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[2011] ZASCA 24
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Gardener and Another v S (253/07) [2011] ZASCA 24; 2011 (1) SACR 570 (SCA) ; 2011 (4) SA 79 (SCA) (18 March 2011)
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THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case No: 253/07
In the matter between:
PETER GRAHAM GARDENER
................................................................
First
Appellant
RODNEY MITCHELL
...........................................................................
Second
Appellant
and
THE
STATE
....................................................................................................
Respondent
Neutral citation
:
Gardener v The State
(253/07)
[2011] ZASCA 24
(18 March 2011)
Coram:
HEHER,
CACHALIA and SERITI JJA
Heard:
18 February
2011
Delivered:
18
March 2011
Updated:
Summary:
Criminal
law – fraud – prejudice – intention to prejudice –
company director intentionally and without acceptable
explanation
withholding disclosure of facts relevant to transaction in which
company interested –
a priori
case of fraud.
Criminal law –
sentence – role of public interest in balance of factors.
____________________________________________________________________________________
ORDER
On appeal from:
Western Cape High Court (Cape Town)
(Uijs AJ sitting as court of first instance):
The appeals of both
appellants against conviction are dismissed. The appeals of both
appellants against sentence are upheld. The
sentences imposed by the
Western Cape High Court are set aside and replaced by the following:
Each accused is sentenced
to seven years’ imprisonment.
_______________________________________________________________________
JUDGMENT
_____________________________________________________________________
HEHER JA (CACHALIA AND
SERITI JJA concurring):
[1] This is an appeal
from a judgment of Uijs AJ sitting in the Western Cape High Court
with leave of that court.
[2] The appellants, Mr
Gardener and Mr Mitchell, were at material times joint chief
executive officers of LeisureNet Limited, a
listed company, and
directors of LeisureNet International Limited, an offshore
subsidiary, and of its subsidiary, Healthland Germany
Limited. The
last-mentioned held half the shares in Healthland Germany GmbH, the
balance being held by a Jersey company, Dalmore
Limited.
[3] In May 1999
International purchased Dalmore’s interest in Healthland
Germany for DM 10 million. The appellants each held
a 20 per cent
interest in the business of Dalmore in Germany and received a
proportionate share of the purchase price (DM 2 million
each) in
consequence. The price was raised and paid by LeisureNet. The
appellants had not disclosed their interest in Dalmore to
LeisureNet
or International before or at the time of the sale and did not do so
subsequently. That fact only came to light in the
course of an
enquiry into the affairs of LeisureNet subsequent to its liquidation
in 2001. The appellants were charged with (inter
alia) fraud in
failing to disclose their interest in Dalmore to the board of
LeisureNet during the period about April to December
1999 (‘the
Dalmore charge’) and were duly convicted. Gardener was
sentenced to 12 years’ imprisonment (of which
4 years were
conditionally suspended). Mitchell was likewise sentenced to 12
years’ imprisonment, but, in his case, 5 years
were
conditionally suspended.
[4] The appellants
acknowledged from the outset of the trial that they had at all
material times been under a duty to disclose their
interests in
Dalmore to the LeisureNet board and, in failing to do so, had
breached that duty. In the appeal they also conceded
that their
conduct had made them guilty of contravening s 234(1) of the
Companies Act 61 of 1973, with which offence they had been
charged in
the alternative to the Dalmore charge. That concession was limited to
an admission of negligence in failing to make
the disclosure, culpa
being sufficient
mens rea
for a contravention of the section.
[5] The issues in this
appeal are:
1 Whether, in failing to
disclose their interest in Dalmore, the appellants intended to
deceive the board of LeisureNet.
2 If they did so intend-
(a) whether the
appellants possessed an intention to prejudice the company; and
(b) whether their failure
to disclose resulted in actual or potential prejudice to it.
3 If the conviction on
the charge of fraud is sustained-
(a) whether the trial
court misdirected itself in the manner in which it evaluated the
interests of society in relation to the crime;
(b) whether the trial
court erred in imposing a heavier sentence on Gardener by reason of
certain convictions for VAT fraud and
insider trading committed
during his tenure as managing director of LeisureNet (but after the
perpetration of the Dalmore fraud)
and for which he had been
convicted and sentenced before the trial commenced.
(c) whether the sentences
were, in any event, disturbingly inappropriate, thus justifying
interference by this Court.
4 If the fraud conviction
should be set aside, the appropriate sentence for a conviction for
contravening s 234(1).
[6] The
proper determination of the appellants’ intentions during the
relevant period can only be made in the context of the
evidence
concerning their own experience and conduct during the preceding five
years (‘the facts as a whole’:
S v
Ressel
1968 (4) SA 224
at 231A-D and 232A-E).
[7] Health & Racquet
Club Ltd was listed on the Johannesburg Stock Exchange on 11 April
1994. According to its prospectus the
company was ‘the market
leader in ownership and operation of fitness-based leisure clubs in
South Africa’. During 1995
its name was changed to LeisureNet
Ltd.
[8] For a number of years
before the listing the appellants had been associated in establishing
and managing fitness clubs. Gardener
was a chartered accountant and
possessed expertise in the financial aspects of running the
businesses. Mitchell’s skill lay
in the planning, setting up
and operation of the clubs.
[9] Initially the largest
shareholder in LeisureNet was a Cape Town attorney, Mr Joubert Rabie.
Both appellants held substantial
interests. Rabie withdrew at an
early stage but remained both a friend and business associate of the
appellants. The Krok family,
prominent in South African business,
obtained direct or indirect holdings in the company and apparently
influenced the appointment
of its board to the advantage of the
company. The chairman was Mr Joe Pamensky, a chartered accountant and
businessman and, formerly,
a respected administrator of South African
cricket. Also appointed was Mr Archie Aaron, a very senior and
esteemed Johannesburg
commercial attorney. A strong corporate
governance ethic was inculcated in the board members, and in
particular, as the evidence
showed, repeated calls were made on its
members to disclose their personal interests in matters arising for
discussion in the affairs
of the company.
[10] Although LeisureNet
was initially interested in expanding its interests beyond South
Africa, unfortunate experiences in England
and Holland in 1994 led
the board to assure its investors in the 1994 annual financial
statements that the company would not expand
overseas, save by way of
franchise.
[11] Early in 1995 the
appellants were approached at the offices of LeisureNet in Cape Town
by Mr Hans Moser, a former business
associate who had relocated to
Germany. He was eager to develop businesses in that country along the
lines of Health & Racquet
Clubs and enquired whether LeisureNet
would be interested in embarking on a joint venture. The appellants
explained to him that
LeisureNet would proceed only by the route of a
licence or a franchise. An oral agreement was reached in terms of
which LeisureNet
granted Moser licence rights for Germany in respect
of the Health and Racquet brand name.
[12] During the first
half of 1996 Rabie requested that the oral licence agreement be
reduced to writing, and, as a result, a 20-year
written exclusive
licence agreement for Germany was concluded on 14 May 1996 between
LeisureNet and Dalmore Ltd, in which Moser
and Rabie had an interest
through offshore entities. The agreement was signed by the first
appellant and clause 2.6 provided that:
‘
in
all of their dealings with the LICENSEE [Dalmore], the officers,
directors, employees and agents of the COMPANY [LeisureNet]
act only
in a representative capacity, not in an individual capacity, and that
this Agreement, and all business dealings between
the LICENSEE and
such individuals as a result of this Agreement, are solely between
the LICENSEE and the COMPANY’.
[13] During the second
half of 1996 Moser was again in Cape Town. He discussed the
developing business with the appellants at LeisureNet’s
premises. He explained that it needed a competent business plan to
persuade landlords and financiers to support it, a plan that
provided
a demonstrable ability to operate health clubs and to run a competent
financial corporate structure in relation to a health
club business.
He asked the appellants, whose reputations apparently carried weight
even in Germany, whether they would allow him
to use their names and
whether they would give him their personal backing in the German
operation. They agreed to do so in return
for a 20 per cent interest
(for each of them) in whatever the German business produced in due
course. This, it would appear, was
not to be a direct interest in
Dalmore through equity, but rather an undertaking by Moser to
recognise their financial stake in
the German aspects of its
business. Despite the fact that the appellants thereby acquired an
interest in LeisureNet’s licensee
with the obvious concomitant
potential for a future conflict of interest the appellants thought it
unnecessary either to inform
the LeisureNet board or seek its
approval. Their explanation was that the prospect of future expansion
of Dalmore’s interests
in Germany was so tenuous that they did
not consider it necessary to do so.
[14] During about April
1997 LeisureNet considered investing offshore by way of joint
ventures and as a result the board sent the
appellants to Australia
(in April) and Germany (in May) to investigate opportunities. Up to
that stage the appellants had not visited
Germany to assist Moser
with his franchise. According to Gardener they had done nothing other
than to lend their names to the business.
According to Mitchell they
had advised Moser in Cape Town from time to time. Both testified
that, if the franchise in Germany were
to continue, they would become
involved in operations and management in return for the interests
they had obtained in Dalmore.
[15] At an executive
committee meeting of LeisureNet on 25 June 1997 the possible
expansion of its business to Germany was discussed.
The appellants
raised the licensing agreement as a potential problem. It was then
resolved that the appellants would ‘pursue
the investigation
with regard to the cancellation of the regional licence for Germany
and the conclusion of a joint venture with
the licensee’. The
meeting requested the appellants to open negotiations to these ends.
The appellants consequently visited
Moser in Germany in June 1997
where they had discussions with him and on their return they
negotiated with Rabie representing Dalmore.
It was agreed that the
licensing agreement for Germany would be cancelled.
[16] On 1 August 1997
LeisureNet, Dalmore and Healthland Fitness Club GmbH entered into a
written agreement which the second appellant
signed on behalf of
LeisureNet. In this, ‘the first shareholders’ agreement’,
LeisureNet in essence obtained
50 per cent of the shares in GmbH, the
company through which Dalmore conducted its operations in Germany.
LeisureNet undertook
to advance on loan to Healthland Fitness Club
GmbH its funding requirements to an amount equal to the cost of
fitting out the first
five facilities (health, leisure and fitness
complexes). The agreement contained a right of first refusal in the
event of either
party wishing to transfer its shares in the company.
LeisureNet was to appoint four directors to the board and Dalmore
three. If
the appellants are to be believed it did not occur to them
that LeisureNet should be informed that it was effectively going into
partnership with its own joint chief executives and providing funds
which would be used, at least in part, to their ultimate benefit.
Gardener and Mitchell were appointed as two of LeisureNet’s
nominees to the board.
[17] During October 1997
LeisureNet approached the exchange control department of the South
African Reserve Bank for approval of
the first shareholder’s
agreement. Approval was given on 10 October 1997.
[18] From August 1997
LeisureNet, with the assistance of its auditors reconsidered its
overall structure and agreements. Upon the
advice of the auditors it
decided to split the employment of the appellants between South
Africa and its offshore interests. At
about this time, as an
incentive to the appellants, LeisureNet agreed to issue 5% of the
shares in its international subsidiary,
LeisureNet International, to
each of the appellants on the basis that such holdings would be
non-dilutable, ie the appellants would
each retain that proportion in
the shareholding of the company irrespective of the numbers of future
shares allotted.
[19] In that context the
appellants with the assistance of Investec Ltd, caused offshore
trusts and companies to be set up by Insinger
Trust (Jersey) Ltd to
house these and other interests. Although the trustees were in law
not bound to carry out the requests of
the appellants in respect of
the trust assets it appears that in practice their ‘letters of
wishes’ were honoured.
[20] During 1998, as part
of the restructuring of LeisureNet’s offshore subsidiaries:
1 LeisureNet
International Ltd was introduced as LeisureNet’s subsidiary to
hold its interests in Germany.
2 Teria Ltd, a United
Kingdom company, was interposed above GmbH as the sole shareholder of
GmbH. On 5 May 1998 its name was changed
to Healthland Germany Ltd.
3 International and
Dalmore each became 50% shareholders in Healthland Germany Ltd
consistent with the joint venture agreed between
them in August 1997.
4 To accommodate the
restructuring, the first shareholders’ agreement was replaced
by a second shareholders’ agreement
on 30 October 1998. It was
signed by Gardener on behalf of LeisureNet and International, and by
Dalmore and Healthland Germany
Limited. In this agreement the funding
obligation of LeisureNet was to be satisfied by subscribing for
preference shares in Healthland
Germany Limited ‘limited to the
fit-out costs . . . of such number of premises in aggregate not
exceeding an amount of £5,000,000.’
[21] During the first
half of 1998 the first appellant requested Rabie to record the
interests that he and the second appellant
held in the German
business of Dalmore. Rabie duly instructed the Royal Bank of Canada
Trustees Ltd, the trustees of an offshore
trust set up by Rabie which
held shares in Dalmore, on 30 June 1998 as follows:
‘
I
hereby direct that 20% of the shareholdings of the company Teria
Limited must be registered in the name of Peter Gardener and
a
further 20% in the name of Rod Mitchell as their respective nominees
upon my death. The Trustee of the trust holds the said shares
as
trustee. This should be received as my wishes accordingly’.
The evidence of Gardener
and Mitchell establishes that they discussed the request to Rabie,
perhaps before it was made and, certainly,
after the instruction was
carried out, although neither was shown the letter.
[22] During 1998
International was engaged in discussions with a rival operator in
Germany, Fitco, for the acquisition by International
of shares in
Fitco. To that end the appellants were involved in a process of due
diligence in Germany.
[23] Towards the end of
1998 a venture capital fund, Brait, discussed with the group the
possible acquisition of a portion of International’s
operations. During the same period and into the following year
another venture capital fund, Bankers Trust, approached the group
for
the possible acquisition of a portion of International’s
European operations. It became clear to the appellants that
it would
redound to the substantial advantage of LeisureNet if it were able to
acquire the whole of the shares in Healthland Germany,
principally
because that company would in consequence become much more desirable
to prospective suitors. In addition the unattractive
prospect of
Dalmore disposing of its interest to a third party, perhaps one
elsewhere in competition with International, would
be negated.
[24] At the beginning of
April 1999 representatives of Fitco, together with Moser, visited
South Africa to discuss the possible
acquisition by Fitco of
Dalmore’s interests in the German operation. The appellants
decided that LeisureNet, through International,
should acquire
Dalmore’s 50% shareholding in the German operation. In
telephone conversations with the directors of International
and
certain of LeisureNet’s directors consensus was achieved. The
second appellant then manipulated the negotiations to the
advantage
of LeisureNet. Knowing that Moser would consider a purchase price of
DM 15 million, he suggested to the Fitco representatives
that they
offer about DM 10 million, telling them that he would try to persuade
Rabie and Moser to accept such an offer. On 9 April
1999 Mitchell
received a letter from Fitco containing a proposal to acquire
Dalmore’s shares in Healthland Germany for DM
10 million. He
convinced Rabie, who acted on Moser’s behalf, to accept DM 10
million. When Rabie agreed, Mitchell informed
him that International
intended to exercise the right of pre-emption stipulated in its
favour in the second shareholders’
agreement.
[25] On 16 April 1999 an
agreement was signed in terms of which the shareholding of Dalmore in
Healthland Germany was sold to International
for DM 10 million. It
was signed by Gardener on behalf of International, Leisurenet and
Healthland Germany.
[26] At a meeting of
LeisureNet’s executive committee on 24 May 1999, the agreement
with Dalmore was discussed and at the
board meeting of 26 May 1999
the acquisition of Dalmore’s interests in Healthland Germany
was confirmed. At neither meeting
was a disclosure made of the
appellants’ interests in the acquisition. Once again the
appellants explained in evidence that
they were so concentrated on
the transaction that disclosure did not occur to them. The minutes of
the meeting of the board on
26 May recorded the following statements
which are relevant to this judgment:
‘
3.
Disclosure of Directors’ Interests:
The
meeting was informed that no further disclosures were received from
any of the directors subsequent to the previous meeting.’
And further:
‘
The
meeting on the recommendations of Exco. . . confirmed LeisureNet
International Limited’s acquisition of all Dalmore Limited’s
interests in Healthland Germany Limited with effect from 1 May 1999
for an amount of DM 10 million and the payment therefor by
the
Company issuing 7,85 million shares at 420 cents per share with
effect from 28 May 1999.’
[27] Within the following
week both appellants issued appropriate instructions to ensure that
their share of the proceeds of the
sale was paid by Dalmore directly
into the offshore accounts of their trusts.
[28] Before the
acquisition of Dalmore’s shares by International, a process of
due diligence undertaken by Bankers Trust was
already in progress.
That continued after the acquisition of the Dalmore shares. It is
clear from Mitchell’s evidence that
even before the Fitco offer
was received he and Gardener were optimistic that they would be able
to sell Healthland Germany to
Bankers Trust at an enormous price
provided International was able to obtain control of all the Dalmore
shares. The key representatives
of Bankers Trust left its employ in
the middle of 1999 and moved to AIG. After substantial negotiations
and a due diligence process
lasting most of the year, an agreement
was concluded on 21 December 1999 in terms of which AIG purchased 25%
of International for
£17 million. At that stage, too, Germany
remained a major focus of offshore development for the LeisureNet
group.
The law governing
fraud
[29] It is trite that:
‘
Fraud
consists in unlawfully making, with intent to defraud, a
misrepresentation which causes actual prejudice or which is
potentially
prejudicial to another.’
J R L Milton:
South
African Criminal Law and Procedure
, Vol. 2 (3
rd
Edition) at 702. And see
S v van den Berg
1991 (1) SACR 104(T)
at 106b.
[30] With regard to the
question whether non-disclosure is criminally fraudulent Coetzee J in
S v Burstein
1978 (4) SA 602(T)
at 604G-605B, stated the law
in this regard as follows:
‘
The
question whether non-disclosure is criminally fraudulent is not an
easy one. As pointed out by Hunt in
SA
Criminal Law and Procedure
Vol
2 at 716, silence may well constitute civil fraud without
constituting criminal fraud. The distinguishing feature lies mainly
in the presence or absence of the necessary intention to defraud.
There are very few cases of criminal non-disclosure. The most
comprehensive judgment on this topic is that of Trollip J (as he then
was) in
S
v Heller and Another
(2)
1964 (1) SA 524(W)
at 536-538, which I adopt, with respect, as an
authoritative statement of the law. For the purpose of dealing with
the facts of
the present case more conveniently, I would summarise
the requisites of this type of fraud, as discussed by the learned
Judge,
as follows:
(a)
a duty to disclose the particular fact;
(b)
a wilful breach of this duty under such circumstances as to equate
the non-disclosure with a representation of the non-existence
of that
fact;
(c)
an intention to defraud which involves
(i)
knowledge of the particular fact;
(ii)
awareness and appreciation of the existence of the duty to disclose;
(iii)
deliberate refraining from disclosure in order to deceive and induce
the representee to act to its prejudice or potential
prejudice;
(d)
actual or potential prejudice of the representee.’
See
also
S
v Heller
(2)
1964 (1) SA 524(W)
at 536F-537F;
S
v Brande and Another
1979
(3) SA 371
(D) at 381A-D;
S
v Harper and Another
1981
(2) SA 638
(D) at 677F-H.
[31]
Professor Snyman puts the required
mens
rea
thus:
‘
There
is a distinction drawn between an intention to deceive and an
intention to defraud. The former means an intention to make
somebody
believe that something which is in fact false, is true. The latter
means the intention to induce somebody to embark on
a course of
action prejudicial to herself as a result of the misrepresentation.
The former is the intention relating to the misrepresentation,
and
the latter is
the
intention relating to both the misrepresentation and the prejudice
.’
[Emphasis
provided].
Snyman
Criminal
Law
(5
ed) at 531-2;
S
v Isaacs
1968
(2) SA 187(D)
at 191C-192A;
S
v Huijzers
1988
(2) SA 503(A)
at 506I-508B.
[32]
The authorities I have cited support the view that an intention to
cause actual or potential prejudice is a necessary element
of the
crime of fraud. But it may be that proof of deceit which is
calculated (likely) in the ordinary course of things to result
in
such prejudice is sufficient without a subjective mental element.
1
The law has not
been argued before us and it is unnecessary to decide the question,
since, for reasons which will appear, the State
has, in my view,
succeeded in proving an intention to cause prejudice beyond a
reasonable doubt.
Intention to defraud
[33] The State was
required to prove beyond reasonable doubt that the appellants
withheld disclosure of their interest in Dalmore
with intent to
deceive the board of LeisureNet (and thereby to induce it to act on
the misrepresentation to its prejudice).
[34] There being no
direct insight into the minds of the appellants, the case for the
State was built on the cumulative effect of
the objective
probabilities. The contention, which was accepted by the court a quo,
was that the weight of such probabilities was
sufficient to disprove
beyond a reasonable doubt, the truth of the explanations furnished by
the appellants in evidence for their
non-disclosure throughout the
period April to December 1999. Once that finding was made an
intention to defraud followed as the
only reasonable inference.
[35] In the context of
the events which I have described, the probabilities that influence a
decision as to whether, in failing
to make disclosure, the appellants
intended to defraud the company, can be assessed by reference to the
following:
1 What had to be
disclosed, not so much as a requirement of law but rather as a matter
of pragmatism.
2 The appellant’s
knowledge of the duty and their observance of it in general.
3 Their opportunity to
disclose.
4 Whether the failure was
isolated or repeated.
5 The prominence and
importance of the subject matter requiring disclosure in the minds of
the appellants.
6 What the effects of
disclosure would have been.
7 Whether there were
reasons for withholding disclosure.
8 Whether the appellants
derived a clear benefit from non-disclosure.
9 The conduct of the
appellants in relation to the performance of their duty.
The subject matter of
the disclosure
[36] This is not as
straightforward as it might seem. Undoubtedly the primary duty of the
appellants was to inform the boards of
International and LeisureNet
before the contract for the purchase of Dalmore’s interest was
concluded and confirmed that
they each possessed a financial interest
in Dalmore and the extent of that interest: s 234(1) read with s
234(3) of the Companies
Act. But a full and proper disclosure would
also have involved details of when and under what circumstances it
was acquired. Inevitably
such a revelation would have meant that
LeisureNet’s board became aware that since acquiring the
interest the appellants
had on various occasions negotiated with
Dalmore ostensibly on behalf of LeisureNet and International and
concluded agreements
between Dalmore and those companies which also
benefited themselves. Thus both the personal embarrassment to the
appellants and
the consequences of disclosure must necessarily have
been in the forefront of the minds of both appellants as informed and
experienced
executives of LeisureNet if they had given any thought to
the duty.
The appellant’s
knowledge of their duty to disclose and the opportunities available
for disclosure
[37] The appellants
readily conceded that as directors of LeisureNet they owed a duty to
disclose situations of actual or potential
conflict of interest and
did not deny the applicability of that duty to any of their dealings
between Dalmore and the LeisureNet
group. They were both members of
the executive and ethics committees of LeisureNet. They were
conversant with the statutory requirements.
The duty was drawn to the
notice of members of the board by the chairman, Mr Pamensky, on
repeated occasions during the period
1995 to 1999. Disclosures were
openly made by the appellants and other directors on appropriate
occasions and records were kept.
Both appellants knew that in
discussions with the Reserve Bank relating, for example, to the
acquisition or financing of overseas
assets by LeisureNet, disclosure
of assets held by directors offshore was required. They insisted on
disclosure by their subordinates
in accordance with the principles of
proper corporate governance where the possibility of conflict with
the company might arise.
Examples of failure to
disclose
[38] The appellants were
silent as to their interest in Dalmore at all times, but particular
reference to the following instances
is warranted:
i) when they acquired the
Dalmore interest at a time when Dalmore was a franchisee of
LeisureNet;
ii) when they persuaded
the Board of LeisureNet that the franchise licence should be
cancelled and replaced by a joint venture;
iii) when they negotiated
and concluded the first shareholders’ agreement which brought
Dalmore and LeisureNet into a partnership
agreement;
iv) when they negotiated
and concluded the second shareholders’ agreement;
v) at the time of the
Fitco negotiations and before signing the written agreement in terms
of which International obtained Dalmore’s
shares.
vi) at the executive
committee meeting held on 24 May 1999 and at the board meeting on 26
May 1999 at which the Dalmore transaction
was discussed and
confirmed.
vi) when it became
necessary, in September 1999, to amend the second shareholders’
agreement retrospectively. (Gardener again
signed on behalf of the
LeisureNet companies and Healthland Germany.)
The appellants’
failure to disclose their connection with Dalmore may fairly be
described as chronic.
[39]
The prominence
and importance of their interest in Dalmore in the minds of the
appellants
1 According to their
evidence, the initial oral agreement between themselves and Moser was
regarded as no more than drawing a bow
at a venture with little
prospect of a return. By the time of the first shareholders’
agreement the appellants felt that
LeisureNet’s proposed
expansion into Germany required greater security than a
franchisor/franchisee relationship could provide
because of the
probable scope of business in Germany which was opening up for
LeisureNet.
2 In the first quarter of
1999, LeisureNet, through a rights issue and the sale of its non-core
assets, raised capital of R200 million
to finance its intended
offshore expansion of which Germany was the major focus. As early as
October 1997 a report before the LeisureNet
board had referred to the
‘unique opportunity’ for development in Germany. By
November 1998 there was reference to
‘unparalleled
opportunities offshore’ and Germany was described as ‘a
powerhouse of the health and fitness industry’,
and, in the
following month as a ‘unique window of opportunity’. In
early 1999 the health and fitness industry was
‘one of the
fastest growing in Europe’. In this regard it is worth quoting
from the appellants’ heads of argument
in relation to the
potential value of the German operation at the time of the Dalmore
sale in April 1999:
‘
However,
the documentary evidence points with no exception at all and with a
remarkable consistency to the massive value then represented
by the
German operation. This includes:
91.1.
All of the board minutes dealing with the subject;
91.2.
All of the Exco minutes dealing with the subject;
91.3.
Mr Neil’s own independent observations in Germany (such as with
his due diligence investigation into Fitco);
91.4.
The financial interest shown by financiers such as Brait Capital;
91.5.
The projected profit produced independently by the German team and
reflected on the budget statements for Germany for both
1999 and
2000;
91.6.
The acquisition of Fitco by Fitness First, prior to 9 April 1999;
91.7.
The views of independent analysts published at the time; and
91.8.
The in-depth (and conservative) view expressed by AIG in the
investment memorandum (Exhibit CC in vol. 41).’
In 1999 LeisureNet
budgeted for a 100 fold increase in the previous year’s
operating profit of Healthland Germany.
3 I have referred earlier
to the appellants’ obtaining of a non-dilutable 5% shareholding
in International as compensation
for the inconvenience of spending a
large amount of time away from home during the projected expansion of
the group’s activities
overseas. The critical role which this
interest assumed in the appellants’ intentions and actions over
the next 18 months
or so can best be spelled out in their own words.
[40] Gardener’s
evidence as to his state of mind during the negotiations with Fitco,
and Moser and Rabie, in April 1999 which
culminated in the exercise
of the pre-emptive right is revealing:
‘
I
had only one thing in mind and that was to make sure the top company
[International] received the greatest benefit possible
because
that’s where I had my 5% shareholding
and
that was where LeisureNet had its interests.’
(My emphasis.)
He had earlier testified
that, on the listing of International, an event contemplated from the
outset of its existence as likely
to happen in about 2001, his 5%
interest in the offshore companies was going to be worth ‘something
like’ R75 million.
In an application to the exchange control
department of the SA Reserve Bank in March 1999 the following was
recorded:
‘
Such
is the progress of the international company that it is anticipated
that by the year 2001 it will be possible to list the international
company on an international stock exchange. . . At that stage 20% of
the international companies could be worth conservatively
R300
million compared with the possibility of selling 20% at this time for
R18 million.’
[41] The evidence of
Mitchell leaves no doubt about his state of mind at the time of
negotiating and concluding the Dalmore acquisition.
As to his
relationship with International and their interdependence he said:
‘
You
must remember M’Lord, that, from ’98, my interest and
LeisureNet’s interest, LI’s interest, our stars
were in a
line. Whatever was good for LeisureNet, LI, was effectively good for
me and vice versa. And with regard to the Dalmore
entity, again I
stress, I had no interest, control on the direction of that entity at
all.’
And further, in reply to
questions by the learned Judge:
‘
You
were entitled to 20%? --- I was entitled to 20%, M’Lord.
Why
did it not occur to you to disclose this to the Board, because you
know 6 million rands is a large or that’s the equivalent
of –
in those days, two million dm, that’s a large amount of money.
Did it not occur to you to tell your Board that?
--- M’Lord, as
I gave in my evidence, at that point in time, I again tried to put
things in context in that week. The activity
and the frenzy that was
going, all that I was centred on in that week, as M’Lord has
seen, is to bring that deal home for
Leisurenet.
You
wanted Germany? --- We had to have it. We had to have it.
That’s
how you saw it? --- 100%, M’Lord, and also what I did always
see, M’Lord, is that LI, the top or the company
(indistinct).
The
company which was ultimately going to be listed in London? --- My –
from the time that I got my founder shares, we were,
as I’ve
said, coupled on the (indistinct). It was as if we were going down
the rainbow together, strapped to the pot of gold.
What was good for
the top company, was good for me and what was good for me was good
for . . . (intervention).
I
understand that concept, but where I am losing you and possibly
you’re missing the point of my question. Didn’t it
occur
to you when you realised that Dalmore was a done deal, did it occur
to you that this was going to net you some six million
rand? --- When
the deal was done?
Yes?
--- Without a doubt, M’Lord.
Well
the time the deal was done effectively, it would appear to me, at the
time that you got consent from (indistinct), now the
deal was done?
--- Yes. At that time not, M’Lord.
It
didn’t occur to you? --- Not, M’Lord. And I can say
(indistinct) say no and whether it was a case that I sabotaged
that
out of my mind, once I’ve done the deal way back in 1997, to me
that was a done deal already then. There was an investment
that I had
and I hope to God one day it would materialise into something.
Yes?
--- But it was done.
When
it’s done, it’s going to net you or it having been done
is going to net you a large lump of money? --- My mind
was switching
at that point in time, not during that week, a couple of weeks
afterwards, where my mind was, M’Lord, was to
say, this deal
now has cleared the road to net me an enormous amount of money, not
the six, to net me a potential 35 million, a
150 million if
(indistinct).
Yes?
--- An that was definitely top of my mind then, M’Lord.
Yes,
no, I understand that and you thought you were going to get that from
Leisurenet International Ltd? --- Yes.’
[42] The importance to
Mitchell (and, equally, to Gardener) of the acquisition appears again
from the following exchanges with the
judge:
‘
If
at the end of the day Leisurenet International Ltd when it was
listed, was going to be worth a large pot of money, then it made
sense to get the assets and the companies which would form part of
the Leisurenet International Ltd Group as cheaply as possible,
not
so, because the cheaper you got it, the greater was going to be your
ultimate worth? --- 100%, M’Lord.’
and
‘
No,
let’s call a spade a spade. You were the chap who actually
manouvred everybody into the position where Leisurenet acquired
Dalmore for 10 million? --- Bought Dalmore’s shareholding for
10.
Yes.
Now if it was bought for six and ultimately that was increased
considerably or the value which it had paid was a 10 bagger,
would
have been increased to 60 million dm? --- Yes.
Do
you understand what I am saying. I don’t mean to confuse you
and I am not trying to catch you. I am just trying to think,
if I was
thinking in the long term of what my ultimate worth would be for
Leisurenet International Ltd, I would want to get . .
.
(intervention). --- At the cheapest price possible.
At
the cheapest price, yes? --- I firmly agree with you and the cheapest
possible price, I couldn’t take it further down the
10, I mean
. . . (intervention).
No,
no, no, but you see what you could have done, is you could have said,
I have done – or Mr Gardener and I have done the
most
magnificent deal here, because we can get it at 10 and we’ve
got 20 already. And because we are Directors you don’t
necessarily have to pay us out for that price, because you were the
agents who had in fact . . . (intervention).
---
But then sorry, M’Lord, are you proposing that I would have to
walk away from my right to an investment.’
[43] The overwhelming
benefit of the acquisition and the extent to which it relegated the
payment for the Dalmore interest to ‘small
change’
(Gardener’s expression) was never made clearer than in the
following passage from Mitchell’s evidence
under
cross-examination:
‘
At
this point in time [ie when carrying on the Fitco negotiations] my
interest related that I – my anticipated pay out that
I was
going to receive from Hans [Moser] apropos my 1996 deal that I had
done with him, didn’t even come onto my radar at
this point in
time. At this point in time what was very firmly entrenched in my
mind was that I had now cleared all obstacles out
the way to drive
the Bankers Trust deal through, which would affect – which it
did do – put a value on Healthland –
this is where my
mind was sitting – of just on 700 million, and my personal
wealth was linked into that on my founder shares,
which were sitting
at 35 million. And in my mind then, I thought that if Scott Paton [of
Bankers Trust] could be half believed
on his theory of the ten
bagger, and if he only brought it home at a five bagger, the deal
that I had consummated would have effectively
created value for
LeisureNet to the tune of 3.5 billion and my personal wealth could
have been to the tune of 150 million. So in
my mind I was always
coupled on the tote, as it were, with LeisureNet.’
From this it seems clear
that the stock exchange listing was taking second place to the dollar
signs erected by the prospects of
a deal with Bankers Trust even
while Mitchell and Gardener were pulling the wool over the eyes of
Fitco, Moser and Rabie, and added
a new and very profitable motive to
the conclusion of the purchase, a matter about which Mitchell had
earlier crowed in his evidence
in chief:
‘
Mr
Mitchell, did you tell him [Rabie] of Bankers Trust’s interest
in the off-shore operations of LeisureNet at the time? ---
M’Lord,
what I didn’t tell Joubert and again because there was only one
entity that I was focused on, that was to acquire
the equity for LI.
What I didn’t tell Joubert what our game plan was apropos that
I requested Fitco to put the offer in at
10, not his asking price of
15. I didn’t tell Joubert what our intention was to perform the
classic gazump as soon as we
got that offer down to as low as
possible, that we were going to grab it – that’s LI. And
what I didn’t tell
Joubert was that I had Bankers Trust
effectively in the wings and that the upliftment in value, if Bankers
Trust came in, could
be potentially R75 million and that upliftment
would fall into LeisureNet coffers, not Dalmore’s coffers.
That’s what
I didn’t tell him.’
[44] In the context of
all this evidence, when Mitchell said that they ‘had to have’
Germany, it is quite clear that
he was speaking at least as much for
Gardener and himself as for International. The purchase of Dalmore
and the vast enhancement
of the appellants’ personal wealth
were inextricably linked. It is in the circumstances wholly at odds
with the evidence
to describe the appellants’ conduct as
‘solely for the benefit of [International]’ or as
‘prejudicial’
to their own interest (as appellants’
counsel did in their heads of argument). Moreover the size and
prominence of the benefits
that the appellants stood to gain from the
acquisition (together with their not-insignificant share of the
price) render it in
the highest degree unlikely that their own
interest in Dalmore was not in the forefront of their minds during
all the events of
April and May, including the exco and board
meetings on 24 and 26 May respectively. That they gave attention to
their own personal
interests only after the meetings is very
improbable. Their prompt instructions to Rabie, within days of the
board decision to
confirm and fund the acquisition, was all one with
the importance of the deal to them personally. The role that their
shares in
International played in influencing the appellants during
the relevant period was not referred to by the learned judge in
assessing
the probabilities. It serves however as a substantial
corroborating factor for his conclusion.
[45]
The effects of
disclosure
The possible consequences
may be summarised as follows, bearing in mind the necessary breadth
of such disclosure:
1 Diminution of the
appellants’ status in the eyes of the LeisureNet and, probably,
its shareholders.
2 Inability on the part
of the appellants to influence confirmation of the Dalmore
transaction, because they would perforce have
been obliged to
distance themselves from any further involvement.
3 Uncertainty as to
whether LeisureNet would be prepared to finance the purchase. As
Mitchell put it, its refusal would ‘shatter’
the deal.
4 The strong likelihood
that LeisureNet or International would take steps to recover the
‘secret profit’ derived by
the appellants from their
dealings with Dalmore.
5 Perhaps most
pertinently, the threat which honest disclosure presented to the
appellants’ trouble-free ride ’down
the rainbow to the
crock of gold’ to adapt Mitchell’s expressive
description.
[46] All the factors
mentioned in the previous paragraph were strong disincentives to a
full and candid disclosure of the appellants’
interest in
Dalmore. Aside from considerations of honest dealing and a clear
conscience, however, the appellants stood to gain
nothing material
from opening the can of worms inherent in disclosure.
[47]
The benefit in
fact derived from non-disclosure
As the appellants had
contemplated before concluding the purchase to Mitchell, within six
months 25% of International had been sold
to AIG for a vast profit,
and the appellants, through their holdings in International, duly
swelled by the Dalmore acquisition,
were able to share
proportionately in the resultant good fortune.
[48]
The conduct of
the appellants during May and June in relation to the proceeds of the
Dalmore transaction
First, it should be noted
that it must at all times have been apparent to the appellants that
Moser would be and was able to liquidate
their interest in Dalmore
only if LeisureNet made funds available (for that purpose). Within a
week after confirmation of the sale
agreement the appellants had
given the necessary instructions for the transfer of their proceeds
into their offshore accounts.
Neither suggested in evidence that the
sudden availability of the money came as any surprise to them. On 3
June 1999 Gardener arranged
for payment of £5000 to be paid
from his trust in consideration for the 5% interest in International
long previously allotted
to him and Mitchell’s instructions
followed shortly.
[49] The cumulative
effect of all the aforegoing factors provides strong prima facie
reason to conclude that the appellants knew
at all material times
that disclosure was required of them but deliberately withheld such
disclosure. Whether that is a justifiable
inference can however only
be decided after considering the submissions made on their behalf.
[50] In the appeal the
appellants relied upon two major submissions to justify the
contention that their explanations were reasonably
true, ie that it
had never occurred to either of them to make disclosure..
1 A strong credibility
finding in favour of both appellants made by the trial judge based
upon their demeanour, candour, consistency
and the general impression
created by his observation of the appellants in the witness box.
2 The overwhelming
probability that the appellants were responsible for having procured
the Dalmore shares at a bargain price through
their planning and
endeavours. This, it was submitted, was solely for the benefit of
LeisureNet and to their own prejudice in so
far as it materially
reduced the value (and therefore the proceeds) of their 20% interests
in Dalmore. Reliance was placed on an
observation of the learned
judge uttered in relation to the State’s (unsuccessful)
application to reserve certain questions
of law:
“
One
can scarcely be intending to defraud anyone (in the sense intended by
s 424 of the Companies Act) if one believes subjectively
and on good
grounds which turn out to be well-founded that one is benefitting
one’s company in may ways, including financially
by entering
into a deal.’
(This observation , if
valid, will also be relevant to the existence of an intention to
cause prejudice.)
[51] A credibility
finding of the nature in question can never be entirely discounted.
It is however the result of a subjective
assessment. Its force in any
given case depends upon the strength and cogency of the objective
probabilities opposed to it: the
more such probabilities accumulate
the less persuasive it becomes. Moreover demeanour and (apparent)
candour are tricky yardsticks
when the very basis of the case is the
ability of the witness successfully to deceive others. To rely unduly
on such features may
amount to no more than a demonstration of the
expertise of the witness to deceive the judge, a self-defeating
exercise. Such an
exercise may also be suspect when the witness is an
experienced public speaker and negotiator, or the issue in dispute is
an extremely
narrow one which allows for genuine candour and
adherence to the truth in relation to the bulk of a witness’s
testimony.
All of these considerations prevailed in this instance.
The result is that the weight of probabilities remains the acid test:
are
they sufficient beyond a reasonable doubt to exclude truth from
the appellants’ explanations?
[52] That the purchase of
the half share in Dalmore for DM 10 million was a bargain and a coup
for LeisureNet was proved many times
over. To conclude that that fact
establishes the good faith and selflessness of the appellants is
however to look at only one side
of the picture. The other is,
cumulatively, this:
1 The appellants ensured
that they were paid out rapidly and without question DM 2 million
each for an interest in Dalmore to which
they had made no material
contribution. (There was no evidence of the extent to which Moser had
used or relied on their names.)
If Dalmore had accepted the Fitco
‘offer’ the benefit of payment would have been subject to
stringent conditions and
payment by instalments over several years.
There is no suggestion that the terms of the Fitco offer were ever
disclosed to the
board of LeisureNet.
2 Both appellants would
of course receive the kudos and increase in personal standing which
necessarily flowed from the coup.
3 Because both appellants
were shareholders in International and substantial shareholders in
LeisureNet, the benefit of the bargain
price was also to their
advantage. More significantly, the booming health club industry,
Germany as a powerhouse of that industry
and the immensely favourable
prospects for expansion in that country, meant that the LeisureNet
acquisition of Dalmore held not
only great potential value for
LeisureNet and International but also for their shareholders.
[53] On the evidence,
absent the machinations of Gardener and Mitchell, it is very likely
that Moser would have accepted an offer
of DM 15 million for his half
share in Dalmore, an acceptance that would have resulted in only a
further DM 1 million in the hands
of each appellant. It seems clear
that over and above the receipt of the DM 2 million each from the
transaction, the appellants
stood to benefit financially in
proportion to each financial benefit which would in the future flow
to LeisureNet or International.
Taking all these considerations into
account, two conclusions are warranted: first that the sale of the
Dalmore shares to LeisureNet
was, seen from the appellants’
perspective of obvious and substantial benefit to them personally,
and their efforts, ostensibly
on LeisureNet’s behalf, were
anything but altruistic; second, the fact that the deal resulted in
substantial benefits for
LeisureNet provided in itself no reason to
conclude that the appellants would not have intended to deceive
LeisureNet by withholding
disclosure of their own interests. Indeed,
having regard to the value of the potential returns to the appellants
from the sale,
they would have possessed understandable reluctance to
make such disclosure if they had reason to believe either that the
deal
would thereby be threatened or that the company might take steps
to limit the benefit to them. This last is an aspect I shall return
to in the context of the enquiry into the intention to prejudice
LeisureNet.
[54] A further strong
inference arises from the unlikelihood that even if one of the
appellants had deliberately or inadvertently
failed through the long
history of their Dalmore association to disclose his interest to
LeisureNet, the other would have been
similarly unconscious of his
responsibilities. The evidence proved that the two appellants
operated LeisureNet in a manner that
involved frequent and close
co-operation between them. This was very much the case in relation to
international expansion and the
running of the German operation. That
both were consistently silent on a matter of such importance to
themselves and their companies
was, one is bound to conclude, no
coincidence but rather the result of a premeditated policy.
[55] For the reasons
which I have set out I am satisfied that the learned judge was
correct in finding that the probabilities in
support of a deliberate
withholding of the existence and nature of the appellants’
interest in Dalmore were overwhelming.
It would in my view be naive
in the extreme to believe that the benefits to the appellants
themselves and, therefore, the need
to disclose, were relegated or
subordinated in their minds by the close attention paid to
consummating and carrying through the
sale to International. The
State according proved beyond a reasonable doubt an intention to
deceive the board of LeisureNet.
Actual or potential
prejudice to LeisureNet
[56] At the hearing in
this Court counsel did not press the absence of prejudice. This was
unsurprising. By failing to declare their
interest in Dalmore the
appellants-
(a) precluded LeisureNet
from considering the advantages and disadvantages of the sale
uninfluenced by the participation of the
appellants;
(b) precluded LeisureNet
from investigating and considering the circumstances under which that
interest was obtained with a view
to taking disciplinary steps
against the appellants and/or recovering the whole or part of the
profit which the appellants derived
or stood to derive from the sale;
(c) threatened the
relationship built up between the company and the exchange control
authorities;
(d) induced LeisureNet to
raise the finance and pay them for their interest in Dalmore.
In all of these matters
there resided a potential for prejudice to LeisureNet.
The intent to cause
actual or potential prejudice
[57] As I have previously
indicated the withholding of the fact and details relating to their
interest in Dalmore was deliberate
and not accidental. It was done to
avoid one or more of the consequences that I have identified. All of
those consequences involved
the self interest of the appellants to a
substantial degree. They were all the probable result of the reaction
of LeisureNet’s
board to the unwelcome news.
[58] However, in
considering the intention to cause prejudice, it seems unnecessary to
be more specific as to the nature of that
prejudice. When company
directors deliberately withhold information material to the affairs
of their company from the board of
directors, there is, in the
absence of an explanation for such conduct which may reasonably be
true, an
a priori
case of fraudulent non-disclosure. That is
so because they know that the company can only make decisions through
a board properly
informed and that by withholding proper information
they render it both blind and mute. Thus, in such circumstances, both
prejudice
and the intention to prejudice are proved beyond doubt. In
the context of the evidence, the appellants deliberately withheld
knowledge
of their interest in Dalmore from the board of LeisureNet.
They intended the other board members to believe that no such
connection
existed. The only purpose in so doing and, therefore, by
necessary inference, the appellants’ intention, can only have
been
that they feared or mistrusted the steps which the board,
properly informed, might take and intended to preclude such action.
Broadly
stated, therefore, the prejudice to LeisureNet caused by
their action was ensuring that the board was deprived of the
opportunity
to exercise its judgment in the interest of the company,
a consequence of which both appellants were fully aware.
[59] For all the
aforegoing reasons I conclude that there is no merit in the appeal
against the conviction for fraud.
Sentence
[60] The learned judge
devoted careful attention to his assessment of the appropriate
sentences. His judgment is criticized on only
two substantial
grounds. First, counsel submitted, he overemphasised his view of what
society demanded by way of retribution at
the expense of the other
elements of sentencing. Second, it is said that he imposed sentences
that were disturbingly inappropriate
in the balance of relevant
facts.
[61] Uijs AJ was of the
view that the appellants had been convicted of ‘an offence
relating to a fraud involving more than
R500000 . . . committed in
the execution or furtherance of a common purpose’. Therefore,
so he found, the minimum sentencing
legislation applied, carrying a
sentence of at least 15 years’ imprisonment in the absence of a
finding of substantial and
compelling circumstances. Both parties
were ad idem that such circumstances existed and the learned judge
agreed. He referred to
the fact that the appellants were first
offenders, had ‘disgorged the profits made by virtue of your
short fall into criminality
albeit under some measure of coercion’
and that LeisureNet ‘did not necessarily lose R12 million
because the appellants
gained that amount’. Although I have
some reservations about the second and third factors mentioned by the
court, I am prepared
to accept that they are substantially accurate.
[62] The learned judge
properly explained the balancing process involved in arriving at an
appropriate sentence by reference to
well-known authority which it
would be superfluous to repeat here.
[63] As to the nature of
the crime he took into account that:
(i) it involved a serious
abuse of trust to the company and the public;
(ii) it was not committed
on the spur of the moment but over a period which provided many
opportunities for reconsideration and
disclosure;
(iii) the amounts
involved, R6 million in relation to each appellant, were ‘huge’;
(iv) the fraud did not
actually cause the company to suffer a loss of R12 million;
(v) the fraudulent
actions of the appellants did not lead to the eventual demise of
LeisureNet;
(vi) repayment of R12
million by the appellants was an indication of remorse and a
punishment.
[64] As I have indicated
earlier, it seems to me that LeisureNet, properly informed of the
true facts, would inevitably have been
entitled to claim from the
appellants at least R12 million as a secret profit made in breach of
their fiduciary duty to disclose
or to require them to forfeit their
interests in the joint venture to LeisureNet. Nor does it seem
correct to regard the ‘coercive’
payment of R12 million
as induced by remorse: not only was there no indication of acceptance
of the error of their ways but the
criminal defence has been pursued
to this point on a contention that the company was not prejudiced by
such deception as the appellants
may have perpetrated.
[65]
As to the interests of society Uijs AJ said that he ‘
must
impose,
at
the very least
,
a sentence that will satisfy the community . . . I would be failing
in my duty unless I give
full
weight
to
what the public out there thinks and expects’. (My emphasis.)
In weighing that interest, as he perceived it, the judge
took into
account that:
(i) the appellants had
let society down badly;
(ii)
they had taken R12 million from the coffers of a public company;
2
(iii) persons holding
office at the helm of public companies should not get off lightly if
they breach their trust;
(iv) there is a
particular societal need to deter white collar crime.
[66] Counsel submitted
that the italicized words went too far: the judge had allowed public
opinion to override his own exclusive
duty of achieving the balance
which he had earlier espoused. In so doing, it was contended, he
misdirected himself.
[67]
In
R
v Karg
1961
(1) SA 231
(A) at 236A-C Schreiner JA said:
‘
While
the deterrent effect of punishment has remained as important as ever,
it is, I think, correct to say that the retributive
aspect has tended
to yield ground to the aspects of prevention and correction. That is
no doubt a good thing. But the element of
retribution, historically
important, is by no means absent from the modern approach. It is not
wrong that the natural indignation
of interested persons and of the
community at large should receive some recognition in the sentences
that courts impose, and it
is not irrelevant to bear in mind that if
sentences for serious crimes are too lenient, the administration of
justice may fall
into disrepute and injured persons may incline to
take the law into their own hands. Naturally righteous anger should
not becloud
judgment.’
In
S
v Homareda
1999
(2) SACR 319
(W) at 324b Cloete J pointed out that ‘it is not
the function of the courts slavishly to give effect to public
opinion’.
[68]
True justice can only be meted out by one who is properly informed
and objective. Members of the community, no matter how closely
involved with the crime, the victim or the criminal will never
possess either sufficient comprehension of or insight into what
is
relevant or the objectivity to analyse and reconcile them as fair
sentencing requires. That is why public or private indignation
can be
no more than one factor in the equation which adds up to a proper
sentence and why a court,
in
loco parentis
for society, is
responsible for working out the answer.
[69] It will often happen
that a judicial officer, in a bona fide attempt to express one of the
factors in the equation appears
to overstate its effect. That applies
to the two statements which I have emphasised in the court a quo’s
reference to the
views of the community. But whether they indeed
reflect a misdirection depends on a holistic consideration of the
judge’s
treatment of the subject. In this instance he appears
to have meant no more than that society would take it seriously amiss
if
company directors in the appellants’ position were treated
lightly. He was not suggesting that the community had implicitly
fixed on a sentence of any particular degree of severity or duration
in relation to the appellants. As he had earlier pointed out,
the
public, ill informed as to the causes of the liquidation of
LeisureNet, had vented its anger on the appellants. In emphasising
the reasons for imprisoning the appellants as ‘paramount’
‘as far as society is concerned’ he was making
it clear
that he too regarded the retributive element as the most important
factor and one which justified a substantial term of
imprisonment. In
balancing the equation of accused, crime, retribution/deterrence and
rehabilitation/reformation the weight accorded
to each may fairly
differ, as each clearly did in the judge’s assessment. Given
the nature of the crime and the circumstances
of its commission
together with the minimal degree of remorse expressed by the
appellants for their actions, I cannot find that
the learned judge
either overemphasised the retributive aspect or allowed it to detract
from according fair weight to the other
elements of punishment.
[70] Counsel submitted
that the origin of the crime was ‘an innocent acquisition of an
interest in the German operation years
prior to the events in
question’. This however is a lop-sided and inadequate
reflection of the truth as the earlier part
of my judgment makes
clear. The oral agreement with Moser at the end of 1996 gave rise to
a conflict with the appellants’
fiduciary duty to LeisureNet, a
conflict that was exacerbated by their part in the joint venture and
which they steadfastly maintained
until it became possible for their
Dalmore interests to be turned into money. All the while the wool was
being pulled over the
eyes of the board of LeisureNet.
[71] Counsel described
the acquisition of a 20 per cent interest in Dalmore by each
appellant as ‘having no obvious value’.
But the worth
grew exponentially over the next two and a half years. The growth in
the consciences of the appellants unfortunately
showed no comparable
advance. However ‘innocent’ the origin the connection
between the appellants and Dalmore,
vis-a-viz
LeisureNet it
became steadily more tainted.
[72] It was further urged
on us that Uijs AJ ignored the ‘long and meritorious service to
LeisureNet given by both appellants’.
In carrying out a duty
that was amply compensated by direct and indirect benefits I do not
think credit of this nature required
consideration in the sentence.
In any event the breach of the duty of disclosure extended over a
great part of their otherwise
meritorious service to the company.
[73] Counsel finally
submitted that the learned judge failed to take account of the mental
anguish endured by the appellants while
awaiting their fate over a
period of five years. The pretrial procedures, the trial itself and
appeal procedures were lengthy but
not unduly so. Although they did
not merit specific mention in the judgment of Uijs AJ there is no
reason to believe that he did
not bear those circumstances in mind.
[74] In the result my
conclusion is that the learned judge did not misdirect himself in the
respects urged upon us.
[75] There were however
other misdirections at the heart of the sentences. The learned judge
apparently regarded 12 years as the
appropriate period of
imprisonment in respect of each accused, but he considered it fair to
suspend 4 years of that term, in the
case of Gardener, and 5 years in
the case of Mitchell. A suspended sentence is generally used as a
weapon of deterrence against
the reasonable possibility that a
convicted person may again fall into the same error (or at least one
substantially similar).
However when the sentence requires that the
accused serve a lengthy period of direct imprisonment (as to which
seven years qualifies
easily) that sentence is in itself, a deterrent
to recidivism, and an additional period of suspension serves no
purpose. This is
the more so when the person convicted is already of
mature years or the circumstances of the crime are peculiar or
unlikely to
be repeated, all of which applies to the appellants.
Whether the suspension of a sentence may have a role other than
deterrence
may be determined by particular circumstances (see eg s
297(1)(a) and (b)), but it is never, as the learned judge held, ‘also
a form of mercy’.
[76] The second aspect
concerns the distinction in sentence between the two appellants. The
learned judge apparently regarded Gardener
as having ‘stooped
lower’ than Mitchell inasmuch as he had engaged in other
nefarious activities while a director of
LeisureNet, viz VAT fraud
and insider trading. But he had also been sentenced to correctional
supervision and served his sentence.
To distinguish as the learned
judge did was to punish him a second time. That was improper. I can
find no valid basis for distinguishing
between the two appellants.
[77] The misdirection in
relation to the suspension of part of the sentences leaves us at
large to impose sentences which fit the
case. Despite factual
differences it seems to me that there are considerable similarities
between this matter and
S v Blank
1995 (1) SACR 62
(A) in
which a well-to-do high-flying stockbroker was convicted of 48 counts
of fraud arising from a failure to disclose his personal
interest in
sharedealings to his principal and his partners and to the
Johannesburg Stock Exchange (of which he was a member).
The profits
derived from the frauds exceeded R9,75 million of which the accused
received nearly R1,5 million. He pleaded guilty
and was sentenced to
eight years imprisonment, a sentence which this Court confirmed on
appeal. The benefits to the appellants
of their fraud were
potentially greater. They showed little or no remorse. But they were
also some 20 years older than Blank. Taking
into account all the
circumstances of the case, which have been referred to in this
judgment and in the judgment of the court a
quo, I am of the view
that a lengthy period of imprisonment was demanded and that 7 years’
imprisonment sufficiently represents
the balance between the
competing personal and public interests.
[78] The appeals of both
appellants against conviction are dismissed. The appeals of both
appellants against sentence are upheld.
The sentences imposed by the
Western Cape High Court are set aside and replaced by the following:
Each accused is sentenced
to seven years’ imprisonment.
____________________
J A Heher
Judge of Appeal
APPEARANCES
APPELLANTS: F van Zyl SC
(with him J C Butler SC)
Bernard Vukic Potash &
Getz Attorney, Cape Town
Lovius Block,
Bloemfontein
RESPONDENT: R F van
Rooyen SC (with him R Valley-Omar)
Director of Public
Prosecutions, Cape Town
Director of Public
Prosecutions, Bloemfontein
1
See
particularly,
R v Jolosa
1903 TS 694
at 700;
R v Henkes
1941 AD 143
at 161;
R v Kruse
1946 AD 524
at 532-4;
S
v Huijzers
at 507I-508B;
S v Sithole
1997 (2) SACR 306
(ZSC) at 312d-313c.
2
This
seems inconsistent with his earlier finding, but accords more nearly
with my own view of the case.