The Camping Warehouse case might determine if the US
"fraud on the market" principle is part of Australian
Securities class actions may be easier to prove if a recent
court decision is followed through.
A person who suffers an investment loss because of another
person's misleading or deceptive conduct has a right to recover
that loss by taking action against that person (section 1041I of
the Corporations Act).
The investor must establish that the wrongful conduct caused its
loss. However there have been a number of cases in Australia which
have fallen over because the investor has been unable to prove that
it actually relied on the misleading conduct.
In the United States, the need to prove "reliance" on
the misleading conduct is less of an issue. There, the "fraud
on the market" principle creates a rebuttable presumption that
the investor relied on the wrongful conduct.
Over the years there has a lot of debate about whether this
"fraud on the market" principle does – or should
– form part of Australian law.
In 2007, Justice Finkelstein of the Federal Court commented that
the rebuttable presumption of reliance arguably applied in
Australia (P Dawson Nominees Pty Ltd v Multiplex Ltd  FCA
1061). Now we may find out whether what Justice Finkelstein said
In Camping Warehouse Australia Pty Limited v Downer EDI
Limited VSC 357, a class action is being mounted against a
company for alleged breach of its continuous disclosure. The
investors are arguing that certain information was not made
generally available by the company, and that a reasonable person
would have expected that the relevant information would have had a
material effect on the price or value of the defendant's
securities if that information had been made generally
Significantly, the investors are arguing that the continuous
disclosure rules are so fundamental to an efficient market that
investors only have to prove that the company breached them, and
not, in addition, that the investors actually relied on that
At a relatively early stage in the proceedings, the company
asked the Court to strike out the application on the basis that the
plaintiffs hadn't pleaded reliance.
The Court noted that previous cases which have upheld the need
to prove reliance have not been concerned with alleged breaches of
the continuous disclosure rules. Given that fact, and the comments
of Justice Finkelstein, the Court thought it was at least arguable
that the investors did not have to prove reliance in this case.
Given that the proceedings were still at an early stage, the Court
was not prepared to throw out the investors' case. Instead, the
Court gave the plaintiff leave to amend its statement of claim and
dismissed the strike-out application on the grounds that it is not
beyond doubt that reliance is required, and it is only in the
clearest of cases that a claim should be struck out:
"In my opinion a brief review of the legislation
and authorities establishes, for the purposes of a strike out
application, that the matter is far from clear and the
plaintiff's case is not plainly hopeless...
...The plaintiff has pleaded that the conduct in breach
of the Act caused the loss in the sense of the reduced value of the
shares. The essence of the claim is that the shares when acquired
were overpriced directly because of such conduct. It cannot be
accepted that this formulation is plainly hopeless or bound to
Of course, this only means that, when or if the matter goes to
trial, the investors may be able to argue that they do not have to
prove reliance. It is by no means certain that the Court will end
up accepting that argument. Nevertheless, the Court's decision
to allow the investors to press their claim is potentially
important news for listed companies.
We will continue to follow this case and provide updates of any
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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