Dishonesty hardly the best policy Regulatory Investigations

  • Date:01 Feb 2005
  • Type:CompanyDirectorMagazine
Even innocent traders can become caught up in a criminal prosecution if they don’t tell their story accurately, warns Michael Legg*

Regulatory Investigations

Dishonesty hardly the best policy

Even innocent traders can become caught up in a criminal prosecution if they don't tell their story accurately, warns Michael Legg*

American lifestyle guru Martha Stewart was convicted of making false statements and obstruction of justice during investigations into whether she had engaged in insider trading. She was sent to federal prison, but was never charged with the underlying offence of insider trading.

The investigation into Stewart arose from her sale of roughly 4000 shares in ImClone Systems on 27 December 2001. The next day the share price fell when the US Food and Drug Administration released a negative announcement about the company's key cancer drug, Erbitux.

The US Government accused Stewart of selling the ImClone shares based on insider information, and then lying to government investigators about why she sold her shares.

The allegation of insider trading arose from Stewart's friendship with ImClone CEO Samuel Waksal and because they both shared the same Merrill Lynch broker. Waksal pleaded guilty and received a seven-year jail sentence.

Stewart's defence was that she never lied and that her share sale was based upon a pre-existing arrangement to sell the shares when the price fell to $60.

The Martha Stewart trial illustrates an important distinction between two categories of crimes - ones that punish defendants for engaging in prohibited conduct, "substantive" crimes and ones that punish for any interference with the gathering of evidence during a government agency's investigation, referred to as "process" crimes, such as making false statements, perjury and obstruction of justice.

Unlike Waksal, Stewart was not charged with the substantive crime of insider trading. Rather, her criminal exposure came from the statements she made during investigations.

The US Government responded to the verdict, by saying: "When we first indicted this case, we said that it was all about lies, and as you saw in the evidence, that's what it was: lies to the FBI, lies to the Securities and Exchange Commission about very important matters".

Clearly conduct during the investigation can be as important as the conduct alleged to found the need for the investigation.

In Australia process crimes also exist but they have yet to be employed in such a high profile manner to prosecute alleged corporate crimes the way they were in the Martha Stewart trial. The success of the prosecution in the Stewart trial should put Australian business people and their advisers on notice.

In Australia federal and state legislation contains provisions that could be put to the same purpose as the process crimes Stewart was charged with. For instance, under the Crimes Act 1914 it is an offence to fabricate evidence, to conspire to defeat justice, and to attempt to obstruct, prevent, pervert, or defeat, the course of justice.

In relation to an attempt to pervert the course of justice the High Court in R v Rogerson (1992) 174 CLR 268 held that a false statement during a police investigation would not be an attempt to pervert the course of justice, as police investigations are not part of the course of justice in Australia. However, statements to police officers may still pervert the course of justice as the course of justice includes proposed as well as existing judicial proceedings.

In determining whether judicial proceedings are proposed, it is not necessary to prove that a prosecution for a particular or identifiable offence was in contemplation either by the accused or by the investigating officers. It is enough that there is evidence that an investigation into the relevant activities could lead to a prosecution for some offence.

Accordingly, dishonest statements at the investigation stage may lead to a breach of a process crime. Attempting to pervert the course of justice has a penalty of five years' imprisonment.

The ASIC Act 2001 (Cth) makes it an offence to give false information or obstruct the exercise of powers under the Act. Statements obtained during an investigation, while inadmissible in a subsequent trial for a substantive offence, are admissible in proceedings for making a false statement.

The ACCC's power to issue section 155 notices under the Trade Practices Act to obtain information contains a prohibition on furnishing information or evidence that is "false or misleading" and attracts a penalty of $2200 (20 penalty units) or 12 months imprisonment.

The lesson from the Martha Stewart case is that anyone subject to government investigation, whether it be by the ACCC, ASIC or police, needs to take it seriously and be appropriately prepared.

Even persons innocent of the underlying offence can become caught up in a criminal prosecution if they don't recount their story accurately.

Because of the complexity involved in many business transactions it is prudent to obtain legal representation before agreeing to any interview or discussion with investigators.

* Michael Legg is a solicitor with Gilbert

and Tobin in Sydney

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