I had started on a paper looking at ASIC and the rule of law earlier in the year. Unfortunately I haven’t finished it off but a comment by Rococo Liberal inspired me to post this sample.
There is a widespread view that the Australian Securities and Investment Commission (ASIC) had a horror period at the end of 2009. ASIC lost three high-profile court cases in quick succession with damning judgements made against it. It is not at all clear that this indicates that ASIC had a horror period; if the courts are condemning the regulator’s actions then the regulated must be having an even worse time. As Matthew Stevens argued in the Australian, ‘either the Corporations Law is far too complicated to effectively enforce, or … ASIC is simply not up to the job’.
Eugene Fama and Michael Jensen argue that a good decision making process consists of four stages; initiation, ratification, implementation and monitoring. Initiation and implementation are described as being decision management and ratification and monitoring are decision control. Looking at ASIC there is little difference between decision management and decision control. There no explicit mechanism to ensure that effective control is exercised over management decisions. While the accounts of ASIC will be audited by the Auditor-General to ensure compliance with accounting conventions and annual reports will detail the activities of ASIC there is no mechanism to determine the value that ASIC adds, nor any mechanism to ensure effectiveness, and no mechanism to ensure on-going relevance.
As a government authority ASIC is required to answer questions at Senate estimates committee hearings. These hearing are held three times per year and form part of the budget process. The current ASIC chairman Tony D’Aloisio appeared before this committee on Thursday February 11, 2010. Quite understandably the committee members were somewhat concerned about the spate of court cases that ASIC had lost. These cases were actions against directors at AWB, One.Tel and Fortescue Metals. Chairman D’Aloisio made a long statement defending ASIC. His argument was to point out that litigation is adversarial, and in the face of a vigorous defence, the regulator may expect to lose cases from time to time. Overall ASIC has a high success rate and is committed to learning from its mistakes. At face value this seems quite reasonable. Yet Chairman D’Aloisio made two comments that are problematic.
ASIC is properly discharging its regulatory responsibilities, that ASIC has acted, and continues to act, responsibly in the way that it selects and runs litigation and that it approaches those cases in a focused way, with considerable due diligence.
In running those cases we comply with the Attorney-General’s model litigation rules.
There is no reason to doubt that he thinks ASIC is acting responsibly and with due diligence, or that ASIC doesn’t comply with the Attorney-General’s guidelines. Yet the outcome of the cases suggest otherwise. ASIC initiates, ratifies, implements and monitors the outcomes of the regulatory actions it undertakes. The same people make, and ratify, and implement, and monitor decisions. Where is the due diligence in that process?
Similarly, it must be the case that the Attorney-General’s model litigation rules are in need of some review. According to media reports a judge in the Victorian Supreme Court found that an action against former AWB chief executive Andrew Lindberg was an abuse of process.
He agreed it was oppressive, an abuse of process and would bring the administration of justice into disrepute “in the minds of right-thinking people”.
In the case against Andrew Forrest of Fortescue Metals, a judge of the Federal Court made the point
“It is important that allegations of dishonesty should be made only where there is a reasonable evidentiary basis for them,” Justice Gilmour said. “It is my opinion that, on the totality of the evidence available to ASIC, there was no such basis in this case.”
It is difficult to imagine that the Attorney-General’s model litigation rules promote abusive processes and don’t include the need for evidence when making allegations in a court of law.
But it must the action against the directors of the failed Telco One.Tel that is the most damaging to ASIC. That case had been running since 2001 and in November 2009, a judge of the NSW Supreme Court ‘reached the conclusion that ASIC has failed to prove any aspect of its pleaded case against either defendant’. Speaking before the Senate estimates committee Chairman D’ Aloisio made this extraordinary comment
In the OneTel case, with the vigorous defence, that vigorous defence clearly added to the length of the case.
Should the directors not have conducted a ‘vigorous defence’? As it turned out four directors of One.Tel had been pursued by ASIC, two of those directors did not conduct a vigorous defence while two did. Matthew Stevens, writing in the Australian, has summed up the situation and is worth quoting in full.
On November 18, ASIC’s civil action against One.Tel’s Jodee Rich and Mark Silbermann was sensationally dismissed by a NSW Supreme Court apparently thoroughly unimpressed by the regulator’s management of its case.
What made that decision so harmful to ASIC was that Rich and Silbermann were found to have no case to answer, even though two colleagues, Brad Keeling and John Graves, had actually pleaded guilty and sought a settlement in 2003 and 2004 respectively.
Why anyone with money enough to defend themselves would not settle with ASIC is hard to imagine. Keeling and Grave must believe they are victims of rough justice. Keeling, for example, ended up accepting liability for $92 million of compensation owed to One.Tel, paid ASIC $750,000 of costs (and his own) and ended up being banned from acting as a director for 10 years.
If anything events such as this bring the law into disrepute; not to mention ASIC. Individuals who, we now know, had no case to answer settled their disputes with ASIC and have been severely penalised. Writing in the Australian Financial Review, Bob Baxt and Alan Peckham make a basic yet important point.
Regulators should pursue parties in the courts for alleged breaches of the major provisions of the relevant legislation.
We do not support a regime under which the regulators can force parties to either pay a fine or agree to correct certain behaviour – which has not been found to be illegal by a court – if they wish to avoid court action.
This demonstrates a great inequality of legal weaponry in the regulatory process.
The problem with ASIC and the ATO and the ACCC and most government agencies whose name begins with ‘A’ is a lack of good governance. They are unaccountable because the parliament has failed to create mechanisms to enforce accountability and the parliament itself cannot, or will not, provide sufficient oversight. Of course, rather than restrain its own agents our parliamentarians prefer to restrain the private sector and wage war on banks and the like. I still like Ludwig von Mises’ point, let’s not (always) blame public servants for the failings of politicians.