By Colin Kruger
As Star Entertainment is rapidly running out of both cash and options for survival, the corporate legal battle of the decade begins on Monday to determine whether Star’s previous board should have known earlier about the scandals that have torched more than $4 billion worth of shareholder funds.
Justice Michael Lee – after a one-year delay thanks to the Bruce Lehrmann defamation trial – will preside over Federal Court civil proceedings between the Australian Securities and Investments Commission (ASIC) and 10 former Star board members and executives for breaching their duty to act with care and diligence.
The Star casino in Sydney.Credit: Dion Georgopoulos
ASIC has accused them of not paying sufficient attention to the risks of money laundering and criminal association that have unravelled the casino operator. There could be profound implications for corporate Australia, pertaining to how much trust directors can place in management assurances that a business is running well.
“The real issue they’re tackling is the ability of the board to say they didn’t know,” says corporate governance expert Helen Bird. “That provision is really being tested for the first time.”
The trial might last longer than the casino operator, which lost its casino licences and is running out of cash following successive probes into the money laundering and criminal association issues.
“You would want your board to ask these hard questions because look where it led to ... the debacle that is Star to this day,” Bird says. “You have got to wonder if they’d been more effective with these issues earlier, some of this could have been avoided.”
ASIC already has its first scalp.
In a federal courtroom on Wednesday, Star Entertainment’s former finance boss, Harry Theodore, broke ranks with his former colleagues and settled with ASIC on charges that he knowingly misled NAB about its ATMs being used to funnel more than $900 million into Star’s Sydney casino.
“ASIC and Mr Theodore have agreed terms of settlement, but the agreed penalty hearing is yet to occur,” an ASIC spokeswoman said.
The admission by Theodore, who faces a fine and ban from managing a corporation, is not a big surprise. At the 2022 hearing into whether Star should retain its casino licence, he admitted to acting unethically when approving communications from the casino to NAB that tried to disguise banned gambling transactions as hotel expenses.
There is some solace for the remaining 10 former Star executives and board members facing charges that they were not sufficiently attentive to these risks.
“Admissions by Mr Theodore are not admissible against the other defendants,” the ASIC spokeswoman said.
He will play no part in the trial of former colleagues. This includes former chairman John O’Neill – better known as the sports supremo who brought Australian rugby union into the professional era and did much the same with soccer via the creation of the A-League.
John O’Neill is not the only high-flyer to have their wings clipped since ASIC announced its action in December 2022.
Former Business Council of Australia boss Katie Lahey potentially faces million-dollar fines and a ban from managing corporations if found to be liable, as do investment banker Ben Heap and former Macquarie Bank chief Richard Sheppard.
Michael Lee presided over the Bruce Lehrmann case and will now sit in judgment over the Star matter.Credit: Dion Georgopoulos
The trial comes at a particularly bad time for former Super Retail chair Sally Pitkin. She also faces a courtroom battle connected to the retailer amid allegations of workplace bullying and breaches of the Corporations Act.
Former Star chief executive Matt Bekier and executives Paula Martin and Greg Hawkins are also accused of breaching their duties.
The defendants in the case have previously issued a near-blanket denial of allegations of breaches of director duties.
The former directors deny that they failed in their duties to ensure Star’s anti-money laundering controls were fit for purpose. They say that their decisions were in the best interests of the company and were made in good faith. They also say they relied on advice provided by advisers and executives.
Bird points out the Corporations Act allows directors to use as a defence that they reasonably relied on management, but ASIC is testing this defence. A win would shatter any complacency in corporate boards across Australia.
“They are required to bring an inquiring mind to business operations. It is not ‘set and forget’,” ASIC chair Joe Longo said when the charges were announced.
“The principle I want to really highlight is that in those circumstances, directors ought to be exercising due care and diligence in making proper inquiry as to those risks that go to the core business,” he said.
“We’re not talking about a situation of a subtle risk, or a risk that is a surprising risk. We’re actually talking about risks that go to the core of the business that are readily foreseeable.”
What may have made the board’s myopia particularly egregious is that Crown’s unfolding scandal in 2019 provided a good idea of what kind of problems it needed to look out for in its own company.
A 2019 investigation by The Sydney Morning Herald, The Age and 60 Minutes into Crown triggered an inquiry that confirmed Crown had “facilitated money laundering” through its bank accounts, and went into business with high-roller junket tour groups linked to Triad and other organised crime groups. It subsequently lost its licence to operate casinos.
Star Entertainment is running out of cash.Credit: AFR
A 2021 investigation by the publications alleged Star enabled suspected money laundering, organised crime, large-scale fraud and foreign interference in its Australian casinos for years, even though its board was warned its anti-money-laundering controls were failing. Further inquiries led to the loss of its licences and this ASIC legal battle, as well as legal action by financial crime regulator AUSTRAC over the money-laundering breaches.
An economic funk – and government’s regulatory strangulation of its core gambling business in response to lapses of management – may yet provide the coup de grace for investors who have torched billions gambling on the old adage: the house always wins.
Star Entertainment’s business, once valued at $5 billion, is now worth just $330 million.
This is despite investors tipping in $1.5 billion in 2023 alone to help it bounce back from a $2.4 billion financial loss. This included $600 million worth of regulatory expenses, including fines totalling $200 million in NSW and Queensland.
As ASIC tries to sort through who is responsible for Star’s predicament, the current board and management team are fighting a losing battle to keep the casino operator solvent. There are serious doubts that Star will survive long enough to unveil its half-year results at the end of this month.
In January, Star warned it had just $79 million left in its bank account, having spent $108 million in the three months to December 31.
The new executive team led by former Crown boss Steve McCann is in a near-impossible position in trying to clear a financial minefield, in which any misstep will ensure the group’s financial collapse. Investors have made it clear they will not tip in more money.
The banks will not release another $100 million in debt unless Star can raise more money. The NSW and Queensland governments are not offering any reprieve on roughly $200 million in taxes they stand to collect from the group.
McCann and the board need to cut a deal with someone to keep Star’s head above water – or call in administrators when the cash runs out.
None of this would be a particular shock to McCann who joined Star last year and warned investors in November: “We are at a critical point in our liquidity, with the business currently experiencing material negative cashflow on a monthly basis.”
His pay packet includes guarantees that he will be paid about $20 million in salary, retention pay and bonuses even if there is a takeover or financial collapse.
McCann, once a world-ranked poker player, ensured he will collect even if the house loses.
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