pp 19 - 21.

117 Even though ASIC focusses on serious breaches of corporate law and is the primary investigative body in relation to complex criminal matters involving corporate law with the power to prosecute matters arising under the
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