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Appendix 2 - Answers to Questions on Notice
Questions asked on 13 September 2005
When was the formal
notification of the decision not to prosecute?
There was formal notification on 2 May 2005.
This view was expressly confirmed by the DPP at a liaison meeting with
senior ASIC enforcement staff on 15 June 2005 and in writing on 29 June 2005
prior to ASIC commencing its civil penalty proceeding against Mr Vizard.
(in relation to privileged advice from the DPP-should the public have a
right to see it)
Mr Lucy—My point was that I would like to take the question on notice
so that we can consider our situation.
ASIC respectfully asks that the Committee not press its request for
release of this privileged correspondence.
Advice and correspondence between ASIC and the DPP attracts both legal
and professional privilege and public interest immunity. Accordingly, there is
no public right in favour of disclosure of DPP advice.
The Committee will appreciate that it is essential that the DPP should
be able to correspond frankly and confidentially with Commonwealth law
enforcement agencies such as ASIC. The production of such correspondence, even
"in camera", would be inconsistent with the on-going need for such
frankness and confidentiality.
ASIC respectfully requests that the Committee observe its usual
circumspection in calling for material the production of which might prejudice
current or future law enforcement.
Would you take on notice and provide to the committee—if you are able
to—the dates on which any discussions between ASIC and the DPP about the use
and non-utility of section 19 were had in relation to this matter?
The issue of Greg Lay's evidence was discussed in detail between ASIC
investigators and the DPP on several occasions after ASIC referred a brief of
evidence to the DPP in November 2004.
The tenor of these discussions was that the DPP required Greg Lay to
sign a voluntary witness statement rather than attend a s19 examination and
this was the only way to progress the DPP's decision-making. The critical issue was that the s19
transcript of a witness is not admissible in evidence and while there have
always been provisions to subpoena reluctant witnesses after the laying of
charges, the DPP was and has not been willing to rely on s19 transcripts in
lieu of a signed statement in respect of the evidence of key witnesses when
making decisions to prosecute.
ASIC and the DPP specifically discussed the issue of a section 19
notice in respect to Greg Lay at a liaison meeting of senior ASIC and DPP staff
held on 15 June 2005. The substance of
that discussion concerned whether a s19 examination would assist the DPP in
resolving concerns about the credibility of Greg Lay given his refusal to
provide a statement and his request for indemnification.
The view was that a s19 would not overcome the credibility issue
created by his refusal to sign a statement.
Having provided ASIC investigators with his evidence voluntarily and on
tape, his refusal to verify the truth of those statements made his credibility
– as opposed to the means by which that evidence could be secured – the
Prior to the Vizard matter being made public, I want to know whether
you had raised any concerns about the operation of the MOU or the content of
the MOU, either with the DPP or with the relevant minister.
ASIC and the DPP had been in discussions about updating the MOU for
some months prior to the announcement of the Vizard matter.
The Vizard case itself did not raise any new issues relating to the MOU
that had not already been identified.
(in relation to the
MOU with the DPP)
Chairman, I would like to take that on notice for my own knowledge. I
do not know what Ms Redfern has responded. On the basis that what she said is
correct, which I am sure that it is, I would have no difficulty, but since the
question is directed to me I would need to satisfy myself.
Yes, the document is now public.
Could I ask you on notice, unless you have a ready answer, to take a
look at the CAMAC report, take a look at the DPP’s remarks, integrate it with
other things you know and give the committee a view as to whether there are any
areas in the law covering directors’ duties, insider trading, penalties and
even corporate governance matters which, in your opinion, could be brushed up
or improved arising out of the circumstances of this case?
ASIC does not believe the Vizard case has exposed a systemic weakness
in the enforcement of either the insider trading prohibition or breaches of
directors duties. The case highlights that credible enforcement action always
depends on at least one reliable witness being prepared to give evidence. The
DPP statement reinforces this position.
The case also highlights the difficulties and complexities involved in
investigating and prosecuting insider trading to a criminal standard. In each
case it is necessary to establish beyond a reasonable doubt a defendant
possessed inside information and the inside information was material to the
price or value of the shares and was not generally known. An additional difficulty in this case was
establishing that Vizard was the person who instigated the trading. This required evidence from Greg Lay and this
was the reason he was a critical witness.
As the Explanatory Memorandum to the Financial Services Reform Bill
2001 stated, the difficulties in proving insider trading beyond reasonable
doubt (i.e. the criminal standard of proof)
"...may result in cases not being pursued even where there has been
a breach of the provisions. This
difficulty may result in cases not being pursued even where there has been a
breach of the provisions. This is undesirable as it casts the law into
disrepute, and also threatens the integrity of financial markets...It is
therefore proposed to make the market misconduct and insider trading provisions
civil penalty provisions. The application of the civil burden of proof (balance
of probabilities) will facilitate the bringing of actions for breaches of the
provisions. The application of civil penalties is likely to act as a deterrent
to market misconduct. " (Ex. Mem. Para 2.78-2.79)
The addition of insider trading as a civil penalty obviated the need to
amend further the insider trading prohibition however the Vizard share trades
predated this amendment and hence this route was not available in the Vizard
ASIC v Petsas & Miot (2005) 23 ACLC 269, was also a case that in
the DPP's view could not have been the subject of a successful criminal
prosecution and hence the insider trading civil penalty provisions were used in
There is one possible reform issue that would alleviate the DPP's
difficulties in dealing with reluctant witnesses. An amendment to s49 of the ASIC Act to enable
ASIC to require certain witnesses to provide a statement in an admissible form
would achieve this, and is supported by the DPP. Under the ASIC Act, a s19 examination
transcript of a witness is not admissible unless the witness is dead or
absent. However, currently a witness may
choose whether to provide a statement in a criminal prosecution. Without a statement, the DPP is unable to
properly assess the evidence to make a prosecution decision, and in some
states, a committal cannot proceed.
An alternative, which is not as useful, is to allow a transcript of a
witness' examination to be admitted into evidence where the court or the rules
of procedure, such as in criminal committal proceedings, require a written
statement to be relied on as a record of the witness' evidence in chief. This
may allow the DPP to place greater reliance on s19 transcripts as a basis for
decisions to prosecute than is presently the case.
This may allow the DPP to place greater reliance on s19 transcripts as
a basis for decisions to prosecute than is presently the case.
I would not have thought that being able to tell me whether or not the
two former directors had been interviewed or not, as a matter of fact, is a
Three former directors were interviewed prior to the commencement of
ASIC's civil proceedings.
Subsequent to the decision to investigate the Telstra matter that Ms
Burke brought up, what discussions have there been with either ministers or
ministerial officers and yourself, Mr Cooper, Professor Collier or, to your
knowledge, other officers of ASIC? ...
The decision to investigate Telstra was made on Tuesday 6 September
2005 and the first part of the PJC hearing was 13 September 2005. In that time
there was no contact with Ministers or Ministerial officers by the Deputy
Chairman, Commissioner Collier any Executive Director or any person associated
with the Telstra investigation.
The ASIC Chairman had contact with Minister Brough and the Treasurer at
an FSAC dinner on the evening of 12 September at which the issue of Telstra was
not referred to be neither Minister nor Mr Lucy.
That leads in part to my next question. You referred earlier to an
example about insurance et cetera. As a consequence of this exercise, are you
able to provide the committee with a case-by-case list - but not going to names
- of the mis-selling and the disregard for the interests of clients that you
identified? Please take it on notice.
Answer: See Appendix 4 of this report
I would also like you to take on notice how many identified cases of
mis-selling or disregard of clients’ interests you have ‘settled’—cases that
have reached a successful conclusion, cases where you believed you had to take
action and a response has occurred. I would like the details, not necessarily
names but the quantum of money and the type of case. Could you take that on
Answer: See Appendix 4 of this
I would be interested in some detail of how you regulate the license
dealers in the companies under the new regime as far as your investigations are
concerned and in percentages of investigations that occur and the abnormalities
that you detect.
Answer: See Appendix 4 of this
There is some detail in this press release that I will go into next
time, but can I ask you to check something. The press release went out on 1
April. The Financial Review article on 2 April was obviously off the
back of the press release. However, one of the issues that concerns me is that
the Financial Review article of 2 April, which was based on your press
release, contains detailed information of a monetary size—specifically,
$140,000—that was not in the press release. The question is: are ASIC aware or
have they investigated whether or not a leak occurred from the organisation
that provided to the AFR that monetary detail, which was not in the
press release that was released the day before?
ASIC did not leak any information to the AFR or any other media outlet
about the prosecution of Mr Moore. After
the media release was issued, the AFR asked ASIC what ASIC alleged to be the
total of superannuation money involved in the transactions that are the subject
of the charges.
ASIC supplied that
information to the AFR.
Questions asked on 9 November 2005
Are you aware of any
ASX trading irregularities in relation to Sausage software?
In 1996 ASIC received a referral from the ASX in relation to trading
irregularities in Sausage Software shares but has not received any referral
from the ASX in relation to Sausage Software since this time. ASIC has spoken
to the ASX about trading irregularities in Sausage Software in March 2000.
During this time there were 2 price alerts generated by the ASX's market
One was for an unusual price increase. This was reviewed and assessed
by the ASX as trading within normal range. The other price alert was for a
closing price fall over a 15 day period. This was reviewed and assessed as
price returning to previous levels. No alerts for unusual volumes in relation
to trading in Sausage Software shares were generated by the ASX systems during
this period. These matters were not referred to ASIC.
How many trading
irregularities have been referred from the ASX to ASIC over:
The financial year
Of these referrals,
how many became investigations?
ASIC received the following numbers of referrals from the ASX For the
following financial years. The numbers
of these referrals that have resulted in an investigation are also listed:
Referrals Number of these
Financial year to
date: 16 5
2004/05: 73 27
2003/04: 48 36
2002/03: 53 45
There is a significant change in the proportion of referrals that
resulted in an investigation between the 2003/04 financial years and the
2004/05 financial years. This is because ASIC changed the way it treated ASX
referrals in May 2004. Prior to May 2004, ASX referrals routinely went to
ASIC's enforcement directorate to be assessed in that directorate.
It was common practise for investigations to be commenced as part of
this assessment process. In May 2004, ASIC's procedures were changed so that
the referrals were assessed in what was then ASIC's policy and markets
regulation directorate without a formal investigation being commenced. The
referrals are now assessed in ASIC's compliance directorate without a formal
investigation being commenced.
One of the reasons this change was because ASIC found that a relatively
small proportion of investigations following ASX referrals resulted in
Therefore, it was considered more efficient for referrals to be
assessed before they went to the enforcement directorate with only those that
were more likely to result in an enforcement action or matters of strategic
significance being referred to the enforcement directorate for
The enforcement directorate has not changed the number of resources it
devotes to investigating markets matters but this change has allowed it to
focus more investigative resources on matters that are more likely to result in
enforcement outcomes or have strategic significance.
ASIC believes that this change has facilitated better outcomes in the
investigation of market matters over the last 2 years.
The MOU and protocol
documentation between ASIC and the ASX, can this be made available to the
The MOU is a public
document and is available on ASIC's website.
There are no other current protocol documents between ASX and ASIC.
In relation to
insider trading, is there documentation outlining how and what you investigate
and do you determine your procedures in relation to these investigations?
ASIC does not have specific documentation that sets out procedures for
investigating insider trading but does have documentation providing procedures
in relation to the conduct of investigations generally.
However, ASIC has staff who specialise in insider trading
investigations are in the process of preparing documentation outlining various
methodologies for conducting insider trading investigations. These staff also
provide assistance to ASIC's investigation staff on the methodologies that can
be used to investigate particular insider trading investigations.
Of course, any methodology must recognise that each investigation will
be different depending on the facts and circumstances of the suspected offence
and the investigations need to be tailored accordingly.
What is the final
cost of the switching survey?
Fully loaded staff
costs including salaries, an allowance for salary on-costs, property and
overheads is $0.320.7M. Direct salary costs were $0.238.7M. Travel costs amount
What is the final
cost of the shadow shopping exercise?
ASIC's shadow shopping exercise is in progress and is yet not complete.
We therefore cannot respond to this question at this point in time. When the
exercise is complete a list of costings can be made available to the committee.
Were any accountants
included in the switching surveillance?
Some of the authorised representatives of AFSLees are accountants
and in some cases the surveillance looked beyond their conduct as authorised
representatives into their conduct as accountants outside the scope of their
One particular issue that arose
is whether proper disclosure was being made to clients about which 'hat' the
adviser was wearing, particularly when advising on SMSFs. Another issue was the
risk management procedures of AFSLees in relation to their liability when an
authorised representative acted outside the scope of their authority.
2. Three discrete surveillances were
conducted on accounting firms providing advice and administration services for
SMSFs. One is ongoing.
Super calculators –
do you take actuarial advice here about what is ok?
Yes, ASIC takes
actuarial advice in relation to superannuation calculators.
what have been the issues raised across the sector?
The suggested areas
for improvement in our report were:
Firms had remained more focused on
Sarbanes-Oxley than CLERP9;
Firm's own testing of independence systems
revealed unsatisfactory results;
All firms' partners are required to be
financially independent of clients, but firms had varying policies on
professional staff prohibitions;
Some firms took narrow and legalistic view of
independence when considering non-audit services and did not appear to consider
a reasonable person's perception test;
All firms had inadequate documentation and
varying processes for audit engagement team independence confirmation;
Firms had a wide variety of documentation
supporting decisions for approving non-audit services;
Some firms levels of attendance and completion
of independence training was inadequate; and
Firms did not clearly communicate consequences
of non compliance to staff.
Most firms did not have a central register of independence queries and
Does ASIC share the
view of the Financial Reporting Council, that Audit Independence guidelines in
Australia may be overly prescriptive?
The findings in our report were that all firms had generally adequate
systems and processes in place and we did not identify any breaches of the
We did suggest areas for improvement and our approach was to articulate
to the firms where they could improve but we were not prescriptive about how
they achieve these improvements - this is a matter for each firm to consider in
the context of its own local and global systems, structure, and resources.
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