The restriction of criminal liability for false disclosure in the Financial Markets Conduct Act to deliberate dishonesty or recklessness was a key factor in the Supreme Court’s decision to set aside the home detention sentences against the “Lombard Four”.
The convictions stand, however, as the Court declined to hear an appeal by the former directors to have them overturned.
Chapman Tripp has maintained from the outset that criminal proceedings would probably not have been laid had the Financial Markets Conduct Act (FMCA) been in place at the time the breaches occurred. See Pending law change may have saved Lombard directors.
We consider it appropriate that the Court took into consideration the impending law change, which will come into effect on 1 December this year.
Key to it adopting this approach was that the Court of Appeal, although it sentenced the men to home detention, had upheld the High Court’s finding that the directors had acted honestly and were culpable only of misjudgement.
“It is not easy to think of cases from any area of the criminal law in which imprisonment has been seen as an appropriate response to offending where culpability arises out of a misjudgement by people who took their responsibilities seriously and where the consequences have been economic and have not involved physical injury or death.”
In light of this, the Supreme Court found that “the scope for applying deterrence principles in the present context [i.e. the FMCA] is problematic”.
In our view, it would have been good had the Court also granted leave on the question of conviction – even if only so that Ted Thomas’s contention that a miscarriage of justicehad occurred could be determined.
Extent of loss
The Supreme Court also considered that the losses sustained by investors may have been overstated by the Court of Appeal as much of the money which was invested after 24 December 2007 (at which stage Lombard was in serious trouble) was in fact reinvested.
Had a prospectus either not been issued or been issued with the level of risk correctly identified, receivership would likely “have soon followed”. It was therefore far from clear that those who had reinvested after 24 December 2007 (a total of $1.7 million) had suffered significant loss by comparison with other finance company collapses.
Is the worst of the hangover now past?
A message to boardrooms from the experience of the Lombard directors has been that safety lies in conservatism at the expense of innovation and enterprise.
Lombard is troubling because the directors seem on the face of it to have been taking the issues facing the company seriously and to have taken a number of steps to address them – yet (until yesterday) they got a custodial sentence.
This object lesson in directors’ exposure when things go wrong has led to increased costs and frictions in the due diligence procedures for securities offerings as boards seek – quite rationally - to inoculate themselves from risk.
By restricting criminal sanctions to offences involving an element of fault or deliberate recklessness, the FMCA should help to unwind this debilitating effect and to restore a more healthy balance between accountability and dynamism.
The Supreme Court’s decision to remove the custodial sentences in anticipation of the FMCA is an encouraging step in that direction.