I see nothing in the conviction reasoning to comfort anyone, though burnt investors may see justice of a kind – until the the non-prison penalties to come.

I draw some slight comfort from a discreditable schadenfreude. When Sir Douglas Graham was Minister of Justice I presented the NZ Law Society's submissions on what became the Companies Act 1993. I was also heavily involved in the debate over whether we should have a takeover law like Australia's, or more like the USA or Switzerland (we got mostly Australia's dopey model). I had several meetings to lobby the Minister on both. I recall his indifference to our warnings that the law was casually eroding the balances of shareholder and director powers, rights and freedoms. Puffing smoke rings high in the air as he looked at the ceiling (yes Veronica in those days cigars were common in the Beehive) he told me he thought I was getting a bit carried away, and that he was sure the courts could ensure that uncertain new provisions would be applied sensibly.

But that memory is unworthy. It is far overshadowed by genuine sympathy for the plight of him and his fellow directors.

When honest men share the criminal dock with crooks the crook is comforted,  the boundary between the crooked and the straight becomes obscure and obedience to criminal law becomes a matter of cynical calculation. Instead of being an unquestionable standard for all decent citizens, adherence to criminal law becomes mere risk balancing. The risk of being caught becomes just like other business risks, balanced against the returns. This is even more so when the law renders criminal some acts that the director (as potential criminal) has no practical way to stop.

All healthy legal systems rely on an active consensus of the law abiding to uphold the rules, and to assist in detecting and punishing offenders. That in turn depends on the social mechanisms like shame and disgrace that enforce the consensus.

Our company and securities law is busy trashing that consensus.

Paragraph 10 of Dobson J's Reasons for Verdict explains it.  He did not make the law. He must just apply it:

"In the relevant respects, the law has created criminal liability for what may be no more than a material misjudgement about the accuracy and adequacy of the description of the state of financial health of the company, as directors authorise it in offer documents".

The judge's reasoning highlights how mechanical the law is. I think there were ways in which he could have mitigated the reach of this law, but even if he had, when circumstance emerge that make an offering statement untrue the statutory defences are flimsy. Evidence of honesty, diiigence, compliance with accepted governance principles, reliance on trusted management and reliance on accounting standards may all be immaterial.  

I will think no less tomorrow of the Lombard directors than I did two years ago. I would welcome these convicts to my house. I give them still as much respect  for their achievements as before. I would appoint at least one of them to positions of responsibility. So in this respect criminal law has lost its power to brand. It has lost its power to draw distinctions that are vital for the effective functioning of commercial morality when the policeman or the regulator is not around, or is too busy.

The disjunct between commercial morality or ethics and the criminal law now means that when I do not have personal knowledge I am likely to sympathise with defendants, and assume that they are just losers in a liability lottery,. Criminal law should be invoking in its support the powerful social sanctions of exclusion and disgrace. Now senior directors all over the country have another reason to shudder "there but for the grace of God go I". For if they are any good at all they will often have made decisions with inadequate information, relying on their intuitions about others, juggling risks, applying their best efforts for the company, knowing that it could go wrong.

This is not to say that I do not judge those responsible for losing investors' money. Nor does it say I respect these particular directors for their sagacity as the long bull market in property neared its end, and it became ever more inevitable that the mezzanine financiers of developments would lose their money. They were foolish optimists, in hindsight. I  would not have made the same decisions as them. But perhaps I am more risk averse, and had been through the 1980s as a senior commercial lawyer, 

But I draw a huge distinction between misjudgment (as the judge called it) or foolish optimism on the one hand, and dishonesty on the other. There are plenty of dishonest directors to hound. When the law squanders scarce enforcement millions on foolishness it sends millions more into the pockets of the  lawyers now feeding off the corporate desperation for back-covering records of conspicuous diligence. None of my million dollar per year professional colleagues will be helping make any commercial boats go any faster, though many will be earning more in a year than any liability most of their clients would ever have.

But risk aversion has far higher costs. The flight of people from public markets to private equity and direct investment could waste most of the millions more the government is pouring into securities law, and trying to revitalise the moribund share market. Yet without an active local share market for medium size companies, our successful local business people will continue to sell to foreign capital when they need more, or want to start spreading their personal investment risks.,

Criminalising foolishness is foolish, but if we are now set on it there are many classes of foolishness to criminalise before a failure to warn even more strongly than they did, investors looking for the returns from calculated risk.

What about the politicians who ordered the guarantees for finance companies that have lost us all billions. What about the city planners and the heritage lovers whose aesthetic preferences blocked replacement of old brick buildings that have killed scores of people? What about the boilermakers union leaders who have killed by making it impossible to build steel framed building in New Zealand for decades so that instead we had concrete pillared buildings imitating the slenderness of steel.? What about those who designed or implement the parole laws that enable known violent risks to kill innocent New Zealanders every year?

A couple of years ago, commenting on the charging of Rick Bettle I summarised the likely outcome of convicting honest and diligent but unwise or unlucky directors as follows;

"The deterrent of the prosecutions could see the birth of  impeccable candour among company directors, ushering in a new age in which fear of prosecution makes it  possible to take at face value nearly all public commercial discourse, assuming statements have been checked to exhaustion for possibly misleading inferences. The resulting public confidence will see a flood or renewed saving and direct  investment by the newly trusting "mums and dads".

Or we could be watching a dramatic acceleration of the great decline in  opportunities for direct public investment, as promoters directors and major shareholders decide that the compliance costs (and risks) of public offering far outweigh any lowered costs of capital. On that scenario there will be little that the NZX can do to reverse its decline in significance. The power and revenue of private equity and other "wholesale" market intermediaries will surge, and whatever their 'financial literacy' or newly refreshed trust, for "kiwi mums and dads" there will be declining choice for direct investment."

Another post summarised the effect on the returns investors might expect from share investment, of imposing asymetric liabiliities on directors:

" if shareholders want the upside of good faith judgment when it proves right and want the blood of directors when that same good faith judgment proves to have been unwarranted, then the shareholders will find that the directors will demand a goodly part of the return that the shareholders are expecting. If directors pick up the downside risk for shareholders they will want the return to justify it."

Another contribution to widening inequality.