R v Braithwaite [2012] NZHC 2412 (18 September 2012)

Last Updated: 18 September 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CRI 2008-004-020412 [2012] NZHC 2412

THE CROWN

v

CAROL ANNE BRAITHWAITE

Hearing: 18 September 2012

Appearances: J Dixon and S Symon for Crown

A Arman for Prisoner

Judgment: 18 September 2012

_{SENTENCING NOTES OF ANDREWS J}

Solicitors/Counsel:

Meredith Connell, PO Box 2213, Shortland Street, Auckland 1140 –

[e-mail], [e-mail]

A Arman, PO Box 17132, Greenlane, Auckland 1546 [e-mail]

Copy to:

Duff Legal Limited, PO Box 74532, Greenlane, Auckland 1546 [e-mail]

R V BRAITHWAITE HC AK CRI 2008-004-020412 [18 September 2012]

Charges

[1] Ms Braithwaite, you appear for sentencing today having been convicted on

27 July 2012 following a trial by jury on a charge that you distributed a registered prospectus which contained untrue statements. The maximum sentence for that offence is imprisonment for five years.

Relevant Facts

[2] I set out the facts briefly. You, your husband Mr Ludlow, and Mr Banbrook were directors of National Finance 2000 Limited (I will refer to that just as National Finance). You were described in the prospectus distributed for investment as having a wide range of skills which equipped you very well for your directorship. Your relationship to Mr Ludlow was not disclosed.

[3] National Finance was in the business of offering finance to people buying cars from licensed motor vehicle dealers. The majority of the loans were made to people who bought second-hand vehicles from companies controlled by Mr Ludlow, in the Payless Cars Group. National Finance also provided business loans to motor vehicle dealers – in particular dealers in the Payless Cars group.

[4] Members of the public invested in debenture stock and subordinated unsecured notes in National Finance, on the basis of National Finance’s registered prospectus issued on 22 September 2005, and the financial statements for 30 March

2005 which were contained in the prospectus. You accepted in an admission of facts that you signed the prospectus. You also admitted that the untrue statements were material (that is, significant) to investors’ decisions whether to invest in the company. About $2.5 million was invested in National Finance after the prospectus was distributed.

[5] The charge against you contained the particulars of ten untrue statements in the prospectus. For convenience, I set these out in three groups. First, there were untrue statements concerning related party transactions and lending. These misstated the number, the size, and the terms on which National Finance had made loans to

related parties, in particular a series of interest-free and unsecured loans to you and Mr Ludlow to purchase apartments in Fiji, and to members of your family for other business interests. The total related party lending was $3.39 million as at 30 March

2005.

[6] Secondly, the untrue statements grossly underestimated bad debts. On receivership, it was determined that the total provision for bad debts (whether debts of car buyers or dealers) of just under $900,000 was completely inadequate. For car buyers, further provision of about $860,000 should have been made in the March

2005 financial statements: that is, the provision was about half what it should have been. For dealer loans the inadequacy was even more stark. The provision was just over $15,000. It should have been more than $1 million.

[7] The third group of untrue statements concerned the security held by National Finance for its lending. The prospectus stated that National Finance had not repossessed vehicles, when in fact it had, and it stated that it held security over loans, when in fact it did not.

[8] You were a director of National Finance. You failed to take even basic steps to ensure that the information given in the prospectus and extension certificate was true. Investors were therefore misled to the risks of investing in National Finance. They were exposed to a greater risk that they were entitled to expect from what they were told in the prospectus. It is fair to say that prudent and properly informed investors would be unlikely to have invested in National Finance.

[9] National Finance was put into receivership on 9 May 2006. At that time, there were just over 2000 investors, with investments totalling around $24.8 million. Since then, secured debenture holders have been repaid approximately half of their investment, but no interest. Unsecured Note holders have received nothing.

Victim impact statements

[10] I have read victim impact statements from three investors, and one from a representative of the trustee company. The investors all spoke of their financial

losses, and the resulting struggles they have gone through financially, mentally, and emotionally. Those three are obviously a tiny example. The trustee talks of having received numerous letters and phone calls from investors who suffered financial loss. National Finance had just over 2000 investors, whose average investment was just over $12,500. As the trustee representative says, the debenture holders and note holders were typically retirees and they have now lost a significant part of their retirement income.

Pre-sentence report

[11] I turn now to consider the pre-sentence report. You are now in your early

50s. You have three adult children from your first marriage and two young sons from your marriage with Mr Ludlow. The pre-sentence report notes that one of your young sons suffers from autism. You are currently receiving a domestic purposes benefit.

[12] The report writer recorded that throughout your interview, you were adamant that you had committed no offence. You said that your husband needed three directors for the finance company he wanted to start, and you agreed to be one of them, despite having no previous business experience. You said that while the offending was taking place you were at home with the two very young children. You sat in on meetings, and always had the impression that everything was all right, and you said that information was withheld from you until it was too late. You also said, I note from your evidence in Court, that you relied on other directors: that is on Mr Ludlow and Mr Banbrook, considering that they knew much more about everything than you did, and you also relied on the fact that there was a trustee involved. Those matters may go some way to explaining your offending, but as the jury found, it does not excuse it.

[13] You said you were devastated at the effect of the offending on you, but in your pre-sentence interview you did not express any concern for the investors – the victims of the offending. However, because of the nature of the offending, and your age, the report writer assessed the risk of your further offending as being low.

[14] I have read carefully the letter annexed to Mr Arman’s submissions. In that letter you do express concerns for those who lost money in National Finance. You say that you knew you didn’t know anything about looking after investor funds, but you let your husband, and the others, run everything. You say in your letter that you cannot begin to express how sorry you are to the investors. You note that you, too, have now lost everything – your home, your savings, and your reputation.

Sentencing process

[15] The first step in sentencing you is to establish what is referred to as the starting point. The starting point is the appropriate sentence for the offence on which you have been convicted, before taking into account any aggravating or mitigating factors which relate either to the offence or to you, personally, which would require me to make an adjustment to the starting point, either to increase it or to decrease it, so as to reach the appropriate sentence.

[16] When I sentence you I have to take into account the purposes and principles of sentencing. As to the purposes of sentencing, I have to hold you accountable – what that means is that I must make you responsible for your offending. I have to consider deterrence – in other words, I have to ensure that the sentence will deter both you and anyone else who might be considering similar offending, from in fact offending in this manner. I also have to consider protection of the community. It is also important to denounce your offending – what that means is to tell you, and anyone else who may be minded to offend in this way, that your offending is unacceptable in our society. Further, to the extent possible, I also have to provide for the interests of the victims of your offending and at the same time, the purpose of sentencing any offender is to help the offender to get back into the community and to be a useful member of it.

[17] In your case the relevant principles of sentencing that I take into account, are the gravity of your offending, including your responsibility in it; the seriousness of your offending in comparison with other similar offending; and I must take into account the general desirability of maintaining consistency in appropriate sentencing levels. I am directed to impose the least restrictive outcome that is appropriate in the

circumstances, and I must take into account any particular circumstances relating to you that mean that any particular sentence would be disproportionately severe.

[18] It is desirable to keep offenders in the community as far as that is practicable with regard to the safety of the community. However, the Court can impose a sentence of imprisonment if that is necessary in order to achieve the purposes of sentencing that are relevant to your case.

Features of offending

[19] I come then to the starting point. In considering what the starting point should be, I consider the features of your offending, and the starting points adopted in similar cases.

[20] A very significant factor, but by no means the only one, in assessing the starting point, is the extent of the loss that has occurred. Here, the net loss to investors was in the order of $15 million (that is, about $12 million for secured debenture holders and $3 million for holders of unsecured notes), and that is exclusive of interest. With interest, of course, the loss is far greater. Also, as is shown by the victim impact statements, the loss extended to significant mental and emotional harm.

[21] Another factor that was submitted in Mr Symon’s written submissions for the Crown, was that your offending involved a breach of trust on two levels. First, that you were in breach of your obligations as a director of National Finance to report breaches of the trust deed to the trustee, and failed to do so; and secondly, that you were in breach of your duty to the investors, who relied on the prospectus when deciding to invest in National Finance. I consider that those breaches are inherent in the nature of the offence, and do not need to be considered as an aggravating feature of your offending.

[22] Mr Symon, in his written submissions, also submitted that the victims of your offending were particularly vulnerable, as a large number of them were retired and elderly, and were relying on the interest income for their retirement. Again, I do not

intend to take this into account as a particularly aggravating feature of your offending. It has not been regarded as such in sentencing in other finance companies and, unfortunately, and very sadly for those involved, it is often the case that the victims of this type of offending are people saving for their retirement, who are relatively unsophisticated investors.

[23] Mr Symon also submitted that offending of this sort by directors of finance companies undermines investor confidence in general, not only as to the integrity and consumer confidence in the particular market sector of non-bank debt securities. I accept that the offending may have the effect of undermining confidence in that market sector but I consider that that is also subsumed in considering the extent of the harm caused. I accept the Crown’s submission that the offending continues for the entire period that the prospectus is in effect, and that is because investors continued to invest on the basis of that prospectus. But that is also the case with other prosecutions relating to finance company prospectuses, and can also be considered as part of the extent of the loss caused.

[24] As you heard today in Mr Symon’s oral submissions, the Crown submits that you were grossly negligent. Mr Symon submits that you were on notice to be aware and alert, and to check for problems with National Finance, and you were on notice because of a number of matters. Those included the failure of Mr Ludlow’s previous finance company, which was National Finance Ltd, and by the nature of National Finance’s lending (which was to car buyers who were at high risk of defaulting), and by earlier breaches of the trust deed in 2000 and 2003. A further matter that was submitted as being one that should have put you on alert was the fact that, as a director you were required to, and did, sign directors’ reports to the trustee. Each time you did that you confirmed, with your signature, that you had made “due enquiry” as to the matters on which you were reporting. Mr Symon submitted that you failed to look, you failed to ask any questions, you sought no information about what you were doing. He submitted that if you had looked, if you had asked, if you had considered anything that you were dealing with when you were signing those documents and signing the prospectus, you would have known about the untrue statements. You would immediately have recognised, he said, that the statements were not true.

[25] Mr Arman submitted on your behalf that there are two mitigating factors of your offending: the first was your limited knowledge of the company’s financial position and your lack of involvement in management functions; and the second was what he described as the secretive manner in which Mr Ludlow dealt with National Finance’s affairs. He submitted that you were not grossly negligent: he characterised your offending rather as being a serious error of judgment.

[26] I do not accept the first, that is, your limited knowledge of the company’s position and your lack of involvement in management, as being a mitigating factor. As a director of the company it was your responsibility to know the financial position of the company, at least in general terms. Without that knowledge there was simply no way you could properly carry out your obligations. Nor is not being involved in management any excuse or mitigation. You were still required to know what the company was doing, how it was doing it, and whether it was providing investors with truthful information. Those same considerations also mean that I cannot accept that Mr Ludlow’s conduct can be a mitigating factor.

Comparable cases

[27] Mr Symon referred me to the starting point adopted for Mr Ludlow. I consider Mr Ludlow’s sentencing to be of limited assistance, as he was sentenced on other charges as well as the charges you are facing. The starting point adopted for his sentencing on these charges was four years imprisonment.

[28] I consider it is more useful to refer to the starting points adopted in other sentencings involving similar offending. I will refer, in particular, to the starting points and sentences in the Nathans Finance cases, for Bridgecorp, and the Lombard Finance.

[29] First, Nathans Finance. Nathans was put into receivership in August 2007. The loss to approximately 7000 secured debenture holders was in the order of $168 million. The offer documents contained untrue statements about related party loans, bad debts, liquidity, and the way in which Nathans carried out credit assessment and managed loans. The amount invested after the offer document was distributed was

approximately $25 million. Starting points for sentencing the four directors ranged from two years nine months to three years four months imprisonment.[1]

[30] Secondly, Bridgecorp. The charges against the directors of Bridgecorp related to untrue statements in offer documents distributed between December 2006 and June/July 2007. The untrue statements were in relation to related party lending, they misrepresented Bridgecorp’s lending policies and practices, they misrepresented Bridgecorp’s record as to making interest payments, and misrepresented Bridgecorp’s financial position. About $119 million was invested after the offer documents were distributed, and when Bridgecorp went into receivership in July

2007 it owed more than $487 million, to more than 14,000 debenture holders and capital note holders. The starting points for sentencing the three directors other than Mr Petricevic were either three years three months, or three years imprisonment.[2]

[31] I comment at this point that while the extent of the loss to investors ranges widely over the finance companies I have referred to, and that is dependent on the size of the finance company itself, the nature of the offending is, I consider, very similar between Nathans Finance, Bridgecorp, and National Finance.

[32] Finally, I refer to Lombard Finance. The four directors of Lombard Finance were sentenced on charges relating to untrue statements in offer documents issued in December 2007. In those statements the directors expressed confidence that Lombard had sufficient liquidity to meet its obligations when in fact the directors had serious and constant concerns about the company’s financial position. About

$10.45 million was invested after the offer documents were distributed. When Lombard went into receivership in April 2008 it owed $111 million to about 3,600 unsecured investors. The Judge in that case, considered that the Lombard directors were substantially less culpable than the directors in Nathans Finance and Bridgecorp. He said that the Lombard directors had given personal care and

_{attention to the offer documents, and had made a misjudgement about the extent of}

Lombard’s liquidity concerns. The starting point for the Lombard directors’

sentencing was a combination of community detention and community work.[3]

Assessment of starting point

[33] For the Crown, Mr Symon submitted that the starting point for your offending should be three years imprisonment, and that but for the smaller scale of losses from National Finance’s failure, a higher starting point would have been sought. On your behalf, Mr Arman submitted that the starting point should be between two and two and a half years imprisonment.

[34] In setting a starting point, I take into account the nature of the untrue statements made, the nature of the untrue statements, the length of time the prospectus was in effect, the amount invested after the prospectus was distributed, the total amount lost by investors, and your own conduct.

[35] As in the Nathans Finance and Bridgecorp cases, the untrue statements interest he National Finance prospectus were as to a range of matters. In Lombard, by contrast, they related to one issue. Also, unlike the directors in Lombard, you did not turn your mind to, and you did not exercise any independent judgment as to, whether what was in the prospectus was true; you simply relied on what others told you. You largely abdicated your responsibilities as a director and as I have said earlier, that abdication does not excuse you. That said, as I have noted earlier, it does not appear from the victim impact statements provided to the Court that any of the investors placed any particular reliance on your particular skills and training when deciding to invest in National Finance.

[36] Having had regard to the features of your offending, and the cases I have referred to, I have concluded that the appropriate starting point for your sentencing

_{two years and eight months imprisonment.}

[37] I now turn to consider whether any adjustments should be made to the starting point. It is often the case in sentencing that some credit will be given for the absence of relevant previous convictions. That is, credit is given for a previous good character. Mr Symon submitted that if credit is given at all here, it should be only nominal because you and your co-offenders relied on your good characters to persuade investors in put money into National Finance. Mr Symon referred to the biographical comments in the prospectus, which referred to what was described as your “wide range of skills which equipped you very well” for your directorship. In some sentencings in this sort of case, good character has been treated as a neutral

factor – that is, leading to neither an increase nor a discount to the starting point.[4] In

other cases, a discount has been given.[5] I accept that there will have been some implicit reliance on your character, but there does not appear to have been any specific reliance on you. I am prepared to give you the benefit of a discount for your previous good character.

[38] I turn now to the question of remorse. Mr Symon submitted that you have shown no genuine remorse. Mr Arman submitted that you have, that you have truly acknowledged that you failed in your duty as a director. I note that as late as at the stage of your interview for the pre-sentence report you were adamant that you had not committed any offence. I have, however, as I said, read carefully the letter that you wrote to the Court and I intend also therefore to apply a modest discount to take account of the remorse that is expressed in that letter.

[39] Further, I intend to apply a discount to take into account your particular family circumstances and they are, in particular, that you are the sole care-giver for your autistic child. I note also Mr Arman’s submission that you, too, have lost money from an investment in National Finance.

[40] In the end result I have concluded that the starting point should be reduced by eight months which leads to a final adjusted sentence of two years imprisonment.

[41] Because I have concluded that a sentence of two years imprisonment is appropriate, I turn to consider whether that sentence should be imposed, or whether I should consider a sentence of home detention, or home detention combined with some other sentence. Before I go on, I stress that home detention should not, ever, be considered an easy option. It is the second most serious sentence after imprisonment. It is not imposed lightly, and it is not to be taken lightly. It involves a serious restriction on the activities of the person serving the sentence.

[42] Mr Davidson and Mr Steigrad, directors of Bridgecorp, who had entered guilty pleas, each received sentences of home detention, together with sentences community work. They were each also ordered to pay a substantial amount in reparation. Mr Young, a director of Nathans Finance, also received a sentence of home detention with community work, and was ordered to pay reparation. He did not have the benefit of a discount for a guilty plea. The directors of Lombard, whose offending I consider to be less serious than yours, and have been convicted after trial, were all ordered to complete either 300 or 400 hours community work. The directors who were ordered to complete 300 hours community work were also ordered to pay reparation.

[43] I accept that you are not in a position to make any payment in reparation. In your case, I have concluded that the appropriate sentence is a combination of home detention and community work. That will provide the appropriate detention, but also some reparation to the community for the loss that the community has suffered. I consider that such a sentence will adequately meet the purposes of deterrence and denunciation, and would be the least restrictive sentence that is appropriate in the circumstances.

Sentence

[44] Please stand

[45] Ms Braithwaite, on the charge of distributing a registered prospectus which included untrue statements you are sentenced to ten months home detention, and to complete 300 hours of community work.

[46] I direct as follows:

(a) Once you are released from this Court you are to travel direct to your residence at 27 Queens Parade Devonport and await the arrival of the monitoring company representative and the probation officer.

(b) You are to reside at that address for the duration of the sentence of home detention.

(c) You are to comply with the requirements of the electronic monitoring, as directed by the probation officer.

(d) You are to abstain from the possession and/or consumption of alcohol and illicit drugs throughout the sentence of home detention.

(e) You are to be assessed for, had if deemed suitable, undertake any programme or counselling to reduce the likelihood of further offending, as directed by the probation officer.

(f) You are to undertake the 300 hours of community work, as directed by the probation officer.

_{[47] Please stand down.}

Andrews J

---

[1] See R v Hotchin HC Auckland CRI 2009-092-20927, 4 March 2011; and R v Moses HC Auckland CRI 2009-004-1388, 2 September 2011 (Sentencing of Moses, Doolan, and Young).

[2] See R v Davidson HC Auckland CRI 2008-004-29179, 7 October 2011, R v Urwin [2012] NZHC

715, and R v Roest [2012] NZHC 1086 (sentencing of Mr Steigrad).

[3] See R v Graham [2012] NZHC 575 (Sentencing of Sir Douglas Graham, Mr Reeves, Mr Jeffries, and Mr Bryant.

[4] See R v Hotchin, above n1, and R v Kirk DC Auckland CRI 2009-004-24026, 21 December

_2010.

[5] See R v Moses, above n 1, and R v Davidson, above n 2.