Three separate class action suits were commenced in the Federal Court of Australia against the Centro group of companies (Centro). In summary, the applicants purchased securities in Centro, a substantial fall in the price of those securities occurred and due to this fall, the applicants allegedly suffered losses amounting to hundreds of millions of dollars. The applicants allege, inter alia, that Centro made false and misleading statements to the market about their respective financial positions and also failed to provide continuous disclosure as required by the ASX Listing Rules and the Corporations Act 2001 (Cth).
Two of the class actions were commenced on 9 May 2008 by an investor in Centro, Richard Kirby (Kirby class action). The proceedings were prepared by a firm of lawyers specialising in class action suits and funded by a professional litigation funder. The third class action was commenced on 23 May 2008 by another investor in Centro, Nicholas Vlachos (Vlachos class action). The proceedings were prepared by a different firm of lawyers, who also specialise in class action suits.
Although substantially the same, the class actions can be differentiated by, amongst other things, litigation funding arrangements entered into and the length of the investment period. The group of investors which Kirby represents is commonly referred to as a "closed class", because those investors entered into a funding arrangement with a litigation funder. Kirby represents a specified investment period. The group of investors which Vlachos represents is an "open class" and is not limited by any such litigation funding agreement. Vlachos represents a longer investment period.
Application To Stay Class Action Proceedings
Centro brought an application seeking an order that the Vlachos class action be stayed until the result of the Kirby class actions had been determined. It was proposed by the Kirby class action that if the Vlachos class action was stayed, then the Kirby class action would amend its group definition to create an "open class" so that the Vlachos group would become members of the Kirby class action without an obligation to pay any commission to the litigation funder.
Conduct Of The Class Actions
The Court noted that there was no legislation in Australia which establishes procedures for dealing with multiple class actions. In this respect, the Court's powers are confined to the rules applicable to ordinary civil litigation and Section 33ZF(1) of the Federal Court of Australia Act, 1976 (Cth) to "make any order the Court thinks appropriate or necessary to ensure that justice is done in [a group] proceeding".
His Honour noted that in the United States these concerns led to the enactment of the Private Securities Litigation Reform Act 1995, codified into Title 15 of the United States Code. In summary, that Act requires the court to appoint a lead plaintiff (usually a large institutional investor with greater sophistication to devote to the action than an individual plaintiff) to oversee the conduct of every securities fraud class action. The appointment is designed to ensure that the action is adequately monitored and that any settlement is in the interest of the investors rather than the lawyers.
Finkelstein J expressed concerns that the proposal put forward by the Kirby class action may not be in the best interests of the current members of that class, but rather a proposal which would benefit the legal representatives and the litigation funder.
Establishing A Litigation Committee
In the interest of all members to the class actions, Justice Finkelstein proposed that an independently selected litigation committee would be the best vehicle to provide the groups' views. On this basis, His Honour noted that it would be preferable for a "litigation committee" to be established to obtain the views of each member rather than just relying on the views of a few members who had been hand picked by the lawyers. It was envisaged that the members would be given the opportunity to nominate themselves or other group members for membership, and in doing so, provide their reasons as to why their nomination should be accepted (eg size of their financial interest, ability or experience in monitoring lawyers etc).
Appointing A Lawyer By Auction
Finkelstein J considered that another issue posed by Centro's application was choosing which lawyers and litigation funders should take over conduct of the class actions. His Honour proposed that the legal representatives for the Kirby and Vlachos class actions conduct a sealed bid auction to determine which lawyers should get to conduct the class action. His Honour indicated that he would be better placed to make a decision if the following information was provided [at 32]:
"1. the experience of the firm in securities class action litigation, together with the background and experience of the particular lawyers in the firm who will be assigned to the case;
2. a statement of the dollar amount of the costs the firm expects to charge for all work performed, such statement to be provided for the following three stages:
- for pleadings through to discovery and pre-trial motions
- from completion of pre-trial motions through to verdict at trial; and
- from trial verdict to final appellate determination;
3. a statement of the terms of funding for the class action, including the commission rates charged; and
4. a statement of the amount to be paid as fair compensation to the lawyers whose action does not proceed in compensation for their work to date in identifying and developing their clients' claims."
His Honour's preference was that the successful tender would be selected by a judge who had the opinion of a litigation committee.
His Honour allowed the parties 21 days to provide written submissions on whether a litigation committee ought to be appointed, and if so, how it should be appointed and what powers should be given to that committee.
On 14 November 2008 Finkelstein J directed that the class actions be allocated to another judge. Centro had raised an objection to His Honour continuing to hear the proceedings on the basis that he has, through a self managed superannuation fund, a small financial interest in Centro and that "there may be a reasonable apprehension by fair minded lay observers, ... that [His Honour] may not bring an impartial mind" to the proceedings.
Finkelstein J has raised important issues for the protection of interests of not only plaintiffs, but also defendants, in class action proceedings. The introduction of a litigation committee and a sealed bid auction process to determine who should conduct the litigation would see a significant reduction in costs usually associated with defending multiple class action claims.
It will be interesting to see if any other judge in Australia shares the same views as Justice Finkelstein.
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