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Client Update: Centro class actions settled

14 May 2012

In brief: The announcement last week of the settlement (subject to court approval) of the Centro class actions, the largest settlement in Australian securities class actions history, is highly significant, but leaves a number of issues unresolved. Partner Ross Drinnan (view CV) and Senior Associate Jenny Campbell report.

The Centro class actions – recap

The Centro class actions were commenced in May 2008 against the listed entities of the Centro Group: Centro Properties (CNP) and Centro Retail (CER). PricewaterhouseCoopers (PwC) (the auditors of CNP and CER) were joined to the proceedings in 2009. There was also a separate claim against PricewaterhouseCoopers Securities Limited (PwC Securities).

The trial, which commenced in the Federal Court on 5 March 2012 and was into its tenth week at the time of the settlement, concerned the parallel hearing of six class actions involving three separate groups of class members. Two of those groups were 'closed classes' represented by Maurice Blackburn and funded by IMF (Australia) Limited. The third group was an 'open class' represented by Slater & Gordon and funded by Comprehensive Legal Funding LLC – that group included all investors who purchased securities in CNP and CER in the relevant period, and who had not signed a litigation funding agreement with IMF.

The claims in each of the proceedings essentially related to the same factual circumstances and gave rise to the same legal issues. That is, whether CER and CNP breached their continuous disclosure obligations and engaged in misleading and deceptive conduct, by failing to properly disclose to the market in their 2007 accounts the full extent of their maturing debt obligations.

PwC was the auditor of CER and CNP, and is alleged to have made representations that were misleading or deceptive and to have been knowingly involved in CNP's alleged breach of its continuous disclosure obligations. PwC Securities gave a report to investors in Centro Shopping America Trust in relation to its proposed merger with CER, and is alleged to have made misleading or deceptive statements in that report.

The settlement

The settlement, which is subject to court approval, involves the payment of $200 million (including costs). Of that amount, $150 million is to be paid to the Maurice Blackburn group, with the remaining $50 million to be paid to the Slater & Gordon group.

The Centro companies will contribute $95 million of the settlement amount, with the balance to be contributed by PwC ($67 million) and insurance proceeds ($38 million).

Each group's legal costs and liabilities to their respective litigation funders will be paid from the settlement funds distributed to that group. Those amounts are likely to be disclosed in the course of the settlement approval process.

The proceedings will come back before the court in connection with the settlement approval process on 19 June 2012. The application for approval will be heard by Justice Middleton, and will require his Honour to form a view as to whether the proposed settlement is fair and reasonable, and in the interests of all group members.

The settlement, if approved, will be the largest in the history of Australian securities class actions. By way of comparison, other major settlement amounts have included (including costs): $144.5 million in Aristocrat, $112 million in GIO, $110 million in Multiplex and $39.5 million in AWB.

There has never been a judgment in an Australian securities class action. With the settlement of the Centro class actions, that is likely to remain the position for some time yet.

Issues left unresolved

Leaving aside the specific facts of the case, the Centro matters raised a number of interesting legal issues that will now remain unresolved as a result of the settlement. Those issues include the following:

Issue Description
The 'causation question'

The settlement means that this is not the opportunity to determine the 'causation question' in securities class actions. That is, whether the requirement of causation can be satisfied by general notions of reliance by the market on the company's contravening conduct affecting the price at which group members purchased and/or sold their securities. Or, whether it is necessary for each group member to prove that they actually relied on the contravening conduct.

The answer to this question will determine the process by which claims in a securities class action are dealt with following the determination of the common issues. That is, whether group members' claims can be dealt with en masse, with causation essentially being presumed, or whether each group member must individually establish that the company's contravening conduct caused their particular loss (because they actually relied on the conduct).

This question was the subject of detailed submissions at the trial of the shareholder class action against Aristocrat Leisure Limited in late 2007, but that case settled before judgment. Since that time, it has been an issue in the Multiplex, AWB and Centro class actions, but each of those cases has been settled either before trial or before the court could be addressed on the issues.

How is shareholder loss measured? 

There is also an open question as to how loss is quantified in securities class actions.

A commonly proposed method involves calculating the level of 'inflation' in the share price as a result of the company's failure to disclose bad news to the market. Another method that is often proposed when the shares in question have been sold is a basic 'purchase price less sale price' approach.

The objective of inflation-based approaches is to determine the true value of the shares at the time of acquisition in order to support a Potts v Miller approach to damages (ie the difference between the price paid for the shares and their true value at the time of purchase). There is, however, significant debate as to how inflation should be calculated.

Once again, that issue was the subject of extensive expert evidence and detailed submissions at the trial of the shareholder class action against Aristocrat in late 2007. However, as mentioned above, all other securities class actions have settled before reaching a similar stage and, therefore, the issue remains unresolved.

Attribution: whose knowledge is relevant for audit sign-off? 

The claims against PwC raised important issues in relation to the extent to which the knowledge of audit staff can be attributed to the statutory auditor (ie the audit partner who signs the audit report).

PwC argued that, although the audit report was provided by the relevant audit partner on behalf of the firm, it was that partner's opinion. Accordingly, the representations made in the audit report could only be misleading or deceptive if that partner (as opposed to others in the firm) did not believe them or lacked a reasonable basis for them.

In that context, PwC argued that certain key matters in relation to Centro's debt classification that may have been known by other members of the audit team were not known by the audit partner (and could not reasonably have been known by him) and that, accordingly, those matters should not necessarily be attributed to him for the purposes of determining whether certain representations made in the audit report were misleading or deceptive.

These arguments raised some important legal issues relating to attribution of knowledge in the audit context that will remain unresolved as a result of the settlement.

Next steps

As mentioned above, the proceedings will be back before the court, in connection with the settlement approval process, on 19 June 2012. We will report on the outcome of that process in due course.

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