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TC Beirne School of Law, The University of Queensland
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Comino, Vicky --- "The Challenge of Corporate Law Enforcement in Australia" [2009] UQLRS 3; (2009) 23 (3) Australian Journal of Corporate Law 233-265

Last Updated: 27 October 2009


THE UNIVERSITY OF QUEENSLAND
LEGAL RESEARCH SERIES


THE CHALLENGE OF CORPORATE LAW ENFORCEMENT IN AUSTRALIA


Vicky Comino∗

* BA/LLB (Hons), LLM (Queensland), TC Beirne School of Law, The University of Queensland

The introduction on 24 July 2009 of the long-awaited amendments to the Trade Practices Act 1974 (Cth) criminalising serious cartel conduct focuses attention on the important role of the criminal justice system to deal with cases of serious wrongdoing. In 1993, major reforms were made to the law relating to enforcement of the statutory duties of company officers by the introduction of the civil penalty regime found in Pt 9.4B of the Corporations Act 2001 (Cth). These reforms arose from recommendations of the Senate Standing Committee on Legal and Constitutional Affairs (the ‘Cooney Committee’) and implemented what has become known as “strategic regulation theory”. This theory provides insights on how regulatory compliance can be achieved most effectively, contending that sanctions in the enforcement pyramid should escalate as contraventions of the law become more serious and that criminal liability should apply only for continued non-compliance or for serious breaches of the law. By following this approach, the hope was that ASIC could more effectively cope with corporate misconduct. This article discusses strategic regulation theory to explore, firstly, its capacity to guide ASIC to fulfil its regulatory obligations, and, secondly, the desirability of that approach. It argues that it is not pyramidal enforcement that is inadequate, but ASIC’s perceived failure to use criminal sanctions in cases of serious corporate misconduct, and contends that this threatens to undermine its reputation as an effective regulator.


Introduction

The Australian Securities and Investments Commission (ASIC), as “Australia’s corporate, markets and financial services regulator”,[1] plays a key role in maintaining the integrity of the market and the wellbeing of the Australian economy. It is therefore of utmost importance that ASIC operates under an appropriate regulatory scheme and exercises its powers properly.

Traditionally Australian corporate law has been enforced by the criminal law. ASIC, like its forerunner, the National Companies and Securities Commission (NCSC), however, had problems in enforcing the directors’ duty provisions,[2] because of the difficulties associated with the use of the criminal law, including the need to satisfy the criminal rules of evidence and higher standard of proof,[3] with the result that these provisions were not seen as providing an effective enforcement regime.[4]

The system underwent a transformation when government accepted the major recommendations of the Cooney Committee[5] report, which considered the vital issue of sanctions for directors and sought to construct a pyramid of enforcement mechanisms for the regulation of company officers by proposed reforms to the prevailing sanctions for contravention.[6] These recommendations were that criminal liability apply only where conduct is ‘genuinely criminal in nature’,[7] that is, where company directors had acted ‘fraudulently’ or ‘dishonestly’,[8] and that civil penalties be provided for breaches by directors where no criminality is involved.[9]

Strategic regulation theory, graphically represented by the pyramidal enforcement model,[10] underpinned fundamental reforms made in Australia in 1993 to the regime of sanctions for enforcement of the statutory duties of corporate officers[11] when the civil penalty regime, currently contained in Pt 9.4B of the Corporations Act 2001 (Cth), was introduced.[12] This was aimed at reducing the role of the criminal law so that criminal sanctions applied only to the most serious contraventions.[13] The majority of cases attracted civil penalty sanctions.[14] By adopting the current civil penalty approach, it was hoped that ASIC could more effectively regulate corporate misconduct.

This article will examine strategic regulation theory and pyramidal enforcement for the purposes of discussing not only the ability of strategic regulation theory to shape ASIC’s regulatory design and practice but, also the desirability of such an approach in ASIC’s quest for better regulation. In relation to the latter issue, notwithstanding that the pyramidal enforcement model provided the foundation for the introduction of the civil penalty regime and the enforcement pyramid supporting it,[15] this article argues that it is not pyramidal enforcement but ASIC’s implementation of it that is the problem. Although ASIC has been committed to following strategic regulation theory and pyramidal enforcement since 1993, unless it is viewed as consistent in both its application and in taking enforcement action at appropriate levels in the pyramid, it is in danger of not being regarded as a credible regulator. This is especially the case if the perception is that, ASIC does not flex its muscles sufficiently often to use serious sanctions, that is, criminal sanctions, in cases of serious corporate wrongdoing, particularly against high profile violators.[16] Criminal sanctions are not a potent deterrent to potential corporate wrongdoers,[17] unless they recognize that the regulator will do more than threaten their use.


Strategic regulation theory and the pyramidal enforcement model

Strategic regulation theory is an economic theory of regulation, which recognizes that it is not possible for any regulatory agency to detect and enforce every contravention of the law it administers and which provides a macro perspective on the role of enforcement sanctions in achieving regulatory compliance.[18] It advocates that regulatory compliance can be secured most effectively by persuasion, rather than legal enforcement, since legal proceedings are expensive, whereas cooperation between the regulator and the regulated is cheap.[19]

The core strategic concept of a pyramid of enforcement was developed by Braithwaite who argued, in To Punish or Persuade,[20] that compliance is most likely when a regulatory agency displays an explicit enforcement pyramid. The pyramid model requires the regulator to be armed with a wide range of sanctions that escalate in severity from education and persuasion at the base, through various other stages to criminal sanctions and incapacitation at the apex of the pyramid for continued non-compliance or serious breaches of the law.[21] The regulator should move from one level to the next, beginning at the lowest level in most cases.

Significantly, Ayres and Braithwaite, who coined the phrase ‘responsive regulation’ in 1992[22] and elaborated on the pyramidal enforcement model, argue that regulatory agencies are often best able to secure compliance when they are “benign big guns”.[23] Regulators will be able to speak softly when it is known that they carry big sticks. The tougher and more various the sanctions, the greater the success regulators are likely to achieve by proceeding softly. The more those sanctions can be kept in the background, the more regulation can be transacted through moral suasion, the more effective regulation will be.[24]

Ayres and Braithwaite believe that the regulatory agencies most effective in achieving their objectives are those that strike some sort of balance between the ‘deterrence’ and ‘compliance’ models of regulation.[25]

The fundamental question has thus become: “When to punish; when to persuade?”[26]


The Game Theorist’s Answer

Pyramidal enforcement proceeds from the “game theory” of regulation, which posits that regulatory compliance is a dynamic game of negotiation and interaction between the regulator and the persons regulated.[27] It presumes that those regulated are rational, single actors who decide whether to comply with regulation by an assessment of the costs and benefits resulting from compliance at a particular time.[28] Accordingly, effective regulation requires more than just issuing commands in the expectation that there will be penalties for those who fail to comply.

Employing the approach of game theory regulation developed by Scholz,[29] Ayres and Braithwaite[30] explain the crucial role of mutual cooperation and the contingent role of deterrent punishment in cases of defection from that mutual cooperation:

Scholz models regulation as a prisoner’s dilemma game wherein the motivation of the firm is to minimize regulatory costs and the motivation of the regulator is to maximize compliance outcomes. He shows that a TFT [tit-for-tat] enforcement strategy will most likely establish mutually beneficial cooperation, under assumptions he believes will be met in many regulatory contexts. TFT means that the regulator refrains from a deterrent response as long as the firm is cooperating; but when the firm yields to the temptation to exploit the cooperative posture of the regulator and cheats on compliance, then the regulator shifts from a cooperative to a deterrent response. Confronted with the matrix of payoffs typical in the enforcement dilemma, the optimal strategy is for both the firm and the regulator to cooperate until the other defects from cooperation. Then the rational player should retaliate (the state to deterrence regulation; the firm to a law evasion strategy). If and only if the retaliation secures a return to cooperation by the other player, then the retaliator should be forgiving, restoring the benefits of mutual cooperation in place of the lower payoffs of mutual defection.[31]


TFT Regulation and Motivational Diversity in Business

The TFT policy prescription expounded by Scholz for regulators to try cooperation first is not premised on the assumption that business people are cooperative in nature. Rather, it proceeds on the basis that the payoffs in the regulation game make cooperation a rational choice until the other players defect from cooperation and that the motivational account of the firm is of a unitary actor concerned only with maximizing profit.[32]

In Responsive Regulation, however, relying on the data collected from empirical work undertaken by Braithwaite on corporate offending,[33] Ayres and Braithwaite contend that a strong case for TFT enforcement - “regulation that is contingently provokable and forgiving” - can be made from the wide range of motivational accounts of business conduct disclosed by these studies.[34] The studies reveal motivations, such as reputation, social responsibility and making money, as well as demonstrating that business actors often have plural or mixed motivations, and, in some cases, unvirtuous, economically irrational or undesirable motivations. The robust nature of TFT regulation is thus highlighted justifying it as a general strategy.[35] Further, since sound public policy must speak to the diverse motivations of the regulated public, it is argued that TFT regulation which is consistent with these motivations may work well in not merely constraining non-compliance of purely economic actors, but also in fostering the inculcation of trust and civic virtue.[36]

Reputation
Braithwaite’s research with Fisse in The Impact of Publicity on Corporate Offenders, demonstrates that both corporations and individual executives are concerned about reputational interests and not just money.[37] The ramifications of this initial empirical questioning of the pure economic rationality model of business conduct do not appear very dramatic. If business actors are deterred not only by economic but also reputational losses, then adverse publicity sanctions should be available to deal with regulatory offenders, which are precisely the policy solutions put forward by Fisse and Braithwaite.[38] Thus, TFT can operate properly with adverse publicity providing a punishment payoff.[39]

Importantly, research has found that the effectiveness or threat of a sanction is affected by the size, power and culture of the organization.[40] Negative publicity, for instance, seems to be the most effective sanction as far as large corporations are concerned.[41] This point is well illustrated by what transpired in the James Hardie controversy. When the James Hardie Group restructured in 2001, the liability-ridden subsidiaries[42] were cut adrift from the parent company and the group[43] and a special purpose fund, known as the Medical Research and Compensation Foundation (MRCF) was established to manage the payment of asbestos related claims against the subsidiaries.[44] Later, when it became apparent that the MRCF would not have sufficient funds to pay all likely future claimants, James Hardie was adamant that it had taken all proper steps in establishing the Foundation and that further substantial funds beyond the initial funding of around $293 million would not be made available to the Foundation. Without the adverse publicity and public outcry surrounding its corporate reconstruction and clear under-funding of the Foundation, which led, in February 2004, to the New South Wales government setting up a Special Commission of Inquiry, and the negative findings of that Inquiry,[45] along with the involvement of the Australian Trade Union movement in the matter, it is doubtful that the James Hardie Group would have taken the necessary steps to ensure that asbestos victims would be adequately compensated. This only occurred on 7 February 2007,[46] when the shareholders of the parent Dutch company, JHINV,[47] voted to accept, a plan whereby the group would provide $4 billion over the next 40 years to fund claims against the former subsidiaries.[48] The enormous amount of adverse press, no doubt, also, put political pressure on ASIC to take enforcement action against James Hardie and a number of its former directors and officers.[49]

Social Responsibility
Ayres and Braithwaite, point out, however, that other data suggest that there is a need to examine carefully the limitations of the rational choice model of business conduct.[50] Research has found that:

Corporate actors are not just value maximizers - of profits or of reputation. They are also often concerned to do what is right, to be faithful to their identity as a law abiding citizen, and to sustain a self-concept of social responsibility.[51]

Yet, research also, found that the rhetoric about putting social responsibility before profits was often not matched by responsible action[52]

Ayres and Braithwaite explain that it was such findings which led Braithwaite to argue, in To Punish or Persuade,[53] that a sound regulatory enforcement policy could not be developed without an appreciation that sometimes business actors were powerfully motivated by making money and sometimes they were powerfully motivated by a sense of social responsibility.[54] Braithwaite thus rejected a regulatory strategy based solely on persuasion and one based solely on punishment. He concluded that:

business actors exploit a strategy of persuasion and self-regulation when they are motivated by economic rationality. But a strategy based mostly on punishment will undermine the good will of actors when they are motivated by a sense of responsibility...When actors see themselves as pursuing a higher calling, to treat them as driven by what they see as baser motivation insults them, demotivates them.[55]

Ayres and Braithwaite go on to explain that the danger of a punitive approach which projects negative expectations of the regulated actor is that it undermines self-regulation,[56] a fact which they emphasize is not unique to business regulatory encounters.[57] They also emphasize that it is not confined to individual behaviour, with Bardach and Kagan’s work identifying that one of the difficulties of a largely punitive approach is that it engenders an organized business subculture of resistance to regulation where that subculture allows for the sharing of knowledge about methods of legal resistance and counterattack.[58]

However, rejecting “punitive regulation is naïve; to be totally committed to it is to lead a charge of the Light Brigade. The trick of successful regulation is to establish a synergy between punishment and persuasion”.[59] As Ayres and Braithwaite argue:

Strategic punishment underwrites regulatory persuasion as something that ought to be attended to. Persuasion legitimates punishment as reasonable, fair, and even something that might elicit remorse or repentance.[60]

Further, they explain how wading in with punishment as a strategy of first choice is counterproductive in a number of ways.[61] In the first place, punishment is expensive, persuasion is cheap. If persuasion is attempted first and is successful, increased resources are available to expand regulatory coverage. Second, punitive enforcement results in a game of regulatory cat-and-mouse where firms seek to defy the spirit of the law by exploiting loopholes, and the state continues to make more and more specific rules to close the loopholes. The result can be:

(1) rule making by accretion that gives no coherence to the rules as a package; and
(2) a barren legalism concentrating on specific, simple visible violations to the neglect of underlying systemic problems.[62]

Third, reliance must be placed on persuasion rather than punishment in industries where technological and environmental factors change so fast that regulations cannot keep abreast of those changes.[63]

Ayres and Braithwaite go on to explain that, in view of these problems of punitive enforcement and since large numbers of corporate actors in a variety of contexts seek to fit the model of the ‘responsible’ citizen,[64] persuasion is preferable to punishment as the strategy of first choice.[65] To adopt punishment as a strategy of first choice is unworkable, unaffordable and counterproductive, as it undermines the goodwill and motivation of those committed to compliance.[66]

Accordingly, by a very different approach from the economic rationality calculus in the work of Scholz,[67] Ayres and Braithwaite point out that TFT is the best strategy:

TFT is the best strategy for Scholz because, in maximizing the difference between the punishment payoff and the cooperation payoff, it makes cooperation the most economically rational response. TFT is the best strategy in To Punish or Persuade because it holds the best hope of nurturing the non-economic motivations of firms to be responsible and law abiding... By cooperating with firms until they cheat, regulators avert the counter productivity of undermining the good faith of socially responsible actors. By getting tough with cheaters, actors are made to suffer when they are motivated by money alone; they are given reason to favour their socially responsible, law-abiding selves over their venal selves. In short, they are given reason to reform, more so because when they do reform they find the regulator forgiving. When they put reforms in place, they find that the forgiving regulator treats them as if their socially responsible self was always their ‘real’ self. For Scholz, forgiveness for firms planning to cooperate in the future is part of maximizing the difference between the cooperation and punishment payoffs. In To Punish or Persuade, forgiveness is advocated for its importance in building a commitment to comply in the future.[68]

By fostering expectations of responsibility and cooperation, “the regulator can coax and caress fidelity to the spirit of the law even in contexts where the law is riddled with gaps or loopholes,” so that in this way TFT also resolves the loophole-opening contradiction of punitive regulation.[69]

Ayres and Braithwaite therefore conclude, importantly, that analyses of what makes compliance rational and what builds business cultures of social responsibility converge on the point that “compliance is optimized by regulation that is contingently ferocious and forgiving”.[70]

‘Single-round regulatory encounters’
Ayres and Braithwaite, however, identify that TFT regulation is unlikely to work with the determinedly profit maximizing actor in a regulatory context where the regulator and the actor are in “a single-round regulatory encounter”.[71] While acknowledging that Handler may be right to recognize that “continuity of relation is probably the norm in the modern state”,[72] Ayres and Braithwaite also recognize that there are areas where regulatory encounters are not continuous but are one-off episodes.[73] Indeed, this article argues that many of the serious corporate contraventions are one-off episodes that need to be dealt with separately by prosecuting only the most serious cases and, in less serious cases, either seeking court-ordered remedies and civil penalties or reaching a settlement where the defendant agrees to provide a remedy or otherwise be subject to a sanction. Interestingly, this accords with the ideas of Baldwin and Black in Really Responsive Regulation,[74] who argue that there are cases where it may not be appropriate to adopt a stepwise progression up the enforcement pyramid. They believe that “where potentially catastrophic risks are being controlled it may not be feasible to enforce by escalating up the layers of the pyramid and the appropriate reaction may be immediate resort to the higher levels”.[75]

Punishment and Motivational Diversity
The central aspect of TFT regulation which is clearly evident from the foregoing is that it does not assume a particular motivational set on the part of the actors whose cooperation is sought. Under a well-designed pyramid of enforcement, the same motivational neutrality is reflected by the criminal sanctions to which the enforcement process can be escalated if necessary.[76] For corporations and individuals this means the regulator having recourse to a wide range of sanctions, so that non-financial burdens, such as community service orders and adverse publicity sanctions,[77] can be imposed as well as fines or civil penalties.

Ayres and Braithwaite make the point, that punishment should not be regarded in one-dimensional or static terms, as simply a deterrent measure, but as something which can be structured so as to encourage cooperation.[78] They advance the idea of ‘super-punishment’,[79] as a means of motivating a recalcitrant party to become cooperative:

First, super-punishments increase the height of the regulatory pyramid. Furthermore, the threat of the super ‘stick and stick’ punishment preserves scarce regulatory resources by channeling violators to ‘stick and carrot’ punishments (where violators cooperate in implementing self-sanctions). Also, by increasing the credibility of regulatory responsiveness it more effectively channels industry behaviour to more cooperative paths to regulatory compliance. With effective super-punishments, agencies can more credibly deter noncompliance because they can more convincingly say ‘if you violate it is going to be cheap for us to hurt you (because you are going to help us hurt you).’ The notion of escalating super-punishments even further broadens the notion that pyramids can engender cooperation – because super-punishment theory shows that, even within the most punitive portions of the enforcement pyramid, eliciting firm cooperation can enhance the channeling effects of responsive regulation.[80]


Pyramids of enforcement and their design

The strategy of pyramidal enforcement postulates a hierarchy of regulatory responses. As we have seen, this pyramid has at its base the use of less punitive, less costly and less intrusive compliance measures, such as persuasion; as one rises to the apex, these methods become increasingly punitive, costly and intrusive. Under this model, the regulator ascends the pyramid through more severe and complex mechanisms, such as warning letters to civil penalties, leading to more costly and stigmatising actions, such as the use of criminal sanctions and to licence suspension and ultimately to licence revocation and imprisonment.[81] There are various examples of enforcement pyramids found in the literature on corporate enforcement. Figure 1 below is one example set out in Responsive Regulation.

Figure 1: Example of strategic regulation enforcement pyramid[82]


Licence Revocat-ion

Criminal Penalty

Warning Letter


Persuasion


Civil Penalty

Licence
Suspension

Different types of sanctioning, however, are suitable for different areas of regulation.[83] “The form of the enforcement pyramid is the subject of the theory, not the content of the particular pyramid.”[84] Indeed, it is the systematic ordering of sanctions in the enforcement pyramid, with its hierarchy of progressively more severe punishments that is fundamental. It must be made clear to the regulated that non-compliance at any level will result in escalation to a higher level of adverse consequences. The regulated must know that defection from cooperation will be a less attractive option when those regulated face a regulator with an enforcement pyramid.[85]


Desirability of this approach for ASIC


Credible escalation and the ‘image of invincibility’?

Strategic regulation theory and the pyramidal enforcement model underpinned major reforms made concerning enforcement of the statutory directors’ duty provisions when the civil penalty regime, currently contained in Pt 9.4B of the Corporations Act, was introduced.[86] Yet, what is the use of having an enforcement pyramid supporting Pt 9.4B, if, in the first place, the threat of escalation by ASIC to serious levels of response is not credible[87] and secondly, the pyramid is not projected to all participants? [88]

This article argues that, despite parliament arming ASIC with Pt 9.4B so that a strategic approach to regulatory enforcement could be achieved, ASIC’s implementation of that approach seems to be the difficulty. If ASIC is viewed as unwilling to rely on criminal sanctions, in cases of serious corporate contraventions, its reputation as an effective regulator may be eroded.

On the other hand, it should be noted that, even though in recent years ASIC has made greater use of civil penalty litigation, most recently against James Hardie[89] and the Australian Wheat Board (AWB)[90] and succeeded in obtaining many of the civil penalty orders it has sought, particularly against directors involved in high profile corporate collapses, such as those of HIH[91] (although criminal proceedings have also been instituted) [92] and Water Wheel,[93] civil penalties are generally regarded as a second-rate penalty regime,[94] that, while acknowledging that a contravention has occurred, do not deliver the same element of moral culpability as arises with criminal sanctions.[95] This is not to say that civil penalties are not a valuable enforcement tool or to deny the appropriateness of ASIC’s inclusion of them in the ‘key’ enforcement outcomes achieved by ASIC in its annual reports.[96] The argument that this article seeks to make is that criminal sanctions should play a larger and more visible role in ASIC’s armoury to deal with serious contraventions.

The need for the criminal law
In the area of corporate crime,[97] criminal sanctions are motivated by the desire for appropriate punishment and to serve as an effective general deterrent. Champions of the criminal justice system claim that the criminal process offers a greater deterrent for corporations and managers than other control mechanisms.[98] A criminal conviction results in loss of liberty by imprisonment,[99] a criminal record and damage to the defendant’s image and reputation. Chris Craigie, SC, of the Commonwealth Director of Public Prosecutions (DPP) recently made a compelling case in arguing that parliament should consider reviewing maximum penalties for corporate crime and endorsing the imposition of jail terms for serious offences by stating:

The best deterrent for serious corporate crime was jail, because those offenders often had more to lose ... certainly for what you might call ordinary crime, the whole notion of deterrence by imprisonment is a more problematic one, but given the background of some people who might find themselves the subject of corporate prosecution , it’s a wholly different matter for a person who has a great deal to lose and who has hitherto had a reputation, standing in the community and a comfortable, and sometimes privileged life...For such a person the threat of the clang of the prison gate...has a particular potency it might not have for a housebreaker or professional criminal who, if he ever thought about it at all, would tend to regard the possibility of imprisonment from time to time as an occupational risk[100]

The bad publicity and stigma of a conviction[101] far outweighs the label attached to administrative sanctions or an adverse decision in civil proceedings and/or the making of civil penalty orders.[102] Coffee,[103] who has studied the conduct of regulators who have both civil penalties and criminal sanctions at their disposal, also subscribes to this view. He believes that the publicity and public drama surrounding a successful criminal prosecution can generate a greater degree of deterrence than that following a successful civil penalty application, but this is part of his main argument that bureaucratic incentives resulting from the increased publicity of a criminal prosecution mean that regulators will prefer criminal sanctions rather than civil penalties.[104]

The traditional deterrence model, which assumes that fear of legal sanctions keeps persons law- abiding,[105] thus provides the main justification for criminal sanctions and calls for the criminal justice system to play a more significant role in the war against corporate crime.[106]

In the United States, this is certainly the position. ASIC’s counterpart, the Securities and Exchange Commission (SEC) focusses on bringing criminal indictments against suspected major corporate wrongdoers.[107] The SEC’s successful criminal prosecutions, particularly those against former Enron Chief Executive Officer, Jeffrey Skilling and its late Chairman and founder, Kenneth Lay for fraud, conspiracy and insider trading on 26 May 2006,[108] will see at least one of the chief architects of this spectacular case of corporate fraud effectively spend the rest of his life in jail.[109] More recently, Bernard Madoff, has been sentenced to 150 years jail for what may be the largest financial fraud in history.[110] In addition, the shift towards the use of the criminal law with its emphasis on punishment and stigmatisation is evident in many areas, including environmental law, antitrust cases and health care fraud.[111] In Australia, reliance on criminalisation also seems to be occurring, perhaps most importantly to deal with ‘cartels’.[112]

Conventional crime has historically been dealt with punitively in contrast to corporate misconduct which has been handled through administrative agencies or relatively lenient criminal legislation.[113] This is consistent with the position found principally in sociological studies of regulation,[114] which distinguish between regulatory offences and traditional crimes and bar the use of the criminal law to regulate conduct that is not regarded as intrinsically ‘immoral’.[115]

Nevertheless, this article argues that the criminal law should be accorded a more important role by ASIC. Enforcement by criminal sanctions should be the preferred way of dealing with violators in cases involving serious corporate contraventions.

Welsh’s research argues that this is already the case,[116] in keeping with the stated policy of ASIC and the Commonwealth Director of Public Prosecutions (DPP)[117] to issue criminal prosecutions in all cases where the evidence would support one.[118] She relies on data compiled from ASIC media releases issued between 2001 and 2006 and the civil penalty judgments[119] to make the case that the number of criminal prosecutions commenced by ASIC during this period outnumbered the civil penalty proceedings issued. However, on closer analysis of the data, while the reality might be that there were more criminal cases undertaken by ASIC than civil penalty proceedings,[120]many of the criminal cases under s 184 of the Corporations Act were against directors of proprietary companies (proprietary companies tend to be much smaller than public companies), rather than of (typically larger and more high profile) public companies.[121] Of the 18 criminal prosecutions that Welsh identifies as being commenced in 2003, for example, quite a few concerned directors and officers of proprietary companies. The criminal prosecutions include those of Ms Donna Tung Sing Ho for dishonestly using her position as an officer of Bo Long International Development Co Pty Ltd to gain an advantage for herself or Mr Henry Shui Sing Ho, where Mr Ho and Mr Mark Andrew Sweeney were also charged with being involved in the alleged contraventions, relating to the alleged use of company funds to purchase real estate and motor vehicles for personal use;[122] and Mr Hiromi (Henry) Kawada for his involvement in two Australian-registered companies Comestock Corporation (Australia) Pty Ltd (in liquidation) (Comestock) and Jillbridge Pty Ltd,[123] as well as Mr Harunobu Fukasato, who ASIC alleged failed to act honestly as an officer of Comestock.[124] ASIC’s 2003 media releases also feature information about other criminal cases commenced earlier that typically involve directors of proprietary companies. The criminal cases include those against Mr Hasan Kaygusuz, former company lawyer and accountant for Jorbai Pty Ltd (Jorbai), a failed dairy products distribution company, who pleaded guilty to being knowingly concerned in the commission by Mr Bruce Edward Carr and Ms Kym Jeanette Clendenning of dishonestly using their positions as officers of Jorbai;[125] Messrs Damien Gerald Francis Durkin and Timothy Rhys Hawker Williams, former directors of Cotech Pty Ltd committed to stand trial on insolvent trading charges;[126] Mr Sebastian Mark Tomarchio, former director of G & R Tomachio Pty Ltd, which traded as Tomarchio Orchards, who was sentenced to two and a half years imprisonment after pleading guilty to charges of dishonestly using his position to gain an advantage for himself;[127] Mr Brian Patrick Khan, who ASIC alleged had improperly and dishonestly used his position as a director of Kiumph Pty Ltd to benefit himself or entities associated with him;[128] and Mr Christopher Beresford James for dishonestly using his position as an officer of Unleycal (Wholesale) Pty Ltd to gain an advantage for another company, Unleycal Pty Ltd, which operated a car dealership and traded as Unley Mitsubishi, and Unleycal (Wholesale).[129]

By presenting this data and highlighting the preponderance of criminal prosecutions brought by ASIC against directors and officers of proprietary companies, the author is not ignoring the important criminal action ASIC has taken to date in some high profile matters, most notably against the directors of HIH.[130] Nor is the author trivialising the importance of the criminal actions ASIC has properly commenced against directors and officers of proprietary companies.[131] Arguably, however, when directors of usually larger public companies breach their duties, their actions have more far-reaching and serious consequences. ASIC must therefore not fail to advertise its triumphs in the criminal arena, as well as ensure that it uses criminal sanctions in appropriate cases against high profile corporate wrongdoers.

It is interesting that earlier empirical work conducted by Helen Bird and her colleagues at the University of Melbourne concerning ASIC’s enforcement patterns also made a similar finding that ASIC was more likely to pursue court-based enforcement in relation to private companies rather than public companies.[132] That work examined 1438 court-based ASIC enforcement actions completed during the period from January 1997 to December 1999. While it also found the predominant use by ASIC of penal enforcement (which it defined as either civil penalty or criminal matters) over civil enforcement activities,[133] it found that 1243 matters involved proprietary companies and 79 actions involved an Australian public company.[134]

As Hawkins,[135] whose work made a significant contribution to the scholarship on sociological theories of regulation, declares, even though enforcement by punitive sanctions is a strategic tool of last resort where other regulatory measures have failed to secure compliance,[136] the formal machinery of the criminal law is appropriate and should be applied in cases where there is perceived moral blameworthiness in the actions of the violator, where what is really being sanctioned amounts to a “symbolic assault on the legitimacy of the regulatory authority”.[137] Here, Hawkins identifies two types of culpable conduct which invite the regulatory agency’s ultimate sanction, namely serious one-off cases and ‘the bad’ cases, the malicious and the obdurate who have resisted the legitimate efforts of the agency to enforce its legal mandate.[138] This approach is, of course, consistent with strategic regulation theory and pyramidal enforcement with strategic regulation theory forming part of the sociological theories of regulation. The criminal law should, also, apply in cases where there are ‘criminal acts of dishonesty’[139] leading to personal or corporate benefit.

Vizard
Although Stephen Vizard did not benefit as a result of his insider trading activities,[140] his case, where there was deliberate and repeated dishonest conduct, is certainly a case where criminal action should have been brought.[141] The same is true of the HIH debacle, where criminal proceedings have been pursued,[142] the AWB scandal,[143] and notorious James Hardie case,[144] just to name a few serious high profile matters.

In the case of Vizard, the puzzling question must be posed: why wasn’t the decision to launch a criminal prosecution made when the evidence seems to support that Vizard was guilty of insider trading? As far as the civil penalty proceedings ASIC issued against him are concerned, Vizard confessed to insider trading.[145]


ASIC has said that the decision not to pursue a criminal case was not theirs, but was “entirely up to the federal Director of Public Prosecutions”,[146] who stated that “it did not have enough evidence to institute a criminal charge”.[147] The DPP would not prosecute Vizard in the absence of a signed witness statement from his accountant, Greg Lay, who refused to provide one. This is despite the fact that Lay had already given sworn evidence to ASIC concerning Vizard’s insider trading activities and could have been compelled to testify against Vizard - although not himself - under the ASIC Act 2001 (Cth) ( the ASIC Act), s 19.

Interestingly, Tony Hartnell, a former ASIC chairman, was reported at the time as saying that:

a major problem is that prosecutors refuse to use that section of the ASIC Act. The

criminal procedure acts of the various states which do require signed witness statements

are not in line with the federal law. The DPP simply ignores the federal legislature. That

section about compulsory examination may as well be removed from the Act.[148]

This raises an important structural dilemma regarding enforcement for ASIC. While it enjoys a

good relationship with the DPP,[149] consideration ought to be given to ASIC, like the SEC, [150]

developing its own prosecutorial arm to ensure that a more consistent approach to decision-

making, more particularly, whether to institute criminal proceedings, could be achieved. It seems

that, at present, as evidenced by the DPP’s refusal to prosecute Vizard in the absence of a signed

witness statement, [151] that the DPP has high prosecution standards, essentially requiring proof

beyond any doubt, not reasonable doubt.[152] The DPP also appears reluctant to prosecute

technical corporate offences where the facts are often complex and where the maximum

sentence for a successful prosecution is only five years,[153] preferring instead to concentrate its

efforts on other types of criminal behaviour that can be dealt with under state laws, which carry

longer sentences.[154] This also raises a significant issue requiring serious consideration namely,

whether there is a need to increase the maximum jail time for corporate crime under the

Corporations Act? In spite of the opposition that would undoubtedly be mounted by business

groups in the community to any increase, Adler’s sentencing, for instance, to four-and-a-half

years[155] and release from jail after only two years, seems completely inadequate. The punishment

does not fit the crime.

Although this issue did not arise in the Vizard case, another important concern regarding

criminal proceedings under the Corporations Act is the requirement that those proceedings be

instituted within a period of five years from the date of the act or omission alleged to constitute

the offence, although the Minister has the power to extend that time.[156] As Alan Cameron,

another former ASIC chairman points out:

It is not at all clear what the philosophical justification for such a limitation is in the

corporate context when that is just the sort of crime that tends to be discovered later and

the proof of such matters eventually turns more on documents and other physical

evidence, and where some at least of the putative defendants are the ones who control the

documents and have the capacity to cover up their abuses for years.[157]

The author agrees that:

The lack of a statute of limitations ensures in the case of other kinds of crime that there is

no reward for those who are capable of successfully concealing their criminal acts or

omissions for any period of time. The same should be the case for corporate crime.[158]

As far as Vizard is concerned, even though the civil penalty proceedings ASIC brought against

him were ultimately successful and resulted in him being banned for ten years from managing a

corporation and ordered to pay pecuniary penalties of $390,000,[159] the overwhelming view

seems to be that ASIC and the DPP went soft on Vizard.[160]


James Hardie

In spite of ASIC issuing civil penalty proceedings against former James Hardie directors and executives over the asbestos scandal,[161] and its recent success in the New South Wales Supreme Court, which has upheld these proceedings against the entire James Hardie board,[162] regrettably, on 5 September 2008, ASIC announced that it would not be taking criminal proceedings.[163] It is intriguing that this decision does not seem to have caused the resentment or criticism surrounding ASIC’s failure to prosecute Vizard or the public outrage relating to James Hardie’s controversial restructure and disastrous compensation scheme in 2001 that turned out to be under-funded by about $2 billion.[164] Part of the reason could be that provided by ACTU secretary, Jeff Lawrence, who was reported as saying:

While it was ‘preferable’ that the perpetrators had also faced criminal charges, unions hoped ‘substantial penalties’ would result from the civil case. The most important thing is that funding has been secured to asbestos victims, this has always been the primary focus.[165]

AWB
AWB is another important case, where the public will be looking closely at whether ASIC institutes any criminal actions.[166] This is especially so as ASIC appeared, even before the fallout from the current financial crisis, to come under mounting pressure to adopt a tougher approach to enforcement. Pressure built as a result of a spate of property developer collapses, namely of Westpoint,[167] Fincorp[168] and Australian Capital Reserve (ACR),[169] although they all involved high risk investments, and the spectacular collapse of stockbroking firm, Opes Prime.[170] Commentators hoped for a change in direction under ASIC’s new chairman, Tony D’Aloisio, a former ASX Ltd chief executive.[171]

ASIC, with D’Aloisio at its helm, should focus its efforts on rigorously enforcing the law rather than continue to allow itself to be exposed to the criticism that it fails to do so, as happened under the chairmanship of Jeffrey Lucy.[172] The view that ASIC fails to adequately enforce the law is also borne out by the results of the stakeholder survey,[173] that preceded ASIC’s recent strategic review and restructure, to help it identify what it did well and where improvements were needed.[174] One of the ways that ASIC can overcome criticisms is to ensure that it uses the criminal law in the enforcement pyramid, underlying Pt 9.4B more, to punish corporate misconduct in serious cases, especially against high profile wrongdoers, and thus prove that it is a serious regulator, crucially portraying an ‘image of invincibility’.[175]

‘Image of invincibility’
Ayres and Braithwaite also consider the question of how regulatory agencies, such as ASIC can project an image of invincibility to organisations that may be more powerful than themselves.[176] Interestingly, they take the talents of the Australian sheep-or cattle-dog, who can exercise “unchallenged command over a large flock of sheep or herd of cattle every member of which is bigger than herself”,[177] and who can force the retreat of a man, even a man with a knife- when the man is bigger, more intelligent, and more lethally armed, as their starting-point:

The first point to make about the regulatory accomplishments of the dog is that dogs are delightfully friendly to other creatures who cooperate with them. Second, dogs are convincing at escalating deterrent threats while rarely allowing themselves to play their last card. They bark so convincingly that a bite may seem more inevitable and terrifying than it is. And they know how to escalate interactively - in way that is strategically responsive to the advance and retreat of the intruder. Friendliness can turn to a warning bark, then a more menacing growl, posture and raising of fur transforms her - she is bigger and seems ready to pounce, teeth are bared, slightly at first, the dog advances slowly but with a deliberateness that engenders irrational fears that a sudden rush will occur at any moment The dog’s remarkable regulatory strategies are based on TFT strategy (the intruder will be extended friendliness when reintroduced as a friend; the sheep will be protected, led to food and drink when they cooperate). The success is also based on finesse at dynamic interactive deterrent escalation, and at projecting an image of invincibility.[178]

Although Ayres and Braithwaite acknowledge the problems which arise in achieving the same degree of finesse in the area of human regulation, they draw on some empirical work for a number of suggestions. The first suggestion results from Hawkins’ important study of British water pollution control.[179] While these water boards were anything but benign big guns in reality, their field officers played a game of regulatory bluff. The fines that flowed from prosecution were actually puny, yet they were dealt with by a degree of misrepresentation of the awful consequences of prosecution and by inspectors alluding to adverse publicity and the humiliation of a court appearance, instead of concentrating on the size of the fines. Accordingly, the image to be built up and reinforced is for regulators “to display the enforcement process as inexorable, as an unremitting process, in the absence of compliance, towards an unpleasant end”, even in cases where there may be a weak relationship between the reality and the image of the enforcement powers of regulatory agencies as benign big guns.[180]

Unlike the British water boards, ASIC has important enforcement powers at its disposal.[181] The real question is whether it will use those powers in appropriate cases to build an image of invincibility.[182] Although ASIC has taken action in some important and high profile cases, perhaps most notably the criminal proceedings it has issued in relation to the HIH disaster, its handling of other matters is undermining this image of invincibility. They include the failure to instigate a criminal case against Vizard, the length of time it is taking to deal with Rich and Silbermann in the long-running One.Tel proceedings[183] and criticism generally for “being on the backfoot”[184] in not acting promptly when it should arguably have been aware of problems concerning Westpoint and Fincorp.[185] It is interesting that all this criticism pre-dated the current financial crisis and resulting global meltdown, where now, more than ever, it is important for ASIC to be seen to act appropriately to prevent confidence being eroded in what is the worst financial crisis since the Great Depression.


Projecting the pyramid of enforcement

It is also useful if pyramidal enforcement is to guide the design of ASIC’s enforcement strategies and practice to ensure that the pyramid is clearly projected to all participants.[186] Regrettably, the suggestions made by Dellit and Fisse in 1994 about how this could be achieved have not been followed. Those suggestions include: amending the Corporations Act to manifest the pyramid, preferably by adding a new division which outlines an enforcement strategy and which lays the groundwork for implementing it,[187] as well as, making sure that the strategy is projected by and within ASIC.[188]

Problems of moving up and down the pyramid in practice
The importance of having access to a range of sanctions which is, of course, the position under the Pt 9.4B pyramid to achieve responsive regulation is highlighted by Ayres and Braithwaite. If the regulated are being cooperative, the regulator should respond by being cooperative, but if the regulated are being uncooperative, the regulator should escalate up the pyramid.[189]

Difficulties, however, can arise with the practice of regulators like ASIC. Moving up and down the regulatory pyramid is not as easy in practice as it seems.[190]

In its review of the use of civil and administrative penalties in the federal sphere, the ALRC noted Fiona Haines’ argument that “escalation of sanctions, while appearing reasonable to the regulator, can prompt companies to move to reduce their vulnerability to scrutiny and liability”.[191] But, of greater significance is the approach of Christine Parker. According to Parker, with whom the author agrees, in order to improve the practice of regulation, regulators must appreciate why and how contraventions occur and the practices and constraints that may be used to encourage compliance:

A sophisticated compliance analysis of regulation implies a sophisticated understanding of the target population. What will make compliance difficult for them? What will motivate them to want to comply? What technical changes will compliance mean for their business or manufacturing processes? What financial impacts will compliance have? This level of understanding of the target population is unlikely to be achieved without significant consultation with, listening to, and research of members of target populations.[192]

In this regard, some interesting comments have been made concerning ASIC’s failure to take

action in relation to the property collapses of Westpoint and Fincorp. While there is the view

that investors cannot expect to be protected from their own greed or stupidity:

[I]t should not be too much to expect ASIC to keep a closer watching brief. ASIC also

seems to be quarantined from market intelligence.[193]


The announcement by D’Aloisio on 8 May 2008 of a strategic review, aimed at making ASIC “closer to the market”[194] and that has since been completed, is therefore to be commended. Importantly, it has resulted in a new structure and new appointments,[195] which hopefully should go some way in helping ASIC to better fulfil its role as enforcer and regulator.[196] One commentator has said that a number of ‘outwardly focused’ stakeholder teams targeting particular areas, including retail investors and consumers, superannuation funds and financial advisers, have replaced the former ‘silo’ directorates, where the intention has been to replace “cumbersome, bureaucratic, process-oriented units with smaller, flexible customer-centric ones”.[197] Yet another commentator stated that “the corporate watchdog has moved to beef up its market expertise with a series of senior executive appointments”, noting that “more than a third came from the private sector”.[198] While these changes have been favourably reported on in the press, ASIC must tread a careful path, lest it be criticised for being ‘captured’ by business.


Conclusion

If ASIC wishes to retain its reputation as a credible regulator and use pyramidal enforcement, it must demonstrate that it is more prepared to take action at the criminal level in serious cases of corporate misconduct. Otherwise, there is the perception that there is ‘justice for sale’ for those wrongdoers with deep pockets who are able to foot the bill, with the non-prosecution of corporate fraudsters discriminating in their favour and against ‘street’ offenders.[199]

Another closely related concern is possible abuse by ASIC of its range of enforcement options and power to negotiate settlements under pyramidal enforcement resulting in injustice.[200] Questions are raised when some defendants are prosecuted, while others who have committed the same type of contravention are only visited with civil penalties or a settlement.[201] The danger also exists that a particular settlement arrived at through negotiation may be too harsh or too lenient in comparison with another.[202] Accordingly, ASIC must seek to be more consistent in its application of pyramidal enforcement and consistent in taking enforcement action at appropriate levels in the pyramid, which in regard to criminal prosecutions Dellit and Fisse argue can be achieved by such measures as closer monitoring of the exercise of prosecutorial discretion, and liaison between ASIC and the DPP to ensure that serious cases dealt with by ASIC that warrant prosecution are not settled or handled in such a fashion as to hinder prosecution.[203] The author is not convinced that this is the answer and believes that ASIC developing its own prosecutorial arm to achieve a more consistent approach to decision-making should be considered.[204]

In all, strategic regulation theory is to be supported to shape ASIC’s regulatory design and practice, but, as this article contends, the difficulty for ASIC appears to be the implementation of this approach to enforcement. ASIC must strive to be consistent in the enforcement action it chooses to take and it must show that is prepared to take action at the appropriate level in the pyramid, especially to rely on criminal sanctions in serious cases of corporate wrongdoing, to ensure that its reputation as an effective regulator is not undermined. Criminal sanctions will not deter potential corporate violators unless they recognize that ASIC will do more than threaten their use.



[1] This is the way ASIC describes its ‘role’: see ASIC website, www.asic.gov.au, ‘About ASIC: Our role’ (Accessed on 4 July 2009). The statement is repeated in other documents published on its website, eg. ASIC, ASIC: A guide to how we work, p 4.

[2] The provisions relating to those duties are now found in the Corporations Act, ss 180- 183, formerly the Corporations Law, s 232, and the Companies Code (Code), s 229. The criminal sanctions which could be imposed were a fine or imprisonment for up to five years or both under the Corporations Law, s 1311, formerly the Code, s 570. Of course, civil remedies, which enabled recovery of loss or damage resulting from the breach could also be obtained: see Corporations Law, ss 232(7), (8) and (11), formerly the Code, ss 229(6), (7) and (10).

[3] The problems associated with the use of the criminal process are well recognised: see, eg, K Schlegel, Just Desserts for Corporate Criminals, Northeatern Uni Press, Boston Mass, 1990.

[4] See Senate Standing Committee on Legal and Constitutional Affairs, Company Directors’ Duties: Report on the Social and Fiduciary Duties and Obligations of Company Directors, AGPS, Canberra, 1989 (the Cooney Committee). See also Australian Law Reform Commission (ALRC), Principled Regulation: Federal Civil and Administrative Penalties in Australia, Report 95, 2002 at [2.62].

[5] Cooney Committee, ibid.

[6] See discussion above, n 2.

[7] Cooney Committee, above n 4, p 190.

[8] Ibid, p 188.

[9] Ibid, p 190.

[10] See in particular the work of Braithwaite, eg, J. Braithwaite, To Punish or Persuade: Enforcement of Coal Mine Safety, State University of New York Press, New York, 1985.

[11] See discussion above, n 2.

[12] The civil penalty regime was introduced by the Corporate Law Reform Act 1992 (Cth) and became effective from 1 February 1993. The regime has been amended a number of times since its introduction in 1993. Most significantly, the number of provisions enforced by the regime has been expanded twice, first in July 1998 and later in March 2002, reflecting the preference in Australia for corporate law breaches to be enforced using civil and administrative remedies rather than criminal penalties: see author’s previous work for a fuller discussion of the civil penalty regime, the reasons for its introduction and the regulatory framework underpinning it, eg, V. Comino, “Civil or criminal penalties for corporate misconduct: Which way ahead?”(2006) 34 ABLR 428 at pp 431 – 435. See also, eg, N Andrews, “If the dog catches the mice. The civil settlement of criminal conduct under the Corporations Act and the Australian Securities and Investments Act” (2003) 15 Aust Jnl of Corp Law 137, for a general discussion of this preference for civil and administrative rather than criminal penalties to deal with corporate law breaches. In March 2007, the federal Treasury undertook a review, Sanctions in Corporate Law, inviting discussion on the issue of the greater use of civil, rather than criminal sanctions for breaches of corporate law: see The Treasury, Review of Sanctions in Corporate Law, www.treasury.gov.au (Accessed on 1 November 2007). More recently, the Corporations and Markets Advisory Committee (CAMAC) has proposed civil penalties for market manipulation and for securities dealers to record all phone calls and text messages after the then Minister for Superannuation and Corporate Law, Nick Sherry, had asked it to look into charges that some short sellers were deliberately spreading damaging rumours about stocks - or engaging in rumourtrage – following the stock market carnage in late 2008. ASIC also wants civil penalties introduced for rumourtrage in addition to existing criminal penalties to provide “access to the full range of regulatory options” and ensure that rumourtrage is “met by a scalable response”: see P. Durkin, “ASIC worried over margin loan disclosure”, AFR, 16 March 2009, p 7.

[13] A person who contravened a civil penalty provision was guilty of a criminal offence if that person contravened the provision knowingly, intentionally or recklessly and (i) was dishonest and intended to gain an advantage or (ii) intended to deceive or defraud someone. The criminal sanctions which applied for a successful prosecution of the criminal offence were a fine of up to $200,000 or imprisonment for up to 5 years or both. The current position is that the criminal penalty regime, formerly in Pt 9.4B, continues to apply to substantive provisions of the Corporations Act, which provide that contravention is an offence. The Corporations Act, s 184, dealing with criminal breaches of the statutory duties of corporate officers is an example of such a provision. Criminal penalties, namely a fine and /or imprisonment, also continue to be prescribed in the Corporations Act, s 1311 (3), Sch 3.

[14] Where a civil penalty provision was breached, the consequences could include the court prohibiting the person from managing a corporation for a specified period of time and/or imposing a pecuniary penalty of up to $200,000 upon that person. The available orders continue to be pecuniary penalties and management disqualification orders. Pt 9.4B now, however, deals only with the imposition of pecuniary penalties. The imposition of management banning orders is dealt with under s 206C of Pt 2D.6 of the Corporations Act, entitled “Disqualification from managing corporations”. Pt 2D.6 prescribes all methods by which a “person can be disqualified from management”, which includes contravention of a civil penaty provision.

[15] See Comino, “Civil or criminal penalties for corporate misconduct”, above n 12, p 433 -435. The Cooney Committee recommended that Parliament enact an enforcement pyramid, which proposed three vital levels of sanctions ASIC could use to regulate the conduct of directors. There would be civil remedies at the base, civil penalties in between and criminal sanctions at the apex, instead of the then existing two levels of criminal and civil sanctions.

[16] See discussion below, Vizard, James Hardie and AWB. But note Welsh’s research: M. Welsh, “Civil Penalties and Strategic Regulation Theory: The Gap Between Theory and Practice” (2009) 33 Uni Melb Law Review (forthcoming), discussed below, nn 116 – 120.

[17] In the academic literature a distinction is usually made between regulatory offences and ‘real crimes’ (indictable offences, such as murder and robbery in contrast to summary or simple offences). Those who deny the criminal nature of regulatory offences argue that such offences are ‘lesser matters’, which people do not view in the same manner as traditional crimes, so that their criminalisation is inconsistent with public morality: see later discussion, n 115. This article distinguishes between regulatory wrongs, eg, failure to lodge returns on time – and ‘serious’ wrongs: fraud, breach of statutory/fiduciary duty – which are often one-off matters and necessarily should result in high level action, civil penalty or criminal proceedings. See also later discussion, The need for the criminal law, in particular nn 98 - 104.

[18] Researchers in this field include J. Scholz, “Deterrence, Cooperation and the Ecology of Regulatory Enforcement (1984) 18 Law and Society Review 179; and C. Dellit and B. Fisse, “Civil and Criminal Liability under Australian Securities Regulation: The Possibility of Strategic Enforcement” in G. Walker and B. Fisse (eds), Securities Regulation in Australia and New Zealand, Oxford University Press, Auckland, 1994, p 580. This chapter was not retained in later edition (1998). See also G. Gilligan, H. Bird and I. Ramsay, Research Report: Regulating Directors’ Duties – How Effective are the Civil Penalty Sanctions in the Corporations Law? Centre for Corporate Law and Securities Regulation, The University of Melbourne, 1999, Pt IV, pp 8-16. Strategic regulation theory is not confined to corporate regulation. It has been used extensively in other fields, including occupational health and safety regulation: see, eg, N. Gunningham and R. Johnstone, Regulating Workplace Safety: Systems and Sanctions, Oxford University Press, Oxford, 1999; environmental regulation: see, eg, G. Richardson, A. Ogus and B. Burrows, Policing Pollution: A Study of Regulation and Enforcement, Clarendon Press, Oxford, 1983; and trade practices regulation: see, eg, C. Parker, “The Compliance Trap: The Moral Message in Responsive Regulatory Enforcement” (2006) 40 Law and Society Review 591. Parker applied strategic regulation theory to enforcement of the cartel provisions in Pt IV of the Trade Practices Act 1974 (Cth).

[19] See Gilligan, Bird and Ramsay, ibid, p 9.

[20] Braithwaite, To Punish or Persuade, above n 10.

[21] For individual offenders the criminal sanction of imprisonment is regarded as the ultimate penalty, while for corporate offenders, sanctions, such as deregistration, punitive injunctions, adverse publicity orders and licence revocation are regarded as equivalent penalties.

[22] I. Ayres and J. Braithwaite, Responsive Regulation, Transcending the Deregulation Debate, Oxford University Press, New York, 1992.

[23] Ibid, p 19.

[24] Ibid.

[25] Ibid, p 21. By adopting the terms ‘deterrence’ versus ‘compliance’, Ayres and Braithwaite rely on one of the leading formulations provided by Reiss of the binary model of enforcement strategies or styles, which has been important in the academic literature in seeking to enhance our understanding of law enforcement and the part it plays in the regulatory process: see A. Reiss Jr, “Selecting Strategies of Social Control over Organizational Life” in K. Hawkins and J. Thomas (eds) Enforcing Regulation, Kluwer-Nijhoff Publishing, Boston, The Hague, Dordrecht and Lancaster, 1984. The other leading formulations are those of Hawkins and Bardach and Kagan. The terms Hawkins employs in describing this model are ‘compliance’ and ‘sanctioning’: see K. Hawkins, Environment and Enforcement: Regulation and Social Definition of Pollution, Clarendon Press, Oxford, 1984, p 3, while Bardach and Kagan in their identification of the two basic styles of regulation call one style of enforcement typified by the title of their study: Going by the Book as ‘regulatory unreasonableness’ and the other, ‘regulatory reasonableness’: see Bardach and Kagan, Going by the Book: The Problem of Regulatory Unreasonableness, Temple University Press, Philadelphia, 1982.

[26] Ibid.

[27] See Scholz, “Deterrence, Cooperation and the Ecology of Regulatory Enforcement”, above n 18.

[28] Ibid, p 180.

[29] See discussion above, nn 27- 28.

[30] Ayres and Braithwaite, Responsive Regulation, above n 22, p 21.

[31] Ibid.

[32] Ibid, pp 21- 22.

[33] The fieldwork on the impact of adverse publicity on corporations is summarised in B. Fisse and J. Braithwaite, The Impact of Publicity on Corporate Offenders, State University of New York, Albany, 1983; on pharmaceutical companies in J. Braithwaite, Corporate Crime in the Pharmaceutical Industry, Routledge and Kegan Paul, London, 1984; on coal mining companies in Braithwaite, To Punish or Persuade, above n 10; on Australian regulatory agencies in P. Grabosky and J. Braithwaite, Of Manners Gentle: Enforcement Strategies of Australian Business Regulatory Agencies, Oxford University Press, Melbourne, 1986; and a preliminary report on the work of nursing home regulation is provided in J. Braithwaite, T. Makkai, V. Braithwaite, D. Gibson and D. Ermann, The Contribution of the Standards Monitoring Process to the Quality of Nursing Home Life: A Preliminary Report, Department of Community Services and Health, Canberra, 1990.

[34] Ayres and Braithwaite, Responsive Regulation, above n 22, pp 19 and 22.

[35] Ibid. See also Dellit and Fisse, above n 18, 1994, p 575.

[36] Ibid, p 20.

[37] See Fisse and Braithwaite, above n 33. See also discussion below, nn 41 -49, particularly James Hardie, which is a good case study illustrating this point. But see J. McConvill, “Directors’ duties to stakeholders: A reform proposal based on three false assumptions” (2005) 18 Aust Jnl of Corp Law 88 at 89. McConvill provides an interesting discussion of the James Hardie case from another perspective.

[38] See Ayres and Braithwaite, Responsive Regulation, above n 22, p 22. Note, however, the tendency of the ALRC in its report in 2002 to recommend against publicity unless sanctioned by court order: see ALRC, Principled Regulation: Federal Civil and Administrative Penalties in Australia, Report 95, above n 4. A problem with publicity is that it can be used by the regulated as well as the regulator. In a recent case concerning a company, Promina Group Limited (Promina), who paid a $100,000 fine complying with an infringement notice that ASIC issued against it on 21 February 2001 pursuant to the administrative penalty regime under the Corporations Act, Pt 9.4AA (ASIC alleged that Promina contravened the continuous disclosure provisions “by failing to inform ASX Limited (ASX) that it had received a proposal from Suncorp-Metway Limited (Suncorp) to acquire all the ordinary shares of Promina”: see ASIC, “Promina pays $100,000 fine”, Media Release 07-69, 20 March 2007), notwithstanding that this was publicised by ASIC, Promina proceeded to issue its own publicity disputing any contraventions and stating that it paid up because it was in the best interests of its shareholders: see < http:www.afr.com.au/pubs/ldr/foracma/07.htm> .

[39] Ibid.

[40] See, eg, ALRC, Background Paper 7, “Review of civil and administrative penalties in federal jurisdiction”, Penalties, Policy, Principles and Practice in Government Regulation, Conference, Sydney, 7- 9 June 2001, p 13.

[41] Ibid. The Environmental Defenders Office expressed to the ALRC that reputation was extremely important to large public companies. Yet, in the area of environmental protection, it reported that many of the worst offences were committed by ‘fly by night’ companies, who offend, get caught and then reappear in different forms: Environmental Defenders Office, Consultation, Sydney, 7 December 2000. See also Grabosky and Braithwaite, Of Manners Gentle, above n 33, pp 216-217. On a related issue, this study found that one of the main reasons that most Australian regulatory staff believe large firms are more law-abiding than small business is because of their increased sensitivity to publicity. Another reason is that they have the resources to employ compliance personnel. Such findings are not new and have international counterparts: see, eg, J. Black, “Managing Discretion’, Paper presented to ALRC Penalties, Policy, Principles and Practice in Government Regulation Conference, above n 40, p 12.

[42] The subsidiaries, Amaba Pty Ltd and Amaca Pty Ltd, were the companies in the James Hardie Group that were involved in the manufacture and sale of asbestos, which gave rise to ‘long- tail’ liabilities to asbestos victims.

[43] Part of the corporate restructure involved the James Hardie Group entering into a scheme of arrangement to move control from Australia to the Netherlands and set up as a Dutch company that took with it $1.9 billion in assets from the Group: see discussion in J. Farrar, Corporate Governance: Theories, Principles, and Practice (3rd ed), Oxford University Press, Melbourne, 2008, p 511, where Farrar also points out that the Netherlands does not have a treaty with Australia for the enforcement of civil court judgments. See also Briggs v James Hardie & Co Pty Ltd ( 1989) 16 NSWLR 549; 7 ACLC 841.

[44] MRCF was set up as a separate entity not related by shareholding or in any other way to the other companies in the James Hardie Group.

[45] The Special Commission of Inquiry handed down its report in September 2004: see D.F. Jackson, QC, “Report of the Special Commission of Inquiry into the Medical Research and Compensation Foundation”, September 2004 (the Jackson report). This report is available online at < http:www.cabinet.nsw.gov.au/hardie/PartA.pdf> (Accessed on 4 July 2009). Significantly, the Jackson report found that: James Hardie had under-funded the MRCF by about $2 billion; having pocketed the proceeds, James Hardie had the capacity and moral obligation to compensate the victims; James Hardie made misleading and deceptive statements in regard to the establishment of the Foundation; this conduct required investigation by Commonwealth authorities; and serious questions were raised about the conduct of a number of professional firms.

[46] In December 2005, James Hardie Industries NV (JHINV) and James Hardie 117 Pty Ltd had entered into an agreement to provide long term funding for compensation arrangements for victims of asbestos-related diseases in Australia with the New South Wales Government and the Asbestos Injuries Compensation Fund Limited, as trustee for the Asbestos Injuries Compensation Fund, which was amended on 21 November 2006 (Final Funding Agreement). But this agreement, which occurred against a background of a threat by the New South Wales government to pass legislation to unravel the restructuring of the Group if no settlement was reached was also subject to conditions precedent (referred to in JHINV’s announcement to the ASX dated 1 December 2005), including shareholder approval.

[47] Part of the 2001 corporate reconstruction of the James Hardie Group concerned the transfer of its jurisdiction of incorporation from New South Wales to the Netherlands.

[48] But note later discussion at n 165.

[49] See later discussion at n 89.

[50] Ibid: see, eg, P Yeager, “Realms of Reason: Notes on the Division of Moral Labor in Corporate Behaviour”, Paper to Edwin Sutherland Conference on White-Collar Crime, Indiana University, 1990. His paper is on deontological reasoning in business organisations.

[51] Ibid. During Braithwaite’s fieldwork, business actors constantly argued that the common view of them as motivated only by money was a simplistic stereotype. While acknowledging that they were primarily motivated by economic factors, they claimed that they gave serious consideration to business responsibility, ethics, and obligations to abide by the law and to be responsive to non-shareholding stakeholders in the corporation.

[52] Ibid, p 24.

[53] Braithwaite, above n 10.

[54] Ayres and Braithwaite, Responsive Regulation, above n 22, p 24.

[55] See ibid, pp 24-25.

[56] Ibid, p 25.

[57] Ibid: see, eg, M. Lansky, “Violence, shame and the family” (1984) 5 International Journal of Family Psychiatry 21 at 23. Lansky makes this point about the dangers of treating violence in patients as an eruption that must be held down by regulation of movement, physical or chemical restraint, concluding that a model of “holding down” both inhibits dialogue about the interpersonal vulnerabilities which lead to violence and justifies “a type of regulation that humiliates the patient and complicates the return of self-regulation”.

[58] Ibid: see Bardach and Kagan, above n 25. In their work, Bardach and Kagan argued that, in the United States, many regulators were being too legalistic in their approach to enforcing regulation via ‘regulatory unreasonableness’. Other difficulties with such an approach include the tendency to give essentially compliant firms a positive disposition to resist or to reduce their efforts to comply with the intent of the law, aiming instead for only the minimal level of compliance required with the rules, and a propensity towards unnecessarily complex rules, the ‘regulatory ratchet effect’, where in regulatory design and rule-making, there is a tendency towards making new rules and increasing the complexity of existing rules to cover loopholes: see discussion, below n 62.

[59] Ibid.

[60] Ibid, pp 25-26.

[61] Ibid, p 26.

[62] Ibid, citing the work of Bardach and Kagan, above n 25 and Braithwaite, 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] NSWSC 171; (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] NSWSC 274; (2005) 53 ACSR 471 ; and R v Williams [2005] NSWSC 315; (2005) 216 ALR 113; 53 ACSR 434.

[93] In ASIC v Plymin and Others [2003] VSC 123; (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 [2002] NSWSC 483; 1810; 42 ACSR 80. See also discussion by Finkelstein J in ASIC v Vizard [2005] FCA 1037; (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] FCA 1037; (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 Corporations Act, major offences are generally prosecuted by the DPP. This occurs in accordance with a Memorandum of Understanding (MOU) between the DPP and ASIC: see MOU dated 1 March 2006, which is available on the ASIC website.

[118] Welsh, above n 16, p 21.

[119] Ibid, p 20, Table Two: Number of criminal prosecutions commenced and civil penalty proceedings issued alleging a contravention of Corporations Act 2001 (Cth) ss181,182 ,183 or184.

[120] Ibid. In 2001, eg, Welsh states that the total number of criminal prosecutions under s 184 totalled 12 as opposed to 0 civil penalty applications under ss 181, 182 or 183. It should be noted, however, that in June 2001, ASIC instituted civil penalty proceedings in the HIH case against Adler, Williams and Fodera, while in December 2001, it commenced civil penalty proceedings in the One.Tel case against John David (Jodee) Rich and Bradley Keeling, its former Joint Managing Directors, Mark Silbermann, its former Finance Director and John Greaves, its former Chairman: see author’s previous work for a fuller discussion of these proceedings: Comino, “The enforcement record of ASIC”, above n 86, pp 196-200 and pp 206- 207.

[121] But see discussion below, nn 130 - 131.

[122] See ASIC, “Bo Long investment scheme, three charged”, Media Release 03-019, 17 January 2003.

[123] See ASIC, “Gold Coast resident pleads guilty”, Media Release 03-025, 24 January 2003. Kawada pleaded guilty to 16 charges under the Corporations Act and Queensland Criminal Code, which included pleading guilty to two counts of failing to act honestly in the exercise of his powers and discharge of his duties as an officer of the company.

[124] Ibid.

[125] See ASIC, “Melbourne solicitor sentenced on ASIC charge”, Media Release 03-139, 29 April 2003.

[126] See ASIC, “Tasmanian directors to stand trial on insolvent trading charges”, Media Release 03-153, 16 May 2003.

[127] See ASIC, “Former Shepparton company director jailed”, Media Release 03-161, 22 May 2003.

[128] See ASIC, “Launceston company director sentenced to twelve months jail”, Media Release 03-163, 23 May 2003.

[129] See ASIC, Adelaide company director jailed”, Media Release 03-275, 1 September 2003.

[130] See discussion above, n 92.

[131] Discussed above , nn 122 – 129.

[132] See H. Bird, D. Chow, J Lenne and I. Ramsay, Research Report: ASIC Enforcement Patterns, Centre for Corporate Law and Securities Regulation, The University of Melbourne, 2003, p xiii. See also H. Bird, D. Chow, J Lenne and I. Ramsay, “ Strategic Regulation and ASIC Enforcement Patterns: Results of an empirical study” (2005) 5 Journal of Corporate Law Studies 191.

[133] See Bird et al, ibid (2005), p 227. Civil enforcement actions were brought to court in 122 matters and penal actions were brought in 1316 matters, but because many of the latter cases involved external administration, if these were excluded, the number of penal matters brought to court was reduced to 450.

[134] Ibid.

[135] Hawkins, Environment and Enforcement, above n 25

[136] Ibid, pp xii- xiii.

[137] Ibid, p 205.

[138] Ibid.

[139] In the language of the Cooney Committee, above n 4, pp 188 and 191, this conduct can be equated with the most serious contraventions, those ‘genuinely criminal in nature’, that is, where company directors acted ‘fraudulently’ or ‘dishonestly’, recommending that criminal sanctions apply in such cases.

[140] See ASIC v Vizard [2005] FCA 1037; (2005) 54 ACSR 394. ASIC commenced civil penalty proceedings against the defendant, seeking a declaration that the defendant’s conduct as a director of Telstra Corporation Limited (Telstra) had contravened Corporations Act, s 183 (formerly Corporations Law, ss 232(5) and 183) by improperly using secret boardroom information to trade in shares in three listed companies in which the telco had an interest to gain an advantage for himself and/or others.

[141] In ASIC v Vizard [2005] FCA 1037; (2005) 54 ACSR 394 at [43] 405, Finkelstein J stated: “The defendant was a director of Telstra, one of Australia’s largest companies. He owed his position to the belief that he was honest and capable. Highly confidential information came his way in his capacity as a director. He used that information for the purpose of benefiting himself and his family. This was both dishonest and a gross breach of trust. Not only that, the defendant well knew that what he was doing was wrong. His breach of trust was carefully concealed and only discovered by chance. Everything was done for personal gain...It was only because of the vagaries of the marketplace that the defendant did not realise his gain.”

[142] The laying of criminal charges against Adler, for instance, arising out of his conduct as a director of the HIH group of companies was vindicated by the following comments made by Dunford J of the New South Wales Supreme Court in sentencing him to jail: “The offences are serious and display an appalling lack of commercial morality...Directors are not appointed to advance their own interests but to manage the company for the benefit of its shareholders to whom they owe fiduciary duties... They were not stupid errors of judgement but deliberate lies, criminal and in breach of his fiduciary duties to HIH as a director”: see ASIC, “Rodney Adler sentenced to four-and-half years’ jail”, Media Release 05-91, 14 April 2005 (emphasis added). See also R v Adler [2005] NSWSC 274; (2005) 53 ACSR 471.

[143] See discussion below, AWB.

[144] See discussion below, James Hardie.

[145] On 4 July 2005, when ASIC announced its decision to bring civil penalty proceedings, it issued a media release stating: “ASIC has filed a Statement of Agreed Facts with the Federal Court of Australia in which Mr Vizard agrees with the facts that give rise to the allegations. Mr Vizard has agreed with ASIC that it is appropriate for the Federal Court to declare that he contravened his duty to Telstra in using the Telstra information”: see ASIC, “ASIC commences civil proceedings against Stephen Vizard”, Media Release 05-190, 4 July 2005. Although Vizard tried to deny his insider trading confession: see B. Speedy, “Vizard denies insider trading confession”, The Australian, 18 July 2005, p 29, he later cooperated with ASIC and admitted his insider trading in telecommunications shares: see discussion, below n 159.

[146] See Speedy, ibid.

[147] See J. Hewett, ‘Two men and a case to answer’, AFR, 23-24 July, p 20.

[148] Ibid, quoting Hartnell.

[149] See Gilligan, Bird and Ramsay, above n 18, pp 38-42. Their research found that the relationship at the time (mid-1998) was positive across the regions, although there was some variation. See also Farrar, Corporate Governance, above n 43, pp 315-320. Farrar explains how the differing attitudes of ASIC and the DPP have, in the past, resulted in relations between the two organizations becoming strained, although he believes that the relationship has since settled down. ASIC sees its character as commercial and professional, clearly having an affinity with commerce, which is in contrast to the legal culture of the DPP, whose primary role is criminal law investigations and prosecutions. Tensions reached crisis proportions in September 1992, after Michael Rozenes of the DPP criticised Hartnell, then ASIC Chairman, as the ‘gentleman regulator’ who preferred to focus upon easier civil actions rather than harder criminal prosecutions, which led to the then Attorney-General, Michael Duffy intervening and issuing a written direction telling both parties to co-operate in the prosecution of serious criminal offences. An MOU was signed, dated 22 September 1992, detailing the close consultative steps involving ASIC and the DPP right from the start of an investigation and making it clear that the decision whether ASIC could lay criminal charges rested with the DPP. This MOU has been replaced by a new MOU expressed to be “to substantially the same effect”: see discussion, above n 117.

[150] But note that concerning enforcement of violations of securities laws, the SEC and Department of Justice cooperate in this area.

[151] This problem of the DPP’s general insistence on a signed witness statement before it will prosecute has been long recognised: see, eg, J. Longo, “ASIC powers -where to from here?” (2001) 21 Australian Corporate News 385, p 386. Longo was the National Director of Enforcement of ASIC until March 2000.

[152] It should be noted, however, that Longo has explained that generally the reason that the DPP will not decide to prosecute in the absence of signed statements from material witnesses even where a signed transcript of that person’s evidence on oath is available under the ASIC Act, s 19, is because it is not in a form that can be included in a hand up brief, since it could contain inadmissible evidence. Accordingly, another solution is to enact reforms to strengthen ASIC’s powers to compel any witness who has given evidence in an examination to sign a written statement of that evidence so that it can be used in the prosecution process as were proposed (but not proceeded with) by the Financial Services Reform Bill 2000 (Cth).

[153] See Corporations Act, s 1311 and Sch 3.

[154] See, eg, Criminal Code Act 1899 (Qld), s 408C, which deals with fraud, where offenders may be liable to imprisonment for ten years in certain circumstances.

[155] See R v Adler [2005] NSWSC 274; (2005) 53 ACSR 471. See also Adler v R [2006] NSWCCA 158; (2006) 57 ACSR 675, where Adler’s appeal against this sentence was dismissed by the NSW Court of Criminal Appeal.

[156] See Corporations Act, s 1316.

[157] See A. Cameron, “Enforcement, Getting the Regulatory Mix Right” (1994) 4 Aust Jnl of Corp Law 121 at 123. ASIC was not prevented from bringing criminal proceedings against well-known Melbourne business identity, Solomon Lew, concerning the Yannon transaction, which cost the retailing group Coles Myer $18 million because the action was statute-barred. But, the fact that the matter was over five years old when ASIC’s investigation commenced highlights the difficulties that Cameron discusses. The matter did not become public until 1995 when the then finance director of Coles Myer, Philip Bowman, came forward about the deal that involved a shelf company, Yannon Pty Ltd purchasing $25 million in preference shares in Lew’s company, Premier Investments Ltd from FAI Insurances Ltd, where Coles Myer assisted with the purchase by providing guarantees: ASIC News, “Yannon too hard: ASIC bows out” (2000) 1 Australian Corporations Law – Bulletin, 14 January 2000: see http://online.butterworths.com (Accessed 21 March 2000).

[158] Cameron, ibid.

[159] See ASIC v Vizard [2005] FCA 1037; (2005) 54 ACSR 394. On the issue of disqualification, even though ASIC had requested a five-year ban in the light of Vizard’s admission of his wrongdoing and the contrition he expressed, Finkelstein J at [47]-[48] found that: “disqualification for 5 years is not sufficient. I appreciate that I need not be too concerned with specific deterrence. The defendant’s very public disgrace suggests that it is unlikely that he will be given the opportunity of again becoming a director of a sizeable publicly listed company. In any event, it is common ground that he is unlikely to offend again. My real concerns here are with punishment for retributive purposes and general deterrence, but principally the latter. Indeed general deterrence is of primary importance in cases of this kind. A message must be sent to the business community that for white collar crime “the game is not worth the candle”, to use the language of a Canadian judge, McDermid JA, in R v Jaasma (1976) 1AR 553 at 555”. On the other hand with respect to the pecuniary penalties, Finkelstein J at [44]-[45] thought that although Vizard’s actions were “within the category of a worst case for an offence of this type. Nonetheless it would be inappropriate to impose something close to the maximum pecuniary penalty ($200,000) for each contravention. First to impose the maximum penalty would be to ignore those factors that the law says should be taken into account in sentencing. Here the significant factors are the public disgrace which has been suffered by the defendant and his family, the genuine and unreserved contrition expressed by the defendant and the admissions made by him, which in this case certainly saved the time and expense of what might otherwise have been a rather lengthy trial. Second, there is the submission by ASIC, supported as it is by the defendant, that the appropriate penalty for each offence is $130,000. The cases, including decisions of the Federal Court in NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission [1996] FCA 1134; (1996) 71 FCR 285; 141 ALR 640 and Australian Competition and Consumer Commission v Colgate-Palmolive Pty Ltd (2002) ATPR 41-880; [2002] FCA 619, hold that I should not depart from the penalty recommended by the parties unless it is clearly out of bounds”. He went on to criticize the proposed penalty as “low” and said that: “Left uninstructed I would have imposed a higher penalty, but not substantially different from that suggested”, although he added: “If this penalty is insufficient, parliament should increase the maximum”, suggesting that it may require review.

[160] See, eg, J. Mc Cullough, “One law for rich, another for richer”, The Courier Mail, 30-31 July 2005, p 27. Mc Cullough wrote:“[H]ere is Steve Vizard, clearly an insider abusing a position of trust, potentially many times - not just once - and he gets a slap on the wrist.”

[161] See discussion above n 89.

[162] Australian Securities and Investments Commission v Macdonald and Others (No 11) (2009) 256 ALR 199; 71 ACSR 368; [2009] NSWSC 287; BC20090303649; and Australian Securities and Investments Commission v Macdonald and Others (No 12) [2009] NSWSC 714; BC200907531.

[163] See ASIC, “James Hardie Group civil action”, Media Release 08-201, 5 September 2008. Interestingly, it should be noted that, in addition, to announcing that it would not bringing any criminal proceedings against former James Hardie directors or executives, ASIC announced that it would discontinue its indemnity claim, which was part of the civil action and which sought an order requiring JHINV to execute a deed of indemnity up to a maximum of $1.9 billion, or such amount as James Hardie Industries Limited (JHIL) or its directors considered necessary to ensure that JHIL remains solvent, for example, as a consequence of incurring liabilities in regard to asbestos related claims. In this media release, ASIC stated that the “need for that claim has been superseded by the Final Funding Agreement becoming fully operational”, explaining that when it commenced the civil penalty proceedings in February 2007, that it had indicated to the market that if the conditions precedent to the Final Funding Agreement were satisfied which it believed at that time have been met, that it would not pursue the indemnity claim against JHINV. But note discussion at n 165.

[164] The under-funding by this amount was one of the findings of the ‘Jackson report’, which is discussed, above n 45.

[165] See M. Jacobs, “Civil case only for ex-Hardie people”, The Weekend AFR, 6-7 September 2008, p 2 (emphasis added). But note recent developments, where James Hardie is now claiming that the financial crisis and downturn in the housing market and construction industry have affected its operating cash flow position so that it may not be able to meet its obligations to fund future claims. In fact, James Hardie did not make a payment in 2009 and it seems that it will also not make a payment in 2010. Further, it has been reported that the company would be seeking a government bail-out of about $200 million to enable it to meet its obligations: see A. Grigg and M. Skulley, ‘Hardie fund seeks $200m help’, AFR, 18 August 2009, p 3.

[166] In reality, ASIC does not act alone in major matters: see earlier discussion, n 117. Besides ASIC and the DPP, the Oil-for-food Taskforce is also investigating the issuing of criminal proceedings in this matter. The Australian Federal Police which is part of the taskforce, however, has recently dropped its investigation, but ASIC’s criminal investigation is continuing: see J. Eyers, ‘AFP drops inquiry into AWB officers’, The Weekend AFR, 29-30 August 2009, p 7.

[167] Westpoint, which raised funds for property development projects offering high returns to unsophisticated investors, collapsed in February 2006 owing about $300 million to about 4,000 investors.

[168] Administrators were appointed on 23 March 2007 after the Fincorp group of companies, which specialised in property development and investments and which raised funds from the public to carry out these activities through ‘first ranking notes’(First ranking notes were notes issued by Fincorp secured over its assets by a floating charge) and ‘unsecured notes’ (Unsecured notes were issued by Fincorp but not backed by any charge or other security) collapsed, owing over $200 million to note holders. There were about 8,000 investors in Fincorp in first ranking notes and unsecured notes.

[169] ACR, which was placed into voluntary administration on 28 May 2007, was a property development financier that used a similar business model to that of Fincorp, raising money from the public through “Deposit Notes”. Deposit Notes are unsecured notes issued by ACR, the repayment of principal and interest of which rank behind repayment of secured debt by ACR and equally with other unsecured loans owed by ACR. ACR had issued approximately $330 million of Deposit Notes to about 7,000 investors.

[170] Opes Prime collapsed in April 2008.

[171] See, eg, R. Harley, “Collapse! Why more investors are taking the fall: Regulators are under pressure as more innocent investors get burned”, The Weekend AFR, 2-3 June 2007, pp 1, 21-23.

[172] See, eg, M. Drummond, “Gentler ASIC steady as he goes’, AFR, 11 May 2007, p 81.

[173] See ASIC, Annual Report 2007- 2008, p 5, for the results of that stakeholder survey. The full survey results are available on the ASIC website, www.asic.gov.au/strategicreview (Accessed 10 July 2009).

[174] ASIC’s strategic review and restructure are discussed below, nn 194 – 198.

[175] This expression is used by Ayres and Braithwaite, Responsive Regulation, above n 22, p 44.

[176] See ibid, pp 44 - 47.

[177] Ibid, p 44. Ayres and Braithwaite explain that they are not interested in how this is accomplished in terms of the genetic endowments, rational calculation, or human training of the dog, but rather, they are interested in the strategic effects through which it is accomplished.

[178] Ibid.

[179] See Hawkins, Environment and Enforcement, above n 25.

[180] See Ayres and Braithwaite, Responsive Regulation, above n 22, p 45. Ayres and Braithwaite refer to the costs of managing such an appearance, including in backsliding and cross-negotiation to extricate the agency from the risk of an appeal or an unsuccessful prosecution. They also raise the problem of whether a regulatory agency could sustain such a fragile image of invincibility in a more litigious business regulatory culture, such as in the United States.

[181] But note the problems associated with the ASIC Act, s 19, discussed above nn 146 – 148 and 151, that bedevilled ASIC’s ability to bring a criminal case against Vizard. Additionally, ASIC’s investigation and enforcement powers are narrower than some of its foreign counterparts, such as the SEC, where there is arguably a case for its powers to be expanded to achieve improved enforcement action: see T. Middleton, “ASIC’s investigation and enforcement powers-current issues and suggested reforms” (2004) 22 C & S LJ 503.

[182] See Ayres and Braithwaite, Responsive Regulation, above n 22, p 46.

[183] Even though ASIC commenced civil penalty proceedings in December 2001, only proceedings against two of the defendants namely, Keeling and Greaves have been finalised. The proceedings against Rich and Silbermann are yet to be concluded. Proceedings against these defendants have been the subject of many procedural challenges, including a successful appeal to the High Court in ASIC v Rich [2004] HCA 42; (2004) 220 CLR 129; 209 ALR 271. For a detailed discussion of these proceedings: see the author’s previous work, eg, Comino, “The enforcement record of ASIC”, above n 86, pp 205- 208.

[184] See, eg, J. Collett, “Human cost of ASIC failures”, The Sydney Morning Herald, 6 June 2007, p 8; and P. Manning, “Danger do not enter”, AFR, 21 July 2007.

[185] See later discussion at n 193.

[186] See also Dellit and Fisse, above n 18, p 593.

[187] Ibid, pp 593- 594. This approach departs from the traditional rule-bound ‘command and control’ conception of legislation.

[188] Ibid, pp 595- 596.

[189] Ibid, p 36.

[190] See also ALRC, Background Paper 7, “Review of civil and administrative penalties in federal jurisdiction”, above n 40, p 10.

[191] Ibid, citing F. Haines, Corporate Regulation: Beyond Punish or Persuade, Clarendon Press, Oxford, 1997, p 219.

[192] Ibid, citing C. Parker, The State of Regulatory Compliance: Issues, Trends and Challenges, PUMA/REG (99) 3 Report prepared for the OECD Public Management Committee, p 51.

[193] See, eg, The Editorial, “Fincorp shows ASIC needs more intelligence”, The Weekend AFR, 31 March-1 April 2007, p 62 (emphasis added). Westpoint investors were offered a “fixed” return of 6 percentage points above bank deposit rates, a margin that should have reminded them of the old saying that ‘if something sounds too good to be true, it usually is’, while Fincorp was offering up to 8.5per cent on its current debenture issue and up to 10 per cent on past issues to its investors. See also the results of the stakeholder survey discussed above, n 173, for evidence of this point.

[194] See ASIC, “ASIC announces executive appointments”, Media Release 08-191, 22 August 2008.

[195] See ibid, for details of the new structure and appointments, which became effective on 1 September 2008. ASIC’s new ‘financial economy’ structure is made up of twelve stakeholder teams, and eight deterrence (enforcement) teams. The stakeholder teams include accountants and auditors; insolvency practitioners and liquidators; corporations; market participants; investment managers; super funds; and deposit-takers, credit and insurance providers, while the new deterrence teams have been formed “to bring sharper focus to the investigation and prosecution of serious misconduct”. Each team is headed by a Senior Executive Leader. The introduction of Senior Executive Leaders replaces two previous levels of senior management by combining Executive Directors and Directors into one level. Senior Executive Leaders also head ASIC’s new ‘real economy’ teams. In addition, ASIC has created a new role of Chief Legal Officer (CLO), which is akin to Corporate General Counsel of large companies, who reports directly to the Commission. The CLO also leads ASIC’s new team of Special Counsel, and contributes to legal professional development for the whole of ASIC. The role of Special Counsel is to provide legal, strategic and other input into major cases and to assist the deterrence teams. Concerning recruitment in regard to the twenty-five positions set out in this media release, the appointments made by ASIC involved internal promotions (sixteen) and external recruiting (nine). See also J. Cooper, ASIC hot topics, an edited version of a presentation made to the Institute of Actuaries of Australia/Finsia, Business Luncheon, Sydney, 17 July 2008, p 4, ASIC website (Accessed 11 November 2008). This is what the ASIC Deputy Chairman had to say about the strategic review when he posed the question: “What does it mean for the industry? - The aim is for ASIC to: better understand the markets it regulates; be more forward-looking in examining issues and assessing systemic risks; be much clearer in outlining to the market why it has chosen to intervene and the behavioural changes it is seeking; and have a clearer set of priorities (principal priorities being retail investors and insider trading, market manipulation and disclosure).” On the issue of how this would be achieved, Cooper listed that ASIC would make additional investment in market research and analysis; appoint an experienced external Advisory Panel drawn from sectors of the economy to advise ASIC’s Commission on market developments and potential systemic issues; abolish the former ‘silo’ directorates of ASIC and replace them with 18 ‘outward-focused’ stakeholder teams, eg for investment managers, investment banks, superannuation funds, financial advisers, retail investors and consumers and others; recruit more senior-level personnel from the markets; appoint more Commission members; and train up existing staff through industry secondments.

[196] But note that previous attempts by ASIC to improve its workings have not always met with success. The expansion of the Compliance directorate “to give greater emphasis to real-time regulation” in 2006, for instance, did not prevent losses from similar collapses as that of Westpoint. The Compliance directorate was expanded in the aftermath of the Westpoint collapse and criticism that ASIC could have prevented the massive losses from it if it had been more proactive: see ASIC, “Working for Australia: ASIC Annual Report 2005- 06”, Media Release 06- 378, 31 October 2006.

[197] See A. Jury, “Chanticleer- Regulator tries to reinvent itself’, AFR, 9 May 2008, p 76.

[198] See A. Midalia, “ASIC moves to boost street cred”, The Weekend AFR, 23-24 August 2008, p 7. These appointments include former ASX executive and AXE ECN Pty Limited Chief Executive Officer, Greg Yanco as head of ASIC’s market participants (stakeholder) team within its ‘financial economy’ branch and Victorian barrister, Michael Kingston, as ASIC’s CLO.

[199] See also Dellit and Fisse, above n 18, p 608.

[200] Ibid, p 583.

[201] Ibid. See, eg, McCullough, “One law for rich, another for richer”, above n 160. This article reported on the apparent injustice of ASIC’s treatment of Vizard in failing to bring criminal proceedings against him when there was evidence of deliberate and repeated dishonest conduct, whereas other defendants who were guilty of the same sort of conduct faced criminal actions.

[202] Ibid. See, eg, earlier discussion at n 159, where ASIC was criticised by the court for requesting only a five-year ban on managing companies against Vizard.

[203] Ibid, p 608.

[204] See earlier discussion at nn 150 – 152.


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