- New entrants are being drawn to the Australian securities litigation market by returns received by litigation funders and lawyers.
- One new entrant is Melbourne City Investments Pty Ltd ("MCI"), which was found to have probably been created to launch class actions to enable its sole director and shareholder, Mr Mark Elliott, to earn legal fees from acting as the solicitor for MCI.
- Due to concerns about a real risk of a conflict of interest, the Court ordered that Mr Elliott be restrained from acting for MCI in two shareholder class actions while MCI is the lead plaintiff, and that both proceedings not be permitted to continue as class actions while MCI and Mr Elliott act in tandem as plaintiff and solicitor.
- In a third shareholder class action, MCI was found to lack standing as it had no claim for compensation and could not continue the class action.
Litigation for Profit—New Entrants in the Securities Litigation Market
In the last six to eight months, Australia has witnessed a spike
in shareholder class action activity that appears to be driven, at
least in part, by new lawyers and litigation funders entering the
market.1
Between October and December 2013, MCI as representative party
commenced shareholder class actions against Leighton Holdings
Limited, Treasury Wine Estates Limited, and WorleyParsons Limited.
All three claims were in relation to allegations of defective
disclosure to the securities market.
The solicitor acting for MCI was in all cases Mr Mark Elliott.
Mr Elliott was also the sole director and shareholder of
MCI.
MCI was incorporated on 1 November 2012. On the day of its
incorporation, MCI purchased 39 shares in Leighton for $684.06, 140
shares in Treasury for $693.00, and 28 fully paid shares in
WorleyParsons for $694.96.
In addition, on 1 November 2012, MCI purchased parcels of shares
in another 17 publicly listed companies, each parcel costing a
little under $700. In February 2014, MCI purchased further small
parcels of shares in another 145 publicly listed companies.
In each class action, the Supreme Court of Victoria has prevented
the continuation of the class actions as currently
conceived.
Class Actions Against Treasury Wine Estates and Leighton Holdings—Real Risk of Conflict of Interest
Treasury Wine and Leighton contended that the proceedings
against them were brought by MCI for the collateral purpose of
generating legal fees for Mr Elliott, and they sought a range of
relief including that each proceedings was an abuse of process and
should be stayed. Alternatively, they sought orders in the exercise
of the inherent jurisdiction of the Court to restrain Mr Elliott
from acting for MCI in the proceedings whilst MCI is the lead
plaintiff.
Justice Ferguson found "it is probable that the reason for
MCI's existence is to launch proceedings, such as the present
proceedings, to enable its sole director and shareholder to earn
legal fees from acting as the solicitor for MCI".2
The small shareholdings held by MCI meant that the compensation
that MCI stood to gain would be less than $700 in each class
action. Justice Ferguson inferred that it was therefore unlikely
that proceedings were commenced for the purpose of recovering
compensation. The inferences or findings may have been rebutted by
MCI's director, Mr Elliott, if he had given evidence. No such
evidence was given.3
The Court has inherent jurisdiction to stay proceedings where they
are an abuse of process, which includes where the proceedings are
predominantly brought for an improper purpose. However, the power
of a stay is to be used only in exceptional circumstances. Justice
Ferguson found that as MCI had the immediate and legitimate purpose
of obtaining orders for compensation—and to stay the
proceedings would broaden the abuse of process concept beyond its
recognised boundaries—no abuse of process
existed.
Rather, the concern was with the conduct of the solicitor. The
Court also has inherent jurisdiction to make orders to ensure the
due administration of justice and to protect the integrity of the
judicial process, including restraining a legal practitioner from
acting in proceedings. The principles for restraining a legal
practitioner are:4
- The test to be applied is whether a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice requires that a lawyer should be prevented from acting, in the interests of the protection of the integrity of the judicial process and the due administration of justice, including the appearance of justice.
- The jurisdiction is exceptional and is to be exercised with caution.
- Due weight should be given to the public interest in a litigant not being deprived of the lawyer of his or her choice without due cause.
- The timing of the application may be relevant, in that the cost, inconvenience and impracticality of requiring lawyers to cease to act may provide a reason for refusing to grant relief.
A number of arguments were put forward as to why Mr Elliott should not continue as the solicitor on the record. These include:
- Mr Elliott may be required to give evidence in his role as sole director of MCI.
- Evidence may be "adjusted" because of Mr Elliott having a personal pecuniary interest in the outcome of the proceedings.
- A conflict exists between Mr Elliott's pecuniary interest and his duty to the court.
- A conflict exists between Mr Elliott's duty to MCI as its director and the interests of the group members.
The last of these arguments, essentially the possibility of a duty–duty conflict, was relied on by Justice Ferguson, who stated:5
the [hypothetical fair-minded independent observer] would consider that Mr Elliott is compromised in his role as a solicitor such that there would be a real risk that he could not give detached, independent and impartial advice taking into account not only the interests of MCI (and its potential exposure to an adverse costs order), but also the interests of group members.
A number of arguments were also made for the discontinuance of
the class action, but the Court found that that there was nothing
irregular about the proceedings. The Court did rely on the power in
the class actions legislation to make orders it thinks
"appropriate or necessary to ensure that justice is done in
the proceeding".
The Court ordered that Mr Elliott be restrained from acting for
MCI whilst it is the lead plaintiff and that the proceedings not be
permitted to continue as group proceedings whilst MCI and Mr
Elliott act in tandem as plaintiff and solicitor.
Class Action Against Worley Parsons—No Standing
MCI commenced proceeding on its own behalf and on behalf of all
persons who acquired ordinary shares in WorleyParsons on or after
14 August 2013 and who were, at the commencement of trading on 20
November 2013, holders of any of those shares. MCI was not a member
of the group it sought to represent. It purchased its shares prior
to the alleged misleading conduct.
MCI alleged that WorleyParsons published forecasts of increased
earnings on four occasions between August and mid-October 2013
which it had no reasonable grounds for making and which were
misleading or deceptive in breach of s 1041H of the
Corporations Act 2001 (Cth). MCI alleges that
WorleyParsons corrected its earnings forecast on 20 November
2013. MCI claims that the fall in the price of WorleyParsons'
securities after 20 November 2013 was a result of
WorleyParsons' conduct.
MCI alleged that group members suffered loss and were entitled to
compensation pursuant to ss 1041I and 1325 of the
Corporations Act. However, MCI did not itself make any
claim for compensation. MCI sought declarations that WorleyParsons
contravened s 1041H and that the group members were entitled
to compensation and interest.
WorleyParsons successfully challenged MCI's ability to bring
the class action on the basis that it lacked standing. MCI sought
to argue that it was enforcing a public right. Justice Ferguson
observed that "[w]hilst MCI sought to elevate its position as
the lead plaintiff well above the ordinary member of the public,
there is no basis for doing so".6 MCI argued that a
different approach to standing is taken in relation to lead
plaintiffs and class actions. But the lack of a claim for damages
or the pleading of anything else to show that MCI had a real
interest in seeking declaratory relief meant the requirements for
standing were not satisfied.
Footnotes
1.See Jones Day Commentary, "Securities
Class Actions Escalate in Australia" (May 2014)
http://www.jonesday.com/securities-class-actions-escalate-in-australia-05-14-2014.
2.Melbourne City Investments Pty Ltd v Treasury Wine Estates
Limited (No 3) [2014] VSC 340 at [9].
3. See Jones v Dunkel (1959) 101 CLR 298 for the
common law principle that where a party fails to tender evidence or
call a witness, it may be inferred that nothing in that absent
testimony or evidence would have assisted the party's
case.
4. Melbourne City Investments Pty Ltd v Treasury Wine Estates
Limited (No 3) [2014] VSC 340 at [39] citing Kallinicos v
Hunt (2005) 64 NSWLR 561.
5. Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No 3) [2014] VSC 340 at [50].
6. Melbourne City Investments Pty Ltd v WorleyParsons Limited [2014] VSC 303 at [22].
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.