Most Read Contributor in New Zealand, September 2016
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
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
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 justice1 had occurred could be
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
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