Shareholder class actions may be rarer and harder to prove if a decision by the Federal Court to dismiss a pair of class actions directed at Commonwealth Bank stands the test of time.
The Federal Court on Friday threw out these class actions in terms that will cause plaintiff law firms to reconsider the risk and return trade-offs for any future actions against listed companies.
In 2017 and 2018, two separate representative actions were filed against CBA, both centred on the bank’s alleged misconduct over the three years prior to the commencement of landmark proceedings in August 2017 against the bank by AUSTRAC over failings by the bank around its obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act.
Commonwealth Bank did not contest these proceedings, resulting in a civil penalty of $700 million. The Federal Court imposed this penalty in June 2018.
Breakdowns in risk management of this nature by listed companies, especially by very large companies, have inspired a whole new domain of litigation over recent decades centred around a common theme of seeking compensation for shareholders said to suffered damages when the share prices of miscreant companies tumble or fall in the wake of shock disclosures of this type.
In these two cases (known in short as Zonia Holdings and Baron) the plaintiffs alleged breaches of continuous disclosures by CBA as well as allegations the bank engaged in misleading or deceptive conduct on a continuous basis by publishing, and failing to correct or modify, various representations.
These representations included representations to the effect that the bank had in place effective policies, procedures and systems to ensure its compliance with relevant regulatory requirements and with its continuous disclosure obligations.
The applicants alleged that because the bank did not comply with its continuous disclosure obligations as it should have done, or because the bank engaged in misleading or deceptive conduct, or because the bank issued and did not correct an allegedly defective cleansing notice in September 2015, CBA shares traded on the ASX at an artificially inflated price.
In a nutshell, Justice David Yates explained in a summary of reasons, the plaintiffs “contend that they acquired CBA shares in that inflated market and, as a consequence, paid too much for them.”
For the time being, Justice Yates has suppressed publication of the full reasons for judgement, to allow time for the parties to consult on which of the most commercially sensitive material in the judgement needs to be redacted.
So for now there is only the short summary with which to understand Yates’ reasoning.
Justice Yates found that, as alleged, Commonwealth Bank was aware of its “non-compliance” in relation to two risk assessments in 2015. Yates also found that the bank was aware of failures in 2015 and 2017 relating to CBA’s obligations to AUSTRAC.
“I am not satisfied that [this material], in any of its pleaded forms, was information that, if disclosed at the relevantly pleaded times, would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of CBA shares” Yates wrote.
“More generally, I am not satisfied that the information, in any of its pleaded forms, was information that a reasonable person would expect to have a material effect on the price or value of CBA shares if that information were to have been generally available at the relevantly pleaded times.”
Put another way, nobody can reliably establish what information influences the prices at which anyone buys or sells shares, a conclusion that defies the received nonsense on “efficient markets”.
Further, Yates said he was “not satisfied that the CBA made the compliance representations or the continuous disclosure representation” alleged in the case.
So a hands down win for Commonwealth Bank and perhaps a confronting loss for the shareholder class action industry.