ASIC v Rich

5934/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V JOHN DAVID RICH & ORS JUDGMENT 1 HIS HONOUR: On 24 August 2004 I ordered that the final hearing of this proceeding, then scheduled to commence on 25 August 2004, be postponed until 6 September 2004, and I published my reasons for judgment: ASIC v Rich [2004] NSWSC 772. My decision was consequent upon an application formally made on 23 August and foreshadowed on 19 August, and arose out of a contest between the parties and PricewaterhouseCoopers ("PwC") as to discovery and the production of documents, which had been ventilated in interlocutory hearings on 9, 12 and 19 August. Now the first and fourth defendants (to whom I shall refer, for convenience, as "the defendants") make application for various costs orders against ASIC and PwC, and orders that those costs be assessed and paid forthwith. 2 Pursuant to my directions, made to minimise costs and disruption of preparations for commencement of the hearing on 6 September, the costs applications have been dealt with by written submissions. The defendants' submissions (40 paragraphs plus annexures) were dated 26 August 2004, submissions on behalf of ASIC and PwC were undated but comprised 12 paragraphs, there was a submission from the defendants in reply dated 31 August 2004 (11 paragraphs), and an undated supplementary submission by ASIC comprising one paragraph. 3 First, ASIC accepts that it should be ordered to pay the costs of the adjournment application heard on 23 August and any costs thrown away by reason of that adjournment. The reason it gives for this concession is that these costs were incurred as a result of mistakes made by ASIC in relation to discovery, principally in relation to the date upon which the contemplated litigation purpose became dominant over the investigatory purpose. As explained in my reasons for judgment of 24 August, paragraphs [6] and [24], ASIC had previously claimed litigation privilege in respect of documents created after mid-October 2001, and reduced that claim to documents created after 4 December 2001 by letter dated 19 July 2004. I regard ASIC's reason for submitting to an order for these costs as sufficient to justify the order. 4 As I mentioned in paragraph [1] my reasons for judgment of 24 August, there was an earlier postponement of the commencement of the hearing, from 2 August to 23 August, because ASIC filed a late affidavit by an important lay witness. The defendants claim a similar order for costs in respect of that postponement and ASIC has not contested that claim. 5 My first order, therefore, will be an order that ASIC pay the defendants' costs of the adjournment applications heard on 29 July and 23 August 2004, and any costs thrown away by reason of those two adjournments. 6 There is more contention about the costs of the hearings on 9, 12 and 19 August, relating to issues of discovery and production of documents. Before the court on those occasions was an application by ASIC to set aside paragraphs 8 and 9 of a subpoena to PwC dated 2 July 2004. PwC made a corresponding application to set aside paragraphs 8 and 9 of the subpoena. Counsel appeared on those days on behalf of both ASIC and PwC, and I therefore take it that the application by PwC as well as the application by ASIC was before the court for determination. The defendants contend that ASIC and PwC should be ordered to pay their costs of those two applications and of the hearings on those three days. 7 There is a summary of the evolving dispute with respect to discovery and production of documents in paragraphs [5] to [14] of my reasons for judgment dated 24 August. As I explained there, the parties were able to reach an accommodation in respect of some of their disputes by the time of the second hearing day on 12 August. It appeared on that day that, given time, further progress could be made, and so the interlocutory hearing was adjourned until 19 August. By 19 August, senior counsel for the defendants informed me that his clients would apply for postponement of the commencement of the hearing, then scheduled to begin on 23 August, by at least two weeks, on the ground that the documents that had been recently produced indicated that ASIC's discovery had been inadequate. 8 In my reasons for judgments of 24 August I observed that: · amongst the large volume of documents that had been produced by ASIC since early July, there were some that appeared potentially to have real significance (paragraph [17]); · it was reasonable for the defendants' legal team to wish to consider and analyse the documents further (paragraph [18]); · although documents were produced as part of a negotiated outcome and some of the defendants' demands were withdrawn, there was a basis for criticising ASIC's approach to the production process, especially with respect to litigation privilege and client legal privilege (paragraph [23]); · ASIC had changed its position with respect to litigation privilege by limiting its claim to the period after 4 December 2001, and had withdrawn claims for client legal privilege thereby releasing some apparently important documents concerning Mr Carter's relationship with ASIC in the period from October to December 2001, in each case with no explanation for the change of heart (paragraph [24]); · the cross-examination of Ms Rees, ASIC's solicitor, laid the foundation for a concern that she might have misapprehended the proper scope of client legal privilege (paragraph [24]); · the defendants had been placed in a predicament (of having inadequate time to consider large volumes of materials produced not long before the scheduled hearing date) which had arisen, to a significant degree, by the fault of ASIC in failing to discover documents that ought to have been discovered much earlier (paragraph [28]). 9 Those findings imply that a substantial part of the disputation with respect to production and discovery of documents during the July-August period arose out of inadequate disclosure and mistakes on the part of the ASIC team, which came to light only through the process of the defendants issuing multiple notices to produce and subpoenae.

10 There are, specifically, two points. First, it was only when Ms Rees wrote to Ms Kelly on 19 July saying that documents would be produced in answer to the first subpoena up to 4 December 2001 without a claim privilege, that the defendants deduced that ASIC must have revised the cut-off date for its claim to litigation privilege from mid-October until 4 December, although it took some further time before ASIC came to acknowledge that general proposition. The change of position by ASIC, which has not been explained, led to the issue of a further notice to produce and initiated a process which led to the conclusion that ASIC's discovery up to that time had been incomplete. A large part of the volume of documents that have been produced is attributable to the revision of the cut-off date.

11 Secondly, ASIC withdrew some of its claims to client legal privilege over certain documents after Ms Rees had been cross-examined on 9 August. The reasons for ASIC's change of position were not given, but as I said in my reasons for judgment of 24 August (paragraph [24]), the cross-examination had laid the foundation for concern that Ms Rees may have misapprehended the proper scope of client legal privilege. In the circumstances, I think it is probable that there was a connection between the cross-examination and the concession.

12 It seems to me that the defendants have made out their case for costs, to the extent that these mistakes on the part of ASIC necessitated or led to the interlocutory contest. There are, however, three countervailing considerations.

13 The first is that the process of interlocutory applications began when the defendants decided to seek documents relevant to PwC's involvement in the investigation and in the proceedings. They initiated the process of seeking documents by issuing the subpoena dated 2 July 2004, and they did so at a time when the commencement date for the hearing was 2 August. No adequate explanation has been given for the initiation of the process so belatedly. It had been evident for about two years that Mr Carter of PwC would be a centrally important expert witness for ASIC. It must have been plain to the defendants that the production of the material demanded by the first subpoena and the first notice to produce, which was issued shortly afterwards, would require extensive work on the part of ASIC and PwC. That work would have to be done at a time when they were involved in final preparation for the hearing. I do not say that the process was commenced belatedly in order to cause disruption, but that appears to have been its effect. It would be wrong to encourage or condone, by an unqualifiedly favourable costs order, a process of belated demands for production having the effect of interfering with final preparation for a hearing. It is relevant to this issue that, although they appear to have been initially resistant in some respects, ASIC and PwC have made prodigious efforts to meet their obligations under the various notices to produce and subpoenae that have been issued, with the result that (as noted my reasons for judgment of 24 August) an enormous amount of material has been produced.

14 Thus, one has a process of production and discovery that was commenced by the defendants too late and too close to the trial date, but which brought to light some mistakes by ASIC about claims to privilege and therefore some inadequacies in ASIC's discovery. That suggests that the court's decision on costs needs to be a balancing exercise in which neither party should completely succeed.

15 Secondly, putting to one side the production of documents that occurred in consequence of ASIC's changes of position with respect to litigation privilege and client legal privilege, what followed after the process was initiated on 2 July was a working through of evolving issues, under intense pressure of time in view of the pending hearing. This is best seen in the evolving understanding of what would be required for PwC to produce all of the billing records and backup tapes initially demanded by the defendants, which led to qualifications of the defendants' approach and a development of the position of ASIC and PwC as it became evident that some relevant documents could be produced (and in some cases created) without the cost and labour initially feared. It is unnecessary for me to set out the steps in this evolution, which are well summarised in the defendants' written submissions (which I shall leave in the court's file).

16 There were other examples of any evolving approach to the production process, on both sides - as I observed during the hearings, particularly at the hearing of 12 August, when I was told that many of the previous matters in dispute had evaporated through this process. The fact that such an evolution occurred, in pressing circumstances because of the belated commencement of the process by the defendants, tends to weigh against their application for an order for costs.

17 Thirdly, a particular privilege claim was contested by the parties before White J on 13 August 2004, after I expressed the view that it would be better to approach another judge since I was responsible for hearing the trial. White J decided that the claim to privilege had been made out. In his Honour's ex tempore reasons for judgment delivered on that day, he said if the only question which had arisen had been the discrete application that he heard, he would have ordered that the costs of that application be ASIC's costs in the proceeding. ASIC said it would be unfair to order it to pay the costs of the application before White J, in the circumstances.

18 In my opinion it is appropriate to treat the application before White J as part of the larger production and discovery process that was the subject of the hearings before me, and not to make an order for costs separately in respect of that application. However, the outcome of the application before White J and his Honour's observations should be taken into account as a factor weighing in ASIC's favour, in the balancing of considerations that I regard as appropriate in order to determine the defendants' application for costs. I should note that in written submissions, there was a disagreement as to whether the defendants had made it clear prior to the hearing before White J that if ASIC provided an affidavit verifying the claim to privilege there would be no further challenge to the claim. For the purposes of the present judgment, I accept the statement by counsel for ASIC that, whatever the defendants' counsel may have intended to convey, they did not succeed in conveying that message, and so it was reasonable for ASIC to place the matter before White J without providing a further affidavit.

19 Weighing up these various matters, and taking into account not only the evidence place before me but also what I observed about the ebb and flow of the contest over the interlocutory hearing days, I have come to the view that the defendants are entitled to recover some costs in respect of the production and discovery issues and the hearings on 9, 12 and 19 August, and on 13 August before White J, but they should not be completely successful. It seems to me undesirable to endeavour to apportion costs by reference to the issues upon which the defendants succeeded and did not succeed, because that would complicate the process of assessment of costs and be a breeding ground for further disputation. Exercising the discretion that I have with respect to matters of costs, I have decided to allow the defendants to recover part of their costs calculated as a percentage of the total. In my opinion, all things considered, the correct percentage is 50%.

20 It seems to me appropriate that the burden of the costs order should be borne by ASIC alone, even though PwC was the applicant in one of the applications before the court. This is because the important factors weighing in favour of the defendants relate to ASIC's mistakes on questions of privilege. On the other hand, I would not think it appropriate to make an order for costs in favour of PwC, which was involved in the process of evolution to which I have referred, and has not succeeded in setting aside the subpoena of 2 July. However, my conclusion will leave PwC free to pursue any claim it may wish to make for its expenses of compliance with the subpoenae. 21 There remains the question whether I should order that the defendants' costs of the adjournment applications be assessed and paid forthwith. The defendants made submissions on that point, to which ASIC did not respond. I am persuaded that on the principles to which I recently referred in Fiduciary Ltd v Morningstar Research Inc [2004] NSWSC 664, such an order is appropriate in this case. I am particularly influenced by two factors. The first is the likelihood that a substantial period of time will elapse before the final determination of the proceedings. The second is the fact that ASIC has made no submissions in opposition to the application for these costs, and has conceded that the costs of the adjournment application heard on 23 August and costs thrown away by reason of that adjournment were incurred as a result of mistakes made by ASIC. 22 My opinion as to costs of the production and discovery issues extends to the costs of the submissions with respect to costs, in view of the outcome with respect to costs of the production and discovery issues. The production and discovery issues were the principal matters addressed in submissions. 23 Therefore my orders will be:

1. Order that the plaintiff pay the first and fourth defendants' costs of the adjournment applications heard on 29 July and 23 August 2004, and any costs thrown away by reason of those adjournments;
2. Order that those costs be assessed and paid forthwith;
3. Order that the interlocutory application by the plaintiff made on 6 July 2004, and the interlocutory application by The Partners, PricewaterhouseCoopers, made on 6 August 2004, be dismissed.
4. Order that the plaintiff pay 50% of the costs of the first and fourth defendants with respect to (a) the interlocutory applications by the plaintiff and The Partners, PricewaterhouseCoopers, referred to in order 3; (b) the hearings before Austin J on 9, 12 and 19 August 2004, and before White J on 13 August 2004; and (c) the costs of the application by the first and fourth defendants for costs of the interlocutory applications and hearings. **********

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