Client Update: Securities class actions – where are we up to?
29 February 2012
In brief: The trial of the securities class actions against the Centro Group – the last of a cluster of high-profile securities class actions commenced in the Federal Court between 2006 and 2008 – is scheduled to commence next week. The commencement of the trial brings with it the possibility of the first judgment in an Australian securities class action and, importantly, the possibility of the first decision to deal with causation in a securities class action. As Centro is only the third securities class action to reach trial, it is a good time to reflect on the current state of the Australian securities class action landscape. Partner Ross Drinnan (view CV) and Senior Associate Jenny Campbell report.
- The Centro class actions
- What must the Centro investors do to prove causation?
- The securities class action landscape
- Will Centro be the first judgment in an Australian securities class action?
The Centro securities 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 is also a separate claim against PricewaterhouseCoopers Securities Limited (PwCS).
Next week's trial will involve the parallel hearing of six class actions involving three separate groups of class members. Two of those groups are 'closed classes', represented by Maurice Blackburn and funded by IMF (Australia) Limited. The third group is an 'open class', represented by Slater & Gordon and funded by Commonwealth Legal Funding LLC – that group includes all investors who purchased securities in CNP and CER in the relevant period and who have not signed a litigation funding agreement with IMF.
The claims, however, essentially relate to the same factual circumstances and give 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. One of the key alleged breaches is that CNP stated in its 2007 accounts that it had no interest-bearing current liabilities on its balance sheet as at 30 June 2007, but later announced that it had $2.7 billion in interest-bearing current liabilities at that time. Between December 2007 and February 2008, CNP and CER made a series of announcements correcting the 2007 accounts and stating that they had been unable to refinance the billions of dollars of mis-categorised debt that had become payable. During that period, the price of CNP and CER securities fell significantly.
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. PwCS gave a report to investors in Centro Shopping America Trust (CSF) in relation to its proposed merger with CER and is alleged to have made misleading or deceptive statements in that report.
Some of these issues were, of course, the subject of the findings made by Justice Middleton last year in ASIC's case against the directors of CNP and CER.1 IMF has said that his Honour's findings will provide 'important support' in the class actions it is funding because of, among other things, the substantial overlap between the allegations in the two cases.2
The issue of causation in securities class actions has not been considered by Australian courts.
In general terms, the 'causation question' is whether:
- it is necessary for each group member to prove that they actually relied on the company's contravening conduct in making the relevant investment decision (direct causation); or
- the requirement for causation can be satisfied by general notions of reliance by the market on the company's contravening conduct affecting the price at which each group member purchased and/or sold their securities (indirect causation).
This question was the subject of detailed submissions at the trial of the shareholder class action against Aristocrat Leisure Limited in 2007, but that case settled before judgment.3
The answer to the 'causation 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
- each group member must individually establish that the company's contravening conduct caused their particular loss (because they actually relied on the conduct).
As a result, determination of the 'causation question' is likely to have significant ramifications for the way in which securities class actions are structured in the future and, ultimately, whether they remain a viable business proposition for plaintiff law firms and litigation funders.
The current uncertainty on this issue is a risk factor for plaintiffs and defendants alike and, as a result, increases the prospects of cases settling prior to judgment.4 It remains, of course, to be seen whether the Centro cases will also be settled before judgment (or, indeed, before the trial starts on Monday).
The first securities class action5 in Australia was commenced in 1999 against GIO. Since that time, at least 30 securities class actions have been commenced, but not one has proceeded to judgment. A trial was held in the shareholder class action against Aristocrat in late 2007, but, as mentioned above, that case was settled before a final judgment. The shareholder class action against AWB Limited was settled after three days of trial. Unless they settle this week, the Centro cases will be only the third securities class action to proceed to trial.
By the time the Centro cases were commenced, there was talk of an 'explosion' of securities class actions. There has not been an explosion but, as the graph below shows, there has been a marked increase in the number of securities class actions commenced in recent years.
Some of the other more high-profile securities class actions are profiled in the table below:
|GIO||1999||A claim by shareholders who rejected a takeover offer by AMP of $5.35 per share and who received only $2.75 per share six months later under a scheme of arrangement entered into after the company announced massive reinsurance losses. The claim was that GIO's takeover response document, which valued the shares in the range of $5.66 to $6.71 and advised shareholders to reject the offer, was misleading and deceptive.||The case settled in August 2003 prior to trial for $97 million plus $15 million in costs.|
|Aristocrat||2003||Shareholders alleged that the company's financial accounts were incorrect because of the inclusion of certain revenue in circumstances not permitted by accounting standards and that the company did not have reasonable grounds for statements made about its expected profitability for 2002 and the first half of 2003.||The case settled in August 2008 after trial (but before judgment) for $136 million plus $8.5 million in costs.|
|Multiplex||2006||Shareholders alleged that the company did not properly disclose the full extent of significant cost increases and delays (or the risk of significant cost increases and delays) in the construction of the Wembley Stadium. The case settled in July 2010 (three months before trial) for $110 million (including costs).||The case settled in July 2010 (three months before trial) for $110 million (including costs).|
|Telstra||2006||Shareholders claimed that Telstra failed to comply with its continuous disclosure obligations when it gave a private briefing to the Federal Government relating to a forecast drop in future earnings and underspend on operating and capital expenditure four weeks before that information was released to the market.||The case was settled in December 2007 before trial for $5 million (including costs).|
|AWB||2007||The shareholders' claims were based on an alleged failure to disclose AWB's payment of transportation and handling fees to an Iraqi entity in circumvention of UN Security Council resolutions and the making of allegedly misleading or deceptive statements in relation to the company's dealings in Iraq.||The case was settled in February 2010 (three days into the trial) for $39.5 million (including costs).|
History suggests that it is likely that the case will settle – possibly this week before the trial commences (like GIO, Telstra and Multiplex just to name a few) or during the trial (like AWB) or while judgment is reserved (like Aristocrat). After all, every securities class action before it has settled.
A securities class action will, however, eventually proceed to judgment and the Centro cases, with multiple respondents and groups of class members represented by different lawyers and funders, may be a very difficult group of cases to settle.
- ASIC v Healey & Ors  FCA 717; ASIC v Healey & Ors (No.2)  FCA 1003.
- ASIC Centro Win Bolsters Class Action, IMF website: http://www.imf.com.au/news/story1.html.
- See Ross Drinnan and Jenny Campbell, Causation in Securities Class Actions, University of New South Wales Law Journal, Volume 32, Number 3, 2009, 928.
- This was referred to, for example, in the reasons given by the court for approving the settlements in the Aristocrat and Multiplex shareholder class actions.
- By 'securities class actions' we mean class actions brought on behalf of the holders of equity in a company – these are often referred to as 'shareholder class actions', but also include claims (such as the Centro class actions) brought on behalf of security holders that are not shareholders.
- Ross DrinnanPartner,
Ph: +61 2 9230 4931
- Belinda ThompsonPartner,
Ph: +61 3 9613 8667
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