Australian Securities and Investment Commission v Whitebox Trading Pty Ltd

The defendants' position 6 The defendants seek an order that ASIC pay their costs of the proceeding on a party and party basis before 11.00 am on 27 February 2018, and on an indemnity basis thereafter. 7 The basis for this order is that, on 23 February 2018, the defendants served a Notice of Offer to Compromise on ASIC (the offer to compromise). The compromise was that the proceeding be dismissed with no order as to costs. The offer to compromise was made some four months before the commencement on 2 July 2018 of an intended four week liability hearing. It followed service of the defendants' expert evidence on 15 November 2017. 8 The offer to compromise was accompanied by a letter dated 23 February 2018 in which (amongst other things) the defendants' solicitors set out the "relevant history" of ASIC's investigation into the defendants' (and others') conduct, which commenced on 22 October 2012. 9 In their letter, the solicitors recorded that: ASIC was on notice at the time the proceedings were commenced its allegations were denied and that the inferential case that ASIC was bringing was the result of a lack of understanding, on its part, of the normal principles and practice of index arbitrage and a lack of appreciation of the complexities that surround the placement and amendment of orders in the pre-open phase of the ASX, particularly on serial and quarterly expiry days. Those matters should now be apparent to ASIC from the Defendants' expert evidence. 10 The letter also stated that substantial costs had been incurred by the defendants in the defence of the proceeding to date (the solicitors said that the defendants' costs were "around $3 million"); the liability hearing would involve a large number of witnesses, including six expert witnesses; and that if ASIC were to continue to pursue its case, it could be expected that the defendants would incur additional costs of a further "$2-3 million". 11 The letter argued, pointedly, that ASIC's treatment of the defendants, particularly having regard to the costs the defendants were incurring in defending the proceeding, was not proportional to ASIC's treatment of National Australia Bank Limited (NAB) (for whom Whitebox provided securities index arbitrage trading under contract). The letter recorded that ASIC's investigation into NAB resulted in NAB entering into an Enforceable Undertaking which: 6. … did not involve NAB making any substantial admissions of wrongdoing. The only financial impost on NAB, a company with a $80 billion market capitalisation, was a requirement to make a $2 million payment to "fund financial literacy projects in Australia". As far as the Defendants have been able to ascertain, no explanation has been provided by ASIC as to the relevance (if any) of those "financial literacy projects" to the matters the subject of ASIC's investigation, or how the figure of $2 million came to be agreed. 12 The letter continued: 13. The quantum of these costs being incurred on both sides shows how out of proportion ASIC's approach to this case against the Defendants (an individual and a private company) has been, when compared to the approach taken by it to NAB, being the entity which ASIC alleges was the intended beneficiary of the alleged activities and for whom the Defendants were working. 14. The extreme lack of proportion in ASIC's continued pursuit of the Defendants, in very costly and time-consuming litigation after ASIC's entry into the Enforceable Undertaking with NAB, is a matter of great concern to the Defendants (as well, one would suggest, it should be to the general public). 15. The Defendants are aware of press articles showing how ASIC dealt with banks, in the context of negotiating Enforceable Undertakings and related media releases; a practice which applied at the time that ASIC entered into the Enforceable Undertaking with NAB in question here. That practice, and its implementation in ASIC's negotiations with NAB in the present case, has heightened the Defendants' concerns that ASIC has failed to treat NAB and the Defendants in an even-handed manner and is pursuing the Defendants in a manner that cannot justified on any public interest test. 16. ASIC has spent and will continue to spend vast public funds pursuing proceedings against the Defendants which, on any view, have a substantial risk of being dismissed with the costs consequences that follow (and in the Defendants' view will be dismissed with those costs consequences). 17. By its conduct, ASIC is forcing the Defendants to incur extreme expenses defending themselves in litigation which bears no proportion to the achievement of any of ASIC's statutory objects. 13 ASIC rejected the offer to compromise on 23 May 2018, saying: ASIC maintains that it has a strong claim against your clients, and is confident, having regard to the evidence filed to date (including all of the expert evidence), that it will succeed in obtaining the relief sought in the Originating Process. The proposal that the proceedings simply be dismissed with no order as to costs is an inadequate compromise, which does not reflect the strength of ASIC's case or the risks to your clients. 14 Having said that the defendants' proposal was an "inadequate" compromise, ASIC did not volunteer what would be an "adequate" compromise. However, it seems from earlier correspondence that, from ASIC's perspective, nothing less than an admission by the defendants - that on the Serial Expiry Days in question they were intentionally seeking to manipulate the market - would suffice. 15 The earlier correspondence to which I refer is a letter from the defendants' solicitors to ASIC, dated 6 March 2014. This letter makes it tolerably clear that, from about March 2014, it was the common understanding of the parties that ASIC would only resolve the investigation against the defendants on the basis that the defendants consented to orders in which they acknowledged that they had: … engaged in conduct in direct contravention of the Corporations Act by intentionally seeking to manipulate the market (both the ASX and the SFE) in relation to the placing of offers and bids in the pre-opening phases of the ASX and SFE on 18 October 2012 and other earlier days as well. 16 After noting this understanding, the letter conveyed the defendants' position: 1. As much as our clients … see the prospect of continuing incurring legal costs going forward in responding to the ASIC investigation unpalatable, they cannot, and will not be 'trading off' that cost by making admissions of having intentions they did not have. 2. Our clients did not engage in conduct on the 18 October 2012 or on prior days that was undertaken with any intention, desire or directive to manipulate the ASX or the SFE or of any individual stocks or securities trading on those markets. 3. Although the ASIC investigation team may have formed views that this is what they believe may have occurred, that is not what occurred, and if the clients have to continue for years to come to incur costs to establish that the ASIC 'case theory' is wrong, that is what they will do. 4. Our clients feel that legally, morally, ethically and as a matter of their own conscience, they cannot and should not be admitting to engaging in deliberate and conscious acts of wrongdoing that did not happen. 17 Following ASIC's rejection of the offer to compromise, the defendants' solicitors wrote again on 6 April 2018. In this letter, the defendants' solicitors noted that, even though ASIC had not shown any preparedness to compromise, they (the solicitors) anticipated that the defendants would agree to participate in a mediation with ASIC. 18 In a letter dated 18 May 2018, the defendants' solicitors repeated the defendants' willingness to participate in a mediation, saying: In our respectful view, this case is a matter that should be mediated. There are still some substantial costs to be incurred. The factual and legal issues are complex and our earlier correspondence have identified some of these. The dynamics of a mediation can lead to a range of possible outcomes, many of which the parties may not have even envisaged at the time they went into the mediation. In our experience, skilled and experienced mediators are able to bring out the relevant discussions to find resolution. We have attended many mediations where, although parties thought the positions were too far apart, common ground was able to be reached and the matter resolved on mutually acceptable terms. 19 Notwithstanding the defendants' overtures in this regard, and the fact that ASIC was in possession of the defendants' intended expert evidence, it appears that ASIC's steadfast position was that it would not (for whatever reason) enter into discussions with the defendants as to how the proceeding could be resolved without a hearing. 20 The defendants submit that the compromise they offered was a genuine and substantial one, which ASIC unreasonably failed to accept. They submit that r 25.14(2) of the Federal Court Rules 2011 was thereby engaged: If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant's proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent's costs: (a) before 11.00 am on the second business day after the offer was served - on a party and party basis; and (b) after the time mentioned in paragraph (a) - on an indemnity basis. 21 In summary, the defendants submit: (a) At the time of ASIC's rejection of the offer the proceeding was well-advanced towards a hearing which was to commence on 2 July 2018. (b) ASIC had been on notice from the commencement of the proceeding that the defendants disputed ASIC's characterisation of their conduct; (c) ASIC had the defendants' expert evidence, by reference to which they argued that ASIC had misunderstood the normal principles and practice of index arbitrage and the nature and complexities of order placement in the Pre-Open Phase; (d) The defendants were offering to forego substantial costs, such that the offer was a genuine compromise. (e) ASIC had the defendants' intended evidence for in excess of four months. It was by reference to this evidence that the Court found in Whitebox No 7 that ASIC's case contained serious deficiencies, particularly in respect of the second and fourth "pillars"; that ASIC's inferential case was not sufficient to establish the deliberate intention for which it contended; and that ASIC was unable to establish a causal connection between the defendants' impugned orders and the Opening Price of the XJO securities. (f) ASIC failed to assess properly the difficulties with its own case and, based on a mistaken assessment of the strength of that case, failed to engage constructively with the offer that had been made. 22 The defendants also repeat the concerns expressed in their solicitors' letter of 23 February 2018 (which accompanied the offer to compromise) about the objective of resolving ASIC's claim at a cost that was proportionate to its importance and complexity: see s 37M(2)(e) of the Federal Court of Australia Act 1976 (Cth) (the Act) and the duty cast on litigants by s 37N(1) thereof. The defendants submit that the costs of this proceeding are "out of all proportion to the reality of what had occurred, as found by the Court" and that ASIC pursued its case to the end "(i)n preference to any other potential alternative enforcement action", such as entering into an Enforceable Undertaking.

ASIC's position 23 ASIC accepts that costs should follow the event and that, in light of the findings made in Whitebox No 7, an order for costs against it is justified. However, it submits that those costs should be awarded on a party and party basis only. It also submits that these costs should be discounted by 20% in recognition of the fact that, at the conclusion of the evidence, the defendants "abandoned" reliance on the evidence given by Mr de Kantzow: see [33] of Whitebox No 7. 24 ASIC submits that the defendants' claim for costs under r 25.14(2) is predicated on them establishing that ASIC acted "unreasonably" in failing to accept what was, in substance, a "walk-away" or "all or nothing" offer. ASIC submits that, having regard to the circumstances at the time the offer to compromise was made, and the way in which the litigation ultimately played out, its refusal was not unreasonable. In summary, ASIC submits: (a) In the context of a "walk-away" or "all or nothing" offer, rejection does not, alone, establish unreasonableness. (b) Unreasonableness should be assessed from the perspective of whether the unsuccessful plaintiff should have appreciated, at the time of the rejection of the offer, that its case would ultimately fail: Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) [2004] FCA 1437; 212 ALR 281 at [46] - [47]. (c) Here, there was a genuine contest on the facts, with ASIC's case supported by expert evidence. (d) Inevitably, in a case based on inference, there will be room for a range of outcomes. The fact that, in the present case, the outcome was not in ASIC's favour, does not mean that it acted unreasonably in pursuing its "case theory". (e) The defendants' offer "involved no compromise in relation to the substance of the proceeding". It was only an offer that the proceeding be dismissed with no order as to costs. (f) Maintenance of ASIC's case was not unreasonable where, at the time of the offer, "Mr Boshoff had not personally gone into evidence". In other words, there remained a prospect that Mr Boshoff would give evidence as to the defendants' intentions and that it was reasonable to assume that this evidence "could have significantly affected an assessment of the prospects of the case": Australian Competition and Consumer Commission v Australian Egg Corporation [2016] FCA 447. (g) As this is a civil penalty proceeding, the authorities recognise that "the Court should be slow to make an award of indemnity costs": Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2005] FCA 860 at [12]; Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd [2007] FCA 1844 at [24]. (h) There is no suggestion that ASIC commenced this proceeding for any purpose other than to discharge its public responsibilities. 25 In its submissions, ASIC does not dispute that the offer to compromise contained a genuine and substantial compromise that was made at a time when it was in a position to assess the strengths and weaknesses of its case. Indeed, in this latter regard, it says that, given that its rejection was made some weeks after the offer to compromise was made, it can be taken that it had given proper consideration to all of the expert evidence in coming to its decision. 26 Further, ASIC accepts that it would have required admissions of contravention by the defendants in order to form the basis for any agreed resolution of the proceeding. It submits that this was consistent with its regulatory role, and that its dealings with other entities and the possibility of it accepting enforceable undertakings are irrelevant. 27 As to discounting the costs that should be awarded, ASIC submits that Mr de Kantzow's evidence was very substantial, both in volume and the position it occupied in the litigation. It says that Mr de Kantzow was the defendants' principal expert. It cites the following metrics: (a) The defendants' written opening submissions contained 418 references to Mr de Kantzow's evidence, spread across approximately 100 pages. Part C of those submissions (which occupied 15 pages) was essentially a rephrasing of his report and Schedule 4 of those submissions (which occupied 24 pages) was a summary of his report. (b) Mr de Kantzow's report was in excess of 200 pages. Furthermore, he gave evidence over five days, over 244 pages of transcript of the hearing (not including periods when Mr de Kantzow was giving concurrent evidence, but was in truth merely commenting on evidence given by another expert). His evidence took up more than 17% of the transcript of the hearing (244 pages of 1369 pages). (c) Mr de Kantzow participated in three conclaves and joint reports: (1) with Mr Morgan; (2) with Professor Aitken and Mr Graves; and (3) with Professor Frino and Mr Morgan. 28 ASIC submits that, given the "abandonment" of Mr de Kantzow's evidence, the costs associated with it were entirely unnecessary and recovery of them should not be included in the costs award. Further, the reduction it proposes would also recognise that ASIC was put to the trouble and expense of considering and examining that evidence.

Consideration 29 I accept that the offer to compromise represented a genuine and substantial compromise. However, I am not satisfied that ASIC's rejection of it was unreasonable. In coming to this conclusion, I accept ASIC's submission that it can be taken that it gave proper consideration to all the expert evidence at the time it rejected the offer, as its letter of rejection indicates. 30 As I have stressed, ultimately the outcome of this case turned on whether ASIC had established, to the requisite standard (the balance of probabilities), the intention with which it alleged the defendants had acted when placing the impugned orders. As filed and untested, the expert evidence on which ASIC relied supported the existence of that intention. It is true that, after analysis, I rejected significant aspects of that evidence. However, this was done with the benefit of the considerable testing that had been undertaken by the defendants in the course of a lengthy and hard-fought hearing. Further, I accepted other aspects of ASIC's expert evidence as establishing conduct that was consistent with, but not determinative of, the intention it alleged. Although ASIC argued its inferential case around the eight "pillars" it had identified, it was the cumulative effect of the circumstances represented by those pillars, to the extent they were proved, which was required to be considered and assessed. As I stated at [544] of Whitebox No 7, in light of the evidence then before me, and my evaluation of the cumulative effect of the findings I had made in respect of the eight "pillars", I was not persuaded on the balance of probabilities that the impugned orders were placed with the intention that ASIC alleged. 31 In coming to this conclusion, I did not accept the entirety of the defendants' evidence. For example, there is no doubt that the defendants advanced Mr de Kantzow as their principal expert witness. As I recorded in Whitebox No 7 at [33], Mr de Kantzow was subjected to a substantial (and, as events showed, successful) attack on credit. On the fourteenth day of the hearing, the defendants accepted that Mr de Kantzow's evidence should be given no credit, with the important rider that ASIC could nevertheless rely on it to the extent that it supported its case - a facility which ASIC exercised in closing submissions. 32 It can be seen, therefore, that the conclusion to which I came on the question of the defendants' intention was not one that resulted from a complete rejection of ASIC's evidence or a complete acceptance of the defendants' evidence. It was a conclusion that resulted from the kind of testing and evaluation that can only be brought about by a common law trial process. 33 I accept that the costs incurred by the defendants in defending ASIC's case are very significant indeed. I accept that these costs are a significant impost on them having regard to their ultimate success in the proceeding. But this alone does not provide a mandate for the Court to impose a higher cost burden than the normal standard on ASIC as the unsuccessful party. 34 Further, I do not accept the defendants' submissions on the issue of proportionality. For some considerable time before the commencement of the proceeding, ASIC, as the regulator, formed the view that the defendants' conduct was intentional in the particular way it alleged at the hearing. There were objective circumstances which supported that case. As I have said, ASIC's untested expert evidence also supported that case. As a regulator, acting in the public interest, ASIC was not obliged to reach a compromise with the defendants which did not reflect the true nature of the conduct which its investigations had led it to believe had taken place. There is no reason to think that the assessment it reached in that regard was not a genuinely-held and supportable view on the evidence before it, despite the ultimate result of the proceeding. 35 Further in this connection, the fact that ASIC was prepared to accept an Enforceable Undertaking from NAB is really beside the point. The respective positions of NAB and the defendants, in relation to the impugned conduct, are quite different. ASIC had the freedom, within the proper limits of its role as regulator, to treat NAB and the defendants differently. On the whole, I have no reason whatsoever to think that ASIC conducted this proceeding other than in a way that was consistent with the overarching purpose referred to in s 37M of the Act. 36 For these reasons, I am not satisfied that a special costs order, of the kind sought by the defendants, is either appropriate or warranted. 37 Turning to the contention that a discount should be applied in awarding costs to the defendants, the following factors are important. 38 First, at the hearing, it was agreed that ASIC could rely on Mr de Kantzow's opinion evidence, even though (in effect) the defendants could not. Thus, ASIC obtained the benefit (where it could) of the very evidence it now says was unnecessary because the defendants had "abandoned" it. For its part, ASIC did not "abandon" Mr de Kantzow's evidence. It relied on significant parts of it in its closing submissions. 39 Secondly, I accept the defendants' submission that Mr de Kantzow's participation as a witness facilitated the conduct of the hearing in both formulating the issues for trial (by means of the experts' conclaves and the joint experts' reports) and in elucidating (in the course of the concurrent evidence sessions) the issues that fell for determination by the Court. 40 Thirdly, regardless of how Mr de Kantzow's evidence was ultimately treated at the hearing, the defendants were always entitled to retain him and obtain his expert assistance in the preparation of their defence. The fact that his evidence suffered a particular unforeseen fate at the hearing does not mean that the costs of obtaining and adducing that evidence should not be allowed: W & A Gilbey Limited v Continental Liqueurs Pty Limited (1963) 81 WN (NSW) (Pt 1) 1 at 10-11. 41 Fourthly, Mr de Kantzow's affidavit contained a significant amount of factual material that, ultimately, was not in dispute; was not contained in ASIC's evidence; and was relevant to the determination of the issues that were raised at the hearing. 42 On the whole, I am not persuaded that, by reason of the agreement recorded at [33] of Whitebox No 7, there should be any discount applied to the costs that should be awarded.

Disposition 43 In light of these conclusions, an order should be made that ASIC pay the defendants' costs on a party and party basis. No discount should be applied. 44 The defendants have stated that if the amount of their costs cannot be agreed, they envisage applying to the Court for a lump sum costs order in accordance with Section 4 of GPN-COSTS. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.