First Plaintiff v Defendant

Supreme Court of Victoria|2012-03-05|Before: Pagone J

GROUP PROCEEDINGS - Discovery of identity of group proceeding participants - Opt in group proceedings - Corporations Act 2001 (Cth) s 672B.

1 The Defendant ("NAB") seeks orders by summons dated 21 October 2011 in a group proceeding commenced under of the (Vic). The proceeding was initiated by Pathway Investments Pty Ltd and Doystoy Pty Ltd ("the plaintiffs") on their own behalf and on behalf of a defined but undisclosed group of others ("the non-party group members"). The NAB's summons seeks (a) discovery from a limited number of non-party group members and (b) particulars of the identities of those non-party group members. NAB also sought for the proceeding be given a trial date but that application has been deferred pending the outcome of the summons seeking discovery and particulars.

2 The persons identified as group members in paragraph 1 of the statement of claim are described as those who or which:

a) at some time during the period 1 January 2008 and 24 July 2008 ("the relevant period") acquired an interest in ordinary fully paid shares in NAB, and

b) suffered loss or damage by or resulting from the conduct of NAB as pleaded in the statement of claim dated 15 March 2011, and

c) have, as at the commencement of the proceeding, entered into a litigation funding agreement with International Litigation Funding Partners Pte Ltd.

The plaintiffs' allegation against NAB is essentially that it engaged in misleading and deceptive conduct, and breached continuous disclosure obligations, in connection with NAB's actual and potential exposure to a portfolio of instruments described as collateralised debt obligations ("CDOs"). The CDOs were owned by securitisation "conduits" who were sponsored by NAB through the provision to those conduits of liquidity facilities. NAB denies each of the allegations of liability made by the plaintiffs.

3 The particulars of the identity sought in NAB's summons is of the persons or entities who are group members in the proceeding and who fall within three categories, namely, (i) the top 20 group members by volume of shareholding who held more than 500,000 NAB shares as at 1 January 2008, (ii) the top 20 group members by volume of acquisitions of NAB shares who acquired more than 500,000 NAB shares during the relevant period, and (iii) the top 20 group members by volume of sales of NAB shares who sold more than 500,000 NAB shares during the relevant period. The discovery sought by the NAB from each of those in this category of persons or entities (who were defined in the summons as the "Market Participants") is of two category documents namely:

1.(a) All documents referring to NAB's actual or likely exposure to losses on CDOs or Subprime ABS, including without limitation documents referring to NAB's exposure to conduits (including the NAB Conduits) and CDOs held by NAB directly or indirectly (including the Conduit CDOs).

(b) For the avoidance of doubt, to the extent not encompassed by (a), all documents referring to NAB's actual or likely exposure under:

(1) liquidity facilities extended by NAB to conduits (including the Conduit Liquidity Facilities, as defined in paragraph 9 of the Defence); and/or

(2) loans made pursuant to those liquidity facilities (including the Conduit Loans), including, without limitation, documents referring to NAB's exposure to conduits (including the NAB Conduits) and CDOs held by NAB directly or indirectly (including the Conduit CDOs).

actual or potential decisions made by Market Participants to acquire, retain or dispose of an interest in NAB Shares during the Relevant Period, including, without limitation, memoranda, reports and other documents recommending the acquisition, retention and/or disposal of an interest in NAB Shares during the Relevant Period;
any strategy, policy, mandate or benchmark which applied to or governed the acquisition, retention or disposal by a Market Participant of an interest in NAB Shares during the Relevant Period;

all facts, matters or circumstances taken into account or considered by Market Participants in:
1. deciding to acquire, hold or dispose of an interest in NAB Shares during the Relevant Period;
2. determining the price at which they were prepared to acquire, hold or dispose of an interest in NAB Shares during the Relevant Period.

4 The parties agree that the Court has power to make orders of the kind sought by NAB.[1] The parties disagree, however, about whether the orders ought be made at this stage in the proceeding. The plaintiffs accept that the orders are directed to securing relevant evidence of the individual liability (if any) of particular group members but contend that what is sought as particulars or by discovery is not directed to any issue common to the parties at this stage of the group proceeding. The plaintiffs also contend that, in any event, the orders ought not to be made in the exercise of the Court's discretion at this stage of the proceedings.

5 Fundamental to the application for discovery and particulars in group proceedings is whether what is sought is relevant to a common issue in the group proceeding. The particulars and discovery sought by the summons are directed to securing information available to a significant number, and segment, of the Market Participants who traded in NAB shares during the period relevant to the dispute and who are also group members and interested in the outcome of the proceeding. NAB contended that what is sought by way of particulars and discovery is relevant to common issues at this stage of the proceedings and not only relevant to the individual quantum of damage that each of the group members may ultimately be entitled to claim. NAB's written submissions contended:

At trial, the matters identified in the preceding paragraph [in the submissions] will be grounded in a submission that: (a) the views, knowledge and conduct of participants in the market in relation to NAB shares influences the price at which NAB shares are acquired and sold in the market; (b) if one or more participants in the market are aware of particular material information concerning NAB's actual or likely exposure to CDOs, the market price for NAB shares will likely be affected accordingly, particularly where such market participant(s) holds, or acquires, a material volume of NAB shares in a relevant period; and (c) where particular material information enters the market, any inflation associated with that information is removed from the market price for NAB shares.
In addition, NAB will contend at trial that the success of the inflation allegation as the foundation for a damages claim against NAB depends upon the plaintiffs establishing that participants in the market were unaware of NAB's actual or likely exposure to losses on CDOs or Subprime ABS. If there were such an awareness among participants in the market, then NAB will submit that this awareness was likely reflected in the price of NAB shares during the Relevant Period, with the result that the trading price of those shares was not inflated either at all or to the extent asserted by the plaintiffs. At the very least, the existence of such an awareness on the part of one or more market participants must undermine any inference pressed by the plaintiffs that the market overall was unaware of the information. In this way, NAB will contend that the level of the market's awareness of NAB's actual or likely exposure to losses on CDOs or Subprime ABS has a direct bearing on whether the plaintiffs are able to succeed in a claim for damages in the proceedings.

The essence of NAB's contention for present purposes being that the identity of the Market Participants and the discoverable information they had during the relevant period bears upon market awareness and its impact upon the price at which NAB shares traded at the relevant time. There is no doubt that market awareness is an issue engaged in the proceeding. What is disputed in relation to the summons, however, is whether what is presently engaged in the group proceeding includes the awareness of the group of people whose identity is sought and from whom discovery is sought to be obtained.

6 The statement of claim relevantly alleges that during the relevant period NAB knew or ought to have known that the information identified in para 105 of the statement of claim was information concerning NAB that a reasonable person would expect to have a material effect on the price or value of its shares within the meaning of Rule 3.1 of the Australian Stock Exchange Listing Rules. The plaintiffs contend in the statement of claim that NAB knew or ought to have known that it should have disclosed to the market the information which the plaintiffs separately identify in a number of paragraphs of the statement of claim. Some of the information related to NAB's exposure to impairments or losses affecting 10 identified Conduit Notes at certain points in time. Some of the information related to the likelihood that the facilities to the Conduit Notes and to the Conduits who owned the Conduit Notes would not be repaid in full at certain points in time. Some of the information related to the likelihood that NAB would have to recognise a provision or impairment in relation to the losses resulting from the shortfall in Conduit Loan repayments. The plaintiffs' contention being that by not disclosing this information the value of the bank's shares during the relevant period was necessarily greater than, or inflated from, its true value.

7 NAB's defence relevantly denies that the matters alleged by the plaintiffs caused the market price for its shares to be materially greater than its true value or to be greater than the price that would have prevailed but for those matters alleged occurring. It also contends that, at all relevant times, there was a level of market awareness of the matters relevant to, amongst other matters, impairment of the Conduit Loans, including impairment of or losses affecting the Conduit CDOs and, or alternatively, the Conduit Notes, such that NAB was not obliged to make any disclosure of any additional information. NAB further contends in its defence that the information regarding the level of NAB's relevant exposure was publicly known or otherwise not material to the plaintiffs or to the group members.

8 The information the NAB made available to the public, and its impact upon its share price, is a common issue in the pleadings. The pleadings do not, however, engage as a common issue between the group members the actual knowledge of any of the group members or the information actually held by any of them unless it can be shown to be relevant to the price of NAB shares during the relevant period. NAB contends that the information held by the non-party group members described in the summons as the Market Participants whose identity is sought, and from whom discovery is sought, will bear upon the question of what was publicly available and upon the impact of the information they had in affecting the price or value at which NAB shares were trading. To that end the parties filed substantial expert reports in support of their competing positions on the relevance to the market price of NAB shares during the relevant time of (a) the identity of the persons or entities whose identity is sought by NAB's summons and (b) of those people or entities having had the information which is sought to be discovered from them.

9 The expert evidence relied upon by NAB does not establish that the particulars and discovery sought would provide a statistically reliable foundation in support of NAB's defence. The position of NAB in this regard had initially been rather more robustly to the effect that the identity of the persons whose identity is sought, and of the information in their possession, would enable the provision of reliable statistical evidence relevant to the market price of NAB's shares for the relevant period. Mr Betts, a solicitor acting for NAB in the proceeding, said in an affidavit filed in support of the summons that he had been informed by a Dr Tabak, senior Vice President of NERA Economic Consulting, that a group of shareholders with the characteristics of those identified in NAB's summons would constitute a sample group whose knowledge and behaviour was likely to "represent an appropriate proxy for the knowledge and behaviour of the market". That proposition, however, was not maintained in those terms at the hearing of the summons. Senior counsel for NAB accepted during the hearing that the evidence sought in the summons would not produce a sample that was "a statistically representative sample" but that it might nonetheless serve in some other way "as a proxy for the wider market and that group". It would, according to those submissions, "provide a platform for further enquiries".

10 The affidavit sworn to by Mr Betts led to the filing of a report by the plaintiffs from a Professor Gordon made 22 November 2011. Professor Gordon was asked whether the orders sought by the summons would "provide a statistically valid method of determining the knowledge and behaviour of the market for NAB shares as a whole". Professor Gordon is an expert in statistical science, although not in financial economics, and was not challenged to be qualified as an expert to answer the question he had been asked. In his opinion:

The Market Participants [whose identity NAB seeks and from who it seeks discovery] are not appropriate to serve as a proxy for the knowledge and behaviour of the market for NAB shares as a whole, even accepting Dr Tabak's proposition that a representative sample of large NAB shareholders can serve as such a proxy. The Market Participants are self-selected, and therefore not statistically representative. They have all decided to participate in the group proceedings. This decision is an important feature that sets them apart from the whole group of large shareholders, and therefore is a strong potential for selection bias. They are what is known as a "convenience sample", which is an unsound sampling method.

Dr Gordon's report was followed by a responsive report from Dr Tabak filed on behalf of NAB. It largely agreed with Professor Gordon, but added that the question asked of Professor Gordon and his answer was "irrelevant to the forensic enquiry" which was the subject of the application and was typical of the ways in which financial experts use information from parties in securities litigation. What Dr Tabak explained, unsurprisingly, is that targeted inquiries were likely to produce useful lines of inquiry and helpful information. That is not sufficient reason for granting the discovery and particulars sought by NAB in group proceedings.

11 The other evidence filed on the summons included expert evidence about how market knowledge and price inflation may be proved in a statistically reliable way. A second report from Professor Gordon, dated 13 December 2011, was filed by the plaintiffs confirming his earlier opinion that a self-selected sample was not suitable to determine the knowledge and behaviour of the market for NAB shares and confirmed his view that what was needed for statistical reliability was "a representative sample" that would guarantee that the members would be no more or less likely than other NAB investors to have information showing that they had a "correct" understanding of NAB's CDO exposure. That report was followed by an expert report from a Dr Werner filed on behalf of the plaintiffs dated 23 January 2012 and a further report from Dr Tabak dated 30 January 2012. Dr Werner expressed opinions that, upon the hypothesis of an efficient market, a stock traded in an efficient market would (a) reflect all publicly available information and (b) would reflect material private information about a company which had an impact upon the valuation of the company's shares by those trading in the shares. The expert reports also explained the process and probative usefulness of event studies and analyst reports in markets.

12 The cases dealing with applications of the kind brought by NAB have counselled caution before granting the orders sought. The nature of the proceedings as a group proceeding is a factor relevant to the question of whether orders of the kind sought should be made. In Mobil Oil Australia Pty Ltd v The State of Victoria[2] the High Court said in respect to "opt out" proceedings:

... persons who are group members may opt out of the proceedings and, if they do, they are taken never to have been a group member (unless the Court otherwise orders). Group members, however, need to take no positive step in the prosecution of the proceeding to judgment to gain whatever benefit its prosecution may bring.[3]

In Thomas v Powercor Australia Ltd[4] J Forest J said:

It follows that one of the consequences of the opt out model, as was clearly intended by the legislature, is the ability of group members to "sit back" and watch the proceeding unfold. In the event that the representative plaintiff is successful and questions answered result in a declaration of liability, then a group member may become entitled to a share of an award of damages or a distribution from a fund set up by the court.[5]

These observations were made in respect of "opt out" proceedings rather than "opt in" proceedings (as are the proceedings before me). In this case, unlike "opt out" proceedings, each of the parties whose identity is sought have opted in to the group proceeding and each had, as at the commencement of the proceeding, entered into a litigation funding agreement with International Litigation Funding Partners Pte Ltd. It is also relevant in considering whether to grant orders such as those sought by NAB to take into account the nature of the issues in the proceedings and the probable qualities or profile of the persons whose identity is sought and from whom discovery is sought. Observations were made during the second reading speech in the respective parliaments introducing legislation to facilitate class actions suggesting that members of the class would ordinarily not need to participate in the proceedings until the point at which they might wish to bring individual claims about quantum.[6] Those observations, however, were directed to class members who may be thought to be relatively poor and lacking financial resources and may not as readily apply as group members who are large corporations with substantial resources seeking substantial sums of money. In this proceeding the press release by the plaintiffs' lawyers estimated claims of about $450m and the parties whose identity is sought are large institutions with financial means.

13 Non-party group members in a group proceeding, whether an "opt in" or "opt out" proceeding, however may still expect that they will not be participating in the proceeding as a party. That follows from the nature of group proceedings. It is the plaintiffs, and not the other non-party group members, who have the carriage of the case and the responsibility to conduct the case upon the instructions they give. It would be inconsistent with the nature of the proceeding as group proceedings for them to be required to give discovery or to have their identity disclosed as a matter of course. It may be easier to resist applications of the kind sought by NAB in "opt out" proceedings but in each case it will be necessary to show that the orders sought ought to be made.

14 In all cases it will be for the applicant to establish that the orders sought should be made by establishing a legitimate forensic basis for the orders sought in the context of a group proceeding. What is sought in this case are details going to the actual knowledge of group members and of their identity. The actual knowledge of the information which was allegedly not disclosed by NAB during the relevant period is not raised by the pleadings as a common issue. At best it may be said that disclosure of the identity and discovery of the information may put the defendant upon a chain of inquiry[7] that may assist the NAB in its case depending upon what is found. The identity of the parties and the material known to those parties during the relevant time (if any) is otherwise unlikely to provide statistically reliable evidence on the common issues at this stage of these group proceedings. Unlike the position that frequently arises in other proceedings, this is not a case where an expert has been retained to provide an otherwise admissible opinion, probative of issues in dispute, and who identifies the need for specific information that, if provided, would assist the Court in its ultimate determination of the issues in dispute. I am not disposed to make the orders sought by NAB in its summons.

15 It is not necessary for me to consider the competing arguments about whether the orders sought by NAB were oppressive and the relative merits of the competing proposals for how statistically reliable information should be obtained, although it might be desirable to make the following observations. NAB also argued that it needed the particulars and discovery it had sought to establish matters that it could not otherwise establish by other means. There was considerable debate before me concerning the utility of the information sought by the summons, of whether the NAB was able to obtain the information for its stated objective through other means, and of whether the orders sought were otherwise oppressive. NAB led evidence pointing to the difficulty involved for it to obtain the materials it sought through other avenues that might be available to it, such as its own share register. Mr Betts deposed to these difficulties in an affidavit under the heading "There is no effective alternative to seeking discovery from market participants". Counsel for the plaintiffs suggested that the difficulties were both overstated and failed to have regard to the power of NAB under s 672B of the Corporations Act 2001 (Cth) to require the disclosure of the information it claimed to need. Senior counsel for NAB contended, in response, that the provision could not be relied upon in aid of litigation and, in any event, that it could not operate to require the provision of information of the kind sought in respect of past events.[8] It is not desirable for me to express a view on the proper construction of the section in light of my reasons for dismissing the summons and the way in which it arose in the proceeding. It arose only in the course of oral argument and did not have the benefit of mature consideration by counsel for either side. It will be sufficient to note for present purposes that the submissions by senior counsel for NAB have much force although there have been cases when a statutory right to obtain information has been held to be available in aid of litigation.[9] For present purposes I will proceed upon the assumption of the correctness of the argument for NAB and that it may not have recourse to s 672B of the Corporations Act 2001 (Cth) to obtain the information which it seeks to obtain through the summons. It is, at any rate, appropriate to assume that the NAB has been responsibly advised not to have recourse to s 672B. I will also assume as correct the matters deposed to by Mr Betts about the difficulties facing NAB in obtaining the information it seeks through other processes. None of that, however, is sufficient to justify discovery or particulars in this case at this stage and on the materials so far adduced. I am not persuaded that there is a sufficient present forensic benefit to NAB for the orders to be made. It might be different if, as I noted above, an expert had given evidence of needing specific information not otherwise available, or not otherwise reasonably available, which, if provided, was likely to enable the expert to produce probative and admissible expert evidence.

16 I am also not presently persuaded that the difficulties to NAB of obtaining the information by other means justifies the orders sought. In that regard it may be necessary for any difficulties facing NAB to be weighed against the advantages that making the orders is likely to produce and weighed against the disadvantages and burdens imposed upon the group members if the orders were made bearing in mind that the proceeding is a group action. The orders, if made, might produce something useful or might give rise to a chain of inquiry but it might not. There is no reason to assume that any of the persons whose identity is sought and from whom discovery is sought has any information that was not otherwise available to the public. It is conceivable that one of them received information not available to the public, such as might be found in an email, of a kind that could conceivably be relevant to the price at which the recipient of the information might have purchased NAB shares. There is, however, nothing to indicate that there was such an email, or any such information.

17 The plaintiffs for their part also point to the difficulty that they, or the other non-party group members, would face in securing the information of the kind sought by NAB. Some of those difficulties are similar (if not the same) as those identified for NAB in the affidavit by Mr Betts. The issue of whether to make the orders sought is not to be determined on the basis of the relative burdens or inconvenience that may fall upon the respective parties but, rather, by evaluating the justification for the orders for discovery and particulars which are sought by reference to the probative value of the evidence sought, the likelihood of its existence, and the fact that the information is sought in group proceedings. In my view it would not be warranted to make the orders sought by NAB at this stage of the proceeding for the reasons which I have given above. The reports tendered in evidence on the summons do not suggest that the price of the shares during the relevant period had already reflected the existence of information of the kind sought by NAB and which was not publicly available. That is not to say that there was no information of the kind sought by NAB in the summons nor that such information had not already had an effect on the price of NAB shares as it may contend at trial but, rather, that the evidence available on the summons does not support an inference sufficient to justify orders for discovery or particulars as sought.

18 The summons of NAB dated 21 October 2011 will be dismissed and the proceeding will be listed for directions.

[1] See: Supreme Court Act 1986 (Vic) s 33 ZF; Thomas v Powercor Australia Ltd [2010] VSC 489, [52].

cf. P Dawson Nominees Pty Ltd v Brookfield Multiplex (No 2) [2010] FCA 176, [15]; see also Civil Procedure Act 2010 (Vic) s 48(1); Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 32.07; McMullin v ICI Australia Operations Pty Ltd (No 6) (1998) 84 FCR 1, 4.

[5] Thomas v Powercor Australia Ltd, [30] (citations omitted); see also Multiplex [16]-[17].

[6] Second Reading Speech, Courts and Tribunals Legislation (Miscellaneous Amendments) Bill 2000 (Vic), House of Assembly, 31 October 2000 (Rob Hulls, Attorney-General), 1252; Second Reading Speech, Federal Court of Australia Amendment Bill 1991 (Cth), House of Representatives, 14 November 1991 (Michael Duffy, Attorney-General), 3176.

[7] Mulley & Marney v Manifold [1959] HCA 23; (1959) 103 CLR 341.

[8] See: Australian Securities and Investments Commission Regulatory Guide 86, Tracing Beneficial Ownership, June 2007, RG 86.11.

[9] See: Palmdale Insurance Ltd (in liq) v L Grollo & Co Pty Ltd [1987] VicRp 8; [1987] VR 113.

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