Source: https://thelawreviews.co.uk/edition/the-securities-litigation-review-edition-3/1144254/australia
Timestamp: 2018-02-21 13:23:38
Document Index: 517186266

Matched Legal Cases: ['art 4', 'art 10', 'art 13', 'art 4', 'art 10', 'arts 1', 'arts 1']

Australia - The Securities Litigation Review - Edition 3 - The Law Reviews
Insider trading and market manipulation are prohibited under Australian law.6 Insider trading consists of trading in securities while in possession of non-public information that, if it were made public, would have a material effect on the price or value of the securities. It is the possession of material non-public information that makes a person an insider. It is not necessary for the trader to be an insider in the sense of having a fiduciary or other relationship with the issuer of the securities. The application of the prohibitions on insider trading are broad, covering any financial product that is able to be traded on a financial market.
Market manipulation occurs when a person engages in activity that has or is likely to have the effect of creating an artificial price for trading in financial products or on a financial market. As for what constitutes an artificial price, it is sufficient to show that the sole or dominant purpose of a trade was to create or maintain a particular price for those securities.7
Civil liability for certain breaches of duty under the Corporations Act, including a company’s continuous disclosure obligation, can extend to any party ‘involved’ in the contravention.11 Criminal liability can also extend to accomplices.12 Similarly, where conduct involves the breach of a director or officer’s duties to the company of care, diligence, good faith or fidelity, that director or officer and anyone involved in the contravention will be liable. This includes liability for a civil penalty from public enforcement and for damages from a private action.
Directors, auditors and professional advisers are viewed by ASIC as ‘gatekeepers’, in the sense that they are an independent corporate monitor capable of ‘closing the gate’ on wrongdoing. In this respect, gatekeepers are expected to play an almost co-regulatory role with ASIC. For this reason, ASIC has been clear that it will take enforcement action against gatekeepers who do not take their responsibilities seriously and discharge their duties carefully where this has permitted wrongdoing to occur.13
ASIC has brought a number of high-profile civil penalty actions against directors, management and individual auditors for alleged breaches of duty in connection with corporate disclosure.14 Directors and auditors have also had to contribute to compensation for affected investors as a result of class actions or ASIC proceedings.15
In Australia, shareholder class actions16 are the most prevalent and significant type of private securities litigation, although securities litigation can also take the form of individual or derivative action.
Shareholder class actions can be commenced via the opt-out representative procedure that exists in Australia under Commonwealth legislation17 and under the almost identical Victorian,18 New South Wales19 and Queensland20 legislation.21 A similar regime has been recommended for introduction in Western Australia by the Law Reform Commission of Western Australia,22 but is yet to be introduced.
The most common causes of action relied upon are breach by a company of the continuous disclosure provisions of the Corporations Act23 and breach by a company of the misleading or deceptive conduct provisions of the Corporations Act and ASIC Act.24 These causes of action are often pleaded together.
Shareholders who suffer loss as a result of this corporate misconduct may bring an action for damages either individually or by way of a class action (the latter often being the more commercial option).25
a the company was aware of material, price-sensitive information that it failed to disclose to the market;
b the failure to disclose caused the company’s share price to trade on the market at an inflated price during the period of non-disclosure; and
c it and other group members acquired shares during the period of non-disclosure at an inflated price and, as a result, suffered loss by ‘overpaying’ for the shares they acquired.
The Australian third-party funding industry is well established. The majority of shareholder class actions in recent years have been funded by a third party (although there are exceptions). The industry has enjoyed significant growth, in particular since a 2006 High Court of Australia (the High Court) ruling that held that litigation funding was not an abuse of process26 and a 2007 Federal Court of Australia (the Federal Court) ruling that permitted a class to be defined by reference to whether members had signed a funding agreement, thus effectively permitting opt-in or ‘closed’ classes (and excluding ‘free riders’).27 Where previously the major obstacle for litigation funders was the requirement to enter into separate funding agreements with every claimant, the Federal Court has recently held that all claimants in a class action funded by a litigation funder were obliged to contribute to the ‘common fund’ (regardless of whether they had entered into the funding agreement) and that the contribution amount was to be determined by the Court, not the funder.28 This decision is likely to result in an increase in both the frequency and scale of shareholder class action proceedings, with fewer competing proceedings commenced by different representative plaintiffs against the corporate defendant.
The Corporations Act provides individual shareholders with the right to bring a statutory derivative action on behalf of a company in respect of any cause of action that the company has.29 The action is commenced with the company as the plaintiff. Actions against one or more directors for breach of directors’ duties are commonly brought as a derivative action by shareholders.30
c the claims must give rise to a substantial common issue of law or fact.31
In circumstances where there are multiple respondents, every group member is not required to have a claim against each of the respondents to the proceeding.32
a one or more representative parties (known as the applicant) bring the action against a respondent on behalf of the entire group;
b there is no certification requirement;
c the consent of the group members is not required, and group members are not required to be individually identified; and
d before the trial of common issues, group members must be notified of the proceedings and have the right to opt out (any judgment will bind all group members who have not opted out).33
a the costs that would be incurred if the proceeding continued as a class action are likely to exceed the costs that would be incurred if each group member commenced separate proceedings;
b all the relief sought can be obtained by means of proceedings other than a class action;
c the class action will not provide an efficient and effective means of dealing with the claims of group members; or
d it is otherwise inappropriate for claims to be pursued by means of a class action.34
The Federal Court may also, of its own motion, order the discontinuance of the proceeding in these circumstances.35
A class action in the Federal Court progresses in the same way as any other Federal Court proceeding but with a number of procedural overlays. These include:
a certain notifications to group members;
b court approval for any settlement (see Section II.iii, infra) and distribution regimes; and
c if settlement is not reached, trial of common issues and following the trial of common issues, the determination of individual claims (which may involve separate individual trials).36
a the process by which class actions are allocated to a docket judge and, in appropriate cases, to a designated case management judge or a registrar, or both;
b case management procedures;
c disclosure requirements relating to costs agreements and litigation funding agreements, which regulate disclosures to class members, the Court and other parties; and
d guidance on communication with class members.37
As group members are not parties to the class action proceeding, their role in the proceeding is generally passive until the conclusion of the trial of common issues.38 Accordingly, discovery is usually limited to documents in the possession, custody or control of the representative party. As such, attempts by respondents to seek information regarding the identity of group members and the quantum of their individual claims is an emerging feature of shareholder class actions in Australia. This information may be sought through several means, including requests for further and better particulars of the applicant’s statement of claim, an application for discovery, or by agreement between the parties.39
a it is probable that the company will not itself bring, or take proper responsibility for, the proceeding;
b the applicant is acting in good faith;
c it is in the best interests of the company that the applicant be granted leave;
d there is a serious question to be tried; and
e either the applicant gave 14 days’ notice of the application to the company or it is appropriate to grant leave even though the applicant did not give the required notice.
Settlement of a class action in the Federal Court must be approved by the Court at a settlement approval hearing. Notice must be given to group members of the proposed settlement.40
In exercising its discretion to approve a settlement agreement, the Court performs a protective function in the interests of group members. Approval will only be granted to a settlement where the settlement is fair and reasonable having regard to the claims of the group members who will be bound by it (both as between the parties to the litigation and as between individual group members).41 The Court is unlikely to approve a proposed settlement that does not take into account the relative strengths and weaknesses of each individual group member’s claim.42
A statutory derivative action brought under the Corporations Act can only be settled or discontinued with the leave of the court.43 This aims to prevent the defendant and applicant from agreeing to settle the proceedings where it would not be in the best interests of the company (as may occur if the defendant provides a personal incentive, such as a monetary payment, to the applicant to settle).44
To succeed in a shareholder class action seeking damages for breach of continuous disclosure obligations or misleading or deceptive conduct by a company, the applicant must show a causal connection between the loss suffered and the alleged misconduct. The loss must ‘result from’,45 or a person must suffer loss ‘by’,46 the conduct that has contravened the relevant statutory provisions.
a applicants allege that they detrimentally relied on the misrepresentations or omissions of the company; or
b a ‘mere inflation’ approach or ‘market-based’ causation (which is based on elements of the US ‘fraud on the market’ theory), where applicants assert that they suffered loss by purchasing shares at a price that was artificially inflated as a result of the misrepresentations or omissions of the company. This approach does not require the applicant to plead that he or she actually read and relied on the disclosures or representations.
The appropriate test for causation in the context of a shareholder class action remains controversial.47 While the reliance-based approach is consistent with ordinary Australian principles of causation, most shareholder class action claims also plead market-based causation. However, market-based causation has received recent judicial support,48 and there now seems to be tentative judicial encouragement to its proponents, potentially signalling further cases that rely on an indirect causation argument.
It is likely an Australian court would calculate loss as being the difference between the price at which the shareholder acquired their interest and an alternative measure of the value of the security, such as its ‘true’ or ‘market’ value in the absence of the contravening conduct by the company.49 Shareholder class action claims traditionally plead several different loss methodologies.
In the context of statutory derivative actions, the remedy available to the company depends upon the cause of action claimed in the proceedings. Where derivative proceedings allege a breach of a civil penalty provision of the Corporations Act (such as a breach of directors’ duties), the company may apply for a statutory compensation order requiring the defendant to compensate the company for damage suffered as a result of the breach.50 In calculating the damage suffered for a breach of directors’ duties, the court may include profits made by the director or any other person resulting from the breach.51
a commencing criminal prosecutions or referring matters to the CDPP to commence a criminal prosecution;
b commencing civil proceedings for a pecuniary penalty;
c applying to the court for an extensive range of non-pecuniary remedies, including declarations of contravention, compensation orders and injunctions;
d intervening in other civil proceedings;
e administrative action, such as issuing an infringement notice, suspending, cancelling or varying an Australian Financial Services Licence, banning individuals, referring a matter to the Panel or accepting an enforceable undertaking; and
f reporting serious contraventions of the law to the Minister responsible for ASIC (currently the Assistant Treasurer), Australian Federal Police, the CEO of the Australian Crime Commission, the CDPP or a prescribed agency.
When considering whether to initiate civil proceedings, ASIC must be satisfied, after obtaining written legal advice, that it is the most suitable method of enforcement.52
ASIC has a unique information advantage when making this determination as compared to private litigants. ASIC has the ability to extensively investigate alleged contraventions before commencing enforcement action, using its broad information-gathering powers, which include the power to:53
a issue notices to produce;
b execute search warrants;
c conduct compelled witness examinations under oath (transcripts of which are admissible in certain civil proceedings);54 and
d intercept phone calls.
In the context of compelled witness examinations and notices to produce, individuals cannot rely on the privilege against self-incrimination as a basis for refusing or failing to provide the information requested by ASIC. However, such information will generally be inadmissible as evidence in any criminal proceeding or proceeding for the imposition of a penalty against the individual.55 It should be noted that corporations are not protected by the privilege against self-incrimination.56
ASIC cannot compel the production of documents protected by legal professional privilege; however, ASIC may seek voluntary disclosure of privileged communications.57
ASIC has adopted a policy of first considering whether it can prosecute market misconduct such as insider trading and market manipulation criminally, and will only consider civil proceedings if this is unavailable.58
If ASIC considers that it has sufficient evidence of a criminal offence, it will normally refer the matter to the CDPP. ASIC will seek to deal with matters through the criminal process where serious conduct is identified that is dishonest, intentional or reckless and where there is sufficient admissible evidence. The CDPP ultimately determines whether to commence a criminal prosecution.
To ensure a fair trial, the CDPP is subject to higher disclosure obligations than parties to civil litigation. This generally includes informing the accused of:59
a the case to be made against them;
b information relating to the credibility or reliability of prosecution witnesses; and
c information that has been gathered through the investigation but on which the prosecution does not intend to rely, or that runs counter to the prosecution case.
In civil penalty proceedings, ASIC must first apply to the court for a declaration that the defendant has contravened a ‘financial services civil penalty provision’.60 Following the declaration, ASIC can then pursue a pecuniary penalty order, which may be granted if the contravention:61
a materially prejudices the interest of acquirers or disposers of the relevant security;
b materially prejudices the issuer of the relevant security or its members; or
c is serious.
Civil actions only require proof on ‘the balance of probabilities’. This lower threshold makes it easier for ASIC to obtain an enforcement outcome in civil cases.62
The court cannot make a declaration of contravention or order a pecuniary penalty if the defendant has already been convicted of an offence for substantially the same conduct.63 There is no reverse prohibition for criminal proceedings following a civil action, although evidence given in civil penalty proceedings is not admissible in subsequent criminal proceedings.64
Civil penalty and criminal prosecution of contraventions of securities laws may affect the outcome of private proceedings because ASIC regularly provides transcripts of its compelled examinations to class action law firms and liquidators,65 and findings of fact made by a court in a civil penalty proceeding may be used as evidence of that fact in certain private actions for damages.66
ASIC may issue an infringement notice to a listed entity for less serious breaches of its continuous disclosure obligations under the Corporations Act if it has reasonable grounds to believe the entity has contravened those obligations.67 The infringement notice will provide for the payment of a penalty.68
In determining whether to issue an infringement notice, ASIC will generally consider the seriousness of the alleged breach and the view of the relevant market operator.69
ASIC will only issue the infringement notice after conducting a private hearing at which the entity may give evidence and make submissions.70
The entity can elect whether or not to comply with the infringement notice and pay the penalty. If the entity does comply, ASIC cannot commence civil or criminal proceedings against the entity (subject to certain exceptions).71 ASIC will publish details of the notice and the entity’s compliance.72 If the entity does not comply, it will remain confidential. However, if ASIC commences proceedings against an entity following withdrawal of, or failure to comply with, a notice, ASIC will issue a media release on the fact of commencement and details of the outcome of the proceedings.73
Civil penalty proceedings brought by ASIC are in some instances settled out of court, with the parties subsequently approaching the court with an agreed statement of facts and ‘agreed penalty’, to request the penalty be converted into an order. In such instances, the court will generally accept a penalty that was within a ‘permissible range’ even if the court would have arrived at a different figure.74 While this practice has attracted judicial criticism,75 a series of judgments from the High Court have now confirmed that in civil penalty proceedings a court is not precluded from receiving and, if appropriate, accepting an agreed (or other) civil penalty submission.76 The High Court has observed that there is an important public policy involved in promoting predictability of outcomes in civil penalty proceedings and that ‘the practice of receiving and, if appropriate, accepting agreed penalty submissions increases the predictability of outcome for regulators and respondents’.77
In criminal prosecutions, charge negotiation can take place at any stage.78 This may result in the defendant ultimately pleading guilty to fewer or lesser charges.79 However, criminal prosecutors are not permitted to make submissions to the sentencing judge on the specific sentencing result or the range within which it should fall.80
Following an investigation, ASIC may also be open to negotiating an enforceable undertaking, a form of administrative settlement that ASIC accepts as an alternative to civil or other administrative action.81 An enforceable undertaking is a very flexible enforcement outcome and may include:82
a details of the misconduct;
b details of how the promisor will address the misconduct, such as through the implementation of monitoring and reporting mechanisms; and
c details of any agreed compensation to third parties or agreement to perform community services, such as funding an education programme.
ASIC will require that the terms of the enforceable undertaking are publicised.83 Separately, ASIC has noted that it will generally not accept an undertaking that does not acknowledge that its views in relation to the alleged misconduct are reasonably held nor any undertaking containing clauses denying liability or omitting details of the alleged misconduct.84 As a general rule, ASIC will issue a media release regarding the enforceable undertaking and make it publicly available.85 In relation to reports drafted by independent experts, it will publish a summary of the final report or a statement referring to its content (and will generally also publish a summary of, or statement referring to the content of, any interim report).86 ASIC has stated that it will only accept an enforceable undertaking if it considers that it provides a ‘more effective regulatory outcome than non-negotiated, administrative or civil sanctions’.87 Importantly, ASIC will not consider an enforceable undertaking unless it has reason to believe there has been a breach of the law and it has commenced an investigation or surveillance in relation to the conduct,88 or as an alternative to commencing criminal proceedings.89
The criminal penalties for securities laws contraventions imposed by courts are increasingly severe,90 reflecting the gravity with which the courts regard such offences.
For individuals, conviction of certain serious securities market offences carries a sentence of up to 10 years’ imprisonment or a fine that is the greater of:91
a A$810,000 (4,500 penalty units); or
b three times the total value of the benefits obtained that are reasonably attributable to the commission of the offence, or both imprisonment and a fine.
Corporations that commit such offences can be fined the greater of:92
a A$8.1 million (4,500 penalty units);
b three times the total value of the benefits obtained that are reasonably attributable to the commission of the offence; or
c 10 per cent of the corporation’s annual turnover during the year preceding the commission of the offence.
In civil penalty cases, the court may impose a pecuniary penalty of up to A$200,000 for an individual and A$1 million for a corporation for each breach.93
The maximum penalty payable under an infringement notice is A$100,000 for entities with a market capitalisation over A$1 billion.94
a the foreign issuer’s legal presence in Australia;
b whether the foreign issuer is listed on an Australian exchange and the type of listing it has; and
c the nature and location of the foreign issuer’s relevant conduct that may form the basis of potential securities actions.
One aspect of Australian courts’ jurisdiction is the amenability of a defendant to the court’s writ.95 Once a defendant has been legally served, a court has jurisdiction to entertain the action against that defendant.96 Service can be effected on those present within the relevant Commonwealth, state or territory jurisdiction. A foreign issuer’s presence in the jurisdiction, and thus amenability to a court’s writ, may be necessitated by either of the following:
a a foreign company carrying on business in Australia is required to register with ASIC and appoint a local agent97 who, among other things, must accept service on behalf of that foreign company;98 or
b a foreign entity listed on the ASX, whether as an ASX Listing, an ASX Foreign Exempt Listing or an ASX Debt Listing, must appoint an agent for service of process in Australia.99
The listing rules regarding continuous disclosure, the foundation of shareholder class actions and ASIC enforcement relating to market disclosure, apply to foreign entities who have a standard ASX Listing and to those who have an ASX Debt Listing in relation to their debt securities.100
Those issuers with an ASX Foreign Exempt Listing, while only required to comply with the disclosure obligations of their home exchange, are nonetheless required to provide the ASX with any information that they provide to their home exchange.101 The provision of such information will still be subject to statutory prohibitions on engaging in misleading conduct.102
Another aspect of Australian courts’ jurisdiction relevant to foreign issuers is the power of a court to determine a matter,103 which becomes complex where conduct in that matter occurs outside Australia.
Although the provisions in the Corporations Act typically relied on in shareholder class actions do not operate in relation to extraterritorial conduct, there are other statutory prohibitions on engaging in misleading conduct that do.104 However, ministerial consent is required to rely on evidence of foreign conduct in any private action claiming damages in respect of these provisions.105 The Treasury has published guidance to assist in this process.106
b conduct outside Australia in relation to financial products issued by a person who carries on business in Australia or a company that is formed in Australia.107
a facilitating the development and application of consistent standards and requirements across borders, by contributing to the work of international regulatory bodies, principally the International Organization of Securities Commissions;
b supporting equivalence assessments with counterpart regulators;
c negotiating and implementing bilateral and multilateral agreements and understandings, including fintech-related agreements; and
d supporting initiatives that help the capabilities of regulators in our region.108
ASIC is also increasingly coordinating with securities regulators in other jurisdictions on cross-border issues.109
In July 2015, ASIC published a report on financial benchmarks, addressing the potential manipulation of such benchmarks and related conduct issues.110 ASIC stated that it is investigating the activities of a range of Australian financial institutions, both domestically and overseas, to determine whether or not there has been benchmark-related misconduct in Australia’s financial markets.111 ASIC’s investigations are informed by similar high-profile investigations into benchmark-related conduct and oversight issues observed overseas.112
ASIC has accepted enforceable undertakings from a number of institutions that have notified ASIC of evidence of conduct seeking to influence the relevant institutions’ bank bill swap rate (BBSW) submissions, based on how the submission may have benefitted the relevant institutions’ derivatives positions.113 ASIC has also commenced civil penalty proceedings against three major Australian banks in relation to alleged misconduct relating to BBSW. ASIC alleges that the banks traded bank bills in the relevant market with the intention and likely effect of influencing the setting of the BBSW to their advantage and to the disadvantage of parties to certain products who had an opposite exposure to BBSW. ASIC contends this conduct amounted to market manipulation, unconscionable conduct, a breach of the general obligations of financial services licensees and, in one case, misleading or deceptive conduct. Each bank has indicated that it will vigorously defend the proceedings commenced by ASIC. The hearing of the proceedings will raise important issues in relation to, among other things, the market misconduct and unconscionable conduct provisions of the Corporations Act. The hearing of the proceedings has been set to commence on 25 September 2017.
ii Foreign Exchange Supervision
In December 2016, two major Australian retail banks entered into enforceable undertakings with ASIC in relation to their wholesale spot foreign exchange (FX) businesses. The enforceable undertakings were entered into on the basis of concerns held by ASIC that between 1 January 2008 and 30 June 2013 both banks failed to ensure that their systems and controls were adequate to prevent, detect and respond to inappropriate conduct such as disclosing confidential details of pending client orders to external parties, including identifying the client by code name, inappropriately exchanging confidential, and potentially material, information about the bank’s client flow or proprietary positions, acting together with an employee of another Australian bank to enter offers into the trading platform without any apparent legitimate commercial reason for placing the offers, on two occasions acquiring proprietary positions after coming into possession of knowledge of large fix orders in that currency, and on at least two occasions, trading in a manner that may have been intended to cause the trigger price for a stop-loss order to trade when it might not have traded at that time.114
A further two banks entered into enforceable undertakings with ASIC in relation to their FX businesses in March 2017 as a result of concerns held by ASIC in relation to disclosures of confidential customer and potentially material information, inappropriate order management and trading while in possession of confidential and potentially material information and (in one case) inappropriate personal trading.115
All four banks agreed to develop a programme of changes to their existing systems, controls, training, guidance and framework for monitoring and supervision of employees within their FX businesses and to donate a combined A$11 million to financial literacy programmes.116
iii Insider trading
2016 was a significant year for insider trading enforcement in Australia. In March 2016, the former managing director of a mining company was sentenced to eight years and three months’ imprisonment (with a non-parole period of five years and six months) for insider trading.117 The former managing director traded shares and contracts for difference (CFDs) through various trading accounts (both directly and through a joint criminal enterprise) on the basis of highly confidential inside information gained through his role.118
The court noted that this was a particularly serious case given the amounts invested (including more than A$2 million personally), the profits made (including more than A$1.5 million personally), the defendant’s superior position at the company and his dominant role in the joint criminal enterprise.119
In June 2016, a stockbroker was convicted for conspiring to commit insider trading offences and sentenced to two years’ jail, to be released after one year on a 12-month good-behaviour bond.120 The conspiracy involved an agreement between the stockbroker and an equities dealer whereby the equities dealer procured the stockbroker to trade in CFDs, where the equities dealer was in possession of inside information about the trading intentions of his employer. The stockbroker used the information to obtain more than A$1.4 million profit.121 An appeal against the severity of the sentence was dismissed in December 2016.122
Finally, in December 2016 the Federal Court ordered German company Hochtief AG to pay a financial penalty of A$400,000 and ASIC’s legal costs of A$50,000 after finding it had engaged in insider trading. The Court found the company had instructed its subsidiary to acquire 200,000 shares in Leighton Holdings Limited while in possession of insider information relating to Leighton’s expected financial result for 2013. The company admitted the contravention.123
iv ‘Market-based’ causation
The 2016 New South Wales Supreme Court decision in HIH Insurance Limited (in liquidation) & Ors124 (HIH ) has significance as the first Australian authority to accept indirect market causation as sufficient grounds for causation in a misrepresentation case. In combination with the Full Federal Court’s 2015 decision in Caason125 this appears to indicate tentative judicial encouragement to proponents of market-based shareholder class actions, potentially signalling further cases that rely on an indirect causation argument. Market-based causation contends that the market will efficiently price the value of any material information into the price of a security – meaning that a failure to disclose adverse material information can lead to an inflation of the price of the security. On this theory, damages can be claimed for share-price inflation without needing to prove direct reliance on a specific disclosure failure made by a company.
In HIH, Justice Brereton accepted that, in the context of misrepresentation, causation could be established by evidencing the purchase of shares on the market at an inflated price because of misleading or deceptive conduct. The plaintiffs were shareholders in HIH. During 1999 and 2000, HIH released three financial results that materially misrepresented the company’s true financial position. HIH admitted the results contained misleading or deceptive representations. The key issue was whether causation could be established by the indirect distortion to the price of the securities in the market caused by the misleading representations. The Court held that proof of reliance on the contravening conduct is not an essential element of a cause of action for damages for misleading conduct, and that a sufficient causal connection can be established in ways that do not involve direct reliance. Importantly, it was held that previous authorities did not deny recoverability on the basis of indirect market causation, meaning the plaintiffs were able to recover the difference between the inflated price and true value as damages.
v Enforcement statistics
ASIC has reported the following enforcement outcomes statistics under the umbrella of ‘market integrity’ for the calendar year 2016.126
vi Settling civil penalty proceedings
The Federal Court’s decision in Australian Competition and Consumer Commission v. Australia and New Zealand Banking Group Limited 127 continued the practice of respondents agreeing facts and penalties with a regulator in civil penalty proceedings following last year’s High Court decision in Commonwealth v. Director, Fair Work Building Industry Inspectorate.128 Given the parties had agreed facts, the only matter before the Court was the appropriateness of the penalty proposed between the ACCC and the respondents (ANZ and Macquarie Bank). The relevant conduct related to multiple attempts by traders employed by the respondents to fix the rates submitted by multiple banks that determined the spot rate benchmark of US dollars to Malaysian ringgit, contravening the cartel provisions of the Competition and Consumer Act 2010 (Cth).
The proposed penalties were ultimately accepted by Justice Wigney, but not without close scrutiny; his Honour expressed reservations and held that the parties’ proposal was ‘at the very bottom of the range of appropriate penalties’.129 It should be expected that courts will continue this close judicial scrutiny of agreed facts and penalties, which may ultimately result in circumstances where the penalty proposed is rejected.
Market integrity will remain at the forefront of ASIC’s enforcement agenda in 2017. Changes in ASIC’s regulatory toolkit, particularly advances in its surveillance technology and investment in behavioural and data analytics are likely to impact the nature and volume of its enforcement activity in this regard.
ASIC’s focus on culture ‘driving’ poor conduct shows no signs of abating, with a particular focus on remuneration and incentives that drive poor conduct, which can undermine good governance practices and risk management systems, and threaten market integrity.130 It seems likely that the government will seek to implement some form of senior executive accountability regime, following the example of United Kingdom and Hong Kong regulators.
ASIC is also focused on the ever-expanding number of cross-border businesses, services and transactions, and the interconnectedness of markets across jurisdictions, which it suggests may compromise market integrity, trust and confidence in the global financial system.131 This is likely to mean increased communication flow and cooperation among international regulators, and the potential for enforcement action as a result.
2016 was a landmark year for Australian class action litigation. The net effect of the 2016 decisions concerning the common fund doctrine and market-based causation, combined with the introduction of a separate class action regime in Queensland, is likely to be a continuation of the steady growth in the number of class actions filed in Australia. Between 1992 and 2010, approximately 19 class actions were filed on average each year throughout Australia. However, in the period 2010–2016, this number rose substantially to an average of 29 class actions per year.132
The Full Federal Court’s decision Money Max Int Pty Ltd (Trustee) v. QBE Insurance Group Limited 133 will further encourage third-party funding in the Australian class action market, which is likely to herald significant changes in the class action landscape, including an increase in funders and larger claims. The presence of more funders is likely to mean a greater appetite for plaintiffs to pursue claims that are more novel in this jurisdiction as they search for market share, including actions against small to mid-cap listed companies, which have historically been overlooked.
With the 2016 developments, Australia is close to becoming a perfect environment for class action plaintiffs and funders. We expect this will result in calls for a review of the regulatory requirements for funders and minimum prudential requirements and restrictions on the level of control funders have over class actions and the size of commissions they can charge.
It remains more important than ever for listed entities to be alive to, and take steps to guard against, the risk of shareholder class actions.
The announcement in October 2016 of the ASIC Enforcement Review Taskforce to review ASIC’s enforcement regime will have a significant impact in 2017 and beyond. The Taskforce is led by a panel of representatives from government agencies including ASIC and the CDPP. The panel will be supported by an expert group drawn from peak industry bodies, consumer groups and academia.
The Taskforce’s terms of reference are broad. They include the level of penalties and types of remedies that ASIC can seek; widening the use of infringement notices; establishing a peer review panel for financial advisers; ASIC’s powers in respect of certain licensees; and the scope of breach reporting. The Taskforce’s initial Position and Consultation Paper on breach reporting134 includes a preliminary position on a range of reforms aimed at enhancing and clarifying, rather than replacing, the existing breach reporting regime, including the introduction of an objective standard to determine significance, an increase in penalties for failure to report and the introduction of a civil penalty offence and infringement notice regime for breach reporting.
ASIC will no doubt also seek to use the Taskforce to secure a significant increase in its enforcement abilities and the remedies that it has available, which would be in line with the recommendations of the Senate Economics References Committee in their report on penalties for white-collar crime and corporate and financial misconduct.135 It also appears increasingly likely that ASIC will be given new competition objectives (following the lead of European regulators and recommendations by previous Australian government inquiries), which will add a new dimension to the securities litigation landscape.
1 Luke Hastings and Andrew Eastwood are partners at Herbert Smith Freehills. The authors wish to thank Damian Grave, David Taylor, Jeremy Birch, Christine Tran, Alexandra Payne and Isabelle Lamberton for their assistance in producing this chapter.
4 Corporations Act 2001 (Cth) Section 1317DAC. See also ASIC, ‘Regulatory Guide 73: Continuous disclosure obligations: infringement notices’ (June 2012), paragraphs 4–6 (RG 73).
11 Corporations Act 2001 (Cth) Sections 79, 179, 180, 181 and 674.
12 Under Section 11.2 of the Schedule to the Criminal Code Act 1995 (Cth), a person who aids, abets, counsels or procures the commission of the offence by another person is taken to have committed the offence.
13 See, for example: ASIC, ‘Decision in Centro civil penalty case’ (11-125MR, 24 June 2011); ASIC, ‘ASIC enforcement outcomes: January to June 2015’ (Report No. 444, August 2015), p. 19; ASIC, ‘ASIC enforcement outcomes: July to December 2015’ (Report No. 476, March 2016); Medcraft, ‘ASIC explained: who is the corporate watchdog, what does it do and why should Australians care?’ (speech delivered at the National Press Club of Australia, Canberra, 3 December 2014).
14 See, for example: ASIC, ‘Macquarie Investment Management penalised over Corporations Act contraventions’ (16-271MR, 24 August 2016); ASIC, ‘Former Kleenmaid director sentenced to nine years imprisonment for fraud and insolvent trading’ (16-257MR, 15 August 2016); ASIC, ‘MFS executives found to have dishonestly breached duties’ (16-158MR, 23 May 2016); ASIC, ‘ASIC bans former director of Provident Capital Limited’ (15-199MR, 28 July 2015); ASIC, ‘Former Chief Financial Officer of ABC Learning Centres sentenced’ (15-073MR, 31 March 2015); and the following ASIC media releases on the Centro, James Hardie and Fortescue Metals Group cases: ‘ASIC commences proceedings against current and former officers of Centro’ (09-202AD, 21 October 2009); ‘Decision in Centro civil penalty case’ (11-125MR , 24 June 2011); ‘Centro civil penalty proceedings’ (11-188MR, 31 August 2011); ‘Former Centro auditor suspended’ (12-288MR, 19 November 2012); ‘James Hardie civil penalty proceedings’ (09-152, 20 August 2009); ‘Decisions in James Hardie civil penalty case’ (10-273MR, 17 December 2010); ‘Decision in James Hardie penalty proceedings’ (12-275MR, 13 November 2012); ‘ASIC commences proceedings against Fortescue Metals Group and Andrew Forrest’ (06-062, 2 March 2006); ‘ASIC takes action against Fortescue Metals and CEO Andrew Forrest’ (MR09-55, 3 April 2009); ‘ASIC’s proceedings against Fortescue Metals Group Ltd and Andrew Forrest dismissed’ (09-268AD, 23 December 2009); ‘Decision in High Court appeal by Fortescue Metals Group and Andrew Forrest’ (12-244MR, 2 October 2012).
15 See, for example: Andrew Main, ‘Gwalia administrators get $125m to settle damages case’, The Australian, 5 September 2009; Patrick Durkin, ‘KPMG to pay $67m over Westpoint’, The Australian Financial Review, 1 February 2011; Nick Lenaghan, ‘Centro, PwC take record $200m legal hit’, The Australian Financial Review, 9 May 2012.
16 For the purposes of this chapter, representative proceedings will be referred to by the more commonly understood title of ‘class actions’.
17 Federal Court of Australia Act 1976 (Cth) Part IVA, which was introduced in 1992.
18 Supreme Court Act 1986 (Vic) Part 4A, which was introduced in 2000.
19 Civil Procedure Act 2005 (NSW) Part 10, which was introduced in 2010.
20 Civil Proceedings Act 2011 (QLD) Part 13A, which was introduced in 2016.
21 See generally, Grave, Adams and Betts, Class Actions in Australia (2nd edn, Thomson Reuters, 2012).
22 Law Reform Commission of Western Australia, Representative Proceedings: Project 103 – Final Report (June 2015).
23 Corporations Act 2001 (Cth) Section 674(2).
24 Corporations Act 2001 (Cth) Section 1041H; Australian Securities and Investments Commission Act (Cth) Section12DA.
25 Corporations Act 2001 (Cth) Sections 1041I and 1317HA.
26 Campbells Cash and Carry Pty Ltd v. Fostif Pty Ltd (2006) 229 CLR 386.
27 Multiplex Funds Management Ltd v. P Dawson Nominees Pty Ltd (2007) 164 FCR 275.
28 Money Max Int Pty Ltd (trustee) v. QBE Insurance Group Limited (2016) 338 ALR 188.
29 Corporations Act 2001 (Cth) Sections 236 and 237.
30 See Ramsay and Saunders, ‘Litigation by shareholders and directors: an empirical study of the statutory derivative action’ (Research Report, Centre for Corporate Law and Securities Regulation, The University of Melbourne, 2006), p. 29.
31 Federal Court of Australia Act 1976 (Cth) Section 33C. While the Federal Court is the most popular forum for class actions in Australia, there are also class action regimes in the Supreme Court of Victoria and the Supreme Court of New South Wales, which are almost identical to the federal regime: see Supreme Court Act 1986 (Vic) Part 4A and Civil Procedure Act 2005 (NSW) Part 10.
32 Cash Converters International Limited v. Gray (2014) 223 FCR 139 at 144 [21] (per Jacobson, Middleton and Gordon JJ).
33 See generally, Federal Court of Australia Act 1976 (Cth) Part IVA and, in particular, Sections 33E, 33J and 33X.
34 See Federal Court of Australia Act 1976 (Cth), in particular Section 33N(1). For the equivalent state provisions, see Supreme Court Act 1986 (Vic) Section 33N(1), Civil Procedure Act 2005 (NSW) Section 166(1) and Civil Proceedings Act 2011 (QLD) Section 103(K).
35 See Federal Court of Australia Act 1976 (Cth) Section 33N(1).
36 See generally, ibid., Part IVA and, in particular, Sections 33Q, 33R, 33V and 33X.
37 See Federal Court of Australia Practice Note GPN-CA.
38 Earglow Pty Ltd v. Newcrest Mining Ltd and Others (2015) 230 FCR 469 at 479 [32] (per Beach J).
39 To date such applications for discovery have generally been unsuccessful: Pathway Investments Pty Ltd & Anor v. National Australia Bank Limited [2012] VSC 72.
40 Federal Court of Australia Act 1976 (Cth) Sections 33V and 33X.
41 Australian Securities and Investments Commission v. Richards [2013] FCAFC 89,89 at [7]–[8] (per Jacobson, Middleton and Gordon JJ); Hodges v. Waters (No. 7) (2015) 232 FCR 97 at [70] (per Perram J); Kelly v. Willmott Forests Ltd (in liq) (No. 4) [2016] FCA 323.
42 Peterson v. Merck Sharp & Dohme (Australia) Pty Ltd (No. 6) [2013] FCA 447 at [16]–[20] (per Jessup J).
43 Corporations Act 2001 (Cth) Section 240.
44 See Ford, Austin and Ramsay, Ford’s Principles of Corporations Law (16th edn, LexisNexis Butterworths), Part III ‘The Law of Corporate Governance’, Chapter 10 ‘Members’ Remedies’ at [10.240].
45 In the context of continuous disclosure provisions, Corporations Act 2001 (Cth) Section 1317HA states relevantly: ‘A Court may order a person [. . .] to compensate another person [. . .] for damage suffered [. . .] if: [. . .] the damage resulted from the contravention’ (emphasis added).
46 In the context of misleading or deceptive conduct provisions, Corporations Act 2001 (Cth) Section 1041I provides: ‘A person who suffers loss or damage by conduct of another person that was engaged in contravention of Section 1041E, 1041F, 1041G or 1041H may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention’ (emphasis added).
47 See Grave, Watterson and Mould, ‘Causation, Loss and Damage: Challenges for the New Shareholder Class Action’ (2009), 27 Company and Securities Law Journal 483.
48 HIH Insurance Limited (in liquidation) & Ors (2016) 335 ALR 320; Caason Investments Pty Ltd v. Cao (2015) 236 FCR 322.
49 See Grave, Adams and Betts Class Actions in Australia (2nd edn, Thomson Reuters, 2012), pp. 920–928.
50 Corporations Act 2001 (Cth) Sections 1317H (1) and 1317J(2).
51 Ibid., Section 1317H(2).
52 Legal Services Directions 2005 (Cth) Schedule 11, Parts 1 and 4; Senate Economics References Committee, Parliament of Australia, Performance of the Australian Securities and Investments Commission (June 2014), p. 261.
53 ASIC, ‘Information Sheet 145: ASIC’s compulsory information gathering powers’ (September 2015).
54 Australian Securities and Investments Commission v. ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181; Australian Securities and Investments Commission Act 2001 (Cth) Section 19.
55 Australian Securities and Investments Commission Act 2001 (Cth) Section 68.
56 Corporations Act 2001 (Cth) Section 1316A.
57 See ASIC, ‘Information Sheet 165: Claims of legal professional privilege’ (December 2012); and Eastwood, ‘Providing your legal advice to the regulator’ (2013), 41 Australian Business Law Review 66.
58 ASIC, ‘ASIC enforcement outcomes: July to December 2016’ (Report No. 513, March 2017), paragraph 16; ASIC, ‘ASIC supervision of markets and participants: July to December 2014’ (Report No. 425, March 2015), paragraph 96; Tony D’Aloisio, ‘Insider trading and market manipulation’ (speech delivered at the Supreme Court of Victoria Law Conference, Melbourne, 13 August 2010).
59 See Commonwealth Director of Public Prosecutions, Statement on Prosecution Disclosure (30 April 2006), pp. 2–5.
60 Corporations Act 2001 (Cth) Section 1317G(1A).
62 It should be noted that ASIC is bound by a ‘model litigant obligation’ when conducting civil proceedings – see Legal Services Directions 2005 (Cth) Schedule 1, Parts 1 and 4.
63 Corporations Act 2001 (Cth) Section 1317M.
64 Ibid., Sections 1317P and 1317Q.
65 Australian Securities and Investments Commission Act 2001 (Cth) Section 25; see generally Eastwood, ‘Potential Uses of Transcripts of ASIC Examinations’ (2009) 27 Company and Securities Law Journal 555.
66 Australian Securities and Investments Commission Act 2001 (Cth) Section 12GG.
67 Corporations Act 2001 (Cth) Section 1317DAC; RG 73, paragraph 6.
68 RG 73, paragraph 26.
69 Ibid., paragraph 9.
70 Ibid., table 1, paragraphs 16–22.
71 Corporations Act 2001 (Cth) Section 1317DAF.
72 Ibid., Section 1317DAJ; RG 73, table 1, paragraph 40.
73 RG 73, paragraphs 41–42.
74 NW Frozen Foods Pty Ltd v. Australian Competition and Consumer Commission (1996) 71 FCR 285, 291 (per Burchett and Kiefel JJ) and 298–299 (per Carr J).
75 Director, Fair Work Building Industry Inspectorate v. Construction, Forestry, Mining and Energy Union (2015) 229 FCR 331.
76 Commonwealth v. Director, Fair Work Building Industry Inspectorate (2015) 326 ALR 476 at [1] (per French CJ, Kiefel, Bell, Nettle and Gordon JJ). This is in contrast to criminal proceedings, in which prosecutors cannot make a submission as to the appropriate sentence or sentencing range: Barbaro v. The Queen (2014) 253 CLR 58.
77 Commonwealth v. Director, Fair Work Building Industry Inspectorate (2015) 326 ALR 476 at [46] (per French CJ, Kiefel, Bell, Nettle and Gordon JJ).
78 Commonwealth Director of Public Prosecutions, Prosecution Policy of the Commonwealth: Guidelines for the Making of Decisions in the Prosecution Process, 9 September 2014, paragraph 6.17 (CDPP Prosecution Policy).
79 Ibid., paragraph 6.14.
80 Barbaro v. The Queen (2014) 253 CLR 58.
81 ASIC, ‘Regulatory Guide 100: Enforceable undertakings’ (February 2015), paragraph 4.
82 Ibid., table 4.
83 Ibid., paragraphs 43–44.
84 Ibid., paragraphs 39–40.
85 Ibid., paragraph 4.
86 Ibid., paragraphs 78–85.
87 Ibid., paragraph 18.
88 Ibid., paragraph 17.
89 Ibid., paragraph 21.
90 See, for example: Regina v. Xiao [2016] NSWSC 240, Regina v. Glynatsis (2013) 230 A Crim R 99; The Queen v. Jacobson [2014] VSC 592; Commonwealth Director of Public Prosecutions v. Hill and Kamay [2015] VSC 86.
91 Corporations Act 2001 (Cth) Schedule 3 item 310.
93 Ibid., Section 1317G(1B).
94 Ibid., Section 1317DAE.
95 Lipohar v. The Queen (1999) 200 CLR 485, 516-517 (per Gaudron, Gummow and Hayne JJ).
96 Copping v. Tobin Brothers Canberra Marine Centre Pty Ltd [1980] 1 NSWLR 183; Laurie v. Carroll (1958) 98 CLR 310. See also, for example: the Uniform Civil Procedure Rules 2005 (NSW) Rule 6.2; Supreme Court (General Civil Procedure) Rules 2015 (Vic) Rule 6.02; Federal Court Rules 1979 (Cth) Rule 7.1.
97 Corporations Act 2001 (Cth) Section 601CF.
98 Ibid., Section 601CX.
99 ASX, Listing Rules (5 March 2015), Rule 1.1 condition 4(b) (ASX listings), Rule 1.11 conditions 9 and 10(a) (ASX foreign exempt listings), Rule 1.8 condition 4(b) (ASX debt listings); ASX, ASX Listing Rules Guidance Note 4 – Foreign entities listing on ASX (at December 2015), p. 20.
100 ASX, Listing Rules (6 March 2015), Rules 3.1–3.1B and 1.10.1; ASX, ASX Listing Rules Guidance Note 8 – Continuous Disclosure: Listing Rules 3.1–3.1B (January 2014, August 2015).
101 ASX, ASX Listing Rules (6 March 2015), Rules 1.15.2, 1.15.3; ASX, ASX Listing Rules Guidance Note 8 – Continuous Disclosure: Listing Rules 3.1 – 3.1B (January 2014).
102 Such as the Corporations Act 2001 (Cth) Section 1041H and the Australian Securities and Investments Commission Act 2001 (Cth) Section 12DA.
103 Lipohar v. The Queen (1999) 200 CLR 485.
104 Under the Competition and Consumer Act 2010 (Cth) or the Australian Securities and Investments Commission Act 2001 (Cth).
105 Competition and Consumer Act 2010 (Cth) Section 5; Australian Securities and Investments Commission Act 2001 (Cth) Section 12AC.
106 Australian Treasury, ‘Guidance on obtaining ministerial consent to rely on extraterritorial conduct in private proceedings’ (3 April 2012), www.treasury.gov.au/Access-to-Information/InformationPublicationScheme/Guidance-on-obtaining-Ministerial-consent-to-rely-on-extraterritorial-
conduct-in-private-proceedings.
107 Corporations Act 2001 (Cth) Section 1042B.
108 ASIC, ‘ASIC’s Corporate Plan 2016–2017 to 2019–20’, p.30.
109 See, for example: ASIC, ‘ASIC enforcement outcomes: January to June 2014’ (Report No. 402, July 2014), p. 9.
110 ASIC, ‘Financial benchmarks’ (Report No. 440, July 2015).
111 Ibid., p. 12; ASIC, ‘Market integrity report: July to December 2015’ (Report No. 475, April 2016).
112 Ibid., p. 4.
113 Ibid., p. 14.
114 ASIC, ‘ASIC accepts enforceable undertakings from NAB and CBA to address inadequacies within their wholesale spot FX businesses’ (16-455MR, 21 December 2016).
115 ASIC, ‘ASIC accepts enforceable undertakings from Westpac and ANZ to address inadequacies within their wholesale FX businesses’ (17-065MR, 15 March 2017).
116 Ibid; see also ASIC, ‘ASIC accepts enforceable undertakings from NAB and CBA to address inadequacies within their wholesale spot FX businesses’ (16-455MR, 21 December 2016).
117 Regina v. Xiao [2016] NSWSC 240.
118 Ibid., at [17] (per Hall J).
119 Ibid., at [90]–[93] (per Hall J).
120 Regina v. Curtis (No. 3) (2016) 114 ACSR 184 at [63] (per McCallum J).
121 Ibid., at [11], [19] (per McCallum J).
122 Curtis v. Regina [2016] NSWCCA 299 at [72] (per Payne JA).
123 Australian Securities and Investments Commission v. Hochtief Aktiengesellschaft [2016] FCA 1489.
124 (2016) 335 ALR 320.
125 Caason Investments Pty Ltd v. Cao (2015) 236 FCR 322.
126 ASIC, ‘ASIC enforcement outcomes: January to June 2016’ (Report No. 485, August 2016); ASIC, ‘ASIC enforcement outcomes: July to December 2016’ (Report No. 513, March 2017).
127 [2016] FCA 1516.
128 (2015) 326 ALR 476.
129 Australian Competition and Consumer Commission v. Australia and New Zealand Banking Group Limited [2016] FCA 1516 at [146].
130 ASIC, ‘ASIC’s Corporate Plan 2016–17 to 2019–20’, p. 22.
131 Ibid., p. 31.
132 V Morabito, ‘An Empirical Study of Australia’s Class Action Regimes, Fourth Report: Facts and Figures on Twenty-Four Years of Class Actions in Australia’ (29 July 2016), p. 8.
133 (2016) 338 ALR 188.
134 ASIC Enforcement Review, ‘Position and Consultation Paper 1: Self-reporting of contraventions by financial services and credit licensees’ (11 April 2017).
135 Senate Economics References Committee, ‘“Lifting the fear and suppressing the greed”: Penalties for white-collar crime and corporate and financial misconduct in Australia’ (March 2017); see especially recommendations 3, 4, 5 and 6.