Jun

17

False and misleading statements

Posted by

by Raymond Mah & Gan Chong Chieh 

Guilty or not guilty?

Managers and directors carry the heavy responsibility of keeping customers happy, employees productive and shareholders well rewarded. At the same time, the law imposes on them stringent compliance and reporting standards, of which any failure to comply may result in a conviction together with hefty fines or even imprisonment.

Hitting international headlines about a decade ago were allegations of reporting fraud and various convictions in the Enron and WorldCom accounting scandals.  On the local front, there have been charges for making false and misleading statements against directors from, amongst others, Satang Holdings Bhd and Transmile Group Bhd.

This article will briefly examine the charges against the directors from Satang Holdings Bhd.  We will focus on the knowledge that an accused must be proven to possess before a conviction is sustained.

The company

Satang Holdings Bhd (“Satang”) founded its business supplying aviation tools and spare parts. Subsequently, it expanded its core business to the maintenance, repair and overhaul services of safety and survival equipment and related accessories for the Royal Malaysian Air Force.

In 2008, three of Satang’s executive directors were charged for making false or misleading statements to Bursa Malaysia Securities Bhd (“Bursa”).  The accused were charged under Section 122B(b)(bb) of the Securities Industry Act 1983 (“SIA”) and Section 369(b)(B) of the Capital Market & Services Act 2007 (“CMSA”) for making false or misleading statements in respect of each of the quarters in the financial year ending 30.9.2007.

Offence under section 369 CMSA

The purpose of the CMSA (which repealed the SIA with effect from 28.9.2007) is to enhance the capital market’s regulatory framework, promote business efficacy and market integrity and strengthen investors’ protection.

Section 369(b)(B) CMSA (previously section 122B(b)(bb) of the SI Act) provides that:

“A person who knowingly authorizes or permits the making or furnishing of, any false or misleading statement or report to the Commission, a stock exchange or a recognized clearing house relating to the affairs of a listed corporation commits an offence and is liable on conviction to a fine not exceeding three million ringgit or to imprisonment for a term not exceeding ten years or to both.”

Therefore, to establish an offence under section 369(b)(B), the prosecution must prove beyond reasonable doubt each of the following essential ingredients:

(a)  that a statement or report was made to the Securities Commission or Bursa (“the said statement”);

(b)  the said statement was false or misleading; and

(c)  the accused knowingly authorized or permitted the making of the said statement.

Firstly, whether a statement or report was made to the Securities Commission or Bursa is usually an issue that is not disputed.

Secondly, to prove that the said statement was false or misleading may be less straight forward and in order to assist the court, expert witnesses may be called to give evidence on whether the said statement complies with accepted accounting standards and practices.

Thirdly, the prosecution must prove that the accused knew or had knowledge that the said statement was false or misleading.  Thus, it is a defence to show that the accused did not know that the said statement was false or misleading at the material time or that he was under a mistaken belief that the statement was not false or misleading.

Mistake of fact

It is well established in criminal law that a mistake of fact is a ground for acquittal. The Federal Court in the case of PP v Koo Cheh Yew & Anor [1980] 2 MLJ 235, a case concerning a charge for importing pianos from South Africa, held:

“Proof or lack or absence of knowledge, again on a balance or probabilities, that the goods in question are prohibited from importation (e.g. as in this case that the pianos originated from South Africa) may be grounds for acquittal as a mistake of a fact.

Even where the requirement of knowledge is not specified in the statute, a mistake of fact is a valid defence under section 79 of the Penal Code, which states:

“Nothing is an offence which is done by any person who is justified by law, or who by reason of a mistake of fact and not by reason of a mistake of law in good faith believes himself to be justified by law in doing it.”

The High Court in the case of PP v. Mohd Amin Mohd Razali & Ors [2002] 5 CLJ 281 explained that the absence of mens rea (Latin for “a guilty mind”) is a defence both under section 79 of the Penal Code and the common law:

“The learned counsels for the defence also contended that some of the accused persons were labouring under a mistake of fact which consequently negatived mens rea and this would tantamount to a complete defenceunder s. 79 of the Penal Code. Alternatively it was submitted that if a mistake of fact does not fall under s. 79 of the Penal Code it would still be a mistake of fact under the Common Law.”

The common law position on a mistake of fact was explained by the Australian High Court in the case of R v. Turnbull [1944] NSW SR 108:

“The general rule as to mens rea is clear and plain. It is a well established rule of the common law that an act is not criminal unless it is the product of a guilty mind. Thus, mens rea has two elements: (1) a mind; (2) which is guilty. The first is always essential… Assuming his mind to be sufficiently normal for him to be capable of criminal responsibility, it is also necessary at common law for the prosecution to prove that he knew that he was doing the criminal actwhich is charged against him, that is, that he knew all the facts constituting the ingredients necessary to make the act criminal were involved in what he was doing.”

The verdict

The trial of the three Satang directors commenced in October 2009.  Upon the close of the prosecution’s case in February 2010, the court accepted the defendants’ submission that there was no case to answer.  All three accused were acquitted and discharged.

It appears that the court was not prepared to accept the evidence of the prosecution witnesses on the knowledge of the accused.  The court was not satisfied that the accused knew or had knowledge that the said statements were false.

The prosecution relied heavily on the evidence of two key witnesses to prove that the statements were false and that the accused had knowledge of the falsity.  Interestingly, these two witnesses were Satang’s former finance director and finance manager, both of whom were qualified accountants.  According to their evidence, they acted on the instructions of the accused to inflate the sales figures for submission to Bursa.

During cross-examination, the former finance director and finance manager were confronted with the accused’s defence that it was them who had increased the sales figures and had led the accused to believe that the adjustments were acceptable by accounting standards.  It was argued for the accused that even if the statements were false, the accused trusted and believed that the statements to Bursa were in order.

In evaluating their credibility, it was significant that the prosecution witnesses were in fact accomplices. Further, they gave conflicting evidence of what transpired in the preparation of the statements and the finance committee meetings. This led to a reasonable doubt in the prosecutions’ case.

Conclusion

As with the accused in the Satang case, many managers and directors take for granted that the accounts and statements placed in front of them at board meetings for approval are true, fair and in accordance with accounting standards.  However, that is not always the case.

While proving an intention to defraud or knowledge of falsity is not an easy task for the prosecution, defending criminal charges is burdensome, stressful and costly.  To avoid such situations all together, managers and directors must always understand, scrutinise and query the accounts, statements and reports that they approve and satisfy themselves that all is in order.

Tags: , , ,

Category: Judicial Review, Tort Law

Comments are closed.