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Former HIH exec sent to prison

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SYDNEY, Australia—Dominic Fodera, the former chief financial officer of collapsed insurer HIH Insurance Ltd., was taken into custody last week ahead of his sentencing for signing off on incomplete documents relating to an HIH financial transaction.

He faces up to five years in jail after the Supreme Court of New South Wales found him guilty of criminal charges April 9.

After hearing sentencing submissions, Justice Megan Latham adjourned the matter for sentencing on June 7 and revoked Mr Fodera's bail.

In November 2005, the Australian Securities and Investments Commission charged Mr. Fodera with authorizing the issue in 1998 of a prospectus for convertible notes from which there was a "material omission."

The issue, which raised $155 million Australian ($96.7 million) for HIH, did not disclose an arrangement between HIH and the Australian unit of French bank Societe Generale, which was described by the HIH Royal Commissioner--which investigated the circumstances surrounding HIH's collapse--in April 2003 as a "total return swap."

Under the "total return swap," HIH agreed to provide $35 million Australian ($21.6 million) to Societe Generale to enable it to buy the convertible notes and that any risk or loss associated with the notes would be borne by HIH, thus reducing Societe Generale's exposure as an underwriter.

The failure to disclose these matters gave the false impression to investors that Societe Generale would have a financial interest in the notes after they had been issued and subscribed for, and that Societe Generale regarded them as a sound financial investment.

Investors included several institutional investors, many of whom continued to hold the notes at the date of HIH's collapse.

The notes issue helped finance HIH's bid for FAI Insurance, which was launched in 1998.

Mr. Fodera's attorney, Graham Ellis, requested leniency for his client, saying Mr. Fodera's conduct reflected recklessness and inadequate due diligence rather than dishonestly and deception.

The court heard of the difficulties that Mr. Fodera had endured since the Royal Commission Enquiry into the HIH collapse, including a two and half year wait before charges were filed. "The delays were significant and should not be overlooked," Mr Ellis said.

The prosecutor, Alan MacSporran, noted that Mr. Fodera continued to deny his guilt and would not accept that his actions were deceptive and misleading. "For (Mr. Fodera) to say he was unaware that the omissions in the prospectus were material flies in the face of the jury's case against him," he said.

Mr. MacSporran said that Ray Williams, the founder and former chief executive officer of HIH, who was sentenced to four and a half years in 2005, saw his sentence reduced because of his cooperation and acceptance that signing a prospectus without making inquiries about HIH's true position was reckless. "(Mr. Williams) accepted the plea; Mr Fodera still maintains his innocence."

Mr. Fodera has also been charged with an additional four counts of failing to disclose information and two counts of failing to act honestly as a director.

HIH became Australia's biggest corporate failure in 2001 when it collapsed with losses of $5.3 billion Australian ($2.7 billion).

Mr. Fodera was the sixth person to be jailed over the 2001 corporate collapse.