ASIC v Vines

This is a civil penalty proceeding brought by the plaintiff against three executive officers of the GIO Group, arising out of their part in the making of a profit forecast used by the Group parent, GIO Australia Holdings Limited ("GIO Australia Holdings"), in a Part B statement responding to a takeover bid by a subsidiary of AMP Limited ("AMP"). I have adopted the expedient of referring to the plaintiff by its acronym, ASIC, solely for convenience.

Although there was a substantial amount of oral evidence, the central evidence in this case is a large quantity of documents, sometimes complex documents about technical matters. The final hearing, which ran for 56 hearing days, was much longer than the estimate of counsel (PTB 0055-0057). After the conclusion of the hearing, the court received written submissions in excess of 800 pages in length, and there were supplementary oral submissions heard over a period of 9 days, leading to these very long reasons for judgment. Although the judgment is long, I have not set out and expressly dealt with every written and oral submission (cf Digi-Tech (Australia) Ltd v Brand [2004] NSWCA 58, at [282]-[291]). I have done my best to consider every submission, but I have confined my express reasons for judgment to the findings of fact and submissions that I regard as material, in the sense of being significant to "the decision-making process": see Customs and Excise Commissioners v A [2003] 2 All ER 736, at 753-4; and Digi-Tech at [284].

GIO Australia Holdings was a listed public company until a time well after the AMP takeover bid closed. It was the holding company of GIO Insurance Ltd ("GIO Insurance") and other companies in the GIO Group. GIO Insurance conducted its business in two divisions, corporate insurance (not relevant here) and reinsurance ("GIO Re"). From about July 1998, the board of directors of GIO Insurance was composed of full-time executive officers of the GIO Group.

The first defendant, Mr Vines, was the chief financial officer ("CFO") of the GIO Group. The second defendant, Mr Robertson, was the executive director of GIO Insurance at all material times until early November 1998. He continued to have a role at GIO Re thereafter, though the scope and nature of his role is one of the controversial factual issues to be resolved. Mr Robertson was replaced as executive director of GIO Insurance by the third defendant, Mr Fox, in early November 1998, though Mr Fox says, controversially, that some of the responsibilities attaching to the office of executive director (including those most germane to this case) were left with Mr Robertson.

In its Second Amended Statement of Claim ("SASC"), ASIC alleges that, during the period from August to December 1998, while AMP's takeover bid was open, the three defendants contravened the statutory duty of care and diligence of executive officers, then found in s 232(4) of the Corporations Law. ASIC also alleges that Mr Fox, but not the other two defendants, failed to act honestly in the exercise of his powers and the discharge of the duties of his office, contrary to the provision that was then s 232(2) of the Corporations Law.

GIO Australia Holdings' Part B statement, issued in December 1998 in response to AMP's takeover bid, used a profit forecast for the year ended 30 June 1999 for the GIO Group as a whole. The forecast for GIO Re, a component of the Group forecast, was for a business profit before tax of A$80 million.

Central to ASIC's case is the assertion that the three defendants failed to inform GIO Australia Holdings or GIO Insurance, their directors and management, or the due diligence committee established in connection with the AMP bid, or the financial advisers of the Group, of the true potential effect on the $80 million profit forecast of claims received or likely to be received by GIO Re in respect of Hurricane Georges, a hurricane that passed through Puerto Rico, the American Virgin Islands and the Gulf of Mexico in the period from 21 to 28 September 1998, causing substantial damage leading to insurance and reinsurance claims.

In the ensuing sections of my reasons for judgment, I shall, in this order: explain some technical concepts concerning reinsurance (section 1.2); describe the main and the subsidiary participants in GIO's Part B process and their roles (sections 2.1 and 2.2); make observations about the credit of the witnesses for ASIC and for the defendants (section 2.3); set out, in the degree of detail that is (regrettably but unavoidably) necessary in such a technical case, the facts relevant to my decision, dealing with disputed questions of fact along the way (sections 3.1 to 3.44); make findings about the respective responsibilities of Mr Robertson and Mr Fox in the period from 4 November onwards (section 4); make observations on some relevant questions of law (section 5); deal with the pleaded claims and defences of each of the three defendants, making determinations on the basis of my factual findings (section 6, 7 and 8); and provide my conclusions (section 9).

By and large, the resolution of this case depends upon findings of fact and inferences from them, rather than upon any point of law. There are particular and discrete factual issues about the duty of honesty, applying only in the case of Mr Fox. Otherwise, the case requires an assessment of whether each defendant's conduct involved breach of their statutory duty of care and diligence, in various particularised respects. ASIC's case against each defendant, and their defences, depends upon the overall conclusions to be drawn from many detailed and accumulating determinations of the meaning and significance of documents, what was said at meetings and in conversations, how people acted and why they did so. The facts must be considered in detail to do justice to the contentions of both sides. 1.2 Reinsurance concepts

As this case requires some understanding of reinsurance, it is as well to set out at the beginning some basic reinsurance concepts and terminology. The explanations that I shall record were provided by lay counsel to a lay judge, and so they do not purport to have technical precision, but are thought to be sufficient for the purposes of this case. The subject is reinsurance of general insurers in areas of risk such as property, marine, business, professional indemnity, aviation and space insurance.

Reinsurance essentially involves the offering of insurance to a direct insurer, who is conventionally called a cedant . It is effectively the sub-underwriting of the insurance risk assumed by the cedant. The cedant arranges reinsurance in order to reduce its underwriting risk and thereby provide additional capacity and lower exposure to dramatic movements and profitability. From the insurer's point of view, the reinsurance is described as outwards reinsurance , putting the risk out to the reinsurer. From the reinsurer's point of view, the reinsurance is inwards reinsurance . Typically, when the parties to a reinsurance negotiation reach agreement on its terms, the terms are recorded in a placement slip , a short summary document prepared before and in anticipation of a formal policy document.

Reinsurance is written in a relatively small number of key markets around the world, including London, New York and Bermuda. The London market is the most sophisticated reinsurance market, reflecting the concentration in London of brokers, underwriting skills and underwriting capacity, which is provided by the Lloyd's syndicates and corporate reinsurers. The greatest demand for reinsurance is generated out of North America, reflecting the size of the US economy and high levels of insurance there.

Reinsurance can be classified into facultative reinsurance, which involves the reinsurance of an individual risk offered by a cedant, and treaty reinsurance, where the reinsurer agrees to accept automatically the transfer of all risks falling within the scope of the agreement. Reinsurance may also be subdivided into proportional reinsurance, where the reinsurer accepts a designated percentage of the premiums and losses of the cedants, and non-proportional , where the reinsurer accepts only specified risks between or above certain limits. A common example of non-proportional business is excess of loss reinsurance.

Reinsurers customarily insure themselves, to a degree, by taking reinsurance from others. That is referred to as retrocession . The reinsurer who provides cover to another reinsurer is called a retrocessionaire . It is common for reinsurers to act as retrocessionaires as well, so that the international insurance market is a complex web of risk transfers and retransfers amongst the world's reinsurers, acting either as reinsurers to primary insurers or as retrocessionaires to reinsurers.

Typically a reinsurer such as GIO Re offers reinsurance cover for cedants in relation to various categories of loss - for example, property, marine, space, directors and officers liability, and professional liability. It is convenient to mention, in passing, that GIO Re and other reinsurers participated in the Minet Accountants International Professional Indemnity Programme ( MIPI ), a complex program to share the risk of losses by the large international accounting firms, on a global basis.

Most cedants classify the business they write under four broad headings, namely direct and facultative, proportional treaty, risk excess-of-loss (risk XL), and catastrophe excess-of-loss (catastrophe XL). It was the practice of GIO Re to draw a distinction, in its reinsurance business, between its attritional book and its catastrophe book . The attritional book related to reinsurance on an ongoing basis of typical and recurring risks not related to any single specific event. The catastrophe book related to claims for losses in respect of major events, typically natural catastrophes such as earthquakes and hurricanes. GIO Re's practice was to regard any single occurrence which caused it to make total payouts greater than $10 million as a catastrophe, for this purpose.

Generally cedants enter into reinsurance contracts on a calendar yearly basis, that is, the contract provides cover from 1 January to 31 December in a particular year, to be replaced, if renegotiated, as from 1 January in the following year. In accounting for the premiums received for reinsurance contracts, the reinsurer distinguishes between earned and unearned premium . Where a premium accrues in a given period but it is likely that a proportion of any claims payments under the contract to which the premium relates will be made in a later period, the reinsurer treats a portion of the premium corresponding with future anticipated payouts as unearned premium, in its financial statements for the period in which the premium accrued.

A premium for reinsurance is sometimes quoted as a percentage rate on line or ROL . To say that a particular insurance has a rate on line of 1% is to say that the insurer is paid a premium of $1 for every $100 of cover.

A claim by a cedant on its reinsurer implies that the cedant has a liability to its own insureds in respect of which it is entitled to reinsurance indemnity. Sometimes, however, a cedant may notify its reinsurer on a precautionary basis that according to its assessment, it will receive claims from its insureds in the future of a specified amount. In the present case such notifications have been called precautionary claims . The amount notified as a precautionary claim may lead to an actual claim by the cedant of the same amount, or of a greater or lesser amount.

The impact of claims can be offset by a reinstatement premium , which is a premium payable to reinstate the policy for the remainder of its term after a claim has been made.

The profit of an insurer in any period is equal to the increase in its total assets over the period reduced by the increase in its total liabilities over the same period. As the settlement of insurance claims is subject to delays it is necessary for an insurer to set up reserve provisions for claims that have been incurred and reported but not fully settled at the balance date; and also for claims that have been incurred but not yet reported to the insurer, called IBNR claims . There is no generally accepted actuarial method of determining outstanding claims provisions for reinsurers (Mr Robertson's affidavit, paras 34-5).

When a catastrophe occurs, the reinsurer makes an assessment of what is called the ultimate loss , that is the amount that will be required to meet all claims liabilities, eventually, in respect of that occurrence. The assessment of ultimate loss is partly an actuarial task, but of course it involves the exercise of judgment. It is a difficult and uncertain process, because the extent of the reinsurer's exposure to a particular catastrophe will depend not only on identifying the nature of the damage and the cedants who are at risk in the locality of the catastrophe, but also the other reinsurance arrangements and retrocessions that bear upon the event. When the ultimate loss has been assessed, it is discounted to present value and brought to account together with premiums and retrocession arrangements so as to calculate profit for the year in which the catastrophe occurred. But those calculations are based on assessments that may need to be revised in later years, as experience of the losses caused by the catastrophe unfolds. In calculating the ultimate loss for a catastrophe, a reinsurer will take into account paid claims, reported and outstanding claims, and also an estimate of IBNR.

In assessing the ultimate loss for a catastrophe, a reinsurer might be forced initially to rely on percentage figures showing its average share of total market losses for previous similar events. A calculation of ultimate loss based on average share makes the rather vulnerable assumption that the loss for the new catastrophe will conform to the average. The validity of that assumption depends, in part, on the actual reinsurance contracts that have been written by the reinsurer covering the new catastrophe. One method of checking the validity of the assumption is to conduct a contract-by-contract analysis . This procedure involves staff of the reinsurer identifying from its records (usually, in recent times, computerised) the cedants likely to have suffered losses from the catastrophe, and then reviewing the insurance files for those cedants. In the course of the review, the staff consider policy terms and limits, and excess clauses, perhaps also obtaining information from the underwriters who wrote the reinsurance policies, and considering the reinsurer's experience with those cedants in prior years. Using their expertise, the staff then make an estimate of the claims to which they are exposed from those cedants.

Finally, it is appropriate to make some observations about the processes of modelling and forecasting. Mr Robertson submitted (written submissions, para 43) that the reinsurance industry is volatile and that forecasting profits in the industry is hampered by inherent uncertainties. The evidence in this case supports that submission. As Mr Vines observed in an e-mail dated 22 November 1998 (PTB 1179), an adjustment of 5% to the claims reserve will impact on reported results, in the case to GIO Re, by $110 million, and "no-one can predict claims to that level of accuracy particularly when $1.4 billion of the liability is represented by an estimate of claims that are thought to have been incurred have not yet been reported to us (IBNR's)". Mr Robertson himself said on 7 December 1998 (affidavit para to 213) that the $80 million profit forecast was his best estimate, but the final profit result could easily differ from the forecast by $100 million, and he had no way of knowing whether the difference would be positive or negative. Factors that can materially impact on actual profits include actual versus expected development of long tailed classes of business and unpredictable events such as earthquakes, hurricanes, storms, freezes, floods, fires, tornadoes and other man-made or natural disasters (Part B statement, Appendix One:1999 Forecast: PTB 1935). Consequently, as Mr Murray of PwC observed (PTB 1458), profit forecast in reinsurance "is not an exact science", and "differences of opinion about the level of reserving can legitimately and reasonably be reached by an differing actuaries".

These features of the reinsurance industry add to the court's difficulty in applying the statutory standard of care and diligence, and are matters that need to be carefully borne in mind. The fact that a profit forecast is adhered to over a substantial period of time and then, only a few months later, the actual results show that the forecast was wrong by many millions of dollars is not, per se , an indication of negligence, let alone dishonesty, in the preparation and maintenance of the forecast. But the duty of care and diligence may not have been discharged where pertinent information (including the existence of a contrary view supported by analysis) is disregarded or not properly reviewed and verified, or where the reasoning process employed to support the forecast is inadequate. 2. DRAMATIS PERSONAE 2.1 The roles of Mr Vines, Mr Robertson and Mr Fox Mr Vines

Mr Vines was by profession and training a chartered accountant and auditor (T 2496-2498). He worked with Price Waterhouse from 1968 to 1995, beginning in the London office and becoming an audit partner in 1981. He specialised in banking and had a number of prominent banking clients, and was also auditor of GIO Australia Holdings. Importantly for present purposes, he was not a specialist auditor of general insurance businesses. In his capacity as auditor of GIO Australia Holdings he had frequent contact with Mr Robertson, whom he knew to be an actuary of longstanding experience, extensively involved in GIO's privatisation and listing in 1992. Mr Vines said he participated in discussions about technical issues with the actuaries but left it to the specialists to descend into the details (T 2516). He regarded Mr Robertson as an actuary with a very good understanding of the business and situation within GIO, who was highly regarded by GIO's board of directors (T 2517). He formed the view that reports received from Mr Robertson would be very well considered and soundly based (T 2517).

During his last five years at Price Waterhouse, Mr Vines was the managing partner for New South Wales, spending about three quarters of his time dealing with questions of management, and the remainder doing audit work. He had frequent contact with the chief financial officers of his audit clients, whose qualifications and training were generally in accounting. After his employment with GIO ended in 1999, Mr Vines became a senior executive officer with ReAC and became chief executive officer of that company in about May 2000, at a time when the company was not writing new business and had gone into run-off (T 2499).

Mr Vines commenced his employment at GIO in July 1995 (T 2499), under a written service agreement with a subsidiary in the GIO Group. The employment agreement described his position as chief financial officer (PTB 0001). At that time Bill Jocelyn was the group managing director (T 2500), and GIO Australia Holdings had been a listed public company for about three years.

Mr Vines said that, as chief financial officer, he had responsibility for the financial reporting of the Group. This entailed the consolidation of financial reports produced by the subsidiaries, and forming his own view about the financial soundness and integrity of the business, but not the production of the subsidiaries' reports (T 2501). He had responsibility for tax matters, and for capital management within the Group, including the allocation of capital to existing businesses and to prospective businesses. He was responsible for financial matters at the Group level in the context of reporting to the stock market and to the public. For various purposes (for example, in the course of the due diligence process described below) the Group's activities and subsidiaries were classified into four categories, namely GIO General (which included home and vehicle insurance and compulsory third-party insurance), GIO Insurance (corporate and reinsurance), financial services (including GIO Finance and GIO Building Society) and other activities (including the investment function, asset management, central costs and income tax). Mr Vines' financial responsibilities at the Group level extended to all of these categories.

There appears to have been some expansion of Mr Vines' role and responsibilities when Stewart ("Nick") Steffey replaced Mr Jocelyn as chief executive in July 1998. During the period when Mr Jocelyn was chief executive officer, the operating subsidiaries were largely independent businesses whose executive directors reported to the subsidiary boards, on which the holding company directors sat. As chief financial officer, Mr Vines was responsible for financial reporting and taxation affairs of the Group, including the consolidation of reports coming from the subsidiaries, but he did not prepare the financial reports of any of the subsidiaries (T 2501). He attended the monthly board meetings of GIO Australia Holdings and the quarterly board meetings of the subsidiaries by invitation, but he was not a director (T 2502). The subsidiaries held management committee meetings attended by the executive director of the subsidiary and his team. Mr Vines did not attend those meetings. The executive director of each subsidiary had management responsibility for the subsidiary’s business, including retrocession protection and regulatory compliance (T 2502). The subsidiaries prepared 6-monthly valuations but Mr Vines did not play any role in their preparation (T 2503-4). All this suggests that Mr Vines may have had a limited involvement in the financial affairs of the subsidiaries, through his role in financial reporting at the Group level and his observation of quarterly board meetings.

After Mr Steffey replaced Mr Jocelyn in June 1998, the holding company directors resigned from the boards of the subsidiaries (T 2504), and those boards became executive boards. The executive director of each operating subsidiary reported to Mr Steffey, who reported to the holding company board as chief executive. Mr Vines joined some of these subsidiary boards including the board of GIO Insurance, where he was a director from 21 July 1998 to 22 February 1999 (T 2504-5). Mr Vines said there were no formal directors' meetings of GIO Insurance and he regarded his appointment as a director of that company as a formality (T 2821), because all substantive decisions taken in respect of the reinsurance business, and all other parts of the Group, were taken by the parent board (T 2822).

It seems to me that, whatever may have been the position before Mr Steffey arrived, Mr Vines' role thereafter put him in closer contact with financial matters at a divisional level, though in a supervisory role. Mr Vines agreed in cross-examination that his role as chief financial officer required him to satisfy himself that such matters as budgets were properly and reasonably formulated (T 2812), and that it was his function to investigate what was reported to him in order to satisfy himself, through his own inquiry, that it was essentially valid (T 2816). As regards financial accounts and reporting, he agreed (T 2890) that as chief financial officer of a substantial company group, he had the following responsibilities: · to review financial information on a consolidated basis; · to respond to issues raised by management or auditors at the subsidiary level; · to ensure that the financial statements of the Group as a whole and its divisions reflected compliance with Australian accounting standards, and to give advice to the management and the board to ensure that this happened; · to ensure that accurate information about the company's financial position was prepared and provided to management and the board of directors; · to ensure that the information that was supplied to the stock exchange in the investment community was accurate and meaningful; and · to intervene if he became aware of some deficiency in a division's financial statements that was not being dealt with.

Mr Vines agreed that he "had, generally speaking, a supervisory role in relation to [the financial affairs of the Group]" (T 2816), and "had the responsibility of a chief financial officer, as [he] saw it”. In cross examination, senior counsel for ASIC explored with Mr Vines what he understood by the responsibilities of a chief financial officer. While he said that the chief financial officer's role is influenced by how the group is managed and personalities involved, he accepted that there is a substantial commonality of role and function in the positions of chief financial officers of company groups, and agreed that a chief financial officer of a company group has responsibility for the financial integrity of the group (T 2889).

There were substantial additions to these functions in the second half of 1998, particularly after AMP's takeover bid was announced. The result was, in my opinion, to leave Mr Vines with a very heavy workload (demonstrated by his diary entries, to which he was taken during examination in chief), and also to put him in a central position in the takeover response process. I shall deal with some of these matters in more detail later, but it is appropriate to bring together here the principal elements of his additional responsibilities: · he attended meetings of the takeover response committee and the Part B working group as well as the DDC, where he had a co-ordinating role; · he was in very frequent contact with the advisers, including Macquarie Bank, Chase, PwC and the lawyers; · he met with Mr Steffey and Macquarie Bank every day, often for hours on end (T 2564); · he participated in meetings organised by Macquarie Bank with institutional shareholders, and had discussions with rating agencies (T 2565) and brokers (T 2567); · he devoted substantial time to discussions with McKinseys in relation to their strategic review and with Trowbridge in respect of the capital adequacy study (T 2566); · there was additional work for him in the area of commentary on monthly management reporting (T 2566), and in redefining the delegation authorities to executive directors consequent upon Mr Steffey's revised board structure (T 2567); · he was required to supervise projects which involved restating GIO's accounts under United States Generally Accepted Accounting Principles; · he supervised the outsourcing of the internal audit function, a task involving a tendering process by external accountants who were briefed by Mr Vines (T 2567); · he reviewed the tax and accounting implications of various senior management employment incentive programs formulated by the new general manager of human resources hired by Mr Steffey, Stuart Yoland (T 2568); · he and his team continued their responsibilities for capital management, tax compliance and tax planning (T 2570).

A proper assessment of Mr Vines' responsibilities involves adding to the more "routine" responsibilities he had in his position as chief financial officer of the Group, the additional special responsibilities assigned him in respect of the takeover response and other projects.

Mr Vines initially had a professional staff of three. Jenny Lau worked on the preparation of consolidated financial reports for the Group. There were two tax specialists involved in the preparation of tax returns and tax planning for the Group. At a later time, after Mr Steffey became chief executive in June 1998, Jodie Johnson joined Mr Vines' staff as the first member of a proposed mergers and acquisitions group which Mr Steffey wished to establish (T 2501-2). When pressure built up for the supply and processing of information during the Part B process in response to AMP's takeover bid, a senior manager at PricewaterhouseCoopers, Richard Deutsch, was seconded to Mr Vines' group (T 2552). Mr Robertson

Mr Robertson, now retired, was an actuary by profession. After about 10 years with the AMP Society in New Zealand, and another 14 years in professional consulting work, he undertook a consulting assignment for the Government Insurance Office of New South Wales (as GIO then was) in 1989, and then was appointed to establish a representative office for GIO Reinsurance in Malaysia. When GIO's privatisation was completed in mid-1992, Mr Robertson became group financial officer until 1995, and he was also secretary of the Board Audit Committee of GIO Australia Holdings. He gave evidence that in these roles he became aware of the operations of GIO Re and in particular, the volume and type of business it was writing (Mr Robertson's affidavit, paras 7 and 8).

From 1995 to 1997 he was the executive director of GIO General. He said that in early 1997, the chairman of the GIO Group at that time, John Iliffe, approached him in relation to the job of executive director of GIO Insurance, thinking that the present holder of that office, Mr Roach, was about to resign. Mr Iliffe told Mr Robertson his brief would be to find a replacement executive director or a purchaser for the reinsurance business, and also told him that he had been "earmarked to assume the position of managing director" of GIO Australia Holdings when Mr Jocelyn retired in 1998. Mr Iliffe arranged for Mr Robertson to be interviewed by executive search consultants for the position of managing director, but then Mr Iliffe was overcome by illness and died in May 1997 (affidavit, para 10).

In September 1997 Mr Robertson became executive director of GIO Insurance after the sudden resignation of Mr Roach (Mr Robertson's affidavit, annexure FWR1). He accepted the appointment after the new chairman, Stanley Howard, offered it to him on "conditions to be discussed later". Mr Robertson said he assumed this was a reference to what Mr Iliffe had discussed with him earlier in 1997. In other words, he was expecting to be elevated to managing director and chief executive after the retirement of Mr Jocelyn. At Mr Howard's instigation, he was contacted by new executive search consultants who were assisting the board in recruitment to that position, and he had two meetings with them.

On 18 May 1998 Mr Howard called on Mr Robertson to inform him that the GIO board had chosen Mr Steffey as managing director. Mr Robertson met Mr Steffey later that day. Mr Robertson said he told Mr Steffey on that day that he did not wish to work in reinsurance and did not intend to remain long-term in the role he was then occupying. He said Mr Steffey told him he would recruit a new executive director for GIO Insurance, and asked him to stay on until a replacement was found, at which time Mr Steffey would either find him a job that he would be interested in or would give him a redundancy package (Mr Robertson’s affidavit, para 15).

Mr Robertson occupied the position of executive director of GIO Insurance until early November 1998, when Mr Fox took up his appointment. Mr Robertson remained employed by the GIO Group until 31 August 1999 (when his position was terminated on the ground of redundancy), performing various special assignments, but the nature of his position during the period from early November to mid-December 1998 is controversial. I shall deal with it in section 4.

It is relevant to note that Mr Robertson was away from GIO's offices from Friday 4 September to Sunday 20 September (Monte Carlo conference), on Wednesday 14 October, on Tuesday 3 November, from Friday 6 November to Tuesday 17 November 1998 (Boston insurers' meeting), and from Friday 18 December 1998 to Sunday 3 January 1999 (vacation). Mr Fox

Mr Fox is a Chartered Insurer who had a career in the insurance industry in London for over 20 years before his appointment to GIO. From 1972 to 1998 he was employed by the American Reinsurance Company Inc or its UK branch. In 1993, when American Re obtained a branch licence to act as both insurer and reinsurer in London, Mr Fox coordinated the process and was the Principal UK Executive nominated on the licence.

When Mr Steffey took up his position as chief executive in July 1998, he briefed an executive placement bureau to find a new executive director for GIO Insurance. They contacted Mr Fox, and a televideo conference was arranged between Mr Fox and Mr Steffey, in August 1998. According to Mr Fox (first affidavit, para 11) Mr Steffey told him that the GIO reinsurance operation was in a mess and suffered badly from lack of management, and that GIO Re were not aware of what was happening in the international market.

Mr Fox attended an interview with Mr Steffey in Sydney on 31 August 1998. He gave evidence (first affidavit, para 12) that Mr Steffey said the reinsurance business would need to be moved out of Sydney, perhaps to London, and if Mr Fox came on board that idea could be further explored. He also said he was looking at offshore funding and a group stop loss coverage and would want the new executive director to put the project together. According to Mr Fox, Mr Steffey referred to Mr Robertson and said, "you would primarily be taking his role although he will stay on for approximately 6 months to continue work on the financials, the takeover response and to help out generally." Mr Robertson gave evidence that Mr Steffey never described his ongoing role at GIO Insurance in this fashion (T 3117). He gave similar evidence with respect to other claims by Mr Fox (set out below) as to their respective responsibilities.

Mr Steffey told Mr Robertson he had asked executive search consultants to headhunt a new executive director for GIO Insurance. Mr Fox visited Sydney again on 19-22 September at GIO's request. According to Mr Fox, Mr Robertson took him for a trip to the Blue Mountains (Mr Fox's first affidavit, para 16). Mr Robertson located the trip to the Blue Mountains late in August (Mr Robertson's affidavit, para 16; T 3120). Nothing turns on this discrepancy of evidence. On 21 September Mr Fox attended an informal dinner with Mr Robertson, at which he met Mr Schneider and Annemie Pelletier of GIO Re (Mr Fox's first affidavit, and para 22; Mr Robertson's affidavit, para 96).

During that visit, Mr Fox was interviewed again by Mr Steffey, but he was not interviewed by Mr Robertson (Mr Fox's first affidavit, para 22). According to Mr Fox (first affidavit, para 18), Mr Steffey repeated that Mr Robertson would remain for at least 6 months and said: "I can't expect you to know immediately all about the current financial status of GIO. Frank will stay on to handle the financial aspects of the AMP takeover bid. This will free you up to sort out the management of the company and to focus on the key objective of relocating the business."

Mr Fox said (first affidavit, para 19) that he knew nothing of GIO's financial position, did not feel qualified to participate in the takeover process, and did not wish to do so. He said he would not have accepted the position at the GIO had he thought he was to be responsible for those matters.

During his visit to Monte Carlo in September 1998, Mr Robertson interviewed at least one of the candidates for the position, and sent an e-mail to Mr Steffey recommending that Mr Fox should be appointed (Mr Robertson's affidavit, para 80). Mr Robertson gave evidence explaining his reasons for recommending Mr Fox (affidavit, para 81). One of his reasons was his belief that Mr Fox had some, admittedly limited, experience in alternative risk transfer products.

Mr Fox was offered the position of “Executive Director, Reinsurance” by a letter from Mr Steffey dated 22 September 1998 (PTB 0529A), his employment to commence on a date to be agreed. There was some further correspondence concerning the redundancy provision in his employment contract, in which (by letter from GIO's Director Human Resources dated 25 September 1998 (PTB 0535)) it was made clear that redundancy entitlements would operate in the event of takeover regardless of the takeover circumstances. Mr Fox accepted the appointment by telephone on 30 September, ceased employment with American Re on 30 October, and travelled from London to Sydney on 2 November, arriving in Sydney at approximately 6 a.m. on 4 November (affidavit, para 25-27).

On 2 October 1998 Mr Robertson sent an e-mail to various staff announcing Mr Fox's appointment (Exhibit P21). He said that until that time, GIO Re had been run by "enthusiastic amateurs", including himself. He said that since arriving at GIO Insurance just over 12 months previously, he had become convinced that it was time to appoint an executive director who had "a really deep background in the reinsurance business", and that after interviewing quite a number of people he had finally found the right one. He gave brief information about Mr Fox and said that Mr Fox would arrive in Sydney on about 1 November, and he added: "I shall stay on for some months to introduce him around and familiarise him with GIO Re and its style of operation, and will progressively move into a strategic role which Nick Steffey has in mind for me in GIO's other corporate activities".

The e-mail implied that the decision to recruit a new executive director, and the selection of Mr Fox, had been decisions made by Mr Robertson. In fact the decision was taken by Mr Steffey, although it was supported by Mr Robertson.

Mr Fox took up the position of executive director early in November 1998. He gave evidence that his first day on the job was Wednesday 4 November 1998, though Mr Vines and Mr Robertson said his first day was Thursday 5 November. According to Mr Fox's account (first affidavit, para 27), Mr Vines telephoned him at his hotel about an hour after he had arrived, and asked him to come to GIO's head office, and he promptly did so and remained in the office for the rest of the morning. Mr Vines said he could not recall doing so, and that he believed Mr Fox commenced work on 5 November. For reasons I shall explain, it seems to me probable that a discussion with representatives of Guy Carpenter located by Mr Fox on 4 November in fact occurred on 5 November, and if Mr Fox came into the office on 4 November nothing significant occurred for the purposes of this case.

Mr Fox gave evidence (first affidavit, para 35) that on his first day in the office Mr Steffey told him: "Frank knows all about the finances and will stay on board with you as joint executive director for 6 months to handle the financials and the response to the AMP bid to let you get your feet under the table. It would be impossible for you to understand GIO Re's financials in such a short time. I want you to concentrate immediately on reorganising the management and getting the UK branch licence under way for the next renewal season [and then he mentioned other tasks for Mr Fox, none of which related to the profit forecast or the AMP bid]."

Mr Fox gave evidence (first affidavit, para 36) that he understood that Mr Steffey's instructions related to his areas of responsibility, and that Mr Steffey had authority as chief executive to determine such matters. He gave details of the work he did in the areas of responsibility assigned him by Mr Steffey (first affidavit, paras 229-247). He said he assumed Mr Robertson had been given corresponding instructions but he did not have any discussions with Mr Robertson about their respective roles (para 37).

Mr Fox was appointed to the board of GIO Insurance on 25 November 1998. Mr Robertson remained a director of GIO Insurance, with some executive responsibilities.

Mr Fox's employment with GIO was terminated, effectively from 15 June 1999 (Mr Fox's first affidavit, para 228).

The question of the respective responsibilities of Mr Fox and Mr Robertson after Mr Robertson's arrival was the subject of conflicting evidence by them. I shall consider further evidence and make findings in section 4. My overall conclusion is that Mr Fox acquired the unqualified responsibilities of the executive director of GIO Insurance, as from his arrival on 5 November 1998, but Mr Robertson retained a concurrent role with joint executive responsibility, with Mr Fox, for financial matters in GIO Insurance relating to the profit forecast to be inserted in the Part B statement. 2.2 The roles of others relevant to this case

Gregory Schneider's working career began in 1990 as an actuarial assistant in the United Kingdom, and in 1993 he was employed by Lloyd's of London to work on the Equitas project, which valued the insurance and reinsurance assets and liabilities of numerous Lloyd's syndicates that had reported major losses, in order to set a price for the transfer of their portfolios to a new corporate vehicle. Mr Schneider said (first affidavit, para 4) his main work with Equitas was to evaluate the adequacy of the reserves set by the Lloyd's syndicates. This included review of reserves for syndicates participating in the MIPI program. He said (para 5) some of the contracts he evaluated were financial reinsurance contracts. After his work for Equitas, he joined a firm that managed portfolios for a number of Lloyd's syndicates, occupying the position of group actuarial manager. He passed 8 of the examinations required by the Institute of Actuaries in the United Kingdom for fellowship of the Institute, but he did not complete the remaining examinations, which were in superannuation and life insurance. The examinations he passed entitled him to be classified as an associate of the Institute of Actuaries in the United Kingdom, and in 1997 he became an associate member of the Institute of Actuaries of Australia.

He commenced employment with the GIO in February 1997, initially as an assistant actuary with GIO Re, reporting to the financial controller of GIO Insurance who, in turn, reported to the executive director (Mr Schneider's first affidavit, paras 9-10). Mr Robertson explained (affidavit para 29) that in his initial capacity, Mr Schneider's main responsibilities had been to operate GIO Insurance's computer programs which calculated provisions for IBNR, outstanding claims and unexpired risks, and to construct and maintain a management information system, using a computer system known as COGEN. Mr Schneider said (first affidavit, para 11) that his main duty was to recommend reserves at the end of each half-year. But that, presumably, was a recommendation based upon the application of a valuation model designed by someone else (as the evidence, explained below, shows), and was not a recommendation direct to the board of GIO Insurance because Mr Schneider reported to the financial controller and was not, at that stage, the company's actuary.

Mr Schneider became "General Manager, Technical Services" in GIO Insurance in June 1998, pursuant to Mr Robertson's business plan of May 1998 (PTB 0006), reporting directly to Mr Robertson as executive director of that subsidiary. He said (first affidavit, para 13) that he retained his existing responsibilities and in addition, he was regularly required to analyse and prepare reports on GIO Re's reserving requirement (valuation). Mr Robertson's evidence was consistent with Mr Schneider's on this point. The additional responsibilities of Mr Schneider's new role, said Mr Robertson (para 30), included recommending provisions for catastrophe claims, modelling aggregate exposures, and retrocession protections (Mr Robertson's affidavit, paras 29 and 30).

It is relevant to note that, according to Mr Robertson's memorandum to the board of directors of GIO Insurance dated 18 May 1998, Mr Schneider was "chiefly responsible for making recommendations to the Reinsurance Committee about the design (but not the implementation) of GIO Re's retrocession protection". That is relevant because it suggests that Mr Schneider would not have had the authority to negotiate or, a fortiori , to enter into the American Re retrocession agreement, which is one of the important transactions in this case.

Once he became General Manager, Technical Services, for practical purposes Mr Schneider was (at all times relevant to this case) the internal actuary for GIO Re, although he had not quite completed all of the examinations necessary to become an actuary. He was part of the executive team but in a less senior position than Mr Vines, Mr Robertson and (later) Mr Fox. Mr Schneider was assisted by a team of actuarial and technical staff including Paul Driessen.

Mr Schneider's work on such matters as valuation and the recommendation of reserves will be referred to frequently in this judgment, but at this stage a general comment by Mr Robertson should be noted. Mr Robertson said in his affidavit (para 41) that he had difficulty with what he claimed was Mr Schneider's "inability to meet Group reporting deadlines", because he was always "tinkering" with complex valuation models, and was "invariably late" in providing the GIO Re accountants with information required for their accounting packs which had to be reported to the chief financial officer, and even when he supplied purportedly final figures he would "invariably propose that later adjustments should be made". Mr Robertson said that on more than one occasion he told Mr Schneider he was "driving Ken Wright and his accountants mad" by proposing changes to valuation figures after they had closed their accounting packs, and that he was to stop "fiddling with the computer programs". Mr Robertson said he believed that Mr Schneider was good at building computer models, but he did not have a high regard for the accuracy of Mr Schneider's work and the figures that he would present (affidavit, para 42).

It is clear from the evidence of the two men that there was a degree of tension between them, bordering on animosity. That being so, Mr Robertson's criticisms of Mr Schneider's delay and inaccuracies may have been a little exaggerated. But other evidence establishes that Mr Schneider did not meet Mr Vines' deadline for the first quarter highlights and it appears that Mr Robertson had to finalise his memorandum of 4 November 1998 without being able to wait for Mr Schneider's revised first-quarter results. Other evidence points to the fact that there was not only a mismatch error in the valuation model developed by Mr Schneider but there were some other errors made by him as well.

Mr Schneider was ASIC's most important witness, in the sense that he gave evidence broadly to the effect that he warned the defendants at various times in the period from October 1998 onwards that Hurricane Georges would have a larger effect on the profit performance of GIO Re than had been allowed for in the profit forecast. He gave evidence that in the period between 19 October and 9 November 1998 he caused a review to be conducted of the insurance policies that gave GIO Re an exposure to Hurricane Georges claims, and that this work confirmed his warnings. This came to be called the "contract-by-contract analysis". Much of the evidence given by Mr Schneider was contradicted by the defendants.

Gerhard Fricke was, at the relevant times, GIO Re's reinsurance claims manager, reporting to the executive director (Mr Robertson until November 1998, and thereafter Mr Fox). He supervised approximately 35 staff in the claims department. The claims department recorded and advised the company's executive managers of claims experience in relation to events reinsured by GIO Re. Mr Fricke's role included overseeing the claims processes, registration and recording of inward reinsurance claims from cedants, and preserving appropriate amounts to cover the claims on the claims recording system, called COGEN. He sent various e-mails with respect to Hurricane Georges claims to Mr Fox and others, as will be seen.

Connie Daviskas was an assistant manager in the claims department of GIO Insurance. On about 9 November 1998 she was instructed by Mr Fox to set up what was referred to in evidence as "the Hurricane Georges register". When the register was set up, arrangements were instituted within GIO Insurance for personnel of the claims department to enter Hurricane Georges claims on COGEN, as soon as they were received, to make sure that the COGEN records were up-to-date.

Simon Hedley was an underwriter for GIO Insurance. He was involved with Mr Schneider in the contract-by-contract analysis in relation to Hurricane Georges claims. Sean Peak was an assistant to Mr Schneider in work connected with the contract-by-contract analysis.

At all relevant times the auditors of the GIO Group were PricewaterhouseCoopers ("PwC"). Ian Hammond was the senior audit partner responsible for the GIO work. Patrick Murray was the audit partner for GIO Insurance. Mr Murray had spent most of his career auditing insurance-related businesses (T 1367; T 2498). He was assisted by Victoria Howell. As well as discharging their functions as GIO Insurance's auditors throughout 1998, PwC had specific instructions in October 1998 to review the first-quarter results (T 1369).

Stephen McClintock was a PwC partner who was a director of PricewaterhouseCoopers Securities Ltd ("PwC Securities"), a company associated with PwC that was used for work for which a securities dealers or advisers licence might be needed (T 1368). The company was retained to prepare a review of the business profit forecast for 1998/99 for the purposes of the GIO Part B statement in response to AMP's takeover bid. Christopher Latham was an actuary and a partner of PwC, who provided external actuarial advice to GIO Re.

Until 1998 the public regulator of the general insurance industry was the Insurance and Superannuation Commission ("ISC"), but on 1 July 1998 the ISC was replaced by the Australian Prudential Regulatory Authority ("APRA"). 2.3 Credibility of witnesses

I have not reached any generally adverse conclusions with respect to any witness other than Mr Fox. When I recount the evidence of a particular witness on a subject, it is to be taken that I accept that evidence unless I say otherwise. It is, however, necessary to resolve conflicts in the evidence and I shall do so as and when they arise. There was no assault on the overall credibility of any witnesses other than Mr Schneider, Mr de Vroome (an expert witness), Mr Vines, Mr Robertson and Mr Fox, and I shall therefore make observations only about those five witnesses.

In no case was I given a generally unfavourable impression of a witness by observing his demeanour, or prevarication in response to questions, or inconsistencies in his answers. In those circumstances the approach I have taken to resolving conflicts in the evidence is, bearing in mind the Briginshaw standard, to assess each matter upon which evidence was challenged in its own terms, in light of the context, other documentary and witness evidence bearing on the question, and the coherence and plausibility of the competing evidence. I have endeavoured not to approach the task of resolving conflicting evidence on any given issue with a predisposition in favour of or against the evidence of a particular witness. This is so even in respect of Mr Fox, whose evidence on many points I have rejected. As I shall explain, the result of my analysis of the evidence, question by question, is to put Mr Fox in an unfavourable light reflecting adversely on his credibility. But that is the result of my analysis rather than a step in the reasoning.

There was inevitably a degree of reconstruction, rather than pure recollection, in the evidence of witnesses who were being asked about events and conversations that occurred more than five years before they gave their evidence. Often it was evident that the witnesses were influenced by documentary evidence, not infrequently observing that they had no independent recollection of a certain matter (for example, a date) but would accept the accuracy of what was indicated by the documents. In such circumstances it is important for the witness to do his or her best to recollect and to be honest about the limits of recollection and the extent of reliance on the documents. ASIC contended that in some respects, the defendants went beyond the limits of recollection and gave evidence that was pure reconstruction. I shall deal with that contention where appropriate. Mr Schneider

Senior counsel for Mr Vines objected to Mr Schneider giving his evidence in chief by affidavit, since his evidence included evidence of the contents of conversations central to ASIC's case. I decided to allow Mr Schneider's affidavit to be read, except for certain designated paragraphs which related to the crucial conversations, and in respect of those matters, Mr Schneider gave viva voce evidence. It was put to him in cross-examination that he had memorised the relevant parts of his affidavit, and he admitted that he read through the conversations two or three times in preparation for giving his oral testimony. That does not seem to me to provide a basis for any adverse inferences about his evidence.

Mr Schneider's evidence was extensively tested in lengthy cross-examination. Although he was occasionally combative and (as noted below) had a tendency to try to create a debate with cross-examining counsel, I did not form an adverse impression of his honesty as a witness.

It was submitted (Mr Robertson's written submissions, para 510) that Mr Schneider gave his evidence in an evasive manner and made a determined effort to obfuscate and be unco-operative with his cross-examiner. I agree that there were some difficulties encountered in the course of his cross-examination, but I think that submission is not an accurate account of them. It is true, as was submitted on Mr Robertson's behalf, that Mr Schneider from time to time answered a question with the question and sometimes gave non-responsive answers. I formed the view that he did not properly understand his role as a witness, and may have believed that his function was to debate the point with counsel rather than simply to answer the question. But that tendency did not undermine his credibility. It was more in the nature of over-enthusiasm.

Mr Robertson submitted (written submissions, para 511) that Mr Schneider displayed arrogance and ambition, frequently telling the court that he had more experience than Mr Robertson in reinsurance, and aspiring to Mr Robertson's job. Mr Robertson gave evidence (affidavit paras 112-3) of a conversation with Mr Schneider in which, according to Mr Robertson, Mr Schneider said he was not willing to be blamed for a profit forecast that turned out not to be realised, and that he would create a history file showing that he opposed the forecast, to show to AMP when they arrived. Mr Schneider denied this conversation but he agreed that he created a "sequence of events" file in 1999 (T 0716-9). He agreed with a suggestion in cross-examination that he had acted in a disloyal fashion to Mr Robertson.

It seems to me probable that Mr Schneider became concerned about his career when the AMP takeover bid was announced, particularly as the announcement hinted that the reinsurance business might not be retained after the bid was successful. There is evidence of his concern about his career and his reputation in his e-mail to Mr Fox dated 3 May 1999 (PTB 2275). It is understandable, in circumstances where there was an emerging disagreement between Mr Schneider and Mr Robertson with respect to the impact of Hurricane Georges, which became evident with the publication of the first quarter highlights, that Mr Schneider would have decided to keep file copies of documents relating to the profit forecast, which he eventually (some time in 1999: T 0718) brought together in a file. None of that reflects adversely on his credit.

His credit would be adversely affected if I were to find, contrary to his denial, that he told Mr Robertson he would show the file to AMP and that he created it for that purpose. But Mr Schneider gave an alternative explanation for the ultimate creation of the file (T 0717-8), which is not implausible. It was hardly necessary for Mr Schneider to create a special file to demonstrate to AMP that he opposed the profit forecast, given the contents of the first quarter highlights. On the very limited evidence I am not able to find in favour of Mr Robertson's version of their discussion about the "history" file.

Mr Vines (written submissions, para 122) made a similar though somewhat more general submission. He said it was apparent that Mr Schneider was concerned about his own position in 1999, and he suggested that Mr Schneider was also concerned that he should have done more about Hurricane Georges than he had done, given that by 1999 its very large impact on GIO Re had become evident. Mr Vines suggested that before Mr Schneider was examined under s 19, he may have recalled the statements he had made about Hurricane Georges in October and November 1999 and reconstructed them from statements that the maximum exposure was $100 million to statements that he thought that Hurricane Georges would be a $100 million type event. It may be, said Mr Vines, that at the time Mr Schneider was confident that exposure to Hurricane Georges would be contained by the American Re contract or it may be he believed that a redundancy in MIPI would be relied upon by Mr Robertson and Mr Fox and approved by PwC in order to maintain the forecast, despite his own claimed belief that there was no redundancy in MIPI. Mr Vines made the point that the existence of these and other possibilities is the reason why the court should not act on uncorroborated and uncertain accounts of conversations inherently unlikely to have taken place.

It seems to me that these "possibilities" are really speculations which, though perhaps consistent with the evidence, have no foundation in it. In particular, there is no proper basis for a finding that Mr Schneider reconstructed his communications about Hurricane Georges in preparation for his s 19 examination. Briginshaw does not require that the evidence must remove all alternative possibilities. I disagree with Mr Vines' submission.

Mr Vines made the related submission (para 124) that the court should conclude that at the time, Mr Schneider did not have the heightened concern about Hurricane Georges which he later claimed to have. He noted that Mr Schneider did not make any written report to anybody recording his opinion that Hurricane Georges was a $100 million type event and did not prepare any written report about his contract-by-contract analysis, other than the HG table. He noted that Mr Schneider never told Mr Murray or Mr McClintock of that opinion.

The argument is essentially directed to Mr Schneider's credit, and I do not accept it. By the time he embarked on the contract-by-contract analysis which led him to form the view that Hurricane Georges was going to be a $100 million type event, Mr Schneider had twice been criticised for not following proper reporting lines and expressing his views directly to PwC. There was every probability that Mr Schneider would seek to verify the opinions expressed in the first quarter highlights (opinions that had been challenged), complete or substantially complete the verification exercise before talking about it, and then report the outcome to his immediate superior, who by that time was Mr Fox. This is essentially the approach he followed, except that he spoke about his work and its probable outcome to Mr Robertson and Mr Fox a little before the analysis was complete, because they were relevant to the disagreement that Mr Lange had wanted resolved at the meeting on 5 November. Therefore I do not agree that there is any proper basis in the evidence for a finding that Mr Schneider, with the benefit of hindsight, subconsciously reconstructed events to avoid being placed in an unfavourable light.

The defendants drew attention to some inconsistencies in Mr Schneider's evidence, particularly as between the evidence he gave during his s 19 examination by ASIC in 2000 and the evidence he gave at the hearing. There is a convenient summary of these submissions in ASIC's submission on Mr Schneider's credibility, para 51. It is unnecessary to set out the various inconsistencies here. Having considered them, my view is that they do not rise to the level of calling into question the reliability of Mr Schneider's evidence as a whole. In my opinion they show only that discrepancies are likely to arise when an honest witness gives evidence on the same complex subject matter on two occasions separated by several years and on the second occasion, is subject to very extensive cross-examination.

Mr Robertson submitted (para 514) that Mr Schneider's evidence should be treated with caution given his refusal ever to admit that he might have been wrong. Reference was made to evidence that he gave in cross-examination about the space error and MIPI, and about omitting some contracts in his contract-by-contract analysis. Mr Schneider was in the witness box for a very long time and it was noticeable, as Mr McClintock said, that Mr Schneider was never backward or reticent in expressing opinions he held, and was to some extent assertive (T 1561). But he did eventually admit to error (T 0661) and again, I do not agree that there was any reason for generally concluding that he was not a credible witness.

My rejection of the submissions attacking Mr Schneider's credit on a general basis does not entail that I disagree with submissions that his evidence should be assessed cautiously. He was ASIC's central witness. ASIC must prove its case on the Briginshaw standard, as explained in section 5 of these reasons for judgment. It was necessary to be careful, when assessing Mr Schneider's evidence, to consider whether he had clearly recollected that one defendant rather than another participated in the conversations of which he gave evidence. From time to time in the body of this judgment I shall conclude that the particular defendant was not a participant in a conversation notwithstanding Mr Schneider's evidence to the contrary.

Additionally, and perhaps understandably given the lapse of time, some of his evidence in cross-examination about the content of conversations was rather vague, both as to content and as to time, and some of it I have rejected partly for that reason. But again these matters are not destructive of his credit in a general sense. Mr Vines submitted (written submissions, para 121) that the uncertainty and generality of Mr Schneider's account of the critical conversations suggested that his accounts were generally unreliable (though, he said, not necessarily consciously unreliable). I have not extracted any such general principle from his evidence. I have tried to weigh up the quality of his evidence and the quality of other documentary and witness evidence as well as the inherent plausibility of what is said, so as to reach a conclusion, where the evidence allows me to do so, bearing in mind the Briginshaw standard.

There were extensive submissions about Mr Schneider's credibility, which often descended into the specifics of whether the court should accept particular aspects of his evidence. I shall deal with those issues in my presentation of the facts. Mr de Vroome

Anthony de Vroome was ASIC's reinsurance expert. He swore two long affidavits, one in respect of Mr Robertson and one in respect of Mr Fox. He gave extensive oral evidence.

Mr de Vroome has had a long career in general insurance, as an underwriter and in management, and in the period from 1985 to August 2001 he was the National Reinsurance Manager for NRMA Insurance. Mr Robertson attacked his evidence by comparing Mr de Vroome's curriculum vitae with the curriculum vitae of James Morgan, who gave expert opinion evidence on Mr Robertson's behalf. I accept that Mr Morgan's curriculum vitae speaks of a broad experience in the reinsurance industry and in particular, in the management of large international reinsurance companies, whereas Mr de Vroome's specific reinsurance experience is focused on his time as reinsurance manager with NRMA, where the reinsurance business was conceded by Mr de Vroome to be "a sideline" to the company's main business (T 2191). GIO Re's reinsurance business was much larger. But still it was very extensive experience in reinsurance, amply sufficient to establish a field of expertise for the purposes of expert opinion evidence.

I found that Mr de Vroome gave clear and plausible evidence of a kind that was helpful to the court on various issues. The same was true of Mr Morgan. Occasionally I have not accepted their respective opinions, as noted elsewhere (particularly in section 7 of this judgment). But the fact that Mr de Vroome’s extensive experience in reinsurance was with a substantially smaller business than GIO Re, or the businesses with which Mr Morgan was associated, was not a ground upon which I relied for disbelieving or discounting his evidence or preferring the evidence of Mr Morgan. Mr Vines

Mr Vines gave viva voce evidence in chief and was extensively cross-examined. Substantial parts of his evidence concerned his recollection of documents, and events recorded in documents, but he also gave evidence about meetings and conversations, frequently disagreeing with Mr Schneider's evidence about such matters.

ASIC submitted (written submissions, para 326) that the court should assess Mr Vines' evidence on the basis that he was able to give it after he had heard ASIC's opening and all of ASIC's evidence, and therefore with a complete opportunity to reflect upon the whole case put against him before he was obliged to put forward his own recollection of events. That is in fact what happened, in accordance with Mr Vines' rights: see Rich v ASIC (2004) 78 ALJR 1354; [2004] HCA 42. In my view it would be wrong to approach Mr Vines' evidence with any presumption or attitude generated by those circumstances.

Mr Vines studied all or a large portion of the documents in ASIC's tender bundle as part of his preparation for his evidence, and read Mr Schneider's affidavits closely (T 2806). He said that prior to doing so, there was quite a bit of confusion in his mind. He agreed (T 2807) that sometimes he could not actually remember a conversation or a meeting but, when hearing what another witness said had happened, he drew the conclusion that he simply would not have said the things attributed to him. When it was put to him in cross-examination (T 2790) that it was difficult, giving evidence about matters that had occurred five years previously, to distinguish between memory and reconstruction, he said: "I think what I've come to realise is you may not know what happened, but you often know what didn't happen."

That seems to me a frank and reasonable explanation. I formed a generally favourable view of Mr Vines as a witness, and although I have not accepted all of his evidence, I was not given reason to doubt his credibility on any general ground. Indeed, ASIC did not invite me to do so (written submissions, para 329).

ASIC submitted (written submissions, para 327) that there is a very real risk in the case of a party in the position of Mr Vines, that over the course of time the party will come to believe, contrary to the truth, that he or she could not have done, said or heard any of the things that would subject the party to onerous liability. I agree that this risk must be borne in mind. It is true for all defendants that the court should be cautious in accepting their evidence when the case against them "gets close to the quick" (ASIC's written submissions, para 329). But there are also circumstances in which it is acceptable for a party to give evidence that particular conduct or a statement alleged against him or her did not occur because, for stated reasons, the allegation is implausible. In the end, I have found observations at a general level unhelpful in assessing Mr Vines' evidence. I see no general reason for rejecting his evidence where it is not contentious, and where it is in conflict with other evidence, it is necessary to assess the particular matter rather than to apply some general approach. Mr Robertson

Mr Robertson 's affidavit made on 8 December 2003 was a carefully considered response to the case against him, prepared after ASIC's evidence had closed, making frequent references to that evidence by transcript page and purporting to answer it in detail. He was cross-examined at length.

In April 2000 he gave evidence over a period of three days in a private examination before an ASIC examiner. Some of the answers he gave on that occasion were inconsistent with his affidavit and oral evidence at the hearing. He sought to explain the discrepancies in his affidavit (para 241ff). He said that he was contacted to appear at the examination after he had been retired for about 8 months, that his memory of events had faded and he was confused about some of the issues, that he did not seek legal advice or representation during his examination, that he spent no time refreshing his memory from documents or otherwise preparing for the examination, that he had not seen most of the documents for over 12 months and some for over 18 months, that he did not invoke the privilege against self-incrimination because he did not consider that he had done anything wrong, and that he was happy to help ASIC in its investigations. He then sought to correct some discrepancies between the transcript of examination and his evidence at the hearing.

On the whole, this episode is to the credit of Mr Robertson, who has no doubt had many occasions in the period up to and during the trial to rue his open co-operation with the regulator. But of course, I shall from time to time have to deal with discrepancies between his s 19 evidence and his evidence at the hearing.

ASIC submitted that the court should prefer Mr Schneider's evidence to Mr Robertson's evidence on various specific matters (for example, whether Mr Schneider told Mr Robertson about the contract-by-contract analysis, a question I have resolved in ASIC's favour). ASIC also made the general submission (written submissions (Robertson), para 40) that Mr Robertson's evidence about his recollection of events and the reasons why he acted or did not act should either be rejected or treated with caution. This submission was made on the ground that much of this evidence was reconstruction rather than recollection, in the context of litigation where his conduct was subject to scrutiny, with the inevitable result that his version of events was more favourable to him than the true facts. ASIC did not submit that in his process of reconstruction Mr Robertson was intending to mislead the court or give false evidence (written submissions (Robertson), para 47).

I found Mr Robertson to be an honest witness who was prepared from time to time to make admissions against his interest, such as his admissions that Mr Schneider told him in their meeting on 5 November that he believed Hurricane Georges would be a $100 million type event, and that they discussed the claims figures in the October Status of Registered Events report during that meeting.

I agree with ASIC that in respect of particular components of his evidence, Mr Robertson did endeavour to reconstruct without any independent recollection, and on other occasions his recollection was faulty. But my approach has been to assess those components of his evidence in their own terms, rather than to approach his evidence with a general predisposition to treat it more cautiously than the evidence of other witnesses. The outcome has been that I have accepted Mr Robertson's version of the events more often than I have rejected it, although on one important matter (whether Mr Schneider told him about the contract-by-contract analysis at their meeting on 5 November) I have found against Mr Robertson. Mr Fox

ASIC submitted that the court should not accept Mr Fox's evidence as true and reliable except to the extent that it was corroborated by other evidence, or was inherently probable, or was given against Mr Fox's interests. As I have explained, I have adopted an approach to the assessment of evidence that does not depend upon any general finding about the credibility of a witness. But on the basis of my analysis of each issue, I have frequently come to the conclusion that Mr Fox's evidence is to be rejected. That process leads firmly to a conclusion adverse to Mr Fox's credibility, and therefore I accept ASIC's submission as reinforcing my primary reasoning.

For reasons given in the body of the judgment, I have rejected Mr Fox's evidence on each of the following significant issues: · whether he had limited responsibility as executive director of GIO Insurance; · whether he took the initiative in asking for the Hurricane Georges register to be established; · whether he "binned" the Hurricane Georges register e-mail; · whether the letter he wrote to American Re on 13 November 1998 was for the same deal as the American Re placement slip, or was for a different Gulf of Mexico exposure; · whether his secretary, Ms Irvine, sent a facsimile to Mr Hammond and Mr Vines about "particular areas of conservatism" without his authority; · whether he had any day-to-day responsibility for the American Re negotiations; · whether he knew about the $80 million profit forecast on 24 November 1998; · whether he discussed the $80 million profit forecast with Mr McClintock on 24 November 1998; · whether he attended a meeting with Mr Robertson and Mr Schneider on 5 November 1998 following a meeting with Mr Lange; · whether Mr Schneider told him at any time that he believed Hurricane Georges was a $100 million type event; · whether Mr Schneider told him on 9 November 1998 that the worst-case scenario was $100 million; · whether he told PwC on 7 December 1998 that notifications to date in respect of Hurricane Georges were $60-65 million; · whether he told PwC on 7 December 1998 that management's best estimate for the ultimate loss in respect of Hurricane Georges was $60-65 million; · whether he received an assurance from Mr Robertson on 7 December 1998 before signing the representation letter and management sign-off; · whether Mr Schneider's secretary gave him Mr Schneider's assurance about auditor approval before he signed the placement slip on 18 December 1998. 3. FACTS 3.1 The GIO Group, up to June 1998

The GIO Group was a government-owned enterprise until its flotation and listing in 1992. It was, and continued after listing to be, one of Australia's largest general insurance companies. It entered into the reinsurance market in 1986, and thereafter was by a considerable margin the largest of the three Australian reinsurance companies. It operated in Australasia, Southeast Asia and Europe, and was a minor player in the London reinsurance market. Governance

In 1995 Mr Jocelyn was the managing director of GIO Australia Holdings and the chief executive of the GIO Group. The corporate structure of the Group remained unchanged after that time, but corporate governance changed substantially after Mr Steffey replaced Mr Jocelyn as chief executive from July 1998.

In 1995 the members of the GIO Australia Holdings board were also members of the boards of each of the major subsidiaries, including GIO Insurance (T 2500). In addition, the executive director responsible for the running of the business of each subsidiary was a member of that subsidiary's board. In Mr Jocelyn's view, the subsidiaries were to be run as autonomous business ventures. The management teams of the subsidiaries were in different locations. Financial reporting was generally limited to six-monthly reporting, although each subsidiary reported to the holding company every three months (T 2500). According to the evidence of Mr Vines, Mr Jocelyn had little or no confidence in such processes as management accounting, monthly reporting and budgeting (T 2503). Consistently with this approach, GIO Insurance, under the supervision of Owen Roach, then the executive director, developed an actuarially-based model to produce six monthly valuations for the reinsurance business.

After Mr Robertson took over from Mr Roach as executive director of GIO Insurance in September 1997, he retained two French reinsurance consultants to visit in February and March 1998 and report on GIO Re's internal structure and controls (Mr Robertson's affidavit, para 22). The consultants delivered a critical report on 17 April 1998. They said, inter alia , that they were struck by the loose organisation and great weakness of communication between the different divisions in GIO Insurance, that some branches were underwritten without sufficient technical knowledge and with inadequate guidelines, that the back office was not fully operational, that external controls on underwriters were lacking, and that underwriters were excessively influenced by brokers. Their recommendations included, in addition to freeing underwriters from the influence of local brokers, that steps be taken to assess the aggregate exposures of the company and then decide whether or not retrocession covers would have to be reshaped, and that a comprehensive inventory of outstanding claims be established (Mr Robertson's affidavit, annexure FWR2).

Mr Robertson gave evidence that he agreed with the French consultants' comments about lack of control over underwriters. He explained that this had come about when, in 1996, GIO Re's chief underwriter had resigned to work for a competitor, and Mr Roach, concerned that business would be taken away from GIO Re, gave instructions for the renewal of as much business as could be renewed (affidavit, para 24).

Mr Robertson adopted the practice of having informal weekly meetings with a "reinsurance committee" comprising Mr Schneider, together with GIO Re’s senior underwriter and an underwriting manager, a practice discontinued after Mr Fox's arrival (affidavit, paras 32-33). He produced a business plan (PTB 0006), which he presented to the board of directors of GIO Insurance in May 1998. His principal concern, according to that document, was to bring the "front office" (essentially, the underwriters) under tighter supervision to ensure that the board's policies were observed, but there were other changes more important for this case. In accordance with the business plan, Ken Wright became the financial controller of GIO Insurance, responsible for the financial and management reporting of all activities within that subsidiary. Mr Wright reported to Mr Robertson as the executive director of GIO Insurance, and he in turn reported to the chief executive. He did not report to Mr Vines, though he was in regular contact with him, and Mr Vines read the business plan document (T 2817).

As mentioned at section 2.2, Mr Schneider's responsibilities were revised in Mr Robertson's business plan. There is some evidence recording Mr Vines' understanding of Mr Schneider's role and responsibilities, which has some importance to ASIC's case against Mr Vines. Mr Vines said that when he read the business plan, it accorded with his understanding of what Mr Schneider's role and responsibilities were (T 2818). He understood that Mr Schneider would constantly monitor the performance of GIO Re's business at the portfolio level, and would be chiefly responsible for modelling GIO Re's aggregate exposure to claim events (T 2819). Mr Vines understood that Mr Schneider was supposed to have systems in place to ensure that he remained constantly aware of the aggregate exposure of each underwriter, and he was supposed to be aware of potential clashes of exposures between underwriters, and the overall position of GIO Re (T 2819). Mr Vines knew Mr Schneider was chiefly responsible for making recommendations to the reinsurance committee about the design, but not the implementation, of GIO Re's retrocession protections (T 2820). Generally, Mr Vines agreed that in so far as anyone in GIO Re was carrying out the professional activities of an actuary, it was Mr Schneider and those who assisted him, and if anyone was going to take a view dependent upon actuarial investigation, it would be Mr Schneider in the first instance (T 2815).

As explained in section 2.1 (Mr Vines), Mr Steffey altered the governance arrangements in the Group by converting most of the subsidiary boards into management boards (T 2504). That strategy was implemented for GIO Insurance on 21 July 1998, when the main board directors resigned from office as directors of the subsidiary. The subsidiary board thereafter comprised Mr Steffey, Mr Robertson, Mr Vines and Frank Bush, who was the company secretary (PTB 0067).

Thus, during the period from July to early November 1998 the board of directors of GIO Insurance was an executive board, comprising the chief executive officer of the GIO Group (Mr Steffey), the company secretary of the Group (Mr Bush), the CFO of the Group (Mr Vines), and the executive director of GIO Insurance (Mr Robertson).

In July or August 1998 Mr Steffey engaged McKinsey & Co, management consultants, to conduct a strategy review (T 2552). McKinsey personnel were conducting the review during the second half of 1998, when the main events to which I shall refer took place. Business issues

An indication of the business climate in mid-1998 for reinsurers can be found in Mr Robertson's business plan of May 1998 (PTB 0006). In 1992 the reinsurance markets were required to deal with Hurricane Andrew, a very large catastrophe which led to substantial claims against GIO Re, and that was followed, not long afterwards, by the Northridge earthquake in Los Angeles. Large catastrophes such as these have the effect of creating a "hard" market in which premium pricing is firm and there is, for a time, generally good profitability. But by mid-1998 global reinsurance markets had become extremely soft, because recent catastrophe experience had been benign.

Within that general business environment, at least three concerns had emerged for the executive management of GIO Re at or prior to the commencement of Mr Steffey as chief executive in July 1998. These related to the management of risk exposure, the adequacy of provisioning and the existing valuation models, and budgeting and the introduction of management accounts. Risk exposure

Well before the arrival of Mr Steffey, there was concern amongst senior management about GIO Re's risk exposure. On 6 November 1997 Mr Robertson, recently appointed executive director of GIO Insurance, made a report to the GIO Insurance board, noting that there was a great deal of interest in the reinsurance industry in "alternative risk transfer", that is, the use of financial markets rather than reinsurance markets as a vehicle for the transfer of risk from insurers who considered themselves excessively exposed (Exhibit D1, tab 20). He said that GIO Re would be interested in being involved in alternative risk transfer, although its development was at an early stage, and he noted that he had appointed a US agent to structure a suitable transaction. It does not appear from the evidence that any such transaction eventuated, but the American Re transaction of November 1998 has some of the characteristics of financial reinsurance, as will be seen.

In April 1998 GIO began a comprehensive and complex risk management study, part of which involved looking at the risk-based capital requirements of the Group (T 2565). Trowbridge, consulting actuaries, did most of the work but contributions were made by the actuaries within GIO, including Mr Schneider (T 2566).

In about April 1998 a table was prepared (T 0063A) summarising probable maximum losses that could arise out of a book of business written by GIO Re at 1 January 1998. Mr Vines considered it and had discussions with Mr Robertson or Mr Schneider about it (T 2507). He said he believed Mr Schneider was involved in the exercise (T 2814). The summary showed a total of A$700 million net of retrocession, a figure that was A$445 million in excess of the limit that had been set by the board. The table showed that retrocession agreements under negotiation would reduce the total to A$372 million, A$117 million in excess of the limit (T 2505-6). Mr Vines said that one of the first management issues that Mr Steffey had to address when he arrived in June 1998 was this excess exposure. He said some retrocession agreements that had been negotiated did not fix the problem across the portfolio as a whole, but merely plugged particular gaps (T 2507).

Mr Steffey was concerned that GIO's retrocession arrangements did not provide a total solution to protect the company, and so debate began about setting up a whole of loss type of retrocession cover. He instructed Mr Robertson to go to the market to see what sort of cover could be found (T 2507). Mr Robertson went to a number of brokers and reinsurers and recommended negotiations with some of them, including Munich Re. Eventually there were negotiations with Guy Carpenter and American Re, discussed below, with a particular focus of attention on retrospective cover for losses caused by Hurricane Georges. Provisions, valuation models and the June 1997 valuation

In his report to the GIO Insurance board dated 6 November 1997, Mr Robertson said that his most immediate concern upon his appointment as executive director in September 1997 had been the adequacy of provisions for outstanding reinsurance claims (Exhibit D1, tab 20, p 5). In his affidavit (paras 34-36) Mr Robertson explained that there is no generally accepted actuarial method of determining outstanding claims provisions for reinsurers. He said that many European and US insurers rely upon case by case estimation of notified claims, adding an allowance for IBNR claims, but he expressed the opinion that GIO Re's underwriters "were not sufficiently in touch with their portfolios" for that method to be effective. Therefore, GIO Re used a valuation model that had been developed by Mr Roach as executive director, adapting the "Bornhuetter-Ferguson method". It is unnecessary to deal with the detail here, beyond noting that there is an explanation in an appendix (FWR3) to Mr Robertson's affidavit.

Mr Roach's model was subjected to criticism, and he adjusted it from time to time. In particular, the external auditors expressed some concern about the adjustments made to the model under Mr Roach's supervision for the purposes of the 30 June 1997 figures, and the board audit committee asked for a review of the underlying assumptions that had been applied as at June 1997 (T 2510). Upon taking up the executive directorship in September 1997, Mr Robertson was keen to see such a task undertaken. On 6 November 1997 he reported to the GIO Insurance board that he had retained Mr Latham (then of Coopers & Lybrand Actuarial Consultants and later of PwC) to express an independent opinion on the adequacy of the provision that had been made. Mr Robertson said that Mr Schneider was also making an assessment of the parameters of the reserving model, with a view to producing a more robust model to use in the preparation of the 31 December 1997 half-year figures and subsequent financial statements.

Mr Robertson reported to the GIO Insurance board on the preliminary results of these investigations on 9 December 1997 (Exhibit D1, tab 21 - minutes). In his draft advice Mr Latham estimated the outstanding claims provision at a figure that was very close to the figure in GIO's Annual Report as at 30 June 1997, which had disclosed a reinsurance prudential margin of A$119 million. Mr Schneider's draft report on his recalculation of the June 1997 results, using a modified model, would have produced an outstanding claims provision A$174 million greater than the actual provision as at 30 June 1997. In his memorandum to the board audit committee of GIO Australia Holdings dated 11 February 1998 (Exhibit D1, tab 21), Mr Robertson said he was not unduly concerned with such a discrepancy of opinions, for several reasons, which he set out. But he expressed concern that Mr Latham's final report, dated 7 January 1998, differed from Mr Latham's own draft by reducing the value of premium assets, with the result that in Mr Latham's final view the provision in fact made by GIO as at 30 June 1997 allowed for a prudential margin of only A$66 million.

Mr Schneider's final report on the valuation of reinsurance claims and premiums, as at June 1997, was dated 28 January 1998. It was summarised and discussed in Mr Robertson's memorandum to the board audit committee dated 11 February 1998. Mr Schneider calculated that the outstanding claims provision should have been A$139 million more than in the published accounts. Mr Robertson gave an explanation for the divergence and said that the principal interest in Mr Schneider's report was not its result, which had been overtaken by events, but its detailed description of a new valuation methodology, which was then used for the 6-month period to 31 December 1997.

In his affidavit (para 39), Mr Robertson said the important changes to the model as at 31 December 1997 were that: · it separated out catastrophe claims and projected their development separately from other (i.e. attritional) claims; · space insurance and the MIPI business were removed from the attritional model and treated separately, in order to recognise their unique characteristics; and · while the Roach model had assumed that new business would meet the profit objective of 10% of net earned premium, releasing that profit as the premium was earned, the revised model assumed a break-even result for new business until experience indicated that real profit was emerging.

In his affidavit (paras 45-50), Mr Robertson gave a brief description of the attritional and catastrophe claims models after the implementation of these changes. The attritional claims model was used to calculate the value of total claims expected for all claims other than "catastrophes", catastrophes being defined as claims which were expected to cost GIO Re more than A$10 million. The model operated by blending an initial assumption about the expected cost of claims for each class of business written in each year with the developing cost of claims actually notified for that class as the years passed. That blending involved weighing the actual claims by a "credibility factor" which represented the relative degree of belief in the developing experience. The credibility factor was calculated mathematically from parameters based on GIO Re's past experience for each class of business.

In the catastrophe claims model, each catastrophic event was modelled separately, by taking the total insurance market loss for the event, estimating GIO Re's share of the total loss, determining the expected claims incurred to date by applying an expected claims development pattern to GIO Re's estimated total loss, and then comparing the expected claims so calculated with the actual claims incurred to date and adjusting the estimate of GIO Re's total loss by a proportion of the difference between the two, the proportion being an adjustment factor similar to the "credibility factor" for the attritional model. The difference between expected ultimate claims and actual notified claims was taken to be IBNR claims. IBNR claims would be discounted to allow for the delay in likely payment.

Although the new methodology would have required, as at 30 June 1997, strengthening of the reinsurance outstanding claims provision by A$139 million, and there was an alteration in the estimate of unbooked premium, Mr Schneider was nevertheless able to report a profit of A$9.1 million for the six months to December 1997, because (according to Mr Robertson's 11 February memorandum) the reinsurance business was very profitable during the six months. Mr Robertson recommended an adjustment that would reduce the provision and increase the profit by A$15 or 20 million.

At their meeting on 17 February 1998 the board audit committee accepted Mr Robertson's recommendation and adjusted the figures by $20 million. Mr Vines attended that meeting as secretary to the committee. He gave evidence that he was pleased with the work that had been done by Mr Latham and Mr Schneider and, having heard Mr Robertson's presentation to the members of the committee, he formed the view that GIO's reinsurance business was very soundly based (T 2516).

In his business plan of May 1998, Mr Robertson included a pro forma profit forecast for 1998/99 for GIO Re of $81.5 million, saying that the number was "an orphan" included only because he did not think that a business plan should appear without some attempt at a forecast (affidavit, para 51). From May 1998 onwards he worked to develop the business plan and had discussions with underwriters as to the likely business prospects for their portfolios.

Thus, by the time Mr Steffey commenced in July 1998 there had been considerable debate about the adequacy of provisioning. Mr Vines gave evidence that, not long after Mr Steffey began with GIO, he received instructions from Mr Steffey to undertake a detailed review of the reserves and provisions that were going to be put in place as at 30 June 1998 (T 2517). He said that the purpose of the exercise was to set reserves at a level where the new chief executive would not inherit any of the "sins of the past" (T 2518). Evidently it is not uncommon for a new chief executive to set the balance sheet on a very conservative basis when he or she first arrives - perhaps in a manner similar to politicians who seek to blame the predecessor government's financial management when they are first elected to office (T 2518).

By late July 1998, Mr Schneider had already completed the first computer runs for a draft valuation for June 1998, foreshadowing a business loss for GIO Re of approximately A$25 million for the 1997/98 year. Mr Robertson was aware of this work, and was aware that Mr Schneider, with the assistance of two underwriters, was reviewing the portfolios in marine and aviation (Mr Robertson's affidavit, para 52).

Mr Vines did not pass Mr Steffey's instructions on to Mr Robertson but instead, he spoke to Mr Schneider, asking him whether there were any aspects of the valuation that were less than conservative (T 2519; T 2826). That appears to be of some significance and tends to explain Mr Robertson's anger when he later found out about the proposals for increased provisioning. Mr Vines said that he knew Mr Robertson's general attitude towards such a review, and knew him to be "somewhat cynical of chief executives behaving in this way", and expected that Mr Robertson would be reluctant to make "large and precipitous changes" to GIO's reserves (T 2518). He said he wished to avoid confrontation with Mr Robertson (T 2824), an aspiration not realised, as will be seen. The picture that emerges is that Mr Robertson, frustrated in his desire to become chief executive, occupying the position of executive director of GIO Insurance on a temporary basis, and closely associated with the past management of the Group, may have been somewhat marginalised after Mr Steffey's arrival.

Mr Vines and Mr Schneider identified an aspect of the valuation that had not been conservatively set, namely the deferral of about A$40 million of incurred claims in the catastrophe portfolio, and they agreed that those claims should be expensed for the June 1998 financial year (T 2519). They also discussed a problem with the aviation book, for which premium income had grown rapidly in recent years, arising because of some unsatisfactory contracts written by an inexperienced underwriter. They discussed the marine book and concluded that there was no need for further adjustment there, because marine premium levels were reasonably consistent in recent years and a retrocession arrangement with OP Re (Overseas Partners Ltd) was close to finalisation (T 2526).

Mr Vines then commissioned Mr Latham to review the valuation over the ensuing weekend (25-26 July), in conjunction with him and Mr Schneider (T 2521). The end result of that process was to arrive at a loss for reinsurance of A$88.9 million for the six months to June. Mr Vines met with PwC (including Mr Hammond and Mr Murray) on 29 July 1998 to review issues relevant to the audit of the June 1998 financial statements, and PwC made a note of that meeting, which is in evidence (Exhibit D1, tab 29 & 32). Mr Vines told PwC that, in addition to the A$40 million noted above, there was a A$63 million loss in respect of catastrophes occurring in the six months to 30 June 1998, including two aviation catastrophes and ice storms in Canada, and also losses in marine and aviation attritional.

Mr Vines reported his discussions to Mr Steffey and expressed some concern that reporting such a large loss might have a negative impact on GIO Re's commercial viability, but Mr Steffey said he was not concerned about that ramification and wanted a balance sheet that was "bulletproof" (T 2522). He told Mr Vines to look further into the aviation contracts, and subsequently Mr Vines instructed Mr Schneider to conduct a review of what became known as "the misbehaving contracts" (T 2523). The review involved looking at the underlying aviation contracts that had given rise to the poor result and calculating ultimate loss ratios for each of those contracts (T 2526). This amounted to a form of "contract-by-contract analysis" generally similar to the analysis undertaken in respect of contracts affected by Hurricane Georges, which is discussed below.

Mr Schneider discussed the results of his work on the misbehaving contracts with Mr Vines, in the absence of Mr Robertson. He showed Mr Vines a range of graphs representing alternative ultimate loss outcomes for each of the two most recent aviation underwriting years, and explained the underlying assumptions for each alternative. Mr Vines said it became evident that a subjective decision would be needed (T 2524). After discussion they agreed on certain ultimate loss ratios, which led to the need for an additional provision of A$105.5 million, and therefore an additional loss of the same amount for the January/June 1998 half-year, for which a loss of over A$80 million had already been calculated.

It appears that Mr Robertson was unaware that this additional work had been done until the meeting of 7 August 1998 with PwC, discussed below. On 1 August he wrote a memorandum to Mr Steffey, copied to Mr Vines, in which he said that the last "reporting packs" he had seen, for the preparation of the Group's financial statements, stated a loss on the business operations of GIO Re of A$87.7 million. Mr Robertson proffered an explanation for that loss (Exhibit D1, tab 32). Mr Robertson's memorandum seems to have been out of touch, in some ways, with the thinking of Mr Vines at that time. Budgeting and management accounts

When Mr Steffey arrived, he made it clear that he wanted monthly management account reporting, and he wanted budgets to be prepared for all of GIO's businesses so that when they reported monthly they could report against their budgets (T 2552). Before AMP's takeover bid was announced, the contributions to be made by each of the businesses to Group profit had been established.

Mr Vines had the responsibility of consolidating the budgets of the underlying business units and, in the first instance, reviewing them and forming a view about their reasonableness (T 2553). That involved discussions with the executive directors responsible for preparing and submitting the budgets, as well as with PwC. Mr Vines saw the respective executive directors as responsible for their business forecasts (T 2556). In his review role he developed an "unders and overs" schedule, which I shall consider in detail later in these reasons for judgment. He regarded that schedule as relevant to his review, because business units inevitably performed differently from expectations, and so an "unders and overs" schedule could be used as a tool by which underperformance in one area might be compensated by good news in another area (T 2555-6).

The strategy review by McKinseys was relevant to the budgeting process. A strategy review team was put together involving about 20 GIO staff and almost the same number of McKinsey consultants, and the budgets that had been prepared upon Mr Steffey's instructions were delivered to the strategy review team and studied by them (T 2553). The budgets had already been reviewed by the strategy review team before AMP's bid arrived. Once the AMP bid arrived and it was decided that a profit forecast would be made in the Part B Statement in response to the bid, the budgeting and forecasting work acquired a new focus.

As to monthly management accounts, Mr Steffey sought to establish "flash results" from business units delivered to the centre within two working days of the month-end, followed by more considered results supported by comments from the executive director on the seventh working day of the month. These reports would be reviewed by central management, including Mr Vines, and they would be consolidated, summarised and incorporated into monthly board papers (T 2569; Exhibit D1, tab 184). Mr Steffey also made it plain at an early stage that he favoured quarterly reporting to the market, a task which involved a significant additional workload, including increased actuarial work (T 2569).

Mr Vines questioned the wisdom of quarterly reporting to the market. He discussed his concerns with David Mortimer, who eventually became GIO's chairman, and Mr Mortimer agreed with him. Mr Vines was concerned about the burden that the process of external reporting would impose, and he was concerned that reporting insurance results on a quarterly basis would tend to promote short-term thinking in the market, which would not be sensible for an insurance business, which is fundamentally a long-term business (T 2592). He expressed his views to Mr Steffey but Mr Steffey was not persuaded, and so Mr Vines set about implementing Mr Steffey's directions. That led to predictable difficulties. For example, external valuations of long-tailed businesses such as compulsory third-party and workers compensation would have to be obtained earlier than had been the practice, because in Mr Vines' view it was necessary to have external valuations so that GIO would have a high level of confidence in reporting on quarterly numbers (Exhibit D1, tab 79, exchange of e-mails between Mr Morris and Mr Vines on 17 and 19 September 1998).

Mr Robertson (affidavit, para 43 and 44) gave evidence that he asked Mr Schneider to create a new valuation program able to be run monthly for internal reporting purposes and quarterly for external reporting purposes, but he said Mr Schneider was not able to do this until he had built up a team of skilled staff. He said Mr Schneider indicated he hoped to produce the first results from the new program using data as at 31 May 1998, but that did not prove possible, and the first real attempt to produce a monthly profit result for GIO Re was as at 31 August 1998, but (according to Mr Robertson) the attempt was unsuccessful. Mr Robertson said quarterly results were produced for the first time as at 30 September 1998, and they showed that the new monthly valuation program was not working correctly due to a matching error that was described by Mr Schneider in his "first quarter highlights", noted below. 3.2 Results to June 1998, and budgeting for year to June 1999

By August 1998 the GIO management were working intensively on finalising figures for the financial statements for June 1998. It had become apparent, given the matters set out above, that the Group would report a substantial loss, notwithstanding the more positive tone of Mr Robertson's memorandum of 11 February 1998, and issues arose as to market disclosure. By 13 August 1998 the business loss for GIO Re for the January-June half had been calculated to be A$188.4 million, following a profit of A$29.1 million for the July-December 1997 half-year (PTB 0099).

Mr Schneider made a presentation of the results of his review of the misbehaving aviation contracts to representatives of PwC, Mr Vines and Mr Robertson on 7 August 1998. Mr Robertson gave evidence that he had assumed the meeting was to discuss the financial year-end audit work to date, and that he was surprised when Mr Schneider attended. Then he was told by Mr Murray of PwC that the meeting was to discuss Mr Schneider's work on the aviation account, work about which Mr Robertson had been unaware (Mr Robertson's affidavit, paras 54 and 55). Mr Vines gave evidence that at the meeting, it soon became apparent that Mr Robertson had not been briefed by Mr Schneider before the meeting. He said Mr Robertson became angry, when he saw where Mr Schneider's presentation was leading, and he expressed dissatisfaction with the underlying process (T 2527). His anger was evidently directed towards Mr Schneider (T 2527).

Mr Robertson gave evidence (affidavit, paras 57 and 58) to the same effect, and he said that after a while, he stood up and said: "I am sick of this. I didn't come here to be sandbagged. I am going home." He explained in his affidavit that he did not have a problem with the substance of Mr Schneider's work nor the results, but he had a problem with the way in which he had been informed. He said that the adoption of Mr Schneider's results would require a change of accounting policy, because they would involve making provision for losses that had not yet been incurred.

Mr Vines spoke to Mr Robertson outside the meeting room and explained the instructions he was under from Mr Steffey, and told him that while he shared Mr Robertson's concerns about the commercial impact of reserving at such a high level, he felt they had no choice but to comply with the new chief executive's request (T 2527; see also Mr Robertson's affidavit, para 58). According to Mr Vines, Mr Robertson did not like the implications of the process because it would mean reporting a loss of close to A$200 million. Mr Robertson's evidence was that if Mr Steffey had asked him to have the work carried out with a view to increased provisioning, he would have readily agreed but clearly enough, Mr Vines had made a different assessment when he went to Mr Schneider rather than Mr Robertson to implement Mr Steffey's instructions. Mr Vines and Mr Robertson returned to the meeting, to hear the rest of the presentation.

According to Mr Schneider's evidence (T 0438), after the presentation he had a conversation with Mr Robertson, who was unhappy and spoke to him in a louder-than-usual voice, saying amongst other things: "I’m very unhappy with what’s just happened. It’s your role to provide me with the best information that you can, and it’s then up to me to decide what to do with that information. It’s not your role to have discussions with the auditors."

Mr Robertson said his recollection was that the conversation occurred on Monday 10 August, and that he was too angry to have conducted such a conversation on the evening of Friday 7 August. That is plausible and I accept it. He said he thought about what had happened on the evening of 7 August over the weekend, and he decided to resign on the ground that his ability to act as a senior executive had been seriously compromised by the way the matter had been handled by Mr Vines and Mr Steffey. On 10 August he sought legal advice on that subject, but he said (affidavit para 63) that he subsequently had a meeting with Mr Steffey and Mr Vines during which the matter was resolved to his satisfaction.

Mr Robertson agreed with Mr Schneider's evidence that he had spoken in a louder voice than usual at the beginning of their conversation (Mr Robertson's affidavit, para 61). He denied that he said it was not Mr Schneider's role to have discussions with the auditors. He gave evidence that he always held the view that it was part of Mr Schneider's role to have discussions with the auditors during the reporting season. He said (affidavit, para 62) he in fact told Mr Schneider: "It is not your role to discuss such matters with the auditors before you have discussed them with me".

It seems to me to be evident, both from Mr Schneider's account of the conversation and from Mr Robertson's evidence, that Mr Robertson's intention was not to preclude Mr Schneider from having any discussions at all with the auditors, a matter that would be totally impracticable, but rather it was, as he said, to complain that certain matters had been raised with the auditors before they were raised with Mr Robertson as Mr Schneider's immediate superior. That is in the context that he had just discovered that Mr Vines had bypassed him by talking directly to Mr Schneider, and no doubt he was concerned to re-assert his position of authority.

On 9 August Mr Vines sent an e-mail to Mr Schneider thanking him for his "hard efforts" and "preparedness to face some difficult decisions" (PTB 0067). He foreshadowed the need for an analysis of expected losses involving a contract-by-contract analysis of tactics that would be available to minimise adverse developments. ASIC submitted that this e-mail showed Mr Vines must have understood that the making of a contract-by-contract analysis was one of the ordinary actuarial tools of trade that Mr Schneider would deploy for various purposes. I do not accept this submission, because it is not clear to me that the "contract-by-contract analysis" that Mr Vines had in mind was the kind of analysis undertaken by Mr Schneider in connection with Hurricane Georges. Mr Vines evidently had in mind an analysis of tactics available to minimise the adverse developments for which the aviation provision allowed, rather than an analysis to assess the ultimate loss on those contracts.

On 12 August 1998 Mr Vines gave a special briefing to the GIO Australia Holdings board with a view to the early announcement of the Group's results, which would be an unaudited Group loss of A$28 million to which GIO Re would contribute a loss of A$189 million (PTB 0072ff). The results would be a very substantial shortfall compared to the market expectation at the time (T 2528), the shortfall in expectation being A$250 million for GIO Re (PTB 0075). The board resolved to announce losses consistent with Mr Vines' presentation, and the announcement was made later on 12 August (T 2529-30). Mr Latham's report, 12 August 1998

Mr Latham prepared a report dated 12 August 1998, concerning estimates of outstanding claims (PTB 0109ff), in which he recommended a net increase in the outstanding claims provision of A$43 million, comprising an increase of A$62 million in aviation, offset by reductions in provisions in certain other areas. He also suggested an unexpired risk reserve, apparently quantified at A$57 million. He identified problems with the aviation book but did not acknowledge that Mr Schneider was undertaking a contract-by-contract review.

Mr Latham also made some observations about MIPI, which are important in this case. He noted that the IBNR that had been provided for by GIO was very substantially in the years 1994/95 and earlier, and the development of GIO's claims experience up to 30 June 1998 was over A$30 million less than the IBNR for which provision had been made. But he said he was loath to suggest that the provision be reduced, because the MIPI treaty was notorious in its experience and it was plausible that the estimated IBNR would eventually emerge. This last statement needs to be remembered when one comes to consider how Mr Vines and Mr Robertson subsequently treated Mr Latham's report as the basis for identifying, in effect, a hidden profit reserve of over $30 million to counterbalance Hurricane Georges losses.

There is a substantial discrepancy between Mr Latham's views on some matters and the views expressed by Mr Schneider after his review of misbehaving aviation contracts. Mr Latham said (PTB 0121) that the increases he suggested were, he believed, "reasonable and credible", but that it was "certainly possible to adopt an alternative view". When Mr Vines' attention was drawn to that observation he said, plausibly enough, that it reminded him that actuaries could reasonably adopt alternative assumptions and arrive at quite different results (T 2533). The aviation provision of A$105.5 million

The additional provision of A$105.5 million for aviation was made up of an increased reserve for IBNR, and a slightly larger component which was an unexpired risk reserve. An unexpired risk reserve is a reserve against losses that will arise out of events that will occur in the future, and ordinarily future events are not recognised for accounting purposes.

On 13 August Mr Robertson had a meeting with Mr Steffey to express his concern that the additional provision might not have complied with accounting standards. In raising this issue he was questioning the appropriateness of the unexpired risk reserve. It was reasonable (according to Mr Vines) for Mr Robertson to query this provision (T 2531). Mr Steffey invited Mr Vines to join the meeting (T 2530), and at Mr Steffey's suggestion, they made a call to Mr Hammond of PwC, who supported the action that had been taken of including the unexpired risk reserve in the 30 June figures. This episode tends to reinforce the view that Mr Robertson was becoming marginalised from the central management team.

On 13 August 1998 Mr Robertson sent a memorandum to Mr Steffey, copied to Mr Vines (PTB 0099), purporting to explain the reinsurance loss of A$188.4 million. It is in some ways similar to his memorandum of 1 August 1998, but the figures are notably different. He identified a number of causes, including high claims in property catastrophe arising from the Canadian ice storms early in 1998, high claims in aviation catastrophe due to several airline crashes, and very poor results in aviation attritional due to underwriter inexperience. He referred to Mr Schneider's review of the misbehaving contracts and, in substance, recorded his agreement with the strengthening of the aviation reserve by approximately A$105 million.

In his memorandum of 13 August, Mr Robertson noted that Mr Latham's recommendation in his report of 12 August amounted, altogether, to an additional provision of A$100 million, sufficiently close to Mr Schneider's figure of A$105.5 million that he thought it appropriate to recommend Mr Schneider's figure. Mr Robertson also noted Mr Hammond's advice that it would be proper, and consistent with Australian Accounting Standards, to take into account expected future losses arising out of the expected future development of reinsurance contracts that had been entered into at or prior to 30 June 1998, in circumstances where there was good reason to expect that those contracts would generate losses.

Mr Vines wrote a brief memorandum to Mr Steffey on the same day as Mr Robertson's memorandum (PTB 0108), supporting it and in particular, supporting the recognition of losses in the aviation attritional book by making the proposed $105 million reserve.

The increase in GIO Re's aviation reserves is not a direct issue in this case, but it is relevant in various ways. First, as will be seen, subsequent calculations made in connection with the profit forecast drew upon what was perceived to be a generous reserve for aviation, to cover perceived losses. Secondly, the episode is relevant to understanding the relationships between Mr Vines, Mr Robertson and Mr Schneider and the tensions between the latter two. Thirdly, the episode shows the extent to which Mr Vines was prepared to become involved, as early as August 1998, in the financial affairs of GIO Re.

By mid-August 1998 GIO Re had made some important changes in its financial affairs, for it had: · reviewed the valuation model that had been used in earlier years; · undertaken and implemented substantial changes to its method of accounting for reinsurance premiums and claims and, in particular, its approach to estimating provisions and reserves; and · created substantial reserves at the cost of reporting a large reinsurance loss for the year to June 1998, where the market had expected a small profit. Commencement of the budgeting and business plan process

On 15 August 1998 Mr Vines sent an e-mail to Mr Robertson, Mr Schneider and others, saying "now that the 1998 numbers have been settled I have an urgent need to finalise the 1999 budgets for the Group" (PTB 0122). He set them a deadline of 26 August, and foreshadowed that the Group would move to quarterly reporting to the ASX. Mr Robertson responded on 17 August (PTB 0123), confirming that the budgets would be ready by 26 August and that GIO Re would be ready for quarterly reporting by September.

The evidence includes a document headed "GIO Re 1999 business plan", with a handwritten addendum, "Version 1" (PTB 0124). Mr Robertson gave evidence that the information in this document was supplied to him at a meeting on 26 August (affidavit para 67). The document identifies a business profit of A$52.5 million. It was later revised and attached to a memorandum from Mr Schneider to Mr Robertson dated 26 August 1998 (PTB 0132), discussed below. 3.3 The August 1998 valuation report

A consequence of the structure of the old valuation model was that it was slow to respond to unexpectedly large losses, underestimating ultimate liability. Mr Schneider and Mr Driessen prepared a report on the valuation of claims and premiums as at 30 June 1998, dated 31 August 1998 (PTB 0139, the "August valuation report" or "the report"). The report noted this deficiency with the previous valuation model and identified the changes made for the 1998 valuation. As noted above, other problems with the old valuation model had been identified in the course of preparing the June 1998 financial statements and in responding to Mr Steffey's desire for a "bulletproof" balance sheet. Mr Robertson said rather euphemistically that there were "technical deficiencies" with the old model and an increasing number of ad hoc adjustments to it (Exhibit D1, tab 21).

The report recorded the operating loss before investment income and shareholders funds of A$188.4 million for GIO Re for the 1997/98 financial year, as had been agreed by the board and announced to the market. It was noted that one of the main contributors to GIO Re's result was the creation of the special reserve of A$105.5 million to cover current and future losses in the aviation class, including both attritional and catastrophe claims. Mr Schneider sent copies of the report to Mr Robertson, Mr Steffey and Mr Vines on 8 September 1998. Mr Robertson's evidence (affidavit para 82) was that the report arrived in his office after he had departed for Monte Carlo.

One of the changes made in the report was to revise premium earnings patterns by class of business in order to reflect more accurately GIO's underlying exposure to risk. Previously the earnings pattern was derived for all classes combined, on the assumption that risk was earned uniformly over the calendar year. This led to the consequence that under the old model, 44% of the calendar 1998 premiums for all classes of business would be treated as unearned as at 30 June 1998. In 1997 Mr Schneider studied the incidence of claims over historical calendar years and concluded that in some classes of business (especially catastrophes) the exposure is seasonal, driven by such factors as the hurricane season in the US. These views were implemented in the August valuation report. According to the calculations made by Mr Schneider and Mr Driessen, the exposure pattern in the catastrophe business was 62% in the July-September quarter, 18% in the October-December quarter, 17% in the January-March quarter and 3% in the April-June quarter. Thus, in their view it was necessary to treat a greater portion of a previously paid catastrophe premium for a calendar year as unearned at 30 June. In the transition year to the new system, it was necessary to take a "one-off hit to the accounts" of A$13.8 million (PTB 0179), due to the fact that the opening earnings factor would be based on the old methodology.

The August valuation report contained an appendix (Appendix M) explaining valuation methodology. It showed that the derivation of the outstanding claims reserve for GIO Re was separately determined using four generic model types, namely the attritional claims model, the catastrophe claims model, the MIPI claims model and the space claims model. Each of them was described in Appendix M. The valuation methodology for catastrophes required determination of: · the market loss; · GIO Re's share of the loss; · the expected "incurred to date" taking into account the claims development pattern; and · the appropriate adjustment to be made to the prior ultimate estimate, by reference to the actual and expected "incurred to date". 3.4 AMP's takeover bid

AMP (by a subsidiary, AMP Insurance Investment Holdings Pty Ltd) announced its takeover bid for the shares in GIO Australia Holdings on 25 August 1998 (PTB 0127A). The offer, which was conditional, was for either two AMP shares in exchange for nine GIO shares, or $4.75 cash for each GIO share. According to the press release, the scrip offer valued the GIO Group at around $3.01 billion, a 19% premium to GIO's most recent closing price. The press release quoted the chief executive of AMP as saying: "Inwards reinsurance is not currently a core business for AMP, so a strategic review of GIO's reinsurance business will be carried out following completion of the takeover to examine options for its future ownership and management. The options may include, for example, holding on to the business in its present form, restructuring the business or disposing of the business at an appropriate time."

The offer closed on 4 January 1999. As required by the Corporations Law in operation at the time, AMP served its Part A statement (the bidder's statement) on GIO on about 8 September 1998. GIO Australia published its Part B statement (the target's statement) on 16 December 1998. The Part B statement contained a profit forecast of A$250 million for the GIO Group, which included a forecast profit of A$80 million for the reinsurance division, for the year to 30 June 1999. Much of the case ultimately concerns the reasonableness of maintaining that A$80 million profit forecast for GIO Re. 3.5 GIO's Federal Court proceedings to challenge AMP's Part A statement

GIO Australia Holdings challenged the validity of AMP's Part A statement, served on 8 September 1998, in proceedings before Emmett J reported at 29 ACSR 584 and 30 ACSR 97. Emmett J held that there were some deficiencies in the Part A statement, in reasons for judgment delivered on 25 November 1998. It is unnecessary to deal with those deficiencies here. This is because his Honour made orders on 30 November 1998 validating the Part A statement notwithstanding the deficiencies, with the result that the last date for dispatch of the takeover offers was extended to 4 December 1998.

It is relevant to bear in mind that in the period from shortly after service of the Part A statement on 8 September until 30 November 1998, there was uncertainty as to whether AMP's takeover bid would proceed in accordance with the Part A statement, or indeed, whether it would proceed at all. 3.6 The due diligence process for preparation of the Part B statement

The board of GIO Australia Holdings retained Macquarie Bank Ltd to advise it in relation to the takeover and it engaged Grant Samuel, business valuers, to value the Group for the purposes of the Part B statement. The board appointed a takeover response committee, on the recommendation of Macquarie Bank, to respond to developments in the takeover process, comprising Mr Howard (then the chairman), Mr Mortimer, Mr Hogan and Mr Steffey. The committee met almost on a daily basis, and meetings were attended by the company secretary, Mr Bush, as well as Mr Vines, and representatives of Macquarie Bank and Atanaskovic Hartnell (GIO's solicitors in respect of the bid) (T 2547).

Chase Securities Australia Ltd were also retained to provide investment banking services, at the suggestion of Mr Steffey, because they were an international bank with a very large insurance specialty group and access to the reinsurance market (T 2548). Their role was to assist in the valuation process, and also to put forward possible merger or acquisition deals involving the reinsurance division. Mr Vines explained that if a major acquisition could be orchestrated on behalf of GIO there would be a trigger by which AMP could withdraw its bid, and alternatively, if one of the other general insurers could be induced to bid against AMP, there would be some competitive tension, which would operate to the advantage of shareholders (T 2564-5). Although several prospects were identified, no such transaction occurred.

In early October the board engaged PwC Securities to provide an independent expert's report in relation to the prospective profit and loss financial information for the year ending 30 June 1999 which was to be included in the Part B statement (T 2550). An unsigned draft of their letter setting out the terms of retainer, dated 22 September 1998, is in evidence (PTB 0515A).

PwC, the firm, were instructed by Mr Vines to review the first-quarter results, which were intended, before the AMP takeover bid was announced, to be released to the market as detailed figures on a divisional basis (T 2551; 2570; 2594). They submitted a draft report on 23 October 1998 (PTB 0618ff), but by that time GIO had decided not to release the first-quarter figures to the market and to await the resolution of the Federal Court proceeding in which AMP's Part A Statement had been challenged. Eventually four-month results to October were released on 17 November, but only at the Group level, and because of the high-level nature of the information Mr Vines decided it was unnecessary to obtain a specific review of those figures by PwC before the announcement (T 2595).

In addition to the board's takeover response committee, a Part B working group was formed on the recommendation of Macquarie Bank, responsible for putting together the "selling document" that was at the front end of the Part B document. The working group included representatives of McKinseys, Macquarie Bank and Gavin Anderson & Kortlang (the public relations consultants engaged by GIO for the purposes of the takeover process), as well as Mr Vines, Mr Bush, and GIO's head of communications (T 2563). The working group met every week or so.

A procedure was established, under the direction of Mr Vines, for a subcommittee to review drafts of the profit forecast and for the draft forecast then to be considered by the audit committee (T 2551; Exhibit D1, tab 45).

Although it was not formally constituted until 4 November 1998, it is appropriate to note at this stage that the board of GIO Australia Holdings established a due diligence committee ("DDC"), comprising five non-executive directors (including Lloyd Lange), Mr Steffey, Mr Vines, Mr Bush, Mr McClintock, a representative of the company's solicitors and a representative of Macquarie Bank. It was essentially the coming together, as a single committee of the bid response committee and the board audit committee, for the purposes of the Part B Statement (T 2599; Exhibit D1, tab 83). The DDC had its first meeting on 28 October, when Mr McClintock spoke to presentation notes (T 2600; PTB 0701).

On 2 November 1998 Mr Vines sent an e-mail to the GIO executive team briefly explaining the timetable and process, saying that they would be required to substantiate all material statements which were to be included in the Part B Statement and to ensure that there were no omissions (T 2601; Exhibit D1, tab 84). The Part B working group met on that day and endeavoured to build a timetable around the likely release of an amended Part A Statement, anticipating the timing and the result of the Federal Court proceeding (T 2609; Exhibit D1, tab 91). It was contemplated that intense activity would be needed around 9, 10 and 11 November.

At its meeting on 24 November, the DDC adopted a planning memorandum for the due diligence process (PTB 1683), and qualitative and quantitative materiality guidelines (PTB 1694). The planning memorandum made it clear that Mr Vines had the central executive role in the due diligence process. The document stated that Mr Vines would be responsible for: · co-ordinating the overall due diligence process, including facilitating liaison and communication between members of the DDC and GIO (PTB 1686); · co-ordinating the GIO management team to explore the commercial/business environment in which the GIO Group operated and events or matters which had occurred since 30 June 1998 which were material for disclosure in the Part B statement (PTB 1687); and · the due diligence process with respect to changes in the financial position of the GIO Group and the financial forecasts (PTB 1688).

The quantitative threshold for considering whether to disclose a matter was set at an amount greater than 5% of the appropriate base amount (for items impacting the balance sheet, the base amount was $2,500 million, and for items impacting the profit and loss account (post tax), it was $160 million). The committee also identified specific tasks, responsibility for which was allocated to individual directors. Mr Vines explained that the non-executive directors on the committee realised that it would be inefficient for all of them to look at all of the aspects of the forecast, and that the most convenient way of proceeding was for each of them to take on an aspect of the forecast and to review that aspect on behalf of the rest of them (T 2620). Mr Lange was given responsibility for inwards reinsurance (PTB 0781). It was resolved that Mr Vines would co-ordinate and support the directors in relation to their specific areas of responsibility. As he put it (T 2620), he was to be "the arms and legs of the non-executive directors".

The DDC established a verification sub-committee of four, including Mr Vines (PTB 1861- report dated 9 December 1998). Initially the working deadline for completion of the Part B Statement was 9 or 10 November, although the timetable for completion of the Part B Statement was extended when the Federal Court's decision on the fate of the Part A Statement, originally anticipated in late October, was not handed down until 25 November.

The suggestion for the establishment of a formal due diligence and verification structure, of the kind that one encounters in prospectus preparation came from Mr Vines, who admitted that he had never gone through a takeover defence process before (T 2551; 2593-4). Presumably, in proposing this structure he had in mind that the document would contain a profit forecast which would need to be tested. When he outlined his proposal for a due diligence process to Macquarie Bank, in an e-mail dated 14 October 1998 (Exhibit D1, tab 45), he was told that undertaking a due diligence process was unnecessary because no Part B Statement had ever been litigated (T 2594). Mr Vines told the court that he regarded this as ironic, in light of what had subsequently happened. I agree.

Immediately after the DDC meeting on 4 November, Mr Vines began to organise sessions for the ensuing days, when each of the non-executive directors met with the executive directors responsible for particular aspects of the forecast, along with members of PwC and other relevant people. Mr Vines himself attended those meetings (T 2621). A reinsurance meeting was arranged with Mr Lange for 5 November.

Pursuant to the DDC's planning memorandum, a due diligence questionnaire was circulated to senior management. The questionnaire laid out in explicit terms the obligations arising under the Corporations Law for the accuracy and completeness of the information to go into the Part B statement. In due course Mr Vines and Mr Robertson completed and signed due diligence questionnaires. All three defendants signed what were called "senior management sign-offs" (indeed, Mr Robertson signed two of them) and they all signed what were called "representation letters". Generally speaking, it was an aspect of the due diligence process that the relevant senior executives were advised in express terms of their obligations and the obligations of the parent company in relation to the Part B statement and the process of preparing it, and the documents they signed were assurances in relation to the accuracy and completeness of the process in their respective areas (including the validity of their component of the profit forecast). Mr Robertson gave evidence (T 3115) that when he received the due diligence questionnaire he also received a statement of the materiality guidelines that had been adopted by the board.

The Part B statement (considered in more detail later) was lodged with ASIC on 16 December 1998. In it, the directors of GIO Australia firmly recommended rejection of AMP's bid. Clearly a substantial part of the directors' reasoning was to the effect that GIO shares were worth much more than the bid price, and a substantial component of that claim was the 1998/99 profit forecast. The directors relied on an independent valuation report by Grant Samuel, in which the mid-point valuation was $6.19 per share, substantially higher than the valuation implied in AMP's bid. In their covering letter, the directors referred to the company's results for the first four months of 1998/99 which, they said, showed a "dramatically improved performance", and they added that these results positioned the company well to produce the forecast Group profit before tax and abnormals of A$250 million for the year.

The profit forecast (considered more fully later) was set out as an appendix to the Part B statement. The total Group forecast of A$250 million in operating profit was broken down into divisions, including "Inwards Reinsurance and Corporate Insurance", where the forecast figure was A$69 million, compared with a loss of A$206 million in the audited financial statements for the year to 30 June 1998. This comprised a forecast loss A$11 million for the corporate insurance division and a forecast profit of A$80 million for the reinsurance division.

One of the assumptions upon which the forecast was made was that there would be "no claims in respect of major catastrophes, natural disasters or other events which exceed GIO's reinsurance protections". The expression "major catastrophes" was explained as referring to events with a market loss in excess of US$10 billion. There was an acknowledgement that the performance of the catastrophe portfolio in the year to date has been adversely affected by Hurricane Georges. But it was said that this adverse experience had been offset to a large extent by favourable experience in other classes of business. 3.7 The development of the A$80 million profit forecast

I turn to the development of the A$80 million profit forecast for the reinsurance division. It was derived by Mr Schneider, and thereafter accepted by the defendants and other interested parties, in the period from 26 August to about 23 September 1998. It is not necessary, for the purposes of this case, to explain in detail how the forecast was calculated. The work was done on the basis of certain assumptions, and what is relevant is how the assumptions changed and whether, in light of subsequent developments, it remained reasonable to adhere to the A$80 million figure.

Essentially there were three steps which produced the forecast figure. First, on 26 August Mr Robertson sent a memorandum to Mr Steffey, copied to Mr Vines, reporting on what he described as "the first Budget for reinsurance for 1998/99 in which I have any confidence" (PTB 0129). Mr Robertson's evidence (affidavit paras 68-69) was that he prepared this memorandum using the document (PTB 0124, noted above) that had been provided to him at a meeting early in the day, and that Mr Schneider's memorandum of 26 August referred to below (PTB 0132) was sent to him subsequently. In his memorandum Mr Robertson set out estimates of gross written premium provided by underwriters, and taking into account Mr Schneider's forecast of emerging claims experience, he set out profit figures based on the earlier document and very similar to, but not identical with, the figures in Mr Schneider's later memorandum. In Mr Robertson's memorandum the forecast business profit was A$52.5 million, a positive deviation from 1998 of A$240.9 million. He said that with qualifications, he considered that the forecast profit was "reasonably attainable", and provided a better basis than the company had ever previously had for monitoring the success of the reinsurance operations. Mr Robertson's memorandum said (PTB 0131): "The forecast profit assumes that the catastrophe component of our premiums will generate neither profits nor losses. If there are no catastrophes, business profit will be $85 million higher than shown above. To the extent that catastrophe costs (net of retrocession) exceed $85 million, the profit reserve will be reduced from that forecast."

Secondly, on 26 August 1998 Mr Schneider sent a memorandum to Mr Robertson attaching a document headed "GIO Re 1999 Business Plan", which forecast a business profit of A$51.1 million, a positive deviation of A$239.45 million on the 1998 result (PTB 0132). This was a refinement of the "Version 1" document referred to above (PTB 0124), where the profit estimate had been A$52.5 million. The main changes from the 1998 results to the 1999 projection were a slightly positive result for aviation attritional, after the heavy loss in 1998, the removal of a A$63.4 million loss on the catastrophe book, and the absence of any need for further provisioning in 1998/99. There are notes attached to the document of 26 August, including a note, consistent with Mr Robertson's memorandum of 26 August, which says "if there are no catastrophes in the period we can expect $85 million extra profit" (PTB 0135). Mr Schneider gave evidence that he either prepared or reviewed the estimate of A$85m for net premiums to be earned in respect of catastrophe exposure in the 1998/99 year. The note implies (and Mr Schneider confirmed in his evidence) that the profit forecast of $51.1 million had been prepared on the assumption that the catastrophe business would break even (that is, roughly speaking, that claims would equal premiums).

Thirdly, there was a process, initiated by Mr Vines, by which A$30 million was added to the forecast. He gave evidence that, when he reviewed the budgets of the business units, he noticed that, while GIO Re assumed that the catastrophe component of premiums would generate neither profits nor losses, GIO General had taken the long-term average cost of catastrophes as a budget allowance for catastrophe events (T 2558). It occurred to Mr Vines that a similar concept could be applied to GIO Re. On about 8 September he had a discussion with Mr Schneider (Mr Robertson was overseas), in which he drew attention to the approach taken by GIO General and asked Mr Schneider whether he was being too conservative in recognising none of the catastrophe premium of $85 million as profit (T 2559). Mr Schneider said it would possibly be reasonable to bring some of the projected premium into account as forecast profit, and said he would look at the issue.

Mr Robertson gave credit to Mr Steffey for initiating the process. Mr Robertson said (affidavit, para 70) that on 27 August he had a meeting with Mr Steffey to discuss his memorandum, in which Mr Steffey said it did not seem reasonable to make no allowance in the profit forecast for a component that could make as big a difference as $85 million. Mr Robertson said he agreed, and Mr Steffey asked him how much profit could realistically be expected to come from the catastrophe book. Mr Robertson said he would find out. The next day, according to his evidence, he had a meeting with Mr Schneider in which he passed on Mr Steffey's query.

It seems to me, on balance, that Mr Vines' account should be accepted. Mr Vines was able to give evidence of a process of reasoning emerging out of his review of business unit budgets and in particular, the comparison between the approaches of GIO Re and GIO General. It is possible (though there is no evidence of this) that Mr Vines communicated this specific idea to Mr Steffey, who passed it on in more general terms to Mr Robertson.

Mr Schneider reconsidered the assumption that the catastrophe book would break even in the 1998/99 year. He gave evidence (first affidavit, para 27) that he held the view that the chief reason for a softening market had been the lack of a major catastrophe of the magnitude of Hurricane Andrew in 1992 or the Northridge Earthquake in Los Angeles in 1994, events which had produced losses in excess of US$10 billion and had led to increases in premium rates. He said his view was that in the near term the market would continue to soften unless an event of similar magnitude occurred, in which case it would harden. One of the assumptions he made in the preparation of the projections attached to his memorandum of 26 August 1998 was that the market would continue to soften - that is, there would be no major catastrophe causing the market to harden. He said that for the sake of consistency, he concluded it would be reasonable to revise the profit forecast so as to reflect the assumption that no major catastrophe would occur, and that accordingly GIO Re would earn, as profit, that component of the catastrophe premiums historically representing major catastrophe payouts.

Mr Schneider and his team regularly received schedules from the claims department, listing catastrophes that had occurred in the reinsurance market and the costs to the market and GIO Re of the associated claims. Mr Schneider reviewed the most recent schedule and observed that Hurricane Andrew and the Northridge Earthquake had cost GIO Re an amount representing approximately 33% of the total cost to it of all catastrophes that had occurred since its business began in 1986. He therefore concluded that 33% of the catastrophe premiums projected for 1998/99 could be included as profit, given the assumption that no similar major catastrophe would occur. Mr Robertson gave evidence (affidavit para 72) that Mr Schneider reported back to him on 28 August, in effect giving an account of this reasoning, whereupon Mr Robertson said it would be reasonable to assume that 33% of catastrophe premiums would fall into profit for the purposes of the 1998/99 profit forecast.

In the period up to 14 September Mr Schneider's team obtained updated information from underwriters in regard to premium volume, and updated the expected claims for 1998/99, with the result that catastrophe premiums for the 1998/99 year were recalculated to approximately A$90 million. Consequently the effect of including 33% of the premium income as profit, along with some other changed assumptions, was to increase the forecast profit from about A$50 million to about A$80 million. Mr Schneider telephoned Mr Robertson in Monte Carlo and gave him those numbers. Mr Vines said in cross-examination that his intervention in the formulation of the profit forecast was part of his role as chief financial officer, but said he would not have proceeded with the forecast if it did not meet with the approval of the executive director (T 2882-3). The presentation of business plans

During the week beginning Monday 31 August 1998 all of the Group's senior executives were extensively involved in the presentation of business plans. Mr Vines was co-ordinating the presentation to board members and group executives of the "1999 Group Action Plans", which were being formulated by the executive directors with the help of McKinseys (Mr Robertson's affidavit, para 74). It was not possible to complete the GIO Re section of the presentation before Mr Robertson's departure for Monte Carlo on Friday 4 September, and so Mr Robertson asked Mr Schneider to make the presentation on behalf of GIO Re (Mr Robertson's affidavit, para 76; presumably, the arrangement covered GIO Insurance as a whole).

On 14 September 1998 Mr Schneider sent an e-mail to Mr Vines, copied to Mr Robertson, headed "Business Plan", revising forecasts for business profit and gross written premiums for the years from 1999 to 2003 (PTB 0312). The forecast business profit for 1999 was A$80.3 million. In a later e-mail to Mr Vines on the same day, Mr Schneider requested a meeting to discuss the business plan (PTB 0313). He said that he received no response and no meeting took place. That is probably correct (T 2563). Still later on the same day, Mr Schneider sent an e-mail to Mr Vines attaching a detailed analysis to support the profit forecast, which he had reduced slightly to A$80 million (PTB 0314). The figures represented a refinement in the calculation of attritional profit, reducing it from Mr Schneider's previous estimate of A$51.1 million down to A$50.4 million, and the inclusion of 33% of the year's catastrophe premiums of A$89.8 million. Mr Vines said (T 2562) he looked at the attachment to the e-mail sufficiently to realise that he would not understand most of it, but he understood that the document recorded a forecast business profit of $80 million which included some of the expected $85 million catastrophe premium.

On 16 September 1998, the executive directors of the business units made a presentation to the directors of their business plans and budgets (PTB 0465-0515). As arranged before Mr Robertson's departure for Monte Carlo, Mr Schneider gave the presentation for GIO Insurance (T 2571). Mr Vines and various external parties including representatives of PwC and McKinseys were in attendance. The presentation notes show an operating loss before tax, after taking into account investment earnings, of A$128 million (PTB 0478), but as Mr Vines pointed out in evidence, it could be seen (PTB 0487) that if the significant loss in aviation and one-off revaluation and reassessment were disregarded, the actual underlying performance of the reinsurance operation in 1998 had been extremely profitable (T 2572). The presentation notes also showed profit forecasts for 1999 (A$80 million), and for subsequent years at ascending levels (PTB 0509). Mr Vines observed that it was not until about 2002 that the predicted profitability would come close to the profitability actually achieved, before adjustments, in 1998 (T 2573).

On 18 September, Mr Schneider e-mailed copies of the presentation notes and supporting documents, comprising about 180 pages of graphs and figures, to Victoria Howell of PwC (PTB 0330-0515). The e-mail was copied to Mr Vines, Grant Samuel, McKinseys and Chase. It appears that the presentation to the board had been about business plans at large, rather than the development of a profit forecast for the Part B Statement. However, on 22 September 1998 Mr Schneider sent a memorandum headed "Business Plans for Part B" to Jenny Lau, the Group accountant who was Mr Vines' assistant (PTB 0516), enclosing version 4 of the business plan and drawing her attention to the assumption that in 1999 there would be no major catastrophe, and therefore that a proportion (33%) of the catastrophe premiums could flow through to profit. He sent an e-mail to Ms Lau, copied to Mr Vines, on 23 September (PTB 0531), attaching some business plan figures including a table showing the A$80 million forecast for 1999. On 2 October 1998 he sent a copy of the forecast by e-mail to Mr Robertson (PTB 544). 3.8 Hurricane Georges

Hurricane Georges struck Puerto Rico and the United States Virgin Islands, moving into the Gulf of Mexico, during the period from 21 to 28 September 1998. The hurricane occurred, therefore, only days after the finalisation of the A$80 million profit forecast. The Hurricane caused severe damage in Puerto Rico, and lighter damage in the US Virgin Islands. The centre of the Hurricane passed south of Key West, Florida on 25 September, travelling west by north-west into the Gulf of Mexico rather than following the more usual hurricane path of veering north and travelling up the east coast of Florida. After remaining over the Gulf for a day, it began to move slowly northward and made landfall in Mississippi early on 28 September, causing serious and widespread flooding and rain damage. Later on 28 September it was downgraded to a tropical storm (Mr Robertson's affidavit, paras 86-87).

Mr Murray of PwC gave evidence that "the reinsurance industry as a whole underestimated the loss of Hurricane Georges and the rest of the Australian reinsurance market also significantly underestimated its share of the market" (T 1476). He agreed that it was only in early 1999 when the results of Hurricane Georges became widely known that the extent of the underestimation began to be realised.

It is plain from the evidence, explained in detail below, that: · GIO Re had issued reinsurance contracts under which claims would be made in respect of Hurricane Georges; · it had retrocession protection, under a contract with Overseas Partners Ltd referred to as "the OP Re contract" and other marine retrocession cover, that had the effect of limiting its marine losses to A$8 million in aggregate; · it did not have any retrocession protection in respect of property claims at the level they were likely to be made; · therefore Hurricane Georges had the potential to impact on GIO Re's profit in the 1998/99 financial year, and hence to affect the 1998/99 profit forecast.

On 29 September 1998 Mr Fricke sent e-mails to Mr Robertson, copied to Mr Schneider (PTB 0536), attaching some information from Property Claim Services (PCS - a loss assessing company in the United States) on the status of the hurricane. This confirmed that the hurricane had affected the United States Virgin Islands and Puerto Rico, and then Florida, Alabama, Mississippi, Louisiana and possibly other areas. About 320 homes and 75 houseboats were destroyed in the Key West area. Another report by PCS was sent to GIO Re's claims department on 7 October giving a preliminary estimate of insured property damage for all affected areas of US$2.55 billion. The report said that the overall impact of the hurricane was nothing akin to the damage that had been inflicted by Hurricane Marilyn in 1995 (PTB 0565). Mr Robertson's tracking exercise

Mr Robertson gave evidence that he followed the development of Hurricane Georges each morning during its life, and that in accordance with his usual practice with hurricanes, he arranged for Mr Fricke to obtain the latest satellite pictures overnight and put them on Mr Robertson's computer each morning until 29 September (affidavit para 85).

In his affidavit, Mr Robertson said he endeavoured to identify, from a book kept in his office, other hurricanes that had occurred in the 1990s and were similar to Hurricane Georges, in order to form a view as to the seriousness of the event. He said he identified Hurricane Fran, which (he claimed) had taken the same unusual path followed by Hurricane Georges, but was not quite as severe. He said he checked the cost of Hurricane Fran to GIO Re and discovered that the incurred claims for Hurricane Fran totalled A$14.48 million.

Unfortunately there were some inconsistencies in Mr Robertson's evidence about this tracking exercise, between his affidavit and his oral evidence in cross-examination and re-examination, and the evidence he had earlier given in his s 19 examination. In the s 19 examination Mr Robertson said that when he monitored the path of Hurricane Georges it "looked to me very much like Marilyn", which he then understood was a "non-event for GIO Re" (Exhibit P11, p 244). The ASIC examiner drew his attention to the fact that Mr Schneider had said in the first quarter highlights that if Hurricane Georges turned out to be like Hurricane Marilyn the cost to GIO Re could be expected to reach $100 million, and Mr Robertson stated that he could not make sense of the figures (Exhibit P11, p 276).

In his affidavit, made much later and after ASIC's evidence in the case had been presented, he identified Hurricane Fran, as I have said, explaining that this was a Hurricane that would have been likely to cause major damage in Puerto Rico but not the United States, and followed a path similar to Hurricane Georges. The evidence (PTB 1020C) indicates that GIO Re had a 4.2% market loss exposure to Hurricane Marilyn, for which the total market loss was $875 million, whereas Hurricane Fran caused a total market loss of US$1.6 billion, but GIO Re only incurred 0.69% of that market loss. Because of the percentage exposures, GIO Re's ultimate loss for Hurricane Marilyn was much higher than its loss for Hurricane Fran. Therefore by identifying Hurricane Fran in his affidavit, Mr Robertson had provided a justification for believing that the Hurricane Georges loss would be moderate.

Mr Robertson explained in cross-examination that he came to realise he was mistaken in referring to Hurricane Marilyn in his ASIC examination when he reread the transcript (T 3336), and so he reviewed the tracks of various hurricanes and reached the conclusion, stated in his affidavit, that the hurricane he had tracked was in fact Fran (T 3331). He said (T 3546) that in 1998 he had used a book containing maps of cyclone tracks, but the book had not been located in spite of extensive inquiries. When he came to prepare his affidavit, he looked at a print-out of an Internet site showing tropical cyclone tracks for 1996 (the coloured version is Exhibit D8 and the black-and-white version is Exhibit P30).

In cross-examination he was shown a map (Exhibit P26; see T 3337) which displayed the path of Hurricane Fran, which passed well to the north-east of Puerto Rico. In contrast, the storm track for Hurricane Georges (Exhibit P27) and the storm track for Hurricane Marilyn (Exhibit P 28) passed directly over Puerto Rico. He eventually said he was "absolutely certain it was not Marilyn" that he reviewed in 1998, and he was "as certain as I can be that it was Fran" (T 3345), but he agreed that he had no independent recollection and had in fact reconstructed what he believed he had done in 1998 (T 3345). Then in re-examination he was taken to the composite map displaying tropical cyclone tracks for 1996, which included Hurricane Fran but not Hurricane Marilyn (which had occurred in 1995). He said (T 3547) he believed that the hurricane track he looked at in 1998 was the path of a hurricane that passed over Puerto Rico. The composite map is quite confusing, even in the coloured version, but it seems to me that the only hurricane passing directly over Puerto Rico was Hurricane Hortense. Mr Robertson conceded, in effect, that his affidavit was wrong in identifying Hurricane Fran, saying that if the track of Hurricane Fran did not pass over Puerto Rico (and clearly it did not) he was mistaken in identifying it (T 3548).

This evidence is so confusing as to raise doubt as to whether Mr Robertson undertook any tracking exercise at all in 1998, or has merely persuaded himself through reconstruction that he must have undertaken some such exercise. It is appropriate to conclude, in my opinion, that there was no tracking exercise undertaken with the level of competence that could have led a reasonably competent reinsurance manager to form a view as to the likely effect of Hurricane Georges on GIO Re.

Mr Morgan gave some evidence about this matter. Unfortunately, however, his evidence was also affected by some apparent confusion about the most appropriate hurricane to track in comparison with Hurricane Georges. He said in his affidavit (para 31) that he was asked to assume that Mr Robertson tracked the course of Hurricane Georges against Hurricane Fran, and he said he checked "computer records" and considered that the powers of these two hurricanes were "quite comparable". In fact, however, what he had checked was a copy of the computer record which became Exhibit P30 which, as I have said, seems to show Hurricane Hortense rather than Hurricane Fran passing over Puerto Rico in 1996. It appears that Mr Morgan misread Exhibit P30.

In his oral evidence in chief, Mr Morgan said he had recently confirmed that the hurricane that passed over Puerto Rico was Hortense rather than Fran (T 3562). He reaffirmed the opinions in his affidavit except he substituted Hortense for Fran (T 3563).

The trouble with doing so is that Mr Robertson did not at any stage give evidence that he tracked Hurricane Georges against Hurricane Hortense. His evidence was that he originally looked at hurricane tracks in a book, and there is no evidence that the contents of the book showed all of the 1996 hurricanes on a single page, like Exhibit P30/D8. It therefore seems that Mr Morgan's eventual assumption that Mr Robertson tracked Hurricane Georges against Hurricane Hortense has not been proven.

It seems to me, on the basis of the evidence about hurricane tracks, hurricane intensity, and loss (PTB 1020C) that Hurricane Marilyn was a more appropriate comparator than either Hurricane Fran or Hurricane Hortense. Hurricane Fran did not pass over Puerto Rico. Hurricane Hortense was of a comparatively low intensity when it passed over Puerto Rico. My conclusion is that Mr Morgan's evidence on the tracking exercise is of no assistance to the court. Other grounds for Mr Robertson's belief about the profit impact of Hurricane Georges

Mr Robertson gave evidence about the effect of the announcement of the AMP takeover bid on the reinsurance industry. He said that during the reinsurance conference he attended in Monte Carlo from 4 September 1998, there was much discussion about AMP's public statement that it was not interested in continuing the reinsurance business, and also about the fact that Standard and Poors had put GIO's credit rating on credit watch (affidavit para 79). He said that at least a handful of people (5 or 6 professional reinsurers, managers or senior underwriters of reinsurance companies: T 3114) told him to expect to see a considerable acceleration in claims notified to GIO Re and in precautionary claims, because of these developments. Someone told him that "the moment brokers get a sense of 'blood in the water' they rush to notify claims as quickly as possible, so as to a secure an early place in the queue for payment".

Mr Robertson referred (affidavit para 102-103) to a report dated 2 October 1998 by Mr Fricke, presented to a management committee meeting held on 12 October 1998. According to the report, during August 1998 some 325 new claims were notified, with an increase in incurred costs of $57.3 million of which $45.5 million represented an increase in incurred claims for registered events. In contrast, during September 1998, 544 new claims were notified and the increase in incurred claims was $173.5 million, of which $35.4 million was due to the increase in incurred claims for registered events. Mr Robertson said he took this to be evidence of the precautionary and accelerated claims notifications which he had been warned to expect during his visit to Monte Carlo. Mr Robertson explained (affidavit para 165) that he was aware that the kind of "precautionary claims" to which he referred had found their way into the COGEN system in which claims were recorded at GIO Re, notwithstanding the terms of the Reinsurance Claims Procedure Manual referred to below.

Mr Robertson also said he discussed Hurricane Georges with Nigel Burton, the senior underwriter responsible for the United States and the Caribbean. He said Mr Burton told him that GIO Re had not been writing business in the Caribbean because he considered the premium rates in that area to be inadequate. Mr Burton said he expected that insurance losses from Hurricane Georges in the United States would be largely confined to the primary insurers, and would not have much impact on the reinsurance market, because of the absence of storm surges and widespread wind damage. This evidence was not challenged and I accept it. Mr Robertson’s view about the profit impact of Hurricane Georges

Mr Robertson's evidence (affidavit, paras 94-95) was that on these grounds, he concluded that Hurricane Georges was not likely to prove to be a major event to GIO Re, and the ultimate incurred losses would probably be at about the company's average market share of insured losses caused by natural catastrophes, that is about 0.6%.

Mr Robertson's evidence largely depends on the adequacy of his tracking exercise, and my finding on the evidence on that matter has the consequence that the tracking exercise was not done in the appropriate standard of care and diligence. To the extent that the more appropriate comparator was Hurricane Marilyn, Mr Robertson ought to have concluded from his own investigation that there was a probability that Hurricane Georges would be a $100 million event. Moreover, his view depended upon some factual inferences or assumptions the accuracy of which would become clearer over time, so that it would become less reasonable, as time went on, to persist in relying on the grounds established in September without updating the underlying information. Later reports by PCS

On 8 December 1998 Mr Fricke sent to Mr Fox and Mr Schneider a PCS announcement which increased the total market loss estimate for Hurricane Georges from US$2.55 billion to US$2.955 billion (PTB 1665). On 9 February 1999 he sent an e-mail to Mr Fox attaching a further report by PCS, confirming its estimate of total market losses for Hurricane Georges as $2.955 billion (PTB 2250A).

The gradual revelation of the impact of Hurricane Georges on GIO Re's profit forecast is considered later, when the Hurricane Georges register is explained. 3.9 First quarter results and highlights Preparation of the first-quarter results

As previously indicated, the GIO Group decided in mid-1998 to move to quarterly reporting to the ASX. On 1 October 1998 Mr Vines sent an e-mail to the GIO executive team explaining that there was a very short timeframe for preparation of first quarter results (PTB 0543). At that stage the annual general meeting of GIO Australia was scheduled for 26 October and Mr Steffey wished to announce the results at the meeting. That necessitated figures by 16 October, for review by the audit committee on 19 October and the board on 20 October. Mr Robertson transmitted this e-mail to Mr Schneider and Mr Wright, asking whether they could meet the deadline. Mr Schneider responded on the same day (PTB 0542), saying this would be the first time that the new valuation model would be run to achieve a monthly valuation, but the timetable could be met if a formal process was sacrificed for an ad hoc approach.

Mr Robertson communicated Mr Schneider's memo to Mr Vines, who then sent an e-mail to Mr Steffey (PTB 0542). Mr Vines explained in his e-mail that reinsurance was the one area of business that had not moved to monthly reporting, but it would do so from October onwards. He noted that extensive work had been done to revise the valuation models for six monthly reporting so that they could be run monthly for internal reporting purposes and quarterly for external reporting purposes. He said that September would be the first run of those models, and that PwC would undertake a "desktop" review to give some comfort that the process was sound. Mr Vines gave evidence that he wanted to impress on Mr Steffey, by this e-mail, that the monthly reporting process was not sufficiently robust to be usable for external reporting purposes (T 2575).

Mr Schneider and his Technical Services team set to work on producing the required first quarter results for GIO Re within the timetable that had been set. But there were problems. On 9 October 1998 Mr Murray of PwC sent an e-mail to Mr Robertson, copied to Mr Schneider, in which he observed that there was a "bottleneck" in Mr Schneider's area (PTB 0569). He noted that there was an error in the valuation model for future new business, and a substantial shortfall of about $40 million in the calculation for the 1999 forecast.

Mr Robertson gave evidence that he had discussions with Mr Schneider on almost a daily basis from the beginning of October to 19 October 1998. The subject of the discussions was Mr Schneider's attempts to use the new monthly valuation program to produce profit figures for the three months ending 30 September 1998. Mr Robertson said he was particularly concerned about the existence of what Mr Schneider termed a matching error in his figures, as Mr Robertson felt it cast some doubt on the reliability of the program and the results it was producing (Mr Robertson's affidavit, para 104). Mr Robertson gave evidence that he told Mr Schneider on a number of occasions that the mismatch error had to be identified and corrected and that while the error remained, the program was useless. Each time Mr Schneider told him, "We're working on it".

In addition to requiring that the figures be finalised, Mr Vines, by e-mail of 12 October 1998, asked for management commentaries on the first-quarter results, measuring progress against the business plan (PTB 0573). He asked for the commentaries by the morning of 19 October.

At an early stage Mr Steffey indicated that he wanted to announce the first quarter results to the market, with considerable detail at the divisional level (T 2595). At the takeover response committee, Macquarie Bank suggested it would be useful to include a reference to the forecast that would be made in the Part B Statement in the announcement of the first-quarter results, and to make those announcements together at the forthcoming GIO annual general meeting. There is no clear evidence as to when Macquarie Bank made this suggestion, but Mr Vines said he thought it was raised once it had become clear that there were grounds for challenging the Part A Statement and thereby delaying the time for completion of the Part B statement (T 2550). That appears to have happened at around 14 October 1998, when Mr Addis of Macquarie Bank sent Mr Vines an e-mail about forecasts, saying that on a worst-case scenario the Federal Court case could be over in the following week with AMP not being required to make any changes to its Part A document, and suggesting that the GIO board's sign-off on the Part B be brought forward to an earlier date (Exhibit D1, tab 44).

At the time the suggestion was made, the AGM was planned for late October, but when resolution of the Federal Court proceedings was delayed, Macquarie Bank recommended that the holding of the AGM be delayed to allow the underlying tactical manoeuvres to come to fruition (T 2593). It then became feasible to report the October results, as distinct from the first-quarter results, and so the notion of going to the market with the first-quarter results was overtaken by events (T 2593). The AGM was held on 17 November, and results for the four months to October were announced to the market, but only consolidated information at the Group level was released (T 2595). The first quarter highlights

Mr Schneider and Mr Driessen must have been under considerable pressure to complete their first-quarter calculations and comments. In addition to the problems identified by Mr Robertson and Mr Murray, and in particular, the mismatch error, and the work involved in running the valuation model for quarterly results for the first time, Mr Schneider and Mr Driessen had to cope with the emerging information concerning Hurricane Georges, which PCS had reported as a US$2.55 billion event. They brought together the various issues that were before them in a document written by them and entitled "GIO Reinsurance 1st Quarter 1999 Result Highlights", dated 19 October 1998 ("the first quarter highlights"), which Mr Schneider sent to Mr Robertson on 19 October (PTB 0597). Mr Robertson gave evidence that when the deadline set by Mr Vines arrived on 16 October, there was no time to continue the search for the mismatch error in the new valuation program (affidavit para 106).

The first quarter highlights report is divided into three sections. The first section is a profit analysis, which is a table comparing net profits for the quarter, by insurance class, against business plan forecasts for the half-year and against the valuation model. The profit analysis table shows a net profit for the quarter of A$17.3 million. The second section of the report analyses the results by class, concentrating on space, aviation and marine. The third section identifies "issues". One of the issues was the mismatch between assets and liabilities, said to be caused by changes in exchange rates or rates of interest, amounting to $17.7 million, discussed in the report under the heading "Matching". The document said the mismatch had been reversed so that it would not impact on the quarterly results.

Another issue was Hurricane Georges. Since it occurred within the July-September quarter, Hurricane Georges was a "first quarter" loss. It was therefore necessary for GIO Re to provide for the ultimate loss in respect of that occurrence, and for that provision to be made in the first quarter results.

It is worthwhile to set out the full text of the report on this subject (PTB 0600-01): "Georges Hurricane Georges occurred on the 21-22 and 25-28 of September and according to the Property Claim Service (PCS) produced insured losses of US$1.75bn and US$0.8bn in Puerto Rico and the South Eastern Gulf of America respectively. The GIO historically has a 0.6% market share of an insured loss caused by natural catastrophes. On this basis the cost of Georges would be $25m in Australian dollars. [A$25 million was converted from US$15 million, which is approximately 0.6% of the total PCS loss estimate of US$2.55 billion.] The GIO would only expect US$5.0m from Puerto Rico directly as the GIO has only limited exposure in the country. This is unlike Reac with an office in Miami concentrating on the Caribbean and South America. The exposure in the US is significantly higher as the cost of the storm to the US and the fact that it was spread over 4 states means that the loss falls below the deductible points for most of the contracts. Based on a crude market share approach we would expect $7.5m. The majority of the cost to the GIO, if it arises, will stem from the Lloyd's and Company market protecting Puerto Rico. It is difficult to assess however what the cost will be for that market. We have information to assess, for the London Market, the reinsurance recoveries and our share of those recoveries from historical events. Thus it would be possible to determine an estimate of the cost from the London Market based on an assumed cost to Lloyd's. The cost to Lloyd's is however uncertain. Hurricane Marilyn and Hurricane Luis occurred in the Caribbean in the same year, weeks apart. However Lloyd's share of Marilyn and Luis was 41% and 5% respectively to the property market. If Georges turns out to be like Marilyn the cost to us could be expected to reach $100m. On the other hand it could be a non event. These issues remain unresolved. The 0.6% market assumption was adopted, at this time, and hence Georges is included at $25m."

After noting other issues, including uncertainty created by a decision of the Indonesian government to stop work on a power station called the Karaha Project, the report concluded as follows (PTB 0602): "Full Year Forecast Other than space, the underlying business has performed ahead of expectations. There is, however, still a significant amount of uncertainty. This emanates from: Georges Karaha New whole account reinsurance. Given the level of uncertainty, it is my recommendation, that we place a warning on the full year projection of earnings of $80m. Without much time to prepare an analysis I would recommend reducing the projection to $45m representing one of either Georges or Karaha materialising moderately and assuming the whole account is profit neutral. Please note that if Georges does indeed turn out to be a significant event to the GIO it has the potential to reduce the business profit further."

The first quarter highlights are important for ASIC's case. They constitute a clear warning, by a GIO Re executive discharging actuarial functions, in a considered report prepared in connection with quarterly reporting, that Hurricane Georges could lead to a substantial ultimate loss for GIO Re having a direct impact on the $80 million profit forecast. It was a warning that this loss could reach $100 million, the majority of which would stem from the Lloyd's and Company market in London, where the impact of Hurricane Georges was at that time uncertain. On the other hand, the opinions expressed about Hurricane Georges were not expressed to be based on any actuarial or other analysis, and they were expressed in terms of possibilities based only on comparison with other hurricanes. The overall effect, in my opinion, was to draw attention to the risk of loss from Hurricane Georges in such a fashion that reasonable persons in the shoes of those responsible for the profit forecast would have thereafter treated the development of Hurricane Georges loss as a matter to be kept under particular review. But it does not seem to me that a reasonable person in that position, acting on the basis of the limited analysis and reasoning in the document, would have immediately revised and adjusted the $80 million figure in the manner recommended by Mr Schneider, or at all. On 19 October Hurricane Georges was still a recent phenomenon and it was too early to assess the Hurricane's full impact on the reinsurance market, particularly the London market in which GIO Re might have its main exposure. In its terms, Mr Schneider's recommendation to reduce the forecast was not grounded in analysis. Indeed, ASIC did not submit that the first quarter highlights compelled an immediate revision of the forecast.

Mr Schneider gave evidence that he provided the first quarter highlights report to Mr Vines and Mr Robertson, and also to PwC Securities (first affidavit, paras 43-44). As I have said, the e-mail enclosing the report was addressed to Mr Robertson and I infer that he received it on 19 October, the date which the e-mail bears.

The evidence includes an agenda prepared by PwC for a meeting with Mr Vines on the afternoon of 20 October, to discuss various matters including issues about the quarterly accounts, and the agenda lists the very matters described as issues in the First Quarter Highlights (PTB 0603). This supports Mr Schneider's evidence that PwC received the first quarter highlights on or about 19 October. Mr Vines’ evidence about the first quarter highlights

Mr Vines received and studied the first quarter highlights and made notes on them, which are in evidence (T 2576). He said he read Mr Schneider's recommendation that the projection be reduced to $45 million and thought the points raised were interesting and represented matters to be considered, but he said he did not feel automatically compelled to the conclusion that the profit forecast ought to be amended (T 2577). He said there was a lack of any detailed analysis supporting Mr Schneider's tentative conclusion, and later he said he regarded what was said about Hurricane Georges as being speculation (T 2913-4). To the extent that Mr Schneider's conclusion was based on Karaha nothing new had been identified, and to the extent that it was based on new whole account reinsurance, nothing had been put in place; and at that stage no one had any idea what Hurricane Georges was actually going to cost and so an assumption about its cost had been incorporated into the projection (T 2577).

In cross-examination Mr Vines said he had taken it for granted that GIO Re would "by whatever methodologies it had available, monitor the development of Hurricane Georges constantly with a view to being able to update estimates of ultimate net loss" (T 2912), but he did not turn his mind to whether an available method was to carry out a contract-by-contract analysis of policies at risk (T 2913). He denied that the information in the first quarter highlights required him, as a competent chief financial officer, to take steps to ensure that the ongoing effect of Hurricane Georges was investigated in order to determine what the ultimate net loss would be, noting that it was too soon after the loss and that it would be possible to put a more accurate forecast on the ultimate cost as the claims experience developed (T 2914). He said he expected the reinsurance division to monitor the loss in the way that it ordinarily did, and that the processes already in place, which included monthly management reporting and the appointment of PwC to review the first quarter results and forecast, were sufficient to ensure adequate investigation (T 2914).

Mr Vines said (T 2577) that he was not surprised to see Mr Schneider making a comment about the projection, and he did not think it inappropriate for Mr Schneider to have done so, as he had invited comments on progress against forecast in his e-mail to the GIO executive team dated 12 October (PTB 0573). Mr Vines gave evidence that when he first received the first quarter highlights, he presumed that they had been shown to Mr Robertson, but within 24 hours he became aware that Mr Robertson had not seen the document any earlier than he had, and he thought that was slightly odd (T 2578).

Mr Vines gave evidence that he believed PwC would be given a copy of the first quarter highlights, since by that time PwC had been retained to review the first-quarter results (T 2575). He said he encouraged the process of supplying PwC with the document, and said he believed that the auditors should see what Mr Schneider had said about the forecast (T 2578). He denied thinking that GIO's relationship with the auditors would be damaged by the auditors seeing what Mr Schneider said about the forecast (T 2579). Mr Robertson’s evidence about the first quarter highlights

As to Karaha, Mr Robertson gave evidence (affidavit para 101) that he became aware of and investigated this group of "problematic claims" early in October 1998. He said his investigation showed that there was considerable doubt as to whether the underlying policies would be liable to pay any claim and even if they were, there was further doubt that GIO Re's reinsurance policies would respond. Mr Robertson said that nothing material occurred to affect this position, in his belief, while he remained executive director.

Mr Robertson said (affidavit paras 107-8) that when he read the first quarter highlights on the evening of 19 October and noticed the recommendation to amend the profit forecast, he could not understand why Mr Schneider had touched upon that matter, given that he had not been asked to make any such recommendation and had said (PTB 0542) that in the time available he might be forced to cut some corners. Mr Robertson said the document did not reveal that Mr Schneider had undertaken any analysis to support his recommended revision of the profit forecast, and it appeared he had only considered matters that could reduce the forecast and had not considered any matters which might increase it. Mr Robertson's reinsurance expert, Mr Morgan, gave evidence (affidavit para 53) that a competent reinsurance manager in the position of Mr Robertson would not pay serious attention to Mr Schneider's recommendation to reduce the profit projection, given the apparent lack of analysis, and ASIC's reinsurance expert, Mr de Vroome, agreed in cross-examination that a competent reinsurance manager would require a degree of analysis before changing a profit forecast and would expect that any subordinate who had recommended such a reduction would have done a considerable amount of work in coming to that view (T 2265). Mistakes and adjustments

Mr Robertson said that when he first saw the first quarter highlights, he could not understand the space result, and he had several discussions with Mr Schneider about it after 20 October 1998. He said that after making four unsuccessful attempts to persuade him that the figures were correct, Mr Schneider finally said, in a discussion on 2 November 1998, that he had made an error in the valuation data as at 30 June 1998, by including in the earned space premiums some premiums that should not have been earned until the following year. Mr Robertson said he told Mr Schneider that anyone could make a mistake but it was important not to try to hide it (affidavit para 130). In that conversation Mr Schneider told Mr Robertson he had noticed an additional $9.7 million in the aviation catastrophe account that could be taken into profit either in 1998/99 or 1999/00. Mr Robertson said not to do anything about it at that stage, "but it's nice to know that we have it up our sleeve".

A meeting between Mr Robertson and Mr Schneider took place after Mr Robertson received an e-mail from Mr Schneider on 2 November 1998 (PTB 0728). In that e-mail Mr Schneider said that while they were searching for the mismatch error, he and his team had discovered a program error which produced an incorrect result in the event of a fall in interest rates. Mr Schneider did not say in his e-mail that this was the mismatch error for which he was searching, but he did make that claim in a subsequent memorandum dated 20 November 1998. Mr Robertson said that at the time he received the 2 November e-mail he understood that it was identifying another error, one that had existed in the old valuation program. He said he had a meeting with Mr Schneider about the 2 November e-mail and told him to correct the program for the error he had identified, and rerun it for the first-quarter results, as there was no time for any further search for the mismatch error (affidavit para 129).

Mr Robertson said (affidavit para 131) that during October and early November 1998 he and Mr Schneider discussed three separate issues arising from fluctuating interest rates. The first was the mismatch error of $17.7 million. In Mr Robertson's view, this error indicated that the program was not working correctly. Secondly, there was a "prudential margin problem", arising because falling interest rates had the effect of increasing the prudential margin as a percentage of the outstanding claims provision. This was not a program error, but instead it was an unintended effect of the way GIO Re had been accustomed to determining the prudential margin. The third issue related to the program error identified in Mr Schneider's e-mail of 2 November, to which I have referred. These three issues may have been confused by some of the participants in discussions about the first quarter highlights. 3.10 Management discussion of the first quarter highlights

Mr Schneider gave evidence (T 0440ff) that in October 1998, both Mr Robertson and Mr Vines took him to task for the fact that he had directly communicated with PwC Securities by sending them the first quarter highlights. Mr Schneider's conversation with Mr Robertson, after presentation of the first quarter highlights to PwC

According to Mr Schneider, Mr Robertson, who was angry and spoke in an unusually loud manner, called him into his office shortly after they had met with PwC to discuss the report. They had the following conversation: Robertson: "I’m not very happy with the section in your report dealing with the projection. I did not ask you to put that in the report." Mr Schneider: "I thought the two were obviously linked." Robertson: "I am very unhappy about you putting that in writing. We discussed this in August following the June valuation. It’s not your role to discuss your views with the auditors. You should provide me with the best information that you can and then it is up to management to decide what to do with that information. I don’t accept the $45m projection." Schneider: "There is downward pressure from Hurricane Georges and Karaha, et cetera. 45 million might not be correct but we should look at the issues." Robertson: "I disagree. You are behaving like an overcautious actuary." Schneider: "The weight of probability is that the projection will not be met because of issues like Georges and Karaha. Therefore, in my professional opinion, that is why I advised the reduction in my report." Robertson: "I don’t accept that. Let me know what has to happen for the projection to be met. Don’t tell me your opinions. You should not discuss your views with the auditors. This shouldn’t happen again. You have caused all sorts of problems with the process."

Mr Robertson's account of this meeting (affidavit para 109) is partly in accordance with Mr Schneider's evidence, but there are three important differences: (a) Mr Robertson said he told Mr Schneider: "It is not your role to discuss your views with the auditors before you have discussed them with me " (emphasis supplied); (b) Mr Robertson denied that Mr Schneider expressed a professional opinion in terms of the weight of probability, saying Mr Schneider spoke in terms of three things that might develop into something affecting the forecast, to which Mr Robertson replied that any number of other things might affect the forecast and that Mr Schneider was behaving like an overcautious actuary; (c) Mr Robertson denied telling Mr Schneider not to discuss his views with the auditors and he denied saying that Mr Schneider had caused all sorts of problems with the process.

I prefer Mr Robertson's account of their discussion, with respect to these three points. Just as in the case of their discussion in August, it seems to me unlikely that Mr Robertson would have told Mr Schneider not to discuss his views with the auditors at all, given the need for a continuing close relationship between the auditors and Mr Schneider; and very likely in the surrounding circumstances that Mr Robertson would have told Mr Schneider to convey his views to him before speaking to the auditors. But the difference between the two versions is not as sharp as it might appear, because implied in Mr Robertson's version is the proposition that he, as Mr Schneider's superior, could overrule Mr Schneider's opinions and if he did, the GIO Re view conveyed to the auditors would be Mr Robertson's rather than Mr Schneider's. As to whether Mr Schneider expressed a professional opinion in terms of weight of probability, it seems to me unlikely that such formal language would have been used having regard to the nature of the opinions expressed in the report. The discussion of the impact of Hurricane Georges on the profit forecast was not based on actuarial analysis; rather, it was in the nature of some precautionary observations. It is hard to see how, in the absence of analysis, Mr Schneider's views could be said to have been professional opinions based upon the weight of probability.

Mr Robertson said that the discussion continued as follows: Robertson: "I would like you to write me an e-mail setting out the conditions on which the forecast will be met." Schneider: "Yes, I will do that. Everything is different now with the AMP takeover. What do you think will happen?" Robertson: "I think it is extremely unlikely that a company the size of AMP will give up on its bid for GIO. But it is equally unlikely, unless they increase the bid price, that they will get 90% of the shares giving them the right to compulsory acquisition of all the capital. However I do think it likely that they will acquire more than 50% of GIO's capital which will give them management control." Schneider: "Yes, I agree. You know what will happen then." Robertson: "Yes. They will do what new owners or managers of a reinsurance company almost always do. They will look at GIO Re and say 'Shock, horror!! This reinsurance company is under-reserved for outstanding claims, so we need to increase the claim provisions', which means they will report a very large loss in GIO Re. That will drive the share price down, and they will be able to buy out the minority shareholders at a cheaper price." Schneider: " Yes. There goes your profit forecast right out the window." Robertson: " Yes. There is nothing that can be done about that because I do not believe that I should change my profit forecast in anticipation of changed ownership of the company. I believe that it is my obligation to forecast the profit for the company as it exists today." Schneider: "That's all very well for you, because when AMP come in they will fire you and you’re old enough to be able to retire. But I still have my career to make and I am not willing to be blamed for a profit forecast that turns out not to be realised." Robertson: "Nobody will blame you for the profit forecast because it's not your responsibility. I am the one who makes the forecast. It is my responsibility and you are just the person who 'cranks the handle on the computer', as you like to describe it." Schneider: "I am not willing to take that chance. I am going to create a history file showing that I opposed the forecast to show AMP when they arrive." Robertson: "That's not the sort of loyalty I would hope for from one of my executives. But in the end I accept that you are responsible for managing your own career and you must do what you think is in your own best interest."

Mr Schneider denied any such conversation. The state of the evidence does not permit me to decide whether the conversation occurred. Mr Robertson's account presents him in a very good light, making a prediction as to the outcome of the takeover bid that might perhaps have been aided by hindsight and reconstruction. On the other hand Mr Schneider's concern for his career after the takeover is consistent with his e-mail of 13 May 1999 (PTB 2275), discussed below. I shall not make a finding as to this part of Mr Robertson's evidence. Mr Schneider's alleged conversation with Mr Vines, about "messing up the process"

Mr Schneider gave evidence (first affidavit, para 48) that after his meeting with Mr Robertson, he received a brief telephone call from Mr Vines, who said to him: "I have read your report. You are messing up the process. The auditors are now onto this and this complicates the whole management of the issue. You are not playing as part of the team. This is not to occur again."

Mr Vines gave evidence that Mr Robertson told him he did not agree with Mr Schneider's conclusion about the projection, but he said Mr Robertson did not ask him to speak to Mr Schneider about the matter and he denied ever criticising Mr Schneider for including his comments in the first quarter highlights. He conceded that he might have asked Mr Schneider why he did not clear the report with Mr Robertson before submitting it, because there was a reporting line to be followed, but he said he did not recall having that conversation and said that if he had, it would not have been in an angry tone (T 2579-81; see also T 2687).

In cross-examination, Mr Vines said he did not recall saying anything to Mr Schneider that was critical (T 2920). He accepted that he could not actually recall what he said, and he agreed that he had read Mr Schneider's evidence and concluded that he "would not have said" what Mr Schneider attributed to him (T 2922).

ASIC submitted (written submissions, paras 333-337) that the court should prefer Mr Schneider's evidence to the evidence of Mr Vines. ASIC drew attention to the fact that according to Mr Schneider, his conversation with Mr Vines followed the conversation with Mr Robertson in which, on any view of it, Mr Robertson "blasted" him for giving a copy of the first quarter highlights to PwC. The fact that there had been an angry discussion between Mr Robertson and Mr Schneider makes it likely that if Mr Vines heard about the exchange, he would have thought it appropriate to speak to Mr Schneider. But it does not assist me to choose between the two versions of the Schneider/Vines conversation. It is consistent with the evidence about the conversation between Mr Robertson and Mr Schneider that Mr Vines would subsequently have reminded Mr Schneider to follow reporting lines, without any heated discussion about "messing up the process".

ASIC also submitted (written submissions, para 337) that Mr Schneider's subsequent conduct was consistent with his being chastised in the manner he deposed to, and consistent with Mr Vines being involved in that process. ASIC noted that Mr Schneider did not send the October results to PwC, but instead, he telephoned Mr Vines on 11 November to inform him of the outcome. ASIC also referred to the fact that Mr Schneider did not prepare a written report summarising his conclusions on the cost to GIO Re of Hurricane Georges. It seems to me, however, that these events do not assist the court to choose between Mr Schneider's and Mr Vines' evidence about their conversation on the first quarter highlights. Both of the matters referred to by ASIC occurred after Mr Robertson had left for Boston, at a time when Mr Fox had only just arrived, when Mr Schneider was in touch with Mr Vines over the American Re negotiations. I do not regard Mr Schneider's conduct at that time as shedding any light on what was said on the earlier occasion.

It seems to me, on balance, that there was a conversation between Mr Schneider and Mr Vines, but it was significantly different from Mr Schneider's recollection of it. It was a conversation along the lines that Mr Vines conceded may have occurred. In substance, Mr Vines told Mr Schneider, without anger, that he should have submitted his report to Mr Robertson before releasing it to others including the auditors, because Mr Schneider should have followed the correct reporting line. I have reached this conclusion for several reasons.

First, two months previously, Mr Robertson had been so annoyed about Mr Schneider disregarding the proper reporting line, when he presented proposals for strengthening the aviation reserve to PwC without any advance warning to Mr Robertson, that he seriously considered resigning. It was Mr Vines who dealt directly with Mr Schneider and excluded Mr Robertson from the process. Mr Robertson's reaction with respect to the first quarter highlights was, once again, anger that the proper reporting line had not been followed and that an opinion had been conveyed to PwC on a matter within his responsibility, without any prior consultation with him. Given the history of the matter, Mr Vines may well have thought it appropriate to speak to Mr Schneider in an effort to re-establish the proper reporting line and repair Mr Robertson's authority. But it seems to me unlikely, in light of his role in the previous departure from proper reporting, that he would have approached Mr Schneider angrily about "messing up the process". Secondly, it is plausible that Mr Schneider, having been criticised angrily by Mr Robertson in a manner that must have upset him, read into Mr Vines' statements more than they were intended to convey, and then imperfectly recollected Mr Vines' words as a criticism of him for "messing up the process" and "not playing as part of the team". Thirdly, Mr Vines' knew Mr Schneider was required to be in close contact with PwC in connection with several of PwC's tasks. It is implausible that Mr Vines would have attempted to prevent communications between Mr Schneider and PwC. Fourthly, in his message to the executive team on 12 October, Mr Vines had invited comments, in circumstances where it was likely that the comments would be made available to the auditors. It seems to me implausible that, having obtained the comments he invited, he would then have sought to suppress communication of them to the auditors, while it is plausible that he would have wanted to re-establish proper reporting lines.

Mr Schneider gave evidence that, notwithstanding the warnings he allegedly received from Mr Vines and Mr Robertson, he was in regular contact with representatives of PwC, especially Ms Howell and Mr Murray, on a day-to-day basis. Mr Schneider's "assumptions" e-mail of 20 October 1998

In an e-mail dated 20 October 1998, addressed to Mr Robertson and copied to Mr Vines (PTB 0604), Mr Schneider responded to Mr Robertson's questioning the validity of "the re-forecast of GIO Re which was contained in my memo to you yesterday" (I infer that this refers to the first quarter highlights). Mr Schneider identified a number of assumptions which would have to be made good if the A$80 million profit forecast were to be maintained. One of the assumptions was that Hurricane Georges would cost GIO Re its average market share of the total catastrophe loss. This implies that any net loss caused by Hurricane Georges above A$25 million would directly flow through to reduce the A$80 million profit forecast. Mr Robertson, in his memorandum of 4 November 1998 to which I shall refer, implicitly accepted that assumption.

Mr Robertson gave evidence (affidavit para 114) that he reviewed Mr Schneider's assumptions and concluded there was no reason to change the profit forecast because, in his view, the assumptions were achievable. Mr Robertson said he also noted Mr Schneider had not considered other areas of the business which might perform ahead of budget, such as MIPI. As to Mr Schneider's assumptions: · the first assumption, namely that the cost of Hurricane Georges would be GIO Re's average historical market share for property catastrophe losses, was supported by Mr Robertson's work on the comparison between Hurricane Georges and Hurricane Fran and his discussion with Mr Burton (noted above); · Mr Robertson said he interpreted Mr Schneider's second assumption to mean that the catastrophe experience would revert to normal, that is that a profit expectation of 33% of catastrophe premiums would be realised for the remaining three quarters of the financial year; · Mr Schneider's third assumption, that the whole account protection which was to be purchased would be profit neutral, was consistent with Mr Robertson's approach; · the fourth assumption, that there would be no change in the revised method for calculating a prudential margin, was consistent with the instructions Mr Robertson had already issued that Mr Schneider was to maintain the prudential margin at the same percentage of claims provisions as had applied at 30 June 1998; · the fifth assumption, that the existing portfolios would not show accelerated loss development in the attritional area over that contained in the projection, was supported by Mr Schneider's indication in his e-mail that the first three months provided no evidence that the experience was accelerating, and therefore, Mr Robertson said, he considered that assumption reasonable (affidavit para 118); · the sixth assumption, that the apparent mismatch was illusory, was supported by Mr Schneider's statement in his e-mail that on close examination no mismatch had been identified.

For present purposes, Mr Schneider's first assumption was the most important one, because it underlined the importance, for the integrity of the forecast, of the Hurricane Georges experience conforming to GIO Re's average historical market share for property catastrophe losses, and consequently the risk to the forecast of any substantial negative deviation. It is of some significance that according to his own evidence, Mr Robertson was continuing to rely, about three weeks later, on the somewhat rudimentary checking he had undertaken shortly after the hurricane occurred, without any updating on an empirical basis.

Mr Vines gave evidence (T 2587-8) that, when he read Mr Schneider's e-mail he thought the assumptions Mr Schneider outlined were not unreasonable assumptions that might support the $80 million projection, but he had the sense that Mr Schneider himself was not convinced that the assumptions were sustainable. He inferred that there was a continuing disagreement between Mr Robertson and Mr Schneider about the projection but they were not irreconcilable.

In the following two days Mr Driessen supplied to Mr Vines, by e-mail copied to Mr Robertson and others, figures with respect to claims experience (PTB 0606). They included a table headed "undiscounted ultimate claims" (PTB 0611), which recorded claims of A$24.9 million for the July-September 1998 quarter in respect of Hurricane Georges. Mr Vines explained that he asked for that information so that he could get an understanding of the kind of claims experience GIO Re had had in the first quarter (T 2590), and he observed that the figure recorded for Hurricane Georges claims was approximately the figure of $25 million referred to in the first quarter highlights (T 2591). ASIC pointed out that this episode demonstrates, if demonstration were needed, that Mr Vines could have access to detailed information from within GIO Re if he wished to have it. But for the reasons I have given, my view is that in the third week of October Mr Vines was not under any obligation to make his own enquiries separately from the executive director, about claims developments for Hurricane Georges. The presentation of the first quarter results to the board, 9 November 1998

As it happened, the first quarter results were not presented to the board of GIO Australia Holdings until its meeting held on 9 November 1998 (PTB 0873). They were tabled by Mr Vines, and Mr Steffey reviewed the principal issues. One of the papers before the board was a paper prepared by Mr Vines (PTB 0876), to which Mr Steffey spoke at the meeting. In the paper Mr Vines addressed the below-budget performance of GIO Re for the quarter in the space and catastrophe portfolios. He noted that claims arising out of Hurricane Georges had been assumed to be $25 million, based on GIO Re's average historical market share of such catastrophes. He then said "Management remains confident the full year forecast business profit of $80 million can be met". The paper concluded by noting that the space portfolio was expected to generate $6 million of profits for the year and there was a strong indication that some of the MIPI reserves might prove to be redundant, based on recent settlements well below expected levels.

Mr Vines gave evidence (T 2647) that when he included in his report this expression of management's confidence in the forecast, he was drawing on Mr Robertson's memorandum of 4 November, as well as his own belief. As to his own belief, he said (T 2648): "I had a view about the prospect that we were entering into a contract of reinsurance that would deal with any adverse development beyond $25 million for Hurricane Georges, and I had my overs and unders schedule in the back of my mind and I knew that within the reinsurance division there were significant redundancies, including MIPI, that could meet any reasonable adverse development of Georges".

The American Re retrocession agreement is considered in section 3.23 and Mr Vines' "unders and overs" schedule is considered in section 3.18. 3.11 Mr Vines' and Mr Robertson's awareness of the relevance of Hurricane Georges claims to the profit forecast

In its amended statement of claim ("the SASC"), para 20, ASIC alleges that Mr Vines and Mr Robertson were aware in October 1998 that Hurricane Georges would result in claims on policies issued by or on behalf of GIO Re and that those claims were relevant to the attainment of the $80 million profit forecast. Having regard to the evidence that I have reviewed under the last two headings of these reasons for judgment, I find that ASIC's contention in para 20 has been made out.

ASIC contends that information subsequently came to light which showed that the A$25 million reserve could no longer be maintained as a reasonable reserve, and that the assumption upon which the A$80 million profit forecast had been made was undermined. ASIC's case is that the information bearing on these matters was known or ought to have been known to each of the defendants before completion of the Part B statement. 3.12 PwC's developing concerns about the Hurricane Georges reserve, up to 4 November 1998

In due course PwC and PwC Securities made an issue of the fact that the occurrence of Hurricane Georges may have undermined the reasonableness of maintaining the A$80 million profit forecast. They followed up that issue in various ways, in meetings and by other communications, and they were still making an issue of Hurricane Georges right up to the time of completion of the Part B statement.

This can be seen in PwC's draft report to the board of GIO Australia Holdings reviewing the first-quarter results, prepared on 22 October 1998 and sent by Mr Murray by facsimile to Mr Vines on the following day (PTB 0618 - apparently the report was never finalised: T 1374). Under the heading "significant matters", there was a note about Hurricane Georges (PTB 0621). It was recorded that a reserve had been established in the sum of $25 million for GIO Re's exposure to Hurricane Georges, on the basis of an estimated market share of 0.6% of a market loss estimated to be US$2.55 billion. PwC noted that in the past GIO's exposure to such events had varied significantly, from 4.2% for Hurricane Marilyn to 0.2% for another Hurricane called Mireille, and they continued: "As an indication, applying these market share percentages to Hurricane Georges gives a range of losses from $9 million to $178 million (before reinstatement premiums). There is significant uncertainty as to GIO Re's exposure to this event, particularly through the London market, and the ultimate exposure could be significantly more than the $25 million currently reserved."

In cross-examination of Mr Vines, reference was made to the figure of $178 million referred to in the draft report, and Mr Vines said he did not think that "anyone took that number seriously" (T 2937). He said the possibility that Hurricane Georges might have the same general effect as Hurricane Marilyn was totally hypothetical because the exposure to Hurricane Georges was not known (T 2937). He said (T 2938): "This material did not cause me to think about Hurricane Georges in any different way than any other cat event that had struck GIO Re. In other words, in my view this range was speculative and that GIO Re would do what it ordinarily did in these circumstances to assess the ultimate cost of Hurricane Georges."

ASIC submitted that a competent chief financial officer in Mr Vines' position would have taken PwC's statement very seriously indeed. Although it contained an element of speculation, the statement was made in a draft report to the board by the Group's auditors and did not simply mimic the comments in the first quarter highlights. In my view, however, the draft report did nothing more than to reinforce the warning implied in the first quarter highlights, that Hurricane Georges claims might develop in a manner impacting on GIO Re's profit and therefore the claims development had to be monitored. The statement merely gives a range from a very low to a very high figure, evidently based on nothing more than a comparison with GIO Re's losses in respect of two other hurricanes, and draws attention to significant uncertainty. To say, as ASIC did, that the statement should have been taken "very seriously" is not to imply that any particular steps should be taken in response to it. It does not seem to me that PwC's submission of its draft report to Mr Vines had any separate effect on his duties in the circumstances. The position explained by Mr Vines in cross-examination was, therefore, not unreasonable.

Mr Vines gave evidence (T 2936) that the draft report was not finalised and submitted to the board of GIO Australia Holdings because the reporting to the market of the first-quarter results became superseded by the Federal Court proceeding. I shall return to this point.

On 23 October 1998 Mr McClintock on behalf of PwC Securities sent to Mr Vines a draft of the PwC Securities report on their review of the 1999 profit forecasts, and a draft of the extracts from the Part B statement concerning financial forecasts and risk factors, commenting that "the major outstanding issues relate to reinsurance" (PTB 0635). Figures for inwards reinsurance were omitted from the draft report, and although the assumption was made that no major catastrophes (events with market loss in excess of US$10 billion) would occur in the year to 30 June 1999, the draft of that part of the report added "[consider Georges disclosure]" (PTB 0649; PTB 0669).

Mr Vines met with Mr Hammond, Mr McClintock and perhaps Mr Murray to discuss these draft documents on 23 October 1998 (T 2596). Mr Vines said he believed that PwC had received the first quarter highlights and also Mr Schneider's e-mail of 20 October 1998 identifying the assumptions that would have to be made good if the profit forecast were to be maintained (T 2597).

Allied to their concern about whether Hurricane Georges claims would exceed the historical average was PwC's apprehension about whether the 33% profit assumption of the catastrophe book remained reasonable in light of the first-quarter's experience. On 26 October Ms Howell of PwC raised with Mr Schneider, by e-mail copied to Mr Robertson (PTB 0692), a number of outstanding matters for the forecast and quarterly review, including this one. Mr McClintock sent a copy of this e-mail exchange to Mr Vines on 27 October (PTB 0691), and Mr Vines gave evidence that he read it and inferred that PwC had some concern about the 33% profit assumption but were not, at that stage, recommending any change (T 2612).

On 27 October 1998 Mr McClintock sent an internal e-mail to Ms Howell summarising outstanding points (PTB 0688), in which he said that the validity of the assumption that 33% of premiums could be brought to account as profit needed to be checked in light of the first quarter results, "particularly in light of Georges, Swiss Air and Karaha". He said: "Notwithstanding Frank's views, in my opinion, we need Greg to sign off on the forecast. This issue will need to be discussed with Geoff …". In oral evidence (T 1531) he explained that Mr Robertson's view, probably conveyed to him at a meeting, was that the forecast as a whole was his responsibility as the senior management representative for reinsurance, and that Mr Schneider was responsible for only part of the work. Mr McClintock said it was important in such matters that any issues that were raised be properly documented, considered by management, followed up and cleared (T 1532). He said he communicated his view that Mr Schneider would need to sign off on the forecast, at the meeting with Mr Lange (that was the meeting held on 5 November, noted below).

On the same day Mr McClintock sent a facsimile to Mr Vines (PTB 0691) attaching relevant e-mails (including Ms Howell's of 26 October). Mr McClintock explained in evidence (T 1533) that in his role as chief financial officer, Mr Vines needed to be aware of what the outstanding issues were.

Mr Hammond, Mr Murray, Mr McClintock, Mr Steffey and Mr Vines had a meeting on 29 October 1998, recorded in a note (perhaps an agenda) made by Mr McClintock on PwC letterhead, headed "Outstanding Issues - Reinsurance profit forecasts" (PTB 0714). According to Mr Murray, the purpose of the meeting was to bring to Mr Steffey's attention, as CEO, the issues PwC saw as outstanding and to enlist his support in getting them resolved (T 1378). Mr McClintock said in cross-examination (T 1578) that the meeting was an update of all issues associated with the reinsurance profit forecast as at the end of October. One of the matters he noted was headed "Catastrophe profit assumption". He noted that the model had assumed that 33% of net catastrophe premiums were profit, and that the first quarter catastrophe profit had been $7 million excluding the Hurricane Georges exposure of $25 million. The following then appeared: "PwC estimate further $23m cat profit required in remaining 9 months on estimated net premiums of $30m – 77% profit".

In cross-examination (T 1578-1581) Mr McClintock said that in response to concern that the 33% profit assumption for the catastrophe book would not be achieved having regard to the first quarter profit, Mr Steffey and Mr Vines had commented that it was necessary to consider all factors associated with the reinsurance profit forecast, not just particular issues associated with the catastrophe portfolio, since other portfolios had performed well. He said that Mr Steffey and Mr Vines had said that accelerated and precautionary notifications were impacting the development of the reinsurance portfolios, and that Mr Steffey had expressed the view that there was considerable scope for reviewing the reinsurance portfolio for early years so as to release excess provisions following investigation and clean-up.

Mr Vines also gave evidence about this meeting. He said it was Mr Steffey rather than he who had spoken about precautionary claims (T 2603). He said Mr Steffey explained that the AMP takeover had unsettled the market, and when the market was concerned about a reinsurer, in his experience there was a habit of speeding up claims and even sending in precautionary claims (T 2603). Mr Vines said he had no personal experience of such matters but he gave Mr Steffey's opinion considerable weight, because of Mr Steffey's experience, and he thought that what Mr Steffey said made good sense (T 2603). I accept Mr Vines’ evidence.

It is clear from the correspondence and Mr McClintock's evidence about the 29 October meeting that Mr Vines and Mr Steffey had been made aware, by the end of October, that PwC was concerned about the catastrophe component of the profit forecast, in light of both an uneasiness about the assumption that the Hurricane Georges loss would conform to the historical average, and an apprehension that the shortfall in profit for the first quarter had undermined the 33% profit assumption. ASIC submitted (written submission, para 62) that it was clear from the evidence that "by the end of October the issue of whether the catastrophe component of the $80 million profit forecast could be obtained, and the potential effect of Hurricane Georges on the profit forecast being achieved, was the major outstanding issue for the purposes of PwC, so far as GIO Re was concerned". In my opinion, the evidence does not permit me to go quite so far, as it appears that there were other issues in the reinsurance area (such as Karaha), and the evidence does not establish that the impact of Hurricane Georges was considered at that time to be the main issue for GIO Re. Obviously, however, it was regarded by PwC as a very important issue, and was addressed at some length in the meeting on 29 October.

Mr McClintock said he took "on board" the comments of Mr Steffey and Mr Vines at the meeting on 29 October, as issues to consider in the assessment of the profit forecast. Subsequently his view about alleged counterbalancing factors seems to have hardened. On 4 November 1998 Mr McClintock sent an e-mail to Mr Vines on the subject of "Outstanding Reinsurance Issues", following the meeting that he had with Mr Robertson, Ms Howell, Mr Schneider and Mr Driessen, on that day (PTB 0729; T 1535). One of the issues identified in the e-mail was the achievability of the full year forecast for the catastrophe book. The e-mail said: "The issue concerning the achievability of the full year forecast for the catastrophe book was discussed given the results of the first quarter. We advised Greg that there needed to be a reforecast and the cat book given that, prima facie, it appeared unlikely from a review of the first-quarter results, that the full-year forecast would be achieved." Mr McClintock then set out an analysis in which he took the business plan first-half forecast and used it to produce a first-quarter forecast by adjusting the numbers proportionally in relation to the risk applicable to the first quarter, according to GIO's own figures. His analysis purported to show that while premiums for the quarter were above the annual forecast, the profit was $14 million short of what was expected, assuming that the Hurricane Georges loss was no greater than the reserve of $25 million. He recorded that Mr Schneider was intending to review the entire portfolio because he believed that any shortfall in the catastrophe book might be offset by gains in the attritional book from early years. Mr McClintock said he had stressed to Mr Schneider that there would need to be evidence to support any such position.

Notwithstanding Mr McClintock's advice, there was no reforecasting of the catastrophe book and no specific tendering evidence to PwC to support gains in the attritional book from early years. It seems likely that management's efforts to deal with the Hurricane Georges problem were redirected towards the American Re contract. Mr Robertson's dealings with PwC and Mr Schneider, late October and early November

Finally on the topic of PwC's developing concerns about the profit forecast, there was some evidence given by Mr Robertson to the effect that GIO Re's capacity to respond to queries from PwC was adversely affected by mistakes and delays attributable to Mr Schneider and his team. Mr Robertson referred to three matters.

First, Mr Robertson gave evidence of a meeting he had with Mr Vines and Mr Steffey on the morning of 26 October 1998. He said its purpose was for him to explain to Mr Steffey that he could not yet produce a commentary on the first-quarter results because he was waiting for Mr Schneider to find and correct the mismatch error in the monthly valuation program.

Secondly, Mr Robertson gave evidence of a meeting on 27 October 1998 attended by himself, Mr Murray, Ms Howell and Mr Schneider. Mr Schneider, rather more vaguely, located the meeting (T 0444) early in November and before 4 November. Mr Robertson said (affidavit para 123) that the meeting had been arranged by Mr Murray for the purpose of discussing outstanding matters for the forecast and quarterly review, listed by Ms Howell in her two e-mails dated 26 October 1998 (PTB 0692-0693, noted above). Evidently this meeting was a precursor to the more senior meeting involving Mr Steffey and Mr Vines, held on 29 October. Mr Robertson said he agreed with Mr Murray that all the matters listed in Ms Howell's e-mail were real issues that needed to be discussed, but he said he stated at the meeting that he was not yet in a position to discuss them because he was waiting for Mr Schneider to find the mismatch error in the valuation program, so that he could provide more reliable figures for the first-quarter results. That, according to Mr Robertson, was the occasion that led Mr Murray to give evidence (T 1413) that Mr Robertson had not expressed views about the caveats that Mr Schneider had put in his report regarding possible outcomes for Hurricane Georges and the profit forecast.

Mr Schneider's evidence (T 0444) was that the following conversation occurred at the meeting: Schneider: "PwC and I have been talking about a number of the issues relating to the projection. We discussed a number of the issues. I have explained to PwC that it is not appropriate just to look at one or two issues and that in order to address this properly you would need to re-do the projection." Robertson: "Greg does not have the time to re-do the projection. However, we will fix the interest rate issue and re-run the projection."

Mr Robertson agreed (affidavit para 125) that at the meeting Mr Schneider indicated that in his opinion it was necessary to go back and re-do the profit forecast from the very beginning. Mr Robertson told Mr Schneider it was unnecessary to redo the forecast, and stated his opinion that there was nothing inappropriate about looking at issues one at a time. However, he agreed that he said Mr Schneider should recalculate the projection to take into account the change in interest rates since June 30. He said Mr Murray expressed concern that they were running out of time.

Mr Schneider gave evidence (T 0443) that he had the following conversation with Mr Robertson at about that time, probably (in my view) just before or just after the meeting with PwC on 27 October: Schneider: "I’ve been speaking to the auditors who have raised a number of issues regarding the projection - issues like catastrophes, space, et cetera. It’s not appropriate to look at each of them individually because of the bias they introduce." Robertson: "We have a projection and that projection is $80m." Schneider: "Well, they have raised a number of issues. I have explained to them that it is not appropriate to just look at one issue because of the bias that it will create. We will need to re-do the projection." Robertson: "It is okay to re-do the projection correcting for the interest rates issue. You look at the technical issues and leave the management to me." Schneider: "I’ve discussed a number of these issues already with the auditors and I’ve told them that it is not appropriate to just look at one or two. They have been asking lots of questions and I said that we would need to re-do the projection in order to answer the questions. It would be easier for me if you spoke to them and told them that we will not be re-doing the projection."

Mr Robertson said Mr Schneider did have at least one conversation with him about the issues raised by the auditors, along the lines of Mr Schneider's account (affidavit para 120). This was during the meeting with PwC representatives on 27 October, discussed above. He accepted that he instructed Mr Schneider not to re-do the projection except to correct for the interest rates issue. He denied ever saying "We have a projection and that projection is $80 million", but said he may have told Mr Schneider, "You look at the technical issues and leave the management to me". I accept his evidence on these matters (although, in my view, there was probably a separate conversation between Mr Robertson and Mr Schneider to the same effect), as it seems to me unlikely that Mr Robertson would have adopted the unbudging attitude implied by Mr Schneider's evidence, in response to queries from the auditors.

Thirdly, according to Mr Robertson's affidavit (para 134), there was a meeting on the morning of 4 November 1998 attended by Mr Vines, Mr McClintock, Mr Murray and himself, in which Mr Robertson said he was still waiting for Mr Schneider to find the mismatch in the valuation program but they had run out of time, so Mr Robertson told the others he had instructed Mr Schneider to rerun the first-quarter results and the full-year profit forecast and when he had those documents, he would report to Mr Vines. Mr Vines said he did not have any memory of that conversation but he had no reason to believe it did not happen (T 2619). Later on that day Mr Robertson wrote his memorandum to Mr Vines which is one of the central documents in this case.

Mr Robertson said that at the meeting there was discussion of the impact of falling interest rates on the prudential margin when the valuation model was run. In his e-mail to Mr Vines dated 4 November 1998 (PTB 0729), Mr McClintock said that Mr Robertson was not expecting Mr Schneider to do any further work on the impact of falling interest rates on the prudential margin, "as the impact was not seen as significant to the forecast". Mr Robertson gave evidence correcting Mr McClintock's assertion (affidavit para 135). He said the reason he did not expect Mr Schneider to do further work on that subject was that he did not intend to reflect the impact that falling interest rates had on the prudential margin in the profit result as at 30 June 1999 and therefore it could not affect the forecast.

Mr Robertson also gave evidence that there was some discussion at the meeting about the cost of GIO Re's retrocession cover. He said Mr Murray said that retrocession cover might prove to be some $4 million higher in 1998/99 than in 1997/98. Mr Robertson drew attention to the potential profit of $9.7 million which Mr Schneider had identified in the aviation account, presumably as a balancing item. He explained this item to Mr Vines in an e-mail on 19 November 1998 (PTB 1158). 3.13 Contract-by-contract analysis

In this section of the judgment, and in section 3.14, there is a break in the chronological presentation of the facts, so as to present in a single sequence the development of Mr Schneider's contract-by-contract analysis and its results, summarised in a document called "the HG table", and some of the evidence about discussions of the contract-by-contract analysis.

There is a detailed body of evidence relating to the execution of a contract-by-contract analysis by Mr Schneider and his team between 19 October and 9 November 1998. In addition to some documentary evidence, affidavit evidence was given by Mr Schneider, who supervised the contract-by-contract analysis, Sean Peak, then an actuarial analyst in the Technical Services Department of GIO Insurance, and Simon Hedley, then an international casualty underwriter with GIO Re covering US and London market risks.

Mr Schneider's affidavit evidence was that he initiated the analysis because the first quarter highlights had been based on the assumption that GIO Re would incur its average share of the total market loss for Hurricane Georges, and he wanted to resolve whether it would be a non-event, a $25-million-type event or a $100-million-type event. The work was undertaken by a team of about 10 people from the Technical Services Department and the Underwriting Department, under his leadership, including Mr Peak and Vu Pham from Technical Services, and Mr Hedley and Brigitte Eichen from Underwriting. Mr Peak did a large part of the work and was responsible for keeping a central record of the process, but full records have not been located, and so the evidence of the process is, to a degree, recollection not directly supported by documentation.

The evidence as to the process undertaken for the purposes of the contract-by-contract analysis is complex. It is unnecessary to make detailed findings of fact, and it will be sufficient to outline the process in these reasons for judgment. According to Mr Schneider, the process involved three steps, which I shall call for convenience "contract identification", "spreadsheet list" and "analysis". I shall briefly review the evidence concerning these steps. Overall, my conclusion is that there is sufficient evidence to satisfy me that the contract-by-contract analysis was undertaken in October 1998, the work program and procedures were appropriate for such a review, and the results were reflected in the HG table at PTB 0884. Contract identification

Mr Schneider explained that the first step was to identify all contracts at risk to Hurricane Georges. He and his colleagues determined the criteria for selecting those contracts and used the Technical Services information system to establish contract lists. Staff of the Technical Services Department extracted data from the information system and he checked their results. He recalled requesting staff to undertake further work, which resulted in additional contracts on risk being added to the list. Spreadsheet list

Mr Schneider said that the next step was to prepare a spreadsheet listing the contracts on risk, including details relevant to determining GIO Re's likely exposure. He said a number of versions of the spreadsheet were generated, and he identified a version at PTB 0846. It is sufficient to say that the spreadsheet: · classified the contracts into categories which identified the location of the cedants in the United States or within Lloyd's syndicates or otherwise, and whether they covered property losses extending to or confined to Puerto Rico; · listed the contracts according to the order of magnitude of the rate on line; · identified each contract by name of cedant, reference term (GIO Re's unique contract identifier), whether the contract was written in GIO Re's No 1 Account or No 2 Account, the GIO branch office that wrote the contract, and the identity of the GIO Re underwriter; · described the nature of the contract , including each contract's class of business (e.g. property, marine, whole account), risk territory (e.g. worldwide, US, Puerto Rico), type (e.g. treaty excess of loss or risk excess of loss), claim flag (e.g. risk attaching or loss occurring), and main currency (e.g. US$); · described key contract terms , including the rate on line, the dates of inception and expiry, the total amount payable under the contract in US$ for all reinsurers and GIO Re's share of that amount, and the excess or deductible on the contract.

Both Mr Peak and Mr Hedley gave affidavit evidence that the document from which they worked in their contract analysis was either the document at PTB 0846, or a document similar to and containing the same information as that document. Analysis

Mr Schneider said he had a discussion with most or all of the team working on the contract-by-contract analysis, and asked them to assess the likely losses to GIO Re from Hurricane Georges under the contracts that had been identified. During that process, he had discussions with members of the team as to the estimated amount GIO Re would have to pay under particular contracts. On some occasions, he said, it was clear that GIO Re would be required to pay the limit of its exposure, or would not have to pay anything. On other occasions the contract was not so straightforward and there would be longer conversations in which staff explained how they had formed their assessments and had applied their judgment on the likely level of losses. Reviews of individual contracts could take a few minutes in clear cases or several hours in more complex cases. Mr Schneider said he asked members of the team to examine underwriting files for particular cedants and he recalled members of the team retrieving files and discussing their provisional estimates with him when they had done so. On some occasions, he said, he made his own assessments.

Assessments were made having regard to a number of factors, set out by Mr Schneider in his first affidavit. They included the nature of the business written by the cedants in the past (for example, whether they wrote "high-up" or "low-down"), the reputation of the cedants or the underwriters, whether GIO Re was the leader or follower in writing the reinsurance, the size and type of the contract, the deductible, the overall performance of the contract in the past or where there was no history of prior years, the cedant’s past losses, and the company’s aggregate exposure in the region.

Each contract was given a range of losses: low, medium and high. The range might be wide or narrow, depending upon whether the issues raised by the contract were clear or unclear.

Additional work was done in order to assess GIO Re's share of the US losses of United States domiciled cedants. Two methods of assessment were used. The first, which Mr Schneider described in evidence as "the allocation method" (T 0461), involved Mr Peak allocating loss to individual cedants based on data provided by AM Best, a US agency whose data provided a basis for spreading the estimated direct insured market loss to cedants in the US who had a US risk exposure. The second method used information provided by Risk Management Services, a US company that simulated potential storm trajectories and intensities through the US. This work flowed into the part of the HG table (PTB 0884 - see below) that depicted US losses in US dollars.

The evidence includes a CD containing two documents, entitled "Hurricane Georges.doc" and "RMS.doc". Mr Peak said he prepared both documents. The documents, which appear to have been created in October 1998, relate to the tasks described in the previous paragraph.

Mr Peak gave affidavit evidence of his participation in the contract analysis, under the direction of Mr Schneider. He said that he reviewed underwriting files and had discussions with underwriting staff, to try to determine whether it was likely that a claim against GIO Re would be made under each policy reviewed, as a result of Hurricane Georges, and to estimate the extent of GIO Re's potential loss under the policy if a claim were made. He said it was not possible accurately to predict the amount of GIO Re's loss, and so he estimated losses with a low, medium and high range.

Mr Hedley also gave affidavit evidence of his participation in this analytical work. He said that for approximately two weeks in October 1998, he examined underwriting files in respect of the contracts on the contract list for Lloyd's contracts to provide a "file by file review of London Market Property Risks that may have exposure to Hurricane Georges". Two others worked with him on the London market files. He said that, together, they looked at approximately 100 files, and that he personally considered about 20 or 30 files and reviewed the work of his two colleagues.

Mr Hedley gave detailed evidence in his affidavit about how he identified the files to be reviewed, and about the procedures he followed in reviewing them, and he illustrated those procedures by reference to the J E Mumford underwriting file, which is in evidence. It is unnecessary to make specific findings about his detailed evidence or to set it out here. I am satisfied, however, that it is consistent with and complementary to Mr Schneider's evidence, and tends to show that the procedures adopted by Mr Hedley were appropriate to support the conclusions of the analysis, and that he performed the work in an adequately thorough manner.

The staff who carried out this analytical work reported their results either to Mr Schneider or to Mr Peak. While most of the paperwork now seems to be missing, the evidence (PTB 0845) includes a handwritten note signed "Brigitte" and dated 9 November 1998, which appears to be some notes recording estimates of expected losses for contracts, prepared by Ms Eichen. 3.14 Discussions about the contract-by-contract analysis, and the HG table

According to Mr Schneider's evidence, he said that he and his team were undertaking a contract-by-contract analysis on four occasions: first, on or shortly after 19 October, in separate conversations with Mr Vines and Mr Robertson; secondly, in late October and before 4 November, in several conversations with Mr Robertson; thirdly, during his meeting with Mr Fox and Mr Robertson on 5 November to discuss the differences between Mr Robertson and Mr Schneider, as suggested by Mr Lange; fourthly, in a conversation with Mr Vines shortly before Mr Schneider signed the American Re placement slip. I shall deal with the evidence on the first two occasions here, but I shall defer consideration of the evidence of the meeting on 5 November until section 3.16, which also addresses the meeting with Mr Lange, and I shall defer to section 3.23 my consideration of the evidence of the discussion between Mr Schneider and Mr Vines shortly before signature of the American Re placement slip. Mr Schneider's evidence of discussions on or shortly after 19 October

Mr Schneider gave evidence (T 0439ff) that, on or shortly after 19 October, he had separate conversations with Mr Vines and Mr Robertson in which he told each of them that he had begun a contract-by-contract analysis for Hurricane Georges, very similar to the analysis done for the misbehaving contracts in the aviation book.

Mr Vines denied that Mr Schneider ever told him he was carrying out a contract-by-contract review relating to Hurricane Georges (T 2863), and he said that prior to 7 December 1998 no-one gave him information as a result of a contract-by-contract analysis on Hurricane Georges or told him that a register was being kept of daily reports on the level of Hurricane Georges claims (T 2585). He said he expected GIO Re to do whatever would ordinarily be done to assess the cost of a catastrophic event, and to make him aware of any significant impact if one were identified (T 2584). Mr Vines said (T 2922-3) that it Mr Schneider had told him he was conducting a contract-by-contract analysis, it would have been "memorable" because he had used such a technique previously with aviation.

ASIC submitted (written submissions, para 339) that in cross-examination Mr Vines resiled from this position and simply said he could not recall any such conversation. I do not interpret Mr Vines' evidence in this fashion. He said, quite firmly (T 2923.26), that he would have remembered a statement by Mr Schneider that he was carrying out a policy-by-policy investigation to analyse the contracts one by one, because of the aviation experience. The very next question put to him suggested he was not in a position to deny that Mr Schneider may have, soon after the first quarter highlights were published, suggested in passing "that he was analysing the policies", and Mr Vines replied "I don't recall". He affirmed this answer in reply to the next question. As I understand his evidence, Mr Vines' position was that he denied that Mr Schneider told him that he was conducting a contract-by-contract or policy-by-policy analysis or review (the kind of exercise he had previously performed in respect of the misbehaving aviation contracts), and he did not recall Mr Schneider making the more general statement, in passing, that he was analysing the policies.

Consequently I disagree with ASIC's submission (written submissions, para 340) that there was no real conflict in the evidence on this issue because Mr Vines simply could not recall one way or another. I find it plausible that, if Mr Schneider had mentioned that he was undertaking an exercise comparable to the misbehaving contracts exercise which had led to or supported a dramatic revision of the aviation reserves, Mr Vines would have remembered that information. I agree with ASIC that the combined evidence of Messrs Schneider, Hedley and Peak demonstrates that the contract-by-contract analysis was a substantial exercise that occupied a good deal of their time over some weeks, but in my opinion that does not make it any more likely that Mr Schneider would have told Mr Vines he was carrying it out before the task was completed.

Mr Robertson also categorically denied that any such conversation ever took place (affidavit para 105). He said that at no time did Mr Schneider inform him that he was doing or had carried out a contract-by-contract analysis of the effect of Hurricane Georges on GIO Re, and he said that he was not aware Mr Schneider had made such an analysis until he read Mr Schneider's affidavit of 23 September 2002. However, he conceded that on about 5 November Mr Schneider had advised him and Mr Fox that Hurricane Georges was "most likely to be a $100 million type event" (affidavit para 162; see section 3.16), and he said that when he returned from Boston on 18 November, Mr Schneider showed him the HG table, which he referred to as a "spreadsheet I prepared for Tim" (affidavit para 189).

On balance, I have decided to reject Mr Schneider's evidence that he told Mr Vines or Mr Robertson that he was undertaking a contract-by-contract analysis before the analysis was completed. In my opinion, if they had been told that Mr Schneider was conducting a contract-by-contract analysis, a project involving a substantial amount of work by a team, of a kind that might have had an important bearing on a significant question in which they were very interested at the time, it is probable that they would have been interested to follow the analysis and hear about its outcome. These are not steps Mr Schneider said they took.

Mr Schneider's evidence did not appear to me to be firm evidence of independently recollected conversations that he had with Mr Vines and Mr Robertson. He recounted what he had said to Mr Robertson without being able to recall Mr Robertson's response, and when he was asked about Mr Vines he said "Essentially the same things" (T 0440). When pressed to say what he had said to Mr Vines and what Mr Vines had said to him, he answered by merely giving his part of the conversation, in substantially the same terms as for the Robertson conversation. It is plausible that Mr Schneider had a recollection of having spoken about his contract-by-contract analysis, but not a sharp recollection of when he did so, and so his assertion that he told his superiors that he was undertaking a contract-by-contract analysis at a time before it was completed may well have been in the nature of reconstruction rather than direct recollection.

ASIC submitted (written submissions (Robertson), paras 20-23) that it was overwhelmingly likely that Mr Schneider would have told Mr Robertson the analysis was being undertaken, given the undisputed evidence which shows that the contract-by-contract analysis was performed, involved a considerable amount of work by Mr Schneider and his team, and resulted in the production of the HG table on 9 November. ASIC's argument was that it was inconceivable that Mr Schneider, who according to Mr Robertson's evidence had been reprimanded for expressing his view about the profit forecast to PwC, would not have told Mr Robertson of the fact that the analysis was being undertaken. ASIC asked rhetorically, what possible reason was there for Mr Schneider not to have advised Mr Robertson of the existence of the analysis?

There was some cross-examination of Mr Schneider, on behalf of Mr Robertson, in which it was suggested to him that he had not informed Mr Robertson about the existence of the analysis because he had no faith in its reliability (T 0781) and because Mr Robertson would have attacked his methodology (T 0858). I agree with ASIC that it would be very unlikely that Mr Schneider would say nothing at any stage about the contract-by-contract analysis for these sorts of reasons. But in my opinion, it is not implausible that Mr Schneider, having embarked upon the task after some heated debate about the first quarter highlights, for the purpose of answering the question whether Hurricane Georges was to be a $25 million or a $100 million event, would have decided to keep his powder dry and not mention the work until the likely outcome had become clear. Mr Schneider's evidence of his conversations with Mr Robertson in late October and early November

Mr Schneider gave evidence (T 0443) that he had a number of conversations with Mr Robertson in late October and early November, but before 4 November. He gave a composite account of what was said, without being able to recall the separate content of each conversation. The composite account is as follows: Schneider: "We are almost complete. We have almost completed the contract-by-contract analysis. In my report in October I said Georges could be a small event or a hundred-million-dollar-type event. We’ve looked at a number of contracts, a large number of contracts. We’ve looked at the nature of the contracts, whether they were high up or low down or the type of exposures they had and I am confident that Georges is going to be a hundred-million-dollar-type event." Robertson: "I cannot accept that. How could it be so big?" Schneider: "Well, claims to date are already US$16.9m, or roughly $25m. So the $25m ultimate estimate that was in September is not possible. There is a wealth of exposure by just the number of contracts exposed. Grove alone is US$5m. It’s not inconsistent with the aggregates that we went through in June."

Mr Robertson categorically denied that any such conversation occurred (affidavit para 119). On balance, it seems to me that any conversations Mr Schneider and Mr Robertson had about Hurricane Georges at this time (19 October to 4 November) did not refer to the contract-by-contract analysis. I take into account that Mr Robertson firmly denied that a contract-by-contract analysis was mentioned, in circumstances where it is probable that he would have acted upon any such information if it had been given to him. I also take into account that Mr Schneider's evidence was not of a specifically recollected conversation, but instead, it was a composite account of several conversations, suggesting that his recollection was not sharp. Mr Robertson accepted that on 5 November Mr Schneider told him his opinion that Hurricane Georges was likely to be a $100 million type event (affidavit para 162), and for reasons I shall explain, I have decided to hold that Mr Schneider mentioned the contract-by-contract analysis on that occasion, notwithstanding Mr Robertson's evidence to the contrary. It may be that Mr Schneider's recollection was of that conversation. And as I have said, it is not in my view implausible that Mr Schneider would have kept quiet about the contract-by-contract analysis until it was close to completion.

Mr Schneider gave evidence (T 0445ff) of a meeting he had with Mr Fox and Mr Robertson on 5 November 1998, to which Mr Vines contributed on speaker-phone, in which (according to his evidence) he made reference to the contract-by-contract analysis. That evidence is considered below (in section 3.16). He also gave evidence that he told Mr Vines he believed Hurricane Georges would be a $100 million event and that he had performed a contract-by-contract analysis which supported that conclusion, shortly before he signed the American Re placement slip. I shall consider that evidence in section 3.23 of this judgment.

Mr Fox gave evidence that he became aware on 6 November that Mr Schneider and his assistants were undertaking a contract-by-contract analysis in respect of Hurricane Georges, when Mr Schneider told him during their operational meeting that he was having the work done and needed Mr Fox's authority to ask the claims department for daily updating reports on the progress of claims (first affidavit, para 67). I accept that Mr Fox became aware, at about that time, that a contract-by-contract analysis was being done, but in my opinion it is probable that he learned about it during his meeting with Mr Robertson and Mr Schneider on 5 November (discussed in section 3.16) when according to Mr Schneider (whose evidence on this point I accept, for reasons given below) the contract-by-contract analysis was mentioned. The HG table

Mr Schneider said that during the course of preparation of the contract-by-contract analysis, he had a number of conversations with Mr Peak about how to formulate the results of the analysis. He said to Mr Peak: "Put a summary table together with the categories [by which, he said, he meant the categories into which the contracts had been divided for the purposes of the analysis] down the side for low, medium and high [by which, he said, he meant the low, medium and high estimates of losses]. Put losses to date next to that and convert the medium estimate to Australian Dollars."

There is a single page document printed on 9 November 1998 (PTB 0884). This document figured prominently in ASIC's case and, for ease of reference, I shall refer to it as "the HG table".

Mr Peak gave affidavit evidence to the effect that he created the HG table, following discussions with, and possibly also with the assistance of, Mr Schneider. He said he believed it was created on or before the date it bears, namely 9 November. He said in oral evidence that the preparation of the document completed the contract-by-contract process (T 0801).

The HG table classifies cedants into categories such as "Puerto Rico", "US" and "Sydney based", in its first column. The categories listed in the first column are the same as the categories of contracts listed horizontally in the document at PTB 0846, except that "Sydney Based", "GIO UK", "Risk Attaching" and "Other" are also listed in the HG table.

The table sets out the total estimated claims for each category, in US dollars. The figures are presented in three bands, namely low, medium and high. Mr Peak gave evidence in his affidavit that the low, medium and high estimates were taken either from the review of individual files, or from the list of cedants in the document at PTB 0846. He said in oral evidence that the figures were provided to him by the people involved in the analysis (T 0795). The document also converts the medium band into Australian dollars, in the column headed "Medium AU Dollars".

The last column is headed "Losses to Date". Mr Schneider said that the figures in this last column were drawn from the Hurricane Georges register (discussed below). He said that the results in the last column were not used in the contract-by-contract analysis but were presented in the table as a "high level sanity check of the process".

One of the categories shown in the table was "Marine". As I have said, GIO Re had some outwards reinsurance protection in respect of marine claims. The medium figure shown in the table for "Marine", US$5 million (A$8 million), represented the estimated excess point for that outwards reinsurance protection.

The reader of the table is able to compare, for each category of cedants, the medium estimate in Australian dollars with the unfolding experience of recorded claims. The totals in each band for all categories of cedants are shown, in US dollars and then in Australian dollars. The Australian dollar totals were: low A$84.6 million, medium A$137.5 million, and high A$211 million.

Mr Peak said he provided the document to Mr Schneider without any handwriting on it (T 0802). In the document in evidence, the words "My Best Estimate 100.0" appear under the Australian dollar totals. Mr Schneider said this note reflected his view that, of the possibilities he had in mind when commencing the analysis, a hundred-million-dollar-type event was by far the most likely outcome. Mr Peak said he thought that those words were his (T 0802). He said that he and Mr Schneider had a "trivial" conversation during which Mr Schneider asked Mr Peak what he thought the losses might be. Mr Peak said he "did not give any due consideration" but put down a "round" number, a number which he said "did not have any materiality" (T 0802).

The difference between Mr Schneider's evidence and Mr Peak's evidence on this point does not seem to me to be significant. Whether Mr Peak or Mr Schneider was the one who first advanced the best estimate of $100 million, the fact is that Mr Schneider had already formed the view, by 5 November, that the analysis, at that stage nearly complete, indicated that Hurricane Georges was going to be a $100 million type event, and that was the information he conveyed to Mr Robertson and Mr Fox on 5 November. The HG table, shown to Mr Fox on 9 November and given to Mr Robertson later, provided a range of figures that tended to support Mr Schneider's opinion. The fact that Mr Peak, in a more junior position and without the involvement in the valuation process and first-quarter highlights that had seasoned Mr Schneider, regarded the discussion about the estimate as trivial does not mean that Mr Schneider, from his different and more senior perspective, thought likewise.

Both the printed Australian dollar totals in the "best estimate" are potentially important evidence in this case. If the ultimate loss for Hurricane Georges was A$100 million, A$75 million above the reserve notionally allocated for the purposes of the profit forecast, and all other things were equal, the profit forecast for the year for GIO Re should have been reduced by that figure to become A$5 million. If the ultimate loss was greater, then the profit forecast should have been reduced by a correspondingly greater amount.

Mr Schneider said in evidence that he informed Mr Fox and then Mr Vines (Mr Robertson being away at the time) of the result of the contract-by-contract analysis when the work had been completed, and told them that the work confirmed his view that Hurricane Georges was "a hundred-million-dollar-type event". Those conversations, which also dealt with the American Re transaction, are considered later in section 3.23. The utility of the contract-by-contract analysis

As I have said, Mr Robertson claimed he was not told that a contract-by-contract analysis was undertaken by Mr Schneider and the Technical Services team. He gave evidence (T 3126ff) that, if he had known at the time that such an analysis had been performed, he would have been doubtful of its utility for the purpose of arriving at a reasonable estimate of what Hurricane Georges might cost GIO Re. His reasons for this view related to the expertise of the people making the assessment and the quality of the information available. He said the people carrying out the Hurricane Georges analysis were not well-qualified to make the necessary judgments about property contracts, and the underwriting files with which they were working were known to be in very poor shape.

He contrasted the contract-by-contract analysis for Hurricane Georges with the analysis of misbehaving aviation contracts. He said that he knew the files kept by the aviation underwriter were meticulous and the information would not have been very old because aviation contracts had been written only within the previous two years. He said the analysis was carried out by the person appointed to oversee the aviation business, assisted by Mr Hedley who was familiar with the London market, so the people doing the work were reasonably skilled in the areas in which they were working. Moreover, the purpose of the analysis of misbehaving aviation contracts was to arrive at a conservative figure for the loss that might be occasioned by them so that full provision could be made for that loss to ensure that it would not impact on future profits for which the recently appointed chief executive had become responsible. The contract-by-contract analysis in respect of Hurricane Georges was an attempt to reach an estimate of the likely cost, rather than a conservative provision for it. Given these differences, Mr Robertson said he would have much more faith in the analysis of misbehaving aviation contracts than in the Hurricane Georges analysis.

These opinions were supported by the evidence of Mr Robertson's reinsurance expert, Mr Morgan. Mr Morgan said (affidavit, para 69) that the contract-by-contract analysis would have had very limited value "to Mr Robertson or any competent reinsurance manager in his position", for detailed reasons set out in his affidavit.

ASIC submitted (written submissions (Robertson), para 29) that this evidence was irrelevant and in any event, the criticisms were misconceived or "just plain wrong". Mr Robertson submitted (written submissions paras 267ff) that there were deficiencies in the process adopted by Mr Schneider that seriously undermined the utility and credibility of the analysis.

I partly agree with ASIC's submissions and I have reached the conclusion that Mr Robertson's and Mr Morgan's criticisms of the contract-by-contract analysis do not eliminate or even substantially discount the significance of that evidence.

As to the question of relevancy, ASIC's point is that if Mr Robertson was aware from at least 5 November, as it contends that he was, that a contract-by-contract analysis was being carried out, his duty was to take the analysis seriously, come to grips with the analysis and make a decision as to its significance in the light of all other evidence. Indeed, evidence given by and on behalf of Mr Robertson supports this submission. Mr Robertson agreed (T 3386) that if (contrary to his position) he had been advised that a contract-by-contract analysis had been performed, he would have had to take it seriously and would have worked through the results of the analysis and the methodology step by step with Mr Schneider. Mr Morgan accepted (T 3625) that a reasonably competent reinsurance manager, when advised of the fact that a contract-by-contract analysis had occurred and given the results of it, would have had to take it seriously and could not ignore the results without first understanding the methodology which produced it and identifying flaws in that methodology. Although Mr Robertson and Mr Morgan were critical of Mr Schneider's analysis, they did not say that its deficiencies were so obvious that it could be disregarded in limine .

Mr de Vroome, ASIC's reinsurance expert, went a little further (affidavit (Mr Robertson), para 157), saying that "at the very least" a competent reinsurance manager would give substantial weight to the results of a contract-by-contract analysis and would not discount the results without having reliable evidence to the contrary. I do not have to decide whether the standard is that high, but on any view of the evidence there was an obligation for a person in Mr Robertson's position to give the analysis careful consideration, after he found out about it on 5 November, something that he did not do.

As to whether Mr Robertson's and Mr Morgan's criticisms were misconceived, ASIC contended that the criticisms were based on a misconception about the purpose of the contract-by-contract analysis. Mr Schneider gave evidence (first affidavit, para 101) that his original purpose in undertaking the analysis was to determine whether Hurricane Georges would be a negligible event, a $25 million type event or a $100 million type event. In other words, his purpose was not to arrive at a reasonable estimate of the likely cost of Hurricane Georges to GIO Re. His statement of purpose is consistent with the issue he posed in the first quarter highlights, and with the structure of the HG table. At the time he commenced the contract-by-contract analysis (19 October 1998) there was no useful claims information concerning the development of Hurricane Georges and it would have been unrealistic to expect that an analysis could then be undertaken that would yield a reliable net loss figure. The evidence of Mr Peak (affidavit para 5) that Mr Schneider told him that "the ultimate aim of the exercise was to estimate GIO Re's losses from Hurricane Georges" is not inconsistent with Mr Schneider's evidence, which was directed towards the immediate purpose and intended outcome rather than the ultimate aim. I therefore accept Mr Schneider's evidence as to the purpose of the analysis.

Mr Robertson's criticism was based upon the analysis having been done to arrive at a "reasonable estimate" of the likely cost of Hurricane Georges to GIO Re (T 3126). This is a different purpose. He conceded in cross-examination that the results of the analysis in the HG table at least answered the question whether Hurricane Georges was likely to be a $100 million type event, disregarding reinstatement premiums (T 3489.33). Similarly, Mr Morgan criticised the contract-by-contract analysis from the standpoint that its purpose was to identify the net loss position (T 3618). Mr Morgan conceded in cross-examination (T 3625.12) that the results of the analysis would provide a solid answer to the question whether the Hurricane Georges loss was negligible, or a $25 million event or a $100 million event: notwithstanding certain kinds of criticisms of the analysis.

It seems to me to follow that · criticisms by Mr Robertson and Mr Morgan which merely show that the results of the contract-by-contract analysis would be unacceptable as a loss estimate do not destroy the utility of the analysis as a tool for answering the more limited question posed by Mr Schneider; and · the evidence is consistent with the view that the contract-by-contract analysis used a methodology and approach that was adequate to produce an answer to that more limited question.

ASIC also examined the substantive criticisms of the contract-by-contract analysis that had been made by Mr Morgan in paras 63 and 66 of his affidavit (written submissions (Robertson), paras 35-37). In para 63 Mr Morgan said: "Previous experience has shown that while the overall figures from a contract-by-contract analysis may be a useful indicator of ultimate loss potential, later analysis of the loss as against predictions has usually pointed out significant differences in over and under evaluating the potential effect to any specific excess of loss contract for reinsurance when viewed with hindsight".

ASIC contended (para 36) that this criticism of Mr Schneider's analysis was beside the point, because no-one had suggested that the contract-by-contract analysis was a reliable method for estimating likely losses on particular contracts. But in fact Mr Morgan asserted (affidavit para 65) that the variations in the individual contract level meant that no competent reinsurance manager would place too much reliance on the outcome of such an analysis, even when performed by competent underwriters on well maintained underwriting files. In my opinion ASIC has misunderstood Mr Morgan's argument. It remains true, however, that Mr Morgan's reasoning was directed towards the reliability of such an analysis as a tool for predicting ultimate net loss, and I infer that he would not regard this deficiency in the analysis as sufficient to render the results unreliable for the purpose of answering the more limited question that Mr Schneider set out to resolve.

Mr Morgan said that the contract-by-contract analysis in fact conducted by Mr Schneider and his team suffered from a number of additional flaws, which he enumerated in para 66 of his affidavit. Criticisms of the analysis were also developed in Mr Robertson's written submissions (especially at 280-291). In its submissions, ASIC endeavoured to respond to Mr Morgan's specific criticisms one by one (written submissions (Robertson), para 37). It is not necessary for me to express a view on each point, or even to set them out in full, or to set out in dealing the tower with Mr Robertson's submissions. The issue to which the debate is directed is whether such an analysis is a reliable tool for predicting ultimate net loss. It seems to me that even if all of the criticisms were valid, they would not prevent the analysis from being used to answer the more limited question addressed by Mr Schneider, in an approximate way and given the limitations of time and resources; and even such a flawed analysis could not reasonably be ignored, as Mr Robertson and Mr Morgan acknowledged. Reinstatement premiums

There is, however, once specific criticism I should mention. In subparagraph 66(f) Mr Morgan observed that in GIO Re's contract-by-contract analysis there had been no recognition of potential reinstatement premiums applicable to loss layers, to assist future profit predictions.

Mr Morgan gave an explanation of reinstatement premiums in paras 70-76 of his affidavit. He said that excess of loss reinsurance contracts (as opposed to facultative or proportional treaty reinsurance) invariably contain a provision for the reinstatement of cover where a claim has been made against the contract, in order to put the contract back to the position it was in prior to the loss. This reinstatement requires the payment of a reinstatement premium, which in most cases equates to 100% of the original premium paid, pro rata to the amount of the loss. Mr Morgan said that reinstatement premiums are used by the reinsurer to offset the claims payments at the time of settlement of the claim with the cedant or its broker. But in the reinsurer's accounts the reinstatement premium follows the normal premium route as a credit and the claim against the reinsurer is a debit entry on the balance sheet.

Mr Morgan said (affidavit para 72-74) he conducted an analysis of the contracts identified in the Hurricane Georges register as at 7 December 1998, to determine the reinstatement premiums payable under each of those contracts on the basis of the claims as recorded in the register at that date. His calculation, annexed to his affidavit, showed overall reinstatement premiums for the cedants where claim files were available as amounting to $12,135,999. He said, more generally (affidavit para 76), that reinstatements can be anywhere within a 15% to 25% band of the company's ultimate premium income for a year, depending upon the account makeup.

I accept Mr Morgan's evidence about reinstatement premiums. It is broadly consistent with other evidence in the case. Thus, Mr de Vroome calculated reinstatement premiums at $11.772 million in annexure C of his affidavit of 19 June 2003 and $10.475 million in annexure C of his affidavit of 29 November 2003 (and see T 2348). Mr Fricke put the figure at $11,983,562 (T 1659).

It is not necessary for me to decide whether Mr Schneider and his team should have taken reinstatement premiums into account during the contract-by-contract analysis. Mr Schneider said that this step was not needed in view of the limited purpose of the exercise (T 0495), but he conceded that the calculation of reinstatement premiums could and should be done to get a realistic view of the net impact of Hurricane Georges, in order to reach a "higher order of magnitude" in terms of accuracy (T 0861). Mr Peak (T 0814) and Mr Hedley (T 1142) agreed that it would be appropriate or necessary to consider reinstatement pre-premiums in order to estimate the net loss from Hurricane Georges in respect of each contract, and it would have been a relatively simple matter to take that information into account.

This evidence signifies that, although it would not have been appropriate to disregard the HG table and the analysis because of its failure to take into account reinstatement premiums, it would have been appropriate for Mr Robertson and Mr Fox, or a reasonable reinsurance manager in their respective positions, to have discounted the figures in the HG table by reference to an estimate of the likely level of reinstatement premiums (assuming there was no time for a contract-by-contract calculation). That seems to have been acknowledged by ASIC (and note also the evidence of Mr Peak at T 0813-4, and Mr de Vroome T to 245). In its written submissions (Robertson), para 37(v), ASIC pointed out that, given the limited purpose of Mr Schneider’s contract-by-contract analysis, there was no need for him to quantify the level of potential reinstatement premiums, and it added that if it were necessary to do so, "one could estimate the level of reinstatement premiums as Mr Morgan did in his affidavit [referring to para 76]". Conclusion as to the proper response to the contract-by-contract analysis

In the result, I agree generally with ASIC's concluding submission (written submissions (Robertson), para 39). If a reasonable person in like position to Mr Robertson or Mr Fox during November 1998 was advised by Mr Schneider that he had completed a contract-by-contract analysis, describing the methodology and producing the summary results of the analysis, that reasonable person would have: (a) taken the analysis and the results seriously; (b) sought to obtain an understanding of the work undertaken, to an appropriate level for a reasonably competent reinsurance manager; (c) considered whether there were any problems with the approach or methodology that might remove or reduce the reliability of the work; (d) made an assessment in light of those matters and the surrounding circumstances of the significance to be attributed to the results; (e) decided upon whether further investigations or analyses should be undertaken in order to validate the results, or other action should be taken in light of the results; (f) treated the results of the analysis as plausible pending any such further investigation or analysis; (g) having regard to the results in the HG table, treated as plausible Mr Schneider's opinion that Hurricane Georges was likely to be a $100 million type event. 3.15 Mr Robertson's memorandum of 4 November 1998

Section 3.12 of this judgment, which concentrated on PwC's developing concerns about the Hurricane Georges reserve, brought the chronological account of the facts up to about 4 November. The next important event was Mr Robertson's memorandum of that date. Background

By 4 November 1998 preliminary information indicating the size of Hurricane Georges was available, Mr Schneider had expressed his concerns about the A$80 million profit forecast in the first quarter highlights, and PwC were pressing Mr Schneider and others to demonstrate that the profit forecast was still sustainable in light of the "average loss" assumption for Hurricane Georges and the first-quarter results. It was necessary for Mr Robertson to write his report to Mr Vines on the first quarter, which was well overdue, as Mr Vines had asked for it by 16 October (Mr Robertson's affidavit para 138). Mr Robertson gave evidence that he had delayed the writing of his report in the hope, not realised, that Mr Schneider would find the cause of the mismatch error in the program. Mr Robertson said he was aware that Mr Fox was arriving on the following day, and he also had in mind that he was leaving for Boston on 6 November. He thought it important to provide a final report to Mr Vines as a "sign-off" on his work as executive director. He intended, he said, that his report would be a useful document to leave for Mr Fox so that he could see where Mr Robertson had left off with the monthly valuation model, the first quarter highlights and the profit forecast. He also intended his report to be his response to the issues raised by PwC.

Mr Schneider came to see Mr Robertson on 4 November with a revised valuation output (PTB 0736-0748), but Mr Robertson had very little time to analyse the new figures because of the deadline for his report and his impending departure overseas. According to Mr Robertson's evidence (affidavit para 139), Mr Schneider provided him with information about both the revised profit forecast figures and the revised first-quarter profit figures, contained in two tables that were the same as the tables at PTB 1163-64 (discussed below). He said Mr Schneider told him that the revised profit forecast figure was $65.8 million, of which $10 million was due to the fact that using a lower interest rate than the original projection had resulted in an increase in the prudential margin.

In his memorandum of 4 November 1998, Mr Robertson affirmed the A$80 million profit forecast in light of the first-quarter results (PTB 0762). He addressed the memorandum to Mr Vines, who promptly passed it on by facsimile, without any covering note, to Mr McClintock of PwC. Mr Vines gave evidence (T 2959) that he understood the memorandum to be Mr Robertson's response to his request to deal with the first quarter highlights, and he understood the relevance of that document to the attainment of the full-year forecast.

Mr Robertson agreed in cross-examination that when he prepared the memorandum, he understood it would be provided to PwC, and that a summary or interpretation of it would be given by Mr Vines and PwC to the DDC (T 3285). It follows that one of the uses to which the memorandum would be put, to the knowledge of Mr Robertson, was in the review of the profit forecast as part of the Part B process. Contents of the memorandum

Mr Robertson began the memorandum by noting that an error had been discovered in the reinsurance outstanding claims valuation program, which had the effect of understating profit in an environment of falling interest rates. He went on to identify the result in space as disappointing, but observed that there had been a valuation error from a previous reporting period, the correction of which reduced the space result by A$8.1 million, most of that adjustment being borne in the first quarter. He referred to Hurricane Georges and explained the basis for estimating loss by recourse to the average market share of 0.6%, without questioning the adequacy of the reserve of A$25 million calculated in that fashion. He said that the shortfall of A$8 million arising from the error in the space result would be made up by favourable development in the MIPI account, in which claims incurred had reduced by A$6.7 million during the first quarter. He expressed the opinion, "subject to all the usual caveats that must accompany any forecast of reinsurance results", that the A$80 million profit forecast remained appropriate after considering the actual outcome of the first quarter. He acknowledged, however, that if Hurricane Georges should prove "much more expensive than" the reserve allowed for it of A$25 million, then "this would affect attainment of our profit forecast".

Addressing the concern expressed by PwC that the attainment of the full year profit forecast depended upon much lighter catastrophe experience in the remaining three quarters than in the first quarter, Mr Robertson confirmed that he expected catastrophe experience to be much lighter in the remainder of the year because of GIO Re's historical experience with respect to property and aviation catastrophes, and the intention of the company not to renew a large part of the catastrophe-exposed business as from 1 January 1999. Mr Robertson’s underlying thinking

Mr Robertson gave evidence expanding on the thought processes underlying his memorandum of 4 November. He said (affidavit para 140) that he had been puzzled that Mr Schneider's new figures for the first-quarter profit showed a reduction in the profit from $17.3 million to $15.6 million, because the effect of falling interest rates before the program error was corrected had been to understate the profit, and so the fixing of the program error reported by Mr Schneider in his e-mail of 2 November should have been to increase the first-quarter profit above the figure reported on 19 October. He said he did not have time to question Mr Schneider about the issue and it was only when he returned from overseas after 17 November that he became aware that the reason for the reduction in profit was that Mr Schneider had not spread the increase in the prudential margin across the reserves on a pro rata basis. He said (affidavit paras 195-196) that he realised this late in November 1998, when Mr Murray showed him an e-mail from Ms Howell dated 11 November, and he expressed the opinion that failure to re-spread the increase in the prudential margin pro rata over the various classes of business had the consequence that the first-quarter profit Mr Robertson had reported to Mr Vines in his memorandum dated 4 November, relying on Mr Schneider's figures, was understated by $10 million.

Mr Robertson explained (affidavit para 141) that the loss in the space portfolio, $20.7 million, was due in part to the correction of the premium error (amounting to $8.1 million) that had been made by Mr Schneider and disclosed in their discussion on 2 November. Mr Robertson said he referred to a "valuation error" in the space portfolio, in general terms, because he did not wish to embarrass Mr Schneider further about that issue. He pointed out (affidavit para 143) that, although the first-quarter profit was $16.2 million short of expectation, the quarter's profit expectation would have been more than achieved if the space account had produced the forecast results. Of the shortfall in the space account of $20.7 million, $8.1 million was due to the correction of an error from a previous period, and Mr Robertson considered that the impact of the error had been virtually wholly recognised in the first quarter, so that it would have minimal impact on the rest of the year. He said he discussed the quarter's results with Kirby Ikin, GIO's space underwriter who was highly regarded as a leader in his field, before he wrote his memorandum. Mr Ikin expressed the opinion that the profit forecast for the space portfolio should not be changed, and he gave detailed reasons. Mr Robertson said that as a result of his discussion with Mr Ikin, it seemed reasonable to him to assume that the space account would produce the expected business result in the year, reduced only by the $8.1 million premium correction.

Mr Robertson explained (affidavit para 146) that he considered at the time he wrote his memorandum that the $8.1 million shortfall in the space account would be made up by favourable developments in the MIPI account. He said favourable settlements had caused incurred claims to be reduced by $6.7 million during the quarter, but the approach GIO had used for estimating outstanding claims did not reflect this favourable development. Mr Robertson also referred to Mr Latham's actuarial report dated 12 August 1998 on GIO Re's outstanding claims provisions as at 30 June 1998 (discussed earlier in this judgment), in which Mr Latham said that a degree of over-provision appeared to be developing in the MIPI account. Mr Robertson said Mr Latham had told him he thought there was a $7-8 million surplus, and Mr Robertson said he was confident that after the favourable claims development of the first-quarter there would be at least $10 million of surplus in the MIPI account (affidavit para 1.7). Mr Robertson’s November “unders and overs”

Mr Robertson said (para 148) that in preparing his memorandum of 4 November he calculated in his mind some "unders and overs". There were "unders" or negatives comprising the effect of the interest rate fall (-$4.2 million, identified in para 139 of his affidavit) and the premium error in space (-$8.1 million, identified in paras 130 and 141 of his affidavit), but there was an "over" or positive in the expected surplus from MIPI (+$10 million referred to in para 206 of the affidavit), leaving a net reduction to the original forecast of $2.3 million. Mr Robertson said this did not take into account any benefit from the surplus that might arise in the aviation account and in particular the $9.7 million mentioned to him by Mr Schneider on 2 November 1998 (and referred to in paras 130, 136 and 137 of his affidavit). He said that he therefore considered there was no justification for altering the $80 million profit forecast, which he supported in his memorandum of 4 November 1998 (affidavit para 148). Uses made of the 4 November memorandum

PwC took into account the views expressed by Mr Robertson in his memorandum, in their subsequent work on the profit forecast. Thus, in their draft review of the profit forecast tabled by Mr Vines at the meeting of the GIO Australia board of directors on 17 November 1998 (discussed later), PwC noted a number of concerns and expressly referred to Mr Robertson's views to answer those concerns.

Mr Vines gave evidence that Mr Robertson's opinion in the memorandum was important to him (T 2647). He said he understood Mr Robertson's commentary on Hurricane Georges to be conveying two points, namely that if Hurricane Georges became a much greater cost than $25 million it could impact on GIO Re's ability to meet the forecast (T 2609), and that the $25 million estimate was the best view of what the loss would be at that time (T 2610). He said he accepted that Mr Robertson did not provide all his reasons for concluding that the $80 million profit forecast should be maintained (T 2962). This last point is consistent with Mr Robertson's elaboration, in his evidence, of the reasoning underlying the memorandum in his evidence.

The gist of Mr Robertson's memorandum was reflected in a board paper prepared by Mr Vines for the meeting of the GIO Australia board held on 9 November 1998 (PTB 0876; T 2647). The report said that management remained confident the full year forecast business profit of $80 million could be met. Mr Vines said this statement drew on Mr Robertson's memorandum but was also his own opinion. He said he held that opinion, first, because Mr Robertson had expressed it, and secondly, because he had developed the view that the retrocession contract that was being negotiated would deal with any adverse development beyond $25 million for Hurricane Georges. Additionally, he had his "overs and unders" schedule in the back of his mind and believed that within the reinsurance division there were significant redundancies, including MIPI, that could meet any reasonable adverse development of Hurricane Georges (T 2648). 3.16 Mr Fox's meetings on 5 November, including the meeting with Mr Lange Mr Fox's arrival at GIO

According to Mr Robertson (affidavit para 149ff), when Mr Fox arrived at GIO's offices in Clarence Street on 5 November 1998, he immediately moved into Mr Robertson's office and Mr Robertson, with Mr Fox's permission, took occupation of the office next to him. Mr Robertson showed Mr Fox all the files on topical matters and gave him a brief description of what was in them. The briefing included Mr Schneider's progress in attempting to create a monthly valuation computer program, the first quarter's results as shown in the First Quarter Highlights, and Mr Robertson's memorandum to Mr Vines of 4 November 1998. These are matters of some significance in the present case, as shown below.

Mr Fox said (second affidavit, para 23ff) that Mr Robertson's briefings were given on a number of occasions during the day, he could not recall Mr Robertson pointing out any particular files, and Mr Robertson certainly did not show him the first quarter highlights or his memorandum of 4 November 1998. He referred to Mr Robertson's evidence that they discussed the profit forecast of $80 million for GIO Re and Mr Schneider's concerns about the achievability of the forecast, and the necessity for both of them to sign off on the forecast, and Mr Fox said (para 30) he was sure Mr Robertson was mistaken about those matters. He said he would have regarded any suggestion by Mr Robertson that he would have to sign off in respect of the profit forecast as being inconsistent with what Mr Steffey had told him and inconsistent with his understanding of his role, and he would have been alarmed and would have sought clarification with Mr Steffey. However, in cross examination he agreed he could not dispute that Mr Robertson showed him files concerning GIO Re's profit forecast, although he said he had no recollection of this (T 3772).

Mr Fox said he knew that GIO Re was exposed to Hurricane Georges within the first week of arriving there (T 3679), and that in about the second week after he commenced employment he became aware that the profit forecast for GIO Re was $80 million (T 3691; T 3712; T 3727; T 3828). He said he became aware, no later than 23 November 1998, by which time he had read Mr Schneider's memorandum of 8 November 1998 (PTB 0842) that a reserve had been set for Hurricane Georges at $25 million, and that any greater loss would put the profit forecast in jeopardy (T 3832). He said he became aware that Mr Schneider had recommended reducing the full-year profit forecast, although he claimed that when he became aware of this the issue had been superseded by the American Re contract (T 3832). Discussion between Mr Robertson and Mr Fox

According to Mr Robertson (affidavit, para 153) he and Mr Fox discussed Hurricane Georges on the morning of 5 November, Mr Fox's first day in his new position, and after referring to Mr Schneider, Mr Robertson said: "Greg has expressed concerns about achievability of the profit forecast, especially because of the impact of Hurricane Georges. I don't take these concerns very seriously because Greg is just covering his backside against being held responsible for the forecast if AMP achieve management control of GIO Re. But you would know better than I how big an event Hurricane Georges is likely to be. We have some claims already notified for it but I suspect a number of these claims are exaggerated or precautionary because of the AMP takeover threat."

Mr Robertson said Mr Fox replied: "Hurricane Georges isn't considered to be a big event in London. The market is saying most of the losses will be confined to the primary insurers and won't much impact the reinsurance market."

This is consistent with evidence given by Mr Fox (first affidavit, para 33-34), except that according to Mr Fox, the conversation was on 4 November, others were in the room, and he stated that American Re had done a detailed investigation of Hurricane Georges and had concluded that as far as American Re was concerned, it would have minimal exposure because the losses would be contained within the primary underwriters.

For reasons given later, my view is that Mr Fox was wrong about the date of his first day at GIO. The difference between Mr Robertson's version of Mr Fox's statement about Hurricane Georges, and the version given by Mr Fox, is that in the former version Mr Fox spoke about the attitude of the market as a whole, whereas in the latter version he confined his opinion to the effect on American Re. Mr Fox may have said what he claims to have said, but my view is that he also made the statements attributed to him by Mr Robertson. This is because Mr McClintock gave evidence that at a brief and introductory meeting at some time between 5 and 13 November Mr Fox commented that Hurricane Georges was not a big deal in the London market and was not having any material impact in London at the time he left (T 1646-7).

Mr Robertson's evidence was that he and Mr Fox then had a meeting, during the morning of 5 November, with Mr Vines, Mr Murray and Mr McClintock at which the first-quarter results, the profit forecast and Hurricane Georges were discussed. The purpose of the meeting was mainly to introduce Mr Fox to PwC, and it is likely that the issues discussed were those listed in the e-mail from Ms Howell of PwC to Mr Schneider dated 26 October 1998 (PTB 0692-3). He said that about an hour after this meeting began, the meeting was joined by Mr Lloyd Lange, the non-executive director of GIO Australia Holdings who had been appointed by the DDC to take a special interest in reinsurance. The meeting with Mr Lange

Evidence about the meeting attended by Mr Lange was given by Mr Vines, Mr Robertson, Mr Murray and Mr McClintock. Those present, apart from Mr Lange, were Mr Vines, Mr Robertson, Mr Fox, Mr Hammond (perhaps), Mr Murray, Mr McClintock, and Mr Pollard, another non-executive director (T 1532; T 2632). Mr Schneider was not present. The purpose of the meeting was to review the corporate and reinsurance forecasts, and according to Mr Vines, Mr Robertson's memorandum of 4 November was used as the base document to discuss the issues surrounding the reinsurance forecast (T 2633). Someone at the meeting referred to Mr Schneider's first quarter highlights and said that a difference of opinion had emerged between Mr Robertson and Mr Schneider, and according to Mr Vines, Mr Robertson then said: "Well, it's my task to set the forecast for the reinsurance division". Mr Fox did not say much, but he commented that American Re in London had looked at its exposure to Hurricane Georges and had come to the view that it was unlikely to be a loss that would impact particularly on the reinsurance market.

According to Mr McClintock (T 1547) and Mr Vines (T 2635), Mr Lange suggested towards the end of the debate that Mr Robertson and Mr Fox should meet with Mr Schneider to resolve any differences that might remain, and Mr Robertson agreed to arrange such a meeting.

Mr Robertson (affidavit paras 157-159) gave similar evidence about the content of the meeting with Mr Lange. Mr Robertson said he understood that the internal management disagreement that was to be addressed include a disagreement between himself and Mr Schneider and Mr Schneider and Mr Fox (T 3356), and he also understood that the DDC and PwC wanted to be informed of any management disagreement and the reason for it (T 3356-8).

Mr Fox said (first affidavit, para 50) that he did not recall attending anything identified to him as being a meeting of a subcommittee of the DDC, but in his second affidavit (para 8) he said he did not recall attending such a meeting but it was possible that at some stage while he was in a conference room on 5 November those persons were present. Then in cross-examination Mr Fox agreed that he was present at the meeting but said he could not recall whether there was any discussion about the $80 million profit forecast, Mr Robertson's 4 November 1998 memorandum, or any difference between Mr Schneider and Mr Robertson as to the profit forecast (T 3829). Mr Fox said (second affidavit, para 9) that he had no recollection of looking at Mr Robertson's memorandum of 4 November 1998 or any discussion of the first quarter highlights at any such meeting. He did not recall any suggestion that he should meet with Mr Robertson and Mr Schneider to resolve differences of opinion (paras 10, 32; T 3829).

In my opinion Mr Fox attended the meeting with Mr Lange and others, there was a discussion of the differences between Mr Robertson's opinion in his 4 November memorandum and Mr Schneider's opinion in the first quarter highlights with respect to whether the profit forecast should be modified in light of Hurricane Georges, and in Mr Fox's presence and in his hearing, Mr Lange suggested that Mr Robertson and Mr Fox should meet with Mr Schneider to resolve any differences that might remain. I have reached this conclusion on the weight of evidence, bearing in mind that Mr Fox's account is out of line with the evidence given by Mr Vines and Mr Robertson, and to a degree the evidence of Mr Murray and Mr McClintock. My finding is related to my finding, set out below, that Mr Fox attended a meeting with Mr Robertson and Mr Schneider pursuant to Mr Lange's instruction, a meeting that Mr Fox denied attending.

ASIC submitted (written submissions, para 180) that Mr Vines must have had it in the forefront of his mind, as a result of the meeting with Mr Lange, that there was disagreement between two of the most senior executives within GIO Re as to the likely effect of Hurricane Georges on the profit forecast, and that this issue was central to the concern as to whether the forecast could be attained. I agree with this. Although Mr Schneider was junior to Mr Robertson, he occupied an important position in GIO Re. The fact that the opinion he expressed in the first quarter highlights seemed, on its face, to be speculative and not supported by analysis, did not exonerate Mr Vines, as the most senior executive officer supervising the takeover defence process and Part B profit forecast, from making sure that the disagreement was adequately investigated as proposed by Mr Lange, and either resolved or presented clearly to the DDC as an issue for the committee's determination. The meeting to resolve differences between Mr Robertson and Mr Schneider

Mr Robertson said that later on 5 November, he and Mr Fox had a meeting with Mr Schneider, in which Mr Fox referred to Mr Schneider's recommendation in the first quarter highlights that the profit forecast be reduced, and asked Mr Schneider what his current thinking was. According to Mr Robertson, Mr Schneider said he was not uncomfortable with the assumptions made in the forecast about Karaha and the cost of retrocessions, but he thought Hurricane Georges would have a big effect on the projection.

Mr Schneider gave evidence (T 0445ff) about this meeting. He said there was a conversation as follows: Robertson or Fox: "What do you think [is] the effect Georges will have on the October results and the projection? How is the analysis progressing?" Schneider: "I think Georges will significantly impact the results. We are not finished the contract-by-contract review. If you recall in the first quarter report that I did I said that Georges could be a small event, a $25m event or a hundred-million-dollar-type event. We’ve reviewed a lot of contracts and we’ve looked at the details of the contracts and I think Georges is going to be a hundred-million-dollar-type event." Robertson or Fox: "How can it be so big?" Schneider: "Well, we already have $25m of claims to the end of October, so the $25m estimate is insufficient. The market loss is going up as is the Sydney estimates [sic]. This is consistent with the aggregate analysis I did at June." Fox: "I am surprised to see that Georges is such a significant loss. In London, Georges is not as material." Schneider: "The GIO wrote a lot of low down and dirty covers, often at 100 percent share." Robertson or Fox: "If we had reinsurance in place for Georges, would we still need to adjust the projection?" Schneider: "No. To the extent that the reinsurance limited Georges to $25m and the reinsurance was deemed by APRA to be reinsurance, then the projection would not be affected by Hurricane Georges." The alleged telephone call to Mr Vines

Mr Schneider said that he had not previously heard any discussion about reinsurance in relation to Hurricane Georges (T 0446), and that at the time GIO Re had no applicable cover for catastrophe property losses incurred with respect to Hurricane Georges. He said (T 0445ff), that during their meeting, either Mr Robertson or Mr Fox telephoned Mr Vines, who then participated in the discussion by speaker-phone, as follows: Vines: "We’ve been discussing a reinsurance policy for Georges with Guy Carpenter." Schneider: "Georges has already happened, so you are talking about a known event. Do you mean retrospective insurance?" Vines: "Yes. This is sold in Australia all the time. In fact, Berkshire Hathaway has written a number." Fox: "In London we wrote a lot of these kinds of covers. In fact, it is something that GIO Re should be writing themselves." Schneider: "How does it work?" Vines: "A component of the limit is contingent upon a defined event." Schneider: "Do we have a slip?" Fox: "In my branch in London at American Re we wrote a number of these contracts directly, not through brokers, and this worked well. I know a lot of people at American Re and I think we should approach American Re and ask them to participate in this." Vines: "We should obviously make use of your contacts at American Re." Robertson or Fox: "We could roll this cover into the long-term covers we have been discussing." Robertson, Fox or Vines: "Good idea." Robertson, Fox or Vines: "Firstly, we have a slip. Secondly, we could roll the cover into a long-term protection and, thirdly, these are sold in Australia all the time. I think we can purchase such a cover. What you think?" Schneider: "It sounds reasonable. Obviously it depends on the details of the slip." Vines: "We should move ahead and see if we can purchase the cover." Fox: "We’ll get onto it and we will get in touch with American Re."

Mr Vines said it was "highly unlikely" that the conversation attributed to him on the telephone on 5 November had ever occurred (T 2637-9; T 2986-7). Mr Robertson gave evidence (affidavit, para 166) that he participated in a meeting with Mr Fox and Mr Schneider on 5 November, but he did not recall Mr Vines being telephoned during the meeting, although he said it might have happened after he left. Mr Vines said that at some point he might have told Mr Schneider that he had had discussions with Guy Carpenter from which it appeared that they would be able to purchase reinsurance for Hurricane Georges (T 2986). But he said there was no discussion about any aspect of the terms of the reinsurance, he did not believe that at the time there was a slip, and he did not believe he told Mr Schneider they should move quickly and get the cover placed (T 2987).

One of Mr Vines' reasons for saying so was that the topic of the conversation was well known to those who were meeting with Mr Schneider, and there would have been no necessity to telephone him (T 2639). In submissions, ASIC challenged this explanation (written submissions, paras 84, 352), saying there was every reason why Mr Vines would have been brought into the discussion, particularly in light of his understanding (T 2635) that he was to be involved with Mr Robertson and Mr Fox in sorting out differences with Mr Schneider. ASIC pointed out that Mr Steffey had evidently considered the question of retrocession for GIO Re so important that he conscripted Mr Vines into attending meetings with Guy Carpenter on relatively short notice (T 2614-5), and so at the time Mr Vines was very much involved in the negotiation process. Further, according to ASIC's submissions, Mr Robertson had practically no involvement in discussions with Guy Carpenter and left for Boston on 6 November, and Mr Fox commenced his employment only on 5 November. I agree with ASIC's submissions on this point.

Another reason advanced in support of Mr Vines' evidence was that, it was said, he could not have had possession of a draft placement slip on 5 November. According to Mr Schneider, Mr Vines said during the telephone conversation that he had a slip, but Mr Vines did not believe he made that statement (T 2987). Guy Carpenter's facsimile letter to Mr Vines, enclosing a draft slip (PTB 0838), appears to have been transmitted late in the afternoon of 6 November (T 2641), so Mr Vines could not have said he had that slip on the previous day, 5 November. However, there was a previous Guy Carpenter slip, transmitted to Mr Steffey late in the afternoon of 4 November (T 0784). It appears that Mr Vines had a placement slip during a meeting he had with Mr Grove on the morning of 6 November, because they "went through changes" (PTB 0837). When these matters were put to him in cross-examination, Mr Vines conceded (T 2785) that it was "quite possible" that he had the earlier placement slip on 5 November.

My finding, weighing up these matters, is that I accept Mr Schneider's evidence about the telephone call with Mr Vines on 5 November. It is plausible that Mr Vines would have been approached for information about retrocession at that stage, because he was in a position to know, in general terms, what was in contemplation, and Mr Robertson and Mr Fox were not in such a position on that day. Mr Vines' reasons for saying that the conversation was "highly unlikely" are not persuasive, and he accepted that at some point he might have told Mr Schneider about the discussions with Guy Carpenter. The evidence of Mr Robertson about the meeting with Mr Fox and Mr Schneider on 5 November

Mr Schneider's evidence about the meeting he had with Mr Fox and Mr Robertson was addressed by Mr Robertson (affidavit paras 161-165). He denied that either he or Mr Fox asked Mr Schneider, "How is the analysis progressing?" He gave evidence that he was not aware that Mr Schneider was performing a contract-by-contract analysis and asserted that Mr Schneider did not talk about it during the meeting. He agreed that Mr Schneider had said he thought Hurricane Georges was "most likely" to be a $100 million type event. Mr Robertson said he replied: "I don't see how it could be so big when we don't write business in the Caribbean and Georges was pretty much a non-event in the United States."

The question whether Mr Schneider told Mr Robertson that he was conducting a contract-by-contract analysis became an important issue at the hearing, and I shall consider it below.

Mr Robertson said Mr Schneider referred to the Status of Registered Events Report as at 31 October 1998 (PTB 0792), which had just become available, which showed property losses of A$21.1 million and marine losses of A$7.3 million. He accepted (T 3399) that Mr Schneider may have said "we've already had $25 million of claims to the end of October, so that the $25 estimate is insufficient". He also accepted that during the meeting, he came to the view that $25 million would not be sufficient if the figure shown in the Status of Registered Events Report were correct, and he had no reason to think they were incorrect (T 3399). But he denied Mr Schneider said that the market loss was going up, as was the Sydney estimate, since in fact the market loss assessed by PCS was not increasing at that time and the expression "the Sydney estimate" meant nothing. I accept Mr Robertson's evidence on this latter point, on the ground of its plausibility.

Mr Robertson said he pointed out that marine claims were protected in excess of A$8 million, and the property numbers must have been demonstrating the problem of accelerated and precautionary claims that he had been warned about at Monte Carlo. He said that Mr Fox expressed his amazement that notified claims could be so large, and agreed that there must have been accelerated and precautionary claims notifications because of the uncertainty created by the AMP bid. According to Mr Robertson, Mr Fox suggested a reinsurance policy that would respond to further deterioration in Hurricane Georges and proposed further discussion with Mr Schneider about that idea. Mr Schneider denied that there was any discussion about precautionary or accelerated claims (T 0908).

I accept Mr Robertson's evidence on these matters. It is consistent with Mr Robertson's evidence of what he was told about precautionary claims at Monte Carlo, and his evidence about his discussion with Mr Fox earlier on 5 November.

Mr Robertson denied (affidavit para 164) that Mr Fox told Mr Schneider that he was proposing retrospective insurance. He said that when Mr Schneider asked whether Mr Fox had in mind retrospective reinsurance, Mr Fox replied: "No, of course not. You cannot reinsure retrospectively against known losses. However, you can buy what I call 'IBNR protection' reinsurance, which will respond to incurred claims which have not been reported, and to unreported growth in notified claims. We wrote a lot of covers of this kind in London, and it's the kind of thing that GIO ought to be developing."

I do not accept Mr Robertson's evidence on this point, and I prefer the evidence of Mr Schneider. This is because the American Re placement slip that was subsequently negotiated by Mr Schneider under the supervision of Mr Fox does, indeed, seem to be retrospective cover without qualification. I can see nothing in the document to suggest that the cover it conferred was confined to unreported future growth in claims with respect to existing catastrophes such as Hurricane Georges. If Mr Fox had the view that retrospective cover was impermissible and that the appropriate way forward was to negotiate "IBNR protection", one would have expected some recognition of this distinction in the placement slip and in the evidence of the negotiations, but there is none.

Mr Robertson said (affidavit para 166) that he left Mr Schneider and Mr Fox in discussion. He did not recall Mr Vines being telephoned during the meeting while he was there, and denied being part of any such conversation. He said he was concerned at the level of claims indicated in the Status of Registered Events document to which Mr Schneider had referred, but he did not think that the time was appropriate to make changes in the profit forecast, because Mr Fox had not had time to consider it. As explained in section 7, I do not regard this as an adequate response on the part of Mr Robertson given the level of executive responsibility he retained after Mr Fox arrived (discussed in section 4 of this judgment). Did Mr Schneider tell Mr Robertson he was conducting a contract-by-contract analysis at their meeting on 5 November?

I have accepted Mr Robertson's evidence, in preference to Mr Schneider's, on the question whether Mr Schneider referred to the contract-by-contract analysis in previous conversations. However, it seems to me that on this occasion it is probable that Mr Schneider did refer to the contract-by-contract analysis, in order to support his view of the effect of Hurricane Georges. By 5 November the analysis was nearly complete and the work must have been on Mr Schneider's mind. The purpose of the meeting was to address his difference of opinion with Mr Robertson, and it seems to me highly probable that in the course of a discussion on that subject Mr Schneider would have endeavoured to bolster his views by any available means, the most obvious of which being the contract-by-contract analysis. Mr Fox acknowledged that at about this time (though he denied participating in this particular meeting) he found out about the contract-by-contract analysis (first affidavit, para 67). Therefore I prefer Mr Schneider's evidence to Mr Robertson's evidence on this point.

There are additional reasons for this conclusion, as ASIC submitted. If, as Mr Robertson said, Mr Schneider had made his "$100 million type event" statement without reasons, a person of the experience of Mr Robertson would be likely to have demanded the reasons supporting that statement. Mr Robertson gave unsatisfactory evidence about this. He did not record in his affidavit that he had queried the basis for Mr Schneider's statement. When he was asked in cross-examination whether he could recall querying the basis of the statement, he said he had no specific recollection of doing so but he could not believe that Mr Fox or he had failed to do so (T 3385). Subsequently, he said he had a vague recollection that Mr Schneider was queried and said the basis for his opinion was the "level of claims to the end of October" (T 3386). I agree with ASIC that this evidence is unsatisfactory. Mr Robertson's evidence as to why he did not refer in his affidavit to Mr Schneider's explanation (T 3387) was not convincing.

Mr Robertson gave evidence that, when Mr Schneider gave him the HG table upon his return from Boston, he did not query the basis for it (T 3496). I agree with ASIC (written submissions (Robertson), para 26) that this is very implausible, unless he already knew that the table was based on the contract-by-contract analysis.

ASIC also submitted that I should prefer Mr Schneider's evidence because it was corroborated by his file notes (PTB 0942). For reasons explained elsewhere, I do not regard the file notes as compelling evidence, and therefore I do not see this as a good reason for preferring Mr Schneider's evidence to Mr Robertson's.

Mr Robertson submitted (written submissions, para 214) that there were 10 sound reasons for accepting the Mr Robertson was not told about the contract-by-contract analysis at any relevant time.

First, Mr Robertson submitted that Mr Schneider's professed purpose, to ascertain whether Hurricane Georges was a non-event, a $25 million event or a $100 million event, had been overtaken by events. This was because Mr Schneider agreed in cross-examination that notified claims as at 9 November, the date of completion of the analysis, had reached $59.8 million (T 0738). According to Mr Robertson's submission, that made it obvious that Hurricane Georges was going to be closer to a $100 million event than to a nil or $25 million event. Mr Robertson contended that by early November the analysis had become otiose and was not regarded as important, and this was part of the reason Mr Robertson was not told about it.

I disagree with this submission. It seems to me that, although the claims experience was developing in a manner pointing to Hurricane Georges being a $100 million event, there was still a point in completing the analysis, given all the work that had been put into it and the disagreement between Mr Robertson and Mr Schneider as to the significance of the hurricane. As I have said, the analysis was relevant to the discussion Mr Lange requested because it bore on the disagreement between Mr Robertson and Mr Schneider.

Second, Mr Robertson contended that Mr Schneider had little faith in the results of the analysis. According to Mr Murray's evidence (T 1417), Mr Schneider had undertaken two other exercises in addition to the contract-by-contract analysis, namely an estimate based on GIO Re's historical experience and the application of the model for calculating the ultimate cost of catastrophes. That seems to suggest thoroughness rather than lack of confidence in one of the three methods.

Mr Murray's evidence, in his s 19 examination and at the hearing, was that Mr Schneider had said in late October or early November that he looked at the contracts that would be potentially exposed to Hurricane Georges and had concluded that Hurricane Georges could "never" be more than a $100 million loss (T 1417; T 1418). This evidence is out of line with other evidence including, in particular, the contents of the HG table. I prefer to rely on the documentary evidence. Mr Murray also said that the HG table (PTB 0884) may have been a hypothetical exercise undertaken by Mr Schneider which he himself did not place a lot of weight on (T 1425). I prefer to accept Mr Peak's evidence to the contrary, as he was a person closely involved in the analysis and was the creator of the table.

Mr Murray gave evidence (T 1377-8; T 1423-4) of a conversation with Mr Schneider in October or November 1998 when Mr Schneider outlined a range of possible losses from Hurricane Georges based on GIO Re's historical experience and said that the most extreme worst-case scenario was a loss of $170 million, which Mr Schneider saw as highly unlikely. That evidence seems to me to be consistent with Mr Schneider's opinion that Hurricane Georges was going to be a $100 million type event, not a $170 million type event.

Mr Robertson's contention was that Mr Murray's evidence demonstrated that Mr Schneider had little faith in the result of his contract-by-contract analysis. He noted that Mr Peak expressed his scepticism on the reliability of the results of the analysis (T 0803). But in my opinion, assessing the evidence as a whole, that inference should not be drawn, in view of my conclusions about Mr Murray's evidence on these points.

Third, Mr Robertson submitted that Mr Schneider was afraid if he told Mr Schneider about the analysis before it was completed, Mr Robertson would be critical of his methodology and would put a stop to the exercise. Mr Robertson gave evidence that, after considering the evidence of Messrs Schneider, Peak and Hedley, if he had known at the time of the methodology of the analysis he would have been doubtful of its utility for the purpose of arriving at a reasonable estimate of the cost of Hurricane Georges to GIO Re (T 3126).

It seems to me that Mr Robertson's evidence misunderstood the purpose of the analysis, which, according to Mr Schneider, was not to arrive at a reasonable estimate of the cost of Hurricane Georges to GIO Re, but only to decide what scale of event it would be. This point was discussed in section 3.14.

Fourth, Mr Robertson said he had not been told about the earlier misbehaving contracts analysis, seeking to draw significance from the fact that Mr Schneider was able to complete the analysis without Mr Robertson becoming aware of it. But in my opinion, the difference between the earlier occasion and the circumstances as at 5 November was that the 5 November meeting was called for the purpose of resolving a management disagreement between Mr Robertson and Mr Schneider, an occasion which made it pertinent for Mr Schneider to say that he was completing his contract-by-contract analysis which would, in effect, support his opinion.

Fifth, Mr Robertson said that the analysis was part of the "sequence of events" file. Mr Robertson gave evidence, mentioned in section 2.3, that Mr Schneider told him he would create a history file showing that he opposed the forecast, and he would show the file to AMP when they arrived (Mr Robertson's affidavit, para 112). In cross-examination Mr Schneider agreed that he created a "sequence of events" file (T 0716). His purpose in doing so was to "document the sequence of events" because he had made recommendations and had discussions with his superiors which he wanted to be collected. He said that the file would include "analysis of Georges" (T 0717). Mr Robertson submitted (written submissions, para 238) that this "analysis of Georges" was intended to be part of Mr Schneider's exculpatory paper trail and was a clandestine operation. He said that there was a great deal of covertness in the undertaking of the analysis, which was not included on Mr Schneider's list of current projects as at 4 November (T 0938), was not the subject of any report (T 0851-2), was not referred to in management committee reports, and was not foreshadowed in the first quarter highlights. Mr Fox was shown the HG table during a short conversation on 9 November but Mr Vines was never shown it (T 0482) and Mr Schneider did not produce it at the meeting on 11 November when the October results were discussed (T 0781-2).

I regard this submission as speculative and not supported by the evidence as a whole. The amount of work and number of people involved in the contract-by-contract analysis supports the inference that it was not part of an exculpatory paper trail but was a serious undertaking. Mr Schneider talked to his immediate superior, Mr Fox, about the results on the day that the HG table was prepared. The fact that it was not shown or discussed at the meeting on 11 November does not seem to me to be particularly significant, since Mr Schneider had already shown the HG table to Mr Fox and had referred to the contract-by-contract analysis during the discussion with Mr Robertson and Mr Fox on 5 November, the outcome of which seemed to be, according to Mr Schneider's memorandum of 8 November 1998, to focus attention to the American Re retrocession proposal.

The fact that, on my findings, Mr Schneider did not tell Mr Robertson or Mr Vines that he was conducting a contract-by-contract analysis before the meeting on 5 November, when the work was nearly complete, does not mean that he was keeping the task secret so as to generate an exculpatory paper trail. It would be rational, especially given the criticism he received after the first quarter highlights, for Mr Schneider not to talk to his superiors about the analysis that was under way until it was complete or nearly complete, or there was some particular occasion to talk about it.

Sixth, Mr Robertson noted that neither Mr Vines (T 2583-4) nor Mr Murray (T 1417-25) was told about the contract-by-contract analysis. That does not seem to me to be a matter of significance, given that Mr Schneider reported on the results of the analysis to Mr Fox as soon as they became available on 9 November, and had been criticised on two earlier occasions for discussing such matters directly with PwC.

Seventh, according to Mr Robertson's submission, Mr Schneider gave Mr Murray and Mr Fox different information. According to Mr Robertson's submission, Mr Murray's evidence was that Mr Schneider told him that Hurricane Georges was a worst case $100 million event (T 1417). As I have said, Mr Murray's evidence is in some respects out of line with the preponderance of evidence and I do not accept it on these points. Additionally, I note that there is some ambiguity in the evidence, for at one stage Mr Murray said it was Mr Schneider's view that Hurricane Georges could never be more than a $100 million loss (T 1417-8) but on another occasion Mr Schneider told Mr Murray that the most extreme worst-case scenario was a loss of $170 million (T 1423-4), although he explained on the second occasion that the two figures were given on different bases.

Mr Robertson also relied, in making this submission, on the evidence of Mr Fox that Mr Schneider had said $100 million was the worst-case scenario (T 3695-6). I have rejected that evidence.

Eighth, Mr Robertson noted that there was no mention of the contract-by-contract analysis in Mr Schneider's memorandum of 8 November 1998 (PTB 0842). Mr Schneider began the memorandum by saying that he wished to summarise the discussion on 5 November. But it seems to me that what he did in the memorandum was to summarise the outcomes rather than the full discussion. The memorandum focused on his opinion that if Hurricane Georges cost more than the $25 million that had been estimated, the forecast would be reduced, but the issue would go away to the extent that GIO really could purchase retrocession. Additionally, it is obvious that the memorandum is not a full account of the meeting. Mr Schneider explained that he prepared it under extreme time pressure.

Ninth, Mr Robertson pointed out that Mr Schneider reported to Mr Fox after 5 November, and therefore it was unnecessary for him to tell Mr Robertson about the analysis or its results. But that misses the point that the meeting on 5 November took place at the request of Mr Lange in order to deal with management disagreement about Hurricane Georges, the disagreement being between Mr Robertson and Mr Schneider.

Tenth, it was noted that Mr Robertson volunteered that he was later shown the HG table. This submission was that it would be illogical to him to admit being shown the HG table but to deny being told about the contract-by-contract analysis, if he had (in effect) set out to fabricate his evidence, and therefore he must have been telling the truth. As I said at section 2.3, in giving his evidence Mr Robertson gave me no reason to doubt that he was endeavouring to tell the truth. My decision, that his evidence that he was not told about the contract-by-contract analysis is incorrect, does not imply otherwise. The evidence of Mr Fox denying that there was a meeting between him and Mr Robertson and Mr Schneider on 5 November

In his first affidavit (para 52) and second affidavit (paras 10, 34), Mr Fox denied that he met with Mr Robertson and Mr Schneider on 5 November, and he also denied that he participated in any conversation with Mr Schneider as deposed to in Mr Schneider's evidence. He referred to various statements attributed to him or Mr Robertson by Mr Schneider and specifically denied that he said them. He said (second affidavit, para 35) he had no discussion with Mr Robertson or Mr Schneider on 5 November about the profit forecast of $80 million for the reinsurance division, or any view Mr Schneider may have had that such a forecast was too high, and did not recall hearing that there was disagreement between Mr Robertson and Mr Schneider about the forecast. He said (para 36) he did not recollect being shown the Status of Registered Events as at 31 October 1998 or hearing Mr Schneider express any view, on 5 November, as to the likely magnitude of Hurricane Georges claims. He had no recollection of making any inquiry of Royal and Sun Alliance about their experience with Hurricane Georges. He said he had an operational meeting with Mr Schneider on 6 November, during which Mr Schneider told him he had some involvement in financial reinsurance products and would like to explore that area, and Mr Fox said American Re in London had booked a number of these contracts and suggested that Mr Schneider consider contacting American Re (first affidavit, paras 60-65).

It seems to me more likely than not that Mr Fox was present at the meeting with Mr Robertson and Mr Schneider, in spite of his denial. Mr Robertson's evidence that Mr Fox attended presents a plausible sequence in which Mr Robertson had discussions with Mr Fox, introduced him to PwC, brought him along to the meeting with Mr Lange and then, having been (in effect) told to work with Mr Fox to sort out his differences with Mr Schneider, brought Mr Fox along to assist in that endeavour. I have found that the weight of evidence supports the conclusion that Mr Fox was present at the meeting with Mr Lange and that he heard Mr Lange propose a meeting of Mr Fox, Mr Robertson and Mr Schneider to sort out any differences between the latter two. The conclusion that Mr Fox was present at the later meeting with Mr Schneider is supported by an approximately contemporaneous record, namely Mr Schneider's memorandum of 8 November 1998 (PTB 0842). It is also supported by Mr McClintock's contemporaneous file note of the telephone conversation he had with Mr Fox on 24 November, in which Mr Fox told him what had happened at the meeting (PTB 1206). Those documents also give a guide to the content of the meeting. I infer that the views summarised in the memorandum of 8 November were put forward by either Mr Fox or Mr Robertson without dissent from the other.

While Mr Robertson and Mr Schneider gave somewhat different versions of what happened at the meeting, they both said that Mr Schneider stated that he thought Hurricane Georges was most likely to be a $100 million type event. Mr Fox denied that any such thing was said to him, but I reject his evidence on that point. The meeting was convened for the purpose of sorting out a difference of opinion with respect to the profit forecast and the effect of Hurricane Georges. Mr Schneider and his team had in fact been working for some weeks on their contract-by-contract analysis, which was a substantial undertaking. Mr Schneider was in a position to assess where the analysis was heading, although it was not complete at that time. It seems to me likely that Mr Schneider would have referred to the probable outcome of the analysis in his debate with Mr Robertson at the meeting, in order to reinforce his view that Hurricane Georges required a revision of the profit forecast. Given the range of outcomes set out in the HG table, which was produced four days later, it is unlikely that Mr Schneider would have said (as Mr Fox claimed he did on 9 November) that the "worst-case scenario" for Hurricane Georges was $100 million. It is more likely that he would have reverted to his presentation in the first quarter highlights, which posed the question whether Hurricane Georges would be like Hurricane Marilyn, so that the cost to GIO Re could be expected to reach $100 million, or on the other hand a non-event, and would have said that the contract-by-contract analysis was pointing to the former outcome rather than latter.

It seems to me probable that Mr Schneider showed Mr Fox and Mr Robertson the claims department's report on "Status of Registered Events as at 31 October 1998". Mr Schneider did not specifically claim to have done so but his evidence implies that he made reference to the contents of the document during the meeting. Mr Robertson said Mr Schneider referred to the Status of Registered Events report. The report showed that claims in respect of Hurricane Georges of approximately $28.4 million had been received to the end of October 1998 - that is, by the end of October total claims received exceeded the $25 million reserve that had been established for Hurricane Georges.

Mr Fox maintained his denial in the face of the evidence of Mr Robertson and Mr Schneider, even though he said his recollection of the series of meetings that occurred on 5 November was a "real blur" (T 3775). It is striking that he took this firm position while conceding, with respect to the meeting with Mr Lange, that he may have been present at such a meeting but that he did not recall any discussion of the matters alleged by others to have been discussed. I agree with ASIC (written submissions (Fox), para 83) that it is probable that Mr Fox maintained a position of denial on this issue because he appreciated its importance to his case. To accept the proposition that Mr Schneider said on 5 November that he thought Hurricane Georges would be a $100 million type event would be inconsistent with Mr Fox's evidence (first affidavit, para 136) that Mr Schneider said on 9 November that he thought Hurricane Georges had a "worse case scenario of $100 million". That in turn would undermine Mr Fox's evidence that he told PwC at the meeting on 7 December that the contract-by-contract analysis had indicated a maximum potential loss of $100 million (Mr Fox's first affidavit, para 182).

Mr Fox's evidence about "IBNR protection" was that, though he was aware of IBNR protection reinsurance products, he did not make the initial suggestion that one be obtained for GIO Re, but instead Mr Vines told him that Mr Steffey was looking for a quotation, and Mr Fox had left it to Mr Schneider to negotiate the detail with American Re (second affidavit, para 37). For reasons I shall give, I do not accept that Mr Fox's role in the American Re negotiations was so limited. My view is that Mr Fox supervised those negotiations and Mr Schneider reported to him in respect of them, and it does not matter whether he or Mr Steffey initiated the proposal. Conclusion about meeting of Mr Robertson, Mr Fox and Mr Schneider on 5 November

My findings are that: · a meeting of Mr Robertson, Mr Fox and Mr Schneider took place on 5 November, after the meeting with Mr Lange at which he had suggested that it should occur; · the purpose of the meeting was to consider the disagreement between Mr Robertson and Mr Schneider about the impact of Hurricane Georges and whether the profit forecast to GIO Re should be revised and reduced; · during the meeting Mr Schneider expressed his opinion that Hurricane Georges was a $100 million type event, and he referred to the contract-by-contract analysis; · Mr Schneider showed Mr Fox the Status of Registered Events report as at 31 October, which recorded total claims of more than $25 million; · the difference of opinion between Mr Robertson and Mr Schneider was not resolved but instead, they discussed a proposal to protect GIO Re against Hurricane Georges losses in excess of $25 million by a retrocession agreement, which Mr Schneider agreed would remove the need to adjust the projection if it was deemed by APRA to be reinsurance. "Operational" meeting between Mr Fox and Mr Schneider on 6 November

In a part of his first affidavit evidence that was read (para 68), Mr Schneider said he met with Mr Fox on about 6 November, and Mr Fox gave him the copy of the slip and the fax from Guy Carpenter which are at PTB 0838ff (see above). In oral evidence he said that the document was either the one at PTB 0838 or the one at PTB 0784. In his affidavit he said their discussion included the following: Schneider: "Are you sure this is all going to work?" Fox: "Yes. These types of contracts are not uncommon in London. I have worked on a number myself and we wrote a number of these contracts at American Re." Schneider: "I understand that but will this work in Australia?" Fox: "Yes. A number of these have been sold to insurance companies here so if they worked for them they should work for us. Have a look at the slip and get back to me with your comments." Mr Schneider said in his second affidavit that he could not recall whether Mr Vines participated in this meeting.

Mr Fox gave evidence denying that this conversation occurred, although he acknowledged that he referred to his experience of financial reinsurance at American Re during his operational review meeting with Mr Schneider on 6 November (first affidavit, para 75). He denied having any knowledge of the extent to which insurance companies in Australia might have been buying financial reinsurance. I am unable to find in favour of Mr Schneider's version on the very limited evidence that I have. It seemed to me plausible that Mr Schneider, having just heard about the retrocession proposal, would have invited Mr Fox to comment on it, given Mr Fox's reinsurance expertise. But bearing in mind Mr Fox's denial of any knowledge about Australian companies purchasing financial reinsurance, I am not in a position to say that his evidence is wrong.

Mr Fox denied (first affidavit, paras 74-75) that he was ever given a copy of any Guy Carpenter draft slip by Mr Vines or anyone else. It seems to me unlikely that Mr Fox would have had the draft slip at PTB 0838 when he met with Mr Schneider on 6 November. This is because the fax header indicates that the document was sent, directed to Mr Vines, to the main reception fax at GIO Insurance rather than the fax outside Mr Fox's office, and he said, plausibly enough, that he was still jetlagged on 6 November and left the office at 5 p.m., whereas the fax header indicates that the fax was transmitted at 5:49 p.m. Mr Fox might have received the 4 November draft (PTB 0784), which had been sent to Mr Steffey, though it appears from Mr Vines' evidence (T 2624), which I have accepted for reasons given below, that Mr Steffey did not give him a copy of the draft slip before the meeting on 5 November, and it is therefore unlikely that Mr Fox would have obtained a copy on that day, and the evidence does not provide a basis for me to find that he obtained a copy by the time of his operational meeting with Mr Schneider on the following day. I therefore reject Mr Schneider's evidence that on 6 November Mr Fox gave him a draft slip and asked for his comments.

However, Mr Fox gave other evidence about discussions he had on 6 November with Mr Schneider and Mr Burton, which I accept, as this evidence is not inconsistent with other evidence. He said there was an operational meeting between him and Mr Schneider on 6 November. Mr Fox said (first affidavit, paras 78-79) that Mr Burton, senior underwriter at GIO Re, came to see him on that day to complain that Mr Schneider was producing "all sorts of estimates of maximum potential loss" from the contract-by-contract analysis, and the underwriters were not sure where they stood, and needed to have Mr Schneider make a final decision. He said Mr Burton gave him some figures for Mr Schneider's range of estimates, but at the time of swearing his affidavit in 2003, Mr Fox could no longer recall what the numbers were, although he recalled being concerned that the difference between the high and low limits of the estimate was significantly large so as to make it difficult for the underwriters to plan GIO Re's reinsurance program for 1999. Mr Fox said (first affidavit, para 80) that he immediately arranged a meeting of Mr Schneider, Mr Burton and himself, which took place on 6 November. At the meeting Mr Burton expressed his concern about the uncertainty of the position and Mr Schneider said he hoped to have the work finished by the following Monday.

While I accept Mr Fox's evidence in his affidavit concerning his conversation with Mr Burton, I do not accept some oral evidence he gave on that subject. He said the range of estimates given by Mr Burton was less than $100 million (T 3841). He also said that during their discussion on 6 November, Mr Schneider gave Mr Fox an estimate of the probable result of the contract-by-contract analysis. In his first affidavit (para 77) Mr Fox said he could not recall the number Mr Schneider gave, but in his oral evidence he said the number was not as high as $100 million (T 3839). I reject Mr Fox's oral evidence on these points. I have found that at the meeting between Mr Robertson, Mr Fox and Mr Schneider on 5 November, Mr Schneider referred to the contract-by-contract analysis to confirm that Hurricane Georges was a $100 million type event. It would be inconsistent with that finding to accept that on the following day, Mr Schneider and Mr Burton gave lower figures. Mr Fox's state of knowledge in about the second week of November

In his first affidavit Mr Fox said that he did not know, as at 24 November 1998, the amount of any projected result as mentioned in Mr Schneider's 8 November 1998 memorandum. Then he said: "I did not know the 'projected result' for the year to 30 June 1998 was $80 million, or that Mr Schneider had ever expressed any opinion to the effect that a 'warning' should be placed on the forecast, or that it should be reduced."

His reference to a projection for the year to 30 June 1998 was a mistake, and he intended to refer to the $80 million profit forecast for the year ended 30 June 1999 (T 3755). In cross-examination he agreed that by the second week after his arrival he knew that GIO Re had a profit forecast for a projected result of $80 million and that he had read the draft Part B statement that was in his in-tray (T 3696; T 3727; T 3754.25; T 3825). His attention was drawn to the statement in para 137 of his affidavit that he did not know that the "projected result" was $80 million, and he said (T 3755.15) that he "may well have" known well before 24 November that the profit forecast was $80 million but he "gave no credit to it" in his recollection. When it was put to him that the statement in para 137 of his affidavit was a lie, he insisted that the whole of the sentence be read and eventually said (T 3756.5), after a pause for about a minute: "If you read the first part of the sentence in isolation I read it as wrong."

Mr Fox agreed that he had understood, when he read the draft Part B statement, that it was a draft of an important document (T 3825), and that in one way or another the draft document contained information, including information concerning the forecast profit of the GIO Re, that at some stage was likely to be issued to the market in relation to the takeover (T 3826). He understood that if the document was published, the information contained in it would be very important to assist those interested parties in the market in deciding how they should react to the AMP bid (T 3826). He understood, when he read the draft Part B document and thereafter, that it was very important that all reasonable steps be taken to ensure that any profit forecast information published to the market would be accurate and not misleading, and that insofar as he was called upon to contribute to the dissemination of any information concerning the profit forecast, he had to take all reasonable steps to be accurate (T 3826).

Mr Fox read Mr Schneider's 8 November memorandum (PTB 0843) that some time before having his telephone conversation with Mr McClintock on 24 November. The memorandum would have informed him that the $80 million profit forecast assumed adequacy of the Hurricane Georges reserve of $25 million. It must have been clear to him by 24 November that Hurricane Georges was a very significant issue in relation to the achievability of GIO Re's profit forecast. Mr Schneider's dealings with Grant Samuel

Mr Schneider gave oral evidence (T 0447) that he had a conversation with one of the three defendants (he could not remember which one) after 5 November, in which he said that Grant Samuel and PwC had asked him to continue assisting them with the Part B Statement, and the defendant to whom he spoke authorised him to continue to do so. Mr Schneider said that, in the same conversation, he received authority to correct a valuation error that had been identified by Mr Latham, that would not affect the profit projection for 1998/99 but related to later years.

Mr Robertson said (affidavit para 177) that he was not a party to any such conversation and that he was never told anything about Mr Latham identifying a valuation error. Mr Fox said (first affidavit, para 58) that he was not present during the conversation and did not make any of the statements to which Mr Schneider deposed. The evidence does not justify my making a finding that the conversation deposed to by Mr Schneider in fact occurred.

On 11 November Mr Schneider sent an e-mail to Mr Vines, copied to Mr Fox and a representative of Grant Samuel, headed "Valuation of GIO Re" (PTB 0958). In that context there was a projection of profit for the next 10 years or so, presumably for the purposes of assisting Grant Samuel to make a discounted cash flow valuation, rather than to produce a profit forecast for the 1998/99 year. Mr Fox said (first affidavit, para 101) that he could not recall receiving this e-mail. He probably did. 3.17 Mr Schneider's memorandum of 8 November 1998

On 8 November 1998 Mr Schneider wrote a memorandum addressed to Mr Fox and Mr Robertson, incorrectly dated 8 September 1998 (PTB 0842). Considerable attention was given to this document at the hearing.

Mr Schneider's evidence is that he sent the memorandum to Mr Fox and Mr Robertson but he could not recall whether it was sent by e-mail, by internal mail or by hand. Mr Fox said that he did not recall receiving the document, but he believed that he must have received it some time prior to having a conversation with Mr McClintock on 24 November (first affidavit paras 51 and 134). It seems to me probable that Mr Schneider sent it to Mr Fox, and Mr Fox received it, on or not long after 8 November. As to Mr Robertson, he had left for Boston on 6 November and was not directly involved in the retrocession negotiations. It is not clear whether the memorandum was transmitted to him in Boston.

Mr Schneider said in his first affidavit that he produced the note under extreme time pressure and it is not a full account of the meeting to which it refers. In the memorandum, Mr Schneider purported to summarise the discussion he had with Mr Fox and Mr Robertson on 5 November 1998 concerning the implications of Hurricane Georges and the full year projections (including, I infer, the A$80 million business profit forecast). He confirmed his opinion that, to the extent that Hurricane Georges cost more than the A$25 million that had been estimated, the projected result would be reduced, and he referred to his recommendation that the full year projected earnings be reduced having regard to a number of factors which could cause the Hurricane Georges loss to increase beyond A$25 million. He said the issue would go away to the extent that GIO Re could purchase reinsurance that eliminated the cost to it of Hurricane Georges increasing beyond the A$25 million provision. He said it seemed to him reasonable that the company may be able to purchase such reinsurance, and that the contract could be cancelled and replaced by whole account reinsurance in due course.

Mr McClintock identified a note in his handwriting on a copy of Mr Schneider's memorandum, addressed to Mr Murray, saying "Pat, this is the result of the meeting between Tim, Frank and Greg". In oral evidence Mr McClintock said (T 1547) that Mr Schneider's memorandum was the outcome of his meeting with Mr Robertson and Mr Fox, consequent upon the meeting attended by Mr Lange, and he interpreted the memorandum to mean that the issues associated with reinsurance had been cleared with the exception of Hurricane Georges. As to Hurricane Georges, he referred to Mr Schneider's comment to the effect that his concerns would go away if reinsurance could be purchased. 3.18 Mr Vines' "unders and overs" analysis, November 1998

Mr Vines and Mr Robertson both gave evidence that they had carried out "unders and overs" exercises to assess whether there was any surplus or "redundancy" elsewhere in the reinsurance business to counteract any shortfall in provisioning for Hurricane Georges losses. There is also evidence of such an exercise by Mr McClintock. It is appropriate to interrupt chronological account of the evidence in order to consider, at this stage, the unders and overs analysis carried out by Mr Vines and presented to Mr Mortimer, the new chairman of the GIO Group, on 9 November.

ASIC concedes that it would be legitimate for GIO Re, in deciding whether to adhere to the A$80 million profit forecast, to take into account not only reductions in areas where it was no longer reasonable to expect that the forecast figures would be achieved, but also increases where it had become reasonable to believe that the forecast figures would be exceeded. The process of consideration which takes into account both shortfalls and excesses in reviewing a profit forecast was referred to in evidence as an "unders and overs" exercise.

Mr Vines gave evidence that he first prepared an "unders and overs" schedule in late August or September 1998. He tendered in evidence (Exhibit D1, tab 40 & 115) a document which appears to be an overhead or PowerPoint presentation comprising 10 pages of headings and figures, which he identified as this schedule. I infer that he prepared it after, perhaps shortly after, the announcement of the AMP takeover bid. Perhaps more importantly, he prepared it after the conclusion of the process of review of the valuation model and adequacy of provisioning that had led to the reporting of a substantial loss for the reinsurance business for the year to June 1998. Mr Vines described the document as "an inventory of all the various adjustments we had put in place at 30 June" (T 2534), and later said it was his view of "redundancies and deficiencies and other actions that had been taken at 30 June which had the effect of underpinning the financial position of the Group and future performance" (T 2537). He also said he prepared it because Mr Steffey expected him to have at his fingertips an understanding of where the "redundancies and deficiencies" might be within the Group (T 2534).

Mr Vines said he took Mr Steffey through the schedule shortly after he created it, and at Mr Steffey's request, he presented it to David Mortimer on 9 November 1998, after Mr Mortimer had been appointed chairman of the Group (T 2534). By 9 November the focus of attention had shifted from strengths and weaknesses of the balance sheet, as such, to whether the forecast in the draft Part B Statement should be supported (T 2539). But he did not show the schedule to Mr Murray (T 3861), who said in evidence that he had not seen it before (T 1456).

The document divided the Group into three principal businesses, identified as "General", "Reinsurance", and "Australia". For each of these categories there were summary plus and minus figures, which were then broken down into components. I take it that the plus sign signified an "over", that is an occasion where GIO's accounts had been excessively cautious and extra profit could be generated if a more realistic and less conservative approach were taken, whereas the minus sign indicated an occasion of under-provisioning where the figures used by GIO had been over-optimistic and should be adjusted so as to reduce profit.

The "Summary" page showed "overs" of $71 million, $110 million and $44 million for General, Reinsurance and Australia respectively, and "unders" for those categories of $22 million, $26 million and $0 respectively. The net result was shown to be an "over" of $176 million. For General the individual breakdown figures were relatively small items, which it is unnecessary to examine in further detail. Mr Vines said in evidence that he obtained the numbers from senior executives in the appropriate business groups, whom he believed to be competent. It is worth noting, however, that Mr Vines' handwritten notes made before his discussion with Mr Mortimer indicated that: · five of the "overs" items totalling $25 million had been "locked in" by the time of Mr Vines' presentation to Mr Mortimer (T 2544); · out of an annual budget of $18 million for General catastrophe events (such as floods), there were actual or expected claims of $6 million in the first quarter and $3 million of the annual provision had been released; · out of an annual budget of $5 million for business insurance major claims, there were actual or expected claims of $2.5 million in the first quarter.

For Australia (that is, GIO Australia, the subsidiary that employed staff), the "overs" comprised a superannuation surplus of $40 million and excess provisioning for employee liabilities of $4 million.

It is appropriate to examine the "overs" and "unders" for Reinsurance more fully. There was said to be an "over" for Aviation, "per Robertson", of $45 million. Mr Vines explained to Mr Mortimer (T 2537) that this entry referred to the new provision of $105 million, and reflected Mr Robertson's view that the new provision was excessive in an amount of about $45 million. Next to that entry in the schedule there was a handwritten note, "taken $9.3 million". Mr Vines said he made this note before his discussion with Mr Mortimer, and that it signified that in the first quarter results, the Swissair loss had been recognised and to the extent that premium income from the aviation catastrophe book did not absorb the effect of that loss, $9.3 million had been applied against the $105 million aviation reserve that had been created as at 30 June 1998 (T 2543). In other words, the Swissair loss had been accounted for in the first quarter by applying premium income to it and setting the remaining $9.3 million against the aviation reserve.

There were "overs" listed for property and general liability attritional, and for D & O, totalling $48 million, which Mr Vines said were derived from Mr Latham's opinion that there had been over-provisioning to that extent (T 2537).

There was an entry for MIPI expressed as "+???". Mr Vines said he told Mr Mortimer that in his report, Mr Latham had come as close as you can get an actuary to come to saying he thought MIPI had been over-reserved, without putting a number on it (T 2539). Mr Vines said he had personal knowledge about MIPI. He said that after the boom and bust of the late 1980s there had been some very significant claims against accounting firms, and consequently the accounting firms had reviewed their audit and risk management techniques and had formed a series of captive insurers so that, in effect, the accounting firms had become almost self-insured, other than for very major claims (T 2539). For reserving purposes, Mr Schneider had assumed that IBNR would equal premium income derived between 1991 and 1998 and therefore MIPI would generate no profit, but Mr Vines strongly believed that profit would emerge in the later years by virtue of the actions that had been taken by the profession and by the insurance industry (T 2540). Whereas Mr Latham had identified some redundancy in the years up to 1994/95, Mr Vines (without disagreeing with Mr Latham) believed that there would also be profit in the later years (T 2540). He told Mr Mortimer that in his opinion, the later years would generate at least a $30 million redundancy in due course. That was in addition to the redundancy of approximately $30 million that appeared to emerge from Mr Latham's figures.

Mr Vines said he discussed MIPI with Mr Schneider from time to time. He said Mr Schneider was very wedded to the methodology that he had introduced into GIO Re and was firmly of the view that it produced the right answer (T 2605).

Another "over" for Reinsurance was said to be "Prudential Margin earnings", in the amount of $12 million. Mr Vines explained that this was because the prudential margin, unlike other claims liabilities, was not discounted. The discounting of liabilities would match and negate the earnings produced by the assets put in place to support the liabilities. Since there was no discounting for the prudential margin, the earnings on assets supporting it would flow through to the bottom line (T 2541). This schedule also identified "GIO UK" as an "over" of $5 million. Mr Vines was unable to recall in the witness box the reason for this entry (T 2541).

The list of "unders" included Marine ($12 million) and Malaysia ($14 million), both from Mr Latham's report. There were two other items, namely Aviation and New Catastrophes, for which there were question marks rather than figures. As to Aviation, this was simply an acknowledgement of the possibility that the $105 million provision, expected by Mr Robertson to be excessive, might prove inadequate. Mr Vines said he did not personally believe that this was likely, and told Mr Mortimer his view (T 2541).

As to "New Catastrophes", there are handwritten notes next to the question marks, identifying several catastrophes for a total amount of $139 million, comprising Swissair ($42 million), Hurricane Georges ($25 million), Gujarat ($21 million) and Space ($51 million), and then the handwritten words "but $195m premium deferred 30/6" appear. Mr Vines gave evidence that he made the handwritten notes on the document immediately prior to his discussion with Mr Mortimer on 9 November (T 2542). That was shortly before conclusion of the American Re retrocession agreement. The note signified that there was about $139 million worth of catastrophe events that had occurred in the first quarter of the year to June 1999, but there was said to be $195 million of premium income deferred from the June 1998 year into the 1999 year. Mr Vines said he discussed these figures with Mr Mortimer on 9 November (T 2543).

Mr Vines was cross-examined at length about his unders and overs schedule. ASIC submitted (written submissions, para 264) that the cross-examination had established that many of the items in the schedule were of dubious reliability. It seems to me unproductive to make any detailed assessment of validity of the unders and overs for parts of the GIO business other than reinsurance. The availability of "overs" in other parts of the GIO Group would not have protected the profit forecast for GIO Insurance, a component of which was the forecast for GIO Re. But some observations about the unders and overs for reinsurance are appropriate.

It is to be noted that according to Mr Vines, all of his information was quantified as at 30 June 1998 (T 2846). ASIC noted that the GIO Group had not chosen to take the adjustments into account as at that balance date, presumably in order to suggest that the adjustments were not viable. But it does not seem to me that this is of any particular significance. GIO's balance sheet was re-set at 30 June 1998 after the arrival of Mr Steffey, and the evidence that I have recounted shows that a deliberately conservative approach was taken in a number of fields, including the aviation reserve. In that environment, it was unlikely that any proposal to reduce provisions and release profits in respect of the year to June 1998 would have been received warmly.

ASIC attacked the $45 million listed as over-provisioning in the aviation reserve. It submitted that the foundation for this adjustment was unconvincing, because Mr Vines had based it on something Mr Robertson, or someone close to him, had said. But there was rather more to it than that. The history of the increased provision in the aviation reserve provides some grounds for believing that the reserve was set at substantially too high a level, as Mr Robertson believed. ASIC submitted (written submissions, para 265(f)) that since some formality had been attached to the establishment of the $105 million additional reserve, it was improbable that it could be reduced unless there was considerable favourable experience over a significant period. But in an environment where the board may have wished to take a more realistic attitude in the context of its defence against a takeover bid, it is not obvious to me that the reduction of the reserve would have been difficult to achieve, and more importantly, there is no evidence one way or the other.

Mr Vines also gave evidence about some discussions he had with Scott Collins of Trowbridge, apparently before receiving the first quarter highlights on about 19 October. Mr Collins had prepared a report identifying the capital required by the GIO Group on a risk-based analysis, in comparison with other major players in the industry. In the process of doing this work, Mr Collins looked at prudential margins, and he and Mr Vines discussed what impact there would be on the prudential margin if it was set at a Group level as distinct from being set at either the portfolio level or a divisional level. Mr Vines said (T 2605) that if GIO were to adopt a prudential margin at the Group level, it would almost certainly be a lower number than the prudential margins that were being carried at the time.

Mr Vines gave evidence that in August 1998 he was aware that discussions had been taking place with OP Re, and he was aware that the retrocession arrangement with that company would have a good effect on GIO Re's attritional book, though at that time he was not aware that it would have any effect on the catastrophe book (T 2606). He said he found out that the OP Re cover affected the catastrophe book during his discussion with Mr Schneider and others on 11 November, when they reviewed the October results (T 2606). At that meeting he was told that the OP Re cover capped loss emerging out of the Marine book to about A$8 million.

Mr Vines also gave evidence that, when he was shown the October results on 11 November, he held the belief that GIO Re would become entitled to reinstatement premiums arising from Hurricane Georges claims, although he did not give any particular view as to the quantity of those premiums (T 2607). He said he formed that belief on the basis of an exchange of e-mails that included Mr Schneider's e-mail to Mr Fox dated 10 November (PTB 0939). In that e-mail Mr Schneider had said that one would expect significantly more reinstatements arising from Hurricane Georges, not included in the projection, which had used a "33% of claim premium" approach. 3.19 October results

Prior to 11 November 1998, Mr Schneider and his Technical Services team produced a document called "GIO Re Analysis of Results", which showed the revenue for GIO Re for October 1998 (PTB 0959-69). This was the second time GIO Re had produced monthly style figures, the first being for the September quarter end. The document recorded claims and premium data drawn from COGEN (GIO Re's information system) downloaded into the Technical Services management information system and run through GIO Re's valuation models (see Mr Schneider's first affidavit, paras 138-139). It also showed expenses and other revenue account items, based on assumptions in the valuation model.

The first page of the document (PTB 0959) showed a loss in October, before adjustments, for property/marine catastrophe of A$39.5 million and an overall loss of A$58.5 million, and after adjustments, a profit for property/marine catastrophe of A$3.8 million and an overall loss of A$4.7 million. Adjustments were made in two areas. First, losses in the aviation business (A$7.9 million for aviation attritional and A$2.5 million for aviation catastrophe) were eliminated because they were charged to the A$105.5 million reserve that had been established in the financial statements to June 1998. Secondly, property/marine catastrophe was uplifted by A$43.3 million. That included a component for marine catastrophe retrocession, as I shall explain (and see Mr Schneider's second affidavit, paras 20-22), and reflected an assumption on the part of Mr Schneider and his team that the American Re contract would be put in place so as to limit exposure to Hurricane Georges to the existing reserve of A$25 (see Mr Schneider's first affidavit, para 147). No adjustment was made for the impact of reinstatement premiums (Mr Schneider's first affidavit, para 148).

On the afternoon of 11 November Mr Driessen sent Mr Schneider an e-mail attaching a summary of the movements in the catastrophe model from September 1998 to October 1998 (see PTB 0977 (A4 format); PTB 0976A (spreadsheet format); and PTB 0972-75 (divided into segments)). It showed the level of undiscounted and discounted claims (including IBNR) predicted by the catastrophe valuation model as at 31 October 1998, for each identified catastrophe, and the total increase in ultimate claims for each catastrophe during October. In the case of Hurricane Georges, the figure for undiscounted claims, in millions of dollars, was A$69.056 and the figure for discounted claims was A$67.783. The increase in ultimate claims for Hurricane Georges in October was A$44 million, by far the largest movement in the month.

Mr Schneider explained in his affidavits how he used information about movements in the catastrophe model in calculating the October results. He said that because of time pressure, he did not adjust the predictions made by the valuation model to reflect the contract-by-contract analysis that had by that time been completed for Hurricane Georges (first affidavit, para 146).

The tendered copies of the "GIO Re Analysis Results" and the summary of movements in the catastrophe model are endorsed with some handwritten comments identified by Mr Schneider as his. There are some calculations (especially at PTB 0977) and one of the notes, appearing on the first page of the analysis of results (PTB 0959) is as follows: "I need to explain what this profit is, however, I will do this in e-mail later today. If we can purchase reinsurance for George then the loss is $4.7 otherwise the loss is $29.7m in the month. Greg 11/11/98."

Mr Schneider said in his first affidavit (para 141) that he did not recall sending an e-mail later in the day, as foreshadowed in the note, and no such e-mail has been discovered. But he explained, in his two affidavits, the meaning of these comments. I shall set out my understanding of the explanation, without tracing through all of Mr Schneider steps.

First, he apportioned the undiscounted claims figure of A$69.056 million (which he treated in his calculations as A$70 million) between property catastrophe and marine catastrophe. He did this by obtaining information from the GIO Re claims department as to the level of reported claims (that is, incurred claims excluding IBNR) for Hurricane Georges in marine and in property catastrophe on about 11 November, the time when he made the calculations (those figures were A$38 million and A$21 million respectively). Then (assuming that IBNR would be distributed in the same proportions) he applied those proportions to the model's prediction, concluding that A$25 million of the A$70 million related to marine catastrophe and A$45 million of the A$70 million related to property catastrophe.

Next, he deducted the part of the marine figure of A$25 million that was covered by outwards reinsurance protection including the OP Re contract. This reduced the marine component of the prediction to A$5 million. (In fact, as he had said in his first affidavit (para 97), the estimated excess point was US$5 million or A$8 million, so it appears that Mr Schneider made a mistake in his handwritten calculations by writing "5" rather than "8".) That meant the model's prediction for Hurricane Georges losses (including IBNR) as at 31 October was A$45 million for property and a net figure of A$5 million for marine, totalling A$50 million. From that figure he deducted the existing Hurricane Georges reserve of A$25 million, leaving a net unreserved exposure to Hurricane Georges of A$25 million (which he described at PTB 0977 as "further hit if we don't have reinsurance of $25m in the month"). That was the exposure to which he referred when he explained in his note at PTB 0959 that if no retrocession cover was obtained for Hurricane Georges, the loss would jump from A$4.7 to A$29.7 million. He also calculated the quantum of reported claims for Hurricane Georges not covered by the existing reserve, reaching what he called a "hit" of A$17 million. The meeting to discuss the October results, 11 November 1998

On 11 November Mr Schneider telephoned Mr Vines to say that the first cut of the October valuation was available and it was looking as if there had been a loss for the month of about $4 million (T 2659). Mr Vines was disappointed by that conclusion. In answer to a query by Mr Vines, Mr Schneider referred to the adverse development of Hurricane Georges, and then Mr Vines suggested that they sit down together with Mr Fox and talk about the results. Mr Vines said he wanted to understand the broad basis upon which the October results had been struck, concentrating the discussion on the wider aspects of the result rather than the detailed areas of the valuation (T 2661). The suggested meeting, attended by Mr Vines, Mr Fox, Mr Schneider and Mr Driessen, was held later on the same day, 11 November. The evidence of Mr Vines about the 11 November meeting

Mr Vines said that when he arrived at the meeting, Mr Schneider gave him a copy of the document, "GIO Re Analysis of Results " (PTB 0959), and proceeded to explain it, talking about his assumptions and retrocession recoveries (T 2661). According to Mr Schneider's evidence, a conversation occurred in which he explained that there had not been time to review the figures by reference to experience, and that the calculations assumed that a further loss in the aviation account had been covered by the special reserve of $105 million that had been set up in June. Mr Schneider said he drew the attention of Mr Vines and Mr Fox to the catastrophe model results, and explained that $44 million of the total increase in ultimate claims was due to Hurricane Georges, but in the interests of time his team had not used the results of the contract-by-contract analysis and had simply run Hurricane Georges through the model. He said this would make no difference on a net basis as long as Georges was less than $100 million and cover could be purchased from American Re. He said Mr Vines told him to assume that the cover would be purchased (first affidavit, paras 149-152).

Mr Schneider's evidence on those points (first affidavit, paras 150-152) is broadly consistent with the evidence of Mr Vines, except in two respects. First, according to the evidence of Mr Vines (T 2661; T 2670), it was Mr Schneider who explained that the figures had been based on the assumption that the American Re contract would be in place, but Mr Vines did not disagree with that assumption. Mr Vines explained (T 2664-5) that he was comfortable making the assumption for management purposes because he knew that the cover was close to resolution, and if for some reason the cover was not written, there were other ways in which a loss "of the level been referred to here for Hurricane Georges could be dealt with".

Secondly, Mr Schneider's evidence (first affidavit, para 152) was that he said, "in interests of time, we have not used the results of the contract by contract analysis, but have simply run Georges through the model". As I have said (and see T 2669), Mr Vines asserted that while he may have been told during the meeting that Hurricane Georges had been run through the model, he was never told during 1998 that a contract-by-contract analysis had been undertaken. ASIC contended (written submissions, para 356) that I should prefer Mr Schneider's evidence to the evidence of Mr Vines on this point. ASIC referred to Mr Vines' evidence that at the meeting, Mr Schneider said that Hurricane Georges "could" cost $100 million. ASIC submitted that it would be unlikely that Mr Schneider would have made a tentative suggestion when he had recently completed a comprehensive analysis of the likely position and had concrete evidence available to back up his claim. I disagree with ASIC's submission on this point, and I accept the evidence of Mr Vines, for reasons I shall give when I consider the competing evidence of Mr Schneider and Mr Vines concerning discussions between 9 and 13 November (section 3.23).

Mr Vines gave evidence that Mr Schneider identified the OP Re contract in respect of marine retrocession, and the proposed American Re contract in respect of property retrocession, as the retrocession recoveries that the October figures had taken into account. Someone at the meeting told Mr Vines that the American Re slip was close to being finalised and that it would respond to claims in excess of $25 million in respect of Hurricane Georges (T 2661).

Mr Vines said he asked to look at the underlying schedule in dealing with property and marine catastrophes including Hurricane Georges, and Mr Driessen supplied him with a document like the one at PTB 0976A. That appears to have been done after the meeting, but it seems, according to evidence given by Mr Schneider and Mr Vines, that similar figures were available during the meeting. Mr Vines said it was explained to him at the meeting that the figures used for the October results assumed that the ultimate loss on Hurricane Georges would be about $69 million before discount and before any retrocession recoveries or other adjustments such as reinstatement premiums (T 2662). He said that a document similar to but more extensive than PTB 0976A was considered at the meeting, but the documents available to him at the meeting did not contain Mr Schneider's handwritten notes (T 2667).

Mr Vines gave evidence that when he saw the October results (presumably referring to PTB 0959ff) which contained within them a gross estimate for Hurricane Georges that was in the region of $69m (presumably a reference to the summary of movements in the catastrophe model which can be seen at PTB 0976A), he formed the belief that there was no longer any disagreement between Mr Robertson and Mr Schneider about the size of the Hurricane Georges loss, and that Mr Robertson and Mr Fox supported Mr Schneider's estimate (T 2588). He said that nothing was said at the meeting on 11 November which cast any doubt on the reasonableness of the A$69m estimate for Hurricane Georges or on Mr Schneider's belief that the estimate was reasonable (T 2668). He said that the meeting on 11 November was the first time the learned that Hurricane Georges claims had exceeded $25 million reserve (T 3022).

Mr Vines also gave evidence about some proposals put by him to the meeting on 11 November, and accepted by the others including Mr Schneider, which led to revisions improving the October profit result. First, there was some discussion, initiated by Mr Vines, as to whether the level of IBNR for various other catastrophes had been predicted at an excessive level. Mr Vines said that, after discussion, Mr Schneider and Mr Driessen both acknowledged that the level of IBNR for the Air China catastrophe was probably excessive, and it was agreed that A$5 million could be released out of that IBNR without compromising the reserves (T 2663).

Secondly, they discussed the prudential margin. Mr Schneider said that the figure for the prudential margin in the October results was A$167 million, which was A$10 million more than it had been at 30 June 1998. Mr Vines formed and stated the view that it was not sensible to adjust the prudential margin more frequently than at six-monthly intervals and that the figure should remain at the 30 June level until it was revisited as at 31 December (T 2664). He said the prudential margin should be restated at A$157 million, and that was accepted.

Mr Vines gave evidence that the figures discussed at the meeting had been prepared on the basis that the American Re cover would be in place. He said he was broadly comfortable with making that assumption for management accounting purposes, because he knew that the cover was close to resolution, but he also knew that if the cover was not written, for whatever reason, there were other ways in which a loss for Hurricane Georges of the level being referred to by Mr Schneider could be dealt with (T 2665). As to the appropriateness of taking the American Re cover into account without first receiving accounting advice, Mr Vines said he relied on the representations received from Guy Carpenter, which suggested that what was in contemplation would receive accounting approval, and therefore getting the slip in place was, in his opinion, the first priority, and he expected the views of the auditors to be obtained once the slip was in place (T 2665).

Mr Vines said that if the auditors did not accept the American Re cover, then it would be necessary to look at the "redundancies" that existed within the reinsurance division as an alternative to the retrocession (T 2665). He said his own "unders and overs" had suggested that there was a substantial redundancy within the reinsurance book, without any quantification of MIPI. MIPI had behaved well in the first-quarter results and so, by 11 November, he was even more strongly of the view that MIPI contained a substantial redundancy that could be released, if necessary. He said that if he had not had a belief in the existence of the redundancies, he would not have been content to let the October results go forward without first obtaining external accounting advice on the efficacy of the American Re cover (T 2666). The evidence of Mr Fox about the 11 November meeting

Mr Fox gave evidence (first affidavit, para 99) about his participation at the meeting on 11 November. He said he was asked to attend because Mr Robertson was away. He said he did not recall what was said at the meeting but the subject matter was of a financial nature, and he said very little (T 3696-3700). He claimed his mind was "out of gear" (T 3696). He said (first affidavit, para 102) he did not recall being given a copy of any of the documents which, according to Mr Schneider, were before the meeting (that is, the "GIO Re Analysis of Results" (PTB 0959), attritional model results and catastrophe model movement). He said (second affidavit, para 12) that Mr Schneider did not say that Hurricane Georges might or could go to the level of $100 million during the meeting on 11 November or at any other time in Mr Fox's presence, although Mr Schneider told him on 9 November that the "worst-case scenario" was $100 million.

I do not accept Mr Fox's evidence on these matters. In the first place, I have rejected his evidence that he was not responsible for financial matters. That means, in all probability, that the others at the meeting looked to him to participate in the discussion about the October financial results. It is highly unlikely that Mr Vines, Mr Schneider and Mr Driessen would have discussed the documents that they had before them, in the presence of Mr Fox (who was the direct superior of Mr Schneider and Mr Driessen), without providing Mr Fox with copies. Secondly, even if his responsibilities were restricted, it is inherently probable (as ASIC submitted: written submissions (Fox), para 144) that Mr Fox would have taken a keen interest in the October performance of the business which he had the responsibility to manage. Thirdly, I have also rejected Mr Fox's evidence about his meeting with Mr Robertson and Mr Schneider on 5 November, and I have found that at the meeting Mr Schneider told Mr Robertson and Mr Fox that he believed Hurricane Georges was a $100 million type event. That makes it probable that Mr Schneider said something similar at the meeting on 11 November, and highly improbable that on 11 November he said the "worst case scenario" was $100 million.

I accept the evidence of Mr Schneider, modified by the evidence of Mr Vines, in preference to the evidence of Mr Fox, as to what happened at the meeting. It was clear from his own evidence and my observation of him that Mr Fox was a man of very considerable experience in the reinsurance industry who was well able to understand financial matters. I infer that he listened to what was said at the meeting and wholly or substantially understood it. It follows that Mr Fox heard at the meeting, and understood, that $44 million of the total increase in ultimate claims in the catastrophe model results was due to Hurricane Georges, and that the October figures were based on the assumption that the American Re contract would be put in place so that there would be protection for Hurricane Georges losses up to US$100 million and it would not be necessary to recognise any additional Hurricane Georges loss in October. Events following the 11 November meeting

On 12 November Mr Schneider sent an e-mail (PTB 0984) to the others who attended the meeting, confirming that the actuarial result of a $4.7 million loss was to be uplifted by $15 million "following a direction by Mr Vines". Mr Vines said in evidence that this was not how he felt the meeting went, but rather he thought there were consensual adjustments (T 2678). The adjustments changed the result for October from a loss of $4.7 million to a profit of $10.3 million. I take it that the $15 million uplift came from the reduction in the provision for Air China by $5 million and the reversal of the proposal, contained in Mr Schneider's calculations, to increase the prudential margin by the $10 million. Mr Fox said he could not recall receiving Mr Schneider's e-mail of 12 November (first affidavit para 100).

Subsequently, staff under the control of Mr Wright, the financial controller, prepared revenue accounts and e-mails addressing the results to September and to October 1998, which reflected this uplift in figures (PTB 0985, 1150, 1159).

Meanwhile a draft commentary on the first four months' results was prepared for Mr Vines' review, as part of the process of briefing Mr Steffey for his presentation of results to the board, and Mr Vines settled the document and sent it on (T 2678; Exhibit D1, tab 142). It appears that this document was relied upon by Mr Steffey in his report to the board of GIO Australia Holdings on 17 November (considered at 3.29 below).

In that document, under the heading "Reinsurance", Mr Vines said reinsurance had reported a four-month result of $30.2 million, slightly behind budget of $37.9 million, and he referred to a "strong result" posted by property catastrophe. The figures were taken from the first-quarter results and the October results, the latter having been by then adjusted to produce a reinsurance profit of $10.3 million (T 2679). He said he was aware at the time that the property catastrophe result depended upon the efficacy of the American Re retrocession cover, but he did not think it necessary to draw attention to that fact because he had every reason to believe that the cover would be effective (T 2680). 3.20 The October valuation report

Mr Schneider and Mr Driessen eventually produced a valuation report for the month of October 1998, completing the final version on 1 December 1998 (PTB 1453). They sent the report to Mr Fox and Mr Wright with a covering e-mail dated 2 December (PTB 1452). I infer that Mr Fox and Mr Wright received it about that time. The report was transmitted by facsimile from Mr Schneider's office to Mr Murray of PwC on 7 December 1998.

The report expressed the view that in October GIO Re suffered a A$4.7 million loss. Under the heading "Property/Marine Catastrophes", the following appeared in the report: "Hurricane Georges has resulted in a significant gross loss to the GIO in October. Actually incurred claims increased by $25.5m in the month to $26.9 m as at the end of October. The undiscounted ultimate liability, gross of retrocessions, was increased from $25.0m to $69.0m in the month, resulting in a $43.3m gross loss for the period from this event. "However, GIO Re management has advised that a reinsurance contract has been purchased protecting the GIO. This covers losses from Hurricane Georges for US$45m excess US$15 m. "As mentioned, the gross ultimate undiscounted liability for Hurricane Georges increased from A$25m to A$69m in the period (from US$15m to US$42m). As such, this movement is contained within the reinsurance protection and there is no impact to net profit in the period from this event (the net losses from Hurricane Georges have remained at A$25m). Indeed, if the ultimate liability for Georges (net of all inuring reinsurance) remains less than A$100m (US$60m), there will be no further impact to net profit from this catastrophe. "No analysis was performed within the scope of the valuation model or this report to determine the accuracy and appropriateness of the assumed reinsurance recoveries for Hurricane Georges. It is assumed that the reinsurance contract in question is deemed, by APRA, to be reinsurance."

In my opinion the report would have been perceived by Mr Fox, when he received it, to have been a sufficiently important document for him as executive director, that he would have read it in sufficient detail to satisfy himself that it accorded with his expectations following the 11 November meeting (see ASIC's written submissions (Fox), para 153). In my opinion this would be so even if Mr Fox's responsibilities were restricted with respect to financial matters, since he had the overall responsibility for management of GIO Re and therefore would have been expected to take a general interest in the subject matter of the report. A fortiori , it would have been an important document to read if, as I have found, his responsibilities extended to financial matters. It therefore seems to me probable that Mr Fox became aware, through reading it, that the report found that there had been a loss for GIO Re in the month of October of $4.7 million; and that incurred claims had increased by $25.5 million in the month to $26.5 million at the end of the month, resulting in a gross loss for the period of $43.3 million. He would also have noted that the valuation proceeded on the assumption (as agreed at the meeting on 11 November) that there was effective retrocession in place for Hurricane Georges to US$60 million (A$100 million), and that the gross ultimate undiscounted liability figure for Hurricane Georges had increased from A$25 million to A$69 million in the period and therefore was contained within the reinsurance protection so that there was no impact to net profit. 3.21 The Hurricane Georges register and other reports on Hurricane Georges

It is appropriate at this stage to take another break from the chronological presentation of facts, in order to deal with the evidence about two topics. The first is the provision of information about Hurricane Georges by GIO Re's claims department, considered in section 3.21 of the judgment. The second is the American Re retrocession agreement. This is a much larger topic, which will be considered in section 3.22 (negotiations with Guy Carpenter), 3.23 (negotiations leading to a placement slip with American Re), 3.24 (amendments to the placement slip), 3.25 (the "side letter") and 3.26 (accounting advice on the American Re agreement). GIO Re's claims recording system

As I have said, Mr Fricke was the reinsurance claims manager, supervising the administration of COGEN, GIO's claims recording system. He gave evidence that certain events, including Hurricane Georges, were classified as "registered events" by the claims department, a registered event being an event involving more than one reinsurance contract where the loss was more than A$1 million. Hurricane Georges was recorded as a registered event in COGEN on 14 October 1998, and given two reference numbers, one designating contracts with retrocession cover and the other designating contracts with no retrocession cover.

When a claims officer received a reinsurance claim, he or she would check that the claim was covered by a reinsurance contract and if so, would register the claim on COGEN, in respect of the relevant registered event. The claim was then referred to as a "registered claim". The claims officer carried out this check by analysing the "cover slip", which was an abbreviated version of the contract of reinsurance.

The COGEN system recorded GIO Re's "gross loss share". This was the amount GIO Re had to provide to the reinsurance cedant to cover its claimed loss, before factoring in any retrocession cover GIO Re may have had for the particular reinsurance contract.

Once the claim had been registered, it was allocated to a claims officer, who would check the claim and if it was correct, sign off on it. If the claim was in excess of A$25,000 it was notified to the underwriter who had negotiated the reinsurance cover.

The procedure for registering and processing claims in COGEN was set out in the Reinsurance Claims Procedure Manual, which was tendered in evidence as PTB Volume 13. Mr Fricke said that all claims officers, supervisors and managers were required to ensure that the procedures in the Manual were adhered to in relation to all aspects of processing claims, including registering claims. He gave detailed evidence explaining how claims were entered and recorded pursuant to section 11 of the Manual. Precautionary advices

Section 20 of the Manual recorded GIO Re's policy in relation to precautionary advices. Mr Fricke said a precautionary advice is advice received from a cedant or broker of an occurrence which has the potential to impact on the cover provided by GIO Re. The policy was not to register a precautionary advice as a claim under section 11 of the Manual, but to treat it as a preliminary loss advice under another part of the Manual (section 4.2.2.2).

Mr Fricke said that as far as he was aware, GIO Re's claims staff at the time adopted the practice of following the procedures in relation to precautionary advices set out in the Manual, and he did not recall it ever coming to his attention that a member of the claims department had registered a precautionary advice as a claim on COGEN. He said that according to his understanding, entries on the Hurricane Georges register related to claims registered on COGEN, not any precautionary advices that may have been received by GIO Re.

The defendants relied on the proposition that a substantial portion of the claims notified in respect of Hurricane Georges in the period from September to 7 December 1998 were accelerated or exaggerated or precautionary claims and therefore the total claims figures reported by the claims department were overstated. It might appear from Mr Fricke's evidence and the Manual that the defendants' position as to precautionary claims was untenable, because precautionary claims would not be registered in COGEN and therefore would not appear in the claims reports. But it seems to me that the defendants' references to precautionary claims identified a concept different from the one addressed by Mr Fricke.

Mr Fricke said (affidavit made on 7 November 2003, para 11) that "a precautionary loss advice is an advice received from a cedant or broker of an occurrence which has the potential to impact on the cover - for example where the 'from the ground up' loss was below the deductible of the cover." Obviously this is a relatively precise, technical concept.

Mr Robertson, on the other hand, explained his understanding of the relevant terms as follows (T 3282-4): precautionary claims were those which were "submitted as a precaution against some unfortunate outcome or some other outcome", and they were claims "where someone puts a figure on it that triggers a liability to GIO Re but there is still a precautionary element about it"; accelerated claims were those that were "submitted earlier than would be the case in the normal case", sometimes on the basis of estimates rather than reported losses; exaggerated claims were those notified but subsequently reduced, and could "happen for a vast number of reasons" one of which was haste in getting the claims submitted.

There would be no reason, in general concept, why precautionary, accelerated or exaggerated claims in Mr Robertson's sense of those terms would not be recorded in COGEN like all other claims, especially if there was nothing on the face of the claim document to indicate its character. Mr Fricke seemed to concede this in cross-examination (T 1282). Monthly status reports

GIO Re's claims department prepared reports for management showing the status of events registered on the COGEN system on a monthly basis, called "Status of Registered Events Reports". The reports were prepared by Ms Daviskas over two or three working days, and checked by Mr Fricke, and then circulated.

The Status of Registered Events Report as at 31 October 1998 (PTB 0792) was circulated to number of people including Mr Fox, Mr Robertson and Mr Schneider. The document is initialled and dated 5 November 1998, and the evidence about the meeting of Mr Robertson, Mr Fox and Mr Schneider on that day indicates that Mr Schneider had the document at the meeting. It showed that, in respect of Hurricane Georges, during October GIO Re had paid property claims of A$10,616,140 and there were outstanding property claims of A$10,523,108, and marine claims of A$7,281,385, none of which had been recorded at the end of September. Items 21 and 22 of a schedule to the report gave particulars of cedants and contracts. According to my finding, the report was discussed at the meeting of Mr Robertson, Mr Fox and Mr Schneider on 5 November 1998 (see section 3.16).

Mr Robertson pointed out that the claims department produced another document some eight days after providing Mr Fox with the October Status of Registered Events report. The other document, entitled "GIO Re's Involvement in Large North American Market Losses - Status as at 31/10/98" (PTB 1020C) disclosed claims in respect of Hurricane Georges of US$10.7 million (approximately A$16 million). That suggests a discrepancy that needed to be resolved, but obviously did not provide a basis for disregarding the figures in the October Report or discounting their significance without some process of investigation or review.

Another Status of Registered Events Report was produced as at 30 November 1998, showing the main movements from the previous month (PTB 1444). Mr Fricke said he did not recall the identity of the persons to whom the report was circulated, and there is no record of the names of recipients on the copy that is in evidence. The report shows a rise of 39.4% (A$17,069,684) in claims relating to Hurricane Georges over the month of November (with falls in some contracts because, according to Mr Fricke, some cedants had reassessed their liability). The evidence would not support a finding that Mr Fox received this document but it is clear from the evidence that it would have been available to Mr Fox before his meeting with PwC on 7 December had he asked for it.

A document headed "Catastrophe Model" (PTB 1871A) was also available at about the same time. It showed opening values at 30 September 1998 and closing values at 30 November 1998, and indicated that at 30 November claims paid stood at about $53.69 million and outstanding claims were $31.28 million, with IBNR of $8.73 million. It showed that the model's prediction for ultimate undiscounted claims had increased from $24.95 million at 30 September to $93.7 million ($92.85 discounted) at 30 November. Again, that document would have been available to Mr Fox, had he asked for it, before his meeting with PwC on 7 December.

There was a Status of Registered Events Report as at 31 December 1998, which on its face appears to have been circulated to a number of people including Mr Fox, Mr Robertson and Mr Schneider (PTB 2210), though Mr Robertson (affidavit para 223) denied ever seeing it. It showed paid and outstanding property claims of over A$76.5 million and marine claims of over A$25.6 million for Hurricane Georges.

The latest Hurricane George register which is available in evidence (PTB 2622), that for 15 September 1999, shows gross Hurricane Georges claims of $199.3 million, and claims of $140.6 net of the OP Re retrocession.

Occasionally other kinds of reports were produced concerning the level of claims. For example, on 13 November 1998 Mr Fricke sent Mr Fox, without being asked to do so, an e-mail (PTB 1020A) attaching records showing GIO Re's historical involvement in larger North American catastrophe events. On 3 or 4 December 1998 Mr Vines asked GIO's accounting staff for weekly reporting of claims information as accumulated between monthly reports (PTB 1573). Management committee reports

Mr Fricke attended GIO Insurance management committee meetings, as manager of the GIO Re claims department, and prepared management reports for them. In this way he provided information to the executive director and other members of the committee about claims movements.

On 12 October 1998 Mr Fricke sent to Mr Robertson, Mr Schneider and others, a report on monthly claim movements, in which he noted that PCS had given a preliminary estimate of market loss for Hurricane Georges of US$2.55 billion, and he briefly outlined the progress of the hurricane (PTB 0570). Mr Fricke reported these facts to a meeting of the management committee of GIO Insurance held on 12 October 1998, which was chaired by Mr Robertson (minutes at PTB 1284A). Mr Fricke commented that it was too early to really know the total losses, and at that time GIO had received only A$2 million in claims. Those comments may be contrasted with Mr Robertson's evidence (affidavit paras 102-13), according to which Mr Robertson attached particular significance to Mr Fricke's report and saw it as confirmation that there was a high level of precautionary claims in respect of Hurricane Georges.

A management committee meeting of GIO Insurance was held on 25 November 1998 (PTB 1278 – minutes). Mr Fox was chairman of the meeting. There is conflicting evidence, which I shall consider in section 3.30, as to whether Mr Robertson attended that meeting.

At that meeting Mr Fricke presented a report in which he noted that claims for Hurricane Georges at that time totalled $57 million for property and $25 million for marine. His written report (PTB 1292) gave somewhat lower figures of A$42.8 million for property and A$22.9 million for marine.

There was a management committee meeting on 16 December 1998 (PTB 1884 (agenda); PTB 1893A (minutes)). Mr Fricke presented a report on reinsurance claims, in which he commented that Hurricane Georges losses on property claims had increased considerably, the status as at 10 December 1998 (emanating from 37 claims) being that claims of A$65.1 million had been incurred; marine claims in respect of Hurricane Georges (11 claims) produced incurred losses of A$25.7 million, although a large part of the loss emanating from Zurich Insurance's global energy account was recoverable from a retrocession cover purchased from OP Re (A$10.9 million).

Mr Fricke gave evidence that the figures he used for management committee reports were taken from COGEN and, after 9 November, corresponded with the Hurricane Georges register for the relevant days. Establishment of the Hurricane Georges register

Mr Schneider gave evidence (first affidavit, para 102) of a conversation he had with Mr Fox on about 6 November 1998, in which Mr Fox asked him how often information was produced about Hurricane Georges. Mr Fox disagreed with Mr Schneider's evidence, but he said (first affidavit, para 67) that in his operational meeting with Mr Schneider on 6 November, the day after he commenced work at GIO, he asked Mr Schneider whether there were any issues he wanted to raise, and Mr Schneider said he needed more accurate information on a daily basis from the claims department, for the purposes of his contract-by-contract analysis in respect of Hurricane Georges. Mr Fox said he authorised Mr Schneider to ask the claims department for this information.

According to Mr Fox's evidence (first affidavit, para 81), on the morning of Monday 9 November Mr Fricke came to his office and said: "I understand from Greg that I am to prepare regular updates on major catastrophes especially Hurricane Georges." Mr Fox said he confirmed that Mr Schneider had requested that information so he could know the current claims position by contract and the remaining coverage unused on contracts where losses had been notified. Mr Fricke agreed to make appropriate arrangements.

Mr Fricke gave affidavit evidence to different effect. He said that, when told there were monthly reports, Mr Fox said that Hurricane Georges should be monitored more regularly. Mr Fricke also gave evidence that he had a conversation with Mr Fox shortly before 9 November, in which Mr Fox said he wanted daily updates of claims for Hurricane Georges. Mr Fricke said that he attached a yellow post-it note to the first update on Hurricane Georges, dated 9 November, saying "1st schedule requested verbally by Claudio Battilana and Tim Fox".

I prefer the evidence of Mr Schneider and Mr Fricke to Mr Fox's evidence on these matters. The fact that the e-mails reporting the daily results of Hurricane Georges were addressed to Mr Fox is an indication that it was Mr Fox who required the register to be established. Mr Robertson gave evidence that when he returned from Boston, Mr Fox told him that he had established such a system (affidavit para 193). Moreover, I have found that Mr Schneider told Mr Fox during their meeting with Mr Robertson on 5 November that he believed Hurricane Georges would be a $100 million type event, and that Mr Fox became aware, during his first two weeks at GIO, of the profit forecast and the significance to it of Hurricane Georges losses exceeding the $25 million reserve that had been set for them. It is consistent with those findings that Mr Fox would have wanted to have a system for closely monitoring the development of Hurricane Georges claims, and would have seen the issue as being sufficiently important to justify his own intervention as executive director to establish a daily system. Additionally, it seems to me that the evidence of Mr Schneider and Mr Fricke is more plausible than Mr Fox's evidence, given the kind of system that was established, that is a daily reporting system. That would appear to be the kind of system that would be established to assist a senior executive to monitor the development of claims, rather than the kind of system that would be needed for the completion of the detailed contract-by-contract analysis.

Even if Mr Fox's version of these events were correct, it would nevertheless be plain that the Hurricane Georges register was established with Mr Fox's knowledge and authority. He recognised in cross-examination, and it was the case, that he could find out the result of the monitoring process at any time (T 3838).

Subsequently Mr Fricke began distributing an electronic "register" recording claims received ("the Hurricane Georges register") to individuals including Mr Fox and Mr Schneider, on more or less a daily basis. The register commenced on 9 November, when Ms Daviskas of the claims department sent an e-mail to staff, at Mr Fricke's request, telling them that in the ensuing weeks senior management would be reviewing Hurricane Georges on a daily basis, and therefore claims personnel were to ensure that Hurricane Georges transactions were entered into the system immediately and in accordance with a procedure which she explained (PTB 0880).

Mr Fox said (first affidavit, para 103) that on Thursday 12 November and thereafter on a daily basis he received e-mails from Mr Fricke addressed to him and copied to Mr Schneider and others, attaching a "Hurricane Georges register". He said he understood that Mr Schneider would monitor and use the information and report to him about it when appropriate. Mr Fox gave evidence that he "binned" Mr Fricke's e-mails without reading them (T 3701; T 3710; T 3711; T 3740 - I take this to mean that he deleted them from his e-mails rather than that he printed them out and put them in a wastepaper bin). He said he did not read any of the e-mails until December 1998 (T 3702), when he learned at the 7 December meeting with PwC that the efficacy of the American Re agreement had been called into question (T 3711). He explained that the first e-mails arrived after the American Re agreement had been put in place, and he said that agreement removed the need to examine the Hurricane Georges register (T 3845). He claimed that he relied upon Mr Schneider's professionalism to inform him if the development of Hurricane Georges became a matter of concern, though he accepted that Mr Schneider may have believed Mr Fox was getting the information he needed through the Hurricane Georges register e-mails (T 3846).

I do not accept Mr Fox's evidence that he "binned" the daily Hurricane Georges e-mails. It seems to me highly probable that Mr Fox would have kept himself abreast of the developments by reading at least some of the Hurricane Georges e-mail attachments, though he may not have read all of them. It was Mr Fox who, on my findings, required that the register to be established. He realised by the second week of November the importance of monitoring the development of Hurricane Georges claims because of their potential impact on the profit forecast. He must have realised that this was a matter of high-level concern at GIO.

Thus, he said in cross-examination that he understood the Hurricane Georges register e-mails contained significant information concerning claims relating to Hurricane Georges which potentially undermined the profit forecast (T 3845). He said he understood that under normal circumstances catastrophes of the nature of Hurricane Georges, in so far as they are manifested in claims on reinsurers, develop relatively slowly, although he said that because of the renewal season there would be some pressure on cedants to make claims (T 3834). He agreed that it would require significant investigation of the portfolio to arrive confidently at an answer as to the likely ultimate net claims within a month of a catastrophe occurring (T 3835).

Particular mention should be made of the Hurricane Georges register report of 4 December 1998, because of its proximity to the meeting of the defendants with PwC on 7 December. Mr Fricke's covering e-mail (PTB 2495), referring to Hurricane Georges and Hurricane Mitch, said, in capital letters: "Unfortunately, both events are defying gravity". It seems very unlikely that Mr Fox did not look at the register in light of that attention-catching introduction to it. Had he done so, he would have seen that total Hurricane Georges claims received up to that date were $89.69 million gross or $72 million net of the OP Re retrocession. Mr Robertson's knowledge of the Hurricane Georges register

Mr Robertson gave evidence (affidavit para 193; T 3113) that he was unaware of the existence of the Hurricane Georges register until late November. He had been away in Boston from 6 to 17 November and when he returned Mr Fox was overseas, returning on about 23 November. At some time in the week following his return, Mr Fox told him, he said, that he had arranged for daily reporting of the claims for Hurricane Georges so he could keep a close eye on how they were developing.

At about that time Mr Fox said, according to Mr Robertson, that he had spoken to contacts at Royal and Sun Alliance in London, who had confirmed to him that they had hurried their claims notifications, sending them in based on estimates rather than waiting until damage assessments had been completed (Mr Robertson's affidavit para 194). Mr Fox disagreed with this account, saying (second affidavit, para 40) he was not reading Mr Fricke's e-mails on a daily basis because he believed the American Re contract was effective and because he believed Mr Schneider was monitoring the situation and would report if there were any developments, and in those circumstances he did not tell Mr Robertson he was keeping "a close eye" on how Hurricane Georges claims were developing.

I accept Mr Robertson's evidence of all these matters. It is plausible that he would not have learned about the Hurricane Georges register until after he returned from Boston. Since, for reasons given above, I have reached the view that Mr Fox did indeed instruct Mr Fricke to establish the register and was receiving daily reports from it, and reviewing at least some of them, it is plausible that Mr Fox would have mentioned the register to Mr Robertson when they had discussions in Sydney. The evidence that Mr Fox spoke to contacts at Royal and Sun Alliance is not contentious. Content of the Hurricane Georges register

Volume 8 of the PTB contains copies of updates which, according to Mr Fricke, were provided to Mr Fox in accordance with his request during the period between 12 November and 24 December 1998. The information in the schedules to the e-mails was compiled by Ms Daviskas and drawn down from the COGEN system, and provided to Mr Fricke on floppy disk for his review. He reviewed the information and sent it on by e-mail to Mr Fox and others. Volume 10 of the PTB is, according to Mr Fricke's evidence, a complete set of the Hurricane Georges register.

Mr Fricke gave detailed evidence as to the contents of the Hurricane Georges register, which I need not recount in full. It is enough to record that a reader of the register could identify, for each recorded contract, the maximum amount which the cedant could claim and GIO Re's percentage share of that loss, GIO Re's potential limit for the loss, and the incurred amount of loss in Australian dollars as well as in the original currency. It distinguished between property and marine losses, and between contracts covered by retrocession and those which were not covered. Mr Fricke said he understood that GIO Re's retrocession arrangements for property claims did not operate until the total loss for the insured original market loss, caused by one event, reached US$10-11 billion. The incurred amounts recorded in the register were gross of reinstatement premiums.

Mr Robertson's reinsurance expert, Mr Morgan, gave evidence that there were errors in the Hurricane Georges register that limited its usefulness at any given time, beyond an indication of loss growth (affidavit para 115). In cross-examination he explained "loss growth" to be "the movement factor between each day or each month or each week, depending on how you wanted to clarify" (T 3660). In his affidavit he identified five areas in the register of 9 November 1998 (para 113). He said in cross-examination that these were only examples and that there were other "misrepresentations" that were not confined to the "remaining cover" section of the register and persisted until mid-1999 when the register ceased (T 3661).

Mr Fricke conceded that the process by which the register was created rendered it subject to errors (T 1307). The process involved preparation of a report, the information on which was transferred manually to an excel spreadsheet that became the register (T 1265). Mr Fricke conceded two errors in the course of cross-examination (T 1303-8; T 1288; T 1292-3; T 1302).

Mr Robertson submitted that errors in the register were allowed to perpetuate because there was no rigorous checking of its accuracy. Mr Fricke said he did a spot check of the register every day but under cross-examination he conceded that it would be too time-consuming to check each and every item every day and so what he did was to look at the development of losses rather than actually checking register entries (T 1297-8).

This evidence establishes that the register contained mistakes, but it does not destroy the validity of the register or show that it was useless. It was a record prepared by manual processes and therefore susceptible to some mistakes, but nevertheless an available tool for management and an indicator of "loss growth" in the Hurricane Georges claims on a daily basis. It contained information that was material to the profit forecast.

According to the Hurricane Georges register, total claims rose from A$59.8 million on 9 November (PTB 0845A) to A$89.6 million on 4 December (PTB 2496 - $72 million net of the OP Re retrocession) and A$91.9 million on 7 December (see the "previous" column in PTB 2499, which is the register for 8 December). Since GIO Re had retrocession cover for the marine component, which had the effect of limiting marine claims to a net figure of A$8 million, and according to the register (the "previous" column in PTB 2499) the marine claims on 7 December amounted to A$25.7 million, GIO's net claims exposure on that day was A$74.2 million.

It appears that there was a gap in e-mail transmissions between 4 and 8 December, although as ASIC points out, the evidence shows that Mr Fox could have quickly discovered the position by consulting the electronic records even without a report from Mr Fricke. The evidence includes Mr Fricke's e-mail to Mr Fox, Mr Schneider and others dated 8 December 1998 showing an increase in claims for Hurricane Georges to an overall total of $92.4 million (PTB 1669).

On 17 December 1998 Mr Fricke sent an update to Mr Fox with a covering note in which he pointed out that further claims had been reported with respect to Hurricane Georges and that his updated "market losses" assessment showed that GIO Re's share of the market losses for Hurricane Georges was approximately 1.8%, three times above the average of all events listed in his attached report (PTB 2173). On 23 December 1998 Mr Fricke sent another e-mail report to Mr Fox in which he said that "unfortunately, 'Georges' is still stubbornly moving up" (PTB 2197). The catastrophe claims spreadsheet

In about the first week of November 1998 Mr Schneider's team produced a spreadsheet (PTB 0976A) analysing the claims experience in respect of a number of catastrophes, including Hurricane Georges. Mr Driessen forwarded it to Mr Vines and Mr Schneider by e-mail dated 11 November 1998 (PTB 0971). The spreadsheet shows "opening values" at 30 September 1998 and "closing values" at 31 October 1998, and an analysis including figures for "ultimate claims", based upon certain "input assumptions". Figures are expressed on a discounted basis, as well as on an undiscounted basis, but I shall confine my attention to the latter. The input assumptions include the assumption for Hurricane Georges that the GIO share is 1.6%. The table for opening values shows undiscounted claims at 30 September 1998 of $24.951 million (assuming the figures to be expressed in thousands), and the table for closing values shows undiscounted claims at 31 October 1998 at $69.056 million. The "ultimate claims" table shows an increase of $44 million. The HG spreadsheet

Mr Peak gave evidence in his affidavit that he regularly received copies of e-mails sent by Mr Fricke to a number of GIO Re employees, including Mr Schneider and Mr Fox, which contained details of the number and amount of claims GIO Re had received in respect of Hurricane Georges. It appears that these are the e-mails in evidence at PTB 2460ff. Mr Peak said he adopted the practice, at Mr Schneider's request, of recording details of these claims in an Excel spreadsheet. There is in evidence a CD containing some files, one of which is a file called "sean_george_losses", which Mr Peak identified as a file he created on or shortly after 19 November 1998, on which he subsequently entered data about Hurricane Georges claims extracted from Mr Fricke's e-mails. This file was referred to at the hearing as "the HG spreadsheet".

Mr Peak gave detailed evidence to explain the contents of the HG spreadsheet. It is unnecessary to set out that detailed information here. It is sufficient to say that the HG spreadsheet is an attempt to correlate the claims information that was being generated by Mr Fricke's department with the contractual information that had been extracted during the contract-by-contract analysis. Mr Peak illustrated this by relating the information in the spreadsheet about a particular contract (numbered AT526) with the information in the contract list at PTB 0846, at paragraphs 24ff of his affidavit. He identified some entries on the spreadsheet which, he said, were made for the purpose of recording whether or not a certain claim that had been received was in respect of a contract included in the list of contracts at PTB 0846. He identified other entries which, he said, reflected his practice of reviewing the actual claims to see whether they were consistent with the medium estimates of potential losses recorded on the HG table. One of the pages of the HG spreadsheet is a record of losses incurred by GIO Re which, according to the information supplied by Mr Fricke, related to contracts not included in the list at PTB 0846.

There is a document in evidence (PTB 1175), dated 20 November 1998, which senior counsel for ASIC described in opening as a "relative" of the HG table. There is another very similar document (PTB 1176) which presents slightly different figures and takes them to two decimal points, but I shall concentrate on PTB 1175. PTB 1175 sets out the same categories of cedants as the HG table. There is a column headed "Medium AU$ millions", comparable to a similarly headed column in the HG table, but there are no columns for low, medium and high figures in US$. The table at PTB 1175 shows a subtotal of 131.3, to which are added figures for "Risk Attaching" and "Marine" identical with the corresponding figures in the HG table, to produce a total of 145.50 (compared with 137.5 in the HG table). There is only one other column, which is headed "Total Reported AU$ millions", showing a total of 80.45 (in the HG table there was a column "Losses to Date" with a total of 59.8).

Mr Peak gave evidence that the information recorded on PTB 1175 is almost the same as the information appearing on certain lines of the third sheet of the HG spreadsheet, and the information recorded on PTB 1176 is the same as the information on certain other lines of the third sheet. Mr Peak said (affidavit, para 40) that he believed PTB 1175 and PTB 1176 were documents he printed for, and subsequently gave to, Mr Schneider, reflecting his instructions to give him updated information from the HG spreadsheet to take into account the reported claims.

ASIC pointed out (written submissions (Fox), para 146), in my view correctly, that these documents show that Hurricane Georges was not developing in a way inconsistent with the contract-by-contract analysis, and that there was still considerable room for increases in claims measured against the median result. It is clear that this information would have been available to Mr Fox, as the superior of Mr Schneider, had he asked for it. Accessibility of information about Hurricane Georges claims

Mr Fricke gave affidavit evidence that if he had been asked, in early November 1998, to obtain up-to-date information about the level of Hurricane Georges' claims that had been received, he would have entered the registered event numbers for Hurricane Georges into COGEN, which would have displayed the claims paid and outstanding, together with a list identifying contract numbers and the number of cedants. The entire process would have taken a matter of minutes. All claims department staff had access to this function of COGEN, and they could obtain such information provided they knew the relevant event numbers. The information would, of course, be confined to registered claims. 3.22 Negotiations with Guy Carpenter for retrocession cover

As previously noted, Mr Steffey had expressed interest in "whole of account" cover to manage GIO Re's risk exposure from the time of taking up his appointment as chief executive in July 1998. According to Mr Fox, Mr Steffey had in mind some "stop loss" retrocession arrangements, even when they first made contact. During his interview with Mr Steffey on 31 August 1998, before he accepted a position with GIO Re, Mr Steffey told Mr Fox that he was interested in implementing a group-wide stop loss coverage to equalise the group's results (affidavit of 8 December 2003, para 12). Mr Fox agreed in cross-examination that he received instructions from Mr Steffey at the commencement of his employment to assume responsibility for the stop loss project (T 3682). Mr Vines or Mr Steffey told Mr Fox that GIO Re needed to have some reinsurance protection in place as soon as possible to cover any new unexpected loss or a deterioration in Hurricane Georges during the takeover bid process, and that this was a priority (affidavit, para 39; T 3682). Mr Fox said he understood that there was urgency about obtaining cover for Hurricane Georges (T 3694), and that Mr Steffey was concerned to avoid any new losses materialising before the end of the year which could cause problems for the Part B statement and the profit forecast contained in it (T 3749; T 3854). This evidence is inherently plausible and consistent with other evidence, and I accept it.

However, nothing had been put in place by the end of October 1998, and by that time exposure to Hurricane Georges was emerging as a specific concern. Mr Vines gave evidence that he recalled being aware, prior to 3 November 1998, that Mr Steffey was becoming anxious to put something in place because of the Swissair loss and other catastrophe events that had occurred in the first quarter (T 2614).

Mr Vines gave evidence explaining the haste that had become associated with the proposed retrocession. He said the reason for moving quickly was not the impending annual general meeting held on 17 November, and there was no intention to put the agreement in place before publication of the four-monthly results to the market (T 2747-8). The reasons for haste were evidently twofold. One was to ensure that what the agreement protected was as prospective as possible, as Mr Vines understood that a 15% risk transfer was the minimum requirement for a valid and effective retrocession (T 2948; T 3023). Secondly, the agreement had to be in place before the Part B statement was published, and it was impossible to know when time would begin to run for dispatch of that document until the Federal Court published its judgment on GIO's challenge to the Part A statement, but when the judgment was published it might become necessary to act very quickly (T 3019).

Mr Vines said he had a high level understanding of the difference between reinsurance contracts and other financial contracts but he did not have sufficient expertise to make a judgment as to whether a particular cover would count as reinsurance for accounting purposes (T 2616). He said (T 2625) he understood the general requirement for adequate risk transfer, but he had no underwriting skills or experience in these sorts of contracts, so while he was interested in ensuring that the contract satisfied accounting standards, he had no real knowledge of what the terms and conditions of the contract should be. Therefore he wanted to know whether any proposed slip would conform to accounting standards, but he was not qualified to understand the terms and conditions of the policy document (T 2990). Mr Vines said (T 2787) he had in mind that any agreement entered into would protect the profit projection. He said he thought that if the agreement yielded recovery, that could be booked, but the premiums payable under the agreement would be booked over the life of the agreement and not necessarily all in the first year (T 2787). An important issue to him was whether such an agreement could be properly accounted for in that way (T 2787).

I accept his evidence on these points but it needs to be interpreted. Mr Vines' "high level" understanding was evidently still a quite sophisticated grasp of the regulatory and accounting issues raised by financial reinsurance, as is shown by the evidence of Mr Vines' participation in negotiations for the retrocession contract, and with the accounting firms concerning it. That is what one would expect, having regard to his background as an auditor for banks and for the GIO Group.

There was a meeting on 30 October 1998 attended by Mr Steffey, Mr Robertson and Geoffrey Bromley of Guy Carpenter and Co Pty Ltd, a reinsurance broker, to discuss retrocession cover (Mr Robertson's affidavit, para 126). Mr Robertson said the main subject of the meeting was Guy Carpenter' s desire to be involved in the whole account protection that was proposed to be introduced from 1 January 1999. He said that if the discussion also involved retrocession cover of the kind eventually taken out with American Re, that was his only involvement with such cover. That seems to be correct - there is nothing in the other evidence to indicate that Mr Robertson was involved in the American Re negotiations.

On 3 November 1998, Mr Steffey and Mr Vines met with Scott Grove, who worked for Guy Carpenter. According to Mr Vines (T 2640) Mr Steffey asked him to attend, although he had no detailed understanding of underwriting, to provide some "continuity" pending the arrival of Mr Fox, who would take responsibility for negotiating the contract. Guy Carpenter was negotiating as broker with a view to effecting a retrocession with Berkshire Hathaway, a large United States reinsurer. It appears from notes of the meeting, made by Mr Groves, that a 3 or 5 year cover intercepting on 6 November was discussed, and that Mr Vines asked what was the "significant risk transfer" (PTB 0722). Mr Vines explained in evidence that he was intrigued that a contract of reinsurance could be put in place covering an event (Hurricane Georges) that had already occurred (T 2616).

After the meeting, Mr Grove wrote to Mr Steffey setting out indicative terms for the cover (PTB 0723). It was to be cover for $150 million (presumably US$) with an excess of $5 million for each loss. The top $75 million of cover would not be payable except for a major loss such as a $25 billion US earthquake. The cover would be for 12 months and the premium would be $20 million, with a refund in the event of no claim or early termination, but Berkshire Hathaway would retain a $5 million margin. Mr Vines said (and T 2950) that, to the best of his recollection, he did not see Mr Grove's letter.

On the same day Mr Grove sent a facsimile to one of his colleagues who was overseas, explaining the matters discussed with Mr Steffey and Mr Vines (PTB 0725). Mr Grove said: "Accounting issues are of a major concern to J [sic] Vines. As discussed, you will contact him in regards to this. His main concern is risk transfer." Mr Grove added: "They are looking to include losses from Hurricane Georges. They believe they could have a loss of approx $25 million (I have not clarified if that is A$ or US$). They require this as a 'book entry'. J Vines was quite relaxed [in respect of] 'recouping' the loss. First of June was the date discussed."

Mr Vines explained that the reference to being relaxed about recouping the loss was a reference to the question when cash payment would be received if GIO were to make a claim under the contract. But he said he did not understand what the reference to a "book entry" could mean, for that was the very opposite of what was wanted (T 2618).

Mr Steffey and Mr Grove participated in a teleconference on 4 November, and then Mr Grove sent a facsimile to Mr Steffey enclosing a revised coverage proposal for "whole account protection" (PTB 0784). The figures in the earlier proposal had been refined, and there were specifically articulated "subjectivities", including a statement that the contract would be subject to Hurricane Georges not exceeding "US$30,000,000 F.G.U. i.e. Maximum Recovery US$25,000,000". Clearly the intention was for the contract to cover Hurricane Georges in specific terms.

It appears that subsequently, Mr Steffey ceased to have active involvement in the negotiations and the principal participants on GIO's side were Mr Vines (for a short time), Mr Fox, and (a little later) Mr Schneider. Mr Robertson was overseas from 6 to 17 November. There is a controversial question, addressed below, as to whether Mr Fox played in active role in the negotiations or was merely, as he claimed, a conduit between Mr Vines and Mr Schneider (T 3855-6). The meeting of Mr Vines and Mr Fox with Mr Grove on 5 November 1998

Mr Grove met with Mr Fox and Mr Vines on 5 November, and according to Mr Grove's file note, they considered accounting issues and "deterioration of the Georges book" (PTB 0832). The discussion of Hurricane Georges appears, according to the notes, to have led to a discussion of a change in the inception date.

Mr Grove subsequently confirmed the discussion in an e-mail to his colleagues at Guy Carpenter (PTB 0833). Mr Grove said that Mr Vines was not sure what GIO Re required, and that Mr Fox believed he knew everything about such products but did not know enough about the GIO Re book. Mr Grove said that Mr Vines and Mr Fox wanted to have a price for cover that would include deterioration of the Hurricane Georges loss from A$25 million up to, say, A$50 million, and an alternative price if neither Georges nor another hurricane then under discussion was included. He observed that the main concern of Mr Vines and Mr Steffey was to obtain a cover "which would protect/guarantee their projected profit". He noted that Mr Fox was not "broker friendly" and had said that he had seen covers of the requisite kind at American Re.

Mr Vines gave evidence about this meeting (T 2624-5; T 2972ff). He said that when he went into the meeting, he thought it odd that reinsurance satisfying the accounting standards could be taken out for an event that had already occurred, but he was assisted by Mr Fox's statement that insurance of that kind had been written in London (T 2625). Mr Vines also said that the suggestion that the deterioration of the Hurricane Georges loss from $25 million to, say, $50 million was Mr Fox's suggestion (T 2627). Mr Vines accepted that he said his main concern, and Mr Steffey's, was to obtain a cover that would protect the projected profit of $80 million (T 2628). He agreed with Mr Grove's account of Mr Fox's views, and that he had observed to Mr Grove that he was glad Mr Fox was there to look after the cover, as he had no underwriting skills.

Mr Vines' evidence is consistent with, and to a degree corroborated by, Mr Grove's contemporaneous e-mail, and so I accept his evidence. But it follows from his evidence that Mr Vines must have understood that the proposal was for cover to be obtained against the possibility that Hurricane Georges would exceed the $25 million reserve, up to a total (proposed at that time) of $50 million.

Mr Fox also gave evidence about the meeting. He said that on the morning of 4 November, the day of his arrival in Sydney from London, Mr Vines telephoned him at his hotel and asked him to come into the office. Mr Vines said he did not recall any such conversation and believed that Mr Fox commenced on 5 November, not 4 November (T 2621). Mr Vines' recollection is consistent with Mr Grove's report of the meeting, placing it on 5 November (PTB 0833). It is also consistent with the evidence of Mr Robertson (affidavit para 149ff) that Mr Fox began work on 5 November. Indeed, in his second affidavit (para 3(b)) Mr Fox said that his encounter with Mr Vines and the other two men may have occurred on 5 November rather than 4 November. I therefore do not accept Mr Fox's evidence on this point. If Mr Fox came into the office on 4 November, as he said, he did not have any meetings or conversations of significance to this case.

Mr Fox said (first affidavit, para 38) that on 4 November he "bumped into" Mr Vines and two others in a corridor and had a brief conversation with them, in which Mr Fox was asked his opinion on a reinsurance slip which he was shown (see also second affidavit, para 5). He said his response was that he could not comment on GIO Re's needs and would find out who was the appropriate person to deal with the matter. He referred to Mr Grove's account of the discussion (PTB 0832) and denied some parts of it, asserting in particular that while he was present no one said that GIO Re had already booked losses for Hurricane Georges of up to $25 million and would like the price of the cover to include deterioration of these losses from $25 million up to $50 million (para 40). When asked whether he could suggest any reason why Mr Grove made an incorrect record in his e-mail of 5 November, Mr Fox said (T 3681) he believed that Mr Grove regarded his joining GIO Re as a threat to the business opportunity he was presenting to Mr Vines and Mr Steffey. He said he did not recall saying or doing anything to create the impression that he was not broker friendly, but he did not deny saying he had seen such covers as proposed at American Re.

In his second affidavit he referred to Mr Vines' account of the discussion and disagreed with parts of it. He denied that Mr Vines mentioned, in his presence, a projected profit of about $80 million (para 6).

I do not accept Mr Fox's evidence of these matters. I regard Mr Grove's e-mail account of the meeting as accurate. It would be irrational for Mr Grove to misrepresent the discussion to his colleagues just because he saw Mr Fox as a threat. It seems to me likely that the meeting had some measure of formality about it, in the sense that it was not simply a chance encounter in a corridor. I say this having regard to Mr Grove's account of what was discussed and the likelihood that such matters would have been addressed, given GIO Re's perceived need to move quickly. It seems to me unlikely that Mr Fox was shown a draft proposal on 5 November. Guy Carpenter's first draft coverage proposal was sent to Mr Steffey, rather than Mr Vines, on 4 November (PTB 0784). Mr Vines gave evidence (T 2627) that he believed Mr Steffey did not give him a copy of the draft before the meeting on 5 November, and further, that no-one had a copy of the draft at the meeting of 5 November. Mr Vines' evidence is consistent with Mr Grove's e-mail of 5 November, in which he said that at the meeting on that day, Mr Vines and Mr Fox required a draft slip. It would be consistent with Mr Fox's interest in bringing American Re into the picture as a potential retrocessionaire that he would not be "broker friendly", and it is probable that something happened during the meeting to cause Mr Grove to make that comment. I accept, however, that Mr Fox said something to the effect that he had some experience with these kinds of transactions at American Re.

Mr Vines had a discussion with Mr Grove on 5 November (which may have been separate from their meeting, or part of it) in which he said he wanted to be shown how Guy Carpenter had previously had similar deals, with FAI and ReAC, approved by the auditors (T 2631-2; PTB 0834). Mr Vines said he was very encouraged by what he was told by Mr Grove, and he came to hold the view that it would be quite possible to put in place a cover that would have the desired effect for GIO and would be approved by the auditors (T 2632). During that discussion Mr Grove took Mr Vines through some variations of loss scenarios, where claims were made under the proposed policy at different points in time. In his subsequent e-mail (PTB 0834) Mr Grove said that Mr Vines "seemed quite happy with the examples". Mr Vines said in cross-examination (T 2973) that in fact he did not understand the loss scenarios and explained Mr Grove's contrary impression by saying that he (Mr Vines) was merely being polite. He said he was only interested in confirmation that policies of the kind proposed had been written for other companies and approved by their auditors. Mr Fox’s role in the negotiations

In his first affidavit (paras 45-48), Mr Fox said he found out from Mr Robertson that Mr Schneider was responsible for reinsurance purchases, and he spoke to Mr Schneider and told him to "handle" the retrocession quote from Guy Carpenter, and to make contact with the Sydney office of American Re because it may be cheaper if there was no broker involved. In my view it is unlikely that Mr Robertson would have said that Mr Schneider had such responsibility, or that Mr Schneider would have believed his responsibility was so large, since Mr Robertson's memorandum to the board of directors of GIO Insurance dated 18 May 1998 (PTB 0048) said that Mr Schneider was responsible for recommendations about the design of retrocession protection but not for implementation.

Mr Fox said he then telephoned Mr Vines, to say he had established that Mr Schneider was the person responsible for taking the Guy Carpenter proposal forward, and he said he asked Mr Vines to have all of the Guy Carpenter correspondence sent to Mr Schneider, and Mr Vines agreed to do so. Mr Vines agreed that Mr Fox told him that Mr Schneider would be involved in continuing the negotiations, and that this may have been said on 5 November (T 2750). I accept this evidence.

According to Mr Fox (first affidavit paras 69-73), during his operational meeting with Mr Schneider on 6 November, Mr Schneider said he had not received any documents from Mr Vines about the Guy Carpenter proposal. Mr Fox arranged for his secretary to chase up the documents with Mr Vines' secretary and forward them to Mr Schneider.

Mr Fox said that thereafter he "had nothing to do with" the negotiations (T 3849), except to come to a meeting at Mr Schneider's request for a few minutes and then, as requested at the meeting, to write the letter dated 12 November 1998 stating his intention to invite American Re to quote for GIO's future whole account protection (PTB 983). I do not accept this evidence. In my opinion Mr Fox's evidence on these matters is inconsistent with documentary evidence and the evidence of all other witnesses, and is not to be believed. The documentary evidence to the contrary (considered below) includes the e-mails recording discussions between GIO Re and Guy Carpenter, Mr Yee's e-mails with respect to American Re's negotiations with GIO Re, and Ms Dunbar's notes of meetings. Mr Fox was not able to give any adequate explanation for why the authors of these various documents would have misrepresented the events that they had recently witnessed (T 3681).

Another piece of documentary evidence working against Mr Fox's claim to a very limited role in the negotiations is his letter to Mr Murray dated 23 November 1998 (PTB 1187), in which he referred to "the attached protection that I have purchased", and said "I have put this cover in place". Mr Fox denied that such statements would be true (T 3849) and then, when the letter was shown to him and it was pointed out that he had made those statements, he said (T 3865): " I was using a flight of ego, if you like, in that my team had put it into place but I was using 'I' in my present tense, yes." I find this explanation unconvincing.

I find it inherently plausible that, although Mr Fox had just arrived, he would be eager to accept responsibility and demonstrate his capability, and would immediately become involved in the negotiations, having regard to his background experience as principal UK executive of American Re's London business - especially as he was told, according to his own evidence (affidavit, para 39) that reinsurance protection was needed as soon as possible to cover any deterioration in Hurricane Georges during the takeover bid process. I regard it as inherently implausible that, after Mr Steffey told him that the stop loss project was his responsibility and there was an urgent need to put cover in place to protect GIO Re from deterioration in the Hurricane Georges loss, that Mr Fox would have simply delegated the negotiations to Mr Schneider. Mr Vines’ withdrawal from the negotiations

After his second discussion with Mr Vines, Mr Grove reported to his colleagues by e-mail that the main concern of Mr Vines was to see how similar contracts made with FAI and ReAC had been approved by their auditors (PTB 0834). There were further internal discussions and correspondence, and Mr Grove wrote to Mr Vines on 5 November setting out a revised proposal in which losses from Hurricane Georges could be included or excluded without any effect on the price of the contract (PTB 0838). His letter (which was apparently not transmitted until 5:49 p.m. on 6 November: T 2988) enclosed a further draft placement slip.

After 6 November, Mr Vines dropped out of the direct discussions, and Mr Fox had responsibility for the negotiations (T 2640). Although Guy Carpenter sent Mr Vines the latest draft of the placement slip on 6 November, Mr Vines sent it on to Mr Fox because he realised that the draft was descending into the detail of the cover and that he had no experience at that level (T 2641-2). Mr Vines participated in a meeting with Mr Grove and another representative of Guy Carpenter on 6 November (PTB 0837), apparently discussing the draft placement slip. On balance, it seems probable that the draft discussed at the meeting on 6 November, which occurred in the morning, was the draft sent to Mr Steffey on 4 November rather than the later draft which was transmitted to Mr Vines only on the evening of 6 November (see T 2785; T 2964). Mr Vines said he did not want to continue the meeting when the discussion descended into details which were more properly handled by Mr Fox and his team. He received a further draft placement slip from Guy Carpenter with a facsimile dated 8 November, which he passed on to Mr Fox without closely studying it (PTB 0890; T 2648).

There were further negotiations and internal discussions within Guy Carpenter. As previously mentioned, Mr Grove submitted a further draft placement slip, along the lines of the earlier one though more fully expressed and with revised numbers, and provision for interest (PTB 0891). He addressed the covering facsimile to Mr Steffey and Mr Vines. Mr Vines promptly sent the draft to Mr Fox without comment (PTB 0889). ASIC submitted that the court should find, on the balance of probabilities, that Mr Vines reviewed the draft placement slip at least to gain an understanding of its overall effect, but there is no particular indication that he did, and he denied having done so (T 2988).

It seems to me probable that Mr Fox read the draft. In cross-examination (T 3854) he admitted that he probably read the text of Mr Yee's memorandum to Mr Schneider dated 10 November 1998, which was copied to him (PTB 0935), in which Mr Yee remarked that there had been an increase over the earlier draft from a cover for US$65 million limit excess of US$50 million to US$95 million limit excess US$5 million.

At the GIO Australia Holdings board meeting on 9 November 1998, it was noted that the Group was negotiating a $75 million excess $5 million catastrophe cover with Berkshire Hathaway, plus a possible further $75 million excess $80 million for a fee of $5 million (PTB 0873). According to Mr Vines (T 2647), that comment was made by Mr Steffey.

At about that time, it appears that a decision was made to commence negotiations with American Re. Mr Vines gave evidence that on about 8 November he said he intended to negotiate with American Re, because they could probably write the cover more cheaply and brokerage would be avoided (T 2648). He said that as executive director of GIO Insurance, Mr Fox had sufficient authority to purchase reinsurance, and to delegate authority to someone else, such as Mr Schneider (T 2648). 3.23 Discussions about the HG table, and negotiations for American Re agreement Discussions about the HG table

Mr Schneider gave evidence (first affidavit, para 104) that, on 9 November, he looked at the HG table with Mr Fox and they had a conversation as follows: Schneider: "We have concluded the contract by contract analysis. Based on the result it is clear that this event is more likely to be the $100m type event for GIO Re. In fact the total from the analysis is $137.5m with a high and low of $211m and $85m respectively. We have done a lot of work to arrive at this estimate. I firmly believe it is a $100m type event." Fox: "I just can’t see it being that big." Schneider: "The losses directly from Puerto Rico exposure should be pretty small given our exposures. The largest component of the loss should arise from Lloyd's. We haven’t yet had any reported losses but I wouldn’t expect any at this point."

Mr Schneider said (first affidavit, para 106) that during the same conversation, he expressed reservations about the efficacy and cost of the proposed Guy Carpenter cover, and Mr Fox agreed that the proposal was expensive and said negotiations should be opened with American Re. He added: "I don’t think you need to worry about the risk transfer. I have done similar types of deals in the UK at Am Re and they have passed the hurdles. Also Guy Carpenter have done a number of these types of deals in Australia and these have worked."

Mr Fox gave evidence about these matters in his first affidavit, paras 82-88. He said that on 9 November Mr Schneider came to collect him on the way to the boardroom, where a meeting had been arranged with Mr Yee and Ms Dunbar of American Re. He said Mr Schneider told him: "I have completed the contract-by-contract analysis and the amount I've arrived at is a worst-case scenario of $100 million." He said that at no time until well after the close of the AMP bid did Mr Schneider suggest that the result of the contract-by-contract analysis was any worse than that. Mr Fox's evidence was he could not recall his reply to Mr Schneider's statement, but denied he said "I just can't see it being that big". He said Mr Schneider did not show him any document and in particular, did not show him the HG table, and he was not aware that any document summarising the results of the analysis was in existence. He denied having made the statements attributed to him by Mr Schneider, including some specific statements about "rows" in the HG table attributed to him in Mr Schneider's second affidavit, para 14.

He accepted that he did nothing to investigate whether the result of the contract-by-contract analysis was reliable (T 3843), and that he relied upon Mr Schneider and his team to use their best endeavours. He did not ask Mr Schneider how he worked out his estimate (T 3844). His understanding was that, after the contract-by-contract analysis was completed, Mr Schneider or others would follow up claims notifications as they came in, in order to determine the accuracy of the conclusions based on the analysis (T 3838).

For reasons I gave in section 3.16, my finding is that Mr Schneider expressed his opinion that Hurricane Georges would be a $100 million type event during the meeting of Mr Robertson, Mr Fox and Mr Schneider on 5 November. It follows that it is unlikely that Mr Schneider said, four days later, that his opinion was that $100 million was only a "worst case scenario", and therefore I reject Mr Fox's evidence to that effect.

Mr Fox and Mr Schneider agree that they had a discussion about the results of the contract-by-contract analysis on 9 November, and that fits with the evidence that the contract-by-contract analysis was in fact completed on that day, and the HG table had been prepared. Given that the table existed and was a summary of the results of a great deal of work, it seems to me likely that Mr Schneider would have wanted to show it to Mr Fox, his superior, and that he did so on that day, as he said. According to Mr Robertson's evidence (affidavit para 189), Mr Schneider showed him the HG table after he returned from Boston and described it as "a spreadsheet I prepared for Tim while you were away". I therefore reject Mr Fox's evidence that Mr Schneider did not show him any document during their discussion on 9 November. That conclusion reinforces my finding that Mr Schneider told Mr Fox something stronger than that $100 million was a "worst-case scenario", having regard to the figures appearing in the HG table.

It is consistent with these findings that the amount of the proposed retrocession cover to be negotiated was increased on the same day, 9 November (see Mr Yee's memorandum to Mr Schneider, copied to Mr Fox, dated 10 November 1998, PTB 0935). Meeting with American Re, 9 November

Thereafter negotiations began with American Re. The negotiations were conducted by Richard Yee (branch actuary) and Diane Dunbar (underwriter). Mr Yee's responsibilities included pricing of reinsurance contracts (T 1174), and Ms Dunbar was an underwriter responsible (with another person) for writing Australia/New Zealand business reinsurance contracts limited to property treaty business (T 1175). The general manager of American Re in Sydney was Tony Richardson, to whom Mr Yee reported. American Re's head office was in Princeton, New Jersey. The relevant executives there included Kevin McDermott, who was the regional manager for the Asian region (including Australia), Théodore Walker, who was the financial product underwriter responsible for a number of regions (including Australia), and Greg Aristoff, who was the chief underwriter for the international operations of American Re (T 1174-5).

Mr Yee and Ms Dunbar met with Mr Fox and Mr Schneider on 9 November 1998. Ms Dunbar said in evidence that she had no memory of Mr Fox attending the meeting (T 1324), but Mr Yee's e-mail written after the meeting said that Mr Fox was there (PTB 0904), and he said so in his oral evidence (T 1177-8, T 1198) and Ms Dunbar's own handwritten notes in a "Meeting Planner" (PTB 0887) suggest that Mr Fox was present. That contemporaneous evidence is more reliable than Ms Dunbar's recollection some years after the event, especially as she frankly admitted that her memory is not very good (T 1333).

Mr Fox's own evidence (first affidavit, para 90) was that he was present at the meeting, though he said he stayed for only half an hour. Mr Yee did not agree that Mr Fox stayed only for short time and then left the negotiations to Mr Schneider.

Mr Fox said he explained the attitude of Mr Steffey and the board of GIO Australia Holdings to building an overall stop loss cover for the Group, saying that GIO Re was to put together the first such arrangement, to be used as a blueprint for the other companies; but in the meantime there was an urgent need to put in place a property excess of loss cover to eliminate any new surprises and protect GIO Re from any deterioration in the Hurricane Georges loss. That account is generally consistent with the summary in Mr Yee's e-mail to his colleagues on 10 November (PTB 0904).

Mr Schneider's account (first affidavit, para 108-9) differs from Mr Fox's account in detail. According to Mr Schneider, Mr Fox began by proposing a whole account reinsurance transaction which, he said, would be beneficial to the GIO and to American Re; and then he referred to a "short-term and pressing need" of GIO to obtain protection from Hurricane Georges, because Hurricane Georges might cost the GIO a significant amount which would affect its profit forecast. According to Mr Schneider, Mr Fox suggested a "high level, double trigger concept" that would make the transaction risk-transferring (although he acknowledged that there would not be any "real" risk transfer), while cover for Hurricane Georges would be on a funded basis with a small fee; and he said, after referring to the AMP takeover bid: "Because of the importance of the forecast to the GIO it is imperative that we put the contract in place. It is not certain that Georges will be a significant loss, but there is every potential it will become a significant loss. GIO want to put a financial transaction in place with American Re, that can be cancelled and replaced by longer-term whole account arrangements."

In his first affidavit (para 93), Mr Fox dealt with Mr Schneider's account of the meeting, sentence by sentence. It seems to me that the main differences between them are that, according to Mr Fox: · the cover that was urgently needed was to eliminate new surprises and protect GIO Re from deterioration in the Hurricane Georges loss, rather than to "obtain protection from Hurricane Georges"; · he said, "we have in mind a long-term financial contract that will meet your normal risk transfer criteria"; · he was not aware that GIO Re was preparing any forecast and had been told by Mr Steffey that Mr Robertson was responsible for financial matters such as forecasts, and therefore he did not say "Hurricane Georges may cost the GIO a significant amount and this will affect the forecast"; · he did not say there was every potential that Hurricane Georges would become a significant loss; and · he did not say that the Hurricane Georges loss would be fully funded and that he had in mind a high level, double trigger concept that would satisfy appropriate accounting standards, as he had instructed Mr Schneider to negotiate the cover and Mr Schneider had not spoken to him about its structure.

In my view Mr Schneider's evidence is to be preferred to the evidence of Mr Fox on each of these points. As to (i), it seems to me reasonably clear from my findings about the meeting of Mr Robertson, Mr Fox and Mr Schneider on 5 November and the content of Mr Schneider's subsequent memorandum of 8 November that what was under principal consideration was protection of the profit forecast from deterioration of the claims experience for Hurricane Georges. This was in circumstances where the October Status of Registered Events report had shown, as had Mr Schneider's contract-by-contract analysis and opinion, that the profit forecast was at risk. As to (ii), although it appears that a long-term contract was under consideration, the immediately pressing task was to obtain short-term protection for Hurricane Georges. As to (iii), this is contrary to my finding that Mr Fox became aware of the draft Part B statement and profit forecast in about his second week in Sydney. As to (iv), the statement attributed to him, which he denied, is consistent with the other evidence including the October report and the contract-by-contract analysis. As to (v), this is precisely the sort of retrocession agreement that was subsequently negotiated, and I reject the evidence of Mr Fox that he had instructed Mr Schneider undertake the negotiation and then left it to him.

Mr Schneider said (first affidavit, para 112) that, after this meeting, Mr Fox told him that the proposed transaction was very important to the GIO Group, and that he should give American Re all the help he could. He reiterated his confidence that the transaction would work. He emphasised the urgency of the matter. Mr Fox's evidence (first affidavit, para 95) was different in detail but not in overall effect. Mr Fox explained (first affidavit, para 92) that e-mails sent between Mr Schneider and American Re were copied to him, but he said he did not open the attachments to the e-mails or read any draft slips because he was confident that Mr Schneider was sufficiently qualified to negotiate the terms of any slip and would speak to him if he had any problem. Mr Fox's evidence is implausible. Consistently with my finding as to the content of the discussion in the meeting with Mr Yee and Ms Dunbar on 9 November, and my finding that Mr Fox had a significant role in the negotiations notwithstanding his denial, it seems to me highly probable that he read the e-mails that were copied to him and took a keen interest in the developing negotiations. Mr Schneider's alleged conversations with Mr Vines, between 9 and 13 November

Mr Schneider gave evidence (first affidavit, paras 116-7) that between 9 and 13 November 1998 he had a number of conversations with Mr Vines, mostly by telephone but sometimes in person. He gave the following account of a conversation: Schneider: "In my October report I said that Hurricane Georges could be a non event or it could be a $25 million event or it could be a $100 million event. We have completed a contract by contract analysis. We have looked at hundreds and hundreds of policies. We have had discussions with the underwriters and we have done sufficient work for me to believe the loss will be a $100 million type event." Vines: "I can’t accept that. I can’t understand how the event can be so large." Schneider: "GIO's exposures have increased dramatically. This is not inconsistent with the aggregates that I showed you in June 1998." Vines: "Well it is even more important to purchase reinsurance." Schneider: "I have completed this analysis and it will need to be disclosed to the reinsurers or they could claim non-disclosure." Vines: "The nature of the transaction means that that should not be an issue. You do not have to discuss this with them. Remember this is your opinion and you should not discuss it with the auditors. You caused a big mess in October with the process with the auditors. I do not need a report on this from you."

Mr Schneider said that during his conversations with Mr Vines, Mr Vines asked for updates on progress of the negotiations with American Re, and instructed him to "keep up the pressure".

Mr Vines denied that Mr Schneider had ever said anything conveying to him that Mr Schneider believed Hurricane Georges was a $100 million event, or that he had carried out a contract-by-contract analysis which supported that conclusion, or that Mr Schneider should not communicate with PwC on that topic (T 2585; T 2686; and see above, at section 3.14). He denied that he was ever made aware of the existence of the HG table until his preparation for this case (T 2687). He said (T 2586) that he had a "vague memory" that someone, probably Mr Schneider, mentioned $100 million in connection with Hurricane Georges, but it was "expressed in some sort of speculative term that it might or could go to that sort of level", and was probably said during the discussion of the October results on 11 November. He denied that what was said conveyed to him that Mr Schneider believed that Hurricane Georges was expected to be a $100 million event (T 2586). He agreed that he did not respond by asking for the basis upon which the speculative statement was made, because his understanding at that point in time was that "time was the only thing that would solve that enigma" (T 2926). He gave evidence (T 2925) that "it is possible that on more than one occasion the cost of Georges was speculated, but at no point was it put to me as to be more certain". He said (T 3025) that at some stage over the period from 9 to 13 November he asked Mr Schneider, "How is it going with Am Re?", but he did not recall being told any details of the negotiation. He said (T 3017) that on 11 November, while discussing the October results, he understood that Mr Schneider was close to settling the terms of the placement slip with American Re.

Mr Schneider said he made a hand-written file note (PTB 0942) signed "Greg" and dated 10 November 1998, which says: "Spoke to Frank about size of Hurricane Georges. Also passed size of George loss up the chain. Frank/Tim/Geoff. Analysis suggests George will exceed $100m dollars. Will include in November month end result."

There are some curiosities about this note. It was dated 10 November but there is nothing to corroborate Mr Schneider's evidence that he wrote it on or near to that day, rather than much later (see T 0540). The note began by identifying a conversation with Mr Robertson, but he had left for overseas on 6 November. The assertion in the note that Mr Schneider "passed size of George loss up the chain" seems to suggest a process in which the message would be passed from Mr Robertson to Mr Fox to Mr Vines. The note is followed by another note, made in December with respect to another matter, in relation to Terrigal and the November month-end results.

The notes are self-serving. It was put to Mr Schneider in cross-examination by senior counsel for Mr Vines that he made the notes later, to protect himself from attack, something he denied (T 0639). It was put to him by senior counsel for Mr Robertson that in October 1998 Mr Schneider had told Mr Robertson he would create a history file to record that he opposed the forecast, in order to have something to show AMP when they arrived, a conversation he said he could not recall (T 0716; see also Mr Robertson's affidavit para 112). In the state of the evidence, I do not make any finding about the matters put to Mr Schneider, but the uncertainty on that score creates a measure of caution about placing any substantial reliance on the notes.

Weighing up all these matters, I have decided that the note dated 10 November does not assist me in determining whether to prefer Mr Schneider's version of his conversations with Mr Vines between 9 and 13 November to Mr Vines' evidence that no such conversations took place.

I have decided to accept Mr Vines' account in preference to the account given by Mr Schneider. Mr Schneider's evidence was not specific as to the number of conversations with Mr Vines or the times when they occurred. He did not give any particular context for the discussions he said he had with Mr Vines. Unlike the first quarter highlights, the HG table was not, on its face, a document prepared for circulation to the principal board or senior executives generally, of a kind that would need to be discussed with Mr Vines before circulation.

For reasons given earlier, I have not accepted Mr Schneider's evidence that Mr Vines told him, after presentation of the first quarter highlights, that he was "messing up the process" and was not to speak to the auditors. For the same reasons, I do not accept Mr Schneider's evidence that Mr Vines told him not to discuss the HG table or the contract-by-contract analysis with the auditors or that he had caused a big mess in October.

As to Mr Schneider's claim to have told Mr Vines, on the basis of the contract-by-contract analysis, that he believed the loss would be a $100 million type event, ASIC pointed out (written submissions, para 343) that at the time the conversation was said to have occurred, the contract-by-contract analysis had been completed and its results supported the conclusion that Hurricane Georges was likely to be a $100 million type event, given that the low, medium and high ranges were $84.6 million, $137.5 million and $211 million respectively. ASIC also noted that the amount in the draft Guy Carpenter slip was amended on the evening of 9 November to increase the aggregate limit of the cover from $75 million to $100 million. ASIC submitted that it was implausible that, during the days following 9 November, Mr Schneider would have "gone cold" and merely told Mr Vines that Hurricane Georges "could" cost $100 million, in a vague and speculative way. Further, ASIC contended (written submissions, para 344) that it would be implausible for Mr Vines not to ask for an explanation of the basis of the speculation that Hurricane Georges could go to $100 million, unless he was told that it had come from the contract-by-contract analysis.

On the other hand, Mr Vines said (T 2586) that if Mr Schneider had told him that Hurricane Georges losses were expected to be $100 million on the basis of a contract-by-contract analysis of the kind performed for the misbehaving aviation contracts, the statement would have prompted action. He would have discussed it with Mr Robertson or Mr Fox and obtained their view, and if necessary brought PwC into the discussions as well. He said (T 2587) that unless there was a process that involved PwC and included an examination of "unders and overs" to assess whether they could be used to keep the forecast whole, he would not have agreed to the profit forecast going forward.

I find this evidence of Mr Vines plausible. It seems to me that there is an important difference between the statements in the first quarter highlights, which, as I have said, were rather speculative and not expressed to be based on analysis, and a statement by a person in Mr Schneider's position giving an estimate within a broad category of loss, in the range of $100 million on the basis of a contract-by-contract analysis. A fortiori, there is a very great difference between a statement of the latter kind and a vague and speculative statement, without reasons, that Hurricane Georges could reach $100 million. A statement that is supported by an analytical and empirical process, within the general area of expertise of the person making the statement, demands to be taken seriously and should produce the kind of reaction that, indeed, Mr Vines said he would have undertaken if such a statement had been made. But it would be understandable if a vague and speculative statement not based upon expert analysis did not provoke a reactive course of conduct, or even (in light of the statements already made in the first quarter highlights) an invitation to explain the basis of the speculation. I do not agree with ASIC (written submissions, para 136) that the mere fact that the statement was made by a person holding a position equivalent to the position of internal actuary meant that it should be acted upon, where the statement was vague and speculative and did not purport to be based on analytical or empirical grounds.

It is not implausible that Mr Schneider might have spoken vaguely about the Hurricane Georges loss during his meeting with Mr Vines to discuss the October results, because it appears that at that time, Mr Schneider anticipated that the American Re contract would be effective. The focus of attention in the discussion on 11 November seems to have been on other issues, including the Air China catastrophe and the level of potential margin.

Mr Schneider was extensively cross-examined on whether Mr Vines told him not to prepare a report or communicate with the auditors (T 0526-0537), but remained adamant that he remembered being told by Mr Vines not to do a report. If, however, his recollection that he spoke to Mr Vines about the contract-by-contract analysis is wrong, as I have found it to be, Mr Vines would have had no occasion to instruct him not to prepare a report on the results of the analysis.

Mr Robertson also denied having any such conversation with Mr Schneider (affidavit para 222). That evidence is plausible, given that Mr Robertson was overseas on 9 November when the HG table was completed and did not return until 17 November. I accept it. Further negotiations with American Re

Mr Schneider prepared his own draft of a placement slip and sent it to American Re on 9 November. His draft was much shorter than the final draft that had been sent by Guy Carpenter, though according to his evidence it was based on the earlier draft (PTB 0899). There followed a period of very intense negotiations, the result of which was that GIO Re entered into a retrocession contract with American Re by execution of a placement slip on 13 November. Mr Schneider gave evidence that he had a number of discussions with Mr Fox during this time, but he could not recall the content. At some point during the period from 5 to 9 November the desired cover in respect of Hurricane Georges was increased to US$100 million subject to an excess. Mr Fox agreed that he learned of this increase from reading e-mails copied to him during the course of negotiations (T 3854).

Although it is difficult to be sure about the sequence of events because the evidence is not completely consistent, it appears that there was another meeting with Mr Yee and Ms Dunbar on 10 November, attended by Mr Schneider but perhaps not Mr Fox on this occasion. In her handwritten notes of this meeting (PTB 0932), Ms Dunbar recorded the following, which she said (T 1335) was something said by Mr Schneider: "Currently under hostile takeover bid GIO Re have had to produce profit forecast George will impact on profit forecast cover is to save protection forecasts for this year [George, Aviation]".

Mr Yee sent an e-mail to his colleagues in the United States on 10 November, giving his view of the negotiations (PTB 0904). He noted that GIO was subject to a takeover bid from AMP, and briefly described GIO Re's categories of reinsurance business. He explained that American Re had been asked to supply a quotation for cover in terms of Mr Schneider's draft placement slip, within 48 hours. He noted two enticements that had been offered, if the contract worked out, namely, first, that American Re would be asked to quote for an accident year stop loss or calendar year stop loss cover for the entire GIO business; and, second, that the contract would probably be cancelled and superseded by the proposed accident year stop loss cover.

Mr Yee explained the transaction as follows: "Essentially GIO Re is looking to protect the earnings result for the financial year 1 July 98 to 30 June 99 and smoothing their results for the next 3 to 4 years. They have already suffered a loss for Hurricane Georges of A$36m (estimated) and expect to fully fund for this loss (this would be the first section of the cover). They are looking for a second event cover to protect this year's result backdated to commence on 1 July 1998. There is some risk transfer for the second event cover but little or none for the first event (we were told but have not had information to assess)."

On the same day (10 November), Mr Yee sent an e-mail to Mr Schneider, copied to Mr Fox and others (PTB 0935), acknowledging Mr Schneider's draft placement slip, and saying that in view of the limited timeframe, American Re might be able to provide interim smoothing for GIO Re provided it was able fully to protect its downside. He added: "That is we prefer to have no risk transfer in this cover but we may consider a cover if the risk of loss is extremely remote".

Thereafter there were negotiations, reflected in correspondence: PTB 0956 (Mr Schneider's e-mail to American Re of 11 November), PTB 0981 (various responses to negotiation points by US executives of American Re), PTB 0979 (Mr Yee's e-mail to Mr Schneider of 12 November), PTB 0980 (Ms Dunbar's internal e-mail of 12 November summarising Mr Schneider's responses to negotiation points), PTB 0996 (Mr Yee's internal e-mail summarising negotiations as at the evening of 12 November). The negotiation points related to such matters as the provision of a letter of credit or other facility to negate credit risk, limitation of the scope of the cover so as to exclude such matters as aviation and space losses, and pricing. As to pricing, by 12 November the parties had reached a stand-off, in which GIO Re was offering a margin of $6 million and American Re wanted $8.8 million (T 1206). It appears that, at or before the long meeting on 12 November, the "defined event" was limited by confining it to a second event Gulf of Mexico market loss hurricane in excess of US$10 billion, rather than, more broadly, the USA market loss hurricane in excess of that amount (T 1205). Meeting with American Re, 12 November

Mr Schneider discussed American Re's communication of 12 November (PTB 0979) with Mr Fox, who, according to Mr Schneider, said he was comfortable with American Re's requirements (first affidavit, para 124). Then, commencing in the afternoon of 12 November, there was a further meeting with American Re's representatives, Mr Yee and Ms Dunbar. According to Mr Schneider, Mr Fox was present for some of the time (first affidavit, para 127). The document at PTB 0996 indicates that this was a lengthy meeting attended by Mr Yee and Ms Dunbar, Mr Schneider and "at some points" Mr Fox, which ran until late on 12 November. During her examination in chief (T 1328) Ms Dunbar said she could not remember whether Mr Fox had attended, but in cross-examination she identified the meeting as centring on spreadsheets displayed on a computer on a coffee table, and said that it went until late at night and Mr Fox appeared, but only very briefly. That is broadly consistent with Mr Yee's e-mail at PTB 0996, and with Mr Yee's oral evidence (T 1185), but on Mr Yee's version of the events, Mr Fox may have made more than one brief appearance.

In cross examination (T 1203-4), Mr Yee agreed with the statement that Mr Fox came in just to observe how the conversation was going, and the meeting was really driven by Mr Schneider. He said that Mr Fox handed over a letter dated 12 November 1998 about proposed whole of account cover (PTB 0983) while he was at the meeting. The letter confirmed Mr Fox's intention to invite American Re to quote for GIO Re's future whole account protection commencing 1 January 1999. On its face, this appeared to be an incentive to American Re, designed to encourage them to believe that a larger whole account contract might become available if they co-operated in respect of the specific cover for which GIO Re was pressing.

Mr Schneider said (first affidavit, para 130) that during the meeting, the following exchange occurred: Yee or Dunbar: "We are still not comfortable with the level of risk and we are looking to off-load this risk somewhere else. We haven't managed to do it and it is taking time." Fox: "If we offered you a cover that would remove this risk would that satisfy your needs?" Yee or Dunbar: "Yes."

Ms Dunbar said that in his brief appearance, Mr Fox did not add anything of substance (T 3038). But she was forgetful on other occasions, and her evidence implied that she was not closely involved in negotiations and would not therefore necessarily have appreciated the significance of this exchange. Mr Yee said in cross-examination that he had no recollection of Mr Fox suggesting on any occasion that GIO Re might take back some of the risk for the defined event, and the idea to do so was Mr McDermott's idea (T 1210). It seems to me it would be unsafe to accept Mr Schneider's evidence on this point, having regard, in particular, to the evidence of Mr Yee. I think it probable that if some such thing was said by Mr Fox at the meeting, Mr Yee would have remembered it and would have given evidence accordingly (see T 1211). My conclusion, consistently with Mr Yee's evidence, is that the suggestion that GIO Re might take back some of the risk came from Mr McDermott rather than Mr Fox, and was probably not adverted to during the meeting on 12 November, but subsequently Mr McDermott issued instructions to Mr Yee and Ms Dunbar to obtain a letter from GIO Re prior to signing the placement slip (see the discussion in section 3.25 below).

Mr Fox's evidence (first affidavit, paras 104-109) was that he attended the meeting on 12 November for no more than 5 minutes, and during that time Ms Dunbar asked him for a written confirmation that American Re would be invited to tender for GIO's future whole account protection commencing on 1 January 1999. He said he went back to his office and dictated the letter at PTB 0983, but he did not recall how the letter was delivered. He denied any discussion with Mr Yee or Ms Dunbar about offering a cover to take back some of the risk. Further discussions, 12-13 November

Mr Schneider sent a revised draft of the placement slip to Mr Yee, together with some figures, on 12 November (PTB 0991) a few hours before Mr Yee sent his internal e-mail (PTB 0996) to his colleagues in the US. Mr Schneider said he had revised the draft placement slip after his discussions with Mr Yee and Ms Dunbar, and also with Mr Fox (first affidavit, para 128).

Next, as contemplated by Mr Yee's e-mail (PTB 0996, at 0997) there was a conference call between Mr Yee and Ms Dunbar and US executives of American Re, apparently in the early hours of 13 November. Ms Dunbar (T 1330) recollected participating in a telephone conference with several American Re personnel in the United States through much of the night of 12-13 November, and she made notes of that discussion (PTB 0997A). One of the matters discussed was pricing, and she made notes reflecting a margin of $7.2 million. She was in her pyjamas on the back patio and the call went for so long that the birds started singing and the people on the other end of the lines commented on it (T 1342).

Mr Schneider gave evidence (first affidavit, para 134) that on 12 or 13 November, prior to signing the slip, he had a number of discussions with Mr Fox and Mr Vines. On one occasion he told Mr Fox that American Re had asked for a margin of $7.2m, an increase from the margin of $6m that Mr Schneider had proposed. He asked Mr Fox whether GIO should accept that increase. Mr Schneider said Mr Fox telephoned Mr Vines, who said: "I think we are out of time and we should agree to the margin and sign the slip today." Mr Schneider said Mr Fox agreed (first affidavit, para 134). Mr Schneider also claimed that he had a conversation with Mr Vines on or shortly after 12 November 1998 in which he told Mr Vines the amount of the margin and the letter of credit arrangements that American Re was seeking (second affidavit, para 17).

Mr Vines denied that he participated in any such conversations, saying that he would not have been asked about the margin because he had no experience or knowledge or about how to price such a contract and there was no reason for Mr Fox or Mr Schneider to see his approval or opinion (T 2683; T 3029-30).

On balance, I have decided to accept Mr Vines' evidence on this matter. I do not attach any significance to Mr Vines' own statement that there was no reason for Mr Fox or Mr Schneider to seek his approval or opinion. It is not implausible that Mr Schneider or Mr Fox might have involved Mr Vines in the decision-making process in respect of the margin, given that: · Mr Vines was interested in and had financial responsibility with respect to the Group's profitability, which might be impacted by the margin; · he had explored quite detailed matters of provisioning and prudential margin in the meeting on 11 November; · work on the Part B Statement and the profit forecast had reached an intense stage, and there was pressure to complete the profit forecast, particularly as it would be necessary to move swiftly to finalise the Part B Statement once the Federal Court handed down its decision, if the decision allowed the Part A Statement to go forward as it was or with minor amendments; · Mr Vines was aware, from the meeting on 11 November, that if there were no retrocession the October results would be reduced by $25 million based on the catastrophe valuation model. But there is a plausible alternative hypothesis, in which the decision was made by Mr Fox as executive director without intervention by Mr Vines because Mr Fox had the requisite authority and the decision had to be made swiftly. While they might plausibly have consulted with Mr Vines, the evidence does not establish on the balance of probabilities that they did.

Mr Schneider said (first affidavit, para 135) there was another discussion at that time with Mr Vines, concerning the question of receiving the approval of GIO's auditors to the terms of the slip. He said Mr Vines instructed him not to give a copy of the draft slip to Mr Murray, and that it was necessary to sign the slip even if the auditor's approval had not been given (first affidavit, para 136). Mr Schneider said (para 136) that Mr Vines authorised him to sign the slip, because Mr Fox was not in the office at the time. Again, Mr Vines denied that any such things were said by him (T 2685). My view is that Mr Schneider's version of these events has not been proven on the balance of probabilities.

As to giving a copy of the draft slip to Mr Murray, it is plausible that Mr Schneider might have sought directions from a superior and that, if he raised the matter with Mr Vines, Mr Vines might have told him not to do so until the transaction was finalised. The timetable for the Part B Statement put Mr Vines under pressure to complete the profit forecast, especially since no one knew in mid-November when the Federal Court would deliver its decision or what the decision would say, and therefore no one knew how quickly it would be necessary for GIO to finalise the Part B statement. Further, Mr Vines' own evidence is that he believed the placement slip would be approved by the auditors in due course and that the proper approach was to finalise the document first.

As to authorising Mr Schneider to sign the placement slip, it seems to me plausible that Mr Schneider would have sought authority from a superior before signing the placement slip for such a large transaction, but that does not necessarily lead to the conclusion that it was Mr Vines who granted the authority. Mr Vines' evidence (T 2685; see also T 3031), that if Mr Schneider had asked him whether he should sign the slip because Mr Fox was not around, he would have wanted to know whether Mr Fox had approved the slip, is plausible. On the other hand (see ASIC' is written submissions, para 358), it is clear that Mr Fox was not available to give specific authority to Mr Schneider to sign the slip on 13 November, and Mr Robertson was away. Mr Vines had been closely involved in negotiations with Guy Carpenter, and had been involved in discussions with Mr Fox and Mr Schneider over the terms of the slip. It seems to me probable that Mr Schneider sought the authority of a superior before signing, but, weighing up this evidence, I am unable to conclude that the superior who gave the authority was Mr Vines. Signing a placement slip, and the evidence of Mr Vines and Mr Fox about it

On 13 November Mr Yee and Ms Dunbar attended at Mr Schneider's office and they had a conference call with Mr McDermott of American Re in Princeton. Ms Dunbar said (T 1341) that the call was unsuccessful because of technical problems, but whatever happened, the text of a placement slip acceptable to both sides (PTB 1005) was finally settled on that day. The placement slip was signed by Ms Dunbar on behalf of American Re, and by Mr Schneider on behalf of GIO Re. Once the agreement had been signed, Mr Schneider promptly sent a facsimile to Mr Fox, copied to Mr Steffey and Mr Vines, attaching the signed cover note and saying, "I think we can all rest easy" (PTB 1004).

Mr Vines said (T 2705; T 3032) that when he received his copy of the American Re agreement he would have "glanced" at it, but would not have read the slip in detail because he would not have understood its meaning (T 2705). He was cross-examined as to what he did, and did not, notice when he looked through the signed slip. Generally, his evidence was that he did not see or understand the terms of the arrangement. He said (T 3033) that he looked at the slip, not in any analytical sense, but to see the dollar value of the cover and the point of inception. I infer that Mr Vines knew, on 13 November, that the cover for Hurricane Georges had been substantially increased from what was proposed by Mr Grove on 5 November.

On the day he returned from overseas, 23 November 1998, Mr Fox read the American Re placement slip, and he gave evidence that he knew and generally understood its terms when he read it (T 3857), and had a reasonable understanding of how the agreement worked (T 3857). He said he understood from reading the document that if GIO Re made claims on American Re in the year ended 30 June 1999, it would have to pay back to American Re the amount of those claims in later years (T 3853; T 3883); and he understood that American Re was only at risk in the event of a second US$100 billion hurricane in any one year in the Gulf of Mexico, a risk that was extremely remote (T 3857), and that there was no passing of risk to American Re except in respect of that event (T 3884). He said he believed that the American Re contract effectively limited the loss from Hurricane Georges to $25 million (T 3739) and that it protected GIO Re against total net Hurricane Georges losses up to $100 million (T 3712). He said he realised that in the absence of the American Re agreement, exposure to Hurricane Georges could be material to the profit forecast (T 3712). He said he understood that Mr Steffey wanted an agreement to be entered into urgently (T 3854) and that the purpose was to preserve the profit forecast in the Part B statement (T 3854).

Mr Fox wrote to Mr Murray, the PwC audit partner for GIO Insurance (PTB 1187), saying: "I thought that you would be interested in receiving a copy of the attached protection that I have purchased for GIO Reinsurance. While I am still getting my feet under the table, I have put this cover in place so as to avoid any surprises! "It may well be that this cover gets replaced in the New Year when I have had time to assess fully both the underwriting and the reinsurance needs going forward." The letter made no reference to Mr Fox's side letter of 13 November 1998, which is discussed below. The terms of the placement slip

The placement slip was headed "Whole Account Protection Cover", and was expressed to be for a period of 48 months commencing on 1 July 1998 on a losses occurring basis. It provided indemnity to GIO Re for all losses from all sources, arising from treaty and facultative business, but excluding losses from claims arising out of Y2K and aviation.

The "limit" was expressed as follows: "To pay up to US$95,000,000 ultimate net loss each and every loss occurrence In Excess Of US$5,000,000 each and every loss occurrence subject to the warranties Herein. It is hereby warranted that the excess point for losses emanating from Hurricane Georges is US$15,000,0000 [sic]. It is hereby warranted that losses emanating from the space account is [sic] limited to US$15,000,000. The top US$40,000,000 of the occurrence limit is limited to losses from a defined event. The defined event is a second USA (Gulf of Mexico) market loss hurricane in excess of US$10,000,000,000 in any 12 month period commencing 1 July of 1998/1999/2000/2001. The aggregate limit for this contract is US$150,000,000. To the extent that the defined event does not occur during the course of the contract the aggregate limit reduces to US$100,000,000."

The effect of these provisions may be summarised, approximately, as follows: (1) for any single occurrence not related to Hurricane Georges, American Re indemnified GIO Re for losses in the band between US$5 million and US$60 million; (2) for losses relating to Hurricane Georges, the indemnity was for losses in the band between US$15 million and US$60 million; (3) for losses in the space account, the indemnity was for losses in the band between US$5 million and US$20 million; (4) the aggregate limit of claims in categories (1)-(3) above was US$100 million, in the absence of a "defined event"; (5) for losses from a defined event (a second US$10 billion Gulf of Mexico hurricane within 12 months) the indemnity was for losses in the band between US$5 million and US$100 million, subject to the aggregate limit of US$150 million.

In his memorandum to Mr Vines dated 4 December 1998 (PTB 1572), Mr Fox summarised the position by saying that "As part of the overall retrocession arrangements for GIO Re, an Excess of Loss contract has been negotiated with American Re limiting any further loss to a figure no greater than US$5 million". That would be so as to losses from other catastrophes, subject to the US$60 million limit, but the position as to Hurricane Georges was that the contract covered all additional losses beyond the profit reserve figure of A$25 million, again subject to the US$60 million limit.

Were it not for the premium structure noted below, the retrocession cover for losses in the band from US$5 million to US$60 million would have involved a real risk transfer, except to the extent that it was retrospective cover for losses that had already occurred (including Hurricane Georges losses). The retrocession cover for losses in the band from US$60 million to US$100 million involved a risk transfer not reversed by the premium structure, but it was only slight, because of the improbability on historical grounds of a second US$10 billion Gulf of Mexico hurricane occurring in any 12 month period.

The premiums for the 4 years were US$5 million, US$15 million, US$25 million, and US$35 million respectively. All premiums were to be retained by GIO Re and securitised in the manner described below. Additionally, a "reinstatement premium" would be payable at cancellation or when the contract expired. This would be calculated as 130% of all claims, less premiums received to date, subject to stated annual maximums for each year of US$60 million, US$50 million, US$40 million and US$30 million respectively. Additionally, at cancellation or when the contract expired, GIO Re would pay American Re US$7.2 million for the full four-year period (presumably pro-rated if the contract was terminated early).

Effectively, if claims were made during the four-year period, GIO Re would be obliged upon termination of the contract to pay a reinstatement premium which would amount to a refund of more than all (up to 130%), or (if the annual limits were brought into play) all or most of, the payments made by American Re to meet those claims, and would also be obliged to pay American Re its "fee" of US$7.2 million (or a pro-rated amount).

However, this would be offset by GIO Re's entitlement to a "profit commission" calculated as 100% of all premium (including reinstatement premium) less 100% of all losses, less US$7.2 million for the full four-year period (pro rata with term). This seems to mean that, to the extent that the reinstatement premium (other than the part representing American Re's "fee") exceeded GIO Re's losses, GIO Re would be entitled to a refund by way of profit commission of that amount.

GIO Re was entitled to cancel the cover on 1 July in any year, and also on 31 December 1998, provided that a profit commission was then payable to GIO Re (as it would be, if a premium had been paid and no losses claimed, or if GIO Re had incurred and claimed losses and was obliged at termination to pay a reinstatement premium in excess of losses claimed).

The profit commission (premium less losses) was to constitute a fund to be securitised by a letter of credit, trust deed or similar vehicle, by 31 January 1999 at the expense of GIO Re. If the securitisation requirement was not met then the contract would be cancelled with no liability to American Re, which would be entitled to a fee of US$150,000 (with interest from 13 November 1998), and GIO Re would retain all premiums. If GIO Re cancelled the contract within the first year it would retain all premiums but would be required to pay US$1.5 million pro-rated to the time of termination, but not less than US$1 million.

In effect, the fee arrangements meant that all claims except for a "defined event" claim would be fully funded by premium payments and there would be no risk except the credit risk that might arise if claims were paid before the matching premium was received (although, as will be seen, there was a dispute as to whether American Re would ever be required to make a cash payment as opposed to recognising a payment obligation offset by GIO Re's payment obligations for later years). There was a degree of risk for "defined event" claims above the premium limits that had been set, but the probability of a second US$10 billion Gulf of Mexico hurricane in any 12 month period was slight.

The arrangements for American Re's fees were in substance that US$150,000 would be payable if the contract did not proceed beyond 31 January 1999, at least US$1 million would be payable if the contract was cancelled later in the first year, and otherwise there would be a fee of US$7.2 million payable for the 4 years and pro-rated at US$1.8 million per year in the event of earlier termination.

Thus, the transaction appeared on its face to have the effect of locking in GIO Re's loss in respect of Hurricane Georges to A$25 million for the year ended 30 June 1999, and therefore underpinning and supporting the $80 million profit forecast, for a fee of US$7.2 million over 4 years. But under the agreement, any entitlement of GIO Re to recover surplus claims for Hurricane Georges from American Re would be matched by GIO Re's obligation to pay additional premiums to American Re in later years. The success of the transaction in supporting the profit forecast depended on GIO Re being able to disregard, in its financial statements for the year to 30 June 1999, its premium obligations in subsequent years. Purpose and effect of placement slip

In my opinion the terms of the placement slip and the evidence that I have set out show that Mr Steffey and Mr Vines (to the extent that they were involved), and Mr Fox and Mr Schneider, caused GIO Re to enter into the American Re placement slip for the sole or primary purpose of protecting the profit forecast from adverse movement in Hurricane Georges claims. Bearing in mind that a whole account protection cover was contemplated by Mr Steffey and Mr Fox for 1999 and subsequent years, and therefore that the placement slip was a temporary cover, there is no plausible basis for inferring that those who negotiated the placement slip on behalf of GIO Re were concerned to protect the company from the risk of a second US$10 billion Gulf of Mexico hurricane in any 12 month period. Plainly enough, that part of the transaction was included in order to give the transaction an appearance of genuine risk transfer, even though the real risk transfer was only very remote, so that it would pass muster with the auditors and the prudential regulator. The central part of the transaction represented by the placement slip was an arrangement, not involving any risk transfer, whereby American Re contracted to cover GIO Re for surplus Hurricane Georges claims above US$15 million (A$25 million) in exchange for GIO Re's promise to pay equivalent amounts in later years plus a substantial fee. This, it was hoped, would enable GIO Re to remove the surplus Hurricane Georges claims from its balance sheet at 30 June 1999 and therefore justify a profit forecast which disregarded those surplus claims.

These conclusions are based on my analysis of the placement slip and, as I have said, the whole body of evidence that I have set out, but I should for the sake of clarity note the following significant matters of evidence: · Mr Steffey's desire for whole of account protection, from the time of his arrival at GIO Re, and his anxiety to put something in place because of catastrophe events in the first quarter of 1998/99 (T 2614); · the use, for the purpose of developing the profit forecast, of the assumption that no major catastrophe would occur, so that the component of catastrophe premiums historically representing major catastrophe payouts could be taken into account as profit; · Mr Schneider's comments in the first quarter highlights about Hurricane Georges and his recommendation that the profit forecast be reviewed, which drew attention to the vulnerability of the forecast to adverse claims experience in respect of Hurricane Georges; · Mr Schneider's reiteration, in his e-mail of 20 October 1998, of his view that for the profit forecast to be maintained, the assumption that Hurricane Georges would cost GIO Re its average market share of the total catastrophe loss would have to be made good; · PwC's developing concerns about the adequacy of the $25 million reserve for Hurricane Georges and the viability of the assumption that Hurricane Georges would cost GIO Re its average market share of the total loss, adding to the pressure on GIO Re's senior management to justify the forecast in light of Hurricane Georges; · in the case of Mr Fox, the reinforcement, through the results of the contract-by-contract analysis which were shared with Mr Fox, of Mr Schneider's concern about the inadequacy of the Hurricane Georges reserve; · the availability of daily information about the progress of Hurricane Georges claims through the Hurricane Georges register and other reports from the claims department, showing that claims were trending above the Hurricane Georges reserve; · Mr Schneider's memorandum of 8 November 1998 (PTB 0842) purporting to summarise his discussion with Mr Fox and Mr Robertson on 5 November, in which he confirmed his opinion that surplus claims above A$25 million in respect of Hurricane Georges would reduce projected earnings but the issue would go away if GIO Re could purchase appropriate reinsurance; · Mr Schneider's calculations relating to the October results, discussed with Mr Vines and Mr Fox at their meeting on 11 November 1998; · Mr Grove's description of the proposed transaction (PTB 0725), particularly that GIO Re's representatives were "looking to include losses from Hurricane Georges", and his note of a meeting which considered "deterioration of the Georges book" (PTB 0832); · Mr Vines' evidence that his main concern, and Mr Steffey's, was to obtain a cover that would protect the projected profit of $80 million (T 2628); · Mr Fox's statements at the meeting with representatives of American Re and Mr Schneider on 9 November, that the transaction should include cover for Hurricane Georges on a funded basis with a small fee, and that it was important for the profit forecast that the contract be put in place, because there was every potential that Hurricane Georges would become a significant loss; · Mr Yee's e-mail to his colleagues at American Re (PTB 0904), saying that GIO Re was looking to protect the earnings result for the financial year to 30 June 1999, and to "smooth" their results over the next 3 or 4 years, and that they expected to fully fund for the Hurricane Georges loss which was estimated at A$36 million; · Mr Walker's memorandum to colleagues at American Re dated 18 November (PTB 1117A), saying the transaction was initiated when GIO Re asked for assistance "in spreading Hurricane Georges and other potential losses over the next 4 years"; · Mr Fox's note to Mr Murray (PTB 1187) that he had put the cover in place "to avoid any surprises".

The evidence that during their negotiations, Guy Carpenter gave alternative quotations for cover with and without Hurricane Georges might suggest, if considered in isolation, that protection against further development of the Hurricane Georges loss was not a primary purpose of the GIO Re negotiators. But all other evidence about the Guy Carpenter negotiations suggests an intention on the part of the GIO negotiators to obtain protection in respect of Hurricane Georges, and that is the kind of protection that they proceeded to negotiate with American Re.

In my opinion the evidence shows that Mr Fox understood that if a claim was made under the American Re agreement in the year to 30 June 1999 in respect of Hurricane George losses above $25 million, then that amount together with commission would have to be repaid in later years. He therefore understood that there was no risk transfer in this part of the transaction, and that the proposed accounting treatment would create an illusion that GIO Re had achieved the profit forecast from its ordinary business operations, when in fact it had not (see ASIC's written submissions (Fox), para 205).

Mr Vines, on the other hand, did not have detailed understanding of the regulatory and accounting issues and looked to Mr Fox for expertise. Although he initiated negotiations, initially with Guy Carpenter, for a retrocession arrangement along the lines of what was eventually negotiated, he did not become involved in the details of the contract or the details of its accounting treatment before the placement slip was signed on 13 November. His evidence was that he relied on what he was told by Guy Carpenter and by Mr Fox as to the feasibility of obtaining retrocession cover that would protect the profit forecast from deterioration of Hurricane Georges claims. 3.24 Amendments to the placement slip

Subsequently American Re took the view that the placement slip dated 13 November 1998 was unclearly expressed, and sought to negotiate amendments. From the point of view of GIO Re, apprehension developed or escalated that the contract negotiated with American Re would not meet regulatory and accounting standards, particularly when a qualified opinion was communicated by KPMG in a draft advice dated 20 November (PTB 1170; T 2701; see the discussion below). There was a period of renegotiation, and eventually on 18 December 1998 a substitute placement slip was executed by Mr Fox on behalf of GIO Re.

Concerns began to emerge, within American Re, about the drafting of the placement slip soon after it was signed. An executive of American Re in Princeton, Theodore Walker, sent an e-mail to Mr Yee on 16 November (PTB 1029), saying he was very concerned that the signed slip did not reflect the intent of the cover and listed several points of concern. One was his view that "the only risk portion in the cover is the second event hurricane, and all other losses are to be fully funded". He said that the "reinstatement premium" was more accurately an additional premium and should be so described. The US$150,000 was to be a consulting fee rather than a cancellation fee, and the intention was that if a letter of credit was not put in place until January 1999 American Re would be entitled to the US$1 million fee rather than merely US$150,000. He was concerned to make it clear, presumably with a view to minimising credit risk, that there would be no actual exchange of cash under the contract, other than payment of the fee.

Mr Yee and Miss Dunbar promptly took up these concerns with Mr Schneider and Mr Battilina (GIO's in-house legal counsel). They met on 16 November to express their concerns. Mr Schneider emphasised that GIO Re had a signed slip from American Re, but said that GIO Re would be happy to discuss possible amendments to tighten up the slip. Mr Yee reported back to Mr Walker by e-mail later on 16 November (PTB 1028). He said they had agreed that the slip should be re-worded to clear up "grey" areas, and that the "reinstatement premium" should be an "additional premium". As to fees, Mr Schneider said that literally GIO Re could use the contract until 31 January 1999 and then cancel it by not putting a letter of credit in place, and only pay a fee of US$150,000. Mr Schneider said he would talk to Mr Fox as to when the letter of credit would be established, and when the higher fee would apply.

Mr Schneider gave evidence (first affidavit, para 164) that he had several telephone conversations with Mr Fox during the week beginning 16 November, when Mr Fox was working out of GIO's United Kingdom office. They discussed negotiation points. He said that during one of those conversations, when Mr Schneider referred to American Re's desire to change the minimum fee clause and said it could be a "show stopper", Mr Fox said to him: "We need the cover. You should continue negotiating with American and if we have to you should let this one go." And later: "Do the best you can. We need the cover. If they are insistent we will need to give in."

American Re's concern that there be no obligation to make a cash transfer became more acute after their discussion with Mr Schneider. An internal e-mail by Mr Yee dated 17 November 1998 (PTB 1084) refers to the possibility of a total loss to the funded cover of US$100 million in year 1, at a time when the profit commission fund would contain only the first year's premium of $5 million less the first year's fee. The concern was that American Re might be obliged under the placement slip to pay in cash the balance of the claim on 30 June 1999, although that payment would be recouped by later premiums, including the additional premium on termination. Mr Schneider said that GIO Re did not intend to call for cash in such a case but he believed it was not possible to make a contractual commitment to that effect.

Theodore Walker's inter-office memorandum dated 18 November 1998 (PTB 1117A) shed some light on American Re's understanding of the transaction (which he evidently regarded as merely a proposal at that stage, notwithstanding the signing of the slip). In his view, the transaction was initiated when GIO Re asked for assistance "in spreading Hurricane Georges and other potential losses over the next four years", and he said "they view this as important in their attempt to fight off a hostile takeover bid from AMP, a large Australian financial services group". He explained that the cover would contain two component parts, the first a "fully funded" component covering known Hurricane Georges losses and other potential losses, and the second a risk bearing component related to a second event Gulf of Mexico hurricane generating market loss in excess of $10 billion where both events occur during a 12 month period (a possibility he described as "remote").

Mr Walker noted that discussions were continuing, because American Re wished to reduce the amount of cash contractually transferable, while GIO resisted doing so because of the possibility that offsetting losses against premiums would make the premiums accruable. That is, as I understand this evidence, GIO wanted to avoid any obligation to bring to account on an accruals basis in the 1998/99 accounting year any part of its future premium obligations, because that would negate the benefit of coverage against 1998/99 losses (including Hurricane Georges losses); and it was concerned that if premiums were to be offset against losses, there would be a stronger prospect that accrual would be required.

There were further negotiations, in which it appears that Mr Schneider, having seen the draft opinion of KPMG referred to below, told the American Re negotiators that until there was a contract that would satisfy regulatory requirements he would not regard American Re as being at risk (see PTB 1177) but he wanted a "gentleman's agreement" that if regulatory approval was not obtained and it was necessary to cancel the slip, GIO Re would only have to pay $150,000. Mr Schneider's evidence is that at a meeting on 20 November, he told Mr Yee and/or Ms Dunbar that in "a perfect world", GIO Re would deal with the regulatory issues before signing, but because of timing constraints that had not been possible.

Mr Schneider said (first affidavit, para 169) he met with Mr Fox on 23 November, after Mr Fox returned to Sydney from his London visit. He said he gave Mr Fox a copy of KPMG's draft advice, saying that KPMG's response had not been favourable, although Arthur Andersen would probably be more positive. Mr Fox said it was PwC's opinion that counted, because they were the auditors. Mr Schneider said Mr Fox authorised him to give way on certain negotiating points, to avoid a dispute. Mr Fox sent a copy of the original slip to Mr Murray on 23 November (as noted above), and Mr Schneider said he attended a meeting with Mr Murray and Mr Fox on 27 November 1998 to discuss the matter.

Mr Fox disagreed with Mr Schneider's account of their conversation (first affidavit, para 132). He said he did not know KPMG or Arthur Andersen had been consulted, and that at no stage until 7 December was he aware of any question being raised as to whether the American Re placement should qualify as reinsurance, and until 7 December he had no discussion or meeting with anyone from PwC about that matter. He denied attending any meeting with Mr Murray and Mr Schneider on 27 November (first affidavit, para 141).

ASIC submitted (written submissions (Fox), para 195) that the court should prefer the evidence of Mr Schneider, and find that Mr Fox was aware from no later than about 23 November that there was an issue about the effectiveness of the American Re agreement. I do not believe that the evidence would justify that finding. Mr Fox was overseas from 14 to 22 November 1998, and it is plausible that he may not have become aware of uncertainties about the efficacy of the retrocession agreement while he was away. Mr McClintock's file note of his telephone conversation with Mr Fox on about 24 November suggests that at time, Mr Fox was proceeding on the basis that the American Re agreement was effective, and there is nothing to indicate that Mr McClintock said anything to the contrary. But Mr Fox probably became aware shortly afterwards that there was an issue about the efficacy of the agreement. Mr Schneider sent him a copy of a file note he had made after discussions with American Re (PTB 1352) in which Mr Schneider noted that he had said GIO Re would be asking its auditors to seek approval from APRA that the contract was a "fully-fledged reinsurance contract", and that the representatives of American Re assured him that there had been no problems in getting certification for similar products in Australia.

Mr Vines gave evidence (T 2701) of a meeting on 23 November attended by himself, Mr Fox and Mr Schneider in respect to the American Re deal. That was probably the meeting identified by Mr Schneider. Mr Vines said it was probably at that meeting that he conveyed his thoughts about KPMG's and Arthur Andersen's views about the accounting treatment of the American Re contract. That is consistent with Mr Schneider's evidence. Mr Fox denied (second affidavit, para 14) that Mr Vines conveyed any such information to him at that time or on any other occasion, and said that the first time he was informed of the views held by any auditors in respect of the American Re contract was at the meeting with PwC on 7 December. He said he was not involved in the negotiation for amendments of the American Re contract. He denied (para 16) that he had any conversations with Mr Vines about the consequences of the American Re contract being judged to be ineffective, prior to 7 December. The weight of evidence is in favour of Mr Vines' version.

Ms Dunbar wrote an internal e-mail on 24 November 1998 (PTB 1212) recording Mr Schneider's view that the contract could still work for GIO Re and that he wanted to proceed subject to a new slip being drawn up. The e-mail recorded some proposed amendments to the existing slip and said that Mr Schneider wanted a "gentleman's agreement that if the contract did not pass regulatory hurdles" only $150,000 would be payable. Mr Walker of American Re sent some detailed requirements to the company's Australian representatives by e-mail dated 26 November 1998 (PTB 1343), enclosing a revised draft placement slip. The Australian representatives of American Re subsequently met with Mr Schneider, and confirmed the meeting by an e-mail which, according to Mr Schneider's evidence, was dated 30 November 1998 (PTB 1340). The meeting was attended by Mr Schneider, Mr Richardson, Australian and New Zealand branch manager of American Re, and Ms Dunbar. It appears that Mr Fox did not attend the meeting (T 1318).

Mr Schneider wrote a file note on 27 November 1998 of his meeting with the representatives of American Re, which (on its face and according to Mr Schneider's evidence) was copied to Mr Fox (although Mr Fox denied attending the meeting or receiving the file note: first affidavit, para 142). Mr Schneider recorded that he had told them he agreed in principle with many of the changes they had proposed but the draft wording left much to be desired. He said GIO's position was that it had a signed slip from American Re, which it had passed to its auditors, and that it would ask the auditors to seek an approval from APRA certifying that the slip was "a fully-fledged reinsurance contract". It had been agreed that APRA would not be approached until GIO and American Re had agreed endorsements "tightening up the slip". Mr Richardson confirmed the outcome of the meeting in an e-mail to Mr Walker and others dated 30 November 1998 (PTB 1428). He concluded that Mr Walker's draft would be acceptable to GIO Re with a few changes, and that "there is a big carrot out there in GIO whole account cover".

According to Mr Richardson's e-mail of 30 November, GIO's auditors had approved the original slip as a reinsurance contract. In fact PwC was much more cautious, as noted below. However, Mr Schneider gave evidence that at that time, Mr Fox was still saying he believed that PwC would "sign off" on the transaction. Mr Fox denied (first affidavit, para 143) that he said such a thing.

Matters came to a head, so far as PwC's attitude to the existing placement slip was concerned, in the meeting between the defendants and PwC on 7 December 1998, considered in detail in section 3.35 below. In that meeting PwC told the defendants that in their view the American Re contract was not "a valid reinsurance contract" and should not be accounted for in the manner proposed by GIO, and that they had made their view known to the DDC (PTB 1661). Notwithstanding PwC's view, negotiations continued for amendments to the slip.

Mr Fox gave evidence (T 3767) that he instructed Mr Schneider "to bring the American Re contract back on line as an acceptable retrocession", in order to fulfil his responsibility to ensure that the statements in the Part B statement concerning the profit forecast, which had assumed the efficacy of the American Re contract, remained valid. It seems to me probable that Mr Fox wanted to conclude the revisions to the placement slip in a manner that might persuade PwC to revise their opinion, and that he instructed Mr Schneider to proceed with the negotiations for amendment.

There was a meeting attended by Mr Fox and Mr Schneider and representatives of American Re, including at least Richard Yee, on 15 December 1998. Mr Fox gave evidence (first affidavit, para 201) that he could not remember attending the meeting but if he was there, it was only for a short time. According to minutes of the meeting prepared by Mr Yee (PTB 1880), GIO Re agreed to purchase funded cover (which he called "George Cover") by 18 December. American Re wished to book the cover in its then current financial year. There were negotiations as to whether American Re would price a stop-loss cover on GIO Re's business, or a whole account stop-loss cover for the whole of the GIO business rather than merely the reinsurance branch.

Mr Schneider gave evidence (first affidavit, paras 169, 170, 174) of several conversations with Mr Fox, during the course of the negotiations for amendments to the slip. Essentially, he said, Mr Fox approved the negotiating stance that Mr Schneider was taking, but emphasised that GIO Re needed the cover and if necessary, he should capitulate on specific points.

The replacement slip, as negotiated, was executed on behalf of both parties (by Mr Fox, on behalf of GIO Re) on 18 December 1998 (PTB 2188). Mr Fox said (first affidavit, para 206) he signed it after Mr Schneider's secretary told him that Mr Schneider had seen the document and was happy with it.

Mr Fox said in oral evidence the message from Mr Schneider was that the revised agreement satisfied the auditors' requirements (T 3768), and he claimed that Mr Schneider advised him that he believed the forecast was "safe" and that the American Re agreement "could still hold good after he completed the discussions with PwC and American Re" (T 3769). This evidence was not put to Mr Schneider in cross-examination and I do not accept it, since the revised placement slip did not in any significant way address the problem that there was only a remote transfer of risk in respect of a defined event and no risk transfer in respect of Hurricane Georges.

The drafting of the slip had been refined and "tightened up", but it was essentially the same transaction in commercial terms, except that the $150,000 fee component had gone. On the same day Mr Fox signed a hand-written authorisation to Alan McCormick of GIO, for immediate payment to American Re of US$1.8 million in respect of "cat X/L cover - Reinsurance margin" (PTB 2195). Mr McCormick sent an e-mail to Mr Fox on 22 December saying he had arranged that payment, and that he had the first year outwards premium booked against the contract in the COGEN system, "so that it would be a 'routine' entry included in the half-year a/c's to December" (PTB 2196).

In 1999 there were further negotiations, involving Mr Fox and Mr Schneider, after opinions by PwC and KPMG (discussed below) had made it clear that GIO would be unable to use the transaction to achieve its accounting and financial objectives. GIO and American Re explored further retrocession arrangements (PTB 2268 (although perhaps that letter was never sent: T 1196), 2268A, 2269, 2270), but American Re declined, on 26 March 1999, to participate in any further arrangements except whole account cover for the GIO Group. Then Mr Fox and Mr Schneider negotiated the cancellation of the placement slip (PTB 2271-2274; Mr Fox's first affidavit, paras 222-226). It was ultimately agreed that the placement slip would be cancelled from its inception and American Re would retain a fee of US$250,000 out of the US$1.8 million it had received in premium. A "Commutation Endorsement" to that effect (PTB 2277) was executed on behalf of GIO on 3 June 1999. 3.25 Mr Fox's letter to American Re dated 13 November 1998

Mr Fox wrote a letter dated 13 November 1998 to Ms Dunbar (PTB 0999) that was the focus of much attention in the case. According to ASIC (written submissions (Fox), para 199), Mr Fox wrote the letter as a "side letter" to Ms Dunbar at her request in order to assuage American Re's concerns about the risk that it was undertaking (albeit a remote risk) for the occurrence of a "defined event", by offering to take back a substantial portion of that risk, so as to encourage American Re to finalise the placement slip urgently.

There is some evidence that, although the risk was recognised as "remote" (PTB 1117A), American Re's executives were concerned about the risk transfer for the "defined event" insurance proposed in the transaction, and were looking for a retrocession arrangement to eliminate or share that risk.

Ms Dunbar's notes of her telephone conference call with Mr Yee and US executives in the early hours of 13 November refer to "$40m exposure 2nd Event of Mexico", suggesting that American Re's exposure for the "defined event" was a topic of discussion during the conference call. Then there is a note "call MRA Aust as much as they want of the limit". In cross-examination Ms Dunbar acknowledged that this reflected a suggestion that Munich Re Australia (a sister company of American Re because Munich Re was the parent of both) be approached to accept some of this risk by retrocession agreement (although it had been put to her, wrongly in my view, that the risk in question was the exposure to Hurricane Georges rather than to a defined event). Next to those words Ms Dunbar wrote, in a different coloured pen, "TR - no point", words which, she agreed, indicated that Mr Richardson had subsequently said there was no point approaching Munich Re Australia for a risk sharing arrangement. Ms Dunbar's note then says "we are using them we are filled up in the US", which, she agreed, was a statement indicating that American Re was using Munich Re Australia for such purposes (T 1353).

It seems to me probable that the quoted part of Ms Dunbar's notes refers to the band of exposure between US$60 million and US$100 million, where, under the placement slip, there was to be some exposure to a defined event. So construed, the note confirms a degree of apprehension within American Re as to the defined event exposure, remote though it would be. The suggestion that a call be made to MRA Australia confirms that arrangements were explored for risk-sharing.

On 13 November 1998, the date on which the placement slip was signed, Mr Fox, as executive director of GIO Insurance, wrote a letter addressed to Ms Dunbar at American Re (PTB 0999). The full text of the letter is as follows: " Re: Original Loss Warranty Protection As discussed, we are delighted to be able to offer the following facility to American Re in respect of a certain specific account exposure: The GIO would cover American Re's interest in that specific Property account up to a limit of US$30 million in excess of US$10 million. As we understand this, the contract would be triggered by the second US$10 billion Hurricane in the Gulf of Mexico. The cost of this facility would be 2 percent rate on-line. Should American Re wish to take this forward, I would be happy to put the terms highlighted above into a formal Cover Note."

Mr Yee gave evidence (T 1187-8) that he saw the letter in GIO Re's offices before the placement slip was signed, and that the letter was a precondition to signing. He said (T 1189) Mr McDermott had told him and Ms Dunbar that he (McDermott) had achieved the outcome reflected in the letter, that the letter was a precondition to signing the deal, and that American Re would make replacement arrangements as soon as they could. He said in cross-examination (T 1208) that Mr McDermott told him "he had arranged for GIO Re to take back $30 million of the $40 million exposure for the defined event". When he saw Mr Fox's letter he understood it was the result of what Mr McDermott said he had arranged (T 1209).

On 14 November 1998 Mr Yee sent an e-mail of mutual congratulations to his colleagues (PTB 1024), saying that they had achieved a fairly favourable outcome for American Re and also GIO Re in the space of four days and three nights. He attached to the e-mail the placement slip in the form in which it had been signed. He added: "Accompanying this slip we have been given a side letter from Tim Fox which provides for GIO Re to cover US$30m excess of US$10m for a second event Gulf of Mexico market loss of US$10bn. The cost of this facility is 2% ROL. This facility is provided with the understanding that American Re will make replacement arrangements for the second event cover as soon as possible." He said in his oral evidence (T 1189) that he took the first two sentences of the quoted material from the terms of the letter, and the last sentence reflected what he had been told by Mr McDermott.

In its amended statement of claim, ASIC alleged that Mr Fox signed the letter of 13 November, which it identified in para 62, and alleged that at that time Mr Fox knew or ought to have known a number of things set out in para 63, including that the chance of occurrence of a US$10 billion Gulf of Mexico Hurricane in any 12 month period was extremely remote, and that no expert had given any advice as to whether the proposed non-disclosure was consistent with accounting standards or the law. In para 30 of his defence, Mr Fox responded to paras 62 and 63 of the amended statement of claim, admitting that he signed the letter of 13 November but denying that it was a "side letter". He alleged that before signing the letter, he was contacted by Ms Dunbar of American Re, who told him they were seeking between $50 million and $100 million cover in relation to an interest in Mexico, and he said she assured him that this cover did not relate to the cover she was negotiating with Mr Schneider (details of which were, according to Mr Fox, not known to him). Mr Fox said in his defence that he referred Ms Dunbar's query to GIO Insurance's Underwriting Department and that he was informed by Mr Hedley that the Underwriting Department was prepared to offer cover to American Re as set out in the letter. Mr Fox said he signed the letter at the request of Mr Hedley, because of Mr Hedley's unavailability.

Mr Hedley gave evidence that he became aware that GIO had purchased reinsurance protection in respect of Hurricane Georges late in 1998, but he did not see the placement slip at that time. He said he saw a copy of Mr Fox's letter of 13 November only weeks before swearing his affidavit on 30 September 2002. Mr Hedley said he did not have any dealings with Ms Dunbar or any other employee of American Re in late 1998, about the cover GIO was prepared to offer American Re as set out in Mr Fox's letter, or about any other matter. He said he was not consulted, and did not discuss the cover GIO was prepared to offer American Re as set out in the letter, with Mr Fox or anyone else from GIO. He expressly denied Mr Fox's allegations to the contrary.

Ms Dunbar gave evidence (T 1329) that the only time she remembered seeing Mr Fox's letter was when she was photocopying documents for ASIC, even though the letter was addressed to her. But in cross-examination she was reminded that she had given evidence in her ASIC examination to the effect that she had received the letter on about 13 November (T 1344), and she said she was being truthful at that time and could not now remember in the witness box (T 1345). It seems to me more probable than not that she did receive the letter on about 13 November.

Ms Dunbar also said that she could not recall having any discussions with Mr Fox about retroceding a risk involving an account exposure from American Re to GIO (T 1329), and she would have had no authority to enter into such a transaction. She said that retrocession cover was dealt with by American Re in the United States (T 1323). She did not recall any account exposure of American Re to an interest in Mexico from a hurricane in late 1998 (T 1329; T 1361).

Although Ms Dunbar's recollection of negotiations in November 1998 was poor, it seems to me unlikely that she would have forgotten making an approach to Mr Fox for retrocession cover in respect of an American Re interest in Mexico. Additionally, it is most unlikely, given Ms Dunbar's limited regional responsibility, that she would have made such an approach. On the other hand, she was involved, with Mr Yee, in the negotiations for the retrocession agreement, and if there was to be a "side letter" as part of those negotiations, she may well have been the person to discuss it with Mr Fox, especially if (as the handwritten note discussed below suggests) she was told to do so by a US executive of American Re.

Ms Dunbar identified (T 1331) an undated handwritten note by her (PTB 0823) recording a telephone conversation with or tele-message from Kevin McDermott, an American Re executive in the United States. Apparently the words "Kevin - spoke to Greig" were a record that Mr McDermott spoke to Greg Aristoff, another American Re executive. Ms Dunbar denied that the first reference to "Greig" was a reference to Mr Schneider (T 1357). The note then recorded a message approximately as follows (the precise symbols cannot be fully reproduced): "Greg *GIOR - will send something back today *GIO Re will reinsure us 30 x 10 on US$40m limit - 30 po 40m. * Bind this#"

It seems to me probable that the telephone conversation recorded in the notes happened on or shortly before 13 November. Although unclear, the note seems to imply that Mr Aristoff told Mr McDermott that GIO Re would send something back to American Re that day, and that GIO Re would reinsure American Re to certain stated limits. The notes do not, on their face, make specific reference to the retrocession agreement finalised on 13 November or Hurricane Georges. They do, however, appear to contemplate some commitment by GIO Re of the kind offered by Mr Fox in the "side letter", and the commitment of that kind would address American Re's concern over its US$40 million exposure to a defined event under the draft placement slip. It therefore seems to me likely that Ms Dunbar's notes refer to a proposal that GIO Re take up some of the defined event exposure, implemented by the "side letter", and consequently the notes pointed to a conclusion inconsistent with Mr Fox's explanation of the "side letter".

Mr Yee's evidence was that he was unaware that American Re was seeking cover from GIO for an account exposure it had in Mexico, and it was unlikely that the American Re branch in Sydney would be involved in any such transaction, because its responsibility was for business emanating out of Australia and New Zealand (T 1188).

Mr Schneider gave evidence (first affidavit, para 132) that he had no knowledge of any communications between Mr Fox and Ms Dunbar about a $50 million to $100 million cover in relation to an interest in Mexico, unrelated to Hurricane Georges. Mr Fox's evidence about the letter of 13 November 1998

Mr Fox addressed these matters at length in his evidence. He said (first affidavit, para 111ff) that early in the afternoon of Friday 13 November he received a telephone call from Ms Dunbar, who told him American Re's International Division in Mexico had a potential client for whom they were putting together capacity for a major deal, and that Greg Aristoff would like to know whether GIO could provide capacity of US$50 million to US$100 million in respect of a second US$10 billion Hurricane in the Gulf of Mexico. Mr Fox said he interrupted Ms Dunbar to ask whether the contract had anything to do with Mr Schneider's retrocession negotiations, and she said it did not. He told her that he would refer the request to GIO's underwriters and endeavour to get back to her on the same day. He said Ms Dunbar did not identify the reinsured.

Mr Fox's account is that later in the evening of 13 November, Mr Hedley came to his office, after the secretaries had left but while Mr Fox's secretary remained, assisting him to prepare for his departure for London the next day. He said Mr Hedley told him that the most GIO Re could offer would be US$30 million excess of US$10 billion for a premium of 2% rate on-line. Mr Fox asked him to send a note to that effect to Ms Dunbar, but Mr Hedley said he had no secretarial support and so, in Mr Hedley's presence, Mr Fox dictated to Ms Irvine the letter at PTB 0999. Mr Hedley said "thank you" and left them and later, when the letter was typed, Mr Fox signed it and arranged for Ms Irvine to fax it to Ms Dunbar. He said he heard nothing further about the letter and as far as he was aware, American Re did not accept the offer contained in it. If he had been told that the purpose of the letter had been to protect American Re over a short period until it offloaded its risk, he would have proposed (he said) to postpone the signing of the slip until American Re had arranged the offloading.

Mr Fox said that the "certain specific account exposure" to which the letter referred was a reference to the risk in Mexico that he had discussed with Ms Dunbar. He explained that he did not identify the risk more specifically because Ms Dunbar had not told him who the original reinsured would be. He said it is market practice for a reinsurer who is proposing to grant a large reinsurance program to make such preliminary inquiries of other reinsurers, without identifying the original reinsured, to determine what the market capacity would be to offload some of the program. He denied that he intended the letter to be an offer to reacquire most of the risk of the defined second event cover in the placement slip then being negotiated between American Re and GIO Re. He said it would not make sense to offer to take back some of the defined event risk because to do so would have returned GIO to nearly the same position as if the slip had not been signed. He denied ever having spoken to anyone at American Re's head office in Princeton about the negotiation of the American Re contract.

However, in cross-examination he accepted that a retrocessionaire in the position of GIO Re in relation to such a proposal as alleged by Mr Fox could not sensibly proceed without knowing the nature of the risk insured, the level of the risk, and sufficient information to judge the reasonableness of the excess and what a proper premium would be (T 3858). Although Mr Fox persisted in claiming that it was not uncommon for reinsurers to make general inquiries on a no-detail basis to see what the appetite would be for the assumption of risk (T 3859), and there is no evidence to the contrary, it seems to me inherently highly improbable that a company in GIO Re's position would write a letter making an in-principle offer without some more specific information about the risk and the transaction.

In my opinion the account exposure to which the letter referred was American Re's exposure under the placement slip. In effect, in my view, Mr Fox offered by this letter to take back a proportion of the top US$40 million relating to the "defined event", which had been included in the placement slip in an attempt to create an element of risk transfer (and therefore genuine retrocession) in the transaction. I do not accept Mr Fox's evidence to the contrary. I have reached these conclusions for several reasons.

First, it is inherently implausible that, on the day that the negotiation of the American Re agreement was finalised, Ms Dunbar would have made a different proposal to Mr Fox for reinsurance cover for the very same remote event as had been negotiated as the "defined event" in the American Re agreement, namely a second US$10 billion Gulf of Mexico hurricane.

Secondly, it is probable simply from the wording of the two documents that they were parts of the same transaction. Both covers were said to be "triggered by the second US$10bn hurricane in the Gulf of Mexico". The cost of the cover offered by GIO Re to American Re (2% rate-on-line) was a very low cost for such a cover, tending to imply that the parties to the agreement regarded the risk of occurrence of the insured event as low. Mr Fox himself conceded that it was an "astonishing coincidence" (T 3858).

Thirdly, the documentary evidence and the evidence given by Ms Dunbar and Mr Yee indicate that American Re was concerned about the proposed defined event exposure right up to 13 November, and that the US and Australian representatives of the company had explored ways of offloading that risk. On the basis of this evidence, and bearing in mind that the placement slip was finalised on the same day as Mr Fox's letter was written, it seems very likely that an arrangement was made with the US office (probably Mr McDermott) and Mr Fox that GIO Re would take back the risk identified in the letter of 13 November. Mr Yee and Ms Dunbar did not have the authority to make such a deal, but it seems from her note that Ms Dunbar was instructed to communicate the proposal to Mr Fox, and she must have done so although she could not remember any such conversation when giving evidence.

Fourthly, I regard Mr Yee's e-mail of 14 November (PTP 1024) as important evidence because it is an approximately contemporaneous record of Mr Yee's understanding of the purpose and effect of Mr Fox's letter, by a person principally involved in the negotiations for the placement slip. It was, according to Mr Yee, a "side letter" to the placement slip transaction. The use of the words "side letter" implies that it recorded GIO Re's offer to take back some of the defined event risk in the placement slip. Mr Yee supplemented this in his oral evidence, when he explained that Mr McDermott told him he had arranged for GIO Re to take back $30 million of the $40 million exposure for the defined event, and he assumed that Mr Fox's letter reflected that arrangement.

Fifthly, Mr Fox's explanation of the letter is highly implausible and contrary to the weight of evidence. His account of the curious wording of the letter, referring to "a certain specific account exposure", is inherently unsatisfactory. If Mr Fox wished to identify some proposal entirely separate from the placement slip transaction, one would expect him to have used language making it clear (as, he said, he had established in his conversation with Ms Dunbar) that the proposal had nothing to do with the placement slip transaction.

Sixthly, Mr Hedley firmly denied Mr Fox's version of the events surrounding his letter. I have no hesitation in accepting his evidence. Ms Dunbar also said she could not recollect any such discussions, although this is less important given her difficulty in remembering relevant matters. Significance of the letter of 13 November 1998

The offer made in the letter of 13 November is an extraordinary one. By that letter, concurrently with the making of an agreement under which the only risk transfer was for an extremely remote "defined event", conjured up to give the agreement the appearance of a true retrocession agreement, GIO Re was collaterally offering to take back most of that risk. The fact that the offer was made in a separate letter suggests that it was a "side" transaction, as Mr Yee said it was, implying that it would not be disclosed to those whose job it was to determine the true nature of the agreement for accounting and regulatory purposes, namely the auditors and APRA. That implication is supported by the language of the letter, which appears on its face to be deliberately obscure ("a certain specific account exposure" and "that specific property account"). There is no other plausible explanation than this. That conclusion is confirmed by Mr McClintock's evidence that he did not see the letter in 1998 (T 1556).

It is not clear from the evidence whether Mr Fox's offer was accepted by American Re. Mr Yee's internal memorandum (PTB 1024) suggests that it was intended that the side arrangement have only a short life, to give American Re the opportunity to cover itself by some third party means. Given American Re contemplated third-party protection, and yet Mr Fox offered immediate cover, the implication is that the GIO Re offer was made so that the placement slip would be finalised urgently. ASIC submitted (written submissions (Fox), para 201ff) that there must have been some very imminent event expected to cause Mr Fox to make his extraordinary offer. ASIC's contention is that the imminent event was the publication of GIO Re's four-monthly results as part of the overall GIO profit performance. The board of GIO Australia Holdings approved the results on 17 November 1998, for announcement to the annual general meeting on that day (PTB 1081). As noted later, the announcement referred to "good profits from reinsurance" and "a sound profit despite exposure to events such as the Swiss Air crash and Hurricane Georges" (PTB 1086). Mr Fox knew, as I have found, the GIO Re's profit calculations for October were on the assumption that the American Re agreement was in place. Thus, in ASIC's submission, the letter of 13 November was written to ensure that the placement slip was signed before the profit announcement that was planned for 17 November, because it was needed to validate the assumptions upon which the profit had been calculated.

My view is that there is clear evidence that those involved in the transaction on behalf of GIO Re regarded it as a matter of great urgency. But there was another reason for urgency, namely that retrocession protection was needed so as to support the profit forecast in the draft Part B statement, which would need to be finalised fairly quickly once the Federal Court's decision on GIO's challenge to the Part A statement was announced. Whether the reason for urgency was the publication of the four-monthly profit or the anticipated publication of the Part B statement does not, in the end, seem to matter. The point is that GIO Re pursued the transaction for urgent reasons and Mr Fox wrote the letter of 13 November so as to close the deal forthwith.

Estelle Elizabeth Pearson, an actuary and partner of Deloitte Touche Tohmatsu, gave expert opinion evidence about the placement slip and Mr Fox's letter. As to the letter, she said that the 2% rate on-line premium quoted by Mr Fox to American Re for the US$30 million excess of US$10 million cover was $600,000. Therefore Mr Fox was offering to take back a major part of the risk (remote though it was) transferred under the placement slip at a premium which was very much less than the amount GIO Re agreed to pay to American Re. ASIC submitted (written submissions (Fox), para 204) that this discrepancy in premium is overwhelming evidence that Mr Fox must have appreciated that the risk of the "defined event" occurring was trifling. He therefore must have understood, according to this submission, that the object of including the defined event top layer cover in the placement slip was to create an illusory appearance of genuine retrocession, so as to persuade the auditors and APRA that it was proper for GIO Re to account for the payments received and made under the placement slip in a way that would preserve the profit forecast. I agree with this submission. The discrepancy between the premium offered in the letter and the premium paid by GIO Re reinforces the finding made above (section 3.23) that the "defined event" cover was included not for any genuine reason of risk protection, but in order to give the transaction an appearance of genuine risk transfer that it truly lacked, so that it would pass muster with the auditors and the prudential regulator. 3.26 Accounting advice on the American Re agreement

By 1994 the practice of writing reinsurance cover involving funding arrangements ("financial and finite reinsurance arrangements") had developed to a degree warranting the attention of regulators. Reinsurance of this kind might achieve several objectives, some legitimate and some less so. It might enable an insurer to "smooth" the burden of anticipated heavy losses in a particular year by spreading those losses over a period of years, by a contract under which the reinsurer would be obliged, for a fee, to meet claims by the insurer in the first year, subject to an obligation on the part of the insurer to reimburse the reinsurer in later years together with interest. Such a contract has the appearance of an advance of funds in exchange for interest and commission, rather than true reinsurance but the accounting treatment of the transaction might seem to depend on which classification is adopted - not only for the purpose of calculating annual profit or loss, but also for the calculation of the prudential ratios to be maintained by an insurer. Further, a contract of this kind could have beneficial tax consequences, in certain jurisdictions, provided it could be treated as true reinsurance.

In 1994 the Australian Insurance and Superannuation Commission (APRA's predecessor) issued a circular to general insurance companies (No G3/94 - PTB 1121) to provide guidelines on its attitude, as the industry's prudential supervisor, to such arrangements. The circular noted that there were also significant accounting issues raised in the reporting of financial reinsurance assets and liabilities, and said that accounting standards and practice should be developed to match the prudential approach set out in the Commission's paper: "For example, if a liability is created by the happening of a particular event it should be brought to account in the financial year".

In its paper, the Commission divided financial and finite reinsurance arrangements into three basic categories, namely reinsurance facilities, deposit arrangements and financing arrangements.

According to the Commission, a reinsurance facility essentially involves payment of a premium by the insurer to transfer a portion or all of a risk to the reinsurer. Some indicia of reinsurance are: · premium charged in line with risk exposure; · agreed payment if the insured event occurs; · no contractual commitment by the insurer to repay the claimed amount, even if repayment in future years was intended; · frequently the reinsurer's exposure is limited; · an agreed timeframe, usually a year.

In a deposit arrangement, the insurer makes an advance payment in excess of any true risk premium, and at the completion of the contract the excess of this deposit over claims may be returnable. Some indicia of a deposit arrangement are: · large premium paid over a period; · interest paid on the amounts deposited; · payment made by reinsurer if the event occurs; · may be associated with a limited exposure by the reinsurer; · commission payment or refund if there is no claim; · the arrangement has an agreed timeframe.

In the case of a financing arrangement, the reinsurer advances funds to the insurer upon the happening of an event, and there is a contractual obligation to repay that amount, or a substantial part of it, over time. Some indicia of financing arrangements are: · small initial facility fee; · payment made if event occurs, and then a commitment to repay; · limited exposure for the reinsurer, because of the contractual payback arrangements; · interest charged by the reinsurer; · collateral may be required by the reinsurer; · the arrangement has an agreed timeframe.

It will be seen that the arrangement reflected in the placement slip of 13 November 1998 had elements of all three categories. The first component of the arrangement, "fully funded" by virtue of the premium requirements, had the appearance of a financing arrangement, or of a deposit arrangement to the extent that the premiums were required to be secured forthwith by letter of credit, but the second component (covering the risk of a second Gulf of Mexico hurricane of more than US$10 billion occurring within 12 months), while identifying a remote risk, might arguably be treated as reinsurance. The "fee" of $7.2 million, charged over the full four-year period, was to be non-repayable and could be interpreted as a risk premium for catastrophe cover. But the arrangement involved setting aside a large premium, paid over the four-year period, and a provision for interest, suggesting a deposit or financing arrangement.

It was important for GIO Re that the distinction between true reinsurance and deposit or financing arrangements would impact on the accounting treatment for the transaction. The question was whether it was permissible, under the accounting standards and proper accounting practice, for GIO Re to take to account, in GIO's financial statements for the year to 30 June 1999, its entitlement to be covered by American Re under the agreement for Hurricane Georges claims received in the year, without being obliged to bring to account in the 1999 year its obligation to repay equivalent amounts to American Re by way of premium in later years.

If this accounting treatment were permitted, then the American Re agreement would protect the profit forecast, because any Hurricane Georges claims that were to be brought to account in the year ended 30 June 1999 in excess of the reserve of A$25 million would be offset, in the same year, by American Re's obligation to make payments under the agreement. But if it was necessary, under the accounting standards or by virtue of proper accounting practice, to "accrue" or bring to account in the 1999 year the obligation to repay American Re in later years, the agreement would have no relevant effect, and the profit forecast would be invalidated to the extent that claims with respect to Hurricane Georges were required to be brought to account in the year to 30 June 1999 in excess of the A$25 million reserve. The issue turned on the proper classification of the American Re agreement - was it a true reinsurance agreement, or a deposit/financing arrangement?

It is plain from the evidence of negotiations for the placement slip, to which I have referred, that the question of proper accounting treatment was identified as an issue by those negotiating on behalf of GIO Re, and acknowledged by the American Re negotiators. Although GIO Re did not obtain any external accounting advice concerning the propriety or effect of the arrangement before entering into the placement slip on 13 November 1998, between 13 November and early December 1998, accounting advice was obtained from three firms of accountants, KPMG, Arthur Andersen and PwC.

Mr Vines gave evidence that statements made by Mr Fox and by the Guy Carpenter representatives, during the negotiations with Guy Carpenter, led him to believe that the retrocession contract would be acceptable to GIO Re's auditors, and he therefore did not think it necessary to consult with the auditors until the contract had been negotiated and signed, and he thought it necessary to have the agreement in place so that the auditors could consider the terms and conditions (T 2789; T 3018). He added that he understood there was a tacit agreement with American Re that the agreement would be abandoned if approval was not received from APRA (T 2790; cf T 2790-1). But the signed placement slip was not provided to PwC until 23 November, 10 days after it was signed. Mr Fox sent it to PwC, after a meeting of Mr Fox, Mr Schneider and Mr Vines on that day. Mr Vines explained in evidence that he wanted "an educated view on the slip", by obtaining an independent opinion before approaching PwC (T 2702).

In my opinion, there is an inconsistency in Mr Vines' evidence here. If he was confident enough not to seek an accounting opinion on the slip before it was signed, why did he consider it necessary to obtain an independent opinion and an educated view (indeed, to obtain two independent opinions) before putting the matter to the auditors? Mr Vines said he wondered whether the terms and conditions of the placement slip with American Re were consistent with the sort of terms and conditions that Guy Carpenter had referred to as acceptable to the auditors of other general insurers (T 2700). But apparently he had that thought only when he received draft advice from KPMG. Weighing up this evidence, my view is that, while Mr Vines received some encouragement from the opinions of Mr Fox and Mr Grove that contracts of the kind that had been entered into on 13 November would succeed as reinsurance contracts, there was an element of uncertainty in his mind, especially as to whether PwC would, as GIO's auditors, allow the proposed accounting treatment of the arrangement. It seems to me probable that he adopted the strategy that he would present PwC with a signed slip reinforced by opinions from other auditors, so as to create pressure at PwC to accept the arrangement, believing that if they did not, American Re would unwind the contract. Unfortunately for him, the strategy did not work because KPMG would not approve the arrangement.

None of the accountants advised directly and without qualification that the American Re agreement could or would be treated as a true reinsurance agreement. It was thought that the top level of cover from US$60 million to US$100 million (the second component) probably involved some element of risk transfer, though not very much, and could be treated as reinsurance. There was a question whether the bottom US$55 million was true reinsurance, or a financing or deposit arrangement. KPMG

On 13 November 1998 GIO's in-house legal counsel, Claudio Battilina, sent an e-mail to KPMG attaching the draft placement slip and asking for an opinion as to whether the arrangement would comply with regulatory requirements as far as risk transfer was concerned. He asked for a preliminary response by close of business on the same day, but the evidence does not indicate whether he received a response on that day. That letter was followed up by an undated letter from Mr Wright (the financial controller of GIO Insurance) to KPMG enclosing a copy of the placement slip after it had been entered into with American Re, and specifically seeking advice as to whether the agreement complied with Australian regulatory requirements for reinsurance contracts, and as to how the contract would be accounted for under the Australian Accounting Standards (PTB 1113).

KPMG supplied Mr Battilina with a copy of the Insurance and Superannuation Commission's circular No G3/94 on 19 November, and on 20 November their draft opinion letter (PTB 1170) was provided to Mr Schneider. KPMG's draft opinion said that the transaction qualified as a split contract, with the reinsurance portion represented by the fee of $7.2 million and the remainder being a deposit arrangement. They referred to some partial guidance for accounting treatment provided by AASB 1023, and expressed the view that the $7.2 million should be accounted for as an outward reinsurance expense over the four-year period, and the remainder of the transaction should be treated as an interest-bearing deposit, that is an asset in the balance sheet - a deposit arrangement under the Commission's classification. This seems to mean that in KPMG's view, the transaction would not protect the profit forecast as intended by GIO Re.

Mr Schneider sent the draft KPMG advice to Mr Vines by facsimile on the same day, with a covering facsimile which said, "we have had a much better response from Arthur Anderson [sic]" (PTB 1168). The evidence includes a transmission report showing transmission on 20 November and 5:19 p.m., endorsed by Mr Schneider with the handwritten words, "Geoff could not read please put in internal mail" (PTB 1169). Mr Vines gave evidence that he tried to read the draft advice late on 20 November, which was a Friday (T 3054), but it was illegible. The section of the draft KPMG advice headed "Conclusion" was not obscured, but Mr Vines denied reading it when he received the facsimile on the Friday evening (T 3054).

Mr Vines was given a more legible draft on 23 November and, he said, he then learned that KPMG did not support the desired accounting treatment, but that Arthur Andersen had a more favourable view (T 2700). He claimed that either Mr Schneider or Mr Fox told him they were negotiating with American Re to find words more acceptable to KPMG (T 2701).

ASIC submitted (written submissions, para 220) that Mr Vines' evidence as to the occasion on which he first read the draft KPMG advice should be rejected. ASIC invited the court to find that Mr Vines was well aware of KPMG's adverse opinion on Sunday 22 November, when he wrote his report for the DDC. In my opinion I would not be justified in rejecting Mr Vines' evidence that he did not read the report. I do not find implausible that, important though he may have regarded it, Mr Vines might have put the facsimile to one side in frustration on the Friday evening, when he found that some parts of the draft opinion could not be read, without turning to the unobscured conclusion. However, it seems to me more likely than not that he would have read Mr Schneider's covering facsimile, which implied that KPMG's advice was less positive that Arthur Andersen's, and therefore that the proper accounting treatment of the American Re agreement was at least problematic or subject to doubt. I agree with ASIC that he understood, on 22 November, that there was a real issue as to whether reliance could be placed on the American Re agreement at all, as protection against adverse development in Hurricane Georges claims. Arthur Andersen

On about 19 November 1998 Mr Wright instructed Arthur Andersen to provide an opinion on the American Re transaction. The letter of instructions is not in evidence but the opinion of Arthur Andersen dated 1 December 1998 is in the tender bundle (PTB 1575).

Arthur Andersen analysed the transaction as one not involving any risk transfer in respect of losses up to US$100 million, but with respect to the layer up to US$150 million, there was a risk transfer in that, in their view, it was possible that GIO would be able to claim recoveries in excess of premiums paid. The opinion focuses on aggregate limits, and seems to imply the same reasoning for individual claims in the layers US$60-100 million and US$5-60 million respectively.

As to the proper accounting treatment of the transaction, they expressed the opinion that, on a "strict reading" of AASB 1023, it would be possible for claims recoveries to be brought to account on the policy as soon as they became probable, while at the same time the relevant insurance premiums would be brought to account as they accrued for each year of the cover. This would result in claims recoveries and the related premium expenses being brought to account in different financial years, resulting in fluctuating underwriting losses. However, the end result over the entire period of the contract would be a net loss to the profit and loss account of US$7.2 million (the premiums payable under the contract), assuming that no claims were made in excess of US$100 million. In effect, Arthur Andersen's opinion was that on a strict reading, the accounting standard would condone an accounting treatment which would allow deferral of the effects of Hurricane Georges over the four years of the contract, and so protect the 1998/99 profit forecast. PricewaterhouseCoopers

PwC had the responsibility of taking a view on the effect of the placement slip, as GIO's auditors. It was necessary for PwC Securities to form a view for the purposes of their report on the profit forecast.

Mr Murray gave evidence (T 1387ff) that, when he received the American Re slip from Mr Fox on 23 November, he tested a range of scenarios under which the contract might respond, in order to determine what the accounting income would be under each of them. He formed the opinion that in each scenario, the accounting outcome would be virtually identical, namely a cost to GIO Re of the administration or management fee charged by American Re, but no other impact on the profit and loss account. This was because, he said, under the contract the liability for the additional premium arose at the time when a claim was made, and normal accounting principles would require that this liability should be recognised in the financial statements. The liability, so recognised, would largely offset the claim recovery.

On 30 November 1998 Mr McClintock sent an e-mail to Mr Murray and Mr Hammond, with a copy to Mr Latham (PwC's actuarial partner), attaching a spreadsheet on the American Re agreement and purporting to set out "our conclusions". He said that the second event part of the cover gave rise to a risk transfer, though it was remote (PTB 1431). He also said that if the company were to take credit for a claim recovery, it would be necessary to take up the additional premium payable, less profit commission, and on this basis there would be a net expense for 1999 of $1.8 million or less. He rejected a contention by Mr Schneider that a recovery could be in year 1 and the additional premium in year 4. Additionally, he noted that the relevant US accounting standard would not allow early recognition of a "profit" where a contract was retrospective.

This appears to mean that, in Mr McClintock's view (and in the views of Mr Murray and Mr Hammond to the extent that his e-mail expressed their opinions as well), if GIO Re made a claim under the placement slip in the year to 30 June 1999, then: · both the entitlement to recover from American Re, and the obligation to pay American Re an additional premium corresponding to the amount of the claim in a later year, would need to be brought into account in the June 1999 year, · consequently the accounting effect in that year would be that the recovery would be cancelled out by the additional premium, and · the only net result for the year to June 1999 would be GIO Re's obligation to pay a fee of US$1.8 million to American Re.

Mr Murray and Mr Hammond discussed PwC's view about the retrocession contract at a meeting with Mr Vines on 1 December. One of them told Mr Vines that in PwC's view the contract would not work in an effective way from an accounting perspective (T 1390; T 2717). They said the mechanics of the contract were such that, to the extent that any claim was made under the contract, it would be necessary to accrue premium payable, and therefore the net effect in the profit and loss account would be nil. Mr Vines presented an alternative point of view, based upon the arguments that Arthur Andersen had communicated to Mr Schneider. Mr Murray and Mr Hammond agreed to think about the matter some more. But Mr Vines said (T 2718) he did not hold out much prospect that they would change their minds. There was discussion at the meeting about Mr Latham undertaking a review of MIPI reserves (T 2718).

It seems to me to follow from this evidence that up to 1 December 1998, Mr Vines believed it was probable that Hurricane Georges losses above $25 million would be covered by the American Re agreement, but from that date he understood that GIO Re would not be permitted to account for the agreement in a way that would protect the $80 million profit forecast from reduction by Hurricane Georges losses greater than $25 million. In cross-examination (T 3061), Mr Vines agreed that 1 December 1998 was the first time he realised it would be necessary to investigate whether unders and overs existed. Any "unders and overs" analysis at 1 December would have to come to grips with the fact that the then current estimate of ultimate gross claims for Hurricane Georges (as at 30 November 1998: PTB 1871A) had risen to $92.8 million discounted, having moved up from $67 million discounted as at the end of October. Discussions about the consequences of PwC's view, and suggested " redundancies"

At that meeting there was some discussion as to whether the forecast could be retained if PwC confirmed their view that the contract did not work. Mr Vines said he believed there were "redundancies" and referred particularly to MIPI (although he did not give them his own "unders and overs" schedule: T 3061-2), and there was a discussion in which the suggestion was made that Mr Latham might undertake a review of the MIPI reserves (T 2718).

Mr Robertson gave evidence that he attended a meeting at about this time, with Mr Vines, Mr Fox, Mr Murray and Mr McClintock (affidavit para 198ff). It may have been the meeting about which Mr Vines gave evidence, or a separate meeting. During the meeting, Mr Robertson said, Mr Fox expressed the opinion that the gross property claims, then at about $55-60 million, contained an element of precautionary claims. Mr Fox informed the meeting, according to Mr Robertson, that he did not believe there was a lot of growth left in Hurricane Georges claims, observing that a lot of the claims could not grow any further because they had reached the policy limits.

According to Mr Robertson, he said, in response to a question by Mr Vines, that if claims had blown out so far, reinstatement premiums would probably be very significant. Mr Vines said he could not recall asking that question, but if Mr Robertson had mentioned reinstatement premiums he would have been interested to know what effect they would have (T 2745). Mr Robertson said that Mr Murray informed the meeting that Mr Latham was looking at the possibility of further redundancy developing in the MIPI account, and Mr Fox said he would ask Mr Schneider for advice on whether there were further areas in the valuation that had been conservative, including especially MIPI and aviation.

Mr Fox gave evidence (second affidavit, para 41; T 3815) that he attended no such meeting. He said he had conducted no analysis of the question of precautionary claims. Although he thought that because of the renewal season, cedants with Hurricane Georges claims might be making claims more quickly than normal, he did not express any opinion on the level of precautionary claims. He said he did not recall telling Mr Robertson that he thought there was not "a lot of growth left" in Hurricane Georges claims. However, because Mr Schneider had told him that the contract-by-contract analysis showed that the "worst-case scenario" was $100 million, he did not in fact expect much more growth in claims and may have said something to Mr Robertson that effect.

ASIC submitted that the court should conclude that the meeting described by Mr Robertson did not occur (written submissions (Robertson), para 71). It drew attention to Mr Fox's evidence and noted that the occurrence of the meeting was not put to Mr McClintock or to Mr Vines in cross-examination. But the terms of the conversation to which Mr Robertson deposed were put to Mr Murray, who said he could not recall the conversation but could not deny that it occurred. It seems to me, on balance, that there is sufficient evidence to conclude that the meeting occurred. Probably Mr Fox attended it, as the views attributed to him were views that he held, and it would be likely that PwC would want Mr Fox to participate in discussions on such matters held in early December 1998.

On 3 or 4 December, and in any case before the DDC meeting on 6 December, Mr Hammond or Mr Murray informed Mr Vines that Mr Latham had undertaken a review of the MIPI reserves and had reported back that, in his opinion, there was a surplus of at least $34-35 million, but it would be necessary to have the agreement of GIO management that there was a redundancy in the MIPI reserve before it could be used to counteract the ineffectiveness of the American Re contract (T 2735-6; PTB 1477). Mr Vines said he was confident that this agreement would be forthcoming, believing that the people who would need to agree were Mr Fox and Mr Robertson (T 2737). Mr Vines said that when he had this discussion, he still believed that the reinsurance profit forecast was achievable without reliance on the American Re contract, because in addition to the surplus identified by Mr Latham, which related to the early years of MIPI, Mr Vines believed from his experience in the accounting profession that there was a redundancy in respect of the later years of MIPI (T 2737).

PwC were developing their attitude to the American Re placement slip contemporaneously with the negotiations between GIO Re and American Re for revision of the slip. Mr Schneider approached American Re after a series of meetings with PwC, to say that PwC were proving "somewhat hesitant towards this type of contract", and he asked American Re to provide some information on booking methods (PTB 1438).

Eventually, at their meeting with GIO Re executives on 7 December 1998 (discussed below), PwC made plain that in their opinion, the accounting standards did not permit GIO Re to use the American Re agreement to produce the intended benefit. Their advice was accepted by the DDC. Notwithstanding that outcome, the defendants signed representation letters and the A$80 million profit forecast remained in the Part B statement in its final form. One of the key questions in this case is whether there was any proper basis for maintaining the profit forecast after the PwC advice effectively removed the supposed security bracket of the American Re agreement. That leads to an investigation of "redundancies" and the "unders and overs" calculations by Mr Vines and Mr Robertson. Before those questions are considered, it is necessary to return to the narrative of events during the month of November, after the making of the American Re placement slip on 13 November. 3.27 Due diligence documentation, November 1998

In this section I shall bring together the evidence about the due diligence questionnaires and "sign-off" documentation, and other information provided to the DDC by Mr Vines and Mr Robertson in November 1998.

On 10 November 1998 Mr Vines sent a memorandum to various GIO executives including Mr Robertson, concerning the Part B statement (PTB 0905). He said that it was necessary to include, in that statement, material changes in the financial position in GIO since 30 June 1998 and any other information material to the making of a decision by a GIO shareholder whether or not to accept the AMP offer, being information that had not previously been disclosed to GIO shareholders. He said that in order to identify matters which might or should be disclosed in the Part B statement and to ensure that the statement complied with the law and was not false or misleading (whether by omission or commission), the company had embarked on a due diligence process and a due diligence committee had been formed. He said that part of the process involved the completion by senior management of a due diligence questionnaire, a copy of which he attached to his memorandum. He also enclosed some materiality guidelines, and asked recipients of the memorandum to complete the questionnaire urgently by no later than 12 November.

The due diligence questionnaire commenced with an explanation of the takeover process and the provisions of the Corporations Law governing disclosure in a Part B statement, liability and defences. It explained that the due diligence questionnaire was designed to enable GIO's directors and advisers to prepare information for inclusion in the Part B statement and to ensure that the statement complied with the relevant legal requirements, gave rise to appropriate liability defences, and was not false or misleading.

Due diligence questionnaires were completed by Mr Vines and Mr Robertson. It appears that Mr Vines' questionnaire (PTB 0906), which is not dated, was completed on 10 November (T 2652). In answer to the question whether the business had complied with the actuary's recommendations for reserves, Mr Vines said "where applicable". In answer to the question whether any catastrophe claims had been advised in the period since 1 July 1998 where significant judgment had been exercised in the establishment of the likely loss, he identified, inter alia, Hurricane Georges. In answer the question whether all issues relevant to the profit forecast, assumptions and sensitivities had been disclosed in the representation letter provided to the GIO board with respect to the forecast, he said "yet to see" (because the representation letter had not been provided: T 2655). In answer to the question whether there were any other issues which should be considered by the GIO board for disclosure in the Part B statement, he said "no". In answer to the question whether there were any "significant contracts entered into or pending", he said "alternative forms of retrocession are under active consideration", and he gave evidence (T 2652) that in saying so, he was talking about the American Re cover.

ASIC submitted (written submissions, para 177) that when he answered the due diligence questionnaire, Mr Vines knew that the $80 million profit forecast could not be achieved if the ultimate loss to GIO Re for Hurricane Georges exceeded the reserve of $25 million, subject to the possibility of any shortfall being made up in other areas of GIO Re's business. In my view the documentary evidence establishes that this is correct, regardless of my findings as to Mr Schneider's evidence of his conversations with Mr Vines. I note, in particular, the first quarter highlights (PTB 0597) in which Mr Schneider questioned whether the forecast should be maintained in light of Hurricane Georges; Mr Schneider's e-mail of 20 October 1998 (PTB 0604) where he stated the assumptions upon which the forecast was based; PwC's draft report on the first quarter's figures dated 22 October (PTB 0619) in which attention was drawn to the potential impact of Hurricane Georges; Mr McClintock's e-mail of 4 November 1998 (PTB 0729) where he considered the achievability of the forecast; Mr Robertson's memorandum of 4 November 1998 (PTB 0762) where he set out the basis upon which he believed the forecast was achievable; and the meeting with Mr Lange in which differences between Mr Robertson and Mr Schneider with respect to the forecast were aired. These were all matters known to Mr Vines through his participation or reading of relevant documents. But ASIC's qualification about making up the shortfall in other areas is important. Mr Vines' evidence of his "unders and overs" schedule must be taken into account, and additionally, it is plain from the terms of his answers that Mr Vines took into account that the American Re contract was under active consideration and, indeed, he said in another context (T 2664-5) that by 11 November he knew that resolution of the cover was close.

It appears that Mr Vines completed and dispatched his answers to the due diligence questionnaire before meeting with Mr Schneider and Mr Driessen to discuss the October results on the following day, 11 November. It is not clear from the evidence whether Mr Vines received information as to the development of Hurricane Georges claims up to 31 October before the meeting on 11 November, and if he did, whether he received it before completing the due diligence questionnaire. Mr Vines' evidence is that his call from Mr Schneider, when Mr Schneider reported on the October results and gave him some "broad detail" and talked about the adverse development of Hurricane Georges (T 2659), may well have been earlier on 11 November. It is therefore not clear whether, at the time when Mr Vines handed in his completed due diligence questionnaire, he was aware of Mr Schneider and Mr Driessen's model which predicted, as at 31 October, ultimate loss in respect of Hurricane Georges of $69 million undiscounted and $67 million discounted, and which therefore showed that the reserve of $25 million was no longer adequate and that the profit forecast might have to be reviewed. Since Mr Vines did not refer to these developments in his answers to the due diligence questionnaire, where it would have been relevant to do so, the correct conclusion on the balance of probabilities is that he was unaware of the 31 October figures at that time.

ASIC submitted (written submissions, para 183) that if Mr Vines did not know these matters when he handed in his due diligence questionnaire, it must follow that he completed his answers at a time when he was ignorant of whether the dispute between Mr Robertson and Mr Schneider had been resolved. This is because Mr Vines gave evidence (noted above) that, while he did not specifically follow up the resolution of the dispute, he assumed that the disagreement had been resolved when he saw the figures in the 31 October model.

Mr Robertson completed his questionnaire (PTB 0917) on 10 November, in a hotel room in Boston. He described his position as "executive director - GIO Insurance Ltd" with his areas of responsibility including "reinsurance" (PTB 0919).

In answer to the question whether there had been any material change in external factors affecting GIO with reference to various matters, including economic conditions, Mr Robertson made an attachment to the questionnaire in which he said, under the heading "economic conditions" that there had been changes in market rates of interest and currency rates of exchange which were reflected in valuations made at 30 September 1998 and had been taken into account in the revised profit forecast. In the same attachment, against the heading "significant contracts", he wrote "None other than retrocession protections for Reinsurance".

In answer to the question whether there had been or was planned to be any significant change in the reinsurance protections for the business, Mr Robertson referred to discussions taking place with retrocessionaires with a view to implementing a new whole account protection for Reinsurance to be effective for 1 January 1999.

In answer to the question whether there had been any change in accounting policies, practices or procedures since 1 July 1998, including amongst other things changes in the methods used to establish prudential margins, Mr Robertson replied "No".

In answer to the question whether provision had been made for claims where notification of the claim had been made by a policyholder or cedant, Mr Robertson referred to an attachment which discussed the potential claim in relation to Karaha.

In answer to the question whether the business had complied with the actuary's recommendations with respect to reserves, he said that outstanding claims provisions and other reserves were determined by management without formal actuarial advice, and that he believed the provisions made in GIO Re's profit reporting for the quarter to 30 September, and for profit forecasting, were appropriate and included suitable prudential margins.

In answer to the question whether any catastrophe claims had been advised in the period since 1 July 1998 where significant judgment had been exercised in the establishment of the likely loss, he identified, inter alia, Hurricane Georges.

In answer to the question whether all issues relevant to the forecast, assumptions and sensitivities had been disclosed in the representation letter provided to the GIO board with respect to the forecasts, he said he had not seen the final form of the representation letter, but that all relevant issues had been extensively discussed with the Group chief financial officer, the external auditors and Mr Lange.

In answer to the question whether there were any other issues that should be considered by the GIO board for disclosure in the Part B statement, he answered "no".

Mr Robertson gave evidence (affidavit para 174) that he expected any outstanding issues concerning the profit forecast to be clarified before the representation letter referred to in the questionnaire was prepared and signed, and therefore the outstanding issues would be dealt with in the representation letter to the extent necessary.

On 10 November 1998 Mr Robertson also signed a "senior management sign-off" letter (PTB 0928), in which he said that to the best of his knowledge, information and belief, the answers given in the due diligence questionnaire were true and correct in respect of that part of the GIO Group business and affairs for which he had responsibility. The letter said that he had drawn the attention of the DDC to any other matters of which he was aware occurring since 1 July 1998 which he considered might be material to a decision by a GIO shareholder whether or not to accept AMP's takeover offer. It said he was not aware of any other matter of such nature which he had not already drawn to the attention of the due diligence committee or set out in responses to the due diligence questionnaire.

A GIO board member asked two additional questions with respect to GIO Re, not included in the due diligence questionnaire signed by Mr Robertson. On 10 November Mr Vines sent an e-mail to Mr Fox (PTB 0940) saying it would be "logistically simpler" for Mr Fox, rather than Mr Robertson, to respond to those questions. The questions were whether there were any material reinstatement or retrocession premiums arising since 30 June 1998, and if so, whether the impact of those premiums had been incorporated into the profit forecast. Mr Fox referred the query to Mr Schneider, who replied to Mr Fox by e-mail on 10 November (PTB 0939), copied to Mr Vines and Mr Robertson, by referring to a $160 million "sleep easy" retrocession cover for a cost of $22 million which had been factored into the first-quarter results, and he said that at that stage he was unable to predict whether the whole account cover then under negotiation with American Re would result in a cost saving or an increased cost. He concluded the e-mail by saying: "I think it is important for Frank to respond as he has never asked for my sign-off in respect of the due diligence."

The copy e-mail was received by Mr Robertson in Boston. He responded on the same day, by e-mail to Mr Schneider copied to Mr Fox and Mr Vines (PTB 0941). He said an assumption had been made in the forecast that the overall net cost of retrocessions would be the same in 1998/99 as in 1997/98, and he gave reasons supporting that view. He said that the external auditors agreed with this approach, but had pointed out that if the due diligence process were to drag on until more information about the 1998/99 retrocession program became available, it would be necessary to re-visit the projections. Mr Robertson explained (affidavit para 172) that he did not respond to the director's second question, about reinstatement premiums, because he inferred that this was not the issue on which Mr Schneider had asked for his comment, but he said he agreed with Mr Schneider's reply on that subject. Mr Vines said that this e-mail string was provided to the DDC in answer to the query that had been raised, and he regarded it as a comprehensive response (T 2656). 3.28 Mr Robertson's responsibilities after his return from Boston

Mr Robertson gave evidence (affidavit para 175ff) that after he returned from Boston on 18 November 1998 he had very little to do with GIO Re. He said that he received very few e-mails and memoranda and no one reported to him. In oral evidence he added (T 3116) that from his office, he saw through the glass petitioning that many of the people who had reported to him while he was executive director proceeded down the corridor and into Mr Fox's office, including Mr Schneider, Mr Fricke, Mr Burton and Annemie Pelletier. He said he did not take part in the drafting of any paragraphs in the Part B statement concerning catastrophe claims (T 3116-7). In his affidavit he mentioned, by way of exception, the two memoranda he received from Mr Schneider dated 20 November 1998 (PTB 1161 and PTB 1163) and an e-mail from Mr Vines dated 19 November 1998 (PTB 1158) asking him to quantify the effect on the profit forecast of a 5% increase in gross written premiums and a 1% increase in loss ratios, and to confirm the source of the $9.7 million to which he had referred in the meeting on 4 November. He said he discovered after his return that while he was in the United States, work had been done to use the new valuation model to produce a profit result for the month of October, but he was not involved in that process and was not consulted about it.

Mr Robertson's evidence was that shortly after he returned from Boston, he had a meeting with Mr Steffey who made him responsible for two special projects, relating to reorganisation of GIO's subsidiaries (affidavit para 180). Mr Robertson then had numerous meetings and reviewed papers, and eventually made recommendations to Mr Steffey. On 20 November, after he had started that work, Mr Schneider came to see him and gave him the two memoranda of that date (PTB 1161 and PTB 1163), to provide some "covering text" for the valuation material he had given Mr Robertson on 4 November. Mr Robertson said (affidavit para 187) that he did not take a great deal of notice of the memoranda because he was no longer concerned with day-to-day matters in GIO Re, but he checked that the figures were the same as in his memorandum to Mr Vines on 4 November. He said he did not notice that in the first memorandum, Mr Schneider had suggested he had identified and corrected the source of the mismatch error and the problem with the prudential margin. Mr Robertson gave evidence (affidavit para 188) that he did not believe this to be correct.

Mr Robertson said (affidavit para 189) that at some time after his return from the United States Mr Schneider gave him a copy of the document I have called "the HG table", saying: "You might be interested in this. This is a spreadsheet I prepared for Tim while you were away".

According to Mr Robertson, Mr Schneider did not claim that the document was the result of any contract-by-contract analysis. Mr Robertson said he did not consider the document to be of any importance because he was aware, by that time, that retrocession cover with American Re was in place. ASIC challenged Mr Robertson's evidence on that matter (written submissions (Robertson), paras 18-19). I have decided that Mr Robertson's evidence should be rejected to the extent that it implies that he did not realise that the document shown to him was a summary of the results of the contract-by-contract analysis. I have found elsewhere (section 3.16) that Mr Schneider referred to the contract-by-contract analysis, then nearing completion, in the meeting of Mr Robertson, Mr Fox and Mr Schneider that took place on 5 November at the suggestion of Mr Lange. Therefore, notwithstanding Mr Robertson's evidence to the contrary, I have reached the conclusion that Mr Robertson was aware of the contract-by-contract analysis and the broad shape of its conclusions on 5 November, before he left for Boston. That makes it probable that he realised, when he saw the HG table, that it was a summary of the result of that analysis.

Mr Robertson said (affidavit para 218) that following his signing of the letter of representation and management sign-off on 7 December, he ceased to have any involvement whatever in GIO Re, confining his attention to the special projects given to him by Mr Steffey. He said Mr Steffey arranged for him to be interviewed for the position of group chief actuary of GIO, while indicating that if the position did not appeal to Mr Robertson he would make Mr Robertson redundant with a substantial redundancy payment acceptable to him. Mr Robertson saw Mr Vines and Mr Fox virtually every day until 17 December, at breakfast meetings with Mr Steffey, and at one of those meetings Mr Vines or Mr Fox told him that the American Re retrocession contract was being redrafted. Mr Robertson said he was not involved in the re-drafting, and he was not involved in Mr Schneider's further attempts to use the new valuation model to produce a profit result for the month of November. Mr Robertson went on holidays on 18 December and was away until 3 January 1999.

There is no adequate ground for rejecting Mr Robertson's evidence of these matters. It should be noted, however, that limited actual involvement in work relating to the Part B statement and the profit forecast is quite consistent with the continuation of responsibility for the reinsurance forecast, a responsibility that was confirmed by the events of 7 December. 3.29 GIO's board meeting and annual general meeting on 17 November 1998

The board of GIO Australia Holdings met on 17 November 1998 (PTB 1032 (agenda); PTB 1081 (minutes)). It considered a report from the chief executive officer, Mr Steffey, as to results for the four months ended 31 October 1998 (PTB 1039). The report appears to be based on work prepared by Mr Vines, but there are some differences (T 2691). On the subject of reinsurance, the report noted a four-month result of $30.2 million, said to be slightly behind the budget of $37.9 million (these figures do not quite reconcile with the figures used by Mr Schneider in his commentary in the first quarter highlights because Mr Schneider's commentary did not include the profit contribution to the reinsurance operations made by a subsidiary, GIO UK: T 2752-3). This was followed by the remark: "Space returned to profit in October and a strong result was posted by property catastrophe". The report noted that "Tim Fox is firmly in control and Frank Robertson is supporting him in the transition". That sentence was not in Mr Vines' draft.

Mr Vines agreed in cross-examination (T 3037; and see T 3014) that the statement that there was a strong result in property catastrophe depended upon the American Re agreement being effective, subject to the capacity to fall back on an "unders and overs" analysis, but he said he had no reason to believe that the agreement would be ineffective, bearing in mind what he had been told by the Guy Carpenter people. He said he could not recall whether the board was told that the result depended upon the efficacy of the American Re agreement. He also said (T 3037-8) that at the time, he did not understand that the consequence of the American Re agreement would in substance have been (if effective) to defer the 1999 claims loss to later years. I do not accept this evidence, for reasons given in my analysis of Mr Vines' similar evidence with respect to his understanding of the first draft Guy Carpenter placement slip.

The board also considered a report from the chief financial officer, Mr Vines, who tabled the latest draft of PwC's review of the 1998/99 profit forecast (PTB 1042), which was said to be close to finalisation. Under the heading "Inwards Reinsurance", the PwC draft noted and explained the $80 million profit forecast and recorded work that had been done in assessing the forecast. PwC noted the assumptions for the 1998/99 forecast, which included a 33% profit on net catastrophe premiums, based on the assumption that no major catastrophes (being events with a market loss in excess of US$10 billion) would occur in 1998/99. The draft referred to Mr Robertson's memorandum of 4 November 1998, and concluded that there were inherent difficulties in forecasting the results of any reinsurance business, and therefore it was necessary to ensure that appropriate disclosure would be made in the Part B statement to ensure that shareholders would be aware of the uncertainties inherent in the budgeting process.

PwC's draft opinion on the forecast was that performance of the space and catastrophe portfolios in the first quarter would make the full-year budget for those portfolios difficult to achieve, although PwC acknowledged that the attritional property book had performed well in the first quarter, a reassessment of the MIPI contract had the potential to lead to additional profits, and changes in retrocession arrangements under consideration could alter the risk profile of the business. Under the heading "other issues" PwC's draft noted that the first-quarter result had assumed that GIO's exposure to Hurricane Georges would be 0.6% of the then market loss estimate of US$2.55 billion, that is to say A$25 million. One of the "judgmental issues" relating to the forecast was recorded as "catastrophe and space first-quarter adverse performance".

The minutes of the meeting (PTB 1081) record that the board approved the results of the Group for the four months ending 31 October 1998, and also that the board noted that the fee for retrocession cover of $150 million excess $5 million for catastrophe events had been reduced. There is nothing to indicate that the operation and effect of the American Re agreement was explained to the board, or that the board was told that the agreement had been entered into without accounting advice or auditor approval.

On the same day, 17 November, the annual general meeting of shareholders of GIO Australia Holdings was held. In his address to the shareholders, GIO's chairman (David Mortimer) expressed disappointment in the results in the previous financial year for the reinsurance division which, he said, reflected a rapid deterioration in claims experience and necessitated a major strengthening of reserves for outstanding claims. Mr Steffey also addressed the meeting, saying that in the first four months of the new financial year a sound profit had been achieved in the reinsurance business, despite exposure to major disasters such as the Swiss air crash and Hurricane Georges, and that steps had recently been taken to reduce the volatility of the reinsurance business.

On the same day, GIO Australia Holdings announced to the stock exchange a pre-tax profit for the first four months of 1998/99 of A$88 million. In the media release for that purpose (PTB 1086), approved by the board, Mr Steffey's remarks to the AGM about sound profit in the reinsurance business were quoted, and he was also quoted as saying, "This impressive result reflects GIO's diversification of reinsurance risk and its financial strength". Mr Vines gave evidence that he reviewed the press release before it was considered by the board and was broadly happy with it (T 2693). He said he felt that some other press releases to the market had been too upbeat and told Mr Steffey so, but his opinions tended not to be acted upon (T 2693). 3.30 Some noteworthy events in the second half of November 1998 Mr Fox's absence overseas

Mr Fox left Sydney for London on 14 November 1998 and returned to Sydney on 22 November 1998, resuming work on the following day. He denied having any telephone conversations with Mr Schneider or others from Sydney when he was overseas. DDC meeting, 16 November 1998

The DDC met on 16 November 1998 (PTB 1011 (agenda); PTB 1025 and 1217 (minutes)). It appears that the previous meeting was on 4 November, and a contemplated meeting on 9 November did not occur (T 2650). The meeting considered an issues paper which identified issues arising out of the responses to the questionnaires (PTB 1012). Under the heading "Significant changes in reinsurance protection" the paper made reference to GIO's discussions with retrocessionaires with a view to implementing new whole account protection for reinsurance as from 1 January 1999, but the paper did not expressly refer to the American Re agreement of 13 November. Under the heading "catastrophe claims advised since 1 July" Hurricane Georges was mentioned. The following also appeared in the paper: " Compliance with actuary's recommendations with respect to provisions for outstanding claims : In respect of reinsurance, outstanding claims provisions and other reserves are determined by management without formal actuarial advice. External actuaries have commented upon the adequacy of those provisions after the event. In Frank Robertson's opinion the provisions made in DAL's [semble, GIO Re's] profit reporting for the quarter to 30 September 1998 and for profit forecasting are appropriate and include a suitable prudential margin".

The DDC noted the information provided by Mr Robertson and Mr Schneider responding to the director's question as to whether any material reinstatement or retrocession premiums had arisen since 30 June 1998. The Committee considered that, to the extent that current covers implied a cost greater than that included in the budget, there would be compensating errors that would reduce the net effect of the apparent understatement of costs to about $4 million. The Committee also noted that management had advised it was likely that savings in retrocession costs would be derived from renewal of cover effective 1 January 1999 (PTB 1219). Mr Schneider's memoranda of 20 November 1998

Mr Schneider prepared a memorandum for Mr Robertson dated 20 November 1998 (PTB 1161), in which he set out figures recasting the first-quarter profit after addressing issues relating to matching and the prudential margin. The memorandum included a table showing a revised first-quarter profit of $15.6 million.

By a second memorandum to Mr Robertson of the same date (PTB 1163), Mr Schneider re-computed the business plan for 1998/99 on the basis of interest rates applicable as at September 1998. The earlier business plan ("version 4", attached to Mr Schneider's memorandum of 22 September 1998, PTB 0516) had used interest rates as at 30 June 1998. This re-calculation reduced the overall projection by $14.2 million, down to $65.8 million, because using a lower interest rate resulted in a restatement of the prudential margin, and reduced the investment income earned in the period. In that memorandum Mr Schneider also compared the actual business profit with the business plan for the first quarter, and noted that there was a shortfall of approximately $15 million, and he said "you may wish to consider this fact when assessing whether the full-year projection is appropriate".

In the text of the second memorandum Mr Schneider said that the memorandum should be read as "the accompanying text to the table I provided to you on 4th November". In his affidavit evidence Mr Schneider said that the results recorded in the two memoranda of 20 November 1998 were set out in a number of schedules that he had provided to Mr Robertson on 4 November. This evidence is supported by the fact that the figures in Mr Robertson's memorandum of 4 November for "Business Plan 1st Quarter Profit" and "Actual 1st Quarter Profit", by class of business, are identical with the figures (adjusted to reflect re-calculations, in the latter but not the former case) set out in the memoranda of 20 November. Mr Robertson's evidence, dealt with at 3.15 above, confirmed that the information in Mr Schneider's two memoranda of 20 November was available to him for the purposes of his memorandum of 4 November. But Mr Robertson said, as noted above, that on later reflection he detected some errors in Mr Schneider's calculations. DDC meeting, 23 November 1998

Mr Vines sent a report by e-mail to members of the DDC on 22 November 1998, headed "Part B Forecast Clearance Commentary" (PTB 1178), in which he substantially reiterated the views as to the profit forecast for GIO Re that had been set out in Mr Robertson's memorandum of 4 November. He supported the $80 million profit forecast for 1998/99. Under the heading "Inwards Reinsurance", he pointed out that the reserves for outstanding claims of $2.2 billion totally dominated any discussion of reporting profits, explaining that an adjustment of 5% to the claims reserves would impact the reported results by $110 million, and that the total reserves included $1.4 billion for IBNR. He explained that under GIO Re's new accounting policy, no profit would be recognised on current year premiums relating to the attritional portfolios, but instead profit would emerge from the release of income of prior accident years based on ultimate loss ratios applying to those years.

As to the catastrophe portfolio, he said: "PWC have raised for debate whether or not the forecast results from the Catastrophe portfolio of $29.7 m and Space of $14.0 m are achievable given the high level of events that occurred in the first quarter. Frank Robertson has concluded we can reasonably expect better claims experience for the remainder of the year because the seasonal factors affecting the first quarter have abated and we expect to reduce our exposure to catastrophes through improved retrocessions and the shedding of unprofitable business in the January renewals process. Frank Robertson is of the view that Space will produce a result of $6m and that the shortfall will be made up from favourable development of the MIPI outstanding claims where for example, a favourable variance on claims paid in the first quarter of $6 m was not released to profit."

He noted that the forecast assumed no movement in the level of prudential margin, despite the fact that the fall in interest rates in the first quarter suggested that GIO's mechanistic method would require a further $10 million prudential margin, with a consequent charge against its forecast profits. He noted that possible errors and omissions in the forecast would suggest a net overstatement of profit of $4 million, but that this was immaterial and almost certainly not real, as it relied on an assumption that retrocession costs would be the same as for the 1998 year.

Mr Vines gave oral evidence (T 3055) that the e-mail was "the summation of the situation up to that point", written in preparation for the meeting the next morning. The views he attributed to Mr Robertson were the comments made in Mr Robertson's memorandum of 4 November (T 2706); yet on 11 November he had learned that the estimated ultimate loss for Hurricane Georges was $69 million undiscounted and $67 million discounted, as at 31 October. Those figures implied that Mr Robertson's opinion was at least partly wrong (T 3055).

As to the American Re agreement, he said (T 3056) that at the time he wrote his report he did not understand that its effect was to defer losses from net Hurricane Georges claims above $25 million to later years (evidence that I have rejected in other contexts). He said he wrote the report on Sunday 22 November, and did not receive a legible form of KPMG's draft advice, to the effect that the American Re retrocession agreement would not achieve the desired accounting outcome until 23 November or later (T 2707). He was asked to explain why the report did not mention the doubts that had arisen about the American Re cover, and whether he would have written the report differently if he had received KPMG's draft advice before writing it. He said the report would not have been different, and he did not refer to doubts about the efficacy of the retrocession, because the American Re contract was still under negotiation, and if it proved ineffective, there were redundancies in MIPI and elsewhere that would be available to compensate (T 2707).

Mr Vines concluded the report, after reviewing other businesses, by observing (PTB 1181) that the Group profit forecast included elements that were conservative and elements that were less conservative, and that the pre-tax forecast was reasonable at $246.9 million and could easily be rounded up to $250 million. He said when he wrote those words he had in mind that the forecast had been rigorously reviewed; his unders and overs material had yet to be drawn upon; work had been done on the prudential margin; the risk profile of the reinsurance operation would be changed as from 1 January; and a more comprehensive retrocession program would be put in place as from 1 January (T 2708).

According to the minutes of the DDC meeting held on 23 November 1998, Mr Vines spoke to his report (he confirmed in oral evidence, T 2709, that it was his report at PTB 1178) and drew attention to some flaws that had been discovered in the methodology for determining the prudential margin for inwards reinsurance, and the consequences of the decline in interest rates which had increased the prudential margin by approximately $10 million. I infer that his comments on these matters reflected Mr Schneider’s two memoranda of 20 November. The minutes indicate that there was discussion as to whether a correction of a deficiency would be a change in accounting policy, but it was thought that the variation of $10 million was not material. Mr Vines then advised the meeting that a review of the basis for establishing prudential margins across the Group was likely to establish, on a Group basis, that prudential margins were excess to requirements.

The Committee recommended, on Mr Vines' advice, that a comment be made to the effect that the GIO prudential margin policy was conservative and would be reviewed (at the time, Trowbridge was preparing a discussion paper on that topic: T 2714), and Mr Vines subsequently prepared a draft (Exhibit D1, tab 177; T 2715). Mr McClintock told the Committee that the most significant issues for PwC related to inwards reinsurance, and that PwC was reviewing some adjustments to the forecast provided by Mr Vines, as well as the results to 31 October.

The minutes contained no reference to the October 1998 results for GIO Re, the American Re agreement, or the estimate of Hurricane Georges losses contained in the catastrophe model discussed at the meeting on 11 November 1998. Mr Vines did not assert in evidence that he raised any of these matters at the DDC meeting. I infer that none of them were raised or discussed at the meeting. Mr McClintock's telephone conversation with Mr Fox, 24 November 1998

Mr McClintock wrote a file note dated 24 November 1998 (PTB 1206), recording a telephone conversation he had with Mr Fox at about that time, to discuss the results of the meeting of Mr Fox and Mr Robertson with Mr Schneider, which had taken place at the instigation of Mr Lange. He said in evidence that his practice was to prepare a file note of conversations he considered important, and that he sought to record as much as he could of the conversation with Mr Fox in his note (T 1547-8). At the time, Mr McClintock had not seen Mr Schneider's memorandum of 8 November 1998 (wrongly dated 8 September 1998), and at his request Mr Fox faxed it to him after their conversation (T 1548).

Mr McClintock recorded the following matters: · according to Mr Fox, Mr Schneider had raised only one concern at the meeting, relating to the future development of Hurricane Georges; · Mr Fox informed Mr McClintock that GIO had recently taken out further excess of loss cover which would give protection against any new event in excess of $5 million and also cover further deterioration in Hurricane Georges in excess of $15 million and that Mr Murray of PwC had details of the cover; · Mr Fox commented that he thought this cover was a good idea, as he was concerned that anything might "come out of the woodwork" before he had a chance to review the reinsurance operations; · Mr McClintock asked Mr Fox specifically whether anything had come to his attention, during the period he had been with GIO, which would suggest that the profit forecast of $80 million would not be met, and Mr Fox said he was not aware of any issue that would impact on the forecast.

Mr Fox's evidence of the conversation (first affidavit, para 133) is not materially different, except that he said Mr McClintock did not refer to the $80 million profit forecast or any of the background matters recorded in the note, and he disagreed with the note to the extent that it suggested he was present at the meeting on 5 November. He said he must have received, by that time, Mr Schneider's memorandum of 8 November 1998 (PTB 0842), and he did not deny faxing a copy of the memorandum to Mr McClintock. He said (first affidavit, para 136-7) he was not aware of any difference of opinion between Mr Schneider and Mr Robertson as to the profit forecast or that Mr Schneider had said that a "warning" should be placed on the forecast or that it should be reduced.

I prefer Mr McClintock's evidence about the content of his telephone conversation with Mr Fox to the evidence given by Mr Fox, to the extent that they are in conflict. Mr McClintock's evidence is supported by the file note, which I regard as reliable contemporaneous evidence of what was said. That conclusion is significant in several ways. First, as I have already said, the file note supports my conclusion that Mr Fox attended the meeting with Mr Robertson and Mr Schneider on 5 November. Secondly, the file note establishes that Mr Fox and Mr McClintock discussed the $80 million profit forecast, and shows that on 24 November Mr Fox was aware that PwC was concerned about whether anything had come to his knowledge which undermined the achievability of the forecast, and (I infer) looked to him because of his position.

ASIC submitted (written submissions (Fox), para 95) that, if the court were to find (as I have) that Mr Schneider told Mr Fox at the meeting on 5 November that he believed Hurricane Georges was likely to be a $100 million type event, then the court should conclude that candour required Mr Fox to advise Mr McClintock of Mr Schneider's view. I do not agree with that submission. At the time of their telephone conversation, the American Re agreement was in place and Mr Fox obviously regarded it as effective, judging from the file note. While there may have been some ambiguity as to the upper limit of single-event protection, the upper limit was at least US$100 million, a figure comfortably in excess of the $100 million in Australian currency that had been identified by Mr Schneider. It is clear from the file note that Mr Fox told Mr McClintock that Mr Schneider was concerned about the further development of Hurricane Georges. It was reasonably open to Mr Fox to take the view that Mr Schneider's quantification of the claim was not a matter bearing on whether the forecast would be met, given the retrocession that had been arranged.

By the time of the telephone conversation with Mr McClintock, Mr Fox had sent a copy of the American Re placement slip to Mr Murray (PTB 1187). KPMG had supplied Mr Schneider with a copy of their draft opinion (PTB 1170) but the opinion by Arthur Andersen had not been received and PwC had not yet expressed their view about the efficacy of the agreement. Federal Court judgment, 25 November 1998

The Federal Court handed down its principal judgment on 25 November 1998. For Mr Vines and GIO's Part B team, this meant it was necessary to put the Part B Statement into the hands of shareholders by 16 December, and since a substantial time would be taken up in the printing and mailing process because of the large number of shareholders involved, there was effectively only a week or 10 days for finalisation of the document (T 2712). GIO Insurance management committee meeting, 25 November 1998

As previously noted, a management committee meeting of GIO Insurance was held on 25 November 1998 (PTB 1278 – minutes). Mr Fox was chairman of the meeting. The previous meeting, held on 12 October 1998, had been chaired by Mr Robertson and, of course, Mr Fox was not present (PTB 1284A - minutes).

According to the minutes, and to the evidence of Mr Fox (second affidavit, para 38), Mr Robertson was in attendance. However, Mr Robertson gave evidence (affidavit paras 191-192) that he did not attend and the minutes are incorrect. He said he had a luncheon meeting with Mr Steffey and two others, which is also referred to in his diary (PTB 2380) and that he returned to his office at around 3 p.m. (T 3443). His diary recorded management committee meetings on 25 November and 16 December but according to Mr Robertson, those entries appeared in the diary because they were made earlier in the year when he set up the management committee, and he had not bothered to remove them.

Mr Robertson's evidence at the hearing was inconsistent with the evidence he had previously given in his s 19 examination. At that time he had said that he was "sure I went along to it to introduce Tim" (Exhibit P11, p 272), although he did not "specifically recall attending" (Exhibit P11, p 373). He said in his oral evidence at the hearing that he had a "clear recollection of not going to the meeting" following his luncheon meeting (T 3545), but on the other hand he did not have "a very clear recollection" of walking back to the office and he had "no immediate recollection" of what he did when he arrived there (T 3445).

In my opinion the correct conclusion on this evidence is that Mr Robertson attended the meeting but has subsequently forgotten he was there, and has persuaded himself from his diary entry for the luncheon, the fact that he was not copied in on the original notice of the meeting (T 3545), and his belief that he would not have wished to interfere with the way Mr Fox conducted such matters (T 3545), that he must not have been there. I am influenced by the fact that the best objective evidence is the minute of the meeting, which says that he was there. Mr Fox's evidence was unpersuasive because he seems to have confused the management committee meeting of 25 November with a meeting of Mr Fox and Mr Robertson with Mr Schneider and other GIO Re executives on 5 November (T 3790-3791; see Mr Robertson's written submissions, para 190).

My finding that Mr Robertson was present at the meeting probably does not have any substantial significance. I do not believe it shows any excessive tendency to reconstruct rather than recollect. The significance of the question was said to be that some important information (noted below) was imparted at the meeting by Mr Fricke (ASIC's written submissions (Robertson), para 66). But Mr Robertson conceded in cross examination that he was likely to have been aware of the main components of that information in any event - he "may very well have known" that there had been $57 million worth of property claims (T 3449), and he was either aware of Mr Fricke's figures about the breakdown of the claims or was aware of later updates (T 3449-50).

According to the minutes, Mr Schneider presented a report to the 25 November meeting in which he said that any worsening of claims resulting from Hurricane Georges should be eliminated by the new reinsurance agreement. Mr Schneider's report, dated 23 November 1998, is in evidence (PTB 1288). He recorded the purchase of a reinsurance contract from American Re, and said that "this contract protects any further deterioration in Hurricane Georges beyond the current levels." The report showed a loss of $1.8 million for the month of October for the property class of business. It recorded incurred claims for Hurricane Georges to October of $26.9 million, and said that "any further worsening of Hurricane Georges is assumed to be contained within the reinsurance purchased."

Mr Fricke presented a report in which he said that claims for Hurricane Georges had reached $57 million for property and $25 million for marine "at present" (presumably as at 25 November: PTB 1280).

It seems to me more likely than not that the written report of Mr Schneider (and also the report by Mr Fricke, discussed above in relation to the Hurricane Georges register) were circulated to members of the management committee, including Mr Fox, with the agenda, which is in evidence (PTB 1284), prior to the meeting of 25 November 1998, given that Mr Schneider's written report is dated 23 November and Mr Fricke's report is dated 11 November. But the evidence before me would not support a finding that the report was sent to Mr Robertson.

Thus, by virtue of his attending and chairing the management committee meeting on 25 November, Mr Fox became aware that Mr Schneider was proceeding on the basis that any worsening of claims resulting from Hurricane Georges should be eliminated by the new reinsurance agreement, and that the claims for property for Hurricane Georges had reached $57 million. Since Mr Fox was aware that the OP Re retrocession agreement limited marine claims to about $8 million, he was consequently aware that the net Hurricane Georges claims stood at $65 million on 25 November. DDC meeting, 27 November 1998

The DDC met again on 27 November 1998 (draft minutes at PTB 1487; confirmation at PTB 1593). There was discussion of Hurricane Georges and the Committee passed a resolution on the basis that it was an event occurring in the normal course of GIO's reinsurance business of which account had already been taken in the four-monthly results to 31 October 1998, which had been released to the ASX on 17 November. Mr Vines tabled an amended draft of the profit forecast, forecasting operating profit, before abnormal items and tax, of $250 million (PTB 1373ff; T 2715). Mr McClintock of PwC reported that his firm was reviewing the October figures and had identified some issues in relation to reinsurance, which they were discussing with relevant personnel within GIO. Business plan, version 6

Mr Schneider and the Technical Services team completed version 6 of the business plan on 27 November 1998 (PTB 1392). This involved re-running the business plan model, and showed an expected profit of $68 million for the 1998/99 financial year. This was $2.2 million higher than the figure provided to Mr Robertson on 4 November of $65.8 million. 3.31 Investigation of "areas of conservatism" in early December 1998

Mr Schneider gave evidence (first affidavit, paras 185-186) that on about 2 December 1998, after he had provided Mr Fox with the final copy of GIO Re's results and the October valuation report, they had a conversation in which Mr Fox asked him to look at "areas of conservatism" in the profit projection, so that he could answer questions being asked by the DDC. Clearly enough, the instruction was to look at the upside only. In his first affidavit (para 144 and 145), Mr Fox said that in giving this instruction to Mr Schneider, he was passing on a direction from Mr Vines, which specifically noted China Airlines and MIPI. He disagreed with parts of Mr Schneider's version of their conversation. Nothing turns on the differences in their accounts of the conversation. Mr Vines said he had no clear recollection but he believed that he probably did ask that this work be done, because on the previous afternoon he had been told by PwC that the American Re contract was unlikely to work and he had discussed redundancies with PwC (T 2727).

On the same day, Mr Schneider sent a memorandum to Mr Fox (PTB 1467), headed "Particular Areas of Conservatism". In the memorandum, Mr Schneider said he looked at the valuation process after his discussion with Mr Fox that day, and identified three areas. First, having reviewed expected loss ratios for the underwriting year 1998 and prior years, Mr Schneider said that $39m of profit would emerge in the reporting year ended 30 June 2000, from those earlier years. Secondly, as regards the aviation catastrophe involving China Air, the valuation model contained IBNR of approximately US$10m, and in Mr Schneider's view, further reductions in IBNR would be appropriate. Thirdly, as regards MIPI, Mr Schneider recorded some of the history of accounting for MIPI coverage, noting that a "step-down clause" had been removed in 1993 and in that year there was a US$45m deductible, the deductible becoming US$70m in 1994.

The evidence includes a facsimile transmission form dated 2 December directed to Mr Hammond of PwC and signed by Ms Irvine, Mr Fox's secretary, on his behalf, which said "As discussed in our telephone conversation, attached is memorandum". There is a similar facsimile to Mr Vines, except that it said "as discussed" rather than "as discussed in our telephone conversation". Mr Fox said (first affidavit, and para 146) he had no telephone conversation with Mr Hammond, did not dictate the facsimiles, did not cause the memorandum to be sent to Mr Hammond or Mr Vines, and did not instruct Ms Irvine to sign the facsimiles. He said in cross-examination that Ms Irvine acted irresponsibly in signing the fax to Mr Hammond without authority, and he said he believed Mr Schneider dictated the fax to her and asked her to send it out in Mr Fox's name (T 3867). This evidence is highly implausible and I reject it. The memorandum had been provided to Mr Fox at his request; no reason was identified for Mr Schneider wanting to send it on to Mr Hammond under Mr Fox's name; and no reason was given to explain why Ms Irvine, who was the secretary of Mr Fox and Mr Robertson, would have collaborated in doing so without authority.

GIO Re's internal actuary, Mr Latham, prepared a report for Mr Murray of PwC dated 3 December 1998, at Mr Murray's request (PTB 1477). GIO Re had previously calculated and used reserves for the MIPI treaty which included IBNR based upon an analysis which apportioned to GIO Re a share of the total treaty, rather than a calculation based on GIO Re's own claims experience. In an earlier report, dated 12 August 1998, Mr Latham had expressed the opinion that the IBNR had been set at a high level when compared with GIO Re's claims experience, though he said he was reluctant to suggest that the reserve as at 30 June 1998 should be reduced on this ground.

In his 3 December report Mr Latham reviewed the IBNR figures used for the purpose of calculating reserves for underwriting years up to 1991/92, and compared those figures with GIO Re's claims development during that period. He found that the claims experience for the period was $8.7 million while the IBNR for the same period was $57.4 million. He said that on the basis of these figures, he had become more strongly of the view that the IBNR estimates for the underwriting years up to 1991/92 were likely to have been significantly overstated, and that a reserve for those years of $20 million, as at 30 June 1998, would be considered reasonable. Adoption of this view would lead to a reduction in reserves, after discounting, of $34 million. Mr Latham noted that he had not reviewed the IBNR for the years 1992/93 and later, although he expressed the opinion that the IBNR estimate was "strong" when compared with developing claims experience.

Mr Murray's evidence was that in February 1999 Mr Latham reviewed the work of Mr Schneider on his MIPI model and formed the view that there were potentially further surpluses within MIPI reserves of the order of $30 million (T 1475). PwC reported to the Board Audit Committee in February 1999 (Exhibit D11) that a refinement to the model (Mr Murray said (T 1474) that was a reference to Mr Schneider's model) in the current period, together with favourable experience, had resulted in the release from the MIPI reserves of approximately $32 million. The report also expressed the view, based on an analysis of results, that there were potentially further surpluses within the MIPI reserves of the order of $30 million.

GIO Re's model for calculating liability for MIPI had been created by Mr Schneider. Mr Murray gave evidence about the operation of the model (T 1476-1474). He said that by October 1998 the actual claims experience was significantly at variance with the level of reserves that were being carried, but at that time the reason was not clear (T 1468). Eventually, however, it was discovered that Mr Schneider's methodology was incorrect (T 1471). Mr Murray explained the error in the model, which essentially was that it had assumed, incorrectly, that GIO Re had the same proportions of exposures to each of the big six accounting firms.

Mr Robertson submitted (written submissions, para 418) that in the second half of 1998 Mr Schneider adopted an intransigent position with respect to the accuracy of the MIPI model. He always took the view that no further MIPI reserves should be released (T 0863). In cross-examination he denied that there was an error in the MIPI model (T 0930) and said he did not recall Mr Latham recommending a further release of reserves in February 1999 (T 0929). There is evidence that in 1998 he held a different view from Mr Latham (T 0927-8). Their difference of opinion appears to me to of been at a technical level and the evidence is not allow me to say that Mr Schneider's approach was intransigent at the time, although the developments in February 1999 seem to suggest that Mr Latham was wrong in resisting the release of MIPI reserves.

Mr Schneider gave evidence (T 0453) that he had a conversation with each of the three defendants on the subject of MIPI, in November or December, in which he referred to the fact that PwC had come up with a different estimate from his own for MIPI, and expressed the opinion that while PwC's estimate was not impossible, he thought his Department's approach and results were appropriate.

As I shall explain, at a meeting with representatives of PwC on 7 December 1998, Mr Fox said the ultimate net loss for Hurricane Georges would be $60-65 million. That meant that, taking the lower end of that range, the Hurricane Georges loss was an "under" of A$35 million - that is, A$35 million in excess of the A$25 million reserve that had been made for the purposes of the profit forecast. If the American Re retrocession contract could not be relied on, it was necessary on Mr Fox's figures to find "overs" of A$35 million in order to maintain the profit forecast at the same level.

The evidence includes an undated single-page document headed "Unders & Overs GIO Profit Forecast" (PTB 1604). It is a schedule prepared, on a Group basis, by Mr McClintock of PwC and presented to the DDC meeting of 8 December, evidently relying on the $60 million loss estimate for Hurricane Georges but finding "overs" to match it, in the MIPI contract. I shall consider Mr McClintock's schedule in further detail when I come to consider the DDC meeting of 8 December. 3.32 Due Diligence Committee meeting, 6 December 1998

A meeting of the DDC was convened for Sunday 6 December 1998. The Committee had before it a draft of the Part B statement and Due Diligence Committee Report dated 3 December 1998. They were also provided with another draft of PwC's report to the Committee reviewing the profit forecast, which had been altered to say (at PTB 1551) that the first-quarter result for the catastrophe portfolio had assumed that GIO's exposure to Hurricane Georges would be A$25 million, being 0.6% of a total market loss estimate of US$2.55 billion; but that up to 31 October 1998, claim notifications for Hurricane Georges had increased to $65 million, and this increase suggested that "the 33% profit assumption used for this portfolio is no longer appropriate". There was a notation after this sentence, indicating that this statement was to be discussed with the DDC on 6 December 1998.

The Committee was also provided with a draft of the independent expert's report by Grant Samuel, under cover of a memorandum from Macquarie Corporate Finance dated 4 December 1998 (PTB 1580). The draft described GIO Re as a significant international reinsurance business with a strong position in niche markets. The draft recorded the view of GIO Re management that forecast earnings for 1999 understated the core profitability of the business, and that further earnings growth could be expected beyond 1999. It attributed a valuation to GIO Re of $1-$1.2 billion and valued GIO shares at $5.66-6.72 per share, in comparison with a notional value for the AMP bid of $4.88 per GIO share. Mr Fox claimed (first affidavit, para 152) that he did not see this document prior to the commencement of the present proceeding. I have no reason to disbelieve him on this point.

With respect to sign-offs by senior management, the DDC noted some changes in personnel, including that "Tim Fox had assumed responsibility for the areas for which Frank Robertson was formerly responsible" (PTB 1594). The committee resolved that, inter alios , Mr Fox be required to execute a formal sign-off, and that the sign-off statements executed by Mr Fox and Mr Robertson be suitably amended to take account of the changes in control of their respective areas of responsibility and the dates on which those changes occurred.

According to the minutes of the DDC's meeting of 6 December (PTB 1593), Mr Hammond of PwC raised two issues. The first was whether the profit forecast should be updated to refer to figures as at 30 November rather than 31 October. The Committee was advised that the 30 November 1998 figures were not yet available, and it resolved not to change from the 31 October figures.

The second issue related to Hurricane Georges. Mr Hammond noted that the forecast had assumed that claims in respect of Hurricane Georges would not develop beyond $25 million. To the end of October 1998, claim notifications were approximately $20 million. He said that by comparison with prior catastrophes of the nature of Hurricane Georges, the current level of claims notifications indicated that claims in respect of Hurricane Georges could rise to the order of $60 million. According to the minutes, Mr Steffey commented that the existence of the AMP bid may have caused a number of entities to make early claim notifications to GIO. He also said that GIO had entered into a retrocession contract to protect it from claims in excess of $25 million.

The minutes noted that a question had arisen as to the accounting treatment of the retrocession contract, as to whether the premium for that contract should be brought into account in the 1999 accounting year or in a subsequent year. This was apparently the first time that the committee was told there were doubts about the American Re contract. It was noted that PwC had requested GIO management sign-offs confirming the availability of a redundant provision in MIPI, and Mr Vines had advised that he was confident that these sign-offs would be forthcoming. Mr McClintock gave evidence (T 1628) that one of the PwC representatives said "in words of one syllable that we wouldn't accept it [the American Re agreement] from the point of view of being reinsurance", and that one of the other members of the DDC, Marina Darling, said "well, why did we enter into it if it's not going to be effective?" Later, Mr McClintock observed that PwC from time to time made inquiries of GIO's staff about claims notifications for Hurricane Georges (T 1638). 3.33 The Terrigal meeting

There was a "leaders' meeting" of the executives of the GIO companies in Terrigal on Sunday 6 and Monday 7 December 1998. Mr Schneider called it a "management love-in" (T 0454), and Mr Vines explained, more specifically, that it was intended to be used to convey the strategies that McKinseys had developed, and also as a time for GIO executives to get to know one another (T 2739). Amongst those attending were Mr Steffey, Mr Vines, Mr Robertson, Mr Fox and Mr Schneider. Mr Steffey and Mr Vines did not arrive until shortly after 2 p.m. on 6 December, because they had to attend the DDC meeting in the morning, but they were in time to attend the first session.

Mr Robertson said that at the business session on Monday 7 December Mr Steffey arranged for the executive directors to sit at the front of the room facing the audience, and he insisted that Mr Robertson sat with the executive directors (affidavit para 201). Each executive director (except one) gave a PowerPoint presentation on the future organisation of his company consequent upon the McKinseys review of the Group. Mr Robertson said he sat silent throughout these presentations. Mr Schneider's evidence about conversations at Terrigal

Mr Schneider gave evidence that at the beginning or end of one of the conference sessions, Mr Robertson or Mr Fox asked him to leave the meeting room so that they could have a discussion with him. He said that Mr Robertson, Mr Fox and Mr Vines were present during most of the discussion, and Mr Steffey was present during some of it.

Mr Schneider's account (T 0455) of a part of the conversation in which Mr Vines participated was as follows: Schneider: "I’ve done enough of the analysis for November - we are not finished the November results - to see that the attritional book is moving in a way that will produce a loss for November." Vines: "You don’t need to complete the November analysis." Schneider: "Well, we’re only a few days away and we should be able to complete it." Vines: "You don’t need to complete the analysis and I don’t need a report on this from you. I am sure you have lots to do."

Mr Schneider gave evidence of another part of the conversation, but said he could not specifically recall who was present, though his recollection was that each of the three defendants was there during most of the conversation, while Mr Steffey took a telephone call and was away for longer. His account of the conversation (at T 0456) was as follows: Robertson, Fox or Vines: "How are we going with Am Re and the auditors? Schneider: "Things are progressing smoothly with American Re and we should have a slip to re-sign soon. PwC have not said no to American Re, although they are giving stronger and stronger signals, so that I believe now they will not sign off. KPMG have effectively said no, and Arthur Andersen said maybe, but their advice is somewhat ambiguous. Without American Re, Hurricane Georges is going to develop into the hundred-million-plus event I predicted when I completed my contract-by-contract analysis, in fact, claims to the end of November are $85m. Therefore, it is not really a question of if Georges will materialise." Robertson, Fox or Vines: "How can Hurricane Georges be so big?" Schneider: "That is what my contract-by-contract analysis said. It's consistent with the increase in size of the GIO book in my analysis of aggregates that we did at June. I don’t even think that the $45m projection is achievable now because of Georges, because of the re-cranking of the projection for 68 and the direction the attritional book is heading." Robertson, Fox or Vines: "The MIPI reserves are overstated and PwC agree." Schneider: "I’m happy with the methods and results that we’ve produced. I understand that PwC have a different estimate, but I think our method is appropriate. I discussed this with Chris Latham and we have eventually agreed to disagree." Robertson, Fox or Vines: "These are your views and you should not discuss the projection in Georges with the auditors. You included this in your report in October and it was very unhelpful and we do not want to go through that again." Schneider: "Well, even without Georges in the projection, the attritional book is heading …." [And then, Mr Schneider said, the former part of the conversation, with Mr Vines, took place.]

According to Mr Schneider, Mr Steffey was present when Mr Schneider asked: "If PwC are not signing off on the contract, then what is the point of re-signing the American Re slip?" Mr Steffey replied: "We should re-sign the American Re slip, because it will give the directors comfort." The evidence of Mr Vines, Mr Robertson and Mr Schneider about conversations at Terrigal

Mr Vines said he could not recall speaking to Mr Schneider, but it was likely that he did because there were many social occasions built into the conference program. But he denied that Mr Schneider said anything to him at Terrigal which conveyed that he believed that Hurricane Georges would materialise as a $100 million event (T 2739), or that claims to date totalled $85 million and there was no doubt that it was a material event, or that he had conducted a contract-by-contract analysis (T 2740). Mr Vines said that if Mr Schneider had said any such thing, it would have been a very significant piece of information and he would have spoken to Mr Fox and Mr Robertson to get their view, and then considered redundancies in the manner that had in fact occurred with PwC (T 2741).

Mr Vines said he did not tell Mr Schneider not to complete the November analysis, but he may have referred to the DDC's decision on 6 December that the November numbers were not going to be considered in the context of the Part B Statement (T 2741). He said he had no reason to ask Mr Schneider how things were going with the American Re contract and the auditors, since he had had discussions with the auditors himself (T 2741).

Mr Robertson denied being present at any part of the conversation to which Mr Schneider referred. However, he gave evidence (affidavit paras 202-203) of a conversation he had with Mr Schneider during a sandwich lunch on the beach near the conference hotel, as follows: Schneider: "They have told me not to finish the November valuation." Robertson: "I am not surprised, because no-one could have confidence in the results produced by the unreliable monthly valuation program."

Mr Fox said (first affidavit, para 156) that while he was at Terrigal he may have met Mr Schneider socially but could not recall doing so, and he did not have any discussion with Mr Schneider about business. He denied calling Mr Schneider away while any of the presentations was in progress, or having the discussion to which Mr Schneider deposed. He repeated that the only time prior to 7 December that Mr Schneider spoke of his analysis of the impact of Hurricane Georges on GIO Re was on 9 November when Mr Schneider said that the "worst-case scenario" was $100 million. He denied knowing anything about a report Mr Schneider had prepared in October or any problems in such a report. I reject the last two matters, in light of my findings that Mr Schneider told Mr Fox and Mr Robertson on 5 November that he believed Hurricane Georges was going to be a $100 million type transaction, and that the purpose of the meeting on that day was to seek to resolve disagreement between Mr Robertson and Mr Schneider partly reflected in the first quarter highlights. I shall consider, below, whether to find that conversations took place at Terrigal as deposed to by Mr Schneider. ASIC's submissions about conversations at Terrigal

ASIC made extensive submissions (written submissions, paras 280-287) to persuade the court to prefer Mr Schneider's evidence of the conversations at Terrigal to the evidence of the defendants. The submissions addressed Mr Vines' point that he had no reason to find out from Mr Schneider what progress had been made with the auditors about the American Re contract, and Mr Vines' evidence that Mr Schneider had not said anything to him about deterioration in the attritional book.

ASIC pointed out that Mr Schneider had been receiving copies of the Hurricane Georges register e-mails, and that the total gross claims had reached $89.7 million on 4 December (PTB 2496). Mr Schneider was conducting day-to-day negotiations with American Re for a revised placement slip and was involved in attempts to obtain favourable accounting advice. The Arthur Andersen letter of advice was received on 4 December. The implied submission is that Mr Vines had every reason to approach Mr Schneider for an update in light of these matters.

ASIC drew attention to Mr Richardson's internal e-mail (PTB 1428) reporting on discussions with Mr Schneider about the revised placement slip, in which he responded to various questions that had been asked by Mr Walker. One of his answers was: "2. Hurricane George loss estimates are currently US $60.0 m i.e., US $45.0 m to this account."

ASIC contended that, since US$60m equals A$100m, this e-mail provided objective evidence that by 30 November Mr Schneider understood that GIO Re was likely to make a claim on American Re of US$45m (after allowing for the US$15m excess), that is a claim of A$75m. That meant that by 30 November 1998, Mr Schneider must have understood that if the American Re agreement was not effective, the profit forecast would be reduced from $80 million to $5 million, subject to any unders and overs process. According to ASIC (written submissions, para 284), the likely cost of Hurricane Georges must, in these circumstances, have been "a matter that was screaming concern and urgency to Mr Schneider" by 6 and 7 December. Consequently, according to the submission, there was a very high probability that Mr Schneider would have discussed the issue with his superiors during the leaders' conference.

ASIC's submissions also addressed the position of Mr Vines and the other defendants. By the time of the Terrigal conference, they were confronting the immediate need to sign off on the profit forecast for the purposes of the DDC and board meetings that were imminent, and the issue of the Part B statement. Their deadline was driven by the requirements of the Corporations Law, which set the timetable for the lodgment of a Part B statement. That timetable had been re-started after the handing down of the Federal Court's judgment. ASIC submitted that the information that Mr Schneider had conveyed would be the very last thing that Mr Vines would have wished to hear, because if he acted on it, the Part B timetable would probably be delayed. That would put Mr Vines in the position where he might have to take the blame for derailing the process, and might have to admit that he had gambled on the efficacy of the American Re solution and had lost.

ASIC submitted (written submissions, paras 364-365) that the court should find that Mr Vines was either present during the conversation to which Mr Schneider deposed, or subsequently learned what Mr Schneider had to say. It contended that Mr Schneider's evidence that he was told by Mr Vines not to prepare November results should be accepted. It argued that such a statement would follow logically from Mr Vines telling Mr Schneider about the decision of the DDC on the day before not to include November figures in the Part B statement. Findings about conversations at Terrigal

It seems to me, on balance, that there is insufficient evidence for me to conclude that any of the defendants participated in a discussion at Terrigal in which Mr Schneider said the things he claimed to have said. They all strenuously denied that they did. In effect, ASIC invites the court to find in favour of Mr Schneider's version on the ground that there was such a pressing need for Mr Schneider to have a discussion with the defendants (especially Mr Vines) that it must have occurred. But Mr Schneider's evidence of the conversation is in some respects vague. He was not able to say which defendants said the things he attributed to one of them, and was unsure about when Mr Steffey and Mr Vines departed. According to his evidence the conversation had a number of components, to some of which ASIC's submissions do not apply.

Mr Vines' evidence, that if Mr Schneider said he had conducted a contract-by-contract analysis and that he believed Hurricane Georges would materialise as a $100 million event, Mr Vines would have regarded it as a very significant piece of information and would have acted on it in various ways, seems to me to be plausible. His evidence that he did not instruct Mr Schneider not to complete the November analysis but may have told him about the DDC's decision of 6 December that the November numbers would not be used in the Part B statement, was plausible, as was his evidence that he had no need to ask Mr Schneider about the American Re contract and the auditors since he had recently had discussions with the auditors himself.

Of course, the discussion might have taken place with Mr Fox and Mr Robertson without Mr Vines being present, but on ASIC's submissions it was Mr Vines that Mr Schneider would be most anxious to consult. All things considered, I do not regard the inference that ASIC asks me to draw as being compelling in the sense identified by Sir Anthony Mason in Hksar v Lee Ming Tee & Securities and Futures Commission .

I accept Mr Vines' evidence that he told Mr Schneider, on some occasion during the Terrigal meeting, that the DDC had decided not to require November numbers for the Part B statement, in circumstances where the inference was probably created that Mr Schneider should give priority to other things. 3.34 November results

Mr Schneider sent an e-mail to Mr Vines, copied to Mr Fox and others, on 11 November 1998, seeking guidance about the timetable and work priorities as regards the November valuation report (PTB 0958). Mr Schneider gave evidence that the Technical Services Department worked on the November results between 1 December and 11 December. They extracted information concerning claim movements by valuation class and underwriting year, breaking the figures down for poorly performing years and for individual cedants and individual claims that had been performing poorly. Based on his review of that information, Mr Schneider had formed some conclusions about the direction of GIO Re's results for November, and expected it would be a poor month.

On or before 11 December, Vu Pham, one of the Technical Services team, produced a document called "GIO Re Analysis of Results", which was the revenue account generated by the valuation model for November, before reinsurance recoveries or adjustments for aviation (PTB 1871). Mr Schneider reviewed the document and made some handwritten adjustments, to reflect the fact that aviation losses were covered by the special reserve, and to reflect a recovery from a retrocession contract for space losses. He also increased the result for property catastrophes by $25.1 million, to adjust for the American Re cover for Hurricane Georges losses. The net effect of these adjustments was that the operating loss of GIO Re for November 1998 was $12.2 million.

However, no final profit report or valuation for November 1998 was ever produced. As previously mentioned, Mr Schneider gave evidence that Mr Vines instructed him not to prepare a November 1998 valuation report, and that he should not discuss the matter with PwC. The evidence includes a file note (PTB 0942), endorsed in red ink under an earlier file note dated 10 November 1998, which was in dark blue ink (Exhibit P19). The date appears to be 9 December 1998. It is headed "Terrigal", and says: "Discussed Georges at leaders meeting. Explained where/why numbers heading north at $100 m. Frank/Geoff/Nick - Asked not to produce November month end !!! First time. Greg." Mr Schneider said in evidence that " Frank/Geoff/Nick" referred to Mr Robertson, Mr Vines and Mr Steffey, and that although his note does not refer to Mr Fox, his recollection is that Mr Fox also participated in the discussion.

Mr Schneider made another file note (PTB 1872), which he said he prepared on 11 December 1998. It stated that he had produced a result showing a loss of $12.2 million for November 1998, which was not fully "accurate" because it was calculated at opening rates of exchange. He noted that the calculations had assumed that Hurricane Georges was still covered by American Re "but we have strong signals from PCW [semble, PwC] that this won’t stand". The file note said that adding back Hurricane Georges would produce a loss of $40 million, but if Hurricane Georges was not covered by the American Re contract there would be a further reduction of $32 million resulting in a loss of $72 million for November. It also said: "I have passed this up the chain (Tim, Frank, Geoff) who said they do not need a November result". Mr Schneider's evidence was that in February 1999 he added the following sentence just before that statement: "If not covered then further $32 => result of $-72 for November."

Mr Vines’ evidence was that no-one ever raised with him the absence of November final results (T 2725). I have decided, on balance, to accept Mr Vines' evidence that he did not instruct Mr Schneider not to prepare November figures. It seems to me plausible, as Mr Vines said in evidence, that he might have referred to the DDC's decision, on the previous day, not to update the profit forecast by recourse to the November figures and to rely on the figures as at 31 October. It is plausible to infer that Mr Schneider misconstrued an indication from Mr Vines that November figures were not needed for the Part B Statement as a direction not to finalise the November figures at all. Mr Robertson's statement to Mr Schneider, according to Mr Robertson's evidence, seemed to confirm that November figures were not to be completed at all, but Mr Robertson was probably not involved in decision-making on such matters, by early December, and might simply have accepted what Mr Schneider told him.

Mr Vines presented to the board meeting on 8 December some "flash" figures because, he said, final figures were not available and the board was meeting earlier than usual so as to meet the Part B timetable. There is evidence to indicate that at an earlier time, he was preparing to report to the board on the November financial performance. Thus, on 2 December he wrote to the executive leadership team reminding them of the need to prepare a monthly commentary on key activities and events in their respective areas of responsibility, in anticipation of the board meeting on 8 December, while recognising that many of the divisions would not have firm November numbers (Exhibit D1, tab 185; T 2725-6).

On 4 December 1998 Mr Fox sent Mr Vines a short document headed "November highlights - GIO Re". In his first affidavit (para 150), Mr Fox said he prepared that note in response to a verbal request from Mr Vines to submit a page of "non-financial November highlights". Mr Vines said he did not have such a conversation and that Mr Fox was responding to the e-mail of 2 December, and he pointed out that he was not asking for "non-financial November highlights" but for a commentary on the business ( T 2726). In his second affidavit (para 17), Mr Fox said he did not recall receiving Mr Vines' e-mail of 2 December but it was likely that he did, and he conceded the possibility that his recollection that he was asked to submit a page of "non-financial" November highlights was incorrect and that his memorandum of 4 December was written in response to Mr Vines' e-mail. But nevertheless, he said, at the time he prepared the memorandum it was his understanding that it should deal with non-financial November highlights. 3.35 The events of 7 December 1998

After they returned from Terrigal on the afternoon of 7 December, the three defendants met with Mr Hammond, Mr McClintock and Mr Murray of PwC. Senior counsel for ASIC described this as PwC's "final sign-off meeting" with the senior executives of GIO Re.

Mr Vines gave uncontradicted evidence that he was not there for the whole meeting (T 2742). I accept this.

Mr Robertson said that he did not know there was to be meeting with PwC until they appeared with Mr Vines (T 3173-4), nor did he know what the meeting was about (T 3175). He said (affidavit para 206) that as they were going into the meeting he was shown Mr Latham's memorandum concerning MIPI dated 3 December 1998 (PTB 1477, discussed above). I have no reason to doubt his evidence of those matters.

Mr Fox said in his first affidavit that the meeting of executive directors with the lawyers to execute the sign-off documents occurred before the discussion with PwC, but Mr Vines said that the meeting with PwC came first (T 2751), as did Mr Robertson in his affidavit. That seems to me more likely.

According to Mr Hammond, who opened the meeting, the issues were to obtain an update on Hurricane Georges after the discussion at the DDC meeting on the previous day, to consider the American Re contract in light of PwC's opinion that it was not in substance an effective retrocession contract, and to obtain management's view of the quantum of the potential redundancy in the MIPI claims reserves in light of claims development after 30 June 1998. Mr McClintock raised some other issues concerning the wording of one of the key assumptions in the forecast, and the draft management representation letter, which need not be explored here. Mr Murray's file notes

Mr Murray made file notes of the meeting (PTB 1660). He said he prepared the notes on the morning after the meeting, at a time when he had a firm recollection of what had been discussed (T 1393).

Mr Fox was recorded in Mr Murray's notes as having said that a detailed review, contract by contract, had shown that the maximum potential loss from Hurricane Georges was $105 million. That is not the outcome of Mr Schneider's contract-by-contract analysis. The only maximum in fact suggested by Mr Schneider's work, according to the HG table (PTB 0884), was a figure of A$211 million.

According to the notes, notifications to date were $60-65 million, up from $27 million. Mr Murray did not expressly say that it was Mr Fox who made this statement, but the sentence, though in passive voice, immediately follows a sentence attributing a statement to Mr Fox. I think the correct implication is that according to Mr Murray, Mr Fox made the second statement as well.

According to the notes, one of the defendants said it was management's view that the uncertainty surrounding GIO following the takeover bid was prompting cedants to notify claims early and on a precautionary basis, and one of the defendants said at the meeting that management's best estimate of the ultimate liability was $60 million to $65 million.

Mr McClintock referred to an "unders and overs" schedule he had prepared, which showed PwC's opinion of the adjustments that needed to be made to the forecast, the total net adjustment being a reduction of $14 million, not material in the context of the Part B statement. He took into account an adjustment to the MIPI reserves. Mr Murray's notes recorded that Mr Robertson expressly supported Mr Latham's approach to the adjustment of reserves, and that PwC was informed that although Mr Schneider preferred a different valuation method, he had accepted the validity of Mr Latham's approach. Oddly, Mr Murray said in oral evidence (T 1472) that he did not believe GIO's senior management had seen Mr Latham's 3 December memorandum. Given the contents of his note, I think his recollection in oral evidence was faulty.

According to Mr Murray's notes, Mr Vines said that management remained of the view that the American Re contract was a valid reinsurance contract that should be accounted for in a certain advantageous manner, but PwC's contrary view was noted and it was recorded that the DDC had been made aware of this. The evidence of Mr Vines and Mr Robertson about the discussion of the Hurricane Georges loss

Mr Vines was present during the discussion of Hurricane Georges at the 7 December meeting, according to his own evidence (T 2742-2747). He was taken to Mr Murray's notes in his evidence in chief. He said that he recalled something being said at the meeting to the effect of what was recorded by Mr Murray under the heading "Hurricane Georges" and that Mr Fox had made the statements about Hurricane Georges recorded by Mr Murray (T 2743). Mr Vines said this was the first time he had heard that notifications had reached $60-65 million, an increase from the October figures that he had considered on 11 November, but he thought what Mr Fox said about the ultimate liability was broadly in accordance with the ultimate net loss that had been estimated as at October, because the ultimate net loss would take into account reinstatement premiums and retrocession recoveries including the recovery for marine losses under the OP Re contract (T 2744). He said he left the meeting after the discussion of the subject matter of the first of the two paragraphs in Mr Murray's note under the heading "MIPI Contract", which (according to the sequence of the note) was at a later point in the meeting.

Mr Vines gave evidence (T 3089-90) that if he had known the later numbers (referring to the Status of Registered Events report as at 30 November 1998, PTB 1444, which showed that Hurricane Georges claims had risen in November by 39%) when he heard Mr Fox's best estimate of $60-65 million at the meeting on 7 December, he would have required proof of the basis upon which the estimate had been determined.

Mr Robertson gave evidence (affidavit para 208) that Mr Fox told the meeting: "Hurricane Georges property claims notifications to date are $60-65 million. The maximum potential loss is $105 million. We are firmly of the view that the impending renewal season, and market uncertainty surrounding the AMP bid and the future of GIO Re are causing cedants to submit claims more quickly than usual, and on a precautionary basis. While further development cannot be ruled out, our best estimate of the profit impact of Hurricane Georges property losses is $60-65 million."

It will be noted that according to Mr Robertson, Mr Fox's statements about claims notifications and the estimate were confined to property claims and property losses, and the estimate was an estimate of the "profit impact".

Mr Robertson said in his oral evidence that he heard Mr Fox refer to a contract-by-contract analysis at the meeting, and he took this to be a reference to the work Mr Fox had asked Mr Hedley to do, as Mr Fox had told him at their meeting on 1 or 2 December (T 3175). He said he did not hear any reference to something called, in terms, a "contract-by-contract analysis" in relation to Hurricane Georges at the meeting. Mr Robertson's "unders and overs" analysis

Mr Robertson said (affidavit para 214) he was not shown Mr McClintock's "unders and overs" schedule but had subsequently seen an amended version of it (PTB 1604). He said he calculated his own "unders and overs" (affidavit para 215), the net effect of which was to reduce the profit forecast from $80 million to $78.4 million. It was a modification of the "unders and overs" figures to which he had referred for the purposes of his memorandum of 4 November (affidavit, para 148).

The positive adjustments made by Mr Robertson were: expected MIPI surplus $34 million (affidavit, para 206), unrecognised aviation surplus $9.7 million (affidavit, paras 130, 136 and 137); understatement of first-quarter profit $10 million (affidavit, paras 139, 195 and 196). The negative adjustments were: effect of interest rate fall $4.2 million (affidavit, para 139); space premium error $8.1 million (affidavit, para 145); Hurricane Georges marine losses after retrocession $8 million (T 3125); and Hurricane Georges property losses $35 million (T 3125). Although he did not allow for any further improvement in the MIPI surplus, Mr Robertson said it was obvious to him that there was something wrong with the new approach to valuation of MIPI that had been introduced from 31 December 1997, and that further surplus was likely to arise.

As the positive adjustment for MIPI, it was submitted on his behalf (written submissions para 431) that it was reasonable conduct for Mr Robertson to have taken into account Mr Latham's opinion, so that even if the cost of Hurricane Georges blew out by $35-40 million more than had been allowed for in the forecast, the $34 million over-provisioning for MIPI could be taken into the balance. It appeared at the trial that there was no issue about the legitimacy of the $34 million "over" in the unders and overs analysis (see Mr Robertson's submission, para 432). As to whether it was reasonable conduct for Mr Robertson to expect that further over-provisioning would develop for the rest of the 1998/99 year, he relied in his submissions (para 405) on the evidence considered at section 3.31 that Mr Latham subsequently advised that there were potentially further large reserves.

ASIC made detailed submissions about Mr Robertson's positive adjustment for understatement of the first-quarter profit of $10 million. It contended (written submissions (Robertson), para 40(ii)) that Mr Robertson's evidence on this subject was a matter of reconstruction rather than recollection of the reasoning processes he in fact went through at the time.

Mr Robertson's evidence about the $10 million (affidavit, paras 139, 195 and 196) was that in his memorandum of 4 November 1998 he had used figures provided to him by Mr Robertson on that day (the figures were later set out in Mr Schneider's two memoranda dated 20 November 1998, PTB 1161 and PTB 1163 - see section 3.30). He said he did not have time to analyse the figures before using them in his memorandum, but that Mr Schneider had told him $10 million of the revised profit figure was due to the fact that using a lower interest-rate rather than the original projection had resulted in an increase in the prudential margin.

Mr Robertson explained the background to the prudential margin calculation. He said that the methodology used for determining the prudential margin for GIO Re's inwards reinsurance book, as at 30 June 1998, was to discount the reserves at a rate 3% less than the appropriate discount rate (T 3196). In the first-quarter of 1998/99 there was a reduction in interest rates, which led to an increase in the proportionate value of the prudential margin. In the first quarter highlights Mr Schneider had taken the ratio that the prudential margin bore to the central estimate of liabilities as at 30 June 1998, and applied that same ratio to the reserves as at 30 September 1998. The result of that calculation was to reduce the prudential margin by $23.3 million, and the reduction was allocated across the various classes proportionately to their outstanding claims reserves (see PTB 0600). Mr Robertson said he had instructed Mr Schneider to take this approach (affidavit para 118; T 3259).

Mr Robertson said that in his unders and overs analysis he had taken the view, consistently with what Mr Schneider told him on 4 November, that the prudential margin had been overstated. He said (affidavit para 195) that his view was reinforced by a conversation he had with Mr Murray in late November. Mr Murray had shown him an e-mail from Victoria Howell dated 11 November 1998, which stated that the results have been impacted by a $10 million increase in prudential margin (Exhibit D28), and had said, "Your first-quarter results were actually better than you thought". This conversation was not put to Mr Murray in cross-examination.

In ASIC's submission (written submission (Robertson), paras 52(a), 60, 61), PwC had in fact concluded that the profit forecast for GIO Re should not reflect any change in the methodology used in calculating the prudential margins as at 30 June 1998. ASIC referred to PwC's final report to the DDC in which they said that the prudential margin that had been calculated for the purpose of the profit forecast was consistent with the 30 June 1998 valuation (PTB 1773, at para 65). ASIC pointed out (written submissions (Robertson), para 60) that in his unders and overs analysis Mr McClintock included a negative figure of $10 million that was referable to "the impact of reducing interest rates on prudential margin". Mr McClintock explained in his oral evidence (T 1554) that: "this $10 million is the impact of the change in interest rates that was not adjusted by GIO in their profit forecast, so it went on to our unders and overs as a negative amount".

There seems to be a difference in approach to the calculation of prudential margin between Mr McClintock and Mr Robertson. But in my opinion the evidence before the court does not provide a basis for concluding that Mr Robertson's account of his thinking about the prudential margin should be rejected as mere reconstruction. Mr Robertson's evidence seems to me to be coherent and I accept it. The evidence of Mr Vines and Mr Robertson about the discussion of the American Re contract and the MIPI reserves

Mr Vines confirmed that he had made the statement about the American Re contract attributed to him in Mr Murray's notes, and Mr Robertson gave evidence to the same effect (affidavit para 210). Mr Vines explained that he was conscious that the American Re contract was still being re-negotiated and attempts were being made to accommodate the criticisms of KPMG (T 2745), but he was not relying on the American Re contract in forming his view as to whether the profit forecast was achievable (T 2746).

As to the MIPI contract, Mr Vines said that during the course of discussion of the MIPI contract he was called out of the meeting, at the insistence of Mr Steffey, to attend a sign-off meeting with the lawyers and PwC (T 2746). He was not able to confirm that Mr Schneider accepted the validity of Mr Latham's approach to MIPI, while preferring a different approach (T 2747). Mr Robertson's account of the conversation was to the same general effect as Mr Murray's notes, though his explanation of Mr Schneider's view was that Mr Schneider was convinced his approach was the right one but he was prepared to accept it was not impossible that Mr Latham's different view could be correct (affidavit para 210).

Mr Robertson said (affidavit para 212) that, taking into account Mr Latham's opinion, even if the cost of Hurricane Georges blew out by $35-40 million more than had been allowed for in the forecast, there was a $34 million overprovision identified in MIPI and the likelihood that further overprovision would develop in the remainder of the financial year, so there was no justification for changing the profit forecast. He said that as the meeting continued, he said: "You have all heard me say many times that the $80 million profit forecast was my best estimate, and that the final profit result for the year could easily differ from that forecast by $100 million, but I have no way of knowing whether the difference would be positive or negative. I have to say that the information which is now available to me gives me no reason to think that I could make a better estimate of GIO Re's 1998/99 profit than $80 million." According to Mr Robertson, Mr McClintock said he was comfortable with that statement. Mr Fox's evidence about the 7 December meeting

Mr Fox gave extensive evidence about this meeting (first affidavit, para 177ff; second affidavit, paras 18-21, 47-50; and oral evidence). In his first affidavit (para 199), Mr Fox referred in detail to Mr Murray's file note of the meeting on 7 December, denying the accuracy of some parts of it. He agreed that Mr Hammond, Mr Murray and Mr McClintock of PwC were present, together with Mr Vines and Mr Robertson. He said he was not told what the meeting was going to be about, there was no agenda, and no-one gave any explanation of the purpose of the meeting when it began. There is no evidence to the contrary on this point. He agreed in cross-examination that during the meeting he realised that PwC were involved in a last and final conference with respect to the efficacy of the American Re contract and the financial effects of Hurricane Georges (T 3870), and that the meeting was occurring during the course of a formal sign-off process because of the doubt about the effect of Hurricane Georges (T 3871), and he understood that PwC would act on the basis of what was said at the meeting (T 3871).

Mr Fox agreed that he said, when someone asked what was GIO Re's exposure to Hurricane Georges, that the company had done a contract-by-contract analysis which indicated "a maximum potential loss of $100 million". He said that was the figure Mr Schneider gave him on 9 November as the "worst case scenario". He denied mentioning the figure of $105 million. He said that at some time between 4 November and 7 December someone expressed the opinion that the impending renewal season and the uncertainty surrounding the AMP takeover bid was prompting cedants to notify early and on a precautionary basis. That is consistent with the view held by Mr Robertson. Mr Fox said someone repeated this opinion at the meeting on 7 December. He thought that statement was reasonable because: · in the renewal season from October to December each year, cedants notified losses more promptly than at other times, because of the duty of disclosure of loss prior to the renewal of contracts; and · if it was likely that GIO Re would be closed down by AMP, early claims would be submitted to avoid possible problems of collection, especially if liquidators or run-off agents became involved.

Mr Fox said someone at the meeting mentioned the figures "$60 to $65 million", but he said it was not him, and he could not recall who it was or what was said about the figures. He said he was "at a complete loss" as to why the file note recorded that statement (T 3875). He said that so far as he was aware, there had never been any process of estimation carried out which led to an ultimate best estimate of Hurricane Georges liability at $60-65 million (T 3875), and he said that he did not believe, during the meeting, that that was the best estimate of liability for Hurricane Georges and there was no rational basis for any such statement to have been made (T 3876).

He said he did not know the current value of claims received in respect of Hurricane Georges as at 7 December, but at the management committee meeting he chaired on 25 November, Mr Fricke had said that the claims for Hurricane Georges then totalled $57 million from property and $25 million for marine, and he understood that the marine losses were capped at $8 million because of a retrocession contract and therefore, he understood that the then exposure to Hurricane Georges was $65 million. He said he believed, until the meeting, that the American Re contract was effective to limit GIO Re's exposure to Hurricane Georges to $25 million provided the loss did not exceed $100 million, and that he had not read the daily e-mails from Mr Fricke because he was confident Mr Schneider would speak to him if anything had changed, and he had not done so. Mr Fox said he therefore did not believe that the statement of the figures, $60-$65 million, required any correction or comment by him.

According to Mr Fox, one of the PwC representatives said that, for the purposes of the Part B statement, PwC could not accept the American Re contract as an effective reinsurance contract for accounting purposes; but on the other hand there was an over-reserving, referring in particular to Mr Latham's report on MIPI, with the result that the bottom line was not changed. Mr Fox said this was the first time he had heard that PwC would not accept the American Re contract as an effective reinsurance contract for accounting purposes. Mr Fox gave evidence that, when he learned at the meeting that PwC were of the opinion that the American Re contract was not in substance an effective retrocession contract, he realised immediately that the profit forecast for the purposes of the Part B statement could no longer be supported by the agreement, and that the comfort he had derived from the agreement (namely that it would preserve the profit forecast from Hurricane Georges) had "collapsed" (T 3872). He said that the last time he had heard anything about the effect of Hurricane Georges was at the 25 November 1998 management committee meeting, and he appreciated that claims might have gone up in the period from 25 November to 7 December, and there was every reason to believe that they had gone up because claims had generally been increasing since the catastrophe happened (T 3872-3). He did not advise the meeting that the contract-by-contract analysis was more than a month old and that there had been no recent updates to review the present position (T 3874).

He said he had no communication with Mr Schneider about the accounting treatment of the American Re contract until 8 December, and that the meeting with PwC on 7 December was the first time he was present with Mr Vines during any discussion about the matter. He said he had had no communication with any auditors about the accounting treatment of the American Re contract until the 7 December meeting, apart from sending a copy of the contract to Mr Murray on 23 November.

During his cross-examination, Mr Fox was asked some questions about precautionary and accelerated claims. He expressed the opinion that early or accelerated claims are valid claims, and said that precautionary claims should be treated as claims for the purposes of the aggregate, since precautionary claims that do not materialise into real claims are likely to be evened out on a swings and roundabouts basis by real claims that have not been received (T 3876). He agreed that there had not been, up to the meeting of 7 December, any investigation by GIO Re to make an objective or rational estimate of whether, and if so to what extent, claims recorded in the system were unlikely to represent ultimate payouts (T 3877).

According to Mr Fox, he and Mr Robertson were asked at the end of the meeting to sign a representation letter. Mr McClintock left the room and returned with the form of the letter (which was the letter at PTB 1618), and asked them to read and sign it. Mr Fox said he had not seen the letter at any earlier time and it had not been mentioned. He was not invited to make any amendments to it. It appeared to him that the letter had been prepared by representatives of PwC on the basis of inquiries they made from others at GIO, and he assumed the letter had been carefully prepared after detailed consideration of all the available material. He said he decided he would sign the letter only if Mr Robertson was happy with its contents, and he asked Mr Robertson whether he was satisfied with the letter, and Mr Robertson replied in the affirmative. Mr Fox said he signed the letter after Mr Robertson signed.

Mr Fox said that on the following day, 8 December, he told Mr Schneider to liaise with PwC to see it there was any basis on which they would approve the American Re contract. He also said (first affidavit, paras 203-205) that at some time before 17 December he approached Alan McCormick, head of Technical Accounting at GIO Re and a senior accountant, to give him an opinion on the accounting treatment of the American Re contract. Mr McCormick replied by e-mail dated 17 December 1998 (PTB 2171), saying that as there seemed to be a risk transfer in the contract, with a reasonable chance of the reinsurer having a loss, the contract was a reinsurance contract as commonly accepted. That is contrary to American Re's own view, noted above, that the risk transfer for the defined event was slight and there was no risk transfer in respect of Hurricane Georges which would be "fully funded". Mr McCormick said it would be appropriate to book the spread of premium as per the contract. It is not clear that Mr McCormick was shown the opinions by KPMG and Arthur Andersen, but his view seems rather more accommodating to the contract than even Arthur Andersen's opinion. He admitted these observations were "fairly basic". In my opinion they were wrong. Findings about the 7 December meeting

In my opinion Mr Murray's notes of the meeting are an accurate record of what occurred, subject to one qualification. The single qualification I would make is that the figure of $105 million is odd and does not have any resonance with any other evidence, whereas $100 million would be consistent with Mr Fox's claim that Mr Schneider told him the "worst-case scenario" was that amount. It seems to me that the figure given to the meeting was a maximum of either $105 million or $100 million. I am unable to determine which of those two figures was given and it does not matter in any material sense. Subject to that, I accept the accuracy of the notes because their contents were supported by the evidence of Mr Vines and (except in one respect) Mr Robertson, and to a degree by the evidence of Mr McClintock. Only Mr Fox generally disputed them, and as will appear, I have rejected his evidence to the extent that it is inconsistent with the notes. I have also decided that the factual accounts by Mr Vines and Mr Robertson, to the extent that they are consistent with the notes, should be accepted, including Mr Robertson's account of his additional statement to the meeting.

There is ambiguity in the note as to whether the figures for Hurricane Georges recorded in Mr Murray's notes were gross figures or were net of retrocessions and reinstatement premiums. It seems to me probable that the figure given for the "maximum potential loss" was net of the OP Re retrocession for marine claims but not net of reinstatement premiums. This is because the figure was based on the contract-by-contract analysis, according to the note, and that analysis was net of the OP Re retrocession but was not adjusted for reinstatement premiums.

As to the range of figures for notifications to date, Mr McClintock gave evidence that the reference should be read as to notifications to the end of November (T 1641). In PwC's report to the DDC dated 9 December 1998 (PTB 1757, para 76) the claims notification figure was expressed to be as at 30 November, and Mr McClintock said that this information came from the statements made at the meeting of 7 December. I find that evidence to be inconsistent with the words of the note itself, which speaks of notifications "to date". This is a matter of some significance. The Hurricane Georges register for 30 November 1998 recorded property claims as $59.7 million (PTB 2881). According to the Georges register of 4 December (PTB 2496) the total gross claims for Hurricane Georges were $89.7 million on that day, and the figure had risen to $91.9 million by 7 December (PTB 2499).

There are two other ambiguities about the "notifications to date" statement, namely whether the figures were confined to property claims, as Mr Robertson said, and whether the figures were gross or net figures.

It seems to me that the weight of evidence points to the conclusion that the figures were for both property and marine. Most importantly, Mr Murray's file note does not confine the statement about notifications to property claims. As to the evidence of witnesses, Mr McClintock rejected the idea that the discussion at the meeting related only to property notifications (T 1642). Mr Murray had no recollection other than what was recorded in the file note, but he agreed it was possible that the discussion might have referred to property claims notifications (T 1508). Mr Vines appeared to take the view that the discussion was about both property and marine claims, as he referred to the OP Re contract which relates only to marine claims (T 2743-4). Mr Fox recalled someone mentioning the figure of $60-65 million but could not recall who mentioned it or what it related to (first affidavit, para 188).

ASIC submitted (written submissions (Robertson), para 159), as another factor supporting the view that the notifications were of both marine and property claims, that the file note talked about notifications being "up from $27 million". ASIC referred to the Status of Registered Events Report, which showed claims for both property and marine at $28.3 million and claims for property only at $21.1 million as at the end of October. This submission was that the figure of $27 million was closer to the level of claims for both property and marine than to the level of claims for property only. I would not give any significance to that fact, since neither of the two figures mentioned in the Report was the figure referred to in Mr Murray's notes.

ASIC argued that the figures were gross figures (written submissions (Fox), para 240). The argument was that the October valuation report had been prepared in accordance with GIO Re's practice of accounting for retrocession recoveries outside its accounting model (see, for example, PTB 0736). In that report (PTB 1453 at 1462), which was sent to Mr Fox on about 2 December, it was said that Hurricane Georges had resulted in a significant gross loss in October, when actual incurred claims increased by $25.5 million to $26.9 million as at the end of October. ASIC submitted that this was the $27 million mentioned by Mr Fox and, significantly, it was a gross rather than a net figure. Consequently, the argument went, all of Mr Fox's figures for notifications were gross figures. If the figures given by Mr Fox at the meeting were gross figures, they were very clearly wrong, as Mr Fox knew or ought to have known.

I agree with that analysis, and note that it is supported by the evidence of Mr de Vroome, ASIC's reinsurance expert (affidavit paras 168-9), to the effect that a competent reinsurance manager would understand that the ordinary industry meaning of the term "notification" includes all gross claims, not just claims net of retrocession.

As to whether the $60-65 million "best estimate" of liability was a gross or net estimate, the implication from Mr Murray's note is that the estimate took into account the probability that some claims were precautionary. Given that notifications had already reached the same figure as the estimate of ultimate loss, it seems to me most likely that the estimate was net, not only of an adjustment for precautionary claims, but also of retrocessions (other than the American Re retrocession) and reinstatement premiums. In any event, the evidence does not show that it was unreasonable for Mr Vines and Mr Robertson to interpret the estimate in that way.

ASIC sought to make something of the fact that according to Mr Murray's note, management's best estimate was of "liability" rather than an impact on profit (as Mr Robertson said it was), to support a submission that the estimate was gross of reinstatement premiums (written submissions (Fox), para 251). I think that attaches too much significance to a single word in a file note.

It appears that the reference to Hurricane Georges liability was actually a reference to the profit impact on GIO Re. Mr Robertson used that language (affidavit para 28), and Mr McClintock (T 1645) agreed that the reference was to profit impact. Mr Vines (T 2799) agreed with the suggestion that the estimate was of profit impact, and he also agreed that the estimate related only to property losses (even though at T 2744 he appeared to treat the figure for notifications as including marine losses). Assuming I am right that the estimate was a net estimate, it was probably a net estimate of marine as well as property losses, netted out against the OP Re retrocession.

Next, it is necessary to make some findings as to which of the defendants made the statements recorded by Mr Murray. I find that the statements about the maximum potential loss for Hurricane Georges and about notifications to date, attributed to Mr Fox in the notes (as interpreted above), were made by Mr Fox. That conclusion is supported by the evidence of Mr Vines, Mr Robertson and Mr McClintock (and, as far as the first statement is concerned, the evidence of Mr Fox himself). Mr McClintock confirmed in his oral evidence that it was Mr Fox who said these things (T 1549-50).

It seems to me more likely than not that it was Mr Fox who told the meeting that "management's best estimate" of the Hurricane Georges liability was in the order of $60-$65 million, notwithstanding his denial. Although the notes do not identify the speaker, Mr McClintock said that Mr Fox led the discussion on Hurricane Georges (T 1550), and Mr Vines and Mr Robertson said that Mr Fox made the statement .

I accept that there may well have been discussion about these matters amongst those present, rather than merely pronouncements by Mr Fox, but the evidence requires, in my view, a finding that Mr Fox was at least the principal source of the statements.

It is likely that Mr Fox participated, in a principal role, in the discussion about early notification of claims and precautionary claims, given Mr McClintock's evidence that he led the discussion on Hurricane Georges and given also Mr Fox's own evidence that he agreed with the views expressed in the note on this subject. Mr Vines and Mr Robertson had similar views, and probably also contributed them.

Mr Robertson maintained that Mr Fox did not mention the contract-by-contract analysis during the meeting (see affidavit, para 105; T 3125-6; although he said in cross-examination (T 3515) that there may have been a reference to such an analysis at the meeting, but he understood it to refer to another analysis he had been told about in early December). Mr Robertson's affidavit evidence is inconsistent with Mr Murray's note, which says that Mr Fox referred to "a detailed review of GIO Re's exposure, contract by contract" as supporting the figure Mr Fox gave for maximum potential loss. Additionally, Mr Fox's evidence acknowledged that he referred to the contract-by-contract analysis. I prefer to rely on the file note, which is generally supported by the evidence of Mr Vines. It seems to me unlikely that the contemporary recollection of Mr Murray and Mr McClintock, who reviewed the draft note, would have been defective on this point. This conclusion is a serious one for Mr Fox, given my finding that Mr Schneider showed him the HG table setting out the results of the analysis on 9 November, and he was aware from that time that the range of results was up to $211 million.

There is no evidence that Mr Vines saw the post-November figures before the meeting with PwC on 7 December. However, ASIC submitted that the court should find that he was aware that total gross claims for Hurricane Georges received to the end of November were approximately $85 million. ASIC submitted (written submissions, para 293) that when he chose to do so, Mr Vines had a close involvement in and control over GIO Re's financial affairs. ASIC instanced his role in the determination of the $105 million aviation reserve, his initiation of the increase in the GIO Re profit forecast by $30 million to $80 million, his participation in the meeting on 5 November with Mr Lange, his requests for information from Mr Driessen, and his role in the meeting on 11 November in causing the October profit figure to be uplifted by $15 million.

It seems to me that those events show Mr Vines had the capacity and inclination to intervene at the divisional level when he thought, from his perspective at the Group level, that intervention was needed. But the evidence does not establish that Mr Vines usurped the divisional role by directly monitoring the development of Hurricane Georges claims, and there is no proper basis for inferring, therefore, that he was made aware of the state of claims in early December. His own evidence was that as of 7 December, he had no up-to-date knowledge of the current estimate of Hurricane Georges losses, and the latest information he had in the estimate was the model as at 31 October. My conclusion is that on 7 December, Mr Vines did not have actual knowledge that the $60-65 million estimate was wrong.

I agree with ASIC's contention (written submissions (Vines), para 300) that it must have been apparent to Mr Vines, on 7 December, that Mr Fox may have still been proceeding on the basis that the American Re agreement could be relied upon for accounting purposes, and that he would probably not have investigated alternative means of maintaining the profit forecast. Mr Fox was not present at the 1 December meeting between Mr Vines and Mr Hammond and Mr Murray. Therefore, when he heard Mr Fox's views at the meeting, it would not have been appropriate for Mr Vines to infer that Mr Fox was taking into account some "unders and overs" process. 3.36 Due diligence documentation, December 1998 The representation letter signed by Mr Robertson and Mr Fox

The evidence includes a document entitled "Letter of Representation - Divisions", which was intended to be retyped on the GIO Insurance letterhead but never was, directed to the board of directors of GIO Australia Holdings and signed by both Mr Robertson and Mr Fox under the title, "Executive Director" (PTB 1618). It is undated, but it seems likely that it was signed by them at the end of or shortly after their meeting with PwC on 7 December.

By that letter Mr Robertson and Mr Fox made representations with respect to the GIO Insurance component of the profit forecast for the Part B statement. They said, inter alia , that to the best of their knowledge and belief, having made appropriate inquiries of other management of the Division, the Divisional profit forecast had been properly compiled on the basis of the underlying assumptions; management had considered each of the assumptions underlying the forecast and believed them to be appropriate in all the circumstances; and management were of the opinion that the assumptions and sensitivities that had been made were complete and accurate.

As regards the forecast for the catastrophe portfolio, they noted that an assumption of a 33% profit had been made, and that results to date in 1999 had been adversely impacted by Hurricane Georges. They said that the impact of Hurricane Georges would suggest that the forecast result of $29.7 million for the 1999 year for the catastrophe portfolio might not be met. They continued: "Notwithstanding the deterioration in the performance of the catastrophe portfolio, management do not believe that adjustment to the reinsurance forecast result of $80 million for the year ending 30 June 1999 is required given: the good performance of the attritional property book in the 1999 year to date the MIPI contract reassessments has [sic] the potential to lead to significant additional profits being generated in the 1999 year changes in retrocession arrangements under consideration could alter the risk profile of the business at a lower cost given the current 'soft' market the American Re retrocession policy entered into in November 1998." The management sign-offs by Mr Robertson and Mr Fox

Mr Robertson and Mr Fox each executed a separate "Management Sign-Off", by which they respectively certified the accuracy of Mr Robertson's completed due diligence questionnaire and said they had drawn the attention of the DDC to any other material matters (PTB 1622 and PTB 1623). There is disagreement between Mr Fox, on the one hand, and Mr Vines and Mr Robertson, on the other, as to whether these documents were executed before (as Mr Fox said) or after the PwC meeting.

Mr Robertson was asked to review the due diligence questionnaire he had signed on 10 November 1998 to satisfy himself that the answers remained true and correct, and he did so (affidavit para 217). The wording of the management sign-off documents was very similar to the wording of Mr Robertson's "Senior Management Sign-Off" dated 10 November 1998, except that the sign-offs in the two later documents extended also to the statement of issues that had been prepared in response to the previous sign-offs by senior management (a document considered by the DDC at its meeting on 16 November 1998), and they contained a division of responsibility.

Mr Robertson's document said: "To the best of my knowledge, information and belief the answers given to that questionnaire are true and correct in respect of that part of the GIO Group business and affairs for which I had responsibility up to 1 November, 1998. For the avoidance of doubt this sign-off is given only in respect of matters arising in respect of that part of the GIO Group business for which I had responsibility in the period up to 1 November, 1998."

Mr Fox's document said: "To the best of my knowledge, information and belief the answers given to that questionnaire [by Mr Robertson] are true and correct in respect of that part of the GIO Group business and affairs for which Frank Robertson had responsibility up to 31 October, 1998 and for which I have now assumed responsibility. For the avoidance of doubt while I am not aware of any matter which would affect the credibility of any response given to the questionnaire, this sign-off is given only in respect of matters arising in respect of that part of the GIO Group business for which I have assumed responsibility and only in respect of the period since 1 November 1998."

Mr Vines gave evidence that he was not present when Mr Robertson and Mr Fox signed their letters (T 2752). He said (T 3090) that he did not read the representation letter, either in draft or after it was signed by Mr Robertson and Mr Fox. He said (T 3091) that the letter may have been in the due diligence package that was presented to the board on 8 December, but he was not certain. The management sign-off and representation letter by Mr Vines

Mr Vines completed a "Management Sign-Off", dated 8 December 1998. His document certified to a review of the due diligence questionnaires completed by all senior management, as well as the statement of issues identified in responses to those questionnaires. He said that to the best of his knowledge, information and belief the answers given to those questionnaires were true and correct "in respect of that part of the GIO Group business and affairs for which [he had] responsibility". There was no definition of the part of the business for which Mr Vines had responsibility. I take it, however, that his area of responsibility was a large one, because his certification related to the answers to the questionnaires given by all senior management, and he was, under the planning memorandum, in a position of central responsibility, as I have explained. As in the case of the documents signed by Mr Robertson and Mr Fox, Mr Vines' document certified that he had drawn the attention of the DDC to any other material matters occurring since 1 July 1998, and said he was not aware of anything which he had not drawn to the attention of the DDC.

Mr Vines also signed an undated " Letter of Representation - Divisions" addressed to the board of directors of GIO Australia Holdings (PTB 1648), similar to the one co-signed by Mr Robertson and Mr Fox. In the case of Mr Vines, the representations related to the profit forecast for GIO Australia Holdings and GIO Australia, in the comparatively minor sum of $2.3 million, rather than for GIO Insurance. There is no specific reference to the reinsurance business or Hurricane Georges. Mr Fox's evidence about the signing of the representation letter and management sign-off

Mr Fox gave evidence (first affidavit, para 160ff) describing the circumstances in which the management sign-offs were signed. He said he was driven from the Terrigal meeting to GIO's head office, believing that he was to attend a meeting of "CEO's representatives and the executive group" similar to breakfast meetings Mr Steffey had at other times. He said no one told him what was to occur. He said that he was directed to the boardroom and when he arrived, GIO's executives were there including, for a while, Mr Steffey and Mr Vines, together with lawyers. Either Mr Steffey or one of the lawyers said that those who had completed due diligence questionnaires would be required to sign "management sign-offs". Mr Fox said he had been given no notice that he would be asked to sign such a document, and had at no earlier stage been asked to do anything connected with the AMP takeover bid or the Part B statement. Mr Fox said that when the documents were initially distributed, he was given no documents to sign. But when that was noticed, one of the lawyers left the boardroom and a few minutes later returned with a set of documents, saying that a special statement had been prepared for Mr Fox to reflect the fact that he had not been part of the Part B preparation.

Mr Fox said he was given a copy of parts of Mr Robertson's completed due diligence questionnaire as well as the special form of management sign-off. When he read the management sign-off, he said, he took it to mean that he was being asked to sign off on the areas for which, pursuant to Mr Steffey's instructions, he had in fact assumed responsibility (such as reorganising management and pursuing a UK branch licence), and not the areas in which Mr Robertson continued to have responsibility. He said his understanding was that he should leave financial matters and matters associated with the AMP takeover bid to Mr Robertson. He said he was not shown Mr Robertson's management sign-off dated 7 December, and he presumed that it was not a "special" document and reflected that Mr Robertson's areas of responsibility were continuing after Mr Fox's arrival.

Mr Fox said he had little knowledge of the matters addressed in the due diligence questionnaire and assumed Mr Robertson's answers were correct, as none of the answers he gave struck Mr Fox as being incorrect. He took into account that Mr Steffey had told him on the day of his arrival that he was not required to undertake independent research and obtain external advice, and said he assumed from Mr Robertson's answers to the due diligence questionnaire that all material matters concerning the affairs of GIO Australia Holdings had been drawn to the attention of the DDC, and said he could not think of any matter that he considered was material to him to draw to the attention of that committee. In all, he thought he was being asked to express a view to the best of his knowledge, information and belief, only in respect of those areas for which he had in fact assumed responsibility.

Mr Fox said that, as Mr Robertson was present in the room, he decided the best course was to ask Mr Robertson to assure him directly that his answers were correct, and if he did so, to accept Mr Robertson's word and then sign the document. Mr Fox said he asked Mr Robertson, "Are you still happy with this because I've got no way of checking it?", and Mr Robertson replied in the affirmative. Mr Fox said he signed the management sign-off after he saw Mr Robertson sign his document.

In cross-examination, Mr Fox reviewed the matters dealt with in the due diligence questionnaire to which the management sign-off referred, and said that his responsibilities included "management and control", "industry competitors and operations", "legal" and "outstanding claims", but not "financial" (T 3728-3729). This account suggests a broader area of responsibility than presented in his affidavit. He said he understood that the sign-off process in which he participated related to the Part B exercise, and that the Part B process would go forward on the basis of what was said in the sign-offs (T 3870). He said the efficacy of the American Re agreement was essential to his being able to sign the management sign-off, and accordingly he had signed the document on a false basis because of the non-acceptance by PwC of the agreement, a matter not known to him at the time of signing but disclosed later during the meeting with PwC (T 3879).

Mr Fox's evidence about the representation letter (first affidavit, para 190ff) was that it was prepared at the end of the meeting with PwC, during which there had been a detailed discussion about the impact of Hurricane Georges and other financial matters. He said he was not invited to make any amendments to the letter, and he assumed the letter had been prepared by representatives of PwC, based on inquiries made of others at GIO, and on the basis of detailed consideration of all the available material. He said he asked Mr Robertson whether he was satisfied with the document and Mr Robertson replied in the affirmative.

Mr Fox accepted in cross-examination that, when he signed the letter, he was aware that he had no means of assessing for himself whether it was justifiable to maintain the $80 million profit forecast in face of the Hurricane Georges result (T 3885), and that he had no means of knowing whether all or any of the four points set out in the letter as to why the $80 million profit forecast could be maintained would in fact operate to maintain the forecast (T 3886). He agreed (T 3884) that by signing the letter, he was acknowledging his joint responsibility for the assumptions on which the GIO Re profit forecast was based. Where the letter referred to having made appropriate inquiries of other management of the division, Mr Fox accepted in cross-examination that he not made appropriate inquiries of other management in relation to the effect of Hurricane Georges on the profit forecast (T 3885).

In cross-examination, Mr Fox gave some evidence which was inconsistent with the assertion that his responsibility was limited to non-financial matters. Thus, he agreed in cross-examination that his responsibility as executive director extended to obtaining retrocession cover for Hurricane Georges (T 3748), monitoring claims in respect of Hurricane Georges (not personally but "ultimately") (T 3720), receiving information on claims (T 3720) and providing to PwC specific loss information that was in his possession (as he did on 7 December 1998) (T 3720). Findings as to Mr Fox's evidence

I reject Mr Fox's evidence that the management sign-off was confined to the non-financial matters for which Mr Steffey had allocated responsibility to him. First, for reasons given in section 4, I reject Mr Fox's evidence that his responsibilities were in fact restricted in the manner he contended, or that he believed at the time that they were so restricted.

Secondly, the management sign-off did not contain any such limitation, in its terms. On no reasonable construction could such a limitation have been implied, especially given the nature of the document as a "sign-off" in respect of predominantly financial matters. The document referred to the "business and affairs" for which Mr Robertson had responsibility up to 31 October and "for which [Mr Fox had] now assumed responsibility". Plainly enough, that was a reference to the businesses of GIO Insurance, including the whole of the reinsurance business. The period since 1 November 1998, identified in the document, encompassed claims experience in Hurricane Georges from that date, the results of the contract-by-contract analysis, the American Re contract, and the use of that contract for the purposes of the October results in the maintenance of the profit forecast. Even if he did not, the assurance contained in the sign-off that Mr Fox had drawn the attention of the DDC to all matters he considered might be material, and that he was not aware of any other such matter, was not subject to qualifications by reference to the part of the GIO Group business for which Mr Fox had assumed responsibility.

Thirdly, in my opinion it is implausible that Mr Fox believed, before he signed the document, that it was intended to be restricted to the non-financial matters that had been stipulated by Mr Steffey. If he had held that belief, the reasonable course would have been for him to require that such a limitation be articulated in the document, but he did not do so. In my opinion the terms of the document and the circumstances surrounding its execution overwhelmingly support the inference that Mr Fox believed, at that time, that he had full responsibility for the executive management of GIO Re, jointly with Mr Robertson. Consequently I also reject his evidence that he signed the document only after obtaining Mr Robertson's assurance that he was still happy with it.

Those conclusions are supported by the evidence of Mr Robertson. He said that Mr Fox did not express any surprise or complaint when he was asked to complete the relevant documents (T 3120). He said (T 3129) he did not believe the conversation recounted by Mr Fox had occurred, because he would have been extremely surprised if Mr Fox had asked him whether he, Mr Robertson, was satisfied with a letter prepared by PwC for Mr Fox to sign. He said (T 3130) it would have been absolutely extraordinary for Mr Fox to have said he had no way of checking whether the answers to Mr Robertson's due diligence questionnaire were correct, because by that time Mr Fox had all the same information as Mr Robertson had, and probably more since he had been in his role as executive director for more than a month.

As to the representation letter, it is in its terms a statement, in considerable detail, directed to the board of directors of GIO Australia Holdings and co-signed by Mr Fox without any qualifications, and it expressly says: "We acknowledge our responsibility for the preparation and presentation of the Divisional Profit Forecast, including the assumptions on which the Divisional Profit Forecast is based". Mr Fox did not specifically claim that he interpreted the letter consistently with his contention that he had limited, non-financial responsibility. In light of the nature of the letter and its wording, any such claim would be manifestly false. Indeed he acknowledged in cross-examination that he understood, when he signed the letter, that he was acknowledging his joint responsibility with Mr Robertson for the preparation and presentation of the divisional profit forecast; and he also understood that he was acknowledging his joint responsibility for the assumptions on which the divisional profit forecast was based (T 3884). Given the terms of the representation letter and Mr Robertson's evidence to which I have referred, it is implausible that Mr Fox would have signed the letter only after Mr Robertson gave him an assurance about it, and implausible that Mr Robertson would have given any such assurance. 3.37 Final DDC meeting and report, and board meeting approving Part B statement

The DDC met early in the morning on 8 December 1998 (minutes at PTB 1651). Mr Vines reported on the management sign-offs, copies of which were provided to the Committee. Both Mr Steffey and Mr Vines confirmed to the meeting that they were comfortable with the integrity of the forecast. Mr McClintock recommended that a new assumption in relation to the catastrophe portfolio be added to the Takeover Response Booklet, drafted with Mr Fox, Mr Robertson and Mr Vines, and that was approved (see also T 2749). The Committee recommended that the board should resolve to approve the Part B statement in principle and appoint a subcommittee to approve minor changes.

Mr McClintock told the DDC, as regards the PwC report on the forecast, that claims notified in respect of Hurricane Georges might increase to an additional $35 to $40 million over the amount that had been provided for. He said, however, that good performance in MIPI of $35 million had been included in an unders and overs schedule, which showed a total pre-tax shortfall of approximately $14 million (subsequently revised to $15 million), an amount that was not material.

At the meeting, Mr McClintock produced the unders and overs schedule to which he referred (the revised version is at PTB 1604). It applied to the whole of the GIO Group, and showed a net negative adjustment of $15.1 million before tax and $8.6 million after tax. Those figures were just above the minimum materiality thresholds and well below the maximum materiality thresholds. For inwards reinsurance, Mr McClintock's schedule showed a negative adjustment for catastrophe adverse performance of $35 million and a positive adjustment for MIPI of $35 million. He said in evidence (T 1554-5) that the $35 million adjustment for catastrophe adverse performance was based on an ultimate loss estimate of $60 million, a figure provided by GIO management in PwC's meeting with them on 7 December. Adverse performance in space produced a negative adjustment of $8 million but good performance in property attritional produced a positive adjustment of $7 million. There was a negative adjustment of $4 million for "assumptions re retrocession costs" and a negative adjustment of $10 million for "impact of reducing interest rates on prudential margin". Thus there was a net negative adjustment before tax of $15 million for inwards reinsurance. Small positive and negative adjustments were made in other business divisions, more or less cancelling one another out, so the net result was closely aligned to the outcome in inwards reinsurance. Mr McClintock gave evidence (T 1552) that his unders and overs schedule reflected the final view he took for the purposes of PwC Securities' report to the DDC.

The DDC's report to the board is in evidence (PTB 1676). It summarised the due diligence and verification processes and attached ( inter alia ) minutes of its meetings and management sign-offs, including those provided by Mr Vines, Mr Robertson and Mr Fox. It stated the view of each member of the Committee (subject to some qualifications in the case of PwC and the lawyers) that the due diligence system and inquiries were adequate for their purposes, that all matters relevant for inclusion in the Part B statement had been appropriately dealt with, and that nothing had come to the attention of the members of the Committee that caused them to believe that there was any materially misleading statement or material omission.

The DDC report was dated 8 December 1998. It was delivered to the board of directors of GIO Australia Holdings and considered by the directors on that day. The board met after the conclusion of the DDC meeting (minutes at PTB 1655). The board noted the management sign-offs and resolved to authorise the signing of the Part B statement, subject to receipt of the signed PwC report by the following morning. A draft of the PwC report was available to the directors. The Part B statement, thus approved, included the $80 million profit forecast for GIO Re.

The board meeting on 8 December was treated as the regular monthly meeting for December, although there were other special purpose board meetings in that month. Because the meeting was held earlier in the month than regular monthly meetings, to accommodate the schedule for the Part B Statement, financial results for November were not presented to the board. Instead, Mr Vines provided the board with "flash" figures as at 30 November. The minutes of the meeting refer to the "flash" figures which were to be incorporated into the board papers, but the document cannot now be found (PTB 1656 - minutes; T 2722). Mr Vines gave evidence that the final November results were never presented to the board, but he did not become conscious of that at the time because he was concentrating on preparation of the half-year results (T 2724). He said the absence of final November results was never raised with him by anyone and he did not consciously avoid the preparation of November figures (T 2725). I accept that evidence, for reasons given earlier. 3.38 PwC Securities' report on profit forecast

PwC Securities delivered its report, comprising some 28 pages and annexures and dated 9 December 1998 (PTB 1757), after having received a representation letter (PTB 1662) from Mr Vines, Mr Steffey and Mr Mortimer (chairman of directors, on behalf of the board). By that letter the signatories confirmed that, to the best of their knowledge and belief, and "having made appropriate inquiries of other directors and officials of GIO", they were not aware of anything which would lead them to believe that the forecast was incorrect or misleading in any material respect or contained any material omission". The letter also said that the directors had considered each of the assumptions underlying the forecast and believed them to be appropriate, and specifically, the directors believed that, notwithstanding the position with respect to Hurricane Georges, no adjustment to the forecast result of the reinsurance division was required.

The PwC report concluded that, based on their review (the scope of which was described in the report), nothing had come to their attention causing them to believe that the directors' assumptions were not a reasonable basis for preparation of the forecast, or that the forecast had not been properly compiled on the basis of the underlying assumptions and presented consistently with the accounting principles used by GIO and with the accounting standards and other mandatory professional reporting requirements.

As to inwards reinsurance, the report drew attention to the assumption that there would be no major catastrophes (events with a market loss in excess of US$10 billion) impacting on GIO during the remainder of the year to 30 June 1999, and the forecast of a 33% profit on net catastrophe premiums, on that assumption. PwC commented that the 33% profit margin for the full year might not be appropriate, because the first quarter's results showed a profit on catastrophes of only $7 million leaving a shortfall of $15 million for the quarter. However, PwC relied on Mr Robertson's memorandum of 4 November 1998 and in particular, his view that the performance of the catastrophe book over the remainder of the year would improve given that property catastrophes tend to be concentrated in the first quarter (July-September) and aviation catastrophes are concentrated in the northern hemisphere summer holiday period, together with GIO's intention to shed a large part of the catastrophe exposed business by non-renewal on 1 January 1999.

Under the heading "Matters for consideration by the Due Diligence Committee", the report said: "76 We consider that the full year budget for the space portfolio will be difficult to achieve given the prior period error of $8.1 million recognised in the first quarter. Further, the first quarter results for the catastrophe portfolio assumed that GIO's exposure to Hurricane Georges would be 0.6% of the then market loss estimate of US$2.55 billion, i.e. $25 million. To 30 November 1998, we understand that claim notifications for Hurricane Georges have increased to $60-65 million and that the ultimate expected loss falls within this range. The increase in notifications with respect to Hurricane Georges suggests that the 33% profit assumption used for the catastrophe portfolio is no longer appropriate. 77 Management have advised us that losses on Hurricane Georges in excess of $15 million (up to $55 million) are protected by a retrocession policy entered into in November 1998 with American Re. Our review of this contract however has led us to conclude that, amongst other things, whilst the policy will allow GIO to claim for Hurricane Georges, additional premiums payable under the policy for claims experience mean that no benefit from the policy can be recognised in the Forecast. 78 Whilst management have not accepted his view, they point to positive development in the MIPI contracts in the period to date in 1999 to demonstrate that no adjustment to the Forecast is required. Our report to the Board Audit Committee for the 1998 year highlighted potential overstatements of provisions for MIPI and positive experience in this account since 1 July 1998 would support management's view that the Forecast is still achievable. 79 We also acknowledge, that: the attritional property book has performed well in the first quarter 1999 changes in retrocession arrangements under consideration could alter the risk profile of the business at lower cost given the current 'soft' market."

Mr McClintock gave evidence (T 1552) that he obtained the information in para 76 about the level of notifications to date and the expected ultimate loss, in the range of $60-65 million, from Mr Fox at the meeting on 7 December. 3.39 AMP's bid increase, and publication of the profit forecast

Mr Vines said that after the board's approval of the Part B Statement on 8 December, he was involved in two principal activities. The first was preparing a proposal to the board, considered in mid-December, for payment of a special dividend, which was to be paid to shareholders after the close of the bid by AMP. He said that this proposal required quite a bit of planning because it involved approximately a $200 million reduction of the capital base of the Group. The other ongoing activity was associated with GIO's response to the bid, specifically because, just as the Part B Statement was being signed off, AMP raised its bid price (T 2725).

At approximately 10 a.m. on 9 December, AMP announced an increase in its takeover bid consideration to $5.35 in cash or one AMP share for four GIO shares. The bid had become unconditional. Then the board of GIO met to consider the revised offer. It confirmed its view that the bid was inadequate, notwithstanding the increase in consideration, and should be rejected, and it directed Macquarie Bank to amend the takeover response documentation to delete parts no longer relevant in view of the increased offer. The board also noted that minor changes would be needed to the independent expert's report by Grant Samuel. Then the DDC reviewed the takeover response documentation and reported that, subject to verification, no further action or recommendation was required by the Committee (PTB 1674).

The profit forecast was announced to the market on 10 December 1998 (PTB 1869). The media release said that the forecast result would be founded on a dramatic improvement in operating profits from GIO's core businesses, including reinsurance. Mr Steffey was quoted as saying that the forecast figures were consistent with the $88 million profit before tax and abnormals for the first four months, the underlying trend being very strong. He was quoted as saying that the GIO board would send out the Part B Statement in the following week. He urged shareholders to consider that document and to reject AMP's inadequate revised bid. 3.40 The Part B statement in final form, and the announcement to the market

GIO's Part B statement, and consents by Grant Samuel and PwC Securities to the inclusion of their reports, were lodged with ASIC on 16 December 1998 (PTB 1899). On the same day GIO released a statement to the market (PTB 1896) in which it announced that Grant Samuel, as independent valuation expert, had found that GIO shares had a mid-point acquisition value of $6.19 (16% above AMP's revised cash offer and 21% above the AMP share alternative) and that AMP's takeover offer was neither fair nor reasonable. The media release noted that Grant Samuel had referred to the prospects for substantial improvement in GIO's reinsurance business. Mr Steffey was quoted as saying that GIO's profit forecast for the year to June 1999 had been reviewed by PwC. The media release proceeded to attack the AMP bid and to urge GIO shareholders to reject it.

GIO's takeover response documentation, as sent to GIO shareholders (PTB 1903), comprised two booklets, which together constituted the Part B statement. The first booklet contained the board's recommendation to reject the bid and the reasons for that recommendation, answers to commonly asked questions, an explanation of the importance of the shareholders' decision to the future of GIO, and additional statutory information. The second booklet contained a full copy of the Grant Samuel report.

The profit forecast was a fundamentally important component of the reasoning throughout the takeover documentation. The first reason for rejecting AMP's bid, according to the GIO directors, was that GIO's shares were worth much more than the bid price. In making that assertion, the directors relied on Grant Samuel's report. Grant Samuel, in turn, relied on the profit forecast in the manner described below. The fifth numbered reason given by the directors was that GIO had a blueprint to enhance shareholders' wealth. In developing this reason, they made reference to the plans of Mr Steffey and GIO's management team, which (they said) incorporated a forecast profit before tax and abnormals of $250 million for the 1998/99 financial year and a return on shareholders' funds of 12%.

The profit forecast was Appendix 1 to the first booklet . The forecast ran to over eight pages, in which numerous general and division-specific assumptions were stated. The overall operating profit before tax and abnormal items was $250 million, and the figure for inwards reinsurance and corporate insurance was $69 million, comprising an estimated profit of $80 million for reinsurance and a loss of $11 million for corporate insurance. A sensitivity analysis showed that an increase of one percentage point in the loss ratio would reduce the forecast after-tax profit by 5.2%. The loss ratio was defined as claims incurred over earned premiums after allowance for reinsurance. A note explained that there were reinsurance arrangements protecting GIO from catastrophes and other significant events, which would have to be taken into account.

Under the heading "Inwards reinsurance and corporate insurance", the following text appeared: "There are inherent difficulties in forecasting the results of the inwards reinsurance portfolio given that profits can be significantly influenced by relatively small variations between assumed and actual experience. Factors which can materially impact profits include actual versus expected developments of long tailed classes of business and unpredictable events such as earthquakes, hurricanes, storms, freezes, floods, fires, tornadoes and other man-made or natural disasters. "The result for the 1999 year for the reinsurance division is expected to improve significantly from that reported in 1998. The result for 1998 was impacted by revisions to the valuation model used to estimate outstanding claims and changes in accounting policies in relation to the recognition of earned premiums and the estimation of outstanding claims. Changes in accounting policies reduced profits before tax for 1998 by approximately $79 million. The 1998 result also included losses incurred in the aviation and marine classes. "The change in accounting policy in relation to the estimation of outstanding claims for inwards reinsurance has the effect of increasing the prudential margins established for certain classes of business for the most recent underwriting years until the development of those years is known with a greater degree of certainty. "Significant assumptions used in the preparation of the Forecast comprise: · a decrease in gross written premiums of 15% · no major catastrophes (events with a market loss in excess of US$10 billion) impacting GIO in the remaining period to 30 June 1999 · an improvement in the loss ratio by approximately 66 percentage points after adjustment for the changes in accounting policies noted above · the performance of the catastrophe portfolio in the year to date has been adversely affected by Hurricane Georges. This adverse experience has been offset to a large extent by favourable experience in other classes in the year to date. For the remainder of the year it is assumed that the catastrophe portfolio will incur no further significant losses. The assumption is based on the fact that the Caribbean hurricane season has ended, that exposures to losses will be significantly reduced as a result of the non-renewal of certain contracts at 1 January 1999 and as a result of revisions to retrocession arrangements · the investment portfolio supporting outstanding claims and other insurance reserves is matched with outstanding claims and other reserves in both currency and duration."

Attached to Appendix 1 was a short report from PwC Securities dated 9 December 1998 (PTB 1942 - in contrast with the longer report provided by PwC Securities to the GIO board, summarised above). In the short report, PwC Securities explained that they had reviewed the forecast and that nothing had come to their attention causing them to believe that the directors' assumptions did not provide a reasonable basis for its preparation, or that the forecast had not been properly compiled in accordance with accounting principles. 3.41 The Grant Samuel valuation report

The Grant Samuel report, comprising the second booklet distributed to GIO shareholders, ran for 177 pages plus appendices (PTB 1976), together with a 19 page summary letter (PTB 1957). Grant Samuel valued GIO shares in the range $5.66-6.71 per share. They said that the valuation reflected, inter alia, the prospects for a substantial improvement in GIO's reinsurance business, which had been consistently profitable with the exception of the 1998 financial year. The valuation range for the reinsurance business was $1,050-1,300 million, out of a total Group value of $3,516-4,171 million.

Their principal approach to valuation of the reinsurance business was by discounting projected underwriting cash flows. Grant Samuel were responsible for the assumptions in the cash flow models that they used in relation to future underwriting profitability, and were responsible for the selection of discount rates. To the value thus ascertained, Grant Samuel added the value of the cash flows from investments that represented shareholders' funds supporting the reinsurance business. Those valuation conclusions were reviewed by reference to the multiples of net tangible assets and earnings implied by the share prices of comparable listed companies.

One of the checks of the valuation was to consider the earnings multiple produced by the valuation per share. For this purpose Grant Samuel had regard to the 1999 after-tax forecast, which produced an earnings multiple of 20-23.8. Grant Samuel expressed the view that this relatively high multiple was justifiable having regard to some special features of GIO, including its strategic value to a potential acquirer. Particular attention was given to GIO's forecast of a considerable improvement in performance for the year ending 30 June 1999, and the profit forecast was expressly set out both in the summary letter and the full report. In the full report (at PTB 2070) a number of major assumptions underlying the 1999 profit forecast for GIO Re were set out, including the assumption that a deterioration in GIO Re's catastrophe business as a result of the impact of Hurricane Georges would be offset by better-than-expected performance in other classes of business, and it was noted that GIO Re's management considered that the profit forecast remained realistic despite GIO Re's exposure to Hurricane Georges. The full report made it plain that Grant Samuel relied on information received from senior executives of GIO (see, for example, at PTB 2153). 3.42 Events after board's approval of Part B statement

At the GIO Insurance management committee meeting on 16 December 1998 (PTB 1884 (agenda); PTB 1893A (minutes)), Mr Schneider presented a Technical Services report in which he noted that determination of the reinsurance business profit as at November had been delayed, due to preparation associated with the 31 December 1998 valuation. He said a full revision of the MIPI assumptions would be undertaken at the half-year end and that work was proceeding to streamline the underlying process. As noted above, Mr Fricke presented a report on reinsurance claims, in which he commented that Hurricane Georges losses on property claims had increased considerably.

The board of directors of GIO Australia Holdings met on 17 December 1998 (PTB 2178 - minutes). Mr Vines made a presentation on the GIO Group's capital requirements and capital position and after receiving legal advice, the board noted that the Group's capital requirements had been under review since May 1998, and resolved to return excess capital of 38 cents per share to shareholders on the record on Monday 18 January 1999, subject to final clearance by the company's tax advisers. The board also resolved to bring forward the payment of the interim dividend normally declared in February and paid in April, and resolved accordingly that an interim dividend of 12 cents per share be paid, fully franked, in respect of the year ended 30 June 1998.

Mr Fox gave evidence (first affidavit, para 217) that he left Sydney on 21 December 1998, spending 24 hours in Singapore and then visiting his family in London, returning to Sydney on 10 January 1999. He said he did not access his e-mail while in London.

It does not appear, on the evidence, that Mr Vines did anything after 8 December to monitor the continuing development of Hurricane Georges, or to ascertain whether the representations he and other GIO Re executives had made concerning the maintenance of the profit forecasts had been eroded by later events. 3.43 Close of the AMP bid, and subsequent recognition of the impact of Hurricane Georges losses

AMP made an announcement to the market on 4 January 1999 that its offer would close on that day, as scheduled, expressing confidence that by the end of the day it would have reached a satisfactory level of acceptances (PTB 2236A). At the close of the bid, AMP had received acceptances for shareholders representing 57% of the shares.

During the period from January to March 1999 significant changes were made to the composition of the board and senior management team. By and large, existing officeholders were replaced, apparently (I infer) by AMP nominees. Peter Corrigan became the chief executive officer of GIO Australia Holdings, replacing Mr Steffey. Mr Vines left the company, but Mr Fox remained as executive director of GIO Insurance. In the half-yearly report to December 1998, published in March 1999, Mr Robertson was described as one of the executive management team, having the title "Executive Director" (PTB 2924), but he tendered his resignation as a director of GIO Insurance by a letter to the directors dated 3 March 1999 (Exhibit P23). By circular resolution (Exhibit P22) signed by each of the then current directors of GIO Insurance on 5 March 1999, Mr Corrigan was appointed a director and became chairman of GIO Insurance, and the resignations of Mr Vines and Mr Robertson as directors were accepted.

On 7 January 1999 Mr Robertson sent an e-mail to Mr Steffey, copied to Mr Fox and Mr Vines, on the current outlook for GIO Insurance. He referred to Mr Vines' "flash numbers". He expressed the opinion that the two divisions of GIO Insurance would still be able to deliver their planned full-year business forecasts of $80 million profit for reinsurance and $11 million loss for corporate insurance, in the absence of any unforeseen adverse claims experience in the ensuing six months. But attainment of the planned reinsurance result might not be possible, he said, if the expected new retrocession arrangements were not in place with retrospective effect for the full year. He said that Mr Vines was familiar with the issues involved (PTB 2239). Mr Robertson explained in his affidavit (para 227) that when he wrote this memorandum he still thought that the American Re contract was effective. He said his reference to retrocession arrangements having "retrospective effect for the full year" was a reference to retrocession recoveries which GIO Re was expecting for Hurricane Georges claims for the period up to 31 December 1998.

Mr Vines gave evidence that when he prepared the flash numbers, he had not been informed that claims for Hurricane Georges had reached about A$100 million (T 2673). He said he learned that claims on Hurricane Georges were up to about A$100 million at a meeting with Mr Steffey and the executive team, including Mr Robertson, on the morning of 7 January 1999 (T 2673-4).

Mr Fox prepared a position paper, which he sent to Mr Vines on 1 February 1999 (PTB 2247). In the paper he said that Hurricane Georges had lifted the loss ratio for 1998/9 from 63% to 89%, compared with an average loss ratio of 71%. He said that "without this exceptional loss the result for the year to date would have been $49m towards the $80m planned for the financial year”. Without stop-loss or reserve reduction the business result to December 1998 before tax would be, according to Mr Fox, a loss of $73 million for GIO Re. The business result to December 1998 subject to a stop-loss arrangement and with full Hurricane Georges recovery would be a profit of $66 million. He said that the reporting of a loss would seriously damage GIO Re's ability to trade and put in doubt its continued survival in view of AMP's previously expressed views. He commented that the payback element to stop-loss reinsurers in respect of Hurricane Georges would severely eat into future profitability. He recommended stop-loss arrangements with partial Hurricane Georges recovery, which would lead to a profit to December 1998 of $10 million, but said that there would need to be full auditor approval of the construction of the arrangement.

There is an undated document headed "Hurricane Georges Impact on Results" at PTB 2250, which indicates that the gross Hurricane Georges loss was $150 million, less marine insurance recovery of $20 million and extra reinstatements not in the accounts of $8 million, producing a net Hurricane Georges loss in the accounts of $122 million. Mr Vines said he saw that document late in January 1999, in preparation for a meeting held on about 1 February 1999 with Mr Fox, Mr Corrigan and others, to consider some alternative approaches that might be taken to reserving as at 31 December (T 2674-5).

Mr Robertson gave evidence (affidavit para 229) that he met with Mr Corrigan on about 1 February 1999, and in that meeting Mr Corrigan told him the new management wanted Mr Robertson to stay for a while because he was a calming influence, and his presence would reassure a lot of nervous GIO people. Mr Robertson said he agreed to stay, on the basis that he would subsequently be made redundant. For the next six months, he said, he carried out a few small projects for various parts of the GIO Group, with only very limited involvement in the reinsurance business. However, he attended some meetings at which Mr Schneider's valuation results as at 31 December 1998 were discussed, and Mr Corrigan asked him to assist by explaining the valuation process to the Board Audit Committee. When Mr Robertson suggested to Mr Corrigan that Mr Schneider's figures might not be right, Mr Corrigan said it would not be necessary to check them (Mr Robertson's affidavit, para 233).

On 11 February 1999 Mr Robertson provided a memorandum to the GIO Australia Holdings Board Audit Committee, copied to Mr Fox, with respect to outstanding reinsurance claims as at 31 December 1998 (PTB 2253). In it he commented upon Mr Schneider's valuation of GIO Re as at 31 December 1998, which had produced a business loss for the first half of 1998/99 of $73.3 million. Mr Schneider's figures included half-year losses of $10.8 million for property attritional, $50.3 million for marine attritional, and $31.3 million for space. Most significantly, Mr Schneider calculated a half-year loss for property/marine catastrophe of $72.3 million.

Mr Robertson commented that he was generally "not unhappy" with the results of Mr Schneider's valuation. He said that the results for the attritional classes were not surprising given the state of the international reinsurance market (in which premium rates had been softening continuously for several years) and the known condition of GIO Re's book of business. He continued: "By far the most significant unexpected contribution to the half-year results came from Hurricane Georges. This event is currently estimated as likely to cause us a gross loss of $167 million, and a net loss of $130 million, $8 million in the marine account and $122 million in property. Only a small amount of the loss has come to us from our own direct reinsurance, as we have found unattractive the premium rates in the Caribbean where Georges did most damage. The major part of our loss has come from retrocession provided to other insurers and Lloyds syndicates. We are no longer accepting business of the kind which gave us the worst of these losses."

Mr Robertson then commented on the MIPI reserve. He pointed out that the MIPI plan was completely redesigned in 1992/3 to become less problematic, and GIO had greatly strengthened its reserves, so that in recent years it had consistently demonstrated better claims experience than forecast. He recommended that MIPI should be put into the basic valuation model rather than being treated separately. He said that Mr Schneider had calculated that if this were done as at 31 December 1998, reported profit for the half-year would be increased by $65 million.

Mr Robertson also commented on prudential margins, saying that the current approach used by GIO Re was counterintuitive and should be changed to a new basis, which would generate profits for the half-year of $8.7 million. Coupled with his recommended approach to MIPI, the half-year result to 31 December 1998 would be converted from a loss of $73.3 million to a profit of $0.4 million.

Mr Robertson gave evidence that his instructions, when preparing the memorandum, were to write as if the results were his own valuation results, and he was told it would not be helpful to say that he had not checked the figures, or to express any doubts about them (affidavit para 235). Mr Robertson said (affidavit para 236) that after completing his memorandum, he received a copy of an e-mail from Mr Schneider to Mr Corrigan dated 15 February 1999, which said that the previous valuation result of a $73 million loss was incorrect, and altered the result to a loss of $110 million. Mr Robertson said he obtained detailed figures from Mr Schneider and incorporated the revised figures in a second version of his own memorandum, which was dated 15 February 1999. He said Mr Schneider then told him that the numbers he had given Mr Robertson as central estimate of outstanding claims were in fact the overall provisions including potential margins. Mr Robertson then prepared the third version of his memorandum, dated 16 February 1999. He said he did not sign any of the three versions of the memorandum because he took them to be drafts for someone else's use which did not reflect his own professional opinion (affidavit para 237).

Subsequently Mr Corrigan contacted him to say he could not send Mr Robertson's memorandum to the Board Audit Committee because Mr Robertson had no standing in GIO Insurance, and he asked whether Mr Robertson would mind if Mr Fox re-wrote the memorandum (Mr Robertson's affidavit para 238). Mr Robertson said he did not mind.

Mr Fox's memorandum to Mr Corrigan, copied to Mr Robertson, was dated 18 February 1999 (PTB 2260). The content of the memorandum is noticeably similar to Mr Robertson's memorandum, except that the projected loss figure is different. The loss derived from Mr Schneider's valuation had become $91 million, as a consequence of new currency/investment income information, although the figures for the contributions from each class of business were the same. Mr Fox's comment about the unexpected Hurricane Georges loss was virtually identical with Mr Robertson's comment. His substantive recommendations in respect of MIPI and the prudential margin were very similar to Mr Robertson's. On Mr Fox's calculations, the additional profit produced by adjustment to the prudential margin would be $21.5 million, and the adjusted result for the half-year to 31 December, bearing in mind the higher gross loss figure, was a loss of $4.5 million.

Mr Corrigan sent Mr Fox's memorandum to the Board Audit and Compliance Committee with a statement that he supported Mr Fox's conclusions (PTB 2266).

Mr Fox gave evidence (first affidavit, para 218) that the changes from the memorandum which is in Mr Robertson's name to the memorandum in his name were not made by him, and that he saw a copy of the memorandum only at some time after his return from London on 18 February 1999. ASIC submitted (written submissions (Fox), para 262) that the court should find it is improbable that any officer of GIO Re would have sent the memorandum in Mr Fox's name without giving him the opportunity to read it before it was sent. But it is not so implausible that Mr Robertson's memorandum might have been "re-badged" in Mr Fox's name by someone in the new management when it was discovered that Mr Robertson had no standing in GIO Insurance, and I therefore do not think it would be justifiable to find that Mr Fox's evidence on this point is untrue.

Perhaps the most significant thing about the memorandum of 18 February 1999 is not the question of who wrote it, but the fact that it says nothing to suggest that anything extraordinary had occurred after 7 December 1998 to cause the 31 December 1998 results for Hurricane Georges to be dramatically different from what was in prospect at 7 December.

Mr Fox also gave evidence (first affidavit, para 219) that in February or March 1999 Mr Schneider told him that the contract-by-contract analysis for Hurricane Georges had overlooked the "B Account", which consisted of old, long-term contracts not picked up by the COGEN system, and he added that losses were now going over $100 million. Mr Fox said that was the first time Mr Schneider had ever said anything to him to the effect that losses from Hurricane Georges might exceed $100 million. Consistently with my earlier findings, I reject this evidence. 3.44 GIO's results for July-December 1998

On 5 March 1999 GIO Australia Holdings, under its new management headed by Mr Corrigan, announced the Group's half-year results to 31 December 1998 (PTB 2921). It reported a loss for GIO Re of $19.6 million. It is striking that a business division for which the forecast on 16 December 1998 was a profit of A$80 million for the full year had, less than three months later, announced a loss for the half-year to December 1998 of such a large amount.

The half-yearly report commented as follows (PTB 2931): "GIO Re produced a loss from business activities of $19.6m before tax for the half-year. The most significant contributor to this disappointing half-year result was GIO Re's exposure to claims as a result of Hurricane Georges. Our current estimated net loss for this event is $120 million. Only a small part of the Hurricane Georges loss came from GIO Re's traditional reinsurance activities as premium rates in the Caribbean, where Georges did most damage, had been considered unattractive. Most of the loss came from retrocessional business accepted from other reinsurers and Lloyd’s syndicates. Early in 1998, GIO Re decided to restrict acceptance of this kind of business but was unable to withdraw from yearly contracts entered into in the January 1998 renewal period. Additional retrocessional protection has now been put into place to protect GIO Re from the severity of any similar future losses."

Mention was also made of the softening of premium rates in the property and marine reinsurance markets in recent years, and GIO Re's adoption of a more stringent approach to premium pricing and the writing of business where rates would not adequately reflect the underwriting risk.

It appears that Mr Schneider was unhappy with some press reports concerning the deterioration of GIO Re's financial position. On 13 May 1999 he sent an e-mail to Mr Fox (PTB 2275) referring to the press reports and in particular, comments that the loss was a function of a review by Ernst & Young which indicated a requirement to strengthen reserves by $200 million. Mr Schneider's concern was that the press reports would have an impact on his standing in the reinsurance industry, because it was well known that he was responsible for recommending reserves and the press reports implied that he had made a horrible mistake. He said it was not known publicly that management had ignored his advice on numerous occasions. He noted that he was not asked to produce recommendations in November and December and that his recommendation for October was overruled, as was his view about the size of Hurricane Georges. Mr Fox replied on the same day, seeking to reassure Mr Schneider that he had not been criticised within the company. 4. THE RESPONSIBILITIES OF MR ROBERTSON AND MR FOX FROM 5 NOVEMBER 1998 4.1 Further evidence concerning transfer of responsibilities from Mr Robertson to Mr Fox

I touched upon some of the relevant evidence in section 2.1. Mr Fox gave accounts (first affidavit, paras 12, 22 and 35) of three conversations he claimed to have had with Mr Steffey about his role (on about 31 August 1998, during his visit to Sydney from 19 to 22 September 1998, and on his first day in the office, which he said was 4 November 1998). On each occasion, according to Mr Fox, Mr Steffey told him Mr Robertson would stay on to work on financial matters and the takeover response, and in the second and third conversations Mr Steffey said, according to Mr Fox, that Mr Robertson would handle these aspects and that Mr Fox was to concentrate on other matters, implying that Mr Fox was not to be responsible for the "financials" and the response to the AMP bid.

Mr Robertson gave evidence that Mr Steffey never described his ongoing role at GIO Insurance in this fashion (T 3117). In his affidavit (para 99), Mr Robertson recounted a conversation he had with Mr Steffey on 2 October 1998. Mr Steffey told him that Mr Fox was to be appointed to succeed him at GIO Insurance. Mr Robertson claimed that during the conversation, Mr Steffey told him that he had some ideas for a new position for Mr Robertson but in the meantime, it was necessary to sign off on the Part B statement, and the directors would not be happy with leaving the sole responsibility for doing so to Mr Fox. Therefore, according to Mr Robertson, Mr Steffey said Mr Robertson would have to sign off with Mr Fox, on the basis that Mr Robertson would take responsibility up to 1 November and Mr Fox would sign off for everything after that time.

Mr Vines said no-one ever told him about any such arrangement, and that from his perspective, Mr Robertson remained involved in the preparation of the Part B Statement after Mr Fox arrived (T 2732).

In his e-mail to staff announcing Mr Fox's appointment (Exhibit P 21) Mr Robertson said he would stay on for some months to introduce Mr Fox and familiarise him with GIO Re and its style of operation, and that he would progressively move into a strategic role which Mr Steffey had in mind for him in GIO's other corporate activities.

Mr Robertson gave evidence, considered later, about some meetings that he had with Mr Fox and others on 5 November 1998. He said (affidavit para 168) he considered that after those meetings he had handed over responsibility for the ongoing assessment of GIO Re's profit forecast and its achievability to Mr Fox, although he remained available to deal with any queries Mr Fox might have. He said his understanding was that he had been responsible for the profit forecast until Mr Fox arrived, and that after Mr Fox arrived the achievability of the profit forecast became Mr Fox's responsibility and he remained available to provide support, assistance and advice.

Mr Robertson said (affidavit para 168) he told Mr Fox on 5 November that there was a profit forecast of $80 million for the reinsurance division, and that declaring the year-end profit would be Mr Fox's responsibility, so he should review the profit forecast and decide whether he was happy with it. He said he told Mr Fox: "As you know, we have to sign off on the profit forecast for the company, for the purposes of our defence against this AMP bid. It would seem a bit unreasonable to throw you into the deep end of this and leave you alone. So we will both sign off on the forecast with me taking responsibility up to now and you taking responsibility from now on."

On 4 December 1998 Mr Fox sent a memorandum to Mr Vines headed "November Highlights - GIO Re" (PTB 1572). He reported that "Tim Fox arrived on the 3rd November, 1998 and has taken up his responsibilities as Executive Director". At the meeting of GIO's due diligence committee held on 6 December 1998 it was noted that "Tim Fox has assumed responsibility for the areas for which Frank Robertson was formerly responsible" (PTB 1594). It was resolved that Mr Fox be required to execute a formal sign-off and that the sign-off by Mr Robertson be suitably amended to take account of the change in the control of his area of responsibility and the date on which that change occurred.

The "Management Sign-Off" signed by Mr Robertson on 7 December 1998 asserted that he had responsibility for the part of the GIO Group business covered by the answers to his due diligence questionnaire up to 1 November 1998 (PTB 1622). Mr Fox's "Management Sign-Off" of the same date (PTB 1623) referred to the part of the GIO Group business and affairs for which Frank Robertson had responsibility up to 31 October 1998, "for which I have now assumed responsibility", and declared that the sign-off was given only in respect of matters arising in respect of that part of GIO Group business for which he had assumed responsibility, and only in respect of the period since 1 November 1998. These documents imply an acknowledgement, on the part of both Mr Fox and Mr Robertson, that Mr Fox took over executive responsibility for that part of the GIO Group business and affairs for which Mr Robertson had been responsible up to 31 October 1998, as from 1 November 1998, and that Mr Robertson ceased to have that responsibility as from that time. I do not read Mr Fox's sign-off as acknowledging that the transfer of responsibility occurred only on the date of the document, namely 7 December 1998. 4.2 Mr Fox's responsibility as executive director

Mr Fox's evidence conveyed the general idea that, although he was appointed to the position of executive director of GIO Insurance, he was not responsible for financial forecasting for the reinsurance business, or for contributing information for the purposes of the draft Part B statement or to the DDC, and was therefore not in any way responsible for the $80 million profit forecast, or the potential impact of Hurricane Georges on it, or for the protection of the profit forecast from the impact of Hurricane Georges through retrocession arrangements. It may be that Mr Steffey instructed Mr Fox to give some attention to management improvement and the relocation of the business, but I do not accept that there was any qualification placed on Mr Fox's responsibility so as to exclude responsibility, or joint responsibility, for these matters, or otherwise to limit Mr Fox's responsibilities as executive director.

In my opinion Mr Fox's assertions, to the extent that they imply that he had no responsibility for these matters, are contrary to the weight of evidence. First, there is no such limitation of responsibility in any of the documentary terms of his employment. The letter written to him by Mr Yeoland, Human Resources Director for the GIO Group, on 15 September 1998 said that Mr Steffey and the directors were looking forward to the opportunity to meet Mr Fox "to pursue closure on your taking responsibility for the Company's Reinsurance activities" (Exhibit D13). Mr Steffey's letter of offer dated 22 September 1998 describes the position as "Executive Director Reinsurance" (PTB 529A).

Mr Fox attended Mr Steffey's regular executive meetings (T 2622), chaired the management committee meeting for GIO Re on 25 November 1998 (PTB 1278), and chaired meetings of the reinsurance committee of GIO Insurance on 16, 23 and 30 November, which Mr Robertson did not attend. This would be an odd level of involvement if Mr Fox had no financial responsibility. 1000 Mr Vines gave evidence that neither Mr Steffey nor Mr Fox, nor Mr Robertson, ever said to him that Mr Robertson rather than Mr Fox was responsible for takeover and financial matters (T 2622-3). I accept this evidence. It is consistent with what he wrote in his answers to the due diligence questionnaire, when he said, without qualification, that Mr Fox had assumed responsibility for reinsurance since early November (PTB 0909). That is of some significance because of Mr Vines' position as chief financial officer and his central role in the preparation of the Part B statement. One would have thought that any subdivision of financial responsibility and responsibility for the profit forecast, between the former and new executive directors of GIO Insurance, would have been communicated by the chief executive or by one of them to a person in Mr Vines' position. Mr Vines said that, while he understood that Mr Fox knew little about the operations of GIO Re when he commenced and it would take him time to come to grips with the situation, he expected that if Mr Fox expressed an opinion about anything it would be based on sound reasons. On the other hand, Mr Robertson had become a man without portfolio whose day-to-day responsibility was not entirely clear, but Mr Vines presumed that he would have a continuing involvement in the Part B statement and the forecast (T 2623). 1001 ASIC drew attention to evidence showing that various GIO executives communicated with Mr Fox on the basis that he had executive responsibility of a general financial kind. I agree that this evidence, though inconclusive, points against Mr Fox's evidence of his limited responsibility. Thus: · Mr Vines and Mr Schneider both sent e-mails to Mr Fox concerning the Part B due diligence questionnaire, on 11 and 10 November 1998 respectively (PTB 940 and 939); · the Status of Registered Events report of 5 November 1998 was addressed to Mr Fox as well as Mr Robertson and others (PTB 792); · Mr Fox attended the meeting of 11 November 1998 to discuss the October results; · Mr Schneider's e-mail dated 12 November 1998, concerning Mr Vines' "direction" to uplift the October profit result by $15 million, was copied to Mr Fox (PTB 984), and his memorandum dated 2 December 1998, enclosing the October valuation of claims and premiums, was sent to Mr Fox and Mr Wright although by that time Mr Robertson had returned from overseas (PTB 1452); · the e-mails attaching the Hurricane Georges register were sent by Mr Fricke to Mr Fox, copied to others (PTB 2460-2543). 1002 Importantly, when he had a telephone conversation with Mr McClintock on 24 November 1998 discussing the effect of Hurricane Georges and (according to Mr McClintock) whether the $80 million profit forecast could be maintained (Mr McClintock's file note is at PTB 1206), there appears to have been no suggestion that these issues were not Mr Fox's responsibility and that Mr McClintock should be talking to Mr Robertson. That is consistent with Mr Fox's letter to Mr Murray of PwC dated 23 November 1998, describing his role as "to assess fully both the underwriting and the reinsurance needs going forward" (PTB 1187). 1003 Another part of the evidence fits into this pattern, once Mr Fox's explanation of it is rejected. This is the evidence that Mr Fox asked Mr Schneider to look into "areas of conservatism" in the profit projection, and Mr Schneider then sent Mr Fox his "Particular Areas of Conservatism" memorandum (PTB 1467). Then, later on the same day, a facsimile expressed to be from Mr Fox was sent to Mr Hammond, attaching Mr Schneider's memorandum "as discussed in our telephone conversation" (T 1466). I have rejected Mr Fox's evidence that his secretary, Ms Irvine, sent the facsimile to Mr Hammond without Mr Fox's authority. The consequence is that Mr Fox was, on 2 December, involved in the development of a defence of the profit forecast, to the extent of obtaining Mr Schneider's opinion on areas of conservatism and passing those on to Mr Hammond. 1004 It is of particular significance that Mr Fox signed a management sign-off and representation letter on 7 December 1998, because those documents constitute strong evidence that Mr Fox had assumed plenary executive responsibility for GIO Re. 1005 Mr Fox's management sign-off (PTB 1623) was expressed to be given only in respect of matters arising in that part of the GIO Group business for which he had assumed responsibility and only in respect of the period since 1 November 1998. But nothing was said to indicate that financial responsibility in respect of the reinsurance profit forecast for the Part B statement was excluded. The representation letter (PTB 1618) was signed by both Mr Robertson and Mr Fox under the title, "Executive Director". It contained specific representations with respect to the GIO Insurance component of the profit forecast for the Part B Statement and the impact of Hurricane Georges, without any qualification to convey lack of responsibility on the part of Mr Fox. I have given reasons for rejecting Mr Fox's evidence that he signed these documents only after receiving Mr Robertson's representation that he was satisfied with them, and for rejecting his contention that the wording of the documents should be read down to reflect his allegedly limited responsibility (see section 3.36). 1006 My conclusion, on the basis of this evidence, is that Mr Fox became the sole executive director of GIO Re from at least the time that he arrived in his new position (5 November 1998), with the full responsibility of a reinsurance manager. In a sense, he was chief executive of the reinsurance business, although that concept is qualified by the fact that he was required to report to the chief executive of the parent entity. His responsibility commenced as from 1 November, but that did not mean he was entitled to disregard events that had occurred before that date where they impacted on the ongoing business or had the potential to do so (such as the developing claims experience for catastrophe events that occurred before 1 November). 1007 The role of Mr Robertson ought not to be ignored for the purpose of determining Mr Fox's liability and in particular, applying to him the words "in like position". But the evidence, including in particular the evidence considered in this section and section 4.3, does not establish that Mr Robertson was given exclusive responsibility, after Mr Fox's arrival, for any particular ongoing aspect of GIO Insurance's financial accounting or the response to the AMP takeover bid. 1008 Two of the more difficult factual questions in this case are whether, and if so to what extent, Mr Fox was entitled to rely on Mr Robertson, and whether, and if so to what extent, Mr Robertson was entitled to rely on Mr Fox. I shall consider the first question here and the second question in section 4.3. 1009 It seems to me that Mr Robertson's 4 November memorandum is the key piece of evidence here. He said he regarded it as a "sign-off" on the matters it covered at the point of transfer of responsibilities. In my opinion that evidence was reinforced by the way the 4 November memorandum was received and dealt with within the GIO Group. It was a significant document, taken to represent Mr Robertson's considered opinion on the subjects addressed. It was central to the discussion with Mr Lange and others, attended by Mr Fox, on the following day. In my opinion it was open to Mr Fox to regard it as an assumption of responsibility by Mr Robertson for the opinions he expressed, of a kind that Mr Fox could rely upon for his ongoing work upon taking up his new position. But it was not open to Mr Fox to rely on Mr Robertson in respect of matters which, according to or by implication from the 4 November memorandum, required some form of continuing attention. 1010 Importantly, the 4 November memorandum identified concerns and made predictions, which had the effect of drawing the reader's attention to the relevance of certain post-4 November developments, including developments in catastrophe experience. That meant that Mr Fox was not able to rely on Mr Robertson in respect of the subsequent factual development of Hurricane Georges or the assessment of the financial impact of that factual development. Mr Fox's position was not such that he could abdicate in favour of Mr Robertson any of the responsibilities attaching to the position of executive director as from 1 November, including responsibility to monitor and assess the financial consequences of the claims development of pre-November catastrophes. 1011 ASIC submitted (written submissions (Fox), para 117) that even if Mr Fox was entitled to believe that Mr Robertson was exercising some overall responsibility for the "financials" and the response to the AMP bid, he ought to have understood that Mr Robertson required input from him on the quantitative aspects of outstanding claims for Hurricane Georges. The question strictly does not arise because I have concluded that there was no basis for Mr Fox to believe that Mr Robertson had anything more than joint responsibility with him for some aspects of the management of GIO Re. But if that finding were wrong, I would agree with ASIC's submission, bearing in mind the evidence concerning Mr Fox's involvement in procuring the Hurricane Georges register updates and his admissions concerning responsibility for monitoring Hurricane Georges claims and providing specific loss information to PwC. 4.3 Mr Robertson's continuing responsibilities after the arrival of Mr Fox 1012 Clearly enough Mr Fox assumed a substantial part of the role of Mr Robertson when he commenced work on 5 November. It may be, as suggested by the terms of Mr Robertson's e-mail of 2 October 1998 (Exhibit P21) that the handover of responsibility was progressive or in stages after that time. What matters in the present case is whether Mr Robertson retained a role in relation to GIO Re's financial performance and the profit forecast. 1013 I agree with ASIC's submissions (written submissions (Robertson), para 10) that there are four matters that confirm that Mr Robertson retained some responsibility in respect of the profit forecast after 5 November. 1014 First, he filled out and returned his due diligence questionnaire (PTB 0917), and a "senior management sign-off" letter (PTB 0928), from a hotel room in Boston, on 10 November, that is five days after Mr Fox had arrived. In his covering memorandum (PTB 0905), Mr Vines had made it clear that it was necessary to include in the answers material changes in the financial position of GIO since 30 June 1998 and any other material information, and I infer that Mr Robertson understood that such disclosure was required. Therefore he was reporting as at a time after Mr Fox had become executive director. It appears that at the time, Mr Robertson expected to remain in the due diligence process (affidavit para 174), and there was nothing in his answers to indicate that he was responding only in respect of the period before Mr Fox's appointment took effect. 1015 Secondly, Mr Robertson attended the important meeting of 7 December 1998 with Mr Vines and Mr Fox. His evidence did not suggest that he was participating in some limited role. He gave evidence (affidavit para 212, quoted in section 3.35) that he reaffirmed the $80 million profit forecast in firm language without any indication that his opinion was confined to the pre-November period. On the contrary, he specifically affirmed his opinion by reference to "the information which is now available to me". 1016 Thirdly, he signed the representation letter with Mr Fox on 7 December 1998, under the title "Executive Director" (PTB 1618). That document referred specifically to the claims experience in respect of Hurricane Georges in a period extending after 5 November, and expressed opinions, as at 7 December, about a number of matters including whether management believed that an adjustment to the reinsurance forecast of $80 million was necessary in view of the deterioration in the performance of the catastrophe portfolio. 1017 Fourthly, Mr Robertson signed his management sign-off on 7 December 1998. As indicated in section 3.36, in that document Mr Robertson certified that to the best of his knowledge, information and belief the answers in the due diligence questionnaire were true and correct "in respect of that part of the GIO Group business and affairs" for which he had responsibility to 1 November, and it added: "For the avoidance of doubt this sign-off is given only in respect of matters arising in respect of that part of the GIO Group business for which I had responsibility in the period up to 1 November, 1998." 1018 ASIC submitted (written submissions (Robertson), para 11) that these words, on their proper construction, conveyed that Mr Robertson was only signing off in respect of that part of the GIO Group business to which he was responsible up to 1 November 1998, namely GIO Re, and he was not signing off in respect of that part of the GIO Group business for which he had responsibility after that date, namely the management reviews and other duties that had been assigned to him. In other words, the wording of the management sign-off identified the GIO Re business but it did not impose a time limit on the period of responsibility. 1019 In my opinion, this construction is correct. The word "only" in Mr Robertson's sign-off literally governs matters arising in respect of the business for which Mr Robertson was responsible, that is, GIO Re. The words "in the period up to 1 November 1998" are a part of the description of that business, rather than a separate condition imposing a time limit. If Mr Robertson or the drafter of the sign-off documents had wanted to say that Mr Robertson was to have no responsibility in respect of matters occurring in the GIO Re business after 1 November, it would have been easy enough to say so. That is what happened in Mr Fox's sign-off, in which there is a double "only" - that is, only in respect of matters arising in the business for which he had assumed responsibility, and only in respect of the period since 1 November. It is significant that this wording was not used for Mr Robertson's document. Moreover, the construction that I prefer is consistent with the way Mr Robertson acted, in completing the due diligence documentation of 10 November, participating in the meeting with PwC on 7 December, and signing the representation letter, without on any of those occasions insisting on delimiting his responsibility for events and developments occurring after Mr Fox arrived. 1020 Mr Robertson's evidence in cross-examination seems to me to support the conclusion that after 5 November he retained responsibilities in respect of the profit forecast. He conceded that in giving the sign-off of 7 December 1998 he was verifying the profit forecast based on information that he had or could reasonably have been expected to obtain (T 3232). He said that to obtain information he would have had to seek Mr Fox's permission, but he accepted that he had no reason to believe it would be refused (T 3232). In effect, the only difference between his responsibilities before and after 5 November with respect to the profit forecast seemed, from his evidence, to be that his formal ability to obtain information had become more limited (T 3232). 1021 Since I have held that Mr Fox acquired responsibility as executive director for general management of GIO Insurance including financial matters such as the profit forecast, my conclusion about Mr Robertson's role has the effect that they both were responsible for financial aspects of the Part B statement relating to GIO Insurance and in particular, the divisional profit forecast. 1022 James Morgan, an insurance underwriter with 44 years' experience in the international insurance and reinsurance industry, principally as a chief underwriting manager or chief executive of the companies where he had been employed, gave expert opinion evidence on behalf of Mr Robertson. He said in his affidavit (para 14) that on the basis of the assumptions he had been given, his opinion was that from the time of Mr Fox's arrival, Mr Robertson was not acting as reinsurance manager. ASIC pointed out (written submissions (Robertson), para 13) that one of the assumptions Mr Morgan was given was that from 5 November 1998 Mr Robertson no longer had "the responsibilities for management at [GIO Insurance] which he previously had" (Mr Morgan's affidavit, para 10(b)(iv)). That is, he assumed the critical factual question. Further, there seems to have been some inconsistency in Mr Morgan's evidence. In cross-examination, he agreed (T 3667-8) that he had assumed that Mr Robertson no longer had any responsibility in relation to the profit forecast after Mr Fox arrived. But in re-examination he said he was not assuming that Mr Robertson had no relevant role in the Part B statement or the profit forecast (T 3670). 1023 In the end, I have gained no assistance on the present question from Mr Morgan's evidence. Assuming that Mr Robertson ceased to act as a reinsurance manager when Mr Fox arrived, he nevertheless occupied an important executive position, making him an executive officer for the purposes of s 232(4) (see section 7.2), by virtue of his special role with respect to the profit forecast. The applicable standard of care and diligence is ascertained by reference to a reasonable person in a like position, that is in a position with special responsibilities of the kind in fact held by Mr Robertson, regardless of whether his position was properly designated as "reinsurance manager". The "like position" was a position with continuing responsibility for the divisional profit forecast, occupied by a person who had recently performed the role of reinsurance manager, having the knowledge and expertise gained in that position. 1024 In his written submissions (para 26), Mr Robertson provided an extensive list of items of evidence which indicated, he said, that after Mr Fox's arrival he was no longer the reinsurance manager of GIO Re's business. In my opinion the evidence shows that Mr Fox became "the new Executive Director" on his arrival (for example, as Mr Fricke said, affidavit made 2 October 2002, para 8), and in that sense Mr Robertson was "replaced" by Mr Fox (Mr Schneider, first affidavit, para 12; Mr Vines: T 2815). It is unnecessary for me to enumerate all the examples of evidence of that kind. But I do not agree with Mr Robertson that in light of this evidence, I should conclude that he was no longer performing any managerial functions. He may have been, as Mr Vines said, "a man without portfolio" (T 2623), but for the reasons given above, he retained substantial executive responsibility, concurrently with Mr Fox, in respect of the profit forecast. Indeed, Mr Robertson accepted (written submissions, para 28) that he retained some responsibility for the profit forecast. 1025 Mr Robertson gave evidence (T 3179; T 3232) that when Mr Fox arrived, his responsibility in respect of the profit forecast changed from a "proactive" role as the person who created and was monitoring it, to a reactive role of providing such advice, counsel and assistance as Mr Fox, Mr Vines and Mr Steffey wanted in relation to the profit forecast. He said (T 3178) "it was no longer my responsibility to continue working on the profit forecast", and later he said (T 3232) he believed that after Mr Fox arrived he was entitled to rely on Mr Fox to give him information. I do not accept this evidence, either as evidence of his factual responsibility or as evidence of his belief that the time. It seems to me to be inconsistent with the four principal matters to which I have referred, namely his signing of the answers to the due diligence questionnaire on 10 November, his attendance and conduct at the meeting with PwC on 7 December, his signing of the representation letter with Mr Fox, and his signing of the December management sign-off - "inconsistent" in the sense that they point to the conclusion that there was no such limitation to his executive role in respect of the profit forecast. 1026 The evidence indicates that Mr Robertson's day-to-day involvement in the due diligence process was reduced substantially when Mr Fox arrived, and he had no significant role in the negotiation of the American Re placement slip. He was in the United States from 6 to 17 November and, as noted in section 3.28, when he returned he attended to only a limited number of specific tasks relating to due diligence. That does not mean, however, that he had been exonerated from responsibility in respect of the profit forecast, or his responsibility had been discounted. The contrary was demonstrated by the events of 7 December. Whether or not he could be described as a "reinsurance manager" for any general purpose, he purported to discharge executive responsibility at the level of a reinsurance manager on 7 December, thereby inviting those who observed his conduct to rely on his representations as representations carrying the weight of authority of such a person. 1027 The consequence of my findings about Mr Robertson's responsibility is that, within the sphere of the profit forecast, it is relevant to consider whether he met the standard of care and diligence of a "reasonably competent reinsurance manager", though it must be borne in mind that he was not in fact a reinsurance manager in any general or overall sense and the "like position" to which s 232(4) directs our attention was a very special and idiosyncratic executive position in his case. 1028 ASIC contends that the duty of care and diligence of the three defendants in respect of the profit forecast continued after 7 December. Mr Vines and Mr Fox remained in their positions for some time after 7 December, but the facts concerning Mr Robertson are different. The documents that he signed on 7 December did not contain any express promise by him to continue to monitor the profit forecast, and nothing was implied other than what could be extracted from the fact that he signed the representation letter as "Executive Director". But that did not create an implied representation that he would continue to monitor the forecast, because it was plain, considering together the representation letter and the management sign-offs by Mr Robertson and Mr Fox, that Mr Robertson was the outgoing executive director, and so the reader was not entitled to assume that he would continue in that role. 1029 As noted in section 3.28, after the events of 7 December, including the signing of the representation letter and management sign-off, Mr Robertson ceased to have any involvement whatever in GIO Re, and confined his attention to the special projects given to him by Mr Steffey. He was not involved in the redrafting of the American Re agreement or in Mr Schneider's attempts to use the new valuation model to produce the profit result for November. He went on holidays on 18 December and was away until 3 January. That was the day before the close of AMP's takeover offer, and therefore the day before the currency of the Part B statement as a document capable of influencing decisions by GIO shareholders came to an end. In my opinion these facts indicate an acceptance by those with whom Mr Robertson dealt at GIO Re, evidenced by their not involving him any more in the reinsurance business, that his responsibilities at GIO Re had effectively come to an end. 5. SOME LEGAL ISSUES 5.1 The statutory provisions 1030 Against all three defendants, ASIC alleges contraventions of the substance of s 232(4) of the Corporations Law, as it stood during the second half of 1998, when the conduct and omissions alleged against the defendants occurred. Against Mr Fox, it also alleges contraventions of the substance of s 232(2). I say "the substance of" because, as explained below, these provisions of the State-based national co-operative legislative scheme have subsequently been repealed and replaced by provisions of the Corporations Act, a Commonwealth law which preserves the substance of the former provisions. 1031 The relevant provisions of the Corporations Law in the period from 1 July 1998 to 31 December 1998 (without amendment during that period) were as follows: "232(1) In this section: 'Officer', in relation to a corporation, means: (a) a director, secretary or executive officer of the corporation; …. (2) An officer of a corporation shall at all times act honestly in the exercise of his or her powers and discharge of the duties of his or her office. …. (4) In the exercise of his or her powers and discharge of his or her duties, an officer of a corporation must exercise the degree of care and diligence that a reasonable person in a like position in the corporation would exercise in the corporation's circumstances. (4A) A reference in subsection (2) or (4) to the exercise of powers, or the discharge of duties, of an officer of a corporation is a reference to the exercise of those powers, or the discharge of those duties: (a) in any case - in this jurisdiction; or …. (6B) Subsections (2), (4), … are civil penalty provisions as defined by section 1317DA, so Part 9.4B provides for civil and criminal consequences of contravening any of them, or of being involved in a contravention of any of them. …." 1032 The word "corporation" was defined in s 57A(1) to include any body corporate and a company. As seen above, the word "officer" was defined in s 232(1)(a), in relation to a corporation, to include "a director, secretary or executive officer of the corporation". "Executive officer" was defined in s 9, in relation to a body corporate, to mean "a person, by whatever name called and whether or not a director of the body or entity, who is concerned, or takes part, in the management of the body or entity". 1033 Section 232 of the Corporations Law was repealed, with effect from 13 March 2000, by the Corporate Law Economic Reform Program Act 1999 (Cth) ("the CLERP Act"). The CLERP Act inserted a new Part 2D.1, which dealt with the duties and responsibilities of officers and directors. Approximately speaking, s 180 replaced s 232(4) as the statutory duty of care for officers of corporations, although the new provision was significantly different from its predecessor. There was no direct equivalent in the new law of the statutory duty of honesty in s 232(2), but there was a statutory duty of good faith in s 184(1). The CLERP Act replaced the provisions of Part 9.4B of the Corporations Law, which provided for civil penalty proceedings to be brought for contraventions of s 232 (2) and (4), with a new statutory civil penalty regime. However, the operation of the former Part 9.4B in respect of civil penalty breaches that occurred before 13 March 2000 was preserved by s 1473(1). 1034 Subsequently the Corporations Law was wholly repealed and replaced by the Corporations Act 2001 (Cth), an enactment by the Commonwealth Parliament relying on a referral of power from the States. The Corporations Act took effect on 15 July 2001. The liabilities and obligations imposed by s 232 and the former Part 9.4B, in the form in which they operated in 1998 and as preserved by the transitional provisions of s 1473 of the Corporations Law, were in turn "carried over" into the Corporations Act by ss 1400 and 1401. The latter provisions have the effect that the new Corporations Act applies to the liabilities and obligations of the defendants in respect of the events of the second half of 1998, as if it were in force at that time and contained provisions equivalent to s 232 and Part 9.4B in the form in which they stood in the second half of 1998. The legislative device of applying the new law to pre-commencement matters, while modifying the new law in its application to those matters so as to equate the new law with the law then applying, appears to have been designed to avoid any constitutional weaknesses arising out of the co-operative federal nature of the old law: see Forge v ASIC (2004) 52 ACSR 1, at [24]-[72]. 1035 While the provisions now applicable to the defendants are provisions of the Corporations Act modified to correspond with the relevant provisions of the Corporations Law in force in 1998, I shall for convenience refer to the old Corporations Law provisions as if they were directly applicable, without making expressly the qualification that arises from this historical analysis. 1036 Three issues have arisen concerning the application of s 232(2) and (4) to the instant facts, namely: (a) What is "an executive officer"? (b) What is the content of the duty of statutory duty of care and diligence? (c) What is the content of the statutory duty of honesty? 5.2 " Executive officer" 1037 The statutory definition, set out above, refers to a person "who is concerned, or takes part, in the management of the body". There are two components to this, namely the meaning of "management", and the degree of participation necessary to attract the definition (that is, the meaning of "concerned, or takes part, in"). The case law dealing with these issues is not entirely clear, because of uncertainty about the status of Commissioner for Corporate Affairs v Bracht [1989] VR 821, in which Ormiston J took a wide view with respect to both issues, and uncertainty about the application of that decision (if correct) to the definition of "executive officer" for the purposes of s 232. Management 1038 As to the concept of management, it emerges fairly clearly from the authorities that the following activities do not constitute management: · the execution of instructions by an agent whilst obeying orders: Gibson v Barton (1875) 10 QB 329, at 336 per Blackburn J; · merely administrative work of the kind performed by a company secretary or accountant (although a full examination of the facts may show that such a person in fact makes management decisions): Sycotex Pty Ltd v Baseler (1994) 13 ACSR 766, at 781-2 per Gummow J; · otherwise, the carrying out of day-to-day routine functions in accordance with predetermined policies: Bracht at 829. 1039 There are two areas where the law is less clear, and each may have some relevance to the present case. One is whether "management" can be said to occur where the activity is confined to a segment of the company's overall business (such as production, sales or trading); whether, in other words, "management" is confined to central management of the affairs of the company. The second is whether "management" may occur amongst those corporate officers who are not directors and do not report directly to the board. "Management" and segment responsibility 1040 In R v Campbell (1984) 78 Cr App R 95, the English Court of Appeal took the view that "management", for the purposes of the English provision prohibiting a bankrupt from taking part in the management of a company, related to central management and not to activities confined to particular aspects of the company's business. In Bracht , Ormiston J (at 829) took a broader view. He had to construe s 227(1) of the Companies Code (see now Corporations Act, s 206B(3)), which said that a bankrupt must not "be in any way (whether directly or indirectly) concerned or take part in the management of a corporation without the leave of the Court". He held that a magistrate had erred by holding that the defendant had not been concerned in management because another person had ultimate responsibility for the company's decision-making. In the course of reaching that conclusion, his Honour doubted that, in its context, "management" should be confined to "central management". 1041 He expressed the opinion (at 830) that "the concept of 'management' for present purposes comprehends activities which involve policy and decision-making, related to the business affairs of a corporation, and affecting the corporation as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions may have some significant bearing on the financial standing of the corporation or the conduct of its affairs". He continued (at 830): "Thus, although the decisions of a branch manager, subject to predetermined restrictions, may not be comprehended, there are those involved in large, discrete parts of a corporation's business who, although not participating in the central administration of that corporation, nevertheless are involved in its management to the extent that their policies and decisions have a significant bearing on its business and its overall financial health." 1042 The Bracht case was followed, in relation to the provision prohibiting a bankrupt from managing a corporation, in Griggs v ASC (1999) 75 SASR 307 at [38] to [49] and Nilant v Sherton [2001] WACA 421, at [17] to [18]. In Cullen v CAC (1988) 14 ACLR 789, at 793-4, Young J referred to the breadth of the concept of management adopted by Ormiston J, without disagreement, and concluded that a person disqualified from involvement in the management of corporations who is in doubt as to whether a proposed course of action would infringe the disqualification order, should apply to the court for leave to act. 1043 A different approach to the concept of management can be found in the judgment of Burchett J in Holpitt Pty Ltd v Swaab (1992) 33 FCR 474. The question in that case was whether, under the statutory insolvent trading provisions of the time (Companies Code, s 556), the respondent could be made liable for the company's debt to the applicant on the ground that the respondent was "a person who took part in the management" of the company at the time when the debt was incurred. The applicant's allegation was that the respondent acted as the solicitor to and secretary of the company, arranged for the deposit for a property purchase to be made available, and attended at the exchange of contracts. Burchett J held that these matters could not constitute a basis for the conclusion that the respondent had taken part in the management of the company. He approached the matter on the basis that it would be inappropriate to give the statutory provision a loose meaning ignoring its context (at 476). He expressed the opinion (at 477) that "management" extends to a delegate of the board with "full discretion to act independently" (citing Tesco Supermarkets Ltd v Nattrass [1972] AC1 53, at 171 per Lord Reid), or a person who has "the management of the whole affairs of the company", who is "entrusted with power to transact the whole of the affairs of the company" (citing Gibson v Barton (1875) 10 QB 329, at 336 per Blackburn J). 1044 That appears to equate "management" with "central management", and is therefore, literally, a narrower approach than the approach taken by Ormiston J. Burchett J distinguished Bracht on the ground of its different statutory context (at 477). According to Burchett J's reasoning, those affected by the way in which a company is managed are to be given the benefit of a fairly wide protection from a bankrupt's involvement in management; but where the question is whether an individual should be made liable for the company's debt, there is no reason to stretch the statutory language to encompass those who have no real influence on the decisions of the company to incur debts. To apply Ormiston J's broader approach would have the effect of imposing personal liability on persons who had no control over the decisions which were taken to incur the relevant debts. In his Honour's view, in the context of the insolvent trading provisions, the reference to taking part in the management of a company should be interpreted as applying only to "persons whose management role may be likened to that of a director". 1045 Holpitt v Swaab was applied in Sycotex Pty Ltd v Baseler (No 2) (1994) 51 FCR 425 and Standard Chartered Bank Ltd v Antico (No 1) (1995) 38 NSWR 290, both insolvent trading cases. 1046 The question whether Ormiston J's or Burchett J's approach should be applied to statutory directors' and officers' duties has not yet been finally resolved. In Forkserve Pty Ltd v Jack ( 2001) 19 ACLC 299, where Santow J was required to consider the application of the statutory duty not to make improper use of information in the case of a person alleged to be a director and/or executive officer, his Honour quoted and applied the statement of principle in Bracht and distinguished between "routine clerical or administrative duties" and activities "involving some responsibility and participation in the decision-making processes of the company" (citing Sycotex v Basler ), without referring to the possibly narrower approach adopted in Holpitt , which was apparently not cited to him. 1047 In other cases where the point has arisen, courts have simply considered the functions that the defendants have in fact performed without referring to Bracht or Holpitt or the possible conflict between them (see, for example, Kenna and Brown Pty Ltd v Kenna (1999) 32 ACSR 430, at [188] to [199]). This was the approach taken at first instance in ASIC v Forge [2002] NSWSC 760, at [94] to [108]. On appeal (52 ACSR 1 at [183]-[201]), McColl JA (with whom Handley and Santow JJA agreed) set out the competing lines of authority and found it unnecessary to decide whether the statutory definition of "executive officer" in s 9 of the Corporations Law, as it stood in 1998, should be given the wide or narrow construction. This is because it was plain, on the facts, that the relevant defendant had been concerned in activities which involved both policy and decision-making and related to the company's business affairs as a whole. 1048 In my opinion, for reasons more fully discussed in sections 6, 7 and 8, Mr Vines was an executive officer of GIO Australia Holdings, and Mr Robertson and Mr Fox were executive officers of GIO Insurance, whether one takes the approach of Ormiston J or the approach of Burchett J to the concept of "management". Mr Vines was an executive officer of GIO Australia Holdings but not, for reasons given in section 6, an executive officer of GIO Insurance. But it is probably necessary to decide between those two approaches in order to determine whether Mr Robertson and Mr Fox were executive officers of GIO Australia Holdings. 1049 In my view Ormiston J's decision in Bracht should be followed with respect to the statutory directors' and officers' duties in s 232, in preference to Burchett J's approach in Holpitt . In this statutory context, the purpose of the definition of "executive officer" is to identify, amongst those who work for the corporation, that group whose responsibilities are significant enough to justify the imposition of special statutory duties. It would be very odd if, say, the national sales manager of a major listed corporation, whose dishonesty or disloyalty or negligence could cause very substantial harm to the corporation, were not an "executive officer" subject to the statutory duties because his or her responsibilities were limited to the sales segment of the business, in circumstances where the statutory duty clearly applies to the company secretary. In Holpitt , Burchett J was concerned that the potential unfairness of making a company executive responsible for debts which he or she had no role in incurring. The problem does not arise in the present context, where the issue is intrinsically confined to assessing the proper discharge of the executive's own responsibilities in his or her position in the corporation. 1050 The consequence is, in my opinion, that Mr Robertson and Mr Fox were, by virtue of the application of Ormiston J's approach and in light of the matters addressed in sections 4, 7.2 and 8.2, executive officers of GIO Australia Holdings, as well as being, on any view, executive officers of GIO Insurance. "Management" and intermediate executives 1051 The second uncertain question is whether "management", in this sense, can ever be exercised otherwise than by the board of directors and those who report directly to the board. In Bracht , Ormiston J thought that in the case of a large company, management activities may be undertaken even by those who do not communicate directly with the board. The question did not arise in the Holpitt case, but Burchett J's reliance (at 477) on the observations of Lord Reid in Tesco v Nattrass , where his Lordship speaks of management having delegated discretion to act independently, might suggest that only those who communicate directly with the board fall within the concept. 1052 It is unnecessary to choose between the broader and narrower views in the present case, once one identifies the corporate entities involved in the case of each defendant. Mr Vines was in the first layer of management of GIO Australia Holdings, attending board meetings and reporting to the board as chief financial officer, sometimes through Mr Steffey and sometimes directly. Mr Robertson and Mr Fox were obviously in the first layer of management of GIO Insurance during their respective periods as executive director, and were also directors of that company. After Mr Fox arrived, Mr Robertson retained responsibilities to be performed in dealings with Mr Fox as executive director, and with Mr Vines as chief financial officer and executive officer responsible for the takeover defence process and Part B statement. They were also in the first layer of management of GIO Australia Holdings with respect to a crucially important part of that company's activities, namely the determination of the GIO Insurance contribution to the Part B profit forecast. Each defendant was concerned in "management" of the relevant entity (GIO Australia Holdings for all three, and GIO Insurance for Mr Robertson and Mr Fox), whether the broader or the narrower concept is applied. The degree of participation: "concerned" and "takes part in" 1053 As to the degree of participation, the definition of "executive officer" speaks of being "concerned in" or "taking part in" management. The provision under consideration in the Bracht case was similar, but the words "whether directly or indirectly" were used, arguably widening the scope of the provision. The insolvent trading provision at issue in the Holpitt case spoke only of taking part in management, evidently a narrower concept. 1054 According to Ormiston J in the Bracht case (at 831), "taking part in" connotes active participation, which must be real and direct, but not necessarily in a role in which ultimate control is exercised, although it would have to be more than the administrative carrying out of the orders of others. The idea of being " concerned" in management was held by Ormiston J to have "a much wider operation", connoting "participation at a variety of levels and at differing intensities", some of which "may be relatively modest" (at 832). It covered "a wide range of activities relating to the management of a corporation, each requiring an involvement of some kind in the decision-making processes of that corporation" (at 832). Merely clerical or administrative activities would be insufficient (at 832): "It requires activities involving some responsibility, but not necessarily of an ultimate kind whereby control is exercised. Advice given to management, participation in its decision-making processes, and execution of its decisions going beyond mere carrying out of directions as an employee would suffice." The question, according to his Honour, is whether the defendant "is given some measure of responsibility or some area of discretion, or … his opinion is given some weight in the decision-making processes of management" (at 832-3). 1055 Ormiston J's approach to the expression "concerned in … management" was accepted by the Court of Appeal of New South Wales in Forge v ASIC , 52 ACSR 1 at [200], notwithstanding the difference in statutory language that I have noted. In my opinion it is plain in the present case that Mr Vines took part in, and was concerned in, the management of GIO Australia Holdings through his roles as chief financial officer and the executive officer with principal responsibility for the takeover defence process in the financial aspects of the Part B statement. Mr Fox took part in, and was concerned in, the management of GIO Insurance by virtue of his position as executive director of the company as from 5 November 1998, and Mr Robertson did likewise up to 5 November 1998. Mr Robertson continued to take part in, and be concerned in, the management of GIO Insurance after that date because of his attention to his special responsibilities in respect of the profit forecast. By virtue of the same activities, Mr Fox and Mr Robertson were concerned in, and took part in, the management of GIO Australia Holdings. 1056 However, in my view the evidence shows that Mr Vines was not concerned in, and did not take part in, the management of GIO Insurance as such, because his concern and participation in the affairs of that subsidiary was undertaken by him in his capacity as an executive officer of the parent entity, GIO Australia Holdings. This point is developed in section 6.2. 5.3 Content of the statutory duty of care and diligence 1057 The statutory standard under s 232(4) is "the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances". For the most part, the issues concerning the application of those words to the circumstances of the three defendants in the present case are issues of fact rather than law. It is, however, appropriate to consider whether the statutory standard upon which ASIC relies encompasses, for executive officers such as the three defendants, an objective duty of skill in their respective offices as well as (or as part of) the duty of care and diligence. In this context, "skill is that special competence which is not part of the ordinary equipment of the reasonable man but the result of aptitude developed by special training and experience": Daniels v Anderson (1995) 37 NSWLR 438, at 667 per Clarke and Sheller JJA. 1058 The leading New South Wales case on the content of the duty of care of company directors and officers is the decision of the Court Appeal of New South Wales in Daniels v Anderson . I made an analysis of that case, and its consequences when applied to the statutory duty of care and diligence, in my decision on the admissibility of expert opinion evidence in ASIC v Vines (2003) 48 ACSR 322. I concluded (at [38]-[46]) that, applying the judgment of Clarke and Sheller JJA, the statutory formulation adopts an objective standard of care, measured by reference to what a reasonable person of ordinary prudence would do, enhanced where an appointment to the board of directors is based on the appointee having some special skill, by an objective standard of skill referable to the circumstances. Noting that a director's duties qua director may be enhanced by his or her duties qua executive officer, I said that after Daniels v Anderson there was an objective standard of skill, both at general law and under s 232(4), for executive officers appointed to positions requiring the exercise of skill, notwithstanding the absence of the word "skill" from the statutory formula. 1059 I reached the position (at [47]) that in the case of an executive officer appointed to a designated position, the words "in a like position" refer to a position having the same characteristics as the designated position: for example, the degree of care and diligence that a reasonable person "in a like position" to the chief financial officer of a corporation would exercise in the corporation's circumstances is the objective degree of care and diligence flowing from the position of chief financial officer, encompassing the special skill that is to be brought to such an office. I said that there is identifiable specialised skill attaching to that office (at [48]). Therefore I decided that expert opinion evidence about what a reasonably competent chief financial officer would do in certain assumed circumstances was relevant and admissible. 1060 I noted (at [49]) that my decision on the admissibility of evidence did not preclude submissions at the final hearing challenging my analysis and conclusions as to the statutory duties of executive officers. Now that the final hearing has taken place, it seems to me appropriate to decide, and I do decide, that the reasoning set out in the paragraphs of my earlier judgment to which I have referred is correct. It follows that each defendant, to the extent that he was appointed to a designated executive office, was subject to objective statutory duties of care, skill and diligence measured by the degree of care, skill and diligence that a reasonable person in an equivalent executive position in the corporation would exercise in the corporation's circumstances. 1061 There are, however, three additional points to be made about the statutory reference to a "like position in a corporation". First, those words identify a question of fact to be determined by the court, namely the position actually occupied by the defendant in the corporation. That involved reviewing the evidence to ascertain the responsibilities attaching to the position occupied by the defendant. The evidence relevant to that might include the letter of appointment, any job description, evidence of what the defendant actually did and evidence of what others expected him or her to do. 1062 Secondly, the statutory words require consideration of the whole of the position occupied by the particular defendant. If, to take an obvious case, a defendant were both a director of the corporation and its chief executive, the "like position" would encompass both of those roles. In the case of Mr Vines, therefore, it is necessary to take into account not only his position as chief financial officer, but also the special responsibilities he acquired after the announcement of the AMP takeover bid. 1063 Thirdly, not every officer of a corporation will occupy a position possessing recognised standard characteristics, such as the position of chief executive officer or chief financial officer. Sometimes the officer will have special and unique responsibilities. That is not an obstacle to the application of the statutory standard. The statute requires the court to consider the degree of care and diligence that the hypothetical reasonable person would exercise in "a like position in a corporation", that is in a position, in a corporation in the corporation's circumstances, having the same special attributes as the defendant's position in the corporation. Thus, the statutory standard is capable of applying to Mr Robertson's special position after Mr Fox became the executive director of GIO Insurance. 1064 ASIC made three supplementary submissions, each of which I accept. First, there is support for the proposition that s 232(4) incorporates an objective standard of skill for executive officers, in the judgment Santow J in Re HIH Insurance; ASIC v Adler (2002) 41 ACSR 72, at [372], where his Honour observed that an executive director is taken to have promised in the contract of employment that he or she has the skills of a reasonably competent person in his or her category of appointment and will act with reasonable care, diligence and skill. On appeal, Giles JA noted that it had not been contended any aspect of Santow J's analysis was deficient: Adler v ASIC (2002) 41 ACSR 72, at [528] to [529]. 1065 Secondly, my analysis in ASIC v Vines focused on the position of a director who also holds executive office, but the same reasoning leads to the conclusion that a non-director executive officer is subject to a statutory duty of skill referable to his or her executive position, as well as (or as part of) duties of care and diligence. That point is relevant to the position of Mr Vines vis-a-vis GIO Australia Holdings. 1066 Thirdly, the requirement in s 232(4) to compare the particular officer with a person in a "like" position enables the court to "look both at any special expertise held by individual directors [or non-director executive officers] and the distribution of functions within the corporation": ASIC v Rich (2003) 44 ACSR 441, at [42]. As Mr Robertson's submissions pointed out (para 11(c)), the statutory words involve an examination not just of the formal position which the defendant held, but the manner in which that position was exercised in the corporation's circumstances. 1067 The "corporation's circumstances" include the type of company, the size and nature of the company's business, the composition of its board, and the distribution of its work between the board and other officers": Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 126; as to the relevance of the way work is distributed between directors and other officers, see also Australian Securities Commission v Gallagher (1993) 11 WAR 105; 10 ACSR 43 at 53. 1068 Mr Robertson submitted (written submission, para 14) that, when assessing an alleged breach of s 232(4), it is necessary to consider the transactions as a whole with an eye to reality (citing Adler v ASIC (2003) 46 ACSR 504 at [153] and [458]). I accept that proposition but care must be taken in applying it. In the present case there are numerous particular allegations against the directors. It would be unacceptable if the law were to require or even permit a plaintiff to subdivide a series of events and transactions which are all directed towards a common purpose, by taking each step along the way and alleging a separate breach of the subsection in respect of that step, considered in isolation. That does not mean, however, that in a case where events and transactions are connected, one must seek to identify a single breach as if there were only a single transaction. 1069 Here, although all of the matters alleged against the defendants related to, or were ancillary to, the calculation and forecasting of GIO Re's profit, it was not necessary to fold everything into a single "charge" against each defendant. It was open to ASIC to allege that there were separate breaches in various stages of the due diligence process, such as in the completion of the November due diligence documentation, the negotiation of the American Re agreement, the meeting with PwC on 7 December, the completion of the December due diligence documentation, and so on. The standard of care 1070 Given the language of s 232(4) and the case law interpreting it (especially the recognition in Daniels v Anderson that the statutory formula includes a standard of skill), it seems to me that the general law of torts may now be called in aid as a source of guiding principles for the content of the statutory standard of care of company directors and officers. The statutory standard should not be treated as an idiosyncratic and isolated phenomenon, at any rate so far as the content of the duty is concerned. It seems to me that this is so whether the general law duty of care of company directors and officers is an equitable duty arising out of a fiduciary relationship, or now part of the general law of torts; and if it is equitable, whether it is the equitable standard that is adopted by the statute. Ascertaining whether the statutory standard adopts the substance of an equitable duty may be a matter of significance where the issue is (say) measure of compensation or causation, but that matter does not appear to be significant where the issue is the content of the standard of care. It is therefore of assistance to look to the general law of torts. 1071 In Wyong Shire Council v Shirt (1980) 146 CLR 40 at 47, Mason J held that, in order to determine what a reasonable person would do by way of response to a given risk, the tribunal of fact needs to consider "the magnitude of the risk and the degree of the probability of its occurrence, along with the expense, difficulty and inconvenience of taking alleviating action and any other conflicting responsibilities the defendant may have". It seems to me that the first two of these factors, the magnitude of the risk and the degree of probability of its occurrence, are especially pertinent in the present case. I shall take them in reverse order. 1072 As to the degree of probability of occurrence of the risk, the High Court in Swinton v The China Mutual Steam Navigation Co Ltd (1951) 83 CLR 553 at 566-7 pointed out that " the measure of care increases in proportion with the danger involved". Elaborating that principle, RP Balkin and JLR Davis ( Law of Torts , 3rd edition, 2004, para [8.5]) remarked that "the amount of caution required is not based on an absolute standard but tends to increase with the likelihood that the defendant's conduct will cause harm". That observation is germane to the present case. The three defendants occupied positions which, in somewhat different ways, were capable of influencing the content of GIO's Part B statement and in particular, the profit forecast. It seems reasonable to infer that the content of the Part B statement, and in particular, the level of the profit forecast, was likely to influence GIO shareholders in making their imminent decision whether to accept or reject the AMP bid. Therefore in this case there was a significant likelihood that failure by the defendants, or any of them, to discharge their duty of care and diligence would be likely to cause harm. 1073 As to the magnitude of the risk, in Mercer v Commissioner for Road Transport and Tramways (NSW) (1936) 56 CLR 580 at 601, Dixon J said: "In considering the extent and nature of the measures that due care demands, the first question must be the gravity, frequency and imminence of the danger to be provided against." 1074 In the present case the danger to be provided against was that the GIO shareholders might be left in a position of making their decision whether to accept or reject the AMP takeover bid on the basis of inaccurate or incomplete information, if the defendants or any of them failed to discharge their statutory duty of care and diligence. If, in consequence of the defendants (or any of them) breaching their duty by conduct which allowed too high a profit forecast to be published, GIO shareholders were to decide not to accept the takeover offer, the risk to them would be that they would find themselves locked into a minority position in a company, management control of which had passed under the bid. Without, at this stage, making any findings about causality or remoteness of damage, the court can infer that this risk was a substantial one, because the liquidity of the market for a listed target company's shares, and the share price, will ordinarily be adversely affected once control has passed and any control premium has evaporated. 1075 The statutory standard set by s 232(4) establishes an inquiry as to the degree of care and diligence that a reasonable person "would exercise", not what a reasonable person might do. The standard is similar in concept to the standard that applies in professional negligence cases. If a professional person acts as a reasonable professional would act, he or she is not negligent even if many others would have acted differently in the circumstances. In applying the general standard of care and diligence to a professional person such as a lawyer, auditor, actuary, reinsurance manager or chief financial officer, the law distinguishes between negligence and mere mistakes. 1076 Dealing with the duty of care of a solicitor, McLelland CJ in Eq said, in Trust Co of Australia v Perpetual Trustees Ltd (1997) 42 NSWLR 237, at 247: "Not every mistake by a solicitor founds liability in negligence. There are many uncertain or difficult areas of the law and the expression of an opinion by a solicitor does not normally constitute a promise that the opinion is correct. The duty of care owed by a solicitor to his client is to exercise reasonable skill and care." Later (at 247-8) he remarked: "Mistakes of the kind which I have held to have been made by Mr Cole and Mr Atkins become much more apparent with the benefit of hindsight and in the light of full argument and the opportunity for unhurried investigation and consideration." Taking into account the circumstances in which the solicitors were asked to act, the way the problem was put to them and the way it developed, and the nature of the mistake, he was not prepared to hold that the solicitors were negligent. 1077 I accept that McLelland CJ in Eq's observations are applicable to people in the position of the defendants in this case. Forecasting in a reinsurance business is a difficult and uncertain process, where there is much room for differences of opinion and even small variations of input can produce widely different outcomes (see section 1.2). The issue under s 232(4) is not whether the defendants made mistakes during the course of the due diligence process, but whether they failed to meet the standard of care and diligence that the statute lays down. The statutory standard, like the general law, permits the court to take into account the circumstances of the particular case, and requires the standard to be applied to those circumstances as they existed at the relevant time, without the benefit of hindsight. Due diligence 1078 The law imposes heavy civil, and sometimes criminal, liability on those who provide misleading information to the public securities markets about the price or value of quoted securities. The law is concerned with the protection of investors by endeavouring to ensure that the information upon which they make their investment decisions is materially accurate and complete. Issues of high public policy are involved. 1079 Particular attention is given by the legislatures of industrialised countries, including Australia, to the prescription of disclosure requirements for those who invite the public to invest in securities, and for statutory liability where disclosure is inadequate or defective. In Australia, the prospectus laws were significantly altered on the commencement of Corporations Law in January 1991. The Law prescribed a "reasonable investor" standard for disclosure (s 1022), and expressly deemed various parties who were involved in the prospectus preparation process, including directors, promoters and advisers, to have been involved in any misleading conduct by the corporation, constituted by the distribution of a defective prospectus (s 1006). It also created a series of defences (ss 1008-1011), borrowed from the Trade Practices Act, some of which were expressed to depend upon having made reasonable enquiries. One of them (s 1011) required the defendant to show that he or she "took reasonable precautions and exercised due diligence " to ensure that the statements in the prospectus were true and not misleading and that there were no material omissions from it. Although there were some amendments during the 1990s, that legislative structure remained in place until 1999. 1080 After the commencement of this law, the general practice, at any rate for new flotations and fundraisings by larger listed entities, came to be to establish a formal and fully documented "due diligence" process for public fundraising, in which a due diligence committee was appointed by the issuer's board for the purpose of ensuring that the prospectus disclosed all material facts accurately, and also that those who needed the protection of the statutory defences could rely on the committee process for that purpose (see Ford's Principles of Corporations Law , Butterworths (looseleaf), at [22.211]). Since it was common in Australia at that time, and continues to be common, for issuing companies to make profit forecasts when inviting the public to invest, the work of the due diligence committees frequently focused on the profit forecast and the assumptions and disclosure surrounding it. A similar diligence process was applied where a bidder wished to offer its own securities as consideration in a takeover bid: eg Pancontinental Mining Ltd v Goldfields Ltd (1995) 16 ACSR 463. 1081 In the present case, when the GIO Group decided to respond to AMP's takeover bid by making a profit forecast, it was decided that a due diligence process would be established. As I have noted, it appears that Mr Vines had a role in that decision (section 3.6). The procedure that was adopted and implemented was very like the typical prospectus due diligence process, although operating within the time constraints of the takeover law (temporarily suspended by the Federal Court case). The statutory framework for disclosure and liability was not the same as in the case of a prospectus. The Corporations Law prescribed the content of a Part B statement with particularity, and also required the statement to set out any material changes since the date of the last financial statements, and any other information material to the making of a decision by an offeree whether or not to accept the offer, being material known to any of the directors and not previously disclosed (s 750, Part B, paras 12 and 13). Specific statutory liability extended only to the target company, its directors and certain experts, and the defence to that liability was a defence of belief on reasonable grounds of the truth and adequacy of the disclosure, with no express requirement to make reasonable enquiries or conduct due diligence (s 704). But there was a prospect of liability for those involved in a misleading Part B statement, under s 52 of the Trade Practices Act 1974 (Cth) and its Corporations Law equivalent, s 995(2) (a provision that has no "due diligence" defence), having regard to Fraser v NRMA Holdings Ltd (1955) 55 FCR 452. 1082 There may have been some scope for debate as to whether the prospectus-like formal due diligence process that was adopted by GIO was necessary or appropriate to the task. The framework of liability was different than in the case of a prospectus, but the Part B process shared with prospectus offerings the fundamental characteristic that the information to be conveyed to investors was vitally important information for the purposes of the decision they were invited or required to make. 1083 It is unnecessary for me to decide on the necessity or appropriateness of the process that was adopted. What is important for present purposes is that the process was very much the formal due diligence committee-dominated process that had become the practice in other areas. Mr Vines made clear in his letter to executives dated 10 November 1998 (PTB 0905) that the purpose of the due diligence process was to identify matters to be disclosed in the Part B statement and to ensure that the document complied with the law and was not false or misleading. The due diligence questionnaires (PTB 0906) that were signed by executives in November 1998 began by setting out the statutory requirements and stating the objectives of the questionnaire by reference to those provisions. The questionnaire made it specifically clear that the objectives included ensuring that the Part B statement was not misleading whether by omission or commission. 1084 It was plain to anyone who read those documents, and must have been plain to the defendants, that the information given to the DDC would be considered for inclusion in the Part B statement. The same is true of information given to PwC, since it was well-known that PwC Securities was preparing a report upon which the DDC and the board of directors of GIO Australia Holdings would rely for the purposes of the Part B statement. The criterion to be applied in deciding whether the information that filtered up through the due diligence process would be included in the Part B statement was whether the information was material to the decision of GIO shareholders whether to accept or reject the AMP bid. Clearly matters significantly affecting the profit forecast would meet that materiality standard. 1085 In my opinion, consistently with the case law on the general law of torts to which I have referred (such as Mercer v Commissioner for Road Transport and Tramways (NSW) ), the matters that I have described affected the standard of care and diligence to be met by the three defendants. When they provided information for the purposes of the Part B statement, either to the DDC or to PwC, their standard of care and diligence was influenced by the circumstance that the information was provided within the framework of a due diligence process that was designed to ensure adequate and materially complete disclosure to GIO shareholders in compliance with the law and in a fashion that would protect those involved in the process from liability should a defect later be discovered in the document. These circumstances made it necessary for the defendants to take particular care in providing information. Moreover it was or should have been clear from the questionnaire that it would not be enough for them to confine their attention to what they knew, in circumstances where they could uncover material information by appropriate inquiries. It was apparent that the DDC was relying on senior executives including the three defendants to give their conscientious and careful attention to the documents they were asked to complete and to the information they were to provide in other contexts, such as in discussions with PwC. Is there a special standard of care and diligence in civil penalty proceedings? 1086 A finding of negligence in a civil penalty proceeding attracts a declaration of contravention and may attract penalties in the form of monetary fines, disqualification from managing a corporation and compensation orders which are potentially wider in some respects than the damages that could be recovered in a common law negligence action. Mr Vines submitted that, whereas in a common law case the slightest degree of negligence is sufficient to found a suit for damages, in a civil penalty proceeding such as the present one the degree of negligence to be proved must be of a higher level (that is, as I understand the submission, the statutory standard of care and diligence must be a lower standard than the general law). His submission (supplementary final submissions, para 1) was that the negligence "must be gross enough to become a matter of public concern, to interest the State by reason of its gravity", and the degree of negligence must be "sufficient to merit the punishment which can be imposed". 1087 Sometimes the legislature enacts a law creating a criminal offence for merely negligent conduct. For example, the Crimes Act 1900 (NSW) s 54 provides that "whosoever by any unlawful negligent act, or omission, causes grievous bodily harm to any person, shall be liable for imprisonment to 2 years". The interpretation of that provision was at issue in the Court of Criminal Appeal of New South Wales in R v D [1984] 3 NSWLR 29, in which Yeldham J usefully brought together some of the earlier authorities. The case law shows that the courts have generally interpreted such provisions as setting a standard of care distinctly higher than the common law standard. 1088 The leading English case is Andrews v DPP [1937] AC 576, which involved an offence of unintentional killing caused by negligence. Lord Atkin said (at 583): "Simple lack of care such as will constitute civil liability is not enough: for purposes of the criminal law there are degrees of negligence: and a very high degree of negligence is required to be proved before the felony is established." 1089 In Dabholkar v The King [1948] AC 221 the charge was for a misdemeanour, giving surgical treatment negligently and in a manner likely to endanger life. The Privy Council recognised that there are degrees of negligence depending on the gravity of the charge. They took the view that in the case of the misdemeanour under consideration, the degree of negligence had to be higher than required to establish civil liability to pay compensation, but it was not as high as that held in Andrews to be required to establish the felony of manslaughter. 1090 That approach was followed, in cases concerning the charge of negligence causing grievous bodily harm, in New South Wales ( Clout v Hutchinson (1950) 51 SR (NSW) 32 and R v White (1951) 51 SR (NSW) 188. 1091 In Callaghan v The Queen (1952) 87 CLR 115 the High Court decided that the degree of negligence required to establish manslaughter under the Western Australian Criminal Code was the same as that required to establish a charge under the Code of failure to use reasonable care and take reasonable precautions in the use and management of a vehicle thereby causing death. The Court observed (at 121) that the statutory words "smack very much of the civil standard of negligence". They nevertheless decided that it was appropriate to recognise that the duty to use reasonable care and take reasonable precautions is not a single and unvarying standard but "may have different applications when it is a description of fault so blameworthy as to be punishable as a crime and when it is used to describe the basis of civil liability for harm that is occasioned by the omission". 1092 Civil penalty proceedings share many of the characteristics of other civil proceedings. For example, the burden of proof is on the balance of probabilities (subject to the Briginshaw standard), the trial is before a judge sitting alone, and the civil laws of evidence and procedure apply. But they have some of the characteristics of criminal proceedings. For example, they are concerned with public wrongs rather than the vindication of rights and duties between subjects. They may lead to the imposition of penalties not typical of the civil law such as pecuniary penalties and disqualification orders. They are contests between the power of a government agency and one or more citizens. They have been held to attract the privilege against exposure to a penalty: Rich v ASIC (2004) 78 ALJR 1354. 1093 Callaghan is authority for the proposition that the content of the standard of care may vary depending on the purpose for which it is invoked. The High Court thought it appropriate to apply a higher standard where the statutory description, though using the language of civil negligence, was intended to describe fault so blameworthy as to be punishable as a crime. It is arguable, by analogy with this reasoning, that the civil penalty provisions single out certain contraventions for special treatment on the basis that those provisions describe conduct that is more blameworthy than civil negligence, though not as blameworthy as, at least, some kinds of criminally negligent conduct. It would follow, if this argument were accepted, that the statutory duty of care for company directors and officers would be set at a lower standard than the civil duty of care applicable to professionals and employees, so as to confine the statutory provision to the more serious kinds of negligent conduct. 1094 While the point seems open to argument, at least at the appellate level, my view is that to hold that legislature has lowered the statutory standard of care and diligence below the civil standard by rendering the statutory provision a civil penalty provision would be inconsistent with the legislative history of s 232(4) and also with the present case law. 1095 As far as the legislative history is concerned, the provision was introduced by the Corporate Law Reform Bill 1992. The second reading speech by the Hon Michael Duffy on 3 November 1992 (House Hansard, page 2400) makes it plain that the new statutory standard of care and diligence was introduced to implement the report of the Senate Standing Committee on Legal and Constitutional Affairs on The Social and Fiduciary Duties and Obligations of Company Directors ("Cooney Report"). In Chapter 3 of the Cooney Report there is a discussion of the case law dealing with the duties of care, skill and diligence of company directors. Plainly the discussion proceeds on the basis that the general law standard of care was relevant to, though not determinative of, the proper interpretation of the statutory provision, at that time s 229 of the Companies Code, which established a criminal offence punishable by fine. The Cooney Committee concluded that the common law duty of care of company directors was unsatisfactory because there was no objective common law standard of the reasonably competent company director, as there are objective standards for other professions (Report para 3.25). The Committee said that the state of the law was not satisfactory, and therefore recommended that an objective duty of care for directors be provided in the companies legislation (Report, para 3.28). Far from recommending that the statutory standard of care be made (or remain) less demanding than the common law, the Cooney Committee recommended that the standard be raised. 1096 The case law since that time has proceeded on the basis that developments with respect to the general law standard of care and diligence of company directors and officers are relevant and highly persuasive, if not directly applicable, to the interpretation of the statutory standard. Daniels v Anderson (1995) 37 NSWLR 438, a case about the general law standard of care of company directors, has been applied at first instance in the statutory context. I referred to the principal authorities in ASIC v Vines (2003) 48 ACSR 322. Sitting at first instance, I would not be justified in holding that the location of s 232(4) in the civil penalty regime had the effect of setting the standard of care at a lower and less demanding level than the general law. I reject Mr Vines' submission. 5.4 Content of the statutory duty of honesty 1097 Section 232(2) required an officer of a corporation at all times to act honestly in the exercise of his or her powers and the discharge of the duties of his or her office. ASIC alleges that Mr Fox, but not the other two directors, failed to discharge this duty in certain specified ways. 1098 In Marchesi v Barnes [1990] VR 435 Gowans J explored the meaning of the word "honestly" in this context and said (at 438): "… to 'act honestly' refers to acting bona fide in the interests of the company in the performance of the functions attaching to the office of director. A breach of the obligation to act bona fide in the interests of the company involves a consciousness that what is being done is not in the interests of the company, and deliberate conduct in disregard of that knowledge. This constitutes the element of mens rea in the criminal offence created by the statute …". 1099 His Honour's observations had been taken to mean that a defendant would not be held to have breached the statutory duty of honesty unless it was shown that he or she was conscious that what was being done was not in the interests of the company. Conversely, directors who honestly believed their decision to be in the interests of the company did not contravene this section even though they acted for a purpose that, judged objectively, was not a proper purpose (see Ford's Principles of Corporations Law , Butterworths (looseleaf), at [8065]). Marchesi v Barnes has been followed in several cases: Corporate Affairs Commission v Papoulias (1990) 20 NSWLR 503; 2 ACSR 655; Southern Resources Ltd v Residues Treatment & Trading Co Ltd (1990) 56 SASR 455; 3 ACSR 207; Feil v Commissioner of Corporate Affairs (1991) 9 ACLC 811 and Fitzsimmons v R (1997) 23 ACSR 355. 1100 A different approach was taken in Australian Growth Resources Corporation Pty Ltd v Van Reesema (1988) 13 ACLR 261, where King CJ said (at 272): "The section therefore embodies a concept analogous to constructive fraud, a species of dishonesty which does not involve moral turpitude. I have no doubt that a director who exercises his powers for a purpose which the law deems to be improper, infringes this provision notwithstanding that according to his own lights he may be acting honestly." 1101 In Chew v The Queen (1992) 173 CLR 626, Dawson J said (at 642): "For my own part I cannot, with respect, equate dishonesty in the context of s 229(1) [the precursor of s 232(2)] with mere impropriety … the use of power for an impermissible purpose, viewed objectively as it should be, may be improper, but it is not necessarily dishonest. Whether the element of dishonesty is adequately encompassed by the remarks of Gowans J in Marchesi v Barnes is something which does not fall for decision in this case, but it is, I think, necessary to give the word 'honestly' in a provision creating a criminal offence a somewhat wider scope than King CJ was prepared to give it in Australian Growth Resources Corp Pty Ltd v Van Reesema ." 1102 In Forge v ASIC (2004) 52 ACSR 1, the primary judge concluded that the appellants had breached s 232(2) to the Briginshaw standard, applying King CJ's interpretation of the previous statutory provision in the Van Reesema case (see at [146]). In the NSW Court of Appeal McColl JA (with whom Handley and Santow JJA agreed) referred to the differing approaches to the requirement to "act honestly" taken by Gowans J in Marchesi v Barnes and by King CJ in Van Reesema , but she found it unnecessary to resolve the issue (at [223]-[249]). This was because the primary judge had in fact found the appellants to have been subjectively dishonest. 1103 It is also unnecessary to seek to resolve the differences of approach to the meaning of the words "act honestly" in the present case. ASIC invited the court to find that Mr Fox had failed to act honestly on the Marchesi v Barnes standard, and expressly did not seek to invoke the Van Reesema approach. As I shall explain, my findings against Mr Fox are made on the Marchesi v Barnes standard, and in the alternative, my view is that in the relevant respects, Mr Fox would have breached his statutory duty to act honestly if the Van Reesema test were to be applied. 5.5 Standard of proof 1104 In hearing and determining an application for a civil penalty order, such as in the present case, the court is required by the provision that was s 1317ED(1) of the Corporations Law to apply the rules of evidence and procedure that it applies in hearing and determining civil matters. That means that the standard of proof is proof on the balance of probabilities. However, the civil standard of proof has a measure of flexibility encapsulated by Sir Owen Dixon's observations in Briginshaw v Briginshaw (1938) 60 CLR 336 at 316-2, where his Honour said: "Except upon criminal issues to be proved by the prosecution, it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. Reasonable satisfaction is not a state of mind that is obtained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must perfect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters 'reasonable satisfaction' should not be produced by inexact proofs, indefinite testimony, or indirect inferences." 1105 That standard is applied in civil penalty proceedings, at least where a pecuniary penalty or a disqualification order is sought: Adler v ASIC (2003) 46 ACSR 504 at [142]-[148]; Whitlam v ASIC (2003) 46 ACSR 1 at [117]-[119]. Briginshaw is expressly reflected in the Evidence Act 1995 (NSW) s 140(2), which says that in deciding in a civil case whether it is satisfied that the case has been proved on the balance of probabilities, the court is to take into account the nature of the cause of action, the nature of the subject matter of the proceeding, and the gravity of the matters alleged. 1106 The Briginshaw test has been further explicated by Sir Anthony Mason NPJ, sitting as a member of the Court of Final Appeal of Hong Kong, in Hksar v Lee Ming Tee & Securities and Futures Commission [2004] 1 HKLRD 513. In that case an allegation was made that senior officers of the Securities and Futures Commission deliberately and improperly terminated an investigation in order to avoid the need to make disclosure which might compromise the standing of an expert witness in a trial. Mason NPJ (with whom the other members of the court agreed) said: "[70] … The Judge did not indicate the standard of proof he was applying or the degree of satisfaction which was required. It is not in dispute that the civil standard was applicable and that the civil standard of proof on the balance of probabilities calls for a degree of satisfaction which varies according to the gravity of the fact to be established. The principle is that in a civil case, even a civil case involving allegations of the commission of a criminal offence, the tribunal of fact must be reasonably satisfied of the facts sought to be established, having regard to the gravity of what is sought to be established, though not with the degree of certainty which is indispensable in criminal proceedings ( Briginshaw v Briginshaw (1938) 60 CLR 366 at pp 360-368, per Dixon J; Helton v Allen (1940) 63 CLR 691 at pp 712-713, per Dixon, Evatt and McTiernan JJ; Rejfek v Mc Elroy (1965) 112 CLR 517 at pp 520-522). "[71] Statements may be found in the Privy Council and English decisions which equate the burden of proof in civil cases of facts which are tantamount to a criminal offence to the criminal standard of proof. (See, for example, Lanford v General Medical Council [1990] 1 AC 13 at pp 19-20, per Lord Lowry; Re Solicitor [1992] 2 WLR 522 at p 562, per Lord Lane CJ.) It is now accepted, however, that the correct approach was that stated by Morris LJ in Hornal v Neuberger Products [1957] 1 QB 247 at p 266. This approach was approved in Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 where Lord Nicholls of Birkenhead (with whom Lord Goff of Chieveley and Lord Mustill concurred) said (at p 586E): 'When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability'." 1107 After observing that the allegations in the instant case were to be established as a matter of inference from proved facts, his Honour continued (at [72]): "It is not possible to state in definitive terms the nature of the evidence which the court will require in order to be satisfied, in a civil proceeding, that a serious allegation of this kind, is made out. It would not be right to say that the requisite standard prescribes that the inference of wrongdoing is the only inference that can be drawn (cf Sweeney v Coote [1907] AC 221 at p 222, per Lord Loreburn) for that is the standard which applies according to the criminal standard of proof. In the particular circumstances, it was for the respondent to establish as a compelling inference that very senior officers of the SFC had deliberately and improperly terminated the investigation … for the ulterior purpose alleged, sufficient to overcome the inherent improbability that they would have done so." 1108 The allegations against each of the defendants are serious allegations of contravention of statutory duties. The allegation against Mr Fox of breach of the statutory duty to act honestly is all the more serious. It is appropriate to apply the Briginshaw standard, explicated by Sir Anthony Mason in the manner set out above, to all of the allegations. 1109 A substantial component of the present case depends upon findings of fact about meetings and conversations where the testimony of witnesses is conflicting. Some guidance as to the approach the court should take in such a case was given by McLelland CJ in Eq in Watson v Foxman (2000) 49 NSWLR 315, at 318-9. His Honour was dealing with a misleading conduct case, and he said that in such a case it is ordinarily necessary for the party alleging misleading conduct to prove to the reasonable satisfaction of the court what the conduct was, and the circumstances that rendered the conduct misleading. He continued: "Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may be seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience. "Each element of the cause of action must be proved to the reasonable satisfaction of the court, which means that the court 'must feel an actual persuasion of its occurrence or existence'. Such satisfaction is 'not … obtained or established independently of the nature and consequence of the fact of facts to be proved' including the 'seriousness of the allegation made, the inherent unlikelihood of an occurrence of the given description, or the gravity of the consequences flowing from a particular finding': Helton v Allen (1940) 63 CLR 691 at 712. "Considerations of the above kinds can pose serious difficulties of proof for a party relying upon spoken words as the foundation of a cause of action based on s 52 of the Trade Practices Act 1974 (Cth) (or s 42 of the Fair Trading Act), in the absence of some reliable contemporaneous record or other satisfactory corroboration." 1110 In Moukhayber v Camden Timber & Hardware Co Pty Ltd [2002] NSWCA 58, Heydon JA (with whom Beazley JA and Santow J agreed) referred to McLelland CJ in Eq's judgment and said he thought that the quoted passage, though directed to a misleading conduct case, has a general application. The quoted passage incorporates the Briginshaw principle, which is of particular significance in the present case. 1111 I have endeavoured to apply McLelland CJ in Eq's observations here. Frequently, however, the evidence has gone beyond mere uncorroborated oral testimony of a single witness. The facts and circumstances surrounding contested conversations have provided me with assistance in making sufficiently compelling inferences as to the probability of the conflicting versions of the events, and sometimes I have been aided by contemporaneous documentary evidence such as file notes. 6. ASIC'S CASE AGAINST MR VINES 6.1 ASIC's allegations against Mr Vines 1112 In its written submissions, ASIC grouped its allegations against Mr Vines into five categories. My own summary, using ASIC's descriptions, is as follows: (1) Events on and after 7 December 1998 (a) at the meeting with PwC on 7 December 1998, when he was advised that the American Re agreement was ineffective in accounting terms, Mr Vines permitted Mr Fox to make various statements without correcting him (SASC, para 123); (b) he permitted the other defendants to sign the Representation Letter without correction (SASC, para 124); (c) he did not correct the draft Part B statement (SASC, para 125); (d) he signed his management sign-off (SASC, para 126); (e) he gave assurances to the DDC meeting on 8 December 1998 (SASC, para 127); (f) he signed a letter of representation to PwC on 8 December 1998 (SASC, para 127A); (g) after 8 December 1998, he did not ensure that investigations were carried out to determine whether the statements in the Part B statement remained correct (SASC, para 128). (2) The American Re agreement Mr Vines participated in GIO Re entering into the American Re agreement knowing that the purpose of the agreement was artificially to defer Hurricane Georges losses in excess of $25 million, in circumstances where American Re was taking only an extremely remote underwriting risk, and was to be paid an uncommercial and excessive consideration for the degree of that underwriting risk, and GIO Re entered into the agreement without prior professional advice that it was a proper retrocession agreement, and that it could be accounted for in a way which would make it effective to protect the profit forecast (SASC, para 113). (3) Inadequate investigations Mr Vines failed, in the period up to the PwC meeting on 7 December, to require GIO Re to make adequate investigations into the likely effect of Hurricane Georges on the profit forecast (SASC, paras 104A and 106) and in particular, he failed to make such investigations: (a) following the first quarter highlights (SASC, para 105); (b) following advice given to him by Mr Schneider regarding the results of the contract by contract analysis (SASC, para 110); (c) following information he discovered or ought to have discovered about GIO Re's October 1998 results (SASC, paras 112 and 112A); (d) after Mr Schneider gave him certain information at the Terrigal meeting concerning Hurricane Georges claims (SASC, para 120). (4) Non-disclosure to board and DDC (a) Mr Vines reported to the board and the DDC, before he was advised on 7 December 1998 that the American Re agreement was ineffective for accounting purposes, in a manner which failed to disclose his knowledge of the likely effect of Hurricane Georges on the profit forecast, or his belief that the American Re agreement would protect the forecast (SASC, para 114), particularly: (i) at the 9 November 1998 board meeting (SASC, para 115); (ii) in signing his 11 November 1998 due diligence questionnaire (SASC, paras 108 and 109); (iii) at the 17 November 1998 board meeting (SASC, para 106); (iv) in his 22 November 1998 e-mail to the DDC (SASC, para 117A); (v) at the 6 December 1998 DDC meeting (SASC, para 119); (b) Notwithstanding this knowledge, he failed to recommend an amendment to the 17 November 1998 media release (SASC, para 117). (5) Instructions to Mr Schneider Mr Vines instructed Mr Schneider: (a) not to discuss his view of the probable effect of Hurricane Georges with PwC (SASC, paras 111 and 122); and (b) not to prepare results for November 1998 or do a further profit projection (SASC, para's 121 and 122). 1113 In seeking to make its case against Mr Vines, ASIC relied on expert opinion evidence by Andy Hogendijk. Mr Hogendijk held the position of chief financial officer or its equivalent from 1975 to 2001. He was the chief financial officer of John Fairfax Holdings from 1989 to 1991, and of the Commonwealth Bank of Australia from 1991 to 1997, and then from 1997 to 2001 he was the chief financial officer of Suncorp Metway. 1114 In submissions, senior counsel for Mr Vines did not, as I understood him, challenge the credit of Mr Hogendijk as a witness, but contended instead (see written submissions, para 243ff) that little weight should be attached to Mr Hogendijk's evidence. It was submitted that there is no recognised or generally accepted code of conduct for chief financial officers, and that the powers and duties of an officer of a corporation, whether designated chief financial officer or not, will depend on the circumstances affecting the precise position occupied by that person. 1115 The only evidence before me is the evidence of Mr Hogendijk himself, and some occasional statements by Mr Vines in oral evidence, which did not contest the notion that there is a recognised position in listed public companies entitled "chief financial officer". I accept that there may be quite a range of responsibilities borne by corporate officers bearing that title, but it does seem to me that there is a core of common responsibilities identified by Mr Hogendijk in his affidavit (paras 96-97), relating to the financial operation of the corporate group, supervision of preparation of financial statements, compliance with accounting standards, provision of accurate financial information to management, the board of directors and the stock exchange and investment community. 1116 In the present case an analysis of Mr Vines' full responsibilities shows that by any measure, he was an executive with a large portfolio of responsibilities going well beyond the recognised core responsibilities of chief financial officers. It is important to assess his position and responsibilities, and ultimately his legal duties, by reference to the particular role that he played in the GIO Group. Mr Hogendijk was, to a degree, sensitive to Mr Vines' additional responsibilities (see, for example, affidavit para 98), although on the whole his opinions were directed to the standard applicable to a competent chief financial officer. 1117 In my opinion it is possible to make use of Mr Hogendijk's opinions provided one remembers that Mr Vines had additional responsibilities and one assesses the extent to which Mr Hogendijk has taken into account those additional responsibilities in expressing his view on the instant question. In the end, my use of Mr Hogendijk's evidence has not been by way of application, but has rather been by way of adaptation or use by analogy. That, of course, affects the weight of the evidence. 1118 Mr Hogendijk's experience as a chief financial officer was limited in some ways. He had not been involved in a hostile takeover and had not worked in a large insurer with a reinsurance arm. Nevertheless he struck me in the witness box is a person of some real knowledge of the financial operations of listed companies and also of the insurance industry. On the whole I found his evidence to be useful. 1119 First, I shall note some qualifications to the pleadings made by ASIC in final submissions. Secondly, I shall deal with the position of Mr Vines in the GIO Group and the duties attaching to his office. Then I shall consider and evaluate each of the factual allegations in turn. Qualifications to the SASC 1120 In final submissions, ASIC did not press a claim in the SASC (para 107) that Mr Vines had failed to warn PwC that Mr Robertson's 4 November 1998 memorandum did not represent the views of all of GIO's management. ASIC explained (written submissions, paras 3 and 377) that the evidence at the hearing had established, in its view, that the disagreement between Mr Robertson and Mr Schneider became evident to PwC at the meeting on 5 November 1998 which Mr Vines attended. Additionally, ASIC did not press its allegations in the SASC (in part of para 107) that Mr Vines failed to cause GIO Re to obtain independent advice to the effect that the views of Mr Robertson were reasonable and to be preferred (see written submissions, para 4). 1121 In para 112A of the SASC ASIC alleged that Mr Vines failed to have any, or any adequate, regard to the October valuation prepared by Mr Schneider and Mr Driessen and dated 1 December 1998 (PTB 1452). However, in final submissions (written submissions, para 378) ASIC acknowledged that there was no evidence that Mr Vines received the document. It submitted that if he was not given a copy of it, he ought to have required that he be given one. But there is not sufficient evidence about the matter to permit me to draw that inference. Then ASIC submitted that the matter pleaded in para 112A was of little moment because the evidence established that Mr Vines was advised of the relevant parts of the formal valuation report in the 11 November meeting in which the October profit was considered. That may be so, but my view is that the allegation in para 112A has not been established. 1122 In para 106 of the SASC it is alleged that Mr Vines failed to cause GIO Re to carry out a comprehensive analysis of its exposure to Hurricane Georges, and that he maintained the $80 million profit forecast notwithstanding that such an analysis was not carried out. ASIC pointed out (written submissions, para 379) that this allegation would be material only if the court were to accept Mr Vines' evidence that he was not told by Mr Schneider that a contract-by-contract analysis had been carried out, and what the results of the analysis were. I have decided to accept Mr Vines' evidence on this matter and so the pleading in para 106 is pertinent. 6.2 Mr Vines as an "officer of a corporation" 1123 ASIC alleged that Mr Vines was at all material times an executive officer of both GIO Australia Holdings and GIO Insurance, within the meaning of ss 9 and 232(1) of the Corporations Law (SASC, para 4). The allegation raises for consideration the relationship between Mr Vines and each of those two companies, and his responsibilities to them. 1124 The evidence shows that Mr Vines held a position described as "chief financial officer" for the GIO Group from July 1995 until some time in January, 1999. What does that description entail? 1125 Andy Hogendijk, a company director who held the position of chief financial officer or its equivalent from 1975 to 2001 with various companies including the Commonwealth Bank of Australia and Suncorp Metway, gave expert opinion evidence in which he described the position of "chief financial officer". He said (affidavit, para 96) that although the role of chief financial officer of substantial company groups may vary from group to group, there are some respects in which the role is common. He said that the chief financial officer of a major company group has "special responsibility for various aspects of the financial operation of the group, including, in particular, supervision of and responsibility for the preparation of accurate financial statements for the group”. He said (para 97) that the chief financial officer is responsible for ensuring that accurate information about the company's financial position is prepared and provided to management and the board of directors, and that the information supplied to the stock exchange and the investment community is accurate and meaningful. 1126 ASIC submitted that the court should find that throughout 1998, the role of chief financial officer was in commercial terms relatively well-developed, and that Mr Vines broadly had the duties and functions described by Mr Hogendijk. Mr Hogendijk accepted that the role of chief financial officer may vary from group to group, and therefore, if the evidence were to show that Mr Vines was in an atypical position qua chief financial officer, that evidence would prevail. But it does not. I have set out the evidence concerning Mr Vines' functions and responsibilities as chief executive officer of the GIO Group, after the arrival of Mr Steffey, in section 2.1. Considering that evidence as a whole, it seems to me to be consistent with Mr Hogendijk's description (extracted above) of the usual responsibilities of a chief financial officer of a substantial company group. Indeed, Mr Vines' own description of his role as chief financial officer is to the same effect as Mr Hogendijk's general description. My conclusion is that, after the arrival of Mr Steffey, Mr Vines' position as chief financial officer was in accordance with the norm for such a position. 1127 Neither Mr Hogendijk nor Mr Vines has said that a chief financial officer is, as such, subject to a special responsibility in respect of a profit forecast issued by the company group, as opposed to financial statements and other historical financial information. I would expect his or her responsibility to depend upon the precise role occupied by the chief financial officer in respect of preparation of the forecast. Mr Vines' role in respect of the Part B profit forecast for GIO Insurance and matters surrounding it was a prominent one, as can be seen from my detailed review of the evidence. I note, in particular: 1) Mr Vines' involvement in the increase in GIO Re's aviation reserve for the purposes of the June 1998 financial statements, when he bypassed the executive director of GIO Insurance, Mr Robertson, and dealt directly with Mr Robertson's subordinate, Mr Schneider (see section 3.2); 2) his involvement in the process of formulating GIO Re's $80 million profit forecast, particularly by suggesting, on the basis of his review of the budgets of the business units, that GIO Re might be able to adopt the approach taken by GIO General by bringing to account as forecast profit some of the projected premium income (see section 3.7); 3) his role in the takeover response process, in which the profit forecast was a central component, including his membership of the takeover response committee and the due diligence committee and his co-ordinating role for the latter, and his daily contact with advisers (see section 2.1); 4) his active role in settling the October 1998 profit result for GIO Insurance, when he reviewed Mr Schneider's figures, which would have produced a loss of about $4 million, and suggested that some components of the calculations (the level of IBNR for the Air China catastrophe, and the increase in the level of prudential margin) should be reconsidered (see section 3.19); 5) his involvement in the Guy Carpenter and American Re negotiations, up to about 6 November (see sections 3.22 and 3.23); 6) his participation in the process of obtaining KPMG's "educated view" of the American Re contract and his discussions with PwC about the efficacy of the contract (see section 3.26). 1128 In these circumstances, it seems to me that Mr Vines was given and assumed special responsibility with respect to the integrity of the profit forecast. It was a responsibility the same as, or closely similar to, his responsibility as chief financial officer for the financial integrity of the Group. That encompassed a responsibility (equivalent to the one he acknowledged to exist in respect of financial accounts: T 2890) to exercise care and diligence to the statutory standard, to ensure that accurate information about the profit forecast was prepared and provided to management and the board of directors. Relevant corporations 1129 To which entity or entities was he responsible? Although Mr Vines' contract of employment was with a subsidiary entity, his principal accountability as chief financial officer was to the board of directors of GIO Australia Holdings. Moreover, GIO Australia Holdings was the target of AMP's takeover bid, and consequently Mr Vines' work in the takeover response process was work for that entity. That being so, he was an executive officer and hence an officer of GIO Australia Holdings for the purposes of s 232(4) of the Corporations Law, both in respect of his role as chief financial officer and in respect of his special role in connection with the AMP takeover bid. 1130 Mr Vines was a director of GIO Insurance from 21 July 1998 to 22 February 1999. As a director, he was an officer of that corporation. But in that capacity his duties to GIO Insurance were those of a director, rather than a chief financial officer or executive with special responsibilities in connection with the takeover bid. In my opinion Mr Vines' involvement in the matters summarised in points 1) to 6) above was an involvement from the Group perspective, delving into the financial affairs of an operating subsidiary in order to establish the integrity of the Group's financial position and forecast. It did not amount to being concerned or taking part in the management of the subsidiary as such. That conclusion is consistent with Mr Vines' written submissions (para 38), which draw attention to various aspects of the evidence supporting that view - for example, Mr Vines' evidence (T 2881) that his intervention to strengthen the aviation reserve as at June 1998 was a special exercise he was instructed by Mr Steffey to carry out, and that his involvement in the increase in the reinsurance budget to $80 million was the result of comparing the assumptions behind GIO Re's budget with other parts of the Group and recognising an inconsistency of approach between GIO Re and GIO General. 1131 In my opinion, therefore, Mr Vines was not an executive officer of GIO Insurance. That conclusion is reinforced by the governance arrangements, under which there were no separate board meetings for GIO Insurance and the businesses of that company were run as executive divisions of the Group. But as far as I can see, this conclusion does not have any consequences for ASIC's overall case on liability. 1132 I shall now consider the five areas of factual allegations said to constitute breaches by Mr Vines of his statutory duty as an officer of a corporation (the corporation being GIO Australia Holdings) under s 232(4). 6.3 Allegations group (1): Events on and after 7 December 1998 1133 ASIC contended (written submissions, para 374-5) that in the period up to 7 December 1998 Mr Vines was proceeding on the basis that the American Re agreement would protect the GIO Re profit forecast. He learned there was real doubt about the effectiveness of the agreement when he discussed the accounting treatment with PwC on 1 December 1998, and then at the meeting with PwC on 7 December it was made clear that PwC would not agree to treat the agreement as a true retrocession agreement for accounting purposes. Those contentions are supported by the evidence. ASIC submitted that Mr Vines' conduct from that point must be assessed in light of those events. I agree. 1134 ASIC's pleading makes seven claims of breach of s 232(4) by Mr Vines on and after 7 December 1998. I shall deal with them in the order presented by ASIC in submissions. SASC, para 123 - at the meeting with PwC on 7 December 1998, when he was advised that the American Re agreement was ineffective in accounting terms, Mr Vines permitted Mr Fox to make various statements without correcting him 1135 Paragraph 123 makes allegations in respect of each of the four matters disclosed by Mr Fox to PwC at the meeting on 7 December (that is, the statements about maximum potential loss based on the contract-by-contract review, the level of notifications to date, accelerated and precautionary claims, and management's best estimate of liability). In each case the allegation is that Mr Vines permitted Mr Fox to make the alleged statement "without correcting him". 1136 It is plain from Mr Murray's notes that those attending the meeting on 7 December were aware that PwC saw it as a "sign-off" meeting at which the senior executives would give their final views on crucial matters, relating to Hurricane Georges development, the American Re contract and potential redundancy in the MIPI reserves, prior to PwC's report to the DDC on the profit forecast. Mr Hogendijk gave evidence (affidavit para 171) that a competent CFO would clearly have appreciated that the meeting with PwC on 7 December was an important and serious one at which PwC Securities expected to receive final, accurate and reliable advice from GIO Australia Holdings as to the likely result of Hurricane Georges and its effect on GIO Re's profit for the purpose of the profit forecast and completion of the PwC report. He said a competent chief financial officer would have understood it was probable that PwC Securities would rely on the information provided and would have understood it was the responsibility of the GIO representatives to ensure that the information provided was accurate. It would have been clear that the GIO Re profit forecast was a material part of the Group forecast and the accuracy of information given to PwC Securities would have had an important impact on PwC's report on the Part B statement. 1137 I agree with these opinions. As I have explained in section 5.3, the PwC Securities report to the DDC was part of the due diligence process in which Mr Vines had been closely involved from the outset, and that was a formal process designed to convey to the executives who supplied information the importance of ensuring that the information was accurate and complete, because it would be used to make disclosure to the GIO shareholders of the matters material to their investment decision. The significance of the final "sign-off" meeting with PwC in the context of the due diligence process must have been clear to him. But that does not mean Mr Vines had a duty to usurp the functions of divisional management or to challenge or decline to accept statements made by the executive director of GIO Re on matters within the executive director's sphere of competence. Rather, his duty was to ensure that material matters were addressed by those who had the competence and resources to do so. The four matters disclosed by Mr Fox to the meeting and raised in para 123 of the SASC were matters within Mr Fox's competence and sphere of responsibility as executive director of GIO Re. 1138 ASIC's allegations must be assessed having regard to what Mr Vines knew about Hurricane Georges claims on 7 December. I have found that at the time of the 7 December meeting, Mr Vines was aware that according to the summary of movements in the catastrophe model from September to October (PTB 0976A), sent to him on 11 November, the figure predicted for undiscounted claims for Hurricane Georges as at 31 October was $69.1 million, and the figure predicted for discounted claims was $67.8 million. He did not have any more up-to-date figures. He had not seen the Hurricane Georges register of 4 December and there is no evidence to indicate that he heard about Mr Fricke's report on Hurricane Georges claims to the management committee meeting on 25 November, or the Status of Registered Events Report as at 30 November 1998. I have not accepted Mr Schneider's evidence that he told Mr Vines at Terrigal on 5 or 6 December that claims had reached $85 million. 1139 Mr Vines had, in effect, relied on the executive director of GIO Re to do what was necessary to monitor claims development and had not endeavoured to do so for himself. He was not aware that Mr Schneider had conducted a contract-by-contract analysis or that he had expressed the view, on the basis of that analysis, that Hurricane Georges would be a $100 million type event. He was aware that there had been a disagreement between Mr Robertson and Mr Schneider as to the implications of Hurricane Georges claims development for the profit forecast, but he assumed that the disagreement had been resolved in favour of Mr Schneider (Mr Robertson being by that time away in Boston) when he read the 11 November figures. 1140 Mr Hogendijk expressed the opinion (affidavit para 173) that if he were to consider Mr Vines' position on 7 December upon the basis of his actual apparent state of knowledge, and on the assumption that the executive management of GIO Re had resolved the disparity of opinion between Mr Robertson and Mr Schneider, he could not say that Mr Vines' participation in the meeting was inconsistent with how a competent chief financial officer could have acted. He said (para 174) that the statements apparently made by Mr Fox about maximum potential loss, notifications to date and management's best estimate of liability, were each matters which a competent chief financial officer could reasonably regard as being within the responsibility and knowledge of the executive director, as a group CFO would ordinarily rely upon executive management as being competent to find out the basic facts and provide a reliable assessment of their consequences. He explained that his view was principally based on the fact that Mr Vines was the Group CFO, and not directly in a position to have knowledge of the accuracy of information provided by Mr Fox. I infer that in expressing his opinion, he also took into account Mr Vines' special responsibilities with respect to the due diligence process, to which he had referred (affidavit para 98). 1141 Mr Hogendijk qualified his opinion by insisting that Mr Vines, as a competent CFO, should have taken steps earlier to resolve the disparity of opinion between Mr Robertson and Mr Schneider by arranging for independent advice, and that if he had done so, some investigation would have been carried out and further information would have been obtained to permit a reasonably sound assessment to be made of the likely ultimate cost of Hurricane Georges. 1142 I shall consider below the question whether Mr Vines should have sought independent advice to resolve the difference of opinion between Mr Robertson and Mr Schneider, when it surfaced early in November. There is no reason to think that if Mr Vines had discharged any duty he was alleged to have in November, he would have become aware of additional information that would have led to his knowing that Mr Fox's statements to the 7 December meeting were wrong. That leaves me with Mr Hogendijk's opinion that in not questioning Mr Fox's statements at the meeting, Mr Vines acted consistently with his duties as a competent chief financial officer. 1143 ASIC submitted that Mr Fox's estimate of the Hurricane Georges loss must have seemed to Mr Vines to be unlikely, given what he knew about the estimate at the end of October and the prospect that further claims experience in November might lead to a revision of the estimate, and given the unlikelihood that Mr Fox's views had taken into account any analysis of redundancies. But Mr Fox told the meeting that a contract-by-contract analysis had been conducted. That must have given Mr Vines some reassurance, because he was aware of the previous exercise with respect to "the misbehaving contracts", and his evidence was that if he had known prior to 7 December that such an analysis had been conducted for Hurricane Georges, he would have regarded it as significant information and would have remembered it. The nature and detail of the contract-by-contract analysis were not matters for Mr Vines to delve into, from his position at the Group level. It was enough that the person responsible for the reinsurance division told the meeting that the result of the analysis was a maximum potential loss of $105/100 million. The information Mr Vines had about the level of claims on 11 November and their increase during October was not such as to demonstrate that Mr Fox's statement was wrong, having regard to retrocessions. Mr Vines explained he thought what Mr Fox said was broadly in accordance with the October estimate and that the ultimate net loss would take into account reinstatement premiums and retrocession recoveries including recovery under the OP Re contract. 1144 In my opinion Mr Vines had no duty to "usurp the divisional role" by initiating his own inquiries as to the level of Hurricane Georges claims prior to the meeting on 7 December. He had had discussions with PwC and realised that the accounting treatment for the American Re retrocession agreement was in doubt, but he had put a case to PwC for treating the agreement as a true retrocession and the matter was unresolved. It was only at the meeting on 7 December that it became clear that his argument had not been accepted and that PwC would not agree to the American Re agreement being accounted for as a true retrocession agreement. Up until that point, he had no obligation to inform himself of the level of claims received. That was a matter on which he relied on the reinsurance executive director, Mr Fox. 1145 ASIC alleges in para 123 of SASC that when the statement about accelerated and precautionary claims was made to the meeting, Mr Vines "knew, or ought to have known, that no analysis or investigations" carried out by GIO Re supported the claim stated, and there was no reasonable objective evidence available to support that claim. 1146 In my view this allegation has not been made out. Mr Fox and Mr Robertson were reinsurance managers of considerable experience, who could be expected to have some sense of the level of such claims. Indeed, Mr Robertson's testimony indicated that he had a measure of evidence to support his view. Mr Vines was not a person with expertise in such matters, and in my view he was entitled to rely on his executive colleagues not to make such statements unless they had a proper basis for them. It was not his place to challenge them on this non-financial matter of expertise. The third allegation has not been made out. 1147 ASIC submitted (written submissions, paras 288-308) that Mr Vines should have intervened to correct the statement made at the meeting that the ultimate liability for Hurricane Georges was $60-65 million. This submission relied on Mr Schneider's evidence about what he had said at the meeting on 11 November and to Mr Vines at other times in the period from 9 to 13 November. But I have preferred Mr Vines' evidence to the evidence of Mr Schneider about their conversations, and so my conclusion is that Mr Schneider did not tell Mr Vines during that period that he believed Hurricane Georges was a $100 million type event and that his view had been confirmed by a contract-by-contract analysis. 1148 Having regard to my findings of fact, the allegations in para 123 fail. SASC, para 124 - Mr Vines permitted Mr Robertson and Mr Fox to sign the representation letter without correction 1149 Para 124 pleads that Mr Vines was present when Mr Robertson and Mr Fox signed the representation letter, that he knew or ought to have known the contents of the letter, and that he permitted them to make the representations in the letter to the board of directors without correcting a number of matters. The pleading identifies six statements in the representation letter and claims that Mr Vines should have corrected them, because of his state of knowledge or what he ought to have known. It is unnecessary to list them all here. The principal allegations relate to his permitting the representation letter to affirm the $80 million profit forecast. 1150 ASIC accepted that there was no evidence Mr Vines had read the representation letter, but it submitted that in his position he ought to have done so (written submissions, para 316). I agree. There may be room for argument as to whether a chief financial officer, as such, has an obligation to read such a document, but Mr Vines had additional responsibilities with respect to the takeover defence process and the DDC, which implied that he should use care and diligence at the statutory standard to make sure that the documents presented to the board were in proper order, and therefore that the representation letters that were required from senior management were adequate in content (to the best of his knowledge) and properly signed. 1151 Mr Hogendijk said, correctly in my view, that once it became apparent at the meeting that PwC would not support the American Re agreement, an alternative basis had to be found quickly for offsetting Hurricane Georges losses above $25 million, if the $80 million profit forecast was to be maintained (affidavit para 180). This alternative basis was Mr McClintock's unders and overs schedule (PTB 1604). Mr Hogendijk assumed that PwC regarded the unders and overs process as reasonable. That must have been so, given the terms of their subsequent report. As Mr Hogendijk pointed out, the unders and overs schedule identified catastrophe adverse performance to date at $35 million, a figure which appears to represent the amount of ultimate net Hurricane Georges claims in excess of the $25 million reserve. It follows that Mr McClintock took the bottom end of the $60-65 million stated by Mr Fox at the 7 December meeting. Mr McClintock's calculation reached the conclusion, noted in section 3.35, that the total net adjustment to be made to the reinsurance profit forecast was to reduce it by $14 million, a figure not material in the context of the Part B statement. 1152 Mr Hogendijk said (affidavit para 181) that on the assumptions that he had been asked to make, including the assumed redundancy of $35 million in MIPI (an assumption proved by Mr Latham's 3 December report), he could not conclude that a competent CFO would have rejected the process whereby the increase in Hurricane Georges claims above the reserve had been accommodated within the materiality threshold for maintenance of the $80 million profit. But he added it was clear that a competent CFO would have understood that the exercise was very tight and strongly depended on the reliability of the $60-65 million assessment of the ultimate Hurricane Georges liability, and that the validity of the unders and overs exercise would have appeared to a competent CFO to be very sensitive to the accuracy of that estimate. I accept this evidence. 1153 Mr Hogendijk then gave evidence (affidavit para 183-185) that if Mr Vines was entitled to accept Mr Fox's statement on 7 December that the best estimate of the Hurricane Georges liability was of the order of $60-65 million, it was not unreasonable for Mr Vines to accept the representation letter. He expressed the opinion that some of the statements in the letter were questionable, for example a statement that changes in retrocession arrangements under consideration could alter the risk profile of the business at lower cost, but he said that nevertheless a competent CFO in Mr Vines' position could accept the representation letter provided Mr Vines was entitled to believe the statement made by Mr Fox as to the best estimate of the Hurricane Georges liability. 1154 I take Mr Hogendijk's opinion to be applicable (by analogy) to this case, in view of my finding that Mr Vines was not obliged to correct Mr Fox's statement. I agree with it. The representations were not Mr Vines' representations, and they were being made by the two GIO executives who had the experience, competence and responsibility to make them. In my opinion, having regard to Mr Vines' state of knowledge at that time, there was nothing that would have led a reasonable person in like position in a corporation in GIO Australia Holdings' circumstances to seek to correct the views of the two executives who had the direct and primary responsibility for the GIO Re profit forecast. 1155 It is appropriate to pause, before proceeding to the next group of pleadings, to consider the position Mr Vines was in at the beginning of 8 December. He had known since about 20 October that there was an issue as to whether there would be an adverse development in Hurricane Georges claims that would render inadequate the $25 million reserve that had been provided. The disagreement between Mr Robertson and Mr Schneider on that subject appeared to him to have been resolved in favour of Mr Schneider when the catastrophe claims model predicted as at 31 October that Hurricane Georges claims would be substantial. He had regarded the American Re agreement as a transaction that would protect the profit forecast from adverse Hurricane Georges claims movement, but he was concerned from the beginning of the negotiations that there would be insufficient risk transfer to make it a retrocession agreement acceptable to the auditors. It became evident early in December that his strategy for persuading PwC to accept the efficacy of the American Re agreement might not succeed, and he received confirmation of PwC's attitude on 7 December. These were issues that had been building up for some time. At the same meeting, in what must have been somewhat strained circumstances in view of the timetable for publication of the Part B statement, some "unders and overs" were calculated that would just, but only just, be adequate to maintain the profit forecast within the materiality threshold of the Part B statement. But this calculation was, as Mr Hogendijk remarked, tight, and Mr Vines must have been aware that it depended crucially on the accuracy and reliability of Mr Fox's assessment of the Hurricane Georges liability. Questions accordingly arise as to what Mr Vines should have said and done from that time onwards. SASC, para 125 - Mr Vines did not correct the draft Part B statement SASC, para 126 - Mr Vines signed his management sign-off 1156 Although the draft Part B statement (PTB 1132) was sent by GIO's lawyers to members of the DDC, including Mr Vines, on about 19 November the thrust of the pleading in para 125 seems to be that Mr Vines should have corrected the draft Part B statement before it was presented in final form and adopted by the DDC and the board on 8 December. Para 126 relates to the signing of Mr Vines' management sign-off on 8 December. It is appropriate to deal with that question by examining paras 125 and 126 of the SASC together. 1157 The SASC alleges in para 125 that Mr Vines, knowing the terms of the draft Part B statement, failed to correct certain statements made in the draft, and permitted them to be published. One of the pleaded statements was that: "the assumptions upon which the $80 million profit forecast was based were considered to be reasonable at the date of the Part B statement, when Mr Vines knew, or ought to have known, that the assumption that total Hurricane Georges claims on GIO Re would be in the order of $60-65 million, and that GIO Re's attritional portfolios did not show accelerated loss development, were false". 1158 The other two pleaded statements were the assertion that adverse experience in the catastrophe portfolio caused by Hurricane Georges had been offset to a large extent by favourable experience in other classes, and the assumption that the catastrophe portfolio would incur no further significant losses in the 1999 financial year, both of which (it was alleged) were made with no reasonable objective basis to support them. 1159 Para 126 of the SASC alleges that Mr Vines signed and delivered up to the DDC his management sign-off without advising the committee that by reason of the matters he knew or ought to have known, it was improbable that GIO Re would achieve the $80 million profit forecast in the 1999 financial year. 1160 ASIC made three submissions about Mr Vines' management sign-off (written submissions, paras 311-313). One of them can be despatched summarily. ASIC submitted that Mr Vines should have told the DDC that according to Mr Schneider's opinion, based upon a contract-by-contract analysis, Hurricane Georges was likely to be a $100 million type event, and further, that claims to the end of November 1998 had reached $85 million. I do not accept this submission, because I have preferred Mr Vines' evidence to the evidence of Mr Schneider with respect to their relevant conversations. 1161 The first of the other two submissions was that Mr Vines ought to have formally advised the DDC that until 7 December, GIO Re had proceeded on the basis that the American Re agreement would effectively limit Hurricane Georges losses in the 1999 year to $25 million, but on that day PwC had refused to agree with the accounting treatment that would produce this result. ASIC said Mr Vines should have explained that the first four months' profit figures had been prepared on the basis of the same assumption. 1162 I agree with this submission, in the sense that this information should have been conveyed to the DDC either by addendum to the management sign-off, or in some other fashion before the sign-off was made operative. The management sign-off invited Mr Vines to consider whether the DDC had been told everything material for the purposes of the Part B statement, which included the profit forecast. While his certification of the accuracy of answers to the questionnaire was confined to the part of the GIO Group business for which Mr Vines was responsible, and the scope of that responsibility might have been open to interpretation, the second paragraph of the document related to all matters of which he was aware, whether within his field of responsibility or not. The question that he was required to address was whether he was aware of something not reported to the DDC which he considered might be material to a shareholder's decision whether or not to accept the AMP takeover offer. Information known to Mr Vines, going to the question, whether the American Re agreement protected GIO Re from Hurricane Georges losses in excess of $25 million, was obviously material in that sense, because if there was no protection, then the ultimate Hurricane Georges net loss would be likely to reduce the profit forecast, and hence the value of the shareholding, to a material degree. 1163 Secondly, ASIC submitted that Mr Vines should have told the DDC that on 7 December PwC had been given information concerning the effect of Hurricane Georges in circumstances where he had no evidence that the information had been supported by reasonably reliable investigations. I disagree with this submission, as framed, although in my view there was something else that should have been disclosed, in responding to the second paragraph of the sign-off document. 1164 The developments on 7 December had made the accuracy and reliability of Mr Fox's statements to PwC matters of crucial importance to maintaining the profit forecast, but it was not Mr Vines' role to accumulate evidence to support or undermine Mr Fox's statements. On the other hand, just as he ought to have told the DDC what he knew about the American Re agreement, he should also have told them that in the new circumstances, the accuracy and reliability of management's best estimate of the Hurricane Georges liability had become especially important. 1165 The presence of "unders and overs" was also a material matter for disclosure. The fact that there were redundancies that might or would protect the profit forecast in the absence of the American Re agreement was no justification for non-disclosure of the material facts to the DDC. It was not appropriate for Mr Vines to deprive the DDC of the information necessary for it to make an informed decision as to whether to adhere to the profit forecast or alter the Part B disclosure, in light of the accounting treatment of the American Re agreement and the presence of unders and overs. 1166 Mr Hogendijk gave evidence to the same effect. He said (affidavit para 195) that a competent CFO in Mr Vines' position would have explicitly noted the basis upon which the profit forecast was maintained in the 8 December management sign-off. This was because a competent CFO would have understood that the makeup of the profit was very significant to the market, and investors were likely to be misled if they were allowed to believe that the GIO Re profit forecast was likely to be achieved on the basis upon which it was originally estimated as a result of the ordinary operations of the business. He said that a competent CFO would have regarded it as being part of his or her duty explicitly to bring the issue to the attention of the DDC and PwC Securities. I do not agree, as far as PwC Securities were concerned, because they were already aware of the relevant matters, but my view is that Mr Vines had a duty to inform the DDC regardless of what PwC said to them. 1167 A reasonable person in like position to Mr Vines in a corporation in GIO Australia Holdings' circumstances would have exercised care and diligence to ensure that the DDC was properly informed of all material aspects of the maintenance of the reinsurance profit forecast, before or in the course of giving the management sign-off. In terms of the pleading, such a person would have informed the DDC that the achievement of the $80 million profit forecast was improbable, given the unavailability of the American Re agreement, unless the unders and overs analysis that had been considered at the PwC meeting, and the estimate of Hurricane Georges liability made by Mr Fox, were correct. 1168 A corollary to these findings is that a reasonable person in the position of Mr Vines would have drawn the attention of the DDC to those parts of the draft Part B statement that implied that the reinsurance profit forecast, as part of the Group forecast, would be achieved on the basis of assumptions that did not spell out the position known to Mr Vines. In other words, Mr Vines ought to have invited the DDC to consider some redrafting of the Part B statement in light of the matters of disclosure that he was obliged to bring to their attention. Mr Hogendijk reached a similar conclusion (affidavit para 192), drawing attention to a statement on page 14 of the booklet that spoke of GIO's "strong performance" in the first four months, and said that the company was "well on track to achieve a significant profit in the current year". The booklet referred to "key highlights" of the first four months' result, one of which was "a solid profit achieved by GIO's reinsurance business as recent changes to personnel and management practices took effect …". 1169 A reasonable person in the position of Mr Vines would not have relied upon Mr McClintock's presentation to the DDC as a means of discharging his or her duty of care and diligence. Mr Vines was personally required, by the terms of the management sign-off, to commit his name to the opinions that it contained. By that document the DDC looked to Mr Vines to take personal responsibility. SASC, para 127 - Mr Vines gave assurances to the DDC meeting on 8 December 1998 1170 In para 127 the pleading alleges that Mr Vines confirmed to the DDC that he was comfortable with the integrity of the GIO Group forecast profit, a component of which was the $80 million profit forecast for GIO Re, when he knew, or ought to have known, of matters that made improbable that GIO Re would achieve its forecast. 1171 ASIC made two complaints about the conduct of Mr Vines in respect of the final DDC meeting (written submissions, paras 317-319). First, ASIC submitted that if, as I have held, Mr Schneider did not tell Mr Vines that Hurricane Georges was a $100 million type event and that gross claims had reached $85 million by the end of November, Mr Vines ought at least to have understood that no evidence had been produced to justify Mr McClintock's assessment that total Hurricane Georges claims might reach $60-65 million. Apparently Mr McClintock had simply reflected in his presentation what he had been told at the meeting on the previous day. 1172 I partially agree with ASIC's submission. Mr Vines' responsibility, given his role in the due diligence process as well as his position as chief financial officer, and in circumstances where reliance on the American Re agreement was no longer possible, was to exercise care and diligence to the statutory standard, to ensure that on 8 December the DDC was informed of all matters material to the estimate of loss so that the committee could exercise its judgment as to the viability of the forecast and the disclosure to the shareholders that should be made. My view is that Mr Vines should have drawn the DDC's attention to the fact that Mr McClintock's figures had been taken from Mr Fox's statement about management's best estimate of liability, the accuracy and reliability of which had become crucial because of the unavailability of the American Re agreement and reliance on an unders and overs analysis. 1173 Secondly, ASIC criticised Mr Vines for confirming at the DDC meeting that he was comfortable with the integrity of the Group forecast. ASIC conceded that it might have been reasonable for Mr Vines to make such a statement if he had sound grounds for believing that the anticipated shortfall in reinsurance would be made up by greater than expected profit from other businesses. But in ASIC's submission, unless there was a sound basis for such a belief, Mr Vines should have declined to give the DDC such an assurance about the Group forecast, and should have told the committee about the doubts surrounding the ability of GIO Re to achieve its part of the forecast. 1174 In my opinion it is unnecessary to determine whether, by virtue of the unders and overs schedule or otherwise, Mr Vines had a sound basis for affirming the Group forecast notwithstanding doubts about the reinsurance forecast. My view is that a reasonable person in like position to Mr Vines, acting with care and diligence in a corporation in GIO Australia Holdings' circumstances, would not have given the kind of unqualified assurance about the Group forecast that was given by Mr Vines, in circumstances where real doubts had emerged about a material component of that forecast, without making accurate and complete disclosure of all the material circumstances that had led him to believe that, on balance, the forecast Group forecast could still be achieved and should be adopted. Given the existence of substantial doubts emerging from the unavailability of the American Re agreement and the need to rely on unders and overs, and the need for judgment to be exercised, the responsibility of Mr Vines was to ensure that the DDC had before it the information necessary for it to make the appropriate judgment, rather than to make his own assessment and then give the DDC his conclusions without the judgmental steps in his reasoning process. 1175 The pleading alleges that Mr Vines knew, or ought to have known, of matters which made it improbable that GIO Re would achieve the $80 million profit forecast. Mr Vines knew of PwC's attitude to the American Re agreement, which was in terms a matter making it improbable that the profit forecast would be achieved, and therefore was disclosable. The fact that there were some other balancing matters that might have assisted the company to reach the profit forecast did not absolve Mr Vines from the obligation of disclosure, but added that obligation. SASC, para 127A - Mr Vines signed a letter of representation to PwC on 8 December 1998 1176 Para 127A pleads that Mr Vines signed the letter of representation to PwC securities dated 8 December 1998 (PTB 1662) but failed to advise that by reason of the matters known to him or which ought to have been known, it was improbable that GIO Re would achieve the $80 million profit forecast. There are very lengthy particulars setting out in the matters alleged by ASIC to have been known to Mr Vines. 1177 ASIC submitted (written submissions, paras 322-324) that in spite of the representation to the contrary in his letter to PwC (PTB 1662), Mr Vines did not carry out any "appropriate inquiries" with directors or officials of GIO at any time after 11 November. ASIC contended that Mr Vines either realised or ought to have realised that PwC's decision not to accept the American Re agreement had changed everything, and after that decision there needed to be an inquiry and investigation into the profit forecast of a kind that did not take place. Mr Vines accepted in cross-examination (T 3012; T 3089-90) that he understood that the schedule of catastrophe model movements sent to him by Mr Driessen on 11 November (PTB 0976A) was a monthly process, and that he could have requested the equivalent November information at some point after 30 November, but he did not do so. He said his expectation was that if there was any adverse movement he would have been told about it. 1178 I partially agree with ASIC's submission. I have said that in my opinion, Mr Vines did not have any obligation to make direct inquiries as to the development of Hurricane Georges claims and was entitled to rely on the reinsurance division to inform him of any adverse claims movement. But the decision by PwC not to accept the American Re agreement had a significant effect. It was made just before the finalisation of the due diligence process, a process for which Mr Vines had central responsibility, and at a time when Mr Vines was aware of some adverse claims movement up to the end of October and the prospect that further adverse movement may have occurred in November. PwC's decision had put the profit forecast directly under threat, and the defendants' response had been to develop an unders and overs analysis, in the course of the same meeting, which was acceptable to PwC. 1179 At the end of 7 December the ship was in an unsteady state. The position could be clarified by conducting further investigations, including investigations leading to some form of report on the unders and overs analysis as a whole (MIPI was already supported by Mr Latham's report). Alternatively, it would have been appropriate for Mr Vines, in my view, to present all of the facts to the DDC, and to see whether the problem might be accommodated by appropriate disclosure in the Part B statement. I am not able to say, on the evidence, whether the latter approach was feasible, but since the evidence has not ruled it out, I do not go as far as ASIC does in asserting that the making of further inquiries was necessary. But I do agree with ASIC that in the delicate circumstances that existed on 8 December, Mr Vines' duty of care and diligence should have precluded him from confirming to PwC that "appropriate inquiries of other Directors and officials of GIO" had been made, in the solemn circumstances in which that confirmation was given. SASC, para 128 - after 8 December 1998, Mr Vines did not ensure that investigations were carried out to determine whether the statements in the Part B statement remained correct 1180 The allegation in para 128 is that Mr Vines failed after the publication of the Part B statement and before the end of the period to have any, or any adequate, regard to the available evidence concerning whether it was likely that GIO Re would achieve the $80 million profit forecast. 1181 Mr Hogendijk expressed the opinion (affidavit, paras 197-8) that a competent chief financial officer would have understood that he was under a continuing obligation to be satisfied that later financial results did not undercut any statements to the market made in the Part B statement, or any aspect of the process leading up to the Part B statement, and in the circumstances the competent chief financial officer would least have called for the November results and any development in Hurricane Georges claims. 1182 In December 1998 there was no express statutory obligation for the target company to update its Part B statement so as to disclose material new circumstances (cf Corporations Act 2001, s 644(1)(c)). However, there was a "continuous disclosure" statutory obligation for listed entities, not to intentionally, recklessly or negligently fail to comply with stock exchange listing rules concerning timely disclosure of material information to the market (Corporations Law, s 1001A). As chief financial officer, Mr Vines had a duty to exercise care and diligence to facilitate the listed entity's compliance with these requirements as regards financial matters. In circumstances where the company had announced to the market a profit forecast which was highly material to the impending decision of shareholders whether to accept the AMP bid, and it had become clear that adverse development in Hurricane Georges might impact on the profit forecast in the absence of protection by the American Re agreement, notwithstanding an unders and overs analysis, Mr Vines had a duty to exercise care and diligence to the statutory standard, to ensure that the development of Hurricane Georges was monitored during December 1998 (cf Mr Hogendijk, affidavit para 202). 1183 Mr Vines' evidence was that he expected the reinsurance division to monitor Hurricane Georges in accordance with its usual practices and to report any material adverse development to him. In my opinion, while it was adequate for Mr Vines to assume that in Hurricane Georges would be monitored in the usual fashion at a divisional level up until 7 December, the situation changed after that day. PwC's decision not to accept the American Re agreement, and the reliance placed on a "tight" unders and overs analysis, made it urgently necessary for those with central responsibility to the parent entity for keeping the market informed during the currency of the bid to have a clear and up-to-the-minute understanding of the development of Hurricane Georges claims. Mr Vines was one of the executives who had that responsibility, because of his position in respect of the takeover defence and due diligence process, and in light of the impending board decision on the Part B statement and profit forecast. Once that decision was made, Mr Vines' duty to exercise care and diligence to facilitate the parent company's compliance with the continuous disclosure listing rule meant that it was necessary for him to be sure that the monitoring arrangements: upon which he had previously relied, were continuing in the new circumstances. 1184 That did not mean it was necessary for him personally to review the Hurricane Georges register or any other such information. But it was necessary for him to take care to give directions to ensure that the work was done at the divisional level, and that its results were brought forward promptly to the appropriate senior corporate officer so that an assessment could be made about further disclosure. 6.4 Allegations group (2) The American Re agreement 1185 ASIC submitted (written submissions, para 376) that there are, in substance, seven allegations in SASC, para 113, namely: (a) Mr Vines caused, or participated in causing, GIO Re to enter into the American Re agreement; (b) The real purpose of the American Re agreement was to maintain the $80 million profit forecast by artificially deferring Hurricane Georges claims in excess of $25 million into future financial years; (c) The American Re agreement was not a genuine retrocession agreement; (d) The only apparent underwriting risk undertaken by American Re was extremely remote; (e) The profit commission to American Re was uncommercial and excessive for the degree of apparent underwriting risk; (f) The profit commission was in fact substantially a consideration for American Re's facilitating the protection of the profit forecast; (g) GIO Re entered into the agreement without any expert actuarial or accounting advice that the agreement was a proper retrocession agreement, or could be accounted for as intended. 1186 Allegations (b)-(g) have been made out, on the facts, and are supported by the findings as I have made in section 3.23. That is to say, the agreement in fact entered into was an artificial agreement having the characteristics alleged by ASIC in para 113. The more difficult question relates to allegation (a), the question whether Mr Vines caused or participated in causing GIO Re to enter into the artificial agreement that was in fact concluded. The answer to that question depends upon what Mr Vines contemplated as the agreement while he was involved in the negotiations. 1187 Part of ASIC's case was to contend that Mr Vines understood the proposed retrocession transaction. In submissions, ASIC invited the court to find, as I have, that the draft placement slip discussed at the meeting on 6 November was the draft sent to Mr Steffey on 4 November. For Mr Vines to have discussed the draft, he must have read it. The draft of 4 November (PTB 0785) contained five "loss scenarios", the fourth and fifth of which show how, if a substantial claim were made under the proposed policy in the year ended June 1999, premiums would continue to be paid in subsequent years to ensure that the reinsurer was repaid the amount of the claim as well as commission. These must also have been the "loss scenarios" considered by Mr Grove and Mr Vines in their second discussion on 5 November, according to ASIC's submission, although Mr Vines could not recall whether this was so (T 2965). 1188 Therefore, said ASIC, Mr Vines must have understood, contrary to his evidence (see T 2966-72), that the reinsurance proposal under consideration with Guy Carpenter (and later, the proposal under consideration with American Re) did not involve risk transfer for the bottom layer, because the claim recovery would be repaid by GIO in premium over later years, and so the only real issue in Mr Vines' mind could have been whether the top layer of cover for major losses would be sufficient to make the agreement a true retrocession rather than a finance arrangement. According to ASIC (written submissions, para 109), "the accounting issue must in Mr Vines' mind have been whether accounting principles would permit any claim paid in the year to 30 June 1999 to be accounted for as a retrocession recovery against reinsurance payouts, but at the same time not requiring the off-setting premiums that would be payable in later years to be accounted for immediately as a loss". 1189 I am not sure that Mr Vines' evidence at T 2966-72, when closely read, amounted to saying that he did not understand the principal elements of the reinsurance proposal under consideration with Guy Carpenter. The questions put to him were somewhat different. But if he meant to say that he did not understand the basic elements of the draft Guy Carpenter placement slip, I would find that to be implausible, and I would not accept it. He understood that the Guy Carpenter proposal would not involve risk transfer in respect of Hurricane Georges because claims recoveries would be reflected in premiums in later years; and consequently that the accounting issue was whether there was a sufficient element of risk transfer in the remote top layer cover to justify treating the contract as a reinsurance contract rather than a financial arrangement, so that claims recoveries could be taken into account in the first year of insurance and the matching premiums could be spread over the life of the contract, thus smoothing the insured's loss. I have reached this conclusion for four reasons. 1190 First, it seems to me unlikely that Mr Vines would have sat through an explanation of scenarios designed to demonstrate how the proposed insurance was likely to work, without seeking to reach an understanding of what was being explained. While Mr Vines did not have experience in underwriting or financial reinsurance, the scenarios in the draft placement slip of 4 November are not particularly difficult to understand, especially for an obviously intelligent man with accounting and auditing expertise and experience in general insurance auditing. Secondly, in his facsimile letter to Mr Vines of 5 November enclosing the revised draft placement slip (PTB 0838), Mr Grove pointed out that the reinsurer had significantly increased the risk component in respect of the top US$40 million cover by making the second loss cover apply to any USA loss exceeding US$8 billion. This suggests that Mr Grove was responding to a concern on the part of Mr Vines as to the adequacy of risk transfer, a concern based on an understanding of how the slip would work (cf T 2990-1). Thirdly, Mr Vines made it clear in his evidence that he was concerned that there be an adequate risk transfer (e.g., T 2988). The very concept of risk transfer raises for consideration the distinction between true retrocession and financial arrangements, and the characteristic of the latter that the insurer's payments in deposit or premium bear a relationship to the claims recoveries it receives. Fourthly, there were some hints in his evidence that he in fact had a better understanding of the operation of the proposed reinsurance than he acknowledged in the answers at T 2966-72. He agreed in cross-examination that the accrual issue was discussed in his meeting with Mr Grove on 6 November (T 2989), and he explained the accrual issue as being whether it was necessary to accrue a liability for the cash received in respect of claims recoveries (T 2988), saying that if the contract was not a contract of reinsurance it would be a financial instrument and if cash were received under a financial instrument a liability to repay would have to be recorded. He seemed to accept that if the agreement were a genuine reinsurance contract, it would be permissible to account for claims recoveries as receipts in one year, while premiums would be paid over the life of the contract, but if the contract was a financial transaction there would be no profit and loss effect (T 2989). 1191 I have held that Mr Vines effectively dropped out of the negotiations from about 6 November, and the negotiations with Mr Yee and Ms Dunbar of American Re were conducted by Mr Fox and Mr Schneider. I have rejected Mr Schneider's evidence that Mr Vines authorised him to sign the agreement in its final form on 13 November. 1192 By the time he dropped out of the negotiations, Mr Vines had given his authority to the making of a retrocession agreement that would protect the profit forecast from further deterioration in Hurricane Georges claims, but the agreement he had authorised did not have all the ingredients alleged by ASIC in para 113 of the SASC. He contemplated an agreement reflecting the understanding that I have found him to have had - that is, an agreement that would not involve risk transfer in respect of Hurricane Georges because claims recoveries under the agreement would be reflected in higher premiums in later years, but he believed there would be a sufficient element of risk transfer in the remote top layer cover for the agreement to qualify as a retrocession agreement. 1193 At the time when Mr Vines dropped out of the negotiations, he had reason to believe, and did believe, that the negotiations for the placement slip would be concluded in a fashion that would permit the arrangement to be validly and effectively accounted for, in a manner that would protect the profit forecast against deterioration of Hurricane Georges claims. He had been told by Mr Grove of Guy Carpenter, at their meeting on 5 November, that similar cover had been written for two Australian insurance companies that were regarded as prominent insurance companies at the time. He had also been told by Mr Grove that the cover had met with the approval of KPMG and Arthur Andersen respectively. Mr Fox, who had considerable experience in reinsurance, had told him on the same day that insurance of the kind in contemplation had been written in London. 1194 Mr Hogendijk's expert opinion evidence that a competent chief financial officer in Mr Vines' position would not have authorised or permitted GIO Re to enter into an agreement in the terms of the American Re agreement without first obtaining the opinions of APRA and the company's auditor, is directed towards an agreement of the kind actually entered into by American Re, and not agreement of the kind contemplated by Mr Vines at the time when he was involved in any negotiations. The consequence is that Mr Hogendijk's opinion is not applicable on the findings I have made. 1195 I have found (in section 3.26) that although Mr Vines had been encouraged by the opinions of Mr Grove and Mr Fox that contracts of the kind contemplated would succeed as reinsurance contracts, there was an element of uncertainty in his mind, especially as to whether PwC would allow the proposed accounting treatment of the arrangement, as the GIO Group's auditors. He adopted the eventually ineffective strategy that he would present PwC with a signed slip reinforced by opinions from other auditors (including an "educated view on the slip" from KPMG), so as to create pressure at PwC to accept the arrangement. I have also found that he believed American Re had tacitly agreed to unwind the contract if approval was not received from APRA. 1196 In terms of the seven allegations made by ASIC in SASC para 113, the agreement authorised by Mr Vines, if it was to remain as an agreement and not be unwound, would have been a genuine retrocession agreement in the sense that it would be treated as such by the auditors and APRA. It would therefore not be an artificial arrangement. Consequently the agreement authorised by Mr Vines would not have been an agreement of the kind identified in paras (b) and (c) above. It would have been an agreement where the transfer of risk was sufficient to constitute an acceptable retrocession agreement, rather than an agreement as described in para (d). At the time when Mr Vines dropped out of the picture the profit commission had not been negotiated with American Re and so paras (e) and (f) were not matters that Mr Vines authorised. It appears from the evidence that Mr Vines contemplated entering into the agreement without external actuarial or accounting advice and so element (g) would be satisfied by the evidence. 1197 The result is that the allegation in para 113 of the SASC has not been completely made out against Mr Vines, and fails, essentially because the kind of agreement he authorised was a legitimate agreement complying with accounting and regulatory requirements. 6.5 Allegation (3) Inadequate investigations 1198 These allegations are directed towards Mr Vines' position and conduct before he learned that the American Re agreement was ineffective in an accounting sense, and concerned investigations that should have been undertaken into the likely effect of Hurricane Georges. SASC, paras 104A - alleged failure to disclose the true potential effect of Hurricane Georges claims on the attainment of the profit forecast 1199 These are general pleadings. Para 104A pleads that Mr Vines failed to inform the companies, their boards, the DDC or PwC of the true potential effect of Hurricane Georges claims on the attainment of the profit forecast. Para 106 pleads that Mr Vines failed to cause GIO Re to carry out a comprehensive analysis of its exposure to Hurricane Georges, and maintained the profit forecast although such an analysis was not carried out. ASIC alleges that these assertions are made out in particular ways by reference to the pleadings set out below. 1200 An important issue raised by Mr Hogendijk in his evidence is whether Mr Vines had a duty to take steps to resolve the difference of opinion that arose between Mr Schneider (whose opinion was expressed in the first quarter highlights) and Mr Robertson (whose opinion was expressed in the memorandum of 4 November), as to whether the profit forecast should be revised in light of the development of Hurricane Georges claims. Mr Hogendijk said (affidavit para 120) that a competent CFO in Mr Vines' position, faced with a serious disparity of views between people of such seniority, would not have ignored the views of the person in the position of internal actuary, even if he had serious doubts about their validity, without seeking advice from an independent actuary. He said the natural source of independent advice would have been Mr Latham of PwC. 1201 Mr Hogendijk said that it would not normally be prudent for management to take a view other than the view of the internal actuary, unless the internal actuary's view was found to be wanting after due inquiry by an external actuary; and if a view different from the internal actuary's view was to be taken, management's view would have to be clearly identified and brought to the attention of the DDC and the board, since to take a different view from the internal actuary would amount to a departure from normal practice. 1202 It strikes me that Mr Hogendijk was addressing a situation not precisely the same as the case before me. He spoke in terms of the relationship between a chief financial officer and an internal actuary. Mr Schneider was not, quite, an internal actuary, but instead he held the position of manager of the Technical Services department of GIO Re, and was not a fully qualified actuary. He reported to Mr Robertson, who is the executive director responsible for GIO Re and was a qualified actuary. Mr Vines was not simply a chief financial officer, and his role in the takeover defence process and Part B profit forecast was also important. These three aspects of the matter need be taken into account, when assessing Mr Hogendijk's evidence. Moreover, Mr Hogendijk seems to have contemplated a situation in which the internal actuary has provided advice within his professional sphere supported by appropriate analysis. Since, on my finding, Mr Vines was not told about the contract-by-contract analysis prior to the board meeting on 9 November, Mr Schneider's opinion must have appeared to him speculative and not based on analysis, and perhaps affected by the tension between Mr Schneider and Mr Robertson. 1203 Mr Hogendijk's evidence was attacked in cross-examination on the ground (T 2095-2104) that he was not asked, until shortly before the proceeding commenced, to assume that steps were taken to resolve the disparity of views; and on the ground (T 2111) that he had assumed, without foundation, that a dispute still existed after the release of the October results. But in my opinion, those circumstances do not detract from Mr Hogendijk's evidence as to what a competent chief financial officer in Mr Vines' position would do, knowing that a dispute had arisen and not knowing that it had been resolved. 1204 It seems to me plain that the duty of care and diligence of a chief financial officer entails taking an interest in the resolution of serious financial disagreements between senior executives in the corporate group. I agree with Mr Hogendijk that it would not be appropriate for the chief financial officer simply to disregard the opinion of one of the protagonists, particularly if that person occupies a position akin to internal actuary and the dispute is about an actuarial matter. The commissioning of independent advice to resolve the issue may well be an appropriate step to take. 1205 However, I agree with Mr Vines, who said in evidence that such problems are essentially management problems (T 2994-5), by which I take him to mean that the board would look to management to resolve such issues if possible. In the present case the first step towards resolving the problem was taken when Mr Lange was given special responsibility within the DDC for the reinsurance business and he had a meeting with Mr Vines, Mr Robertson, Mr Fox and representatives of PwC on 5 November, in which it was arranged that Mr Robertson and Mr Fox would meet with Mr Schneider to resolve any differences. In my opinion it could not be said that Mr Vines had any duty to commission independent advice or make disclosure to the board or DDC until enough time had elapsed for that procedure to be implemented. 1206 In fact the outcome was that Mr Robertson and Mr Fox met with Mr Schneider and they discussed the retrocession proposal, and Mr Schneider later confirmed in his memorandum of 8 November 1998 (PTB 0842) that to the extent that Hurricane Georges cost more than the $25 million that had been reserved, the projected forecast profit would be reduced, but the issue would go away if reinsurance could be purchased. Mr McClintock's note on a copy of Mr Schneider's memorandum seems to confirm that the proposed retrocession was the "resolution" of the disagreement. 1207 Mr Vines acknowledged in cross-examination (T 2995) that he did not directly pursue the outcome of the meeting suggested by Mr Lange, but he was aware of the retrocession proposal, and involved in the early negotiations when they began. It would have been obvious to him that any disagreement about the size of Hurricane Georges within the limits of the proposed retrocession would be rendered otiose if an effective retrocession contract could be made. 1208 The evidence indicates, as mentioned above, that in the period from 5 to 13 November Mr Vines believed, relying on what he was told by Mr Grove of Guy Carpenter and Mr Fox, that there were good prospects that an effective retrocession could be negotiated (Mr Vines' written submissions, para 53). Mr Vines submitted he knew the negotiations with American Re were being conducted by Mr Schneider, who said nothing to him to cast doubt on the availability of the cover. There is other evidence that Mr Schneider was, at that time, confident that appropriate cover would be obtained from American Re. That appears in his memorandum of 8 November 1998 to Mr Robertson and Mr Fox (PTB 0842), and from the evidence of Mr Murray (T 1390). 1209 The question is whether, during the period when the American Re negotiations were moving forward and there appeared to be reasonable grounds to hope that an effective agreement could be obtained, there was any concurrent obligation on the part of Mr Vines to obtain independent advice on the difference of opinion between Mr Robertson and Mr Schneider or to report the disagreement to the board or DDC. It seems to me that no such obligation arose during the period from 5 to 11 November, because of the prospect of successfully concluding the placement slip, and as from 11 November, another reason arose for saying there was no such obligation. 1210 The second reason arises out of some evidence given by Mr Vines. He said that he inferred that the disagreement between Mr Robertson and Mr Schneider had been brought to an end when he received the summary of movements in the catastrophe claims model (PTB 0976A) and saw the loss figures predicted by the model as at 31 October, which were about $69 million undiscounted and $67 million discounted, suggesting that the $25 million reserve would be exceeded. I see no reason to disagree with this evidence. Consequently there was no further reason to pursue resolution of the dispute or make disclosure about the fact of the dispute. SASC, para 105 - alleged inadequate investigation following the first quarter highlights 1211 In my opinion the first quarter highlights should have made Mr Vines, in his position as the chief financial officer and also an executive officer with special responsibilities in connection with the takeover process and the Part B forecast, aware of the Hurricane Georges development as an important matter potentially impacting on the forecast and to be kept under particular review. But that does not mean that a special system was needed for that review or that, if some change to GIO Re's practices was needed, it was the responsibility of Mr Vines to ensure that it was implemented. Operating, as he did, at the Group level, he was not responsible for designing and implementing systems for the assessment of claims experience for catastrophes. That was the responsibility of the executive director. In my view, Mr Vines was entitled to assume, in the absence of some ground for thinking otherwise, that GIO Re had in place adequate arrangements for monitoring catastrophe claims experience and that those arrangements would apply to Hurricane Georges. He was also entitled to assume, in the same way, that any deficiencies in the monitoring arrangements would be addressed by the executive director. According to Mr Vines' evidence, which I accept, he believed adequate arrangements were in place and would be implemented. It follows that nothing had been brought to his attention that would require his intervention. 1212 Consequently ASIC's criticism of Mr Vines on the ground that he did not personally make enquiries, or personally ensure that inquiries were made, to obtain information about the development of Hurricane Georges claims, is misguided. For example, Mr Vines' evidence that he made no inquiry as to the claims position at the end of November (T 3088), although he understood that later claims development might alter the assessment of ultimate loss (T 3007), is consistent with the proposition that those updating inquiries were the primary responsibility of the executive director operating at the divisional level rather than the chief financial officer operating at Group level. SASC, para 110 - alleged inadequate investigation after Mr Schneider's advice regarding the results of the contract by contract analysis 1213 I have rejected Mr Schneider's evidence that, on or shortly after 19 October, he had a conversation with Mr Vines in which Mr Schneider said he had begun a contract-by-contract analysis for Hurricane Georges. I have also rejected his evidence that he had one or several conversations with Mr Vines between 9 and 13 November in which he said the contract-by-contract analysis had been completed and he believed the Hurricane Georges loss would be a $100 million type event (section 3.23). Consequently this allegation fails. SASC, paras 112 and 112A -alleged inadequate investigation of October results 1214 As I have said, the effect of ASIC's statement (written submissions, para 378) is that the allegation in para 112A has not been established. 1215 In para 112 ASIC alleges that Mr Vines failed to have any, or any adequate, regard to the disclosure, as pleaded in para 53, of GIO Re's October 1998 results that GIO Re would have suffered a loss in October 1998 of $29.7 million, unless GIO Re could obtain retrocession cover to limit total net Hurricane Georges claims to $25 million, in which event the October 1998 loss would be reduced to $4.7 million. Para 53 asserts that on or about 11 November Mr Schneider forwarded Mr Vines a copy of the October results upon which he had written a note to that general effect (PTB 0959). The contention seems to be that it was the note that Mr Vines failed to have regard to. It does not seem to me that the handwritten note is a matter to which particular obligations should attach that would not attach to the October results themselves. This allegation has not been made out. SASC, para 120 -alleged inadequate investigation after discussion at Terrigal meeting concerning Hurricane Georges claims 1216 I have held that the discussion at Terrigal to which Mr Schneider deposed has not been proved. 6.6 Allegations group (4) Non-disclosure to the board and DDC 1217 The allegations in this group are to the effect that, before he was advised that the American Re agreement would not be effective, Mr Vines failed, in reporting to the board and DDC, to disclose his knowledge of the likely effect of Hurricane Georges on the profit forecast or his belief that the American Re agreement would protect the forecast. 1218 The allegations raise a general issue concerning the significance (or otherwise) of Mr Vines' "unders and overs" schedule, a matter touched on more briefly in other respects above. 1219 I explained in section 3.18 that Mr Vines prepared and showed to Mr Mortimer, chairman of the parent company, an analysis of "unders and overs" to assess whether there was any surplus or redundancy across the Group. ASIC accepted that if there were a properly documented and balanced "unders and overs" exercise which took into account both shortfalls and redundancies and showed a clear net redundancy, it may be legitimate for GIO Re to maintain the $80 million profit forecast notwithstanding adverse claims movement with respect to Hurricane Georges. 1220 The evidence discussed in section 3.18 shows that Mr Vines' "unders and overs" schedule had become, by 9 November 1998, an assessment of some areas of redundancy and deficiency in GIO Re's balance sheet (as well as across the Group) which had a supporting reasoning process. The "unders and overs" exercise provided some grounds for believing that there would be an overall net redundancy that might support GIO Re's profit forecast for the year to June 1999 in the event that Hurricane Georges or any other particular catastrophe might prove to have been underestimated. But there were some significant indeterminacies in it. 1221 For example, there were grounds for believing that the aviation reserve constituted an "over" of some amount, , and it was probably reasonable to believe that the increase in that reserve that had been made when Mr Steffey arrived could be partly reversed. But it seems to me that there would need to be some form of actuarial analysis before reliance could be placed on the surplus aviation reserve for any particular figure as a redundancy that would overcome the inadequacy of the Hurricane Georges reserve. As far as I can see, no such analysis was made. 1222 The "over" for MIPI eventually came to be supported by Mr Latham's report of 3 December 1998, which was the kind of external confirmation that, it seems to me, was required. ASIC made it expressly clear (T 2767) that it was no part of its case that the MIPI "over" of $35 million was illegitimate. Mr Vines had, as I have explained, a confident view about MIPI because of his personal knowledge, but in my view that would not be an adequate basis for relying on MIPI for any additional "over" beyond what was authorised by Mr Latham's 3 December report, in the absence of actuarial confirmation. 1223 Mr Vines also relied on an "over" for "prudential margin earnings" in the amount of $12 million. That amount appears to have been substantially used in the adjustment of the October results that was arranged at the meeting of Mr Vines, Mr Schneider and Mr Driessen on 11 November (see section 3.19). 1224 ASIC made two related submissions about Mr Vines' unders and overs schedule. First, it submitted (written submissions, para 256) that there was reason to doubt that Mr Vines himself believed that the apparent "overs" were valid. Secondly, it contended (written submissions, para 259) that after 1 December 1998, when PwC indicated to Mr Vines that it was likely they would reject the efficacy of the American Re agreement, Mr Vines was only interested in finding redundancies that might be available to prop up the profit forecast, rather than to have a balanced assessment. 1225 ASIC referred to the fact that at his meeting with PwC on 1 December 1998, Mr Vines had suggested that Mr Latham should review the question of over-reserving in MIPI, but did not suggest that Mr Latham be asked to consider the other areas of over-reserving identified in Mr Vines' schedule. ASIC also submitted that it was significant that Mr Vines did not suggest that Mr Latham review any of the "unders" listed in his schedule. ASIC also referred to the fact that on 2 December, Mr Vines instructed Mr Schneider, via Mr Fox, to conduct an investigation for "particular areas of conservatism" (T 2727), rather than to conduct a balanced investigation to ascertain whether any positive or negative adjustments were needed. Mr Vines agreed that he did not ask Mr Latham to investigate whether there was a shortfall in the reserves for marine or for Malaysia, saying (T 3071): "From my perspective, I was only interested in unders and overs that had the effect of maintaining the current forecast. I was not interested in increasing the forecast." 1226 ASIC emphasised Mr Vines' statement that he was only interested in maintaining the current forecast. The evidence indicates, in my view, that Mr Vines did not take steps to ensure that the "unders and overs" exercise upon which he continued to rely into December was properly verified both on the "overs" and on the "unders" side. The evidence does not show that Mr Vines did not believe in the analysis, only that he was anxious to make sure everything that might be put into the "overs" side had been identified. Clearly Mr Vines had not totally disregarded the "unders" side, as his evidence of his initial schedule shows. 1227 In all the circumstances, my conclusion is that Mr Vines' "unders and overs" analysis, as described in section 3.18, was based on a generally plausible reasoning process, and had not been corrupted by a determination to enhance the "overs" and disregard "unders", but its utility was limited by the lack of underlying supporting analysis, particularly actuarial analysis, for some of the items. SASC, paras 64 and 114 - reporting to the 9 November board meeting 1228 ASIC submitted (written submissions, para 196) that the circumstances in which Mr Vines prepared his paper for presentation to the board on 9 November (PTB 0876) constituted a breach of s 232(4). ASIC said that its case in relation to this contravention was partly one of omission, and partly one of deception. 1229 It contended that it was plain on the evidence that Mr Vines did not, at that time, draw to the board's attention material developments concerning the attainment of the forecast, and that without disclosure of those matters, the statement that management remained confident that the forecast of $80 million could be met was misleading. 1230 ASIC referred specifically to the fact that when he prepared his paper for the board, Mr Vines did not know the outcome of the attempt to reconcile the views of Mr Robertson and Mr Schneider. Mr Hogendijk gave evidence (affidavit para 124) that a competent CFO would have felt obliged to bring to the specific attention of the board the fact that the internal actuary and PwC had suggested that the total loss for Hurricane Georges could turn out to be $100 million or more. 1231 For the reasons given above, I do not agree that the first quarter highlights were a matter for disclosure to the board, or that there was any obligation to disclose to the board on 9 November the disagreement between Mr Robertson and Mr Schneider, or to take some independent advice about it. The PwC draft report to which the pleading and Mr Hogendijk refer (PTB 0618), a document that was apparently never finalised, was simply a comparison based on historical experience for other hurricanes, giving a range from $9 million to $178 million, not expressing any view within that range. I think it would have been premature to disclose that draft report on 9 November. 1232 The more difficult and important question is whether, in all the circumstances, a reasonable person in like position to Mr Vines would have given the board a relevantly unqualified assurance of management confidence in the forecast when he knew that there was a dispute in the executive ranks about a matter material to the forecast which, as far as he was aware, had not been resolved. This is not a question about whether to commission independent advice to resolve the dispute, or disclose the dispute the board, but rather whether, in the circumstances of the dispute, an unqualified affirmation of the profit forecast was justified. 1233 Mr Vines explained that the statement affirming the profit forecast drew on Mr Robertson's memorandum of 4 November and was also his own opinion. He said he held the opinion because Mr Robertson expressed it, because he believed that the proposed retrocession contract would deal with any adverse development beyond $25 million for Hurricane Georges, and because he had his "unders and overs" schedule in the back of his mind (including the MIPI redundancy) (T 2648). 1234 My view is that Mr Vines failed to discharge his s 232(4) duty in respect of his report to the board meeting of 9 November, because of his statement about management's confidence in the forecast. My opinion is based on my own assessment of his role and responsibilities in the particular position he occupied, in the company's particular circumstances. He was responsible under the planning memorandum for co-ordinating the due diligence process and had a special responsibility for the financial forecast. His own explanation to executive staff of the purpose of the due diligence process for the Part B disclosure shows that he understood the importance of management bringing forward all material matters to the DDC, and ultimately the board, for consideration. He was well aware of the nature and scope of the disagreement, by virtue of his attendance at the meeting with Mr Lange on 5 November (and also his reading of various documents such as the first quarter highlights, Mr Schneider's "assumptions" e-mail of 20 October, PwC's draft report of 22 October, Mr McClintock's e-mail of 4 November and Mr Robertson's memorandum of 4 November), and that it was a disagreement between the most senior officer of GIO Re (Mr Robertson) and, relevantly, the second most senior officer (Mr Schneider) about a matter of highly material significance to the first-quarter results and the viability of the profit forecast. 1235 In those circumstances a reasonable person in like position in a corporation in GIO's circumstances, acting carefully and diligently, would not have reported to the board, after merely noting the $25 million reserve based on average historical market share, that management remained confident that the full-year forecast business profit of $80 million could be met. I accept, as Mr Vines said, that at the time he had the view that the proposed retrocession would deal with adverse development above $25 million, and he had in mind his unders and overs schedule. But he did not tell the board about these things, or mention to the board that there was a problem arising out of management disagreement which led him to rely on such matters. Instead, the report made a relevantly unqualified assertion about management's view, an assertion that was, in my opinion, incomplete and misleading. The fact that the statement was, objectively, a misleading statement does not necessarily mean that there was a breach of the duty of care and diligence in making it. One can be objectively misleading notwithstanding all due care. But this was a statement that was objectively misleading because of the omission of material facts known to the maker of the statement. Such a statement was not one that a reasonable person in like position in a corporation in GIO's circumstances would make, exercising his or her powers and discharging his or her duties with care and diligence. 1236 In reaching this conclusion I do not hold that Mr Vines intended to deceive the board by making this statement. His own evidence implies that he believed the statement was true, as regards his own view and the view of Mr Robertson, because of the retrocession agreement and the unders and overs. 1237 I have held it was not necessary for Mr Vines to make full disclosure to the board on 9 November of the disagreement between Mr Robertson and Mr Schneider. A reasonable person in like position in a corporation in GIO's circumstances might well have taken the view that the board had established a committee, the DDC, for dealing with matters at that level of detail in circumstances where the position had not reached finality and the problem might be resolved before the Part B statement was adopted. It might have been sufficient for Mr Vines to tell the board that some issues had arisen about the impact of Hurricane Georges on the profit forecast, and that they were being addressed by management, in circumstances where the DDC would be kept fully informed. But a statement to the board that was misleading, because of the omission of material facts known to Mr Vines, was in a different category. SASC, paras 108 and 109 - signing answers to due diligence questionnaire on 11 November 1238 ASIC submitted that the first problem with Mr Vines' answers to the due diligence questionnaire was that he gave the answers at a time when he did not know whether the disagreement between Mr Robertson and Mr Schneider had been resolved. ASIC relied on the evidence of Mr Hogendijk, who said that a competent CFO would have made reference in the answers to the questionnaire to the existence of differences of opinion of the kind that existed between Mr Robertson and Mr Schneider (Mr Hogendijk's affidavit, para 137). For the reasons given earlier, I disagree with this submission. 1239 ASIC made another submission, based on the catastrophe model figures. It contended that when he saw those figures, Mr Schneider must have been aware of the inadequacy of the $25 million reserve and the need to reconsider the profit forecast, with a view to protecting the forecast by retrocession, or supporting it by an unders and overs analysis, or if those alternatives failed, reducing the forecast. ASIC submitted, in effect (written submissions, para 183), that a reasonable executive officer in the shoes of Mr Vines would have appreciated that it was incumbent on him to correct the answers in the due diligence questionnaire if they were inconsistent with what he later learned. 1240 I do not agree with this. I accept that Mr Vines had a duty to correct misstatements in the answers to the questionnaire, but the matters identified by ASIC's submission had not, on 11 November, matured into disclosable items. Mr Vines had his unders and overs analysis in reserve, as it were, and he was aware that Mr Fox and Mr Schneider were working on a retrocession agreement that would protect the forecast, if it succeeded. 1241 In written submissions (para 186) ASIC contended that Mr Vines was aware that Mr Schneider had conducted a contract-by-contract analysis and had formed the view that Hurricane Georges was likely to be a $100 million type event; and that before he handed in his due diligence questionnaire, he should have given the DDC this information. But I have found, contrary to ASIC's contentions, that Mr Vines was not aware of these matters and so the question of informing the DDC does not arise. 1242 ASIC also contended that Mr Vines should have told the DDC certain things about the proposed American Re retrocession agreement, such as that: · it was being entered into for the purpose of preserving the profit forecast; · it would require GIO Re to pay American Re premiums in later years equal to the total claims recovered from American Re in the year to June 1999; · there was an issue whether the proposed agreement was a true retrocession, because it applied retrospectively to cover Hurricane Georges; and · GIO Re had not obtained regulatory approval, or the approval of its auditors on the accounting treatment of the agreement. 1243 I do not agree with the submission that Mr Vines should have passed these things on to the DDC on 10 November. I have accepted his evidence that, although he became aware of the relationship between Hurricane Georges claims development and the profit forecast after reading the first quarter highlights, he looked to the executive director and staff of GIO Re to monitor the claims development for the Hurricane, and expected to be told of any material adverse development, and it was reasonable of him to take that approach. The position changed to a degree on 11 November when he heard that Mr Schneider and Mr Driessen had prepared a model predicting a loss of $69 million undiscounted. It was then more arguable that the disclosure advocated by ASIC would have been appropriate. But by that time the due diligence questionnaire had been completed and presumably lodged. Mr Vines would be required to make further disclosure but he might sensibly have taken the approach of awaiting the completion of the negotiations and the auditors' decision on the efficacy of the agreement as retrocession. SASC, para 106 - reporting to the 17 November board meeting SASC, para 117 - media release on 17 November 1998 1244 The issues raised by allegedly inadequate disclosure to the board and in the media release are essentially the same. The allegation made in para 117 is that Mr Vines was aware of and approved the media release knowing certain things. One of them, which he clearly knew, was that Mr Schneider had warned that the profit forecast should be reduced. That was in the first quarter highlights. Another was that an analysis of reinsurance contracts had led to an estimate that Hurricane Georges would be a $100 million type event. I have found that Mr Vines was not aware of that matter on 17 November. The third matter alleged to have been known by Mr Vines was that the October results had shown that GIO Re would suffer the loss of $29.7 million in October in the absence of retrocession cover. 1245 ASIC submitted (written submissions, para 240) that Mr Vines knew that the October results, which were part of the first four months' figures announced to the market, had been supported by the American Re agreement, which had not been approved by APRA or the auditors, and at the time of the announcement it was not certain that the American Re agreement could be accounted for in a way that would protect the profit forecast and first four months' profit. Additionally, as I have found, Mr Vines was aware that if the American Re agreement was effective, it would follow that claims recoveries from American Re in the 1999 year would have to be repaid in premiums in later years. In those circumstances, ASIC contended that even though Mr Vines had limited influence on the terms of the media release, he was obliged to bring to the board's attention the matters that he knew. In ASIC's submission, the media release implied that sound profits had been generated from the ordinary business activities of GIO Re, whereas in fact the profits had been propped up by what was hoped would be the effect of the American Re agreement. 1246 In my opinion ASIC's submission has been made out. It was important for the board to know the relationship between the October results in the assumed efficacy of the American Re agreement, so that the board would have the opportunity to consider how, if at all, the full information should affect the media release. Mr Vines claimed in cross-examination (T 3040) that, when he participated in the process leading to the publication of the media release, he believed in good faith that there would be sufficient unders and overs to protect GIO Re against whatever excess loss (above the $25 million reserve) might arise for Hurricane Georges. It seems to me that his belief in unders and overs was not a justification for non-disclosure to the board but, rather, an occasion for further disclosure so that the full facts would be presented to the board. SASC, para 117A - e-mail of 22 November 1998 to the DDC 1247 Mr Vines' e-mail to the DDC dated 22 November (PTB 1178) was an important document because it endeavoured to be "the summation of the situation up to that point", written in preparation for the meeting the following morning, as Mr Vines said (T 3055). ASIC submitted (written submissions, para 210) that the e-mail ought to have disclosed a number of matters material to the forecast, and was in its terms misleading. ASIC contended that on 22 November Mr Vines knew, and did not disclose: · the make-up of the October 1998 results for GIO Re and specifically, the assumed treatment of the American Re agreement inherent in those results; · that the debate between Mr Robertson and Mr Schneider as to the appropriate reserve for Hurricane Georges had been resolved substantially in Mr Schneider's favour (see T 3055); and · that GIO Re's catastrophe model was predicting that Hurricane Georges would produce claims (undiscounted) of $69 million and (discounted) of $67 million. 1248 I have recounted the evidence that establishes that Mr Vines had actual knowledge of these three matters on 22 November. It is plain that he did not disclose them in his e-mail of 22 November. There was an exchange of opinions between senior counsel for Mr Vines and ASIC in final oral submissions as to whether ASIC had established that the DDC did not know of the loss estimate in the October catastrophe model and as to whether they did not know that the October results assumed the availability of the American Re contract. I agree with senior counsel for ASIC that it is appropriate here, even bearing in mind the Briginshaw standard to which I have frequently referred, for the court to review the documents provided to the DDC and other evidence as to the materials before the committee, and draw inferences as to what was and was not disclosed to the committee. It seems to me that in the present case the appropriate inference, particularly having regard to the terms of Mr Vines' e-mail, is to infer that the DDC was not aware of these matters (T 4443-4; T 4482-3). 1249 As to the first matter, Mr Vines accepted that the October 1998 results had presumed that the American Re agreement would be entered into (T 3015). The presumption implied that the American Re agreement would qualify as reinsurance so that it would effectively protect the results from adverse claims movement, for if it were in truth a financial arrangement it would have no effect on the profit and loss account apart from American Re's fees. I have set out the evidence which shows that on 22 November (and before that time), Mr Vines realised there was an issue as to whether the American Re agreement was a true retrocession. Indeed, he had just received KPMG's draft advice, partly illegible, with a covering note from Mr Schneider to the effect that the response from Arthur Andersen was much better. In my view Mr Vines' e-mail of 22 November was, in these circumstances, misleading in omitting to disclose the extent to which maintenance of the profit forecast depended upon the efficacy of the American Re agreement, and in omitting to disclose the doubt that existed about that matter, to Mr Vines' knowledge. 1250 Mr Vines gave evidence (T 2707) that if the American Re agreement was ineffective, redundancies were available to compensate for it, particularly in the MIPI portfolio. In my opinion the presence of redundancies would not exonerate Mr Vines from disclosing the manner and extent to which the American Re agreement affected the calculation and forecast of profit. Redundancies, if they existed, were another matter for disclosure, rather than a matter that would justify non-disclosure of reliance on the American Re agreement and doubts about its efficacy. 1251 Mr Hogendijk (affidavit, para 160) gave evidence that a competent chief financial officer in Mr Vines' position would have disclosed the American Re agreement "as it affected the composition of the profit". I do not disagree with this evidence but I do not find it helpful, since in my opinion Mr Vines' duty in the circumstances depended upon his total position in GIO's circumstances rather than that aspect of it constituting his role as chief financial officer. Mr Hogendijk also said that a competent chief financial officer in Mr Vines' position would have qualified the reference he made to Mr Robertson's view that GIO Re could expect better claims experience for the remainder of the year, by suggesting that the projected better claims experience depended on the American Re contract being regarded as a true retrocession agreement (T 2120). It seems to me this evidence is based on a misunderstanding of Mr Robertson's reference to claims experience, which probably related to new events rather than the development of claims in respect of existing events (see Mr Vines' written submissions, para 280). 1252 My conclusion is that Mr Vines' e-mail of 22 November was materially misleading in omitting to refer to the assumed treatment of the American Re agreement inherent in the October results, and the doubts that had emerged about the efficacy of the agreement in accounting sense. In my opinion a reasonable person in Mr Vines' position, acting carefully and diligently, would have realised the materiality of these matters to the GIO Re profit forecast, and would have recognised that the time had come to inform the DDC of the risk that the assumption of efficacy of the American Re agreement underlying the October results might not be made out. 1253 As the second and third matters, it was clear from the evidence that on 11 November, Mr Vines was shown a catastrophe model that predicted the Hurricane Georges loss as $69 million (undiscounted) and $67 million (discounted). Mr Vines' evidence was that this catastrophe model had resolved the dispute between Mr Robertson and Mr Schneider in Mr Schneider's favour. He was therefore aware of these matters when he wrote his report to the DDC on 22 November. As I have explained, the new figures in the model implied that the view of Mr Robertson in his memorandum of 4 November, that $25 million was an adequate reserve for Hurricane Georges, was wrong, a proposition that Mr Vines accepted in cross-examination (T 3055). 1254 Mr Vines was not obliged, in his position at the Group level, to provide reports to the DDC on claims development for Hurricane Georges. He was entitled to assume that the reinsurance division was properly monitoring claims developments and would report to him any matters of significance. But the information from the catastrophe model had a particular significance for Mr Vines, because it signified to him the view Mr Schneider had expressed about Hurricane Georges in the first quarter highlights was being validated by other evidence, and Mr Robertson's view now appeared to be wrong. It had not been necessary to disclose the figures in his answers to the due diligence questionnaire, because it appears that he completed those answers on 10 November and he was given the figures on 11 November. But on 22 November, 11 days later, it was materially misleading for Mr Vines to endorse the $80 million profit forecast (subject to a net overstatement of $4 million) in his report to the DDC, by reiterating in substance Mr Robertson's views in his 4 November memorandum, without addressing the new ultimate loss figures which had invalidated Mr Robertson's view as to the adequacy of the $25 million reserve. The emergence of the $69 million estimate was a significant development that had occurred since Mr Robertson wrote his memorandum. SASC, para 119 - reporting to the 6 December 1998 DDC meeting 1255 ASIC submitted (written submissions, para 234) that Mr Vines ought to have corrected the statement made by Mr Hammond that the total Hurricane Georges claims could rise to the order of $60 million. This is on the primary basis of Mr Schneider's evidence that he told Mr Vines between 9 and 13 November that the contract-by-contract analysis had led him to believe that the loss would be a $100 million type event. But I have preferred the evidence of Mr Vines to Mr Schneider's evidence on this point. 1256 Additionally, ASIC submitted (written submissions, para 289) that Mr Vines was aware, by 6 December, that the American Re agreement would protect the profit forecast only so long as the ultimate net loss for Hurricane Georges was less than $100 million. Mr Schneider gave evidence (first affidavit, para 152) that he said so to Mr Vines at the meeting on 11 November, but I have found against Mr Schneider's account of what was said at that meeting. However, Mr Vines' own evidence provides some guidance as to his state of awareness of that matter. He said (T 3033) that when he read the American Re agreement after receiving it on 13 November, he learnt that the agreement provided cover "broadly in excess of - up to sort of $90 million or thereabouts". He must have been well aware that this limit was, effectively, a limit for (or substantially for) cover in respect of Hurricane Georges, because it was the event that led to the agreement being negotiated. Further, he was aware after the 11 November meeting that by 31 October 1998, the catastrophe model estimate of ultimate loss had increased to $67 million discounted, and he accepted that he knew the estimate could increase in the month to 30 November, as it did (T 3007). 1257 Consequently as at 6 December, Mr Vines was aware that even if some revised wording for the American Re placement slip could be negotiated to the satisfaction of the auditors, the cover provided by American Re was limited and the loss estimate for Hurricane Georges was rising towards that limit. The question is whether this knowledge was sufficient to warrant the conclusion that he ought to have made some cautionary remarks when he heard Mr Hammond say that the current level of claims notifications indicated that Hurricane Georges claims could rise to the order of $60 million. My judgment is that his duty of care and diligence did not require him to do so. The task of estimating the ultimate net loss for a catastrophe was a matter outside his field experience and expertise, and was a matter to be addressed to the executive director of the reinsurance division. 6.7 Allegations group (5) Instructions to Mr Schneider 1258 SASC, paras 111 and 122 - not to discuss his view of the probable effect of Hurricane Georges with PwC, not to prepare results for November 1998 or do a further profit projection 1259 Para 111 relates to ASIC's allegation that Mr Schneider informed Mr Vines on about 9 November 1998 about the results of the contract-by-contract analysis and his view that Hurricane Georges would be a $100 million type event, and that Mr Vines instructed Mr Schneider not to discuss his opinion about the size of the estimated loss with PwC Securities. 1260 I have found (section 3.10) that the discussion Mr Schneider alleged to have had with Mr Vines in October 1998 in which he claimed Mr Vines criticised him for "messing up the process" did not occur in the way that Mr Schneider described it. I said that it was more likely Mr Vines told Mr Schneider, without anger, that he should have submitted his report to Mr Robertson before releasing it to the auditors and others, because he should have followed the correct reporting line. 1261 Para 122 refers to ASIC's allegation that during the Terrigal meeting Mr Vines told Mr Schneider not to prepare another profit projection and not to discuss his views with PwC Securities. I have found that no such instruction was given by Mr Vines at the Terrigal meeting. 6.8 Conclusions as to Mr Vines' liability for breach of s 232(4) 1262 I have found that there were contraventions of s 232(4) by Mr Vines, specified above in paras 1167, 1168, 1172, 1174, 1175, 1178, 1184, 1234, 1246, 1252, and 1254. 7. ASIC'S CASE AGAINST MR ROBERTSON 7.1 ASIC's allegations against Mr Robertson 1263 ASIC submitted that Mr Robertson contravened the statutory duty of care of officers of a corporation then found in s 232(4) of the Corporations Law. In final submissions, ASIC contended that Mr Robertson, in the exercise of his powers and the discharge of his duties as an officer of GIO Insurance and GIO Australia Holdings, failed to exercise the degree of care and diligence that a reasonable person in a like position in the corporation would exercise in the corporation's circumstances, in six broad areas. 1264 The six broad areas specified in final submissions, and the references to ASIC's pleaded case, are as follows: (a) his preparation of the memorandum of 4 November 1998 (SASC, paras 129A, 131, 131A, 131B(c)); (b) his execution of the due diligence questionnaire and management sign-off on 10 November 1998 in Boston (SASC, paras 131B(c), 132(c), 132(f), 133); (c) his affirmation of the $80 million profit forecast notwithstanding the contents of the HG table (SASC, paras 135A, 136, 136A(e), 137, 138A); (d) his participation in the meeting on 7 December 1998 with PwC (SASC, paras 135, 136, 136A); (e) his execution of a representation letter and management sign-off on 7 December 1998 (SASC, paras 137, 138, 138A); and (f) his failure to take any step after the publication of the Part B statement to correct it (SASC, paras 129A, 135A and 139). 1265 Before addressing these allegations, it is necessary to consider Mr Robertson's status as an officer of the potentially relevant corporations, namely GIO Insurance and GIO Australia Holdings. 7.2 Mr Robertson as an "officer of a corporation" 1266 In the SASC (para 5), ASIC contended that at all material times, Mr Robertson was · a director of GIO Insurance, · an executive director of GIO Insurance holding executive responsibility for aspects of the management of that company, and · an executive officer of GIO Insurance and also of GIO Australia Holdings. 1267 There is no issue that at least until 5 November 1998, Mr Robertson was an officer of GIO Insurance for the purposes of s 232(4). In his Notice of Grounds of Defence to the SASC, para 2, he admitted that until 5 November 1988, he was a director of GIO Insurance, holding executive responsibility "for aspects of the management" of the company, and otherwise he was an executive officer of GIO Insurance. The "aspects of management" for which he was responsible are indicated in the business plan that he presented to the board of directors of GIO Insurance in May 1998 (PTB 0006). It emerges from that document that he was, in effect, the chief executive of GIO Insurance, although his position was limited by the circumstance that GIO Insurance was a subsidiary within the GIO Group reportable to the board of directors and chief executive of the parent company. What the business plan shows is that the executive staff of GIO Insurance, including those in GIO Re, all reported to Mr Robertson and that he had responsibility for implementing changes to reporting lines and roles (see PTB 0037). 1268 Significantly for the purposes of the present case, until 5 November 1998 Mr Robertson was subject to the statutory duty to exercise care and diligence to the degree that a reasonable person in the position of executive director of GIO Insurance, responsible for the overall management of its reinsurance operations, would exercise in GIO Insurance's circumstances. That responsibility included the formulation and supervision of profit projections for GIO Re, including the profit forecast for inclusion in the Part B statement. 1269 Mr Robertson did not resign as a director of GIO Insurance until 3 March 1999 (Exhibit P 23). Therefore he remained an "officer" of GIO Insurance for the purposes of s 232(4) until that time. The more important question relates to his responsibilities after Mr Fox arrived on 5 November, because the standard of care and diligence imposed by the subsection is that of a reasonable person "in a like position in the corporation" in the corporation's circumstances. 1270 I have found in section 4 that he had substantial executive responsibility in GIO Insurance from 5 November to 8 December 1998 notwithstanding that Mr Fox had taken over the role of executive director. But it was not, in respect of GIO Insurance, a segmented responsibility akin to responsibility for production or sales. It was part of the central management of GIO Insurance. Though it was a responsibility limited in scope and directed towards the profit forecast, it was discretionary responsibility going to the heart of the financial management of GIO Insurance. If I were wrong on this, I would hold that Mr Robertson was an executive officer because he took part in and was concerned in the "management" of GIO Insurance in the sense described in the Bracht case, which I would prefer on this point to Holpitt v Swaab , for reasons given in section 5.2 . 1271 Therefore Mr Robertson continued to be an executive officer of GIO Insurance, as well as a director, until after 7 December 1998, and so he was until that time an officer of GIO Insurance on two bases, and was subject to the standard of care and diligence of a reasonable person in a like position in both respects. 1272 After 7 December 1998 and until 3 March 1999 he was an officer only as a director of GIO Insurance, and therefore the standard of care and diligence applicable to him was the standard applicable to a person who held a directorship but had ceased to have any practical involvement in the reinsurance business, and that business was managed by the executive director and the management committee rather than through board meetings. 1273 My conclusion that Mr Robertson held executive responsibility with respect to the divisional profit forecast leads to the further conclusion that he was an executive officer of GIO Australia Holdings, as well as GIO Insurance, and therefore an officer of both corporations for the purposes of s 232(1), for reasons I shall explain. The fact that the responsibility was a shared or joint responsibility does not detract from this conclusion. 1274 Before Mr Fox arrived on 5 November 1998, Mr Robertson was one of the Group executive staff participating in the Group management structure designed by Mr Steffey. Under those arrangements there was only one operating board of directors within the GIO Group, namely the board of GIO Australia Holdings, Mr Robertson reported directly to Mr Steffey as Group chief executive, and the management of the subsidiary was not carried out through subsidiary board meetings. The mere fact that the executive director of a subsidiary reports to the group chief executive does not entail that the executive director's activities are to be classified as activities of the group or parent entity. But in this case Mr Steffey's arrangements went further than mere reporting arrangements. Mr Robertson was part of the senior executive team and had responsibility for contributing a major part of the Group financial forecast, an activity concerned with the management of the target company, GIO Australia Holdings. In a substantial sense Mr Robertson was the author of the reinsurance component of the forecast. That is reflected in the importance attached to his 4 November memorandum. The limitation of his role to the business of GIO Insurance did not prevent it from being said that he was concerned or took part in the management of GIO Australia Holdings, on the authority of the Bracht case (see section 5.2). 1275 After Mr Fox arrived, Mr Robertson continued to have and discharge executive responsibility with respect to the profit forecast, culminating in the events of 7 December 1998. He therefore continued to take part in and be concerned in the management of both GIO Insurance in GIO Australia Holdings. Additionally, he acquired some "special projects" from Mr Steffey in which were not GIO Insurance matters. It appears that in his work on those projects, evidently responsible work of a kind allocated to a senior executive, as well as in attending to his responsibilities concerning the profit forecast, Mr Robertson was acting as an executive officer of GIO Australia Holdings. 1276 In section 8.2 I consider some submissions by ASIC as to the significance of finding that Mr Fox was an executive officer of GIO Australia Holdings as well as of GIO Insurance. Those observations are applicable to Mr Robertson as well. 7.3 Allegations group (1): Mr Robertson's memorandum of 4 November 1998 1277 ASIC submitted (written submissions (Robertson), para 72) that in presenting his memorandum of 4 November 1998, and thereby effectively affirming the profit forecast, Mr Robertson failed to discharge his statutory duty of care for the following three reasons: (i) he ignored the advice he received from Mr Schneider before 4 November concerning the contract-by-contract analysis; (ii) he failed to obtain up-to-date information from Mr Fricke concerning the level of notified claims for Hurricane Georges and to incorporate that into his memorandum; and (iii) he otherwise expressed satisfaction with the achievability of the profit forecast notwithstanding the first quarter results. Allegation of ignoring Mr Schneider's advice 1278 This claim depends on the court finding that Mr Schneider told Mr Robertson prior to 4 November that he and his team were conducting a contract-by-contract analysis and that he was confident that Hurricane Georges would be a $100 million type event. I have decided, for reasons given in section 3.14, that the conversations alleged by Mr Schneider have not been proved, although Mr Schneider referred to the contract-by-contract analysis and expressed his view that Hurricane Georges would be a $100 million type event in his meeting with Mr Robertson and Mr Fox on 5 November, the day after Mr Robertson wrote his memorandum. Consequently this allegation is unsuccessful. Allegation of failing to obtain claims information from Mr Fricke 1279 In affirming the profit forecast in his memorandum of 4 November, Mr Robertson adopted the $25 million reserve for Hurricane Georges which had been calculated upon the basis of GIO Re's average market share for such events. If the actual claims experience for Hurricane Georges was extraordinary, then this assumption would be invalidated and the profit forecast would be inadequate. In my view Mr Robertson was aware of this. 1280 Mr Fricke's Status of Registered Events Report as at 31 October 1998 (PTB 0792) disclosed paid property claims of $10.62 million, outstanding property claims of $10.52 million, and marine claims of $7.28 million. It was not available on 4 November but Mr Robertson was aware that by 4 November Mr Fricke had either finished or was close to finalising a figure for claims for the month ended 31 October (T 3351). The only claims information Mr Robertson actually had was the information disclosed to the management committee on 12 October 1998, which indicated that $2 million in claims had been received, and was clearly too early to be of any use (PTB 1284B). He did not approach Mr Fricke or anyone else in the claims department to update that information before writing his 4 November memorandum. In his evidence he did not put forward any reason for not seeking updated information, although he denied that he had any obligation to do so (T 3352). 1281 In cross-examination Mr Robertson's attention was drawn to the October Status of Registered Events Report and he was asked whether he would have affirmed the profit forecast in his 4 November memorandum if he had been aware of claims at that level. He said (T 3348) that he would have referred to the figures in his memorandum and continued: "I would have wanted to think about it hard and I probably would have put a hold notice on the profit forecast, that until things developed a little further I wasn't prepared to make a recommendation on it." He agreed that although he would not necessarily have revised the profit forecast on the basis of those figures, he would not, in light of them, have affirmed the forecast. 1282 ASIC submitted (written submissions (Robertson), para 82) that in those circumstances it was incumbent upon Mr Robertson to take the basic step of telephoning Mr Fricke and asking him what the level of claims was. ASIC relied on the evidence of Anthony de Vroome, its reinsurance expert. Mr de Vroome gave evidence (affidavit (Robertson), para 97) that it was not appropriate for Mr Robertson to have maintained the 0.6% market share loss assumption as at 4 November without having first checked the level of claims actually received by GIO Re up to that date. He said (as Mr Robertson conceded) that a competent reinsurance manager in Mr Robertson's position would have known, on hearing the claims figure, that it was inconsistent with an expectation that the ultimate loss would not exceed $25 million. He said that a competent reinsurance manager in Mr Robertson's position should have undertaken some further cross-checks of the level of claims before confirming the profit forecast. Those checks would include initiating some inquiries as to the likely development of claims made on GIO Re through the Lloyd's reinsurance market (para 101). During his cross-examination, Mr de Vroome accepted that it was appropriate to maintain a reserve based on market share assessment at a time that was six weeks after the event, as "an initial estimate", but this was subject to the proviso that "there is no other information that is available" (T 2237). 1283 Mr Robertson submitted (written submissions para 122) that it was not to be expected that there would be much by way of claims information available only six weeks after the event. He noted that Mr de Vroome ultimately accepted that some competent reinsurance managers would not expect significant claims activity so soon after the event (T 2228). But the evidence shows that the October Status of Registered Events report was made available on the following day (PTB 0792). I infer from that fact, coupled with the evidence that has been given about the nature and operation of GIO Re's recording system, that if Mr Robertson as executive director had telephoned Mr Fricke (or one of his colleagues in the claims department) on the previous afternoon he would have been able to obtain at least a substantial part of the information contained in the report. 1284 In cross-examination of Mr de Vroome, senior counsel for Mr Robertson referred to the document at PTB 1020C, which (as I have said: section 3.21) gave a different and lower figure for Hurricane Georges losses than the Status of Registered Events report. Mr de Vroome conceded that he had assumed that if Mr Robertson made an inquiry on 4 November he would have been given a $28 million figure rather than a $17 million figure (T 2281). In my opinion that does not detract from his evidence that a competent reinsurance manager would have checked the level of claims actually received. Nor is his evidence diminished by his assumption that Mr Robertson was aware of Mr Schneider's contract-by-contract analysis (T 2307), not only because my finding of fact supports that assumption, but also because his view as to whether Mr Robertson should have checked the level of claims was not, as I understand it, affected by that matter. 1285 Mr Robertson's reinsurance expert, Mr Morgan, took a contrary view (affidavit, paras 85-7). He expressed the opinion that a competent reinsurance manager in the position of Mr Robertson did not need to make inquiries about the current status of claims in respect of Hurricane Georges before submitting his 4 November memorandum. He said that a person in the position of Mr Robertson was entitled to rely on those reporting to him, particularly the claims manager, to report significant changes or movements in the position of the claims made against the company. He drew attention (affidavit para 85) to the fact that nothing had been reported to Mr Robertson since the management committee meeting on 12 October to indicate that Hurricane Georges was likely to be a major loss to GIO Re, and no claims figures were given in the first quarter highlights. 1286 Mr Morgan might be right about the duties of a competent reinsurance manager preparing a routine report for internal management consumption. But in my view, his opinion is implausible in the circumstances confronting Mr Robertson on 4 November 1998, and I prefer the evidence of Mr de Vroome with respect to the duty of inquiry. As I have said, Mr Robertson knew that the 4 November memorandum would be provided to PwC and the information and opinions in it would be passed on to the DDC, and therefore that the memorandum would be significant for the purposes of the Part B profit forecast, as well as for the GIO Group's periodical reporting to the market. His evidence to the effect that the memorandum would be a final report by which he would "sign off" on his work as executive director up to the time of the arrival of Mr Fox confirmed that he understood that the document was an important one. And he knew that adverse claims experience would put the profit forecast under pressure because it was based on an assumption of average market share. It seems to me plain in those circumstances that a reasonable person in like position to Mr Robertson in GIO Insurance and GIO Australia Holdings, in the circumstances of those companies, would have made inquiries about the level of claims before issuing the opinions contained in the memorandum. 1287 Mr Morgan gave evidence that he believed the preparation of the 4 November memorandum had nothing to do with the AMP takeover. That is not a matter about which he could give expert opinion evidence, and in my opinion he was wrong about it, for the reasons I have given. Mr Morgan expressed the view that the memorandum was prepared because of the need for Mr Steffey to "get some credence back to GIO Re on the stock exchange because of failures of the half-year results" (T 3650). Even if that were the sole purpose of preparation of the memorandum, and its sole use, in my view a reinsurance manager in the position of Mr Robertson would have had a duty to check on the claims experience before issuing opinions that would affect periodic reporting to the market, because the information as to whether a recent catastrophe was likely to expose the reinsurance business to a loss in excess of its average market share could have a material effect on the price or value of its securities. 1288 Consequently, in this respect ASIC has made out its case in terms of the allegations in SASC, paras 129A and 131, and the first part of para 131A. The claim in para 131B(c), that Mr Robertson failed to have any, or any adequate, regard to the information as to claims notifications for Hurricane Georges identified in the pleading is unsuccessful because the information there specified was not available on 4 November. Allegation of affirming the forecast notwithstanding the first quarter results 1289 In his 4 November memorandum Mr Robertson adverted to the fact that the Space portfolio suffered a loss of $15.9 million in the first quarter, against a forecast profit for the full year of $14 million (PTB 0763-4). He commented on this result and the profit forecast in the following words: "Nothing that has occurred in the first quarter of the year persuades me that this forecast ought to be altered. Of course, given the nature of the reinsurance business, it is not to be expected that each class of business will produce the forecast result for the year. However, the forecast overall business profit of $A80m remains reasonable. "On the face of things, the 1st quarter profit has fallen $A16.2m short of expectation. However, as is clear from the table above, the quarter's profit expectation would have been more than achieved if the Space account had produced the forecast results. $A8.1m of the shortfall in that account was due to the correction of an error from the previous period in reporting premiums. Investigation shows that the impact of this error has been virtually wholly recognised in the first quarter, and it will have only minimal impact in the rest of the year. "I consider that the timing of the Space losses in the first quarter was entirely fortuitous, and that these losses do not affect the profit outlook for the full year. My current expectation, therefore, is that the Space account will produce the expected business result over the full year of $A6m, after allowing for the $A8m premium correction." 1290 ASIC's reinsurance expert, Mr de Vroome, gave evidence criticising Mr Robertson's opinions (affidavit (Robertson), esp paras 115-120). He made the obvious point that in order for Space to make a profit of $6 million, as projected by Mr Robertson (the forecast of $14 million less the $8 million adjustment for the valuation error), a profit of $21.5 million would be required over the last 3 quarters, to make up for the first quarter loss of $15.5 million. He referred to the forecast of net earned premium, $55 million for the full year, of which $11 million had been earned in the first quarter. He noted that anticipated management expenses over the remaining three quarters were $4.5 million. He concluded that 59% (that is, $26 million) of the remaining $44 million of premium income would need to flow to profit, if the first quarter shortfall in Space were to be recovered. He said it would be unrealistic to expect this, in the absence of any special circumstances. He concluded that a competent reinsurance manager in Mr Robertson's position could not have expected the shortfall in profit for Space to be made up in the remaining three quarters. 1291 Mr de Vroome carried out a similar analysis for the catastrophe book (affidavit (Robertson), paras 104-114). His analysis concluded that it was improbable, given GIO Re's profit performance in the first quarter, that it would achieve a profit of $20.3 million over the final three quarters (that was the amount that would be required in order to make up the shortfall in first-quarter earnings in the catastrophe book). At least, he said, there was no evidence available to Mr Robertson which made it reasonable for him to advise that the shortfall in the catastrophe book in the first quarter could with reasonable likelihood be made up over the balance of the financial year. Consequently a competent reinsurance manager in Mr Robertson's position would have stated in the 4 November memorandum that there was real doubt about whether GIO Re could make up the catastrophe book shortfall over the next three quarters, quite apart from any under-reserving for Hurricane Georges. 1292 Mr de Vroome's opinions should be assessed in light of Mr Robertson's evidence. While he said he expected that the Space account would achieve the expected business result over the full year, he gave evidence that he did not assume or conclude that the catastrophe portfolio would meet its full-year forecast, and instead his view was that the portfolios other than Space would perform as forecast for the remaining three quarters (T 3301). Consequently his overall expectation was that the portfolios in combination would meet the forecast after making an adjustment for the premium valuation error, an amount that he expected to be met by savings in MIPI (T 3301). Mr de Vroome's analysis of the catastrophe book had been prepared, incorrectly, on the basis that Mr Robertson had predicted that premiums for the remaining three quarters would make up the shortfall on the first quarter. 1293 In cross-examination, Mr de Vroome was referred to Mr Schneider's calculations about prudential margin. In the first quarter highlights, Mr Schneider had spread the savings derived from changing the methodology for calculating prudential margin across the various classes of business. It was put to Mr de Vroome that Mr Schneider had not carried out a similar exercise in producing the figures provided to Mr Robertson on the morning of 4 November (and later confirmed in his two memoranda of 20 November 1998). Mr de Vroome was shown Ms Howell's e-mail of 11 November 1998 (T 2255; Exhibit D28) in which she said results had been impacted by an increase of $10 million in prudential margin and that after adjusting for that, the first-quarter result was only $6 million short of budget. Then a series of questions was put to Mr de Vroome, to suggest that if there was a sum of $10 million to be added back, the "class-by-class" criticisms of Mr Robertson made by Mr de Vroome (including the criticisms of Mr Robertson's expectations for the Space and catastrophe portfolios) would be incorrect. Eventually he withdrew his "class-by-class" criticisms of Mr Robertson in relation to the 4 November memorandum, except his criticism (considered elsewhere) in relation to the reserve for Hurricane Georges and the need to ascertain the level of claims for Hurricane Georges as at the end of October (T 2260-1; T 2266; T 2268). 1294 Mr de Vroome's evidence should be compared with the evidence of Mr Murray of PwC (T 1464-1466). Mr Murray accepted that PwC's role was to critically analyse the conclusions and assumptions lying behind the $80 million profit forecast, and he said that PwC had done so (PTB 1772), in a process that included critical analysis of the conclusions and assumptions in Mr Robertson's 4 November memorandum. He said that PwC took the view that the conclusions and assumptions contained in Mr Robertson's memorandum were not unreasonable. He agreed that he accepted as a reasonable statement Mr Robertson's view that the quarterly profit expectation would have been more than reached if the Space account had produced the forecast results. 1295 Notwithstanding Mr de Vroome's concessions, ASIC endeavoured in submissions to resurrect Mr de Vroome's analysis of the Space account. ASIC's contention (written submissions (Robertson), para 96) was the questions that had led Mr de Vroome to withdraw his criticism were framed by words suggesting that PwC held the opinion (evidenced by Ms Howell's e-mail) that $10 million should be added back to the first-quarter results so as to reallocate "excess" prudential margin. Mr de Vroome made it clear in re-examination that his answers to this line of questioning were on the assumption that PwC had advised that it was appropriate to add back the $10 million. If, as ASIC submitted, this was not PwC's view as at 4 November, Mr de Vroome's evidence had been given on a false premise and his "class-by-class" analysis had not been undermined. 1296 In my opinion Mr de Vroome's answers in cross-examination had the effect of casting doubt on his analysis of the Space and catastrophe accounts, even if PwC had not advised in favour of the $10 million add-back as at 4 November. The rationale for the add-back was laid before Mr de Vroome during cross-examination. As a reinsurance expert, he had the knowledge and experience to question that rationale if he thought it was inherently implausible. He did not do so. His evidence amounted to saying that if there were a good foundation for adding back $10 million to the first-quarter results, he would withdraw his criticism of Mr Robertson's predictions, and he took it that there was a good foundation because he assumed that PwC had approved the add-back. But Mr Robertson also had the knowledge and experience to make a judgment, on the basis of the materials provided to him by Mr Schneider, on whether there was an "under" of $10 million in the prudential margin that could be applied to the calculation of first-quarter profit. Mr Robertson's evidence was, in effect, that he made that assessment when deciding to endorse the profit forecast on 4 November. Properly understood, Mr de Vroome's evidence does not disagree with such an assessment and acknowledges that if it were made with good foundation, the criticism of Mr Robertson's predictions would go away. 1297 Mr Robertson gave evidence that he did not undertake any quantitative analysis to determine, as Mr de Vroome had done, the rate of return required for the Space account to meet its forecast result (adjusting for the premium valuation error). He said his conclusion as to the Space account was based on a discussion he had with Kirby Ikin, the Space underwriter, in which Mr Ikin affirmed the achievability of the Space forecast for the full year (affidavit para 144; T 3307; see section 3.15). 1298 ASIC submitted (written submissions (Robertson), para 102) that the court should not accept Mr Robertson's uncorroborated assertion that this conversation occurred. ASIC pointed out that there was no note or e-mail referring to the conversation and no documentary material to corroborate its contents. Mr Robertson seemed to have little recollection of when it occurred (T 3307). Mr Ikin was not called by Mr Robertson and there was no explanation for why he was not called. ASIC invited the court to conclude that this was a case of reconstruction rather than recollection. 1299 I have decided to accept Mr Robertson's evidence about his conversation with Mr Ikin. It seems to me probable that, when such a dramatic reversal of results in the Space account became evident for the first quarter, Mr Robertson as executive director would have spoken to the senior underwriter for the Space portfolio. It is clear from his evidence that Mr Robertson had a high regard for Mr Ikin as a leader in his field, who had evidently done good work in developing the Space business. It is also plausible that, having received an expression of confidence from a person in the position of Mr Ikin, Mr Robertson would have found it unnecessary to make any quantitative calculations. He did not refer to his discussion with Mr Ikin in the 4 November memorandum, but in its terms, the memorandum was a succinct summary document written by the chief executive of the relevant business division, in circumstances where the readers would not have expected any elaborate discussion of sources and would have assumed that the executive had properly checked and verified what he was saying. 1300 ASIC contended that even if (as I have found) Mr Robertson's conversation with Mr Ikin occurred, it would not be a sufficient basis to affirm the profit forecast. ASIC contended that at the very least, an analysis should have been performed of the amount of premium to be earned and the requisite rate of return on the premium. But it seems to me probable that Mr Robertson would have assumed that Mr Ikin would have a sufficient basis for the views he communicated to Mr Robertson. It was not unreasonable for him to do so. It appears from Mr Robertson's evidence that the Space account was a specialist area and Mr Ikin was the specialist. Whereas a reinsurance manager might be expected to make inquiries to ascertain the level of claims before reaffirming a profit forecast that was dependent upon assumptions about claims, when it came to a specialised component of the business, the reinsurance manager would, in my opinion, be justified in relying upon the considered views of the specialist. This conclusion is supported by the evidence of Mr Morgan. He said in re-examination that he considered the information disclosed by Mr Ikin to have been a sufficient basis for Mr Robertson's opinion (T 3771). Although, as I have said, Mr Morgan misapprehended the purpose of the 4 November memorandum and the use to which it would be put, it seems to me his evidence on this point is plausible and not diminished, on this occasion, by that misapprehension. 1301 My conclusion is that ASIC has not made out its case against Mr Robertson for affirming the profit forecast in his 4 November memorandum notwithstanding the first-quarter results. 7.4 Allegations group (2): the November due diligence questionnaire and the November management sign-off 1302 ASIC submitted (written submissions (Robertson), para 105) that in signing the due diligence questionnaire and November management sign-off in the terms that they contained, Mr Robertson failed to exercise the degree of care and diligence that a reasonable person in a like position in GIO Insurance and GIO Australia Holdings would have exercised, in the companies' circumstances, in each of five respects: (i) he failed to take into account or disclose the advice he had received on 5 November 1998 concerning the level of notified claims for Hurricane Georges to the end of October; (ii) he ignored or failed to disclose Mr Schneider's advice to him concerning the contract-by-contract analysis and the results of it; (iii) in the alternative to (ii) he ignored, did not query or failed to disclose Mr Schneider's claim that Hurricane Georges was likely to be a $100 million type event; (iv) he failed to disclose the proposal to take reinsurance cover; and (v) the material available to him was not sufficient to enable him to affirm the profit forecast having regard to the poor first-quarter results. 1303 ASIC also submitted (para 106) that Mr Robertson failed to discharge his statutory duty of care and diligence with respect to GIO Insurance and GIO Australia Holdings by failing to advise Mr Vines, PwC or the DDC of the advice he received from Mr Schneider concerning the effect of the claims made in respect of Hurricane Georges as at the end of October and Mr Schneider's view that Hurricane Georges was likely to be a $100 million type event. Failure to disclose level of Hurricane Georges claims to end of October 1304 I have held that during the meeting of Mr Robertson, Mr Fox and Mr Schneider on 5 November 1998, Mr Schneider referred to figures in the Status of Registered Events Report for October. As noted above, Mr Robertson conceded in cross-examination that the contents of that document were such that if he had known that information on 4 November he could not have affirmed the profit forecast in his memorandum of that day (T 3348-9). The implication of this evidence is that, since he knew the contents of the Status of Registered Events Report on 10 November by virtue of the disclosure to him at the meeting on 5 November, he was not in a position to affirm the profit forecast when he completed the answers to the due diligence questionnaire and the management sign-off on 10 November, and should have disclosed the claims information because of its materiality to the profit forecast. Yet he answered a question about whether all issues relevant to the forecast, its achievability and the assumptions on which it was based had been disclosed, by asserting that all relevant issues had been extensively discussed with Mr Vines, the auditors and Mr Lange; and in answer to another question he said there were no other issues that should be considered for disclosure in the Part B statement. In cross examination he eventually conceded that the answer to the first question was wrong (T 3161), although later (T 3369) he said the answer was "incomplete" because he had not discussed, with the persons mentioned, the information he had received in the meeting on 5 November about the level of Hurricane Georges claims at the end of October. He conceded that the management sign-off was also incomplete because he had not drawn the DDC's attention to the level of claims received as at 31 October, and that was a matter which could be material (T 3269). 1305 Mr Robertson was asked why he gave an answer which he knew to be incomplete, and he gave several answers (T 3157-3160). In its written submissions (Robertson), paras 127-8, ASIC quoted Mr Robertson's answers from the transcript and then suggested, correctly in my view, that Mr Robertson had offered five justifications for signing off on documents he knew to be incomplete. ASIC submitted that none of the reasons proffered by Mr Robertson was a real justification for giving a knowingly incomplete answer. I agree with ASIC's submissions on these matters, and I shall explain why. 1306 Mr Robertson's first justification was that he was suspicious of the accuracy of the figures and thought that either they were distorted by accelerated or precautionary notifications or that Mr Fricke had made an error in compiling them. But he conceded that he had no information that would cast doubt on the accuracy of the figures (T 3399). Even if he had a basis for querying the figures, he would not have been justified in signing off without any mention of the figures, given their acknowledged significance for the profit forecast. He should have disclosed the figures and indicated that they raised some doubt about the profit forecast, perhaps also indicating what course of action had been taken or would be taken to clear up the matter. 1307 The second justification was that Mr Fox had agreed to make inquiries in London. Even if that was an adequate form of inquiry, its initiation was no justification for complete non-disclosure. Further, Mr Robertson agreed that he did not communicate with Mr Fox between 5 and 17 November, while he was in the United States, to inquire whether Mr Fox had verified the claims that had been notified (T 3382). This suggests that Mr Robertson did not perceive Mr Fox’s inquiries as having important disclosure consequences for the Part B process. 1308 His third justification, the possibility of a retrocession contract that would protect GIO Re against further deterioration in claims from Hurricane Georges, was not a justification for non-disclosure because the terms of the contract were still under negotiation and its efficacy had not been established. 1309 Mr Robertson's fourth justification was that he did not know whether Mr Fox would adopt the profit forecast. This might have justified postponing the completion of the due diligence questionnaire and management sign-off until he knew whether Mr Fox would alter the profit forecast, but it could not have justified signing documents with incomplete disclosure directed towards the profit forecast as it currently stood. 1310 The fifth justification was that there would be a further opportunity to correct the disclosure because at the time, the Part B response had been "stalled by legal action" (T 3160). This might possibly have justified an answer that indicated the present concerns and asserted a desire to revisit and complete the disclosure at a later time, but it could not have justified giving an "incomplete" answer which failed to disclose information about the level of Hurricane Georges claims at the end of October – a matter which Mr Robertson acknowledged, in effect, to be material (T 3348-9). Further, Mr Robertson did not in fact take up the opportunity to make further disclosure when he returned to Australia on 17 November (T 3382). 1311 Mr de Vroome, ASIC's reinsurance expert, gave expert opinion evidence on this subject. His evidence did not assume, as I have found to be the case, that Mr Robertson was aware on 10 November of the level of Hurricane Georges claims as at the end of October. He said, nevertheless, that he considered that Mr Robertson should have made inquiries and obtained a current figure for claims and that if he had done so, he would have realised that they were inconsistent with the profit forecast (affidavit (Robertson), paras 141-3). ASIC submitted (written submissions (Robertson), para 133) that it followed from Mr de Vroome's evidence that if Mr Robertson had the information (as, in fact, he did) and failed to disclose it then he had failed to act in the manner that a competent reinsurance manager would have acted in his position. 1312 Mr Robertson agreed in cross-examination that he could have stated in his answers to the due diligence questionnaire that the claims notifications for the end of October had cast some doubt on the forecast to the extent that it relied upon an estimate of $25 million for Hurricane Georges, and it would have been easy to do so (T 3374). It was put to him that it was careless of him not to do so, and he said (T 3374): "I wouldn't characterise it as careless, because I agonised over what to say, but some people, I concede, might say that." 1313 Having regard to the evidence, my view is that ASIC has made out its case on this ground. Failure to disclose that Mr Schneider was undertaking a contract-by-contract analysis 1314 I have accepted Mr Schneider's evidence, in preference to the evidence of Mr Fox and partly in preference to the evidence of Mr Robertson, that during his meeting with Mr Robertson and Mr Fox on 5 November 1998, Mr Schneider said that the contract-by-contract review was nearly completed and he thought that Hurricane Georges was going to be a $100 million type event (see section 3.16). As previously mentioned, Mr Robertson conceded in cross-examination that if he had been told that a contract-by-contract analysis had been undertaken and had been given the outcome, then that would be something he could not have ignored, and he would have been obliged to explore the results of the analysis and the methodology which produced it (T 3386). He said he did not believe he could have left the country without discussing the analysis with Mr Vines and PwC, although he was not sure whether, having had that discussion, he would have disclosed the matter separately in the questionnaire or simply left it under the heading of matters that had been discussed with Mr Vines and PwC. In fact Mr Robertson had no such discussion with Mr Vines or PwC before he left for Boston on 6 November. 1315 Mr de Vroome gave evidence that, assuming the competent reinsurance manager to be aware of a contract-by-contract analysis, he or she would inquire as to how it was progressing and would be informed of the results as set out in the HG table (affidavit (Robertson), para 157). The HG table had, of course, been completed by the time Mr Robertson filled out his answers to the due diligence questionnaire and signed the November management sign-off. Having acquired that information, the competent reinsurance manager would have incorporated the results of the contract-by-contract analysis into his answers to the due diligence questionnaire (affidavit para 157). I accept that evidence. 1316 ASIC submitted (written submissions (Robertson), para 135) that it must follow from this evidence that Mr Robertson did not act with due care and diligence in completing his answers to the due diligence questionnaire and management sign-off in the way that he did. I agree. Failure to disclose Mr Schneider's opinion that Hurricane Georges was a $100 million type event 1317 ASIC made this assertion to cover the possibility that I might find that Mr Schneider had said at the meeting on 5 November that he believed Hurricane Georges was going to be a $100 million type event, without referring to the contract-by-contract analysis. I have found that both things were said, and it is therefore unnecessary to deal with ASIC's fallback position. Failure to disclose the reinsurance proposal 1318 One of the questions in the due diligence questionnaire was whether there were any planned changes to GIO Re’s reinsurance protections. Mr Robertson's answer referred only to the whole of account protection proposed to be effective from 1 January 1999. However, Mr Robertson was aware at the time that there was a possibility that a retrocession contract would be raised that would protect GIO Re from further deterioration of Hurricane Georges claims. He said Mr Fox had mentioned this possibility, and that was one of his purported justifications for non-disclosure of the level of notified claims at the end of October (T 3160). He said in cross-examination that he was conscious of the possibility of such a contract being raised (T 3408). He knew that the profit forecast was calculated on the basis of a $25 million reserve for Hurricane Georges claims and that the level of claims by the end of October was such that the reserve was probably insufficient. He also knew, but this is not an essential step in the reasoning, that Mr Schneider had formed the view that Hurricane Georges was a $100 million type event on the basis of his contract-by-contract analysis. He therefore must have realised that the proposal to protect the profit forecast from further deterioration in the Hurricane Georges claims by retrocession was a material and important matter for the DDC. 1319 Mr de Vroome expressed the opinion that a competent reinsurance manager would have disclosed the planned purchase of reinsurance cover in respect of Hurricane Georges, a matter that had been discussed at the meeting of Mr Robertson, Mr Fox and Mr Schneider on 5 November 1998 (though not with participation on the telephone by Mr Vines, according to my findings). Mr de Vroome said a competent reinsurance manager in Mr Robertson's position would have made inquiries of Mr Fox or Mr Schneider in order properly to describe the nature of the cover (affidavit (Robertson), para 161). 1320 There is some room for argument as to whether the mere possibility that such a retrocession contract might be negotiated would need to be disclosed in answer to a general question about other matters that should be disclosed. However, in the circumstances that applied to GIO Re on 10 November 1998, my view is that the DDC was entitled to be told what was planned, and I agree with Mr de Vroome that Mr Robertson should have made disclosure after checking the facts with Mr Fox for Mr Schneider. Insufficient information to affirm the profit forecast after poor first-quarter results 1321 In paras 91-104 of its written submissions (Robertson), ASIC submitted that one of the respects in which Mr Robertson failed to discharge his statutory duty of care and diligence in producing his memorandum of 4 November was that he affirmed the profit forecast notwithstanding the first-quarter results. ASIC also submitted (para 143) that Mr Robertson's completion of answers to the due diligence questionnaire and signature of the management sign-of amounted to another affirmation of the profit forecast, without any qualification by reference to the first-quarter results. There was no evidence that Mr Fox received any additional information concerning the performance of GIO Re between 4 November, when he signed his memorandum, and 10 November when he signed the answers to the due diligence questionnaire and the management sign-off. Therefore, according to ASIC's submission, the signature of those documents was a further breach of duty. 1322 I have rejected ASIC's submission that Mr Robertson breached his duty by affirming the profit forecast in the 4 November memorandum, notwithstanding poor first-quarter results. For the same reasons, I reject the submission that there was a further breach of duty of the same kind involved in his signing the November documents. Conclusions as to the answers to the due diligence questionnaire in the November management sign-off 1323 In my opinion ASIC has established that Mr Robertson, as an officer of GIO Insurance and GIO Australia Holdings, failed to exercise the degree of care and diligence that a reasonable person in a like position in those corporations would have exercised in the corporations' circumstances, when he completed and submitted the answers to the due diligence questionnaire and the management sign-off on about 10 November 1998: · without disclosing or taking into account in his answers the information he had received in the meeting on 5 November 1998 concerning the level of notified claims for Hurricane Georges at the end of October, contained in the Status of Registered Events Report (therefore making out its pleaded case, in terms of SASC paras 131B(c), 132(c) and(f), and 133 insofar as it incorporates 132(c) and (f)); · without disclosing the information he had received in the meeting on 5 November 1998 to the effect that Mr Schneider's contract-by-contract review was nearly completed and he thought that Hurricane Georges was going to be a $100 million type event (therefore making out its pleaded case, in terms of SASC paras 132(c) and (d), and 133 insofar as it incorporates 132(c) and (d)); · without disclosing the proposal to take up a retrocession contract to protect the company from further deterioration in Hurricane Georges claims (therefore making out its pleaded case, in terms of SASC paras 132(h) and 133 insofar as it incorporates 132(h)). 7.5 Allegations group (3): Mr Robertson's affirmation of the profit forecast after the HG table 1324 When Mr Robertson attended the meeting with PwC on 7 December 1998, he learned that the proposed accounting treatment of the American Re retrocession agreement would not be approved by PwC (T 3427-8). He was previously aware that PwC were expressing doubts about the matter (affidavit para 198; T 3427). Thus, from some point of time during the meeting on 7 December, Mr Robertson was aware that the American Re agreement could no longer be relied upon to protect the profit forecast from adverse development in Hurricane Georges claims. 1325 The meeting with PwC was an important one for the formulation of PwC Securities' report to the DDC and board of directors on the Part B profit forecast, and therefore for the content of the Part B statement itself. The meeting led to the execution of the representation letter and the final management sign-offs, which were important documents. The significance of the occasion must have been obvious to Mr Robertson. In that context, ASIC alleges (written submissions (Robertson), para 145) that Mr Robertson "affirmed" the $80 million profit forecast for GIO Re, which relied on an estimated net profit impact for Hurricane Georges of $60-$65 million for property claims, by the following conduct: (i) he did not correct or query Mr Fox's advice to PwC of a profit impact for Hurricane Georges (either for property only or property and marine) of $60-$65 million; (ii) he made a statement during the meeting that "the information which is now available to me gives me no reason to think that I could make a better estimate of GIO Re's 1998/99 profit than $80 million" (affidavit para 213); (iii) he signed off on the representation letter (PTB 1618) which contained a number of statements affirming the profit forecast (ASIC referred to paras 6 and 12 of the representation letter); (iv) he signed off on the management sign-off (PTB 1622). 1326 These four matters have been proved by the evidence. Each of them was plainly an act of "affirmation" of the profit forecast, as ASIC submitted, although the first was a case of affirmation by acquiescence or failure to act. ASIC's allegation is that when he affirmed the profit forecast in these various ways, Mr Robertson was aware that Mr Schneider had conducted a contract-by-contract analysis and he had seen the HG table, which summarised the results of the analysis. 1327 ASIC contended (para 146) that in affirming the profit forecast in these ways, Mr Robertson breached his duty of care and diligence in that, having regard to the information disclosed to him by Mr Schneider concerning the existence of and the results of the contract-by-contract analysis, Mr Robertson: (i) either ignored the information when affirming the profit forecast or should not have affirmed the profit forecast; (ii) did not make any inquiry at any time in order to determine whether Mr Schneider's information should or could be taken into account or should or could be discounted; and (iii) did not disclose Mr Schneider's information to Mr Vines, PwC or the DDC. 1328 I have found that Mr Schneider told Mr Robertson and Mr Fox at their meeting on 5 November 1998 that he had nearly completed the contract-by-contract review for Hurricane Georges and that in his opinion Hurricane Georges was going to be a $100 million type event. Elsewhere I have referred to Mr Robertson's evidence that at some time after 17 November when he returned from the USA Mr Schneider showed him the HG table, which he described as a "spreadsheet" he had prepared for Mr Fox while Mr Robertson was away. Mr Robertson gave evidence that he looked at the document briefly but since he was aware that by that stage the retrocession cover with American Re was in place, he did not consider the document to be of any importance (affidavit para 189). Mr Schneider did not say that the document was a result of his contract-by-contract analysis or otherwise indicate its importance, but nevertheless Mr Robertson accepted in cross-examination that he understood what the document conveyed (T 3479-3481). 1329 In cross-examination (T 3495-6) it was suggested to Mr Robertson that as at 8 December (that is, just after the PwC meeting) he understood that the statements conveyed by the HG table were inconsistent with what Mr Fox had told PwC, namely that the best estimate of the profit impact of Hurricane Georges' property losses was $60-65 million. Mr Robertson agreed. But he said he ignored the contents of the HG table, gave it no weight, and did not ask Mr Schneider what the basis for it was (T 3496). 1330 He gave several explanations for doing so. He said he thought the HG table was a "flight of fancy designed to look good in his history file" (T 3495), and he agreed that he had formed the view that Mr Schneider was seeking to protect himself from the consequences of the successful AMP takeover (T 3496). Later he said that he ignored the HG table because there was no "relevant information" in it (T 3498), and later he said he did not regard the table as being "of value" (T 3507). These various explanations are difficult to understand. If Mr Schneider was expressing opinions so as to protect himself against the consequences of an AMP takeover, presumably Mr Robertson would approach everything Mr Schneider said with scepticism, and yet he was prepared to accept Mr Schneider's statement that there was a $9.7 million aviation surplus (T 3498). As to the statements that the HG table was irrelevant and of no value, the HG table would have conveyed relevant and valuable information, having a potentially large impact on the profit forecast, if its contents were reliable. The only way to establish whether the contents were reliable would have been to conduct some sort of investigation as to the basis of the information in the table, not just to ignore the table. Even if Mr Robertson was not aware that Mr Schneider had conducted a contract-by-contract analysis and that the HG table summarised the results of that analysis, he must have realised that the table was based on some form of analysis, and should have been investigated rather than ignored. Given, however, my finding that Mr Schneider in fact told Mr Robertson that there was a contract-by-contract analysis, the need to investigate it was undeniable. As previously mentioned, both Mr Robertson and Mr Morgan conceded that if a competent reinsurance manager were to be advised that a contract-by-contract analysis had occurred he or she could not simply ignore the results without evaluating the methodology used. 1331 My conclusion is that there was no good reason for Mr Robertson simply to ignore the HG table. It was relevant to the discussion at the PwC meeting and in particular, Mr Fox's statement that management's best estimate of Hurricane Georges was $60-65 million. Mr Robertson acknowledged that the HG table was inconsistent with that estimate and he was not in a position simply to ignore it. He should have disclosed its contents to the meeting. 1332 Mr Robertson said in submissions (written submissions, para 304): "It cannot be the case that Mr Robertson should have been expected to leap into action on the basis of casual remarks made to him, after he had been replaced as executive director, in respect of a number arrived at without any due consideration, which is not material and on which no reliance can be placed." 1333 The question is not whether Mr Robertson should have "lept into action" but simply whether he should have made disclosure of what he knew to those responsible for the Part B statement. The fact that Mr Schneider may have made some casual remarks when giving him the HG table did not serve to conceal from Mr Robertson what the document was, according to his own evidence. Although he had been replaced as executive director he continued to have important executive responsibility in respect of the profit forecast. I disagree with the assertion that the number was arrived at "without any due consideration". It was an estimate by the manager of GIO Re's technical services department based upon a contract-by-contract analysis which, whatever its imperfections, had provided an indicative range for the Hurricane Georges outcome. It was therefore material information of assistance to those who wished to determine whether Hurricane Georges would be a $100 million type event that would therefore exceed the $25 million reserve upon which the profit forecast had been calculated. 1334 There was another reason why Mr Robertson should have disclosed the contents of the HG table to PwC. Mr Lange had made it clear at his meeting with Mr Robertson and others on 5 November that the DDC would want to know that there was no internal management agreement (Mr Robertson's affidavit, para 159). Mr Robertson understood that PwC would also wish to be informed of internal management disagreement (T 3356-7). Mr Robertson understood that the HG table, which represented Mr Schneider's views, was inconsistent with what Mr Fox had told PwC was management's best estimate of the Hurricane Georges loss. The HG table therefore represented an internal management disagreement and something that PwC and the DDC would want to know about and should have been told. Mr Robertson rejected a suggestion put to him in cross-examination that it was careless of him not to have told PwC or the DDC about the terms of the HG table (T 3504), apparently for the same unsatisfactory reasons that led him to ignore the table. 1335 Consequently, in my opinion ASIC's allegations in para 146 of its written submissions (Robertson), which I have set out above, are established by the evidence. Knowing that Mr Schneider had carried out a contract-by-contract analysis and knowing the contents of the HG table, Mr Robertson affirmed the profit forecast at or shortly after the meeting with PwC on 7 December in the ways that I have indicated, ignoring the information he had obtained from Mr Schneider. He did not make any enquiries to ascertain whether the HG table should be taken into account, and he did not disclose the fact of the contract-by-contract analysis or the contents of the HG table, which summarised its results, to Mr Vines, PwC or the DDC. In these ways Mr Robertson failed to exercise the degree of care and diligence a reasonable person in a like position at GIO Insurance and GIO Australia Holdings would have exercised in the companies' circumstances. In respect of these findings, ASIC has made out its pleaded case in SASC paras 136 (insofar as it picks up 83A and 123(d)), 135A, 136A(e), 137 (insofar as it picks up 124(a), (b) and (f)), and 138A (insofar as it picks up 123(d), 124(a), (b) and (f)). 7.6 Allegations group (4): the meeting with PwC on 7 December 1998 1336 I have held that Mr Robertson had joint responsibility with Mr Fox for the profit forecast. As I have said in section 7.5, the meeting with PwC on 7 December 1998 was an important one and Mr Robertson must have realised the significance of the occasion. ASIC's fourth group of allegations against Mr Robertson is that, when he heard certain things said at the meeting with PwC on 7 December, he should have queried or corrected those things or dissented from them. The allegations relate to four statements made to the meeting, about the level of claims notifications, the maximum potential loss, the relevance of accelerated and precautionary claims, and management's best estimate of the Hurricane Georges liability. Claims notifications 1337 When he heard Mr Fox inform PwC that claim notifications to date were $60-65 million, he did not correct or query that statement. He knew that claims notifications had reached over $28 million at the end of October, according to the Status of Registered Events Report to which Mr Schneider had referred at the meeting of 5 November. I have found that he attended the management committee meeting of 25 November, notwithstanding his denial, and therefore would have heard Mr Fricke report to the meeting that claims for Hurricane Georges had reached $57 million for property and $25 million for marine, that is, gross notifications of $82 million. 1338 Even if he did not attend the 25 November management meeting, Mr Robertson conceded in evidence (T 3450) that, as at late November 1998, he was aware of a "higher figure" for the level of reported claims than the figure set out in Mr Fricke's report of 11 November 1998 (the report Mr Fricke produced to the 25 November management committee meeting while updating the figures). Mr Robertson said (T 3449) that he "may very well have known" of a figure of $57 million for property claims as at the end of November. He agreed that if Mr Fox's statement at the 7 December meeting had related to marine and property claim notifications (as I have held) he would have queried it because he would have known it was not correct (T 3514). 1339 Mr de Vroome gave evidence (affidavit para 168-9) that a competent reinsurance manager, hearing a statement about the level of claims notifications which he knew to be incorrect, at a meeting such as the PwC meeting, would be obliged to correct the misstatement. 1340 Mr Robertson submitted (written submissions, para 476) that he was entitled to rely upon what Mr Fox said to the meeting as to the claims level for Hurricane Georges and not to demur from or query what was said. I disagree. If it were true, as Mr Fox said in cross-examination (T 3816), that claims information was in his rather than Mr Robertson's area of responsibility, that would not entitle Mr Robertson to remain mute at the meeting when figures were given for claims notifications that he knew to be too low. Assuming it to be true that Mr Fox told Mr Robertson in the last week of November that he was getting daily reports on Hurricane Georges claims so he could keep a close eye on how they were developing, Mr Robertson was still required to query the figures at the meeting in order to clear up the discrepancy between his understanding of the figures and Mr Fox's - all the more so if Mr Robertson believed Mr Fox had daily information and could clarify the position readily. The other matters mentioned in para 476 do not alter the analysis. 1341 In all these circumstances I agree with ASIC's submission (written submissions (Robertson), para 157) that a reasonable person in a like position to Mr Robertson at GIO Insurance and GIO Australia Holdings, in the circumstances of those companies, would have queried Mr Fox's statement about the level of notifications because of its apparent inconsistency with information known to him. To that extent, ASIC has made out the case against Mr Fox pleaded in SASC paras 135 and 136A(b). Maximum potential loss 1342 Mr Fox told the meeting with PwC on 7 December either that the maximum potential loss for Hurricane Georges was $105 million or that it was $100 million. Mr Robertson did not query Mr Fox's statement and he denied that he had any obligation to do so (T 3517). Mr Robertson accepted in cross-examination that the HG table conveyed that the high for Hurricane Georges was estimated to be $211 million (T 3496). He appeared to agree that he did not ask Mr Schneider what underlay the $211 million figure (T 3516). 1343 In cross-examination, Mr Robertson did not agree with the suggestion that Mr Fox's statement to the meeting with PwC was inconsistent with the high figure in the HG table, because, he said, he had no idea what underlay the $211 million (T 3516). But Mr Robertson understood the HG table and therefore knew that it presented low, medium and high estimates for GIO Re's exposure to Hurricane Georges (see T 3479-80). In those circumstances it is appropriate to infer that he knew there was an inconsistency between the table and Mr Fox's statement, even if it were true that he knew nothing about the underlying reasoning for the figures in the table. In fact, as I have held, he knew that the HG table was referable to the contract-by-contract analysis that Mr Schneider had performed. For reasons I gave in section 7.5, he had no valid reason for ignoring the HG table. 1344 ASIC submitted (written submissions (Robertson) para 164) that in the circumstances, Mr Robertson should at least have queried Mr Fox's statement, and that his failure to do so involved breach of his duty to act with the degree of care and diligence that a reasonable person in a like position in GIO Insurance and GIO Australia Holdings would have exercised in the circumstances of those companies. I agree. To that extent, ASIC has made out the case against Mr Fox pleaded in SASC paras 136A(a) and 136 (insofar as it incorporates 123(a)). 1345 If I were wrong in my finding that Mr Robertson was aware that a contract-by-contract analysis had been undertaken to produce the figures in the HG table, so that he had the HG table but did not understand the basis of it, in my opinion he would have had a duty to make inquiries about it. Mr de Vroome gave evidence (affidavit para 368) that a competent reinsurance manager, aware that a contract-by-contract analysis had been performed but not knowing the outcome, would have made it his business to seek out information concerning the maximum potential outcome of Hurricane Georges before attending the meeting with PwC. It seems to me that the same reasoning would be applicable if a competent reinsurance manager were aware of the contents of a table prepared by the company's internal actuarial staff, giving a range of figures for hurricane losses but not setting out the underlying reasoning - the competent reinsurance manager would have sought out information to ascertain the basis for the figures. Accelerated and precautionary claims and best estimate of ultimate net loss 1346 The sequence of statements about Hurricane Georges at the meeting with PwC on 7 December seems to have been the following, according to Mr Murray's notes: first, Mr Fox made his statement that the maximum potential loss for Hurricane Georges was $105/100 million; secondly, Mr Fox said the notifications to date were $60-65 million, up from $27 million; thirdly, one of the defendants, probably Mr Fox, said that it was management's view that the uncertainty surrounding GIO following the takeover bid was prompting cedants to notify claims early and on a precautionary basis; fourthly, Mr Fox told the meeting that, while further development could not be ruled out, management's best estimate of the ultimate liability for Hurricane Georges was $60-65 million. 1347 When seen in its context, the third statement, about accelerated and precautionary claims, appears to have been made to explain the fact the best estimate of ultimate liability was roughly the same as the claims notifications to date, something that "ordinarily" one would be concerned about, according to Mr Robertson (T 3439). It is therefore appropriate to deal with the third and fourth statements together when considering Mr Robertson's duty. 1348 Mr de Vroome gave evidence about the third statement, concerning accelerated and precautionary claims (affidavit paras 171ff). He referred to Mr Fricke's report dated 11 November 1998 (PTB 1293), according to which property claims in the sum of $29.1 million had been paid, out of a total of incurred property claims, at that time, of $42.8 million. That was one of the factors that led him to say (paras 176-7) that a competent reinsurance manager in Mr Robertson's position at the meeting on 7 December would have required substantiation of the assertion that Hurricane Georges claims were being notified early and on a precautionary basis, and in the absence of any substantiation, would have corrected or dissented from that assertion. I take his reasoning to be that, since accelerated or precautionary claims would not be paid, the fact that such a high level of the claims were paid undermined the suggestion that many of them were accelerated or precautionary. 1349 The other factor referred to by Mr de Vroome to support the opinion expressed in para 176 of his affidavit related to Lloyd's syndicates. He said (paragraph 173) that a competent reinsurance manager responsible for an international reinsurance portfolio would know that it would be unprecedented for the vast majority of claims for a catastrophe occurring in late September to be received by the ultimate reinsurer by early December. He said that generally, claims are notified only after the cedants have a clear liability for the amount claimed. For an event such as Hurricane Georges, that will often be months after the occurrence. Cedants with a direct responsibility for insured losses would be likely to make their claims earlier than cedants who are at the end of a chain of reinsurers each of whom would need to calculate and claim their losses. He pointed out that many Lloyd's syndicates are reinsurers of other reinsurers and are unlikely to lodge their claims soon after the occurrence. 1350 He drew attention to evidence that · no claims from Lloyd's syndicates had been received by GIO Re as at 9 November (PTB 0884); · by 20 November claims totalling $9.8 million in respect of Lloyd's syndicates had been received (PTB 1175); · by 30 November claims from Lloyd's syndicates had increased to $10 million (PTB 2209); · the total medium estimate for Lloyd's syndicates made by Mr Schneider in the HG table (PTB 0884) was $51.8 million. These matters indicated, in Mr de Vroome's view, that as at 7 December, the Lloyd's claims had only just started to trickle in, and in all likelihood a significant amount of additional claims were to be received. 1351 Mr de Vroome also gave evidence (affidavit (Robertson) para 178ff) that he conducted a review of the available records of most property claims appearing on the Hurricane Georges register on 7 December 1998, concluding that with the exception of one claim, all of them were genuine, firm advices and in fact, many claims were settled by GIO well before 7 December. He found no pattern of claims being reported early, although in a couple of exceptional cases payment was made on a projected payment by the cedant but this was done for all reinsurers, not GIO alone. 1352 Mr de Vroome also gave evidence about the fourth statement, concerning management's best estimate (affidavit (Robertson) para 184). He said that a competent reinsurance manager in Mr Robertson's position as at 7 December would have queried or dissented from the estimate of liability, because he would have realised that Hurricane Georges property losses would well exceed the level of property claims notifications that had been reached by that stage. Even assuming that the competent reinsurance manager had no more up-to-date information than the information given to the management committee on 25 November, he would have thought that an estimate of $60-65 million for property losses was "unrealistically low" (affidavit para 185). 1353 Mr de Vroome agreed in cross-examination that he had assumed that the estimate given by Mr Fox to the meeting did not include reinstatement premiums, because reinstatement premiums were paid for the reinstatement of risk and had to be earned (T 2348). But he said that even if $11 million in reinstatement premiums was deducted from claims to determine the impact on profit, he would still not accept the management estimate because exposure to Hurricane Georges was "growing at an alarming rate" (T 2350). 1354 Mr Robertson agreed in cross-examination (T 3450) that he was aware of the break-up of property claims between paid and outstanding claims, either through Mr Fricke's report of 11 November 1998 or an update of the numbers in that report. He said (affidavit para 209) that he did not find any difficulty with Mr Fox's assertion that the profit effect would be only $60-65 million, for three reasons. First, he did not believe that all of the claims notifications were real, and he expected many of them to be precautionary or exaggerated. He based this on the conversations he had with reinsurance executives in Monte Carlo, Mr Fricke's report to the management committee meeting on 12 October showing a large increase in new claims (affidavit para 103), Mr Fox's statement on his arrival about the perception of Hurricane Georges in the London market, and statements conveyed to him by Mr Fox about the views of his contacts at Royal and Sun Alliance. His second reason was that reinstatement premiums could be expected to be large, so that if claims had blown out by another $10-15 million Mr Robertson would have expected at least that much to be offset by reinstatement premiums which would directly reduce loss in 1998/99. His third reason was that the time value of money might have the effect of reducing the value of the claims by $2-3 million. 1355 During his cross-examination a fourth reason emerged, namely that Mr Fox told him early in December that after investigation, he believed that there was not much growth left in claims because many of the claims were at their policy limits (T 3445). Mr Robertson had given evidence of this conversation in his affidavit (para 198) but it was not until cross-examination that he referred to the conversation as a reason for not challenging Mr Fox's "best estimate". 1356 The first reason mentioned by Mr Robertson related to his belief in the precautionary and exaggerated nature of the claims notifications. ASIC did not contend that precautionary or exaggerated claims do not happen or can never distort claims figures. There was evidence of the existence of the general phenomenon (Mr McClintock T 1606; Mr Murray T 1422-3). ASIC submitted (written submissions (Robertson), para 174) that Mr Robertson's reliance on that factor to cancel out what would otherwise have been the impression of a very significant blow-out of claims, even allowing for reinstatement premiums, should not be accepted as a sufficient justification. ASIC put forward three grounds for rejecting Mr Robertson's accelerated/precautionary claims argument. 1357 ASIC's first ground was to contend that Mr Robertson changed his position between the time of his s 19 examination and the time of his oral evidence at the hearing. In the s 19 examination Mr Robertson said (Exhibit P11, p 376): "… $57 million reported so quickly, if these were normal times, couldn't conceivably stop so quickly. As you know, it takes a long time normally for reinsurance claims to come in and so if this had been normal times and $57 million had come in by now, you would be saying: 'cripes, this thing is going to $200 million or more'." He also said (Exhibit P11, p 382) that if there were $57 million of claims in the normal course of business, then the actual figure could not conceivably settle at $60-65 million. In cross-examination at the hearing, he confirmed that these answers were true (T 3452-3), but he was concerned to emphasise that times were not normal in November and December of 1998 (see, for example, T 3453). Additionally, he said that his evidence to ASIC did not reflect his state of mind in early December 1998, because there were many things he knew in December 1998 which he had not recalled when he was speaking to ASIC (T 3456-8). 1358 It seems to me that Mr Robertson did change his position, but that was because of the approach he took to the ASIC examination, which he explained in his affidavit: paras 241ff (see section 2.3). I accept that explanation. It is plausible, as Mr Robertson said in cross-examination, that there were many things in his mind in December 1998 that he did not recall in the circumstances of his s 19 examination. When he had the opportunity to review documents and listen to ASIC's evidence at the hearing, matters which he had forgotten or was confused about in April 2000 came back to him. In any event, his evidence in the s 19 examination related to the significance of accelerated and precautionary claims in the normal course or in normal times, and as he said, times were not normal because GIO was subject to AMP's bid, a matter discussed in Monte Carlo in Mr Robertson's presence. I therefore do not attach any significance to the discrepancy between Mr Robertson's evidence on the question of accelerated and precautionary claims in his ASIC examination and his evidence on that subject at the hearing. 1359 ASIC's second ground for challenging Mr Robertson's explanation (written submissions (Robertson), para 179) was that the matters identified by Mr Robertson as justifying his view that accelerated precautionary claims were significant, did not bear the weight he wanted to give them. Mr Robertson relied on four matters, as explained above (affidavit para 209). I do not agree with ASIC that the conversations in Monte Carlo were merely social and not to be taken seriously. In reaching this view I take into account the industry background provided in Mr Morgan's affidavit (paras 93-105). Mr Robertson was entitled and probably obliged to take seriously the opinions of people in the market who expressed their views at a specialist industry conference. He was also entitled to take into account the views Mr Fox expressed to him about the impact of Hurricane Georges, though the fact that they were expressed in the course of a briefing session on Mr Fox's first day in the office might suggest that they needed to be followed up. Mr Fox's statement that he had spoken to some people at Royal and Sun Alliance, who confirmed that they had hurried their claims notifications (affidavit para 194) was also something appropriate for Mr Robertson to consider. 1360 The fourth matter on which Mr Robertson relied (affidavit para 103) was that he received advice from Mr Fricke concerning an increase in claims activity across the reinsurance book in September 1998. In his s 19 examination Mr Robertson said that GIO Re had no pattern of data to form a view as to the rate of acceleration of claims, and all they had was anecdotal evidence from people that they were getting their claims in (Exhibit P11 p 380). In his affidavit (para 243) Mr Robertson said that in giving evidence in the s 19 examination he had forgotten the sharp increase in the number and amount of claims notified in September and October. In cross-examination (T 3467) he said that "with hindsight" the answer he gave in his s 19 examination was not correct but it was to the best of his recollection at the time. I see no reason to reject Mr Robertson's evidence at the hearing on these points. 1361 ASIC submitted (written submissions (Robertson), para 182) that the matters relied upon by Mr Robertson to support his view about accelerated or precautionary claims were merely "general or non-specific assertions" and were not "a sufficient basis to be positively satisfied that there was a level of precautionary or exaggerated claims sufficient to allay any concern that would otherwise arise about a statement being made to PwC that there was a net profit impact of $60-65 million with notified claims of $60-65 million, even allowing for reinstatement premiums". 1362 I agree that the matters invoked by Mr Robertson, though they were appropriate matters for him to take into account, fell considerably short of what would justify keeping silent at the PwC meeting where Mr Fox expressed "management's best estimate". On Mr Robertson's own evidence, in normal circumstances that estimate would be unacceptable. A reasonable person in Mr Robertson's position in the circumstances of the two GIO companies would have either disagreed with the estimate or explained to PwC the factors that took the present situation out of the ordinary. There should have been an informed debate at the meeting so that PwC could understand to what extent Mr Robertson thought it appropriate to rely on an unusually high level of accelerated (and perhaps exaggerated) and precautionary claims. One suspects that PwC would not have been persuaded that the matters relied on by Mr Robertson were sufficient grounds for such an important conclusion, and would have asked for some form of review of the claims and the likely development of claims. 1363 ASIC's third ground for challenging Mr Robertson's explanation is related to the conclusion I have just reached. ASIC submitted (written submissions (Robertson), para 183) that there was no attempt to make even a basic inquiry to determine whether there was any evidence of precautionary or exaggerated claims. That is not quite true, because of Mr Fox's inquiry with his colleagues at Royal and Sun Alliance. But that single inquiry was no substitute for a more scientific assessment. 1364 What inquiries would be adequate? The answer is not straightforward because the evidence revealed that there is some real difficulty in identifying whether a claim is or is not a precautionary claim (Mr Morgan T 3655-6; Mr Robertson T 3469). On the basis of their evidence the position seems to be that precautionary claims, and also exaggerated or accelerated claims, are often not identified as such in the documentation by which the claims are made. This is hardly surprising because to disclose that the claim has such a status would not be in the interests of the claimant. However, it appears from Mr Robertson's evidence (affidavit para 198) that Mr Fox told him early in December about an investigation into precautionary claims, which apparently involved Mr Hedley looking at a lot of contracts that were exposed to Hurricane Georges and calling on a number of the syndicates in London that had lodged claims, and also involved the "claims people" reporting on the limits of the contracts under which claims were made. If it occurred, it was at least an attempt to test anecdotal information. In cross-examination, Mr de Vroome agreed that Mr Robertson need not have corrected or dissented from Mr Fox's statement if he had known that Mr Fox had done the necessary investigation (T 2336). 1365 Mr Robertson (T 3470-1) and Mr Morgan (T 3655) each accepted that a review could have been undertaken of the wording of the claims advices, to determine if they were expressed as precautionary or were worded to indicate in some other way that they were precautionary in nature. Mr Morgan said (affidavit para 107) that he had carried out such a process when he reviewed the Status of Registered Events Report as at 31 October 1998, and he had concluded that six out of 13 recorded claims were initially lodged as precautionary claims. Mr Robertson and Mr Morgan agreed that a review of the level of paid versus outstanding claims would be of some assistance in determining the level of accelerated or precautionary claims (Mr Robertson: T 4368; Mr Morgan: T 3655). They also agreed that it would have been helpful to see whether there was a pattern of accelerated claims over a longer period than a single month, and to compare this with the equivalent period from the previous year (Mr Robertson: T 3467-8; Mr Morgan: T 3652). Admittedly such investigations would be unable to in identify the full extent of precautionary, exaggerated and accelerated claims (Mr Robertson's written submissions, para 344), but they would be of relevance, according to the evidence. 1366 Mr de Vroome gave evidence (T 2328) that a useful inquiry would be to check with the claims manager to see what was happening. That seems less plausible, as it seems unlikely that the claims manager would be able to provide any reliable information unless a review of the claims documents was undertaken. 1367 In all the circumstances, my view is that a reasonable person in like position to Mr Robertson in GIO Insurance and GIO Australia Holdings, in their circumstances, would not have regarded the information he had about accelerated and precautionary claims as sufficient to make him comfortable with a $60-65 million best estimate, without having subjected that information to some appropriate form of testing. 1368 As to the second reason advanced by Mr Robertson, concerning reinstatement premiums, I have found that the "best estimate" given by Mr Fox was probably net of retrocessions and reinstatement premiums, or at least it was not unreasonable for Mr Vines and Mr Robertson to interpret it in that way; while the figures given for notifications to date were gross figures which had not been reduced by retrocessions or reinstatement premiums. This construction of Mr Murray's notes is consistent with Mr Robertson's evidence. He said in cross-examination that if claims eventually blew out by another $10-15 million so that the total claims became $75-80 million, he would have expected to see $10-15 million of reinstatement premiums to bring the net claims back to $65 million, on the basis that he would expect reinstatement premiums to run at somewhere between one quarter and one-sixth of the claims (T 3440). Mr Robertson's range of figures for reinstatement premiums is broadly consistent with the expert evidence summarised in section 3.14. 1369 This evidence appears to be inconsistent with Mr Robertson's evidence in his s 19 examination, where he said that if the level of property claims notified at the end of November, $57 million, were a true figure then there would be no possibility of a net result of $60-65 million, even allowing for reinstatements (Exhibit P11, p 382-3; T 3456). However, it seems to me that Mr Robertson's evidence at the hearing is plausible and that the appropriate course is to proceed on the assumption that reinstatement premiums in the order of $10-15 million could fairly be expected. 1370 Mr Robertson's third reason is not a substantial justification for not intervening to correct Mr Fox's statement because, as Mr Robertson agreed in cross-examination, the time value of money would not be "very significant" (T 3457). 1371 As to Mr Robertson's fourth reason, he said that Mr Fox told him in early December 1998 that he had investigated the degree to which claims had scope for further development and he thought that many of the claims were at their policy limits (affidavit para 198; T 3455). ASIC submitted (written submissions (Robertson), para 178) that Mr Robertson's evidence on this matter should not be accepted, and was part of his process of reconstructing events rather than recollecting them. I do not agree with this submission. Mr Robertson's evidence of this conversation was in his affidavit and in my opinion, it did not have the air of evidence invented during cross-examination. I have found, contrary to ASIC's submission, that the conversation occurred as Mr Robertson said it did (see section 3.28). 1372 More importantly for present purposes, the conversation would not have provided Mr Robertson with a justification for saying nothing when he heard Mr Fox give our "best estimate" at the meeting with PwC. I have set out Mr de Vroome's evidence about the slow emergence of claims arising through Lloyd's syndicates. I accept that evidence. The evidence shows that in early December it was likely that a significant volume of claims was still to come. Mr Fox's statement that there would not be significant growth because policies had reached their limits cannot have referred to claims arising from Lloyd's syndicates where the claims had not been made and therefore the policies could not be identified. 1373 My conclusion is that, although it was appropriate for Mr Robertson to assess Mr Fox's "best estimate" by taking into account the prospect of reinstatement premiums which may have been in the order of $10-15 million, in all the circumstances Mr Robertson should at least have queried Mr Fox's statements about accelerated and precautionary claims and "management's best estimate", and his failure to do so involved breach of his duty to act with the degree of care and diligence that a reasonable person in a like position in GIO Insurance and GIO Australia Holdings would have exercised in the circumstances of those companies. To that extent, ASIC has made out the case against Mr Robertson pleaded in SASC paras 136A(c) and 136 (insofar as it incorporates 123(c) and (d)). 7.7 Allegations group (5): the representation letter and the December management sign-off 1374 The representation letter, signed by Mr Robertson and Mr Fox as "Executive Director" at the end of the meeting with PwC on 7 December, does not suggest any limitation of the capacity in which Mr Robertson was signing or the time period in respect of which the opinions attributed to him in the letter extended. In the letter they acknowledge their "responsibility for the preparation and presentation of the Divisional Profit Forecast including the assumptions on which the Divisional Profit Forecast [was] based". They confirmed various matters, to the best of their knowledge and belief and "having made appropriate inquiries of other management of the Division". 1375 The December management sign-offs, which were signed by Mr Robertson and Mr Fox in respect of the GIO Re business, were similar to the sign-off executed by Mr Robertson in November, except that the December documents each contained a limitation of responsibility provision. In Mr Robertson's case the document was limited to the part of the GIO Group business for which he had responsibility up to 1 November 1998. I considered the proper construction of that provision in section 4.3. I held that the words of the document identified the GIO Re business and served to exclude the other special projects for which Mr Robertson was given responsibility after Mr Fox arrived. I held that the document did not purport to remove Mr Robertson's responsibility for post-1 November events. 1376 ASIC submitted (written submissions (Robertson), para 189) that in signing the representation letter and the December management sign-off, Mr Robertson failed to exercise the degree of care and diligence that a reasonable person in like position in GIO Insurance and GIO Australia Holdings would have exercised, in the companies' circumstances, having regard to four matters. 1377 The first matter related to what had been disclosed to Mr Robertson concerning GIO Re's exposure to Hurricane Georges, and in particular, the HG table. ASIC's allegation (written submissions (Robertson), para 189(i)) was that, having regard to this information, Mr Robertson could only have: · concluded that the profit forecast was unlikely to be met; or · not been sufficiently satisfied that it could be met, without at least making further inquiry to determine whether the figures in the HG table should or could be taken into account or discounted. 1378 In section 7.5 I found that Mr Robertson breached his duty of care and diligence by "affirming" the profit forecast in various ways on 7 December, while knowing that Mr Schneider had carried out a contract-by-contract analysis and knowing the contents of the HG table, ignoring that information, not making inquiries about it and not disclosing it. Two of the ways in which Mr Robertson affirmed the profit forecast were by signing the representation letter and the management sign-off, each of which contained propositions which supported the forecast. Insofar as ASIC now alleges that it was a breach of duty for Mr Robertson to sign those two documents having regard to what had been disclosed to him concerning GIO Re's exposure to Hurricane Georges by Mr Schneider in the meeting of 5 November and through the HG table, those allegations are made out for the reasons I gave in section 7.5. 1379 In section 7.6 I considered whether Mr Robertson should have queried or corrected Mr Fox's statement of "management's best estimate" at the meeting on 7 December, having regard to the information he knew about the level of claims. I decided that he should have done so, after considering Mr Robertson's submissions with respect to several matters including accelerated or precautionary claims and reinstatement premiums. 1380 It seems to me to follow from the proposition that Mr Robertson ought to have queried or corrected Mr Fox's "best estimate" that he ought not to have signed the December due diligence documents until the issues about the forecast ultimate liability for Hurricane Georges, or perhaps more precisely the forecast impact on profit, had been further explored. But in theory it might have been possible for Mr Robertson to sign the documents, consistently with his duty, if it were clear that other adjustments could be made to the profit forecast that would amply cancel out any adverse impact of claims development in Hurricane Georges. 1381 Mr Robertson gave evidence (affidavit para 215) that as a result of the discussion at the meeting, he made a mental calculation of "unders and overs" which reduced the profit forecast from $80 million to $78.4 million, and he set out the components of that calculation. One of the components was a negative adjustment of $8 million for Hurricane Georges marine losses, limited to that amount because of the OP Re retrocession. Another negative adjustment was $35 million for property losses in respect of Hurricane Georges. In other words, Mr Robertson's calculation was based upon the net profit impact of Hurricane Georges for property losses not exceeding $60 million, given the existence of the $25 million reserve. 1382 Therefore the validity of the "unders and overs" calculation depended crucially on the profit impact of Hurricane Georges property losses, net of reinstatement premiums, not exceeding $60 million. Mr de Vroome's information about the development of claims from Lloyd's syndicates, considered in section 7.6, together with the absence of more up-to-date figures than the 25 November figures, provided strong grounds for concern, in the absence of investigation, and that property claims would invalidate the calculation. Property claims stood at $57 million on 25 November but there had been indications at the management committee meeting on that day that they were rising, and they did rise (as I have said) to $74.2 million on 7 December (PTB 2499; see section 3.21). Even allowing for an adjustment for reinstatements in the order of $10-15 million, and even apart from Mr Schneider's contract-by-contract analysis, a reasonable person in Mr Robertson's position on 7 December would have had grave concerns that the assumption about Hurricane Georges property losses upon which Mr Robertson's "unders and overs" calculation was based would prove to be invalid, because of the existing level of claims and the prospect that substantial Lloyd's syndicate claims were to come. Therefore it seems to me that the "unders and overs" analysis provided no justification for signing the December due diligence documents. 1383 Consequently, in my opinion, ASIC has made out its case that Mr Robertson breached his duty of care and diligence by signing the representation letter and December management sign-off, without making further inquiry to determine whether the figures in the HG table should or could be taken into account or be discounted. ASIC has to that extent made out its pleaded case in SASC para 137 (insofar as it incorporates 124(a), (b) and (f)), and para 138A (insofar as it incorporates 123(d), 124(a), (b) and (f)). 1384 The second matter upon which ASIC relied related to due diligence inquiries. ASIC's contention (written submissions (Robertson), para 189(ii)) was that Mr Robertson breached his duty of care by signing the two December due diligence documents when he had not made any inquiry about the availability of any results for GIO Re since 30 September 1998, and in particular, the results for the attritional property book. 1385 One of the positive adjustments made by Mr Robertson in his "unders and overs" calculation of 7 December was to add $10 million for an understatement of the first-quarter profit. Mr Robertson gave evidence that the maintenance of the profit forecast "depended entirely on what had been the first-quarter results", and the forecast started from the point that had been reached at the end of the first-quarter (T 3434-5). That evidence seems to imply that any consideration of whether the profit forecast could be maintained as at 7 December would have to begin with the first-quarter results, and would have to update them with such further information about business performance as was available. Moreover, one of the reasons given expressly in the representation letter for maintaining the $80 million profit forecast notwithstanding "deterioration in the performance of the catastrophe portfolio" (that is, the adverse impact of Hurricane Georges) was "the good performance of the attritional property book in the 1999 year to date". In these circumstances, ASIC submitted (written submissions (Robertson), para 194) that it was incumbent upon Mr Robertson to at least ascertain what results were available since the end of the first-quarter and, if any were available, what they were. 1386 Mr Robertson was cross-examined about this matter. He accepted that by 7 December he had not inquired as to whether results were available for the various classes of business since the end of the first-quarter, saying he had no expectation that such results would be available (T 3532). But the results for October had become available by the time of the annual general meeting on 17 November, at which time four-monthly Group results were announced, but Mr Robertson did not inquire whether results for the various portfolios, including space, were available (T 3532-3). He was aware that Mr Schneider prepared a monthly valuation program but he said he did not know on 7 December whether the program was being run and he did not seek to find out (T 3533). While the information available on 7 December in respect of the progress of the various classes of business since September would presumably not have been as complete as the quarterly and half-yearly figures, there clearly was some information available and Mr Robertson did not seek to review it, notwithstanding the reference in the representation letter to good performance of the attritional property book in the 1999 year to date . 1387 Mr de Vroome gave evidence about this matter, on the assumption that Mr Robertson attended the management committee on 25 November and became aware of the October results (as I have held to be the case). He said (affidavit (Robertson) para 198) that on that assumption, as at 7 December 1998 a competent reinsurance manager would have sought an indication of what the profit results of GIO Re were for the November period. 1388 I agree with this part of Mr de Vroome's opinion. It seems to me that a reasonable person in like position to Mr Robertson in GIO Insurance and GIO Australia Holdings would not have signed the representation letter, referring to good performance of the attritional property book in the 1999 year to date, without obtaining some up-to-date figures as to what the performance of the attritional property book was. It was not enough to rely on first-quarter figures. Even if Mr Robertson's "unders and overs" calculation had made it amply clear that the profit forecast would be achieved by virtue of other developments, it was in my opinion a breach of the duty of care and diligence to sign a letter having the important consequences of the representation letter, in which an assertion was made about good results in a business segment "to date", without endeavouring to update the figures from 30 September to some date closer to 7 December, when relevant information was available. 1389 I agree with ASIC that it was in breach of duty for Mr Robertson to sign the representation letter and the December management sign-off without making inquiries about the availability of any results of the various classes of GIO Re business since 30 September, given the general content of the two documents and in the case of the representation letter, the specific statement about good performance of the attritional property book in the 1999 year to date, and the evidence indicating that some relevant information was available. To that extent ASIC has made out its pleaded case in SASC para 131B(a) and paragraph 137 (insofar as it incorporates 124(c)), and para 138A (insofar as it incorporates 124(c)). 1390 The third matter upon which ASIC relied (written submissions (Robertson), para 189(iii)) related to the information that was available and would have been discovered about GIO Re's financial results if inquiries had been made. ASIC submitted that, having regard to the information that was available concerning the results for GIO Re since 30 September 1998, had Mr Robertson inquired he would have concluded that, even if the property profit impact of Hurricane Georges was likely to be $60-65 million, the achievement of the profit forecast was nevertheless improbable. 1391 It appears from its written submissions (paras 195-197) that ASIC relies principally on the evidence of Mr de Vroome to support this contention. Mr de Vroome said (affidavit (Robertson) para 210): "In my opinion, a competent reinsurance manager in the position of Mr Robertson would have known the result for the period July to October was below budget, would have known that the reserve for Hurricane Georges was deficient and would not have relied upon the Am Re contract. Such a person would not have signed the Letter of Representation in the manner in which it was worded. Such a person would have known that the profit forecast was unlikely, even apart from the November results. Even with $35 million of over-reserving in MIPI, the profit forecast could not be met unless offsets could clearly be demonstrated in other areas. The suggested offsets were the points I have discussed. Based on the information I have been asked to assume was known to Mr Robertson or was readily ascertainable by him, I do not consider that any reasonably competent reinsurance manager could have been satisfied that those offsets (other than MIPI) were available and that the profit forecast was likely to be met, even apart from the preliminary November results. And in my opinion any competent reinsurance manager seeing the preliminary November results, would have concluded that barring exceptional circumstances the full-year profit would not be achieved." 1392 For present purposes there are two underlying propositions here: · that the July to October figures would have shown a competent reinsurance manager that the profit forecast was unlikely unless offsets could be clearly demonstrated in other areas in addition to MIPI; and · that a reasonably competent reinsurance manager could not have been satisfied that the alleged offsets other than MIPI were available, even apart from the preliminary November results. 1393 As to the first proposition, the October results, submitted by Mr Schneider on 2 December (PTB 1452), reported a loss of $4.7 million, on the assumption that the American Re contract was accepted as a genuine retrocession agreement. Mr de Vroome observed (affidavit para 202) that the attritional property book had shown a profit for the first quarter of $7 million above forecast profit, but in the month of October there was a loss of $1.8 million. He said that while the year to date in October was still above forecast, the change from September to October would have emphasised to a competent reinsurance manager in Mr Robertson's position that there was no discernible trend available for a profit boost in the forecast to be made. 1394 It does not seem to me that this evidence goes so far as to support the conclusion that if Mr Robertson had made inquiries and ascertained the October results they would have shown him, or a reasonably competent reinsurance manager in his position, that the profit forecast would not be achieved, even apart from the emerging claims experience for Hurricane Georges. There was still room for a reasonably competent reinsurance manager in Mr Robertson's position, reading the October results, to undertake an "unders and overs" calculation when assessing the likelihood that the profit forecast would be achieved, and there was room also to make predictions about the likely development of the remainder of the year. 1395 Mr de Vroome referred to the analysis of November results produced by Mr Schneider and his team on or before 11 December (PTB 1871), reporting a loss of $12.2 million of that month, on the assumption that Hurricane Georges would be a $25 million event loss net of retrocession (affidavit, para 89). He observed that the November result for the attritional book was a loss of $6.1 million (para 202), which wiped out the forecast profit made over the first four months. He said that if a competent reinsurance manager in Mr Robertson's position were made aware of this result he would have realised that there was very little chance of the attritional book exceeding budget over the full-year. But the evidence does not enable me to find that this information would have been available to Mr Robertson on 7 December had he sought it out then. In the result, I do not accept the first of Mr de Vroome's two underlying propositions. 1396 As to the second underlying proposition, it appears from his affidavit that Mr de Vroome's reference to "the suggested offsets" were the ones suggested in the representation letter and discussed in paras 190-209 of his affidavit - namely good performance in the attritional property book; the MIPI contract reassessments; changes in retrocession arrangements; and the American Re retrocession policy. Mr de Vroome said that a competent reinsurance manager would accept the MIPI reassessment in view of the opinion of the external actuary, but he argued that the other three matters would not produce acceptable offsets. 1397 However, as I have mentioned, Mr Robertson conducted an "unders and overs" analysis on 7 December in which he relied on two other offsets, namely the unrecognised aviation surplus of $9.7 million and the understatement of $10 million in the first quarter profit due to the calculation of the prudential margin. For the reasons given earlier, on the state of the evidence before me I am unable to conclude that Mr Robertson's reliance on those adjustments was misconceived. 1398 My conclusion is that ASIC has not made out its case on this third matter. 1399 The fourth matter upon which ASIC relied related to lack of enquiry about the retrocession arrangements. ASIC's submission (written submissions (Robertson), para 189(iv)) was that Mr Robertson breached his duty of care and diligence by signing the December due diligence documents and not making any inquiry to ascertain whether GIO Re had determined whether there would be any benefits arising from any "changes in retrocession arrangements". 1400 One of the 4 factors said to justify maintaining the reinsurance forecast notwithstanding the deterioration in performance of the catastrophe portfolio, was that "changes in retrocession arrangements under consideration could alter the risk profile of the business at a lower cost given the current 'soft' market". 1401 Mr de Vroome said (affidavit (Robertson), para 207) he had not seen any evidence of any investigation or discussion with potential retrocessionaires, such as would validate the statement that changes in retrocession arrangements could alter the risk profile of the business at lower cost. He noted (para 161) that in response to the question in the due diligence questionnaire as to whether there were planned any significant changes in reinsurance protections, Mr Robertson said "we are in discussion with retrocessionaires with a view to implementing a new whole-account protection to reinsurance to be effective from 1 January 1999". Mr de Vroome said that if Mr Robertson knew no more than this, then a reasonably competent reinsurance manager in his position would not have made the statement in the representation letter. 1402 In cross-examination Mr Robertson said that the only knowledge he had as at 7 December about changes in retrocession arrangements was that the matter was "still under discussion with a view to introducing the whole account protection" (T 3538). He did not ask Mr Fox about the state of the discussions at the time he signed the letter (T 3538). He therefore did not appear to have any more knowledge about the matter on 7 December than he did on 10 November when he completed the answers to the due diligence questionnaire. 1403 ASIC submitted (written submissions (Robertson), para 198) that, given his state of knowledge, he was not acting with the appropriate standard of care and diligence in signing the representation letter containing that statement. I agree. To that extent ASIC has made out its pleaded case in SASC para 137 (insofar as it incorporates 124(d)). As far as I can see, ASIC's submission on this ground is not directed to Mr Robertson's signing of the management sign-off, and it does not seem to me that this ground identifies a breach of duty with respect to the signing of that document. 1404 ASIC made an additional submission with respect to the December management sign-off (para 199). It submitted that Mr Robertson should not have executed that document without correcting its relevantly unqualified language, in circumstances where he should have corrected Mr Fox's statements at the PwC meeting concerning the level of notified claims, the maximum potential loss from Hurricane Georges, the significance of precautionary and accelerated claims, and "management's best estimate". 1405 I have held that Mr Robertson breached his duty of care and diligence by not querying or correcting those four statements by Mr Fox. In the management sign-off Mr Robertson confirmed, within his area of responsibility, that the answers he gave to the due diligence questionnaire were true and correct, and he said he had drawn material matters to the attention of the DDC and was not aware of any other such matters. The answers to the due diligence questionnaire included answers to the effect that all issues relevant to the forecast had been extensively discussed with Mr Vines, the auditors and Mr Lange, and to the effect that there were no other issues that should be considered by the board for disclosure in the Part B statement. My reasoning in support of my conclusions that Mr Robertson should have queried or corrected Mr Fox's statements implies that it was not correct to certify the accuracy of those two answers without qualification. Therefore in doing so, Mr Robertson breached his statutory duty of care and diligence. To that extent, ASIC has made out at its pleaded case in SASC para 138A (insofar as it incorporates 123(a), (b), (c) and (d)). 7.8 Allegations group (6): Mr Robertson's conduct after publication of the Part B statement 1406 ASIC submitted (written submissions (Robertson), para 200) that Mr Robertson's obligation to advise Mr Vines, the DDC and PwC of the contents of the HG table, or at least to make inquiries with Mr Schneider to ascertain the basis of it, was an ongoing one operating until the close of the offer period. 1407 This allegation fails, because I have found as a matter of fact in section 2.3 that Mr Robertson’s responsibilities as an executive officer in respect of GIO Re’s business came to an end after 7 December 1998. He remained as a director of GIO Insurance but plainly in that capacity he had no responsibilities in respect of the Part B Statement and profit forecast, as GIO Insurance’s board was not operative in a business sense. 7.9 Conclusions as to Mr Robertson's alleged breaches of duty 1408 I have found that there were breaches of s 232(4) by Mr Robertson, specified above in paras 1288, 1313, 1316, 1320, 1335, 1344, 1373, 1383, 1389, and 1405. 1409 I agree with Mr Robertson's submission that in assessing his conduct by reference to the statutory standard, the court must be astute to "recognise the benefits that come with hindsight" (Mr Robertson's submissions, para 3). But, without making the point on every occasion, it seems to me that the breaches that I have found to exist in each case are quite basic breaches that ought to have been obvious to a reasonable person in Mr Robertson's position at the time . 1410 In reaching my conclusions as to breach, I have endeavoured to pay due regard to the notoriously difficult nature of profit forecasting in reinsurance and the wide variations in judgment that may occur between competent reinsurance executives (Mr Robertson’s submissions, paras 2-3). But the difficulty of the forecasting process and the room for variation on matters of judgment does not mean that the court, in applying the statutory standard of care and diligence, should condone exercises of judgment made without proper investigation or proper regard to relevant matters. 1411 Senior counsel for Mr Robertson invited the court to consider the level of information that found its way to the DDC and the board through PwC's report and otherwise, and the fact that the due diligence process was an evolving process (Mr Robertson's submissions, paras 6 and 7). But that consideration does not assist his case, because the problems that have arisen appear on the evidence to be attributable to lack of adequate information, on the part of PwC and then, through them, the DDC and the parent board of directors. 1412 I agree with Mr Robertson's submissions (para 9) that the court must bear in mind that Mr Robertson was in a unique position as from 5 November 1998, because he had been replaced by Mr Fox. The statutory standard of a reasonable person "in a like position" demands that this be done. But although unique, Mr Robertson's position was one of executive responsibility in respect of the profit forecast and the evidence does not indicate that in the new circumstances that existed from 5 November he was in substance inhibited from discharging that responsibility or obtaining information for that purpose. 8. ASIC'S CASE AGAINST MR FOX 8.1 ASIC's allegations against Mr Fox 1413 ASIC made two claims of contravention against Mr Fox in the SASC, namely that he breached his duty of care and diligence in s 232(4), and his duty to act honestly in s 232(2), of the Corporations Law. 1414 The specific pleadings against Mr Fox are found at paras 140-163 of the SASC. As ASIC submitted (written submissions (Fox), paras 2 and 4), the allegations may be grouped as follows: (1) alleged contravention of the duty of care and diligence in s 232(4): (a) his participation in the events of 7 December 1998, comprising the meeting with PwC, his representation letter, his management sign-off letter, and his subsequent failure to take any reasonable steps to ensure that material representations made in the Part B statement remained accurate (SASC, paras 144, 145, 146, 147, 147A and 148); (b) his involvement in the original American Re agreement signed on 13 November 1998 and the revised agreement signed on 18 December 1998, and in writing the "side letter" to American Re of 13 November 1998 (SASC para 143); (c) his general failure to take responsibility and ensure that the board of directors of GIO Australia Holdings, the DDC and PwC were advised of the likely effect of Hurricane Georges on the achievability of the $80 million profit forecast for GIO Re, and his failure to follow up advice that he received with respect to that likely effect, and his failure to ensure that the officers of GIO Re adequately investigated the likely consequences of Hurricane Georges (SASC paras 140A, 141, 142, 142A and 143); (2) alleged contravention of the duty to act honestly in s 232(2): (a) Mr Fox's conduct in causing GIO Re to enter into the agreements with American Re, and in writing the "side letter" to American Re (SASC para 157I(a)); (b) his statements to PwC during the meeting on 7 December 1998 (or alternatively, his failure to correct statements made by others) to the effect that a detailed review of GIO Re's exposure to Hurricane Georges, contract by contract, had indicated a maximum potential loss of $105 million, and that claims notifications received to date were $60-65 million, up from $27 million (SASC para 157I(b)-(d)); (c) his knowledge that his conduct specified in (a) and (b) was not in the interests of GIO Australia Holdings or GIO Insurance (SASC para 157H). For the purposes of presentation of reasons for judgment, I shall deal with Mr Fox’s position under three headings, namely: (1) the events of 7 December 1998 (raising allegations under ss 232(2) and 232 (4)); (2) the American Re agreement and Mr Fox’s letter of 13 November 1998 (raising allegations under ss 232(2) and 232 (4)); (3) allegations of general failings (raising allegations under s 232 (4)). 8.2 Mr Fox as "an officer of a corporation" 1415 It is accepted by the parties that Mr Fox became a director of GIO Insurance on 25 November 1998 and remained in that position until 16 June 1999. As a director of GIO Insurance, he was an officer of that company within the definition of "officer" in s 232(1)(a). There are two more controversial issues that have been raised in submissions, namely whether Mr Fox was an officer of GIO Insurance by virtue of being an "executive officer" in the period beginning 5 November (his first day at work at GIO Re), and whether (and if so for what period) he was an officer, by virtue of being an "executive officer", of GIO Australia Holdings, the parent company. 1416 In my opinion the evidence establishes that Mr Fox was an executive officer of GIO Insurance, in the defined sense, from 5 November 1998. That would be established on Mr Fox's own evidence, if it were accepted in full. According to his first affidavit (esp at paras 18, 25 and 35), Mr Fox came to the offices of GIO Re on 4 November 1998, the day he arrived from England, and was told by Mr Steffey that he and Mr Robertson would be joint executive directors of GIO Re for six months. On the following day, 5 November, he was shown to his new office and had various conversations and meetings on management matters (first affidavit, at paras 45, 46, 48). According to Mr Fox, Mr Steffey told him that Mr Robertson would remain responsible for "the financials" and the response to the AMP bid, and Mr Fox was to concentrate on reorganising management and obtaining a UK branch licence (affidavit, para 35). The executive responsibility to which he admitted was sufficient to warrant the conclusion that he was concerned or took part in the management of GIO Insurance, according to the case law discussed above. The fact that there was, on his evidence, a segmentation of responsibility between himself and Mr Robertson would not stand in the way of that conclusion. 1417 As explained in section 4 of this judgment, I do not accept Mr Fox's evidence, to the extent that it implies that Mr Fox's responsibility was limited so as to exclude financial matters and the response to AMP's takeover bid. The evidence proves, in my opinion, that Mr Fox had a substantial responsibility, jointly with Mr Robertson, for financial matters of GIO Re and for the financial data on which the GIO Re profit forecast contained in the Part B Statement was based, including data relating to Hurricane Georges claims. On my findings, it is a fortiori the case that Mr Fox became an executive officer of GIO Insurance as from the time he took up these responsibilities, that is on 5 November 1998. 1418 In my opinion Mr Fox was also, from no later than 5 November 1998, an executive officer of GIO Australia Holdings. My reasoning on this matter is similar to, though not identical with, the reasoning supporting my conclusion that Mr Robertson was an executive officer of GIO Australia Holdings. 1419 When Mr Fox arrived he was introduced into the executive and management structure that had been established by Mr Steffey, under which there was only one operating board, namely the parent board, and the work of the divisional businesses was managed through the divisional executive directors and their management committees, with the executive directors reporting to the Group chief executive. As I have said in the case of Mr Robertson, this was not just a matter of reporting arrangements but involved the executive directors becoming part of the senior management team for the Group. 1420 There were additional circumstances that show that Mr Fox was in fact concerned and took part in the management of GIO Australia Holdings in connection with preparation of the Part B statement - bearing in mind that the AMP takeover offer was for the shares in GIO Australia Holdings, which was the target company obliged to publish a Part B Statement, and that the DDC was a committee of the board of directors of GIO Australia Holdings. Two additional circumstances are significant to my conclusion. 1421 First, the DDC at its meeting on 6 December 1998 noted that Mr Fox "had assumed responsibility for the areas for which Frank Robertson was formerly responsible" (T 1594). Those areas included contributing to the financial forecast in the Part B Statement, an activity concerned with the management of the target company, GIO Australia Holdings. The DDC required that Mr Fox execute a management sign-off. Mr Fox's management sign-off, dated 7 December 1998, was expressed to be given "in respect of matters arising in respect of that part of the GIO Group business for which I have assumed responsibility and only in respect of the period since 1 November, 1998" (T 1623). The DDC's resolution and the text of Mr Fox's management sign-off both point to the conclusion that he was concerned and took part in the management of the target company, GIO Australia Holdings, and not merely GIO Insurance. 1422 Secondly, PwC were the auditors for the GIO Group, and PwC Securities had been appointed by GIO Australia Holdings to carry out work in respect of the profit forecast for the Part B Statement. When Mr Fox had the telephone conversation with Mr McClintock of PwC Securities on 24 November 1998, which Mr McClintock recorded in a file note (PPTB 1206), he was supplying information as a Group executive relevant to the profit forecast for the Part B Statement. Similarly, he was acting in that capacity when he took part in the meeting with PwC on 7 December 1998. 1423 Although the second of these factors relates to late November and December, the first factor (and in particular the DDC's note that Mr Fox "had assumed" Mr Robertson's responsibilities), indicates that Mr Fox was concerned and took part in the management of GIO Australia Holdings, in the requisite sense, from the time when he commenced work in Sydney on 5 November. 1424 It appears from the evidence that the entity employing Mr Fox was a subsidiary called "GIO Australia Ltd". That fact is not an obstacle to the conclusion that Mr Fox was an executive officer of GIO Insurance and GIO Australia Holdings. The definition of "executive officer" in s 9 of the Corporations Law was concerned with the facts relating to participation in the management of the corporation rather than the formal contractual employer-employee relationship. 1425 My conclusion is that Mr Fox was an executive officer, and therefore an officer for the purposes of s 232, of both GIO Insurance and GIO Australia Holdings as from 5 November 1998 and at all relevant times thereafter. While ASIC submitted that I should reach this conclusion, it contended (written submissions (Fox), para 16) that it probably mattered little to Mr Fox's culpability whether he was an executive officer of GIO Australia Holdings as well as GIO Insurance. This submission was as follows. If Mr Fox were an officer of GIO Australia Holdings, his conduct leading to the publication of a materially misleading Part B statement would have had the immediate effect of putting that company in jeopardy; whereas if he were only an officer of GIO Insurance, and engaged in that misleading conduct on behalf of GIO Insurance, that entity would be in jeopardy on the ground that its officer, Mr Fox, materially misled GIO Australia Holdings and caused the latter to publish a misleading Part B statement. In my opinion, that submission is correct. Having reviewed each of the contraventions that I have found against Mr Fox, my view is that those findings would stand as findings of contravention in respect of GIO Insurance alone, had I reached the conclusion that Mr Fox was not an executive officer of GIO Australia Holdings. 8.3 Allegations group (1): the events of 7 December 1998 · ASIC's claims against Mr Fox in respect to the events of 7 December 1998 are overlapping claims for breach of the duty of care and diligence and breach of the duty to act honestly. I shall deal with all the claims under the following four headings: · the meeting with PwC; · Mr Fox's representation letter; · Mr Fox's management sign-off letter; · Mr Fox's conduct after 7 December. The meeting with PwC 1426 I have found that Mr Fox made four statements at the meeting with PwC, in or to the following effect: (1) that a detailed review of GIO Re's exposure to Hurricane Georges, contract by contract, had indicated a maximum potential loss of $105 million; (2) that claims notifications to date were $60-65 million, up from $27 million; (3) that management was firmly of the view that the impending renewal season and the uncertainty surrounding the takeover offer was prompting cedants to notify claims early and on a precautionary basis; and (4) that while further development could not be ruled out, GIO Re's management's best estimate of the liability was in the order of $60-65 million. 1427 In his written submissions Mr Fox responded to the pleaded claims as follows. As to the statement about maximum potential loss, he contended (written submissions, para 491ff and 265ff) that he passed on accurately information Mr Schneider had told him, and maintained that Mr Schneider had said the "worst-case scenario" for Hurricane Georges was $100 million. I have considered and rejected this evidence in section 3.16. Apart from relying on the evidence of Mr Murray and Mr McClintock, to which I have referred, Mr Fox contended that the court should find that Mr Schneider spoke in terms of a "worst-case scenario" because, barely a few days later, he negotiated retrocession protection to the limit of $100 million. I do not find that to be a compelling argument. It seems to me more plausible, given the costs involved, that a retrocession protection should cover the amount thought to be, broadly speaking, the kind of amount that might need to be paid, rather than be extended to coverage which is only the maximum limit of the range of possible losses. 1428 As to the statement about claims notifications to date, Mr Fox responded (written submissions, paras 493ff, 273ff) that it was improbable that he had made any affirmative or positive statement on the subject. I have taken a different view for reasons given in section 3.35, having regard to the preponderance of the evidence. Mr Fox raised the question of what the figures were meant to identify (written submissions, para 275ff). The view I have taken in section 3.35, is that the figures probably related to notifications of gross marine and property claims. 1429 As to the statement about precautionary and accelerated claims, the evidence as to who made the statement is less than compelling but the conclusion I have reached on balance is that it was Mr Fox. Mr Fox submitted (written submissions, para 506) that it was more likely that Mr Vines or Mr Robertson spoke of these matters, and he said there was no evidence that any of the defendants suggested the probable effect of Hurricane Georges should be discounted because of these matters (para 508). But the sequence in Mr Murray's note suggests that precautionary and accelerated claims were mentioned in order to explain the curiosity that the ultimate liability figure was the same as the notifications to date figure. That seems to me to be plausible, and consistent with Mr Robertson's evidence. 1430 As to the "best estimate" statement, Mr Fox submitted there was a high improbability of his making any such statement (written submissions, para 365) but I have decided that the weight of evidence supports the conclusion that he did. 1431 Para 144 of the SASC alleges that Mr Fox contravened his statutory duty of care and diligence by making those four statements when he knew or ought to have known certain matters. The pleaded matters of knowledge are as follows: (a) that he knew or ought to have known that the total net claims were $72.4 million and that total claims received to date were $85 million; (b) that he knew, or ought to have known, that no analysis or investigations carried out by GIO Re supported the claim made with respect to early and precautionary claims notifications, and there was no reasonable objective evidence available to support that claim; (c) that he knew that Mr Schneider's contract-by-contract analysis had led to an estimate that Hurricane Georges would be a $100 million type event, and he knew or ought to have known that the total net claims to date were $72.4 million; (d) that he knew or ought to have known that his statement about the maximum potential loss being $105 million was not consistent with the information provided to him by Mr Schneider at their meetings on 5 November and 9 November (as particularised). 1432 As to (a), I have found that by 7 December: (i) Mr Fox had looked at some (at least) of the Hurricane Georges register e-mails that he had instructed Mr Fricke to prepare and send him; and (ii) it is more likely than not, having regard to Mr Fricke's covering e-mail, that Mr Fox looked at the Hurricane Georges register for 4 December and learned that Hurricane Georges claims received to that date were $89.7 million gross, or about $72.4 million net of the OP Re retrocession. 1433 Mr Fox contended that, as on 7 December 1998, he did not know the current value of claims received in respect of Hurricane Georges, and said the court should believe his evidence that he did not read Mr Fricke's e-mails, since that evidence was made against interest (written submissions, paras 292-3). The reasons for my finding to the contrary are given at section 3.21. In my opinion the allegation in para (a) has been established by the evidence. 1434 As to para (b) it does not appear that any investigations had been made, by Mr Fox or anyone else, to test empirically whether some of the claims were early notifications or precautionary claims (see T 3877), or to assess the likely level of reinstatement premiums, before the statements were made to PwC. In section 7.6 I considered at some length the expert evidence as to what formal inquiries might be appropriate to ascertain the level of precautionary or exaggerated claims, although there is an inherent difficulty in any such investigation, because the status of the claim or notification as a precautionary or exaggerated claim will often not be apparent on its face. But on the basis of the evidence I noted some suggestions about some limited inquiries that could be made. There is no evidence to suggest that any such systematic inquiries were made in this case. In section 7.6 I listed the matters that Mr Robertson relied on to support his view about exaggerated and precautionary notifications. I concluded that the matters he relied on fell considerably short of what would justify keeping silent at the PwC meeting when Mr Fox expressed "management's best estimate" by referring to management's firm belief that cedants were being prompted to make early and precautionary claims. 1435 As to para (c), I have held that on 9 November 1998 Mr Schneider showed the HG table to Mr Fox, and Mr Fox became aware that the contract-by-contract analysis had produced low, medium and high figures in Australian dollars of $84.6 million, $137.5 million and $211 million, and he also became aware of Mr Schneider's opinion that Hurricane Georges was a $100 million type event. Mr Fox made submissions to the contrary (written submissions para 265ff). As noted above, I have held it is more likely than not that Mr Fox read the Hurricane Georges register for 4 December and was aware that net claims stood at $72.4 million. 1436 As to para (d), I have held that Mr Fox attended a meeting with Mr Robertson and Mr Schneider on 5 November, for the purpose of resolving a disagreement between Mr Robertson and Mr Schneider about the impact of Hurricane Georges on the profit forecast. Mr Schneider referred to the contract-by-contract review that he and his team were doing and said it was not finished. But he said they had reviewed a lot of contracts and he thought Hurricane Georges was going to be a $100 million type event. Mr Schneider also said there were $25 million worth of claims at the end of October and according to Mr Robertson's evidence, Mr Schneider referred to the Status of Registered Events Report as at 31 October 1998. That report showed property losses of $21.1 million and marine losses of $7.3 million. 1437 My finding recorded in relation to para (c) about the discussion between Mr Schneider and Mr Fox on 9 November is also applicable with respect to para (d). 1438 It is a consequence of these findings that all the ingredients of para 144 of the SASC, and hence the contravention of s 232(4), have been established. The conclusion is that Mr Fox did not discharge his statutory duty of care and diligence by making the statements he did at the meeting with PwC. The statement about maximum potential loss based on the contract-by-contract review is substantially inconsistent with the information given to him by Mr Schneider, which indicated a maximum potential loss of $211 million. The statement about notifications to date was inaccurate by a large margin if, as I have found, Mr Fox had seen the Hurricane Georges register for 4 December. The statement about precautionary and accelerated claims was misleading to the extent that it may have suggested a basis for discounting the high claims notifications. The statement of best estimate, though on a net basis, was out of line with Mr Schneider's statement. 1439 In my opinion a reasonable person in Mr Fox's position acting with due care and diligence in the circumstances of the two companies would not have made any of these statements and therefore by doing so, Mr Fox has contravened s 232(4). 1440 If, contrary to my findings, Mr Fox had not read any Hurricane Georges register e-mails, had not been shown the HG table, and had not read the October valuation report, a reasonably careful and diligent executive director in like position in a company in GIO Insurance's circumstances would have done so. Such a person would also have asked for information and would have discovered the information in PTB 1175, the November Status of Registered Events report and the catastrophe model results in PTB 1871A. Such a person would have been aware that a reinsurer does not receive all of the claims in respect of a catastrophe within the first two months after it occurs, and therefore that the only reasonable course for GIO Re was to proceed in the expectation that the number would continue to rise. Para 157I - failing to act honestly 1441 ASIC submitted that Mr Fox contravened s 232(2) in relation to 2 of the statements made at the meeting on 7 December. The first was the "maximum potential loss" statement and the second was the "claims notifications" statement. ASIC has invited the court to apply the concept of "honesty" adopted in Marchesi v Barnes , described in section 5.4. The test is whether Mr Fox's conduct was a breach of his obligation to act bona fide in the interests of the companies of which he was an officer, involving consciousness that what he was doing was not in the interests of the company and deliberate conduct in disregard of that knowledge. 1442 The statement about the maximum potential loss was, I have held (section 3.23), net of the OP Re retrocession but not net of reinstatements. The statement about claims notifications was a statement about gross claims notifications for property and marine "to date", that is up to 7 December. Mr Fox knew about the contract-by-contract analysis and the HG table. He therefore knew the maximum potential loss according to the HG table was $211 million, not $105 million as he wrongly stated. He also knew, on my findings, that gross claims up to 4 December had reached over $89 million. He therefore knew that his statement about claims notifications to date was incorrect by about $24 million. He knew each of the statements was false. Knowing that they were false, and that it was probable PwC would rely on them for the purposes of the Part B statement, he must have realised that to make them was not in the best interests of the two companies, GIO Australia Holdings in GIO Insurance, both companies of which he was an executive officer. When he made the statements with that knowledge, he was acting dishonestly in the Marchesi v Barnes sense. His conduct would also constitute a failure to act honestly under the Australian Growth Resources v Van Reesema test (see section 5.4). 1443 In Mr Fox's written submissions, paras 536-541, it was contended that Mr Fox was simply repeating what Mr Schneider said to him about the maximum potential loss. My finding is that that was not so. As to the statement about claims notifications, it was submitted that Mr Fox could only have been dishonest if he knew that the figures "$60-65 million" were the wrong answer to whatever question was asked on the topic. Reference was made to Mr Fox's evidence that he thought the figures that he heard quoted were not out of line with the last information he had in that, in effect, he thought the figures were "within the range". Mr Fox's evidence was based on the proposition, incorrect in my view, that someone else gave the claims notification figures to the meeting. My finding that it was Mr Fox who did so implies that the evidence to which I have referred cannot stand. It also implies, when coupled with my finding that he read the 4 December Hurricane Georges register, that he was conscious that his conduct was not in the interests of the companies. Mr Fox's representation letter and management sign-off 1444 The SASC alleges that Mr Fox breached his statutory duty of care and diligence by signing the representation letter and management sign-off on 7 December 1998 (paras 145-146 (representation letter); paras 147-147A (management sign-off)). I have dealt with similar allegations concerning Mr Robertson at section 7.7. As I have said, Mr Robertson and Mr Fox both signed the representation letter as "Executive Director". They signed separate management sign-offs, each of which contained some qualifying words reflecting the transition from Mr Robertson to Mr Fox. 1445 In my opinion these two documents contained various misleading matters as follows. There was a representation in the representation letter that management believed that the assumptions that had been made for the purposes of the profit forecast were complete and accurate. One of the assumptions was that the American Re agreement was effective, an assumption Mr Fox knew about on 7 December and learned to be false during the PwC meeting. Secondly, the representation letter referred to the American Re agreement as one of the matters taken into account to support their conclusion that, notwithstanding the deterioration in the performance of the catastrophe portfolio, no adjustment to the reinsurance forecast was required. On 7 December 1998 Mr Fox learned that PwC, the Group's auditors, did not accept that the American Re agreement was an effective retrocession agreement. Thirdly, in the representation letter management's opinion that no adjustment to the reinsurance forecast was needed was also supported by reference to a series of matters including the good performance of the attritional property book and changes in retrocession arrangements under consideration that might alter the risk profile of the business. 1446 As to the management sign-off, Mr Fox certified that to the best of his knowledge, information and belief the answers given by Mr Robertson to the due diligence questionnaire (including Mr Robertson's negative answer to the question whether there were other issues that should be considered for disclosure in the Part B statement) were true and correct in respect of the part of the business for which he had assumed responsibility. That was false or misleading because, by the time he signed the document, Mr Fox knew or ought to have known that the Hurricane George claims experience had well exceeded the $25 million reserve that had been set for the purposes of the profit forecast, and there was a real risk that it would exceed the maximum amount of protection offered by the American Re agreement, and moreover, he knew PwC had formed the view that the American Re agreement was not effective as a true retrocession agreement. 1447 It is uncontroversial that the representation letter was signed at the end of or just after the meeting with PwC. I have found it to be more likely than not that the management sign-offs were signed after the meeting with PwC, and therefore after Mr Fox had discovered that PwC did not regard the American Re contract as an effective retrocession. That finding implies that I reject Mr Fox's evidence that his belief in the American Re agreement's validity was essential to his signing of the management sign-off (T 3879). If I am wrong on those findings, and Mr Fox signed the management sign-off before he discovered the attitude of PwC to the American Re agreement, believing as a matter of the central importance that the agreement was effective, his discovery of PwC's attitude should have led him to realise that he had signed a document on the basis of an erroneous assumption, and he should have taken steps to correct the document or make proper disclosure. 1448 I agree with ASIC (written submissions (Fox), para 225) that words such as "to the best of my knowledge, information and belief", "any other matter of which I am aware" and "I am not aware of any other matter", when used in a formal representation or sign-off document executed by a person with executive responsibility for the matters certified, contain an implied representation. The representation is that the signatory has taken appropriate steps to satisfy himself or herself, through inquiry, of the matters certified, so as to make the statements reliable and meaningful. If the signatory has not taken such steps, the document is misleading to that extent. 1449 Applying those principles, it seems to me that it was misleading for Mr Fox to execute the representation letter and management sign-off as executive director of GIO Insurance, and specifically the statement in the representation letter about deterioration of the catastrophe portfolio, if he had in fact, as he claimed, "binned" the Hurricane Georges register e-mails (or even if, as I have found, he binned some of them), and had not otherwise taken steps to ensure that he had current information about the position in the catastrophe portfolio, including the claims position for Hurricane Georges. It was no answer for Mr Fox to say that he was relying on Mr Schneider to keep him abreast of claims developments, because the Hurricane Georges register e-mails were directed to Mr Fox and it was not suggested that Mr Schneider was aware that Mr Fox was binning them without reading them. 1450 Mr Fox made the point in evidence and in submissions that he was given no advance notice of the subjects to be discussed at the meeting with PwC, and it came as a surprise to him, on 7 December, that he was asked to take part in the management sign-off process. It appears that the decision that he should provide a sign-off was taken only at the DDC meeting on 6 December, as a consequence of the Committee noting that Mr Fox had "assumed responsibility for the areas for which Frank Robertson was formerly responsible" (PTB 1594). I therefore accept that the events of 7 December were to some extent, surprising to Mr Fox. But it does not seem to me that the element of surprise was a justification for signing documents that were misleading. 1451 Although he said he was given no advance notice of the subject of the meeting with PwC on 7 December, Mr Fox accepted that he realised during the course of the meeting, that PwC were involved in a last and final conference about the efficacy of the American Re contract and the financial effects of Hurricane Georges (T 3870), and that PwC would act on the basis of what was said at the meeting (T 3871). He said that during the meeting he realised that the meeting was occurring because there was doubt about the effect of Hurricane Georges (T 3871). He said he understood that the sign-off process that occurred on 7 December related to the Part B exercise, and that the Part B statement would go forward on the basis of what was said in the sign-offs (T 3870). In these circumstances, ASIC submitted (written submissions (Fox), paras 209, 235) that Mr Fox's conduct on 7 December should be measured against the fact that he had an actual appreciation of the purpose of his involvement in the events of that day, and that he had a duty to take all reasonable steps to ensure that any information provided orally or in writing was accurate. I agree with this submission 1452 My conclusion is that on 7 December Mr Fox, either having some detailed knowledge of the level of Hurricane Georges claims (as I have held) or knowing that he had not made adequate inquiries with respect to Hurricane Georges, should have declined to sign the management sign-off and representation letter and should have explained comprehensively to PwC what he knew about the likely effect of Hurricane Georges and what further inquiries he should make before he could give any certification. In signing the documents in those circumstances he breached his statutory duty of care and diligence. Mr Fox's conduct after 7 December 1453 Para 148 of the SASC alleges that Mr Fox failed after the date of publication of the Part B statement and before the end of the period in which the AMP takeover remained open to have any or any adequate regard to the available evidence concerning whether it was likely that GIO Re would achieve the $80 million profit forecast in the 1999 financial year. 1454 Mr Fox submitted (written submissions, paras 529-530) that there was no suggestion in the evidence that Mr Fox was asked to take any responsibility for the Part B statement, let alone after it was published. But as executive director of GIO Re he had responsibility for the reinsurance business and, as I have held, the reinsurance profit forecast, and since his executive office continued after 8 December his responsibility continued as well. 1455 In its written submissions (para 310), ASIC referred to evidence given by Mr Fox that he was advised by Mr Schneider's secretary that the American Re agreement had been be negotiated in a manner that would satisfy the concerns of PwC. ASIC submitted that the court should not accept that evidence. But Mr Fox contended (written submissions, para 530) that it was not put to Mr Fox that this evidence was false. 1456 Assuming that Mr Fox's evidence on this matter is correct, it does not seem to me that it would provide him with a sound basis for failing to discharge the monitoring duty that he had while the offer period continued. This is because the new American Re retrocession agreement of 18 December was essentially the same transaction, no more likely to be regarded as a genuine retrocession agreement than the 13 November placement slip. 1457 In 1998 there was no specific statutory duty on the part of a target company to provide replacement or supplementary information once the Part B statement had been dispatched. However, since GIO Australia Holdings was a listed entity, it was under a continuing obligation by virtue of the Listing Rules of the Australian Stock Exchange, reinforced at the time by s 1001A of the Corporations Law, to disclose material information to the market. Failure to do so would expose the company to the risk of contravention of the statute and possibly civil liability. Information about the developing claims experience for Hurricane Georges was material, disclosable information (or at least arguably so). Mr Fox's statutory duty of care and diligence required that he monitor the development of Hurricane Georges claims and bring any material information forward so that the board could consider whether to disclose it, and thereby attend to the performance of the parent entity's statutory duty. He did not do so. 8.4 Allegations group (2): American Re agreement and letter to American Re dated 13 November 1998 1458 Para 143 of the SASC alleges that Mr Fox breached his statutory duty of care and diligence by causing, or participating in causing, GIO Re to enter into the American Re agreement and the amended agreement, and that he made a related offer in the "side letter" of 13 November: in the circumstances pleaded in paras 113(a)-(e) and para 62. I take the following summary of the pleaded circumstances from ASIC's written submissions (para 285): (a) the real purpose for GIO Re's entering into each agreement was to maintain the $80 million profit forecast by artificially deferring the requirement that total Hurricane Georges claims in excess of $25 million be brought to account in the 1999 financial year; (b) neither agreement was a genuine retrocession agreement in commercial terms, as the only apparent underwriting risk undertaken by American Re was extremely remote; (c) the profit commission payable to American Re was uncommercial and an excessive consideration for the degree of apparent underwriting risk undertaken by American Re; (d) the profit commission payable to American Re was substantially a consideration for American Re's facilitating GIO Re's being able to defer bringing to account total claims resulting from Hurricane Georges in excess of $25 million until after the 1999 financial year; (e) GIO Re entered into each agreement without any expert actuarial or accounting advice that the agreement was a proper retrocession agreement, or that the deferral of the bringing to account of total claims resulting from Hurricane Georges in excess of $25 million until after the 1999 financial year was in accordance with proper accounting practices. 1459 In section 3.23, after considering the evidence in some detail, I held that Mr Steffey and Mr Vines (to the extent that they were involved), and Mr Fox and Mr Schneider, caused GIO Re to enter into the American Re placement slip for the sole or primary purpose of protecting the profit forecast from adverse movement in Hurricane Georges claims. Therefore para (a) is satisfied. In section 6.4 I held that Mr Vines had in fact not caused or participated in causing GIO Re to enter into the American Re agreement for the purposes of para 113 of the SASC, essentially because he dropped out of the picture on or shortly after 6 November. Mr Fox argued (written submissions, para 138ff) that he did not cause or participate in causing GIO Re to enter the contract, but I have decided that the preponderance of evidence supports the conclusion that he was substantially engaged in the transaction, as Mr Schneider's supervisor. 1460 As to para (b), ASIC's contention is that it had become plain to Mr Fox by 11 November, if not before, that the ultimate predicted losses in Hurricane Georges had substantially exceeded the $25 million reserve that had been established for it. Since the American Re placement slip did not involve any transfer of risk in respect of Hurricane Georges, the only way that the agreement could operate to protect the profit forecast was by enabling GIO Re to make claims for losses above $25 million in the year to 30 June 1999, on the basis that equal amounts would be repaid to American Re over the life of the agreement in the form of premiums. In my view, that statement is correct. 1461 ASIC submitted that the profit figure which is of interest to the market is a real profit likely to be earned by a company from its ordinary business activities. Had it succeeded, the American Re agreement would have operated artificially in a way that was very material to the market's understanding of the real profit performance of GIO Re, because it would have enabled a decline in profit caused by excessive claims on GIO Re to be made good by receipts from American Re, but only on the basis that an equivalent sum be repaid to American Re in subsequent financial years. ASIC submitted that it had become clear on the evidence that the American Re agreement was not a genuine retrocession agreement. 1462 Mr Fox's submissions (written submissions, para 485ff) challenged the claim that such an agreement is artificial. He submitted that the American Re agreement was not a traditional contract of retrocession but was, instead, financial reinsurance, as Mr de Vroome agreed (T 2414). He contended that in 1998, financial reinsurance contracts were regularly entered into by insurers, with the object of smoothing the costs of catastrophes by taking the top off a high catastrophe year and moving it or spreading it over a number of subsequent years (referring to the evidence of Mr Murray T 1522-3). In Mr Fox's contention, it was neither objectionable nor improper for an insurer to enter into such a contract, provided it was accounted for in the books of the insurer openly, properly, completely and in accordance with prevailing accounting principles. If it were possible to "move" and spread the impact of Hurricane Georges over subsequent years there would be nothing artificial about the result, which would be the consequence of the nature of the contract and what was permitted by prevailing accounting standards. 1463 The evidence of Mr Murray seemed to confirm that there was a legitimate field of operation for financial reinsurance. He said he did not reject the views of Mr Vines and Mr Schneider out of hand and thought the matter over carefully for a number of days, and consulted colleagues overseas, before deciding that the "reinstatement premium" should be accounted for in the first year, thereby denying the efficacy of the arrangement. But he agreed that the appropriate accounting treatment of the contract was a matter about which accounting minds might legitimately differ (T 1521). 1464 In my opinion Mr Fox's submissions do not take adequate account of the nature of the "defined event" cover. A financial arrangement under which A pays B $100 million in year 1 and in return, B pays A $100 million plus a fee in year 2, is an acceptable commercial transaction unless there are special additional facts. But presumably it would not assist B to spread profit into year 2, because B would be required to account in year 1 for the liability to make the payment in year 2, thereby making the transaction balance-sheet neutral. If the contract is a reinsurance contract, so that payment obligations are related to risk, it may be possible to break the link between the receipt and the outgoing. But if the "risk" is so remote as to be artificial (as in the present case), then the whole transaction acquires an air of artificiality. The artificiality is reinforced if the amount of subsequent year premiums is equivalent to the amount of claim recovery in the first year. One can see in the ISC circular, discussed in section 3.26, various attempts to distinguish true retrocession from transactions artificially made to look like retrocession agreements. To say that such a transaction is a legitimate commercial transaction so long as the accounting standards permit it is to overlook the contrived and theoretical risk transfer. In my opinion ASIC's submission about paragraph (b) is correct. 1465 As to (c) and (d), the artificiality of the transaction may be enhanced by an uncommercial and excessive consideration. Here the evidence establishes, in my view, that the US$7.2 million total commission that American Re would earn under the agreement if it ran for its four-year term was an excessive premium for the highly remote risk of the "defined event" (see esp, the affidavit and report of Ms Pearson). As Mr Fox noted (written submissions, para 109), there is no evidence as to whether the commission payable was a justifiable consideration for the financial aspect of the transaction, but in the present case that is beside the point, because there was no other commercial objective than to protect the profit forecast of GIO Re. 1466 As to (e), it is a fact that no external actuarial or accounting advice was taken as to whether the agreement was a proper retrocession agreement before it was entered into. Mr Fox submitted (written submissions, para 123ff) that Mr Vines had the responsibility to obtain auditor approval and decided not to seek it prior to the execution of the contract (T 2665; T 3018). That is correct. But it was Mr Fox who saw the transaction through to completion, contributing his letter of 13 November, and knowing that there would be no prior auditor approval. 1467 It is reasonably clear from the evidence, set out in section 3.23, that the American Re agreement was negotiated in circumstances of urgency, the party seeking urgency being GIO. As indicated earlier, ASIC has suggested that a reason for urgency might have been the impending publication of the first four-month profit figures, which had been prepared on the assumption that the retrocession agreement was in place. An alternative explanation is that when the Federal Court's judgment on the challenge to the Part A statement was handed down, which could have been at any time, GIO might find itself forced to complete the Part B statement quickly. 1468 ASIC submitted that Mr Fox's letter of 13 November 1998 was a "farce". Mr Fox's position (written submissions, para 184) was that he understood American Re wished to know what GIO Re's appetite was for the kind of cover referred to in the letter, and that by writing the letter, he was conveying what he had been told of GIO Re's underwriting department's response to that inquiry. Mr Fox invited me to find that the letter was American Re's idea, something it insisted on in exchange for the urgent issue of cover on 13 November. But his evidence and submissions were inconsistent with other evidence, which I have accepted. 1469 I reviewed the evidence about Mr Fox's letter in section 3.25, and reached the conclusion that Mr Fox's evidence was to be rejected. I concluded that the letter was written by Mr Fox in order to offer to take back a proportion of the top US $40 million relating to the "defined event" in the placement slip. It was written by him to secure the urgent completion of the transaction at a time when American Re was concerned about even the very remote risk transfer that the placement slip involved. It was, I found (at 712) a "side" transaction, as Mr Yee said it was, implying that it was not to be disclosed to those whose job it would be to determine the true nature of the American Re agreement for accounting and regulatory purposes, namely the auditors and APRA. The vague language of the letter reinforced that conclusion. 1470 In my opinion the evidence establishes that Mr Fox caused or participated in causing GIO Re to enter into the American Re agreement in the circumstances set out in paragraphs (a) to (e) above. A reasonable person acting with care and diligence in the position of Mr Fox in the circumstances of GIO Australia Holdings and GIO Insurance would not have participated in the making of the American Re agreement. Nor would a reasonable person in Mr Fox's position acting with due care and diligence sign the letter of offer of 13 November 1998. Para 157I - failure to act honestly 1471 ASIC also contends that by causing or authorising the American Re agreement and writing the letter of offer of 13 November to American Re, Mr Fox engaged in an act of dishonesty within s 232(2) of the Corporations Law, in the Marchesi v Barnes sense described in section 5.4. The test is whether Mr Fox's conduct was a breach of his obligation to act bona fide in the interests of the companies of which he was an officer, involving consciousness that what he was doing was not in the interests of the company and deliberate conduct in disregard of that knowledge. 1472 In my view, the American Re agreement was not in the interests of GIO Australia Holdings and GIO Insurance because: · it involved the payment by GIO Re to American Re of a substantial fee disproportionate to the remote risk transferred to American Re; · it was an artificial transaction involving no risk transfer in respect of the American Re cover and only an extremely remote risk transfer in respect of a defined event (the risk of loss from a second US$10 billion Gulf of Mexico hurricane within any period of 12 months); and · it was not a genuine retrocession agreement capable of achieving the accounting advantages that GIO Re sought. 1473 When one considers the combined effect of the American Re agreement and the letter of offer, this conclusion is even more powerful. The effect of the letter of offer was that GIO Re was offering to take back the major part of the remote risk that was being undertaken by American Re, and it was doing so for a fee much less than the fee it was paying American Re for transfer of largely the same risk. 1474 In my opinion, his writing of the letter of offer on behalf of GIO Re is strong evidence of Mr Fox's consciousness that the transaction comprising the American Re agreement and the letter was not in the interests of either GIO Australia Holdings or GIO Insurance and was deliberate conduct in disregard of that knowledge. In writing the letter, Mr Fox must have understood that the inclusion of the top-level cover for the remote defined risk was intended to create the artificial appearance of a retrocession agreement to achieve the accounting advantage that was sought. The fact that he wrote the letter of offer in the terms it contains shows that he appreciated that the supposed element of risk in the American Re agreement was negligible, because by the letter he was offering to take back a major share of the defined event risk for a much lower premium. Mr Fox's own evidence to the effect that he believed American Re was testing GIO Re's appetite and the subject matter was unconnected with the American Re transaction, is highly implausible and I have rejected it, for reasons given in section 3.23. 1475 In my view ASIC has proved a contravention of s 232(2) on the Marchesi v Barnes test. The reasons I have given with respect to the interests of the company make it plain that a contravention would have been found if the Australian Growth Resources v Van Reesema test were to be applied. 1476 In oral submissions (T 4463-4) senior counsel for ASIC made it clear that his contention was that the whole of Mr Fox's involvement in relation to the American Re agreement was a contravention of s 232(2). He said the signing of the letter of offer demonstrated what Mr Fox knew, namely that the top level of cover for a defined event was fanciful or illusory. My finding is that Mr Fox caused or participated in causing GIO Re to enter into the American Re agreement and to make the related offer in the "side letter", in breach of s 232(2). That is a finding in accordance with the pleading, as I understand it. I do not believe that senior counsel for ASIC meant to put the matter inconsistently with that. 8.5 Allegations group (3): general failings SASC para 140A-failure to inform of the true potential effect of Hurricane Georges claims on the profit forecast 1477 Para 140A pleads that Mr Fox failed to inform GIO Australia Holdings or GIO Insurance, their boards of directors and management, the DDC or PwC Securities of the true potential effect of the claims received, or likely to be received, by GIO Insurance in respect of Hurricane Georges on the attainment of the $80 million profit forecast. 1478 ASIC submitted (written submissions (Fox), para 280) that Mr Fox, if he had acted with care and diligence, would have positively brought to the attention of those bodies and individuals the likely effect of Hurricane Georges. In the period up to and including 7 December, this would have included showing that Hurricane Georges would have a large and uncertain effect that would be likely to diminish profits very substantially. ASIC contends that Mr Fox should positively have brought to the attention of those bodies and individuals the fact that Mr Schneider had expressed the opinion, as early as 5 November, that Hurricane Georges was likely to be a $100 million type event. It says that Mr Fox should have provided advice of the results of the contract-by-contract analysis. He should have reported on the purpose of the American Re agreement and its manner of operation, and when he learned at the meeting on 7 December that the American Re agreement would not be effective in an accounting sense to protect the profit forecast, he should have advised that no sufficient investigations had been carried out to measure the likely effect of Hurricane Georges as at that time. 1479 Mr Fox's response (written submissions, para 458ff) was to point out that he was not involved in the creation of the profit forecast and was not a participant in the debate as to its achievability. If (contrary to his submission) he attended the meeting with Mr Robertson and Mr Schneider on 5 November 1998, at the suggestion of Mr Lange, it was not as a protagonist in the debate about the impact of Hurricane Georges on the profit forecast. He said there was no evidence that any of the bodies or individuals referred to in para 140A of the SASC had any expectation that Mr Fox would make any statement or comment about the achievability of the profit forecast. 1480 Mr Fox's submission seems to me to disregard the centrally important fact that he was appointed executive director of GIO Re with plenary executive responsibility. That conclusion was resisted on behalf of Mr Fox (written submissions, para 16ff; spreadsheet entitled "Occasions and communications said to be inconsistent with Fox's limited responsibilities"). But I have found that the weight of evidence is in favour of the view that Mr Fox held the position of executive director without limitation. The question was not whether there was any expectation that he would make statements or comment, but rather whether the development of Hurricane Georges and its potential impact on the profit forecast were matters for which he had executive responsibility. My finding that the position was akin to the position of a chief executive, allowing the fact that Mr Fox reported to the Group chief executive, implies that his responsibility extended both to the reinsurance profit forecast and to the system for monitoring catastrophe claims. 1481 As to ASIC's point that Mr Fox should have disclosed what he was told by Mr Schneider on 5 November, Mr Fox asserted that Mr Schneider said only that Hurricane Georges' "worst-case scenario" was $100 million. I have considered and found against this evidence in section 3.16, with some additional comments at section 8.3. 1482 As to the contention that Mr Fox should have advised the bodies and individuals mentioned in para 140A about the American Re agreement, Mr Fox contended that the American Re agreement was Mr Steffey's initiative and he was never asked for advice about how it operated. However I have found, notwithstanding Mr Fox's detailed contentions (written submissions, para 138ff), that Mr Fox had an important role in the American Re negotiations, supervising Mr Schneider. 1483 In my opinion ASIC's case is made out under para 140A. As executive director of GIO Re, Mr Fox was placed in a relationship not only with GIO Insurance, but also with the parent board and the DDC, because of the takeover defence process and the relevance to that process of the reinsurance profit forecast. His duty of care and diligence implied that as a senior executive officer he would bring to the attention of the DDC and PwC developments that would or might materially impact on the profit forecast during the course of the takeover bid. The evidence, and his own submissions, indicate that he did not discharge that duty. SASC paras 141, 142 and 14 3A - failure to act on information supplied 1484 These three paragraphs of the SASC allege in substance that Mr Fox failed to ensure that information provided to him was verified and followed up for the purpose of assessing the validity of the $100 million profit forecast. The information was: · Mr Schneider's statement to Mr Fox on 5 November 1998 that GIO Re had received $26.9 million in claims notification for Hurricane Georges and that Hurricane Georges would be a $100 million type event; · the information provided by Mr Schneider to Mr Fox on 9 November giving the results of the contract-by-contract analysis and the range of results it had determined, and that Mr Schneider believed that Hurricane Georges would be a $100 million type event; · the results of the contract-by-contract analysis. 1485 ASIC's contention (written submissions (Fox), paragraph 282) was that a careful, diligent and skilful executive director in the position of Mr Fox would have taken a positive interest in the development of Hurricane Georges and would have monitored its development personally, to ensure that the ultimate likely cost was investigated and ongoing developments measured against forecasts. 1486 Mr Fox denied that he received the information alleged by ASIC. I have found against him. My view is that, while it is an overstatement to say that a person in the position of the executive director of GIO Re would be required personally to monitor claims developments, I accept that if there is a takeover due diligence process in place, the executive director's statutory duty requires him or her to exercise care and diligence to ensure, once the importance and sensitivity of a particular matter such as the development of Hurricane Georges has become evident, that the phenomenon is properly investigated and monitored. That would include ensuring that any potentially material information provided to the executive director is properly verified and investigated. To that extent I agree with ASIC. In the present circumstances, once Mr Fox as executive director of GIO Re heard Mr Schneider, acting in the position of internal actuary, say that he had conducted a contract-by-contract analysis and believed that Hurricane Georges would be a $100 million type event, he had a duty to bring that information to the DDC and PwC, and perhaps to investigate or verify it. Mr Fox did no such thing. 1487 ASIC contended (written submissions, para 282) that Mr Fox would not discharge this duty simply by taking the view that the American Re agreement obviated the need for continuing investigation and assessment of the likely effect of Hurricane Georges on the profit forecast. This was because a competent executive director could anticipate the possibility of being required to provide a current forecast and for that purpose, be required to point to investigations positively undertaken in order to justify any new forecast objectively. 1488 I am not persuaded by that submission, cast in that general form. Mr Fox alleged that he did not take the initiative to propose the American Re agreement, no one sought his advice about it, and he believed it was an effective retrocession until PwC said otherwise, to his surprise, on 7 December. It seems to me unlikely, in such circumstances, that an executive director would have the extensive positive duty alleged by ASIC. Para 142A - failure to have regard to information 1489 Para 142A of the SASC alleges that Mr Fox failed to have any or any adequate regard to the October 1998 results, and in particular the October valuation report distributed on 1 December 1998 (PTB 1453), the Hurricane Georges register e-mails, and the current information given for Hurricane Georges claims at the 25 November 1998 management committee meeting. 1490 The substance of this allegation, according to ASIC (written submissions (Fox), para 284) is that Mr Fox learned, no later than at the 11 November meeting where the October profit figure was discussed, that Hurricane Georges losses had already substantially exceeded the $25 million reserve which was the assumed cost of Hurricane Georges for the purposes of maintaining the $80 million profit forecast. That position was reinforced by the October valuation report. Mr Fox also learned on 25 November 1998, when he chaired a management committee meeting, that the total gross Hurricane Georges claims had reached $82 million, $65 million net. ASIC alleged that a diligent, careful and skilful executive director in Mr Fox's position should have been concerned of a real probability that Hurricane Georges losses could go much higher. Such an executive director would have actively investigated the developing effect of Hurricane Georges. 1491 I agree that Mr Fox's statutory duty of care and diligence, referable to a reasonable person in a like position, would require him to take some positive action in appropriate circumstances. The "like position" is not simply the position of a reinsurance manager; it is the position of a reinsurance manager responsible for providing information as part of a due diligence process. However, it is not clear to me precisely what investigations are said to be necessary in response to the information identified. The most important thing to do would presumably be to have accurate daily information about claims developments, something that Mr Fox endeavoured to establish shortly after his arrival. 1492 ASIC also submitted, in the context of para 142A, that the diligent, careful and skilful executive director in Mr Fox's position would not have entered into the American Re agreement without first obtaining regulatory confirmation, and would not have rested easy on the ability of the agreement to protect GIO Re from ultimate net Hurricane Georges claims up to $100 million. In my opinion, ASIC's propositions are expressed too broadly. In my view specific duties concerning the American Re agreement do not flow from the general obligations of an executive director to make appropriate investigations of material matters. 8.6 Conclusions as to Mr Fox's liability for breach of ss 232(2) and (4) 1493 I have found that there were breaches of s 232(4) by Mr Fox, specified in paras 1438, 1452, 1457, 1470 and 1486. I have found that Mr Fox also contravened s 232(2) in the circumstances specified in paras 1442, and 1474. 9. Conclusions 1494 I have found that each of the three defendants has failed to meet the statutory duty of care and diligence contained, at the relevant times, in s 232(4) of the Corporations Law. Mr Fox has also contravened the statutory duty to act honestly, contained at the relevant time in s 232(2) of the Law. In the case of Mr Vines, and to a lesser extent Mr Robertson, a significant number of the alleged contraventions have not been made out. In the case of Mr Fox, ASIC has made out all of its principal allegations. 1495 This judgment is confined to the question of liability for contravention of the two provisions. It will be necessary to give the parties the opportunity to make submissions and, if they wish, adduce evidence on the question of remedies, in accordance with the procedure recently affirmed by the Court of Appeal of New South Wales in Forge v ASIC (2004) 52 ACSR 1. In addition, there is an outstanding matter going to liability, namely whether any of the defendants should be given the benefit of the "honesty defence" in s 1317JA or s 1318 of the Corporations Law. During the hearing it was arranged that I would hear submissions on that question, if necessary, after publishing my reasons on convention (T 4109). I shall stand the proceedings over in order to give the parties and their legal advisers the opportunity to consider these reasons for judgment and to give some thought to the next steps, which should include a timetable and directions.