In the matter of HIH Insurance Limited (In Liquidation) (ACN 008 636 575) and others; Smith and Others v Anthony Gregory McGrath

Issues

1. On an "appeal" of this kind from a liquidator's rejection of a proof of debt, the issue is whether the liability referred to in the proof of debt is a true liability of the company enforceable against it. [2] As Barrett J (as he then was) observed in Johnston v McGrath, [3] the "appeal" is a vehicle by which the plaintiff seeks to give substance and particularity to a claim it has already advanced in the form of a proof of debt, and a means by which the plaintiff seeks to make a case in support of the acceptance of the proof of debt, so that the court, acting under s 1321, may direct that the claim in question be admitted to proof despite its previous rejection by the liquidators. The court hears the matter de novo and is obliged to reach its own decision on the evidence, including evidence that was not before the liquidators.
2. The main issues are: 1. Whether HIH, FAI and C&G are liable to the plaintiffs for loss and damage caused by the admitted contraventions. Save for the question of causation, which is addressed by issue (2), there is no dispute as to HIH's liability; but the liability of FAI and C&G as accessories is in issue. 2. Whether the plaintiffs are entitled to claim damages on the basis of "indirect causation", without proving direct reliance on the contravening conduct. 3. The basis for quantification of the plaintiffs' damages.
3. If the plaintiffs fail on issue (2), the proceedings - other than the Baldock proceedings, in which there is an additional claim for reliance-based damages which has been deferred - will be dismissed. If the plaintiffs succeed, then there remain some other issues raised by the defendants pertaining to individual plaintiffs and the orders to be made; as indicated at the trial, it seems likely that many of those remaining issues will become capable of agreement (and, if not, then speedy resolution) once the above three questions of principle are resolved. Accordingly, this judgment addresses those three questions of principle.

The contravening conduct

1. Each of those three main issues requires careful identification of the contravening conduct: the first because accessorial liability depends, inter alia, upon involvement in "the contravention", and the second and third because the entitlement to damages is in respect of damage caused by the contravening conduct. As the plaintiffs did not ultimately press any claim founded on the Convertible Note Prospectus, their case was confined to the overstatement, in the reported financial results, of operating profit (and, as a consequence, net assets) for each of the three periods to which those results related.
2. HIH released the FY1999 results (which were for the 18-month period 1 January 1998 to 30 June 1999) on or about 25 August 1999. The profit and loss statement contained in its 1998/99 Annual Report stated that the operating profit for that period, for the consolidated entities, was $102 million before abnormal items and income tax. [4] In the Annual Report, the "Chief Executive's Review", by the Chief Executive, Mr Ray Williams, appeared the following statement: Going forward, we have also taken decisive action, through the purchase of whole account reinsurance protection, in order to protect all of our businesses from claims development uncertainties including potential underwriting exposures to year 2000 losses.
3. The reference to "decisive action, through the purchase of whole account reinsurance protection" was to reinsurance arrangements into which HIH had entered during the period with Hannover Ruckversicherungs Aktiengesellschaft ("the Hannover Re arrangements"). [5] There were two such arrangements: 1. Hannover One, entered into on 19 August 1999, by which Hannover Re agreed to provide reinsurance cover to HIH of up to $450 million, for claims in excess of $2,869 million, not before the expiry of 10 years, from a Managed Fund to be established, maintained and reported on by Hannover Re, but to which HIH was to contribute $200 million. For this, HIH was to pay Hannover Re a fee of $2.65 million; and 2. Hannover Two, entered into on 20 August 1999, by which Hannover Re agreed to provide reinsurance cover to HIH of a further $100 million from a Managed Fund, to which HIH was to pay a further premium of $11 million per annum for five years (and for which HIH would pay a further fee of $650,000).
4. Although the theory was that the Managed Funds would grow at a sufficient rate to meet claims in ten years' time, on the face of the insurance binders, Hannover Re carried the risk that they would not. However, in a separate but contemporaneous Letter of Credit Agreement and Letter of Credit Authority Agreement, HIH effectively guaranteed the performance of the Managed Fund, so that despite initial appearances on the face of the binders, the risk that the Managed Fund would be insufficient to meet claims was ultimately borne by HIH.
5. In the financial statements of FAI and C&G, and consequently in the HIH consolidated financial statements, the Hannover Re arrangements were accounted for as conventional reinsurance contracts. However, they were not conventional reinsurance contracts, but so-called "financial" reinsurance contracts. By accounting for them as if they were conventional reinsurance, each of FAI and C&G, and the consolidated entity HIH, were enabled to report an operating profit significantly greater - in the case of the consolidated entity, by $92.4 million - than would have been the case had they been treated as "financial" reinsurance, as proper accounting practice and standards required. As a consequence, reported net assets of HIH were also inflated by $92.4 million.
6. HIH released the FY2000 interim results - for the six months ended 31 December 1999 - on or about 2 March 2000. The FY2000 interim results reflected the same treatment of the Hannover Re arrangements as the FY1999 results.
7. HIH released the FY2000 final results on or about 17 October 2000. In the HIH Insurance Ltd & Controlled Entities General Purpose Financial Report 1999/2000, the Hannover Re arrangements were again accounted for as conventional reinsurance contracts. As a result, HIH was enabled to report a consolidated operating profit of $61.9 million for the financial year ended 30 June 2000, whereas had they been treated as "financial" reinsurance, HIH would have reported a loss.
8. The defendants admit that the reported financial results of HIH and its controlled entities wrongly accounted for the Hannover Re contracts as (conventional) reinsurance contracts, and thereby overstated operating profits and did not give a true and fair view of the financial position of the consolidated HIH group; and that by releasing them, HIH engaged in conduct that was misleading or deceptive or likely to mislead or deceive, and thereby contravened TPA, s 52 and Corporations Law, ss 995 and/or 999.
9. For the purpose of these proceedings, the following facts were agreed: 1. Each of the financial statements of HIH for the financial years ended 30 June 1999 and 30 June 2000 were prepared on a consolidated basis for HIH and its controlled entities. 2. The controlled entities of HIH for the financial years ended 30 June 1999 and 30 June 2000 included C&G and FAI. 3. The financial statements of C&G for the financial year ended 30 June 1999 wrongly accounted for the Hannover One reinsurance contract, such that the operating loss of C&G recorded therein was understated by approximately $56,400,000 (subject to consequential adjustments for the effects of taxation and interest income that would have been earned by C&G from the deposit arrangements with Hannover). 4. The financial statements of FAI for the financial year ended 30 June 1999 wrongly accounted for the Hannover One reinsurance contract such that the operating loss of FAI recorded therein was understated by approximately $24,700,000 (subject to consequential adjustments for the effects of taxation and interest income that would have been earned by FAI from the deposit arrangements with Hannover). 5. The financial statements of C&G and FAI for the financial year ended 30 June 1999 were consolidated, with other controlled entities of HIH, with the financial statements of HIH, to produce a consolidated financial statement of HIH and its controlled entities for the financial year ended 30 June 1999. 6. The consolidated financial statement of HIH and its controlled entities for the financial year ended 30 June 1999 overstated operating profits by approximately $92,400,000 (subject to consequential adjustments for the: 1. Effects of taxation, as follows: 1. The reduction of tax expense in respect of HIH and those of its controlled entities that incurred a tax expense; and/or 2. The recognition of a future income tax benefit (FITB) in respect of HIH and those of its controlled entities that recorded a loss, 1. Interest income that would have been earned by HIH and its relevant controlled entities from the deposit arrangements with Hannover). 1. The financial statements of C&G for the financial year ended 30 June 2000 wrongly accounted for the Hannover One and Hannover Two reinsurance contracts such that the operating loss of C&G recorded therein was understated (subject to consequential adjustments for the effects of taxation and interest income that would have been earned by C&G from the deposit arrangements with Hannover). 2. The financial statements of FAI for the financial year ended 30 June 2000 wrongly accounted for the Hannover One and Hannover Two reinsurance contracts such that the operating profit of FAI recorded therein was overstated (subject to consequential adjustments for the effects of taxation and interest income that would have been earned by FAI from the deposit arrangements with Hannover). 3. The financial statements of C&G and FAI for the financial year ended 30 June 2000 were consolidated, with other controlled entities of HIH, with the financial statements of HIH, to produce a consolidated financial statement of HIH and its controlled entities for the financial year ended 30 June 2000. 4. The consolidated financial statement of HIH and its controlled entities for the financial year ended 30 June 2000 overstated the consolidated operating profits (by approximately $108,350,000) and consolidated net assets (by $192,000,000) (subject to consequential adjustments for the: 1. Effects of taxation, as follows: 1. The reduction of tax expense in respect of HIH and those of its controlled entities that incurred a tax expense; and/or 2. The recognition of a FITB in respect of HIH and those of its controlled entities that recorded a loss, 1. Interest income that would have been earned by HIH and its relevant controlled entities from the deposit arrangements with Hannover).
10. Thus, the only relevant contravening conduct is the overstatement by HIH of its operating profit (and consequently, net assets) in the FY1999 results, the FY2000 interim results and the FY2000 final results, resulting from the incorrect accounting treatment of the Hannover Re arrangements.

Accessorial liability of FAI and C&G

1. A person who suffers loss or damage by conduct of another person done in contravention of a provision of TPA, Part IV or V (and s 52 is a provision of Part V) may recover the amount of loss or damage by action against that other person or against any person involved in the contravention. [6] A person is relevantly "involved" in a contravention of a provision of Part V if the person: (a) has aided, abetted, counselled or procured the contravention; or (b) has induced, whether by threats or promises or otherwise, the contravention; or (c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention. [7]
2. Similarly, a person who suffers loss or damage by conduct of another person that was engaged in in contravention of Corporations Law, ss 995 or 999, may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention. [8] A person is involved in a contravention if and only if that person: (a) aided, abetted, counselled or procured the contravention; (b) induced the contravention, whether by threats or promises or otherwise; (c) was in any way knowingly concerned in or party to the contravention, whether by act or omission or directly or indirectly; or (d) conspired with others to effect the contravention. [9]
3. To incur accessorial liability under these provisions, the alleged accessory must have, with actual knowledge of the essential facts which made what was done by the principal contravener a contravention, in some way participated in, assisted or encouraged the contravention. [10] A director is not a party to the corporation's contraventions merely by being a director; to be party to a contravention, the alleged accessory must be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention. [11] Thus, there are two elements of accessorial liability: knowledge, and participation.
4. In respect of the "participation" element, what is required is merely the doing of something which acted to help, encourage or induce the contravention. [12] The accessory "must merely have done something to assist or encourage the bringing about of the contravention". [13] With the abandonment by the plaintiffs of their pleaded claim against CIC, the accessorial liability case is now confined to FAI and C&G. The plaintiffs contend that FAI and C&G sufficiently participated in HIH's misleading conduct - the overstatement of its operating profit in the reported financial statements - to incur accessorial liability.
5. Both FAI and C&G were parties to the Hannover One contract. Both wrongly accounted for the Hannover Re arrangements as (conventional) contracts of reinsurance in their own financial statements for the relevant financial periods, thus reporting operating profits that were overstated as a result of the incorrect accounting treatment of the Hannover Re arrangements.
6. The consolidated HIH financial statements incorporated, in the results of the consolidated entity, those of its subsidiaries. Thus, the misleading information ultimately contained in the reported financial results was originally generated by FAI and C&G, included in their financial statements, and carried forward into the consolidated HIH financial statements. The misstatement in the subsidiaries' financial statements was the genesis of the misrepresentations in the reported financial results of HIH. In this way, the treatment of the Hannover Re arrangements by FAI and C&G in their financial statements was a fundamental input to the contravening conduct. "Participation", in the relevant sense, is established.
7. But mere participation, though essential, is insufficient to attract accessorial liability; such participation must be accompanied by knowledge by the participant of the essential matters that constitute the contravention (whether or not he or she knew that those matters were in law a contravention). [14] This means actual knowledge of the putative accessory, and not such knowledge as might be postulated of a hypothetical person in his or her position, although actual knowledge may be established by inference from the surrounding circumstances. [15] The knowledge of a corporation can be established by the knowledge of a director, servant or agent by whom the relevant conduct was engaged in within that person's actual or apparent authority. [16]
8. In a case of misleading and deceptive conduct such as the present, the essential matters constituting the contravention, of which knowledge by the alleged accessory must be established, are (1) the making of the representation that constitutes the contravention, and (2) that the representation is misleading. [17]
9. The plaintiffs sought to attribute the requisite knowledge to FAI and C&G through their directors Messrs Williams and Fodera. Mr Williams was Chief Executive Officer of HIH, and Mr Fodera was its Chief Financial Officer; both were also directors of C&G and FAI. I have found that FAI and C&G "participated" in the contravening conduct by the release of their own financial statements. For the purposes of attributing knowledge to FAI and C&G under s 84, that participatory conduct is the relevant conduct. Thus, the plaintiffs must establish that directors or agents of FAI and C&G who authorised and released the subsidiary's financial statements did so with knowledge (1) that they would be reflected in the consolidated HIH accounts, and (2) that by doing so the HIH accounts would be rendered misleading.
10. Publication of the subsidiaries' accounts was authorised by Mr Fodera - in both relevant years, he signed the directors' declaration in the accounts of C&G and FAI - and accordingly, it is Mr Fodera's knowledge that is relevant. Mr Fodera was a man of considerable business and accountancy experience. He was described in the HIH 1998/999 Financial Report as a member of its investment, reinsurance and due diligence committee, a chartered accountant with 20 years' experience in the financial services industry, formerly a partner in Arthur Anderson's National Financial Services team, and Chief Financial Officer of HIH since September 1995.
11. As to knowledge that the subsidiaries' reported financial results would be reflected in the consolidated HIH accounts, it is inherent in the concept of consolidated accounts that they include the results of subsidiaries so as to report the outcome of the entire group, and any accountant - let alone one of Mr Fodera's experience - would know and understand that. Moreover, the accounts of each of FAI and C&G were in fact included in the consolidated financial statements of HIH each year, and as Chief Financial Officer of HIH, Mr Fodera must have known that. I am satisfied that Mr Fodera actually knew that the financial statements of FAI and C&G would be carried forward into the consolidated results for HIH, with the consequence that the reported operating profits of FAI and C&G would be reflected in the consolidated results of HIH.
12. As to knowledge that inclusion of the reported operating profit of the subsidiaries would render the HIH consolidated results misleading: while the agreed facts establish that the Hannover Re arrangements were wrongly accounted for, with deceptive results, that does not of itself mean that Mr Fodera knew that to be so. Moreover, there is no direct evidence that Mr Fodera knew that the Hannover Re arrangements were incorrectly treated and thus that operating profits were overstated.
13. However, in the absence of admission, knowledge must usually be ascertained by inference. The plaintiffs submit that once one appreciates the true nature of the Hannover Re transactions, with the associated Letter of Credit transferring the risk back to HIH, the only sensible inference is that they were implemented to create an appearance of profitability which the financial statements would not otherwise bear - in other words, to deceive. I have described above the effect of the Hannover Re arrangements, which was to create an appearance of reinsurance - such as to enable Mr Williams in his Annual Review to describe it as "decisive action" by HIH to protect its business "from claims development uncertainties including potential underwriting exposures" - while in truth, the separate but related Letter of Credit transactions had the consequence that the Managed Fund was funded by HIH and the risk that it would ultimately prove insufficient was retained by HIH. Mr Fodera executed several of the critical documents which constituted the Hannover Re arrangements, including the Letters of Credit. That supports an inference, particularly in the absence of evidence to the contrary, that he understood their effect to be as I have described.
14. Moreover, in the absence of evidence to the contrary, it can and should be inferred - from his qualifications and experience as an accountant, from which he must have been familiar with accounting standards, and his position and responsibilities as Chief Financial Officer of HIH, from which he must have been familiar with accounting practice and standards in the insurance industry - that he knew that the treatment of the Hannover Re arrangements was incorrect according to proper accounting practice and standards, and would create a misleading appearance of profitability.
15. These inferences are reinforced, though they do not depend on, the circumstance that Mr Fodera was not called by the defendants to deny such knowledge: although the defendants protested that he was not "in their camp", he was, as a former officer, obliged to assist the liquidators, and he would much more naturally be called by the defendants to deny that he had guilty knowledge than by the plaintiffs to confess that he did.
16. Invoking Pereira v DPP, [18] the defendants submitted that such an inference could be drawn adversely to them only if it was the only available inference in the circumstances. However, this is not correct: in Pereira, the notion that knowledge must be the only rational inference available was stated in the context of a criminal prosecution, where proof beyond reasonable doubt requires that, in a circumstantial case, all rational hypotheses consistent with innocence must be excluded. The proof required in a civil case is not so demanding; an inference may be drawn if the court is comfortably satisfied, having regard to the gravity of the allegation, that more probably than not it is the true explanation of the circumstances.
17. The defendants submitted that alternative available inferences were that the directors had a mistaken understanding of the Hannover Re arrangements or did not understand their proper accounting treatment, or that they passively acquiesced in them without forming any considered view as to their effect. Given the position and role of Mr Fodera in both HIH and the subsidiaries, his accountancy background and experience, the manifest purpose of the Hannover Re transactions in enhancing the appearance of HIH's financial statements but not in fact removing the risk from HIH, and his involvement in executing critical transaction documents, I consider these explanations highly improbable. I am therefore comfortably satisfied on the balance of probabilities that Mr Fodera knew that the treatment of the Hannover Re arrangements in the FAI and C&G financial statements would be replicated in the consolidated HIH results, and so replicated would create a misleading and deceptive appearance of HIH's operating profit for the relevant periods.
18. It follows, pursuant to TPA, s 84, that FAI and C&G had the requisite knowledge of the essential facts constituting HIH's contraventions, and by publication of their own financial statements were knowingly concerned in and/or party to the contraventions, so as to incur liability in respect of them as persons involved in the contraventions.

Indirect causation

1. A material fact in the statutory causes of action for damages under TPA, s 82(1) and Corporations Law, s 1005(1), on which the plaintiffs sue, is that the plaintiffs have suffered loss or damage "by" the contravening conduct. The word "by" expresses the notion of causation without defining or elucidating it. [19] It is not necessary that the plaintiffs establish that the contravening conduct was the sole cause of any relevant loss; it suffices if the conduct was a cause of the relevant loss, in the sense that it materially contributed to that loss. [20] In this case, the question is whether the publication of HIH's financial results, including overstated operating profit due to the treatment of the Hannover Re arrangements materially contributed to the plaintiffs incurring loss.
2. The plaintiffs did not essay to prove that they were induced to acquire their shareholdings in HIH by the contravening conduct, or that they did so in direct reliance on the contravening conduct. Rather, the plaintiffs contended that they acquired HIH shares on the ASX at the then prevailing market price, and that that market price was artificially inflated by reason of the overstated reported financial results - which conveyed to the market an overoptimistic impression of HIH's financial position and prospects. Thus, it is said that the contravening conduct resulted in the prices at which HIH shares traded on the ASX being higher than those which would otherwise have obtained, and that a person who acquired shares in that inflated market suffered loss because he or she paid more than would otherwise have been paid for the subject shares. In other words, it is said that loss was incurred because the contravening conduct - the release of the overstated accounts - distorted the market on which HIH shares were traded, and the causation requirement is satisfied by the facts that (1) the contravening conduct misled the market into attributing an inflated value to HIH shares, (2) the plaintiffs acquired their shares in that inflated market, and (3) the plaintiffs thus paid more than they would otherwise have paid for the same shares. This has been described as "indirect causation." The plaintiffs contend that the law does not preclude such a claim.
3. Against that, the defendants contended that, on the authority of the decisions of the Court of Appeal in Digi-Tech (Australia) Ltd v Brand [21] and Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [22] and of the Full Court of the Federal Court in Ford Motor Company of Australia Limited v Arrowcrest Group Pty Ltd, [23] where a person claims to have suffered loss by reason of entry into a transaction, they must establish reliance. They argue that "indirect causation" is available only in cases where the applicant is passive and a third party has been induced by the misleading or deceptive conduct to act to the applicant's prejudice; whereas in this case, the plaintiffs are seeking to mount an indirect causation case where the third party is "the market" rather than an identifiable individual, and where they have not been passive but have themselves actively entered into the transactions by which they claim to have suffered loss. In such circumstances, the defendants submitted, it is necessary for the plaintiffs to establish that they relied on (or would have acted differently but for) the contravening conduct, and that absent such reliance there is no "causative bridge" between the contravening conduct and the loss. In this case, that would mean that in order to demonstrate a relevant causal connection between the contravening conduct and the alleged loss, each plaintiff would have to establish that he, she or it was induced by the contravening conduct to enter into the transactions whereby he, she or it acquired HIH shares, in the sense that he, she or it relied upon the overstated financial results when making a decision to acquire those shares, or would have acted differently but for those overstated results.
4. Two questions arise from these competing positions of the parties. The first is whether, as the defendants contend is dictated by authority, "indirect causation" is not available in a case such as the present, and reliance must be established. The second is whether - if indirect causation is available - it has been established; as will be seen in the context of this case, that second question is intertwined with the quantification of the plaintiffs' damages.
5. In the United States, any requirement for evidence of direct reliance might be dispensed with by the "fraud-on-the-market" theory, under which reliance can be presumed: the market price of shares traded on well-developed markets reflects all publicly available information - and hence any material misrepresentations - so that it can be assumed that an investor relied on public misstatements whenever he or she buys or sells stock at the price set by the market. [24] To invoke the presumption, it must first be established that: (a) the alleged misrepresentations were publically known; (b) the stock traded in an efficient market, and (c) the relevant transactions took place after the misrepresentations were made and before the truth was revealed. [25] A stock's listing on a national market is probative evidence of the second factor, but if efficiency is disputed, courts consider the characteristics of the individual stock, including its weekly trading volume, and any expert evidence demonstrating a cause and effect relationship between unexpected, material disclosures and changes in stock prices. [26] Once a plaintiff has successfully invoked the presumption, he or she is presumed to have relied on the non-disclosure. Defendants may rebut this presumption by establishing that: (a) the non-disclosures did not affect the market price; or (b) the plaintiffs would have purchased the shares at the same price had they known the information that was not disclosed; or (c) the plaintiffs actually knew the information that was not disclosed to the market. [27] However, this doctrine does not avail the plaintiffs because Australian law does not authorise any rebuttable presumption of this kind. [28]
6. The ultimate issue posed by TPA, s 82 (and its equivalents) is one of causation, not one of reliance, and reliance is not a substitute for the fundamental question of causation. [29] The word "by" signifies no more than that the loss or damage has to have been brought about by virtue (or reason) of the contravening conduct. [30] As a matter of principle, if causation - "by conduct of" - can otherwise be established, it cannot matter that reliance is not established. Thus, the statutory cause of action does not, per se, include reliance as a necessary material fact (although that is not to say that it will not be one, as a matter of fact, in the context of many, if not most, individual cases).
7. In Janssen-Cilag Pty Limited v Pfizer Pty Ltd, [31] Pfizer had made misleading and deceptive representations to consumers through an advertising campaign. Janssen-Cilag, a competitor, claimed that it had suffered loss and damage because, as a result of the misrepresentations, the public and pharmacists had purchased Pfizer's product instead of a Janssen-Cilag product. Lockhart J held that there was no general requirement under TPA, s 82, that damage could be recovered only where the applicant itself relied on the contravening conduct, and that applicants may claim compensation where the contravener's conduct caused other persons to act in a way that led to loss or damage to the applicant. [32] Having observed that the word "by" in s 82(1) required that there be a sufficient causal link between the contravening conduct and the recoverable loss, and that the loss or damage directly result from or be caused by the contravening conduct, such that the conduct must be the "real or direct or effective" cause of the loss, his Honour proceeded to hold that the entitlement to recover damages under s 82 was not confined to cases in which the applicant had relied upon or personally been influenced by the contravening conduct: [33] Whilst the applicant's loss or damage must be caused by the respondent's misleading or deceptive conduct, I see nothing in the language of the Act or its purpose to warrant the suggestion that the right of an applicant for damages under s 82 is confined to the case where he has relied upon or personally been influenced by the conduct of the respondent which contravenes the relevant provision of Pt IV or Pt V of the Act. Examples abound to prove the point, but it is sufficient if I take one simple case. A manufacturer of, say, leather goods may have established over many years a large and valuable reputation amongst the public or a significant section of the public. The respondent may commence to carry on the business of manufacturing leather products under a name deceptively similar to that of the applicant and by which the applicant's goods are known. Members of the public may be misled into believing that the respondent's business is the business of the applicant or associated with the business of the applicant and they may take their business to the respondent. The applicant has not relied on any representation of the respondent or been misled or deceived by it, but his loss is the loss of business occasioned directly by the respondent's conduct (or the consequent loss of profit). I can conceive of no reason why the Act, which is designed to foster and promote competition and, by Pt V, to prevent misleading and deceptive conduct, should be given a restrictive interpretation in s 82 such that only persons who relied upon the representation are entitled to recover loss or damage from the respondent. The evident purpose of the Act leads in my opinion plainly to a different conclusion.
8. Thus, his Honour held that where a corporation engaged in conduct which misleads consumers, the natural and direct result of which is to cause the public to buy more of its product and less of a rival's, the loss to the rival was direct and immediate, not remote and indirect. [34] His Honour's judgment - and specifically the observation that there was no general requirement that damage could be recovered only where the applicant personally relies upon the contravening conduct - was cited, with apparent approval, by Gummow J in the High Court, in Marks v GIO Australia Holdings Limited. [35]
9. In Hampic Pty Ltd v Adams, [36] Ms Adams (an employee) suffered injury while using a cleaning product acquired by her employer from Hampic. The tin in which the product was supplied bore a warning label, which was deceptively inadequate. Ms Adams' supervisor read the label and gave her the product to use, in a different (smaller) tin than that provided by Hampic. Ms Adams therefore never read the label, and could not have relied upon the contravening conduct of Hampic. Nonetheless. her entitlement to recover of damages under TPA, s 82, was upheld, on the basis that but for the deceptive warning, the supervisor would have acted differently and, in consequence, so too would Ms Adams. Mason P and Davies AJA found that the failure adequately to label the substance contributed to the plaintiff's injury, and held that this was sufficient to sustain her claim for damages, there being no requirement that damages could be recovered only where the applicant relied directly upon the contravening conduct. Their Honours said: 35 Section 82 of the Trade Practices Act gives a cause of action for damages to "a person who suffers loss or damage by the conduct of another person" that was done in contravention of s52 and certain other provisions of the Act. The section does not stipulate any particular manner in which the loss or damage must be suffered. The requirement of causation is not a stringent one (see generally Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25). In Jansen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526 Lockhart J held that there is no requirement that damages can be recovered only where the applicant relies directly upon the conduct of the party constituting contravention of the relevant provision. This decision has been followed in several later cases and the reasoning was expressly approved by Gummow J in Marks v GIO Australia Holdings Ltd (1998) 73 ALJR 12 at 30-1.
10. In Australian Breeders Co-operative Society Ltd v Jones ("ABCOS"), [37] a Full Court of the Federal Court applied these principles in the investment context to uphold a finding that causation was established where, but for a misleading valuation, a third party would not have completed a transaction, with the consequence that the applicant investors would not have made the investments which occasioned their claimed loss - notwithstanding that there was no evidence that they relied on the misleading valuation. In a passage which I set out at length because it helpfully collects some of the relevant authorities and demonstrates the application of the principles to the facts, Wilcox and Lindgren JJ, with whom Lee J agreed, said: [38] One further point should be made about causation. We make it because of the circumstance that there is no evidence that any of the investors (as distinct from MANL) made any decision in reliance on the ABCOS valuation. In cases where a representation is said to constitute misleading conduct for the purposes of s 52 of the Trade Practices Act, typically it is claimed that the applicant relied on the truth of the representation, and thereby suffered loss. But this is not the only situation in which s 52 is available to an applicant. It is sufficient that the loss was "brought about by virtue of the conduct which is in contravention of s 52": see per Lockhart J in Kabwand Pty Ltd v National Australia Bank Ltd [1989] ATPR 40-950 at 50,378. In a later case, Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526 at 530; 109 ALR 638 at 642 Lockhart J expanded on the point: The use of the preposition "by" in s 82(1) is important; it indicates the requirement that there be a sufficient cause or [sic - causal] link between the respondent's conduct and the recoverable loss or damage: see Brown v Jam Factory Pty Ltd (1981) 53 FLR 340 at 350-1; 35 ALR 79; Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (No 2) (1987) 16 FCR 410 at 418; 75 ALR 271. "By" is used in s 52(1) in the sense of "by reason of" or "as a result of"': see Munchies Management Pty Ltd v Belperio (1989) ATPR 50,026 at 50,037; 84 ALR 700. Loss or damage must directly result from or be caused by the respondent's conduct. The respondent's conduct must be the real or direct or effective cause of the applicant's loss; it must have been ``brought about by virtue of'' the conduct which is in contravention of s 52 … Shortly after that decision, Mason CJ spoke to similar effect in Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514 at 525 ; 109 ALR 247 at 253: The statutory cause of action arises when the plaintiff suffers loss or damage "by"' contravening conduct of another person. "By" is a curious word to use. One might have expected "by means of", "by reason of", "in consequence of" or "as a result of". But the word clearly expresses the notion of causation without defining or elucidating it. In this situation, s 82(1) should be understood as taking up the common law practical or common-sense concept of causation recently discussed by this court in March v E & MH Stramare Pty Ltd (1991) 171 CLR 506; 99 ALR 423, except in so far as that concept is modified or supplemented expressly or impliedly by the provisions of the Act. Had parliament intended to say something else, it would have been natural and easy to have said so. In March v Stramare Mason CJ said (at CLR 514; ALR 429): … the law's recognition that concurrent or successive tortious acts may each amount to a cause of the injuries sustained by a plaintiff is reflected in the proposition that it is for the plaintiff to establish that his or her injuries are "caused or materially contributed to" by the defendant's wrongful conduct … Generally speaking, that causal connection is established if it appears that the plaintiff would not have sustained his or her injuries had the defendant not been negligent … But, as the decision in that case illustrates, it is often extremely difficult to demonstrate what would have happened in the absence of the defendant's negligent conduct. In the present case, as it seems to us, there is no difficulty in demonstrating, on the probabilities, what would have happened in the absence of ABCOS' misleading valuation. MANL would not have completed the transaction, the syndicate would not have proceeded and the investors would not have incurred the losses they sought to recover in proceeding NG711 of 1991.
11. Stockland (Constructors) Pty Ltd v Retail Design Group (International) Pty Ltd [39] was an interlocutory appeal from a decision to allow a cross-claim to be amended so as to plead a cause of action under the TPA. The cross-claimant Retail Design (a firm of architects) claimed damages for misleading conduct by Stockland Constructors, said to be constituted by representations made by Stockland Constructors to Stockland Properties (and other companies associated with the Stockland Group), in particular that the architects were the cause of a third party's claim against Stockland and were liable in negligence for the losses of Stockland Constructors and Stockland Properties arising from that claim. Retail Design pleaded that those representations were false, that in reliance on them Stockland Properties and other companies in the Stockland Group formed the belief that the architects were not competent and that, as a result, Retail Design suffered loss in that, whereas previously it had been making substantial profits from work for the Stockland Group, from March 1997 onwards it no longer had that work and those profits. One of the objections to the cross-claim was that it included no allegation of reliance by Retail Design. Hodgson JA, with whom Sheller JA and Davies AJA agreed, held that for a plaintiff to recover damages under the TPA for misleading and deceptive conduct, it was not necessary that the plaintiff itself had been misled, and it may be able to recover loss suffered by it because others were misled. His Honour said: [27] Mr Grieve submitted that there was no allegation that Retail Design had relied on the representations. However, there is no requirement in the Trade Practices Act to the effect that damages are recoverable under s52 and s80 only if they are caused to a plaintiff by reason of the plaintiff itself being misled by the representations. A plaintiff may be able to recover damages for loss suffered by the plaintiff because others are misled by a defendant's misleading conduct: see Flamingo Park Pty Ltd v Dolly Dolly Creations Pty Ltd (1986) 65 ALR 500, Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526.
12. The importance of focussing on causation rather than reliance was highlighted by Giles JA (with whom Beazley JA and Ipp JA agreed) in Smith v Noss. [40] His Honour said: 25 First, the essential question is causation. There may be causation from misleading or deceptive conduct if the conduct lies in failing to disclose that which in the circumstances should have been disclosed. It is not a natural use of the notion of reliance to say that there was reliance on the failure in disclosure, but causation can be found if disclosure would have caused inaction or action other than that which was taken: as was said by Besanko and Vanstone JJ in Smith v Maloney (2005) 92 SASR 498 at 514-5: In a case where there has been failure to advise, as distinct from the provision of incorrect advice, it is somewhat artificial to formulate the test of causation in terms of real inducement because the court is required to consider a hypothetical question namely, what would the plaintiff have done had the defendant provided the advice he was bound to provide. 26 Even where the misleading or deceptive conduct lies in disclosing something - making a representation which is false - the notion of reliance must be used with care. Causation will be established if there would have been inaction or some other action had it been known that the representation was false. Since the representee did not know the falsity of the representation, again there is a hypothetical question, and in such a case the scope for the representee to give evidence of thought processes at the time may be quite limited and "reliance" may mean no more than that the representee would have acted differently had it been known that the representation was false. To speak of a need for explanation or for specific evidence of reliance, or for evidence of a decision-making process, can lead to error; the question is one of causation.
13. That statement was emphatically endorsed by the High Court in Campbell v Backoffice Investments Pty Ltd, [41] in the following terms: With considerations of these kinds in mind, Giles JA was right to point out that reliance is not a substitute in the context of the Fair Trading Act for the essential question of causation. Moreover, it is also right to observe, as Giles JA said, that "[i]t may be artificial to speak of reliance in determining what action or inaction would have occurred if the true position had been known.
14. The above authorities establish that proof of reliance on the contravening conduct is not an essential element of a cause of action for damages under TPA, s 82. A sufficient causal connection can be established in ways that do not involve the applicant directly relying on the contravening conduct. However, the defendants submit that decisions of intermediate appellate courts [42] compel the conclusion that, in a case such as the present in which the causal chain includes steps taken by the plaintiffs themselves to enter into the transaction, reliance is indeed an indispensable element.
15. In Digi-Tech (Australia) Ltd v Brand, [43] the plaintiffs were investors in a scheme based on Digi-Tech's products. Digi-Tech had provided misleading forecasts concerning certain products to Deloitte, who devised an investment scheme based on them and valued the scheme by assuming the correctness of the misleading forecasts. One Mr Urwin, who was not involved in the misleading conduct, proposed the scheme to the investors. The plaintiffs argued that if Digi-Tech had not produced the misleading and deceptive forecasts, there would have been no sufficiently high valuation of the products to support the investment scheme, which would not have gone ahead, so that the promoter Mr Urwin would not have proposed the scheme to any of the investors, with the consequence that the investors would not have invested in it and suffered loss. Thus it was submitted that Digi-Tech's misleading conduct thereby caused the promoter to act in a way that led to loss or damage to the appellants. [44]
16. The Court of Appeal (Sheller, Ipp and McColl JJA) drew a distinction between the Janssen-Cilag and Stockland category of claim, and claims in which plaintiffs suffered loss because they themselves were induced by misleading representations to perform some act or omission by which they were prejudiced: [45] [155] Stockland (Constructors) Pty Ltd v Retail Design Group (International) Pty Ltd followed the approach of Janssen-Cilag. Stockland, like Janssen-Cilag, was not a case where the plaintiff claimed damage caused by entering into a transaction induced by misleading conduct. In both cases the misleading conduct had caused others to act to the direct prejudice of the plaintiff. That is to say, the chain of causation was as follows: first, misleading conduct by the defendant; second, an innocent party is induced by the misleading conduct to act in some way; third, the innocent party's act, by its very nature, causes the plaintiff loss. On this basis, no act of the plaintiff contributes to the loss. The chain of causation is complete without there needing to be any act or omission on the part of the plaintiff. [156] The Janssen-Cilag and Stockland category of claim is materially different to that which occurs when plaintiffs suffer loss because they, themselves, are induced by misleading representations to perform some act or omission by which they are prejudiced. The difference lies in the fact that in the first category of case no conduct on the part of the plaintiff forms a link in the causation chain. In the second category, the inducement of the plaintiff and his or her act or omission causing loss is an essential part of the chain. Without such inducement and a consequential act or omission on the part of the plaintiff there is indeed no linking chain between the misleading conduct and the plaintiff's loss … [157] This analysis demonstrates the fallacy of applying the so-called indirect theory of causation to this case. [158] On the assumption that Digi-Tech's forecasts as to the revenue and gross margin of the products were misleading and deceptive, that misleading and deceptive conduct resulted in Deloitte producing, in essence, a misleading and deceptive valuation to support the price of $72.5m. That valuation enabled the investment scheme to be put together and proposed by Urwin to the appellants. But to complete the chain of causation, there must be something linking the appellants' loss to their entry into the investment scheme. That link is the inducement of the appellants and their consequential act of entering into the transaction to their prejudice. Without that link, there is no proof that the misleading conduct caused the loss. [159] We accept Mr Sheahan's submission that, whatever might be the position in other contexts, in cases of this kind (misrepresentation inducing a transaction) the courts have required reliance by or on behalf of the plaintiff on the misrepresentation as being essential to the proof of causation as required by s 82(1) of the Trade Practices Act 1974. Persons who claim damages under s 82(1) on the ground that they entered into transactions induced by the misrepresentations of other persons must prove that they relied on such misrepresentations and, therefore, "by" that conduct, they suffered loss or damage. As Mr Sheahan pointed out, were it otherwise, representees could succeed even though they knew the truth, or were indifferent to the subject matter of the representation. [160] On this ground alone we would not uphold this argument. [161] We would add, in any event, that we consider to be well-founded Digi-Tech's submission that, by reason of the appellants' omission to plead the indirect theory of causation, they should not be able to raise it at this stage.
17. The distinction drawn between the two classes of claim is that, in the first class, no act of the plaintiff contributes to the loss, and the chain of causation is complete without any act or omission on the part of the plaintiff; whereas in the second, which occurs when plaintiffs are induced by misleading representations to perform some act or omission by which they are prejudiced, the inducement of the plaintiff and his or her act or omission causing loss is an essential part of the chain. The Court held that plaintiffs in the second class, who claim damages under s 82(1) on the ground that they entered into transactions induced by the misrepresentations of other persons, must - to establish that "by" that conduct, they suffered loss or damage - prove that they relied on the misrepresentations. However, that was in the context that while the contravening conduct may have satisfied a "but-for" approach to causation, it did no more than contribute to providing an opportunity for the plaintiff to enter into the relevant transactions. Moreover, a significant factor was the consideration that representees who knew the truth, or were indifferent to the subject matter of the representation, should not be able to succeed.
18. In Ford Motor Company of Australia Ltd v Arrowcrest Group Pty Ltd, [46] Ford contracted with Arrowcrest for certain supplies, and with Arrowcrest's subsidiary Tristar for the supply of steering gears for a car model intended to be produced over four years - however, the agreement with Tristar was for a term of only three years. Towards the expiry of that term, Ford unsuccessfully sought another supplier of steering gears. Despite disagreements and litigation between Ford on the one hand and Arrowcrest and Tristar on the other, Ford remained dependent on Tristar as the only supplier of the component it required. Tristar informed Ford that the unit production cost of the steering gears had to rise, and supplied "cost breakdown" calculations which, Ford contended, were - along with further written justifications of the "cost breakdown" - false representations. However, Ford had no option but to obtain steering gears from Tristar on unfavourable terms, in order to complete the four-year production program for the model.
19. Without determining whether or not the representations complained of were false, the primary judge determined that Ford was not entitled to succeed, on causation-related considerations. That decision was upheld on appeal to the Full Court, which held that the primary judge was correct to find that there was no reliance by Ford on Tristar's alleged misrepresentations, as Ford did not believe them and thus could not have been induced by them to enter into further transactions with Tristar; it was simply a case of commercial advantage, in which Tristar was able to dictate terms when Ford could find no other supplier. In the absence of reliance, Ford could not establish loss. After referring to Janssen-Cilag v Pfizer, Hampic v Adams, McCarthy v McIntyre [47] and Marks v GIO, Lander J (with whom Hill J and Jacobson J agreed) said: [48] [123] None of the cases relied upon support Ford's contention that causation can be established in a misrepresentation case without proof that the misrepresentations were relied upon. They support a different (but irrelevant proposition for the purpose of this case) that an applicant may establish causation in such a case by proving that a third party relied upon the misrepresentations and that party's reliance caused the applicant's damage. … [125] In this case Ford could not establish loss without proving reliance upon the representations made by Tristar. [126] If Ford did not rely upon the misrepresentations it cannot be said that Ford suffered loss or damage "by conduct of" Tristar. Ford was not induced by the misleading and deceptive conduct to do or refrain from doing something which caused it damage.
20. What that case establishes is not that the applicant must necessarily prove that it relied on the contravening conduct, but that the applicant must establish that somewhere in the chain of causation, someone relied on the contravening conduct - in other words, that someone was misled or deceived, and that such deception brought about prejudice to the applicant. Unless someone in the chain of causation is deceived, it cannot be said that the ultimate loss to the applicant is "by conduct of" the respondent, because the conduct would be immaterial to the ultimate loss unless it impacted somehow on the causative process.
21. In Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd, [49] which concerned a claim for damages under Corporations Law, s 1005, in respect of a contravention of s 995, for loss sustained by investors who had participated in a converting note issue, the plaintiffs contended that but for the contravening conduct, the note issue would not have taken place, in which event they would not have acquired any of the notes and would not have suffered loss. However, they did not allege or prove that they were misled. Their case failed on other grounds, but Ipp JA advanced, as a further ground, that as the appellants did not allege or prove that they were misled, Digi-Tech meant that they had not suffered loss "by" the conduct of the respondents. [50] Ipp JA explained Digi-Tech as follows: [51] [615] This Court (Sheller JA, Ipp JA and McColl JA) held that the relief so claimed was based on a flawed "but for" test for causation. The Court held that, under s 82(1) of the Trade Practices Act (Cth), persons who claim damages on the ground of misleading or deceptive conduct in contravention of s 52, and who allege that they incurred those damages by acquiring something in consequence of such conduct, must prove that they were misled by that conduct. If that is not proved, the plaintiffs fail to establish that the damages claimed were suffered "by" that conduct.
22. After referring to Ford v Arrowcrest, his Honour distinguished cases such as Janssen-Cilag "where a person, by misleading conduct, induces another to act to the prejudice of the plaintiff", in which "the plaintiff is a passive victim of misleading conduct" and "no action or omission by the plaintiff affects the loss it suffers", from the Digi-Tech category, in which "the plaintiff acts or refrains from acting to his or her prejudice by reason of conduct of a third party brought about by the defendant's misleading conduct; the plaintiff's conduct is a necessary link in the chain of causation". His Honour explained the rationale of Digi-Tech as follows: [618] The rationale of Digi-Tech (Australia) is that loss incurred by plaintiffs in acting (or refraining from acting) to their prejudice can only be loss caused "by" conduct contravening s 52 if the plaintiffs are misled by that conduct. Likewise, in my view, such plaintiffs can only succeed in cases based on a contravention of s 995 [of the Corporations Law] if, in fact, they are misled. I stress that by "such plaintiffs" I mean plaintiffs who claim to have suffered loss brought about by their own actions or omissions coupled with misleading conduct by the defendants.
23. Giles JA rejected the submission that the relevant passages in Digi-Tech should be discounted as obiter dicta, saying: [52] I do not regard the Court's supplementary observation that the "indirect causation theory" was unavailable on pleading grounds as detracting from the considered statements in the passages I have set out.
24. His Honour explained the relevant distinction between the two classes of claim, and that the second class - in which reliance must be established - is not restricted to a case of direct inducement but extends to all cases where conduct on the part of the plaintiff constitutes a link in the causation chain, in the sense that the plaintiff is someone who made a decision to enter into the transaction, and the representation was material to the decision: [53] [12] The appellants' reliance on the reference in par [156] of Digi-Tech (Australia) v Brand to the category of claim "when plaintiffs suffer loss because they themselves are induced by misleading representations to perform an act or omission by which they are prejudiced" was in my view misplaced. Their Honours were contrasting the kinds of claim, and were not restricting what followed to where there was direct inducement of the plaintiff; they were identifying the kind of claim in which inducement of the plaintiff played a part. The distinction drawn in Digi-Tech (Australia) v Brand is between cases where conduct on the part of the plaintiff "forms a link in the causation chain" (at 54,242 [156]) and where it does not. Where it does, there must be reliance on the misleading conduct in the manner next explained. Where it does not, there may be recovery if the act of the innocent party induced by the misleading conduct "by its very nature, causes the plaintiff's loss" (at 54,242[155]), but that is where the plaintiff passively suffers loss from another's act (as in Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526 at 529-530, where consumers were led by the misleading conduct to buy less of the plaintiff's product). [13] In saying that in a case of "misrepresentation inducing a transaction" reliance on the misrepresentation was required for proof of causation (at 54,242 [159]), from the facts before them and their Honour's discussion they meant a case where the plaintiff was not a passive sufferer from another's act, but was someone who made a decision to enter into the transaction to which the representation was material. Their Honours did not mean direct induce­ment, but that the decision and the materiality to it of the representation was a link in the causal chain.
25. His Honour then, with reference to the judgment of McHugh J in Henville v Walker, considered the extent to which conduct might be said to have caused loss where it was a sine-qua-non of the opportunity to enter into the transaction: [54] [17] There can be postulated, even where the representation was material to the plaintiff's decision to enter into the transaction, that loss or damage is suffered by misleading conduct because the plaintiff would not otherwise have had the opportunity to enter into the transaction. The plaintiff would not have had occasion to make a decision. There is "but for" causation; is it sufficient? [18] In Henville v Walker, after noting that "by" in s 82 of the Trade Practices Act (Cth) invokes the common law concept of causation but is not to be applied rigidly without regard to the terms of objects of that Act, and that causation in law is concerned with determining legal responsibility for a past act or omission, McHugh J said (at 491 [100]-[103]): "[100] In some situations, the legal framework may require a finding that, despite a causal connection in a physical sense between the breach and damage, no causal connection exists for legal purposes. In other situations, the legal framework may require a finding that a causal connection exists even though no more appears than that the damage followed after breach of a legal norm. [101] In the first class of case, some act of the defendant may have set in train, or some omission of the defendant may have failed to set in train, a series of physical events that resulted in or could have avoided damage to another person or property. In this situation, the damage occurred because, given the act or omission, the laws of nature dictated the result. The physical connection between the defendant's act or omission and the damage suffered, and the materiality of the connection is usually apparent, although often enough it will require expert evidence to demonstrate the connection. In this situation, questions of causation usually present no difficulty, although questions of remoteness of damage may do so. Exceptionally, however, the policy or rationale of the legal norm that has been breached will require the court to disregard the physical connection and to make a finding of no causal connection. … [103] In the second class of case, the damage will not have occurred because of the laws of nature but because a person has acted to his or her detriment by reason of or following some conduct of the defendant. The conduct may be an act, an omission, a statement or a suggestion. But it will not be regarded as causally connected with the detriment if it provides no more than the reason why the person acted to his or her detriment. If the defendant intended the person suffering a detriment to act in the general way that he or she did, the common law willinvariably hold that a causal connection existed between the conduct and the detriment. But if the conduct merely provides the reason why the person acted, it will not be sufficient to establish a causal connection unless the purpose of the legal norm that the defendant has breached is to prevent persons suffering detriment in circumstances of the kind that occurred. If a broker negligently advises a client to retain shares because they are a good investment, the broker will be liable for the loss sustained in retaining those shares. But if, having received that advice, the client decides to buy more shares, the broker will not be liable for the further losses unless the terms of the original retainer imposed a duty on the broker to advise in respect of further purchases." [19] His Honour's discussion provides guidance here. Where there is a decision by the plaintiff whether or not to enter into a transaction, any resulting loss or damage is not dictated by the laws of nature. That is not the first class of case, but the second. If the plaintiff would not have had the opportunity to enter into the transaction, that "but for" element does not go beyond a reason why the plaintiff entered into it. Conduct which merely provides the opportunity for the plaintiff to enter into the transaction will not suffice, unless the purpose of s 995 and s 1005 is to provide recompense for loss or damage suffered only because there was the opportunity to enter into the transaction and without regard to materiality of the representation to the plaintiff's decision to enter into the transaction. … [21] Section 1005 should be applied in a way that promotes provision of correct information to investors and protects them in making investment decisions. But this does not warrant compensating investors regardless of the effect on their decision making of the misleading conduct. Once provided with correct information, the investors must make their investment decisions. Perhaps in some circumstances a plaintiff enters into a transaction simply because the opportunity to do so is available, when it would not have been available had there not been the misleading conduct and that plaintiff can be regarded as in like position to the passive sufferer from another's act. That will not be so as a matter of course, and was not so in the present case. [22] As was pointed out in Digi-Tech (Australia) v Brand (at [159]), s 995 and s 1005 should not be given a scope whereby an investor entering into a transaction could recover even if it knew the truth of the underlying misrepresentation, or was indifferent to its truth, and proceeded nonetheless. …
26. Hodgson JA, while agreeing in the outcome, reserved his position in relation to indirect causation and Digi-Tech, making the following observations: [55] [80] I am inclined to think that investors may be able to claim damages on the basis of misleading conduct where: (1) Because of misleading conduct that misleads people involved in putting together an investment opportunity, an investment opportunity is made available to investors which would not have been made available at all but for the misleading conduct; (2) Investors invest in it; and (3) The investors lose money because the investments are, by reason of matters concealed by the misleading conduct, worth less than the investors paid for them. [81] I accept that, if the investors actually know the truth concealed by the misleading conduct, it would be difficult if not impossible to characterise their loss as being loss or damage suffered "by" the misleading conduct, within the meaning of provisions such as s 1005 of the Corporations Law 1991 (Cth) or s 82 of the Trade Practices Act 1974 (Cth). However, I do not think the investors would need to prove that they themselves relied on and were misled by the misleading conduct, except possibly to the extent of showing they did not know the truth concealed by the misleading conduct. As to where the onus of proof would lie in relation to that matter, I note that, in relation to claims based on s 996 of the Corporations Law (Cth), s 1007 appears to place the onus on a defendant to prove that the plaintiff did know. [82] To require investors to prove also that they actually relied on the misleading conduct, or even that if they had known the truth they would not have invested, seems to me possibly superfluous. But for the misleading conduct, there would have been nothing to invest in; and in my opinion it is plainly foreseeable by the persons responsible for the misleading conduct that, if the misleading conduct results in the offering of investments that are worth less than their price by reason of the matters concealed by the misleading conduct, people not knowing the truth may invest in them and suffer loss by reason of the matters concealed by the misleading conduct. On that basis, it does seem to me arguable that loss of that kind would be loss suffered "by" the misleading conduct, at least so long as the investors did not know the truth. [83] It is not necessary for me to express a final view on this question, or on whether my suggested approach is consistent with Digi-Tech (Australia); and I will refrain from doing so.
27. His Honour's approach is reflective of that taken in ABCOS, though it did not refer to it. The views of Giles JA and Ipp JA, on the other hand, are not easy to reconcile with ABCOS, [56] which does not appear to have been referred to. However, the following features of Ingot are significant: first, it did not involve any question of market-based causation; secondly, it was a case in which the only effect of the contravening conduct was to contribute to the opportunity for the relevant transactions to take place; thirdly, it recognised that the position of a plaintiff who enters into a transaction simply because the opportunity to do so is available, when it would not have been available but for the misleading conduct, may be regarded as analogous to a passive victim of another's act; [57] and fourthly, the avoidance of the potential for recovery by persons who knew or were indifferent to the true position was again an important consideration. [58]
28. The defendants also invoked the statement of Handley AJA in Gardiner v Agricultural & Rural Finance Pty Ltd, [59] that a plaintiff relying on a contravention of Corporations Law, s 995 (and analogous provisions), "must establish that he relied on the misleading or deceptive conduct, or the false or misleading statement, or that he would have acted differently if the material omission had been disclosed." [60] However, that was merely a statement introductory to a discussion of the evidence of actual reliance adduced in that case, and was not directed to any indirect causation.
29. Digi-Tech and Ingot were considered by a full court of the Federal Court in ABN AMRO Bank NV v Bathurst Regional Council. [61] As the defendants submitted, that court did not suggest that either was wrongly decided. However, the Full Court said that Ingot did not stand for any "bright-line principle" that it was insufficient for a plaintiff to prove that some other person relied on the alleged misleading conduct and that that person's reliance led to the plaintiff suffering loss, but was authority only for the proposition that where misleading and deceptive conduct provides the opportunity for an investor to enter into a transaction, that investor will not be entitled to recover where the investor knew the truth of the underlying misrepresentation or was indifferent to its truth and proceeded nonetheless; the entitlement to recover loss or damage in a case of misleading and deceptive conduct was not confined to persons who relied on the conduct, and a plaintiff need not establish that the plaintiff directly received and relied upon the misrepresentation made by a defendant. [62]
30. Bergin CJ in Eq appears to have been prepared to accept indirect causation, obiter, in McBride v Christie's Australia Pty Ltd, [63] relying on what Hodgson JA had said in Ingot, and also on ABCOS and Janssen-Cilag, though without reference to the judgments of Giles JA and Ipp JA in Ingot: [265] Both Hodgson JA in Ingot and the Full Court in ABN Amro focused on misleading representations that were not made directly to the person who ultimately suffered loss. Similarly in Australian Breeders Co-operative Society Ltd v Jones (1997) 150 ALR 488 the Full Court of the Federal Court concluded the relevant entity would not have completed a transaction and the syndicate would not have proceeded if a misleading valuation had not been produced in the first place. [266] Having regard to the conclusions I have reached above it is not necessary to deal with the matter on this alternative approach. However if it were necessary, the analogous finding would be that part of the chain of causation was that the plaintiff relied upon the representation in the Catalogue that the Painting was painted by Albert Tucker, which she would never have received had it not been made by HFA to Christie's on consignment of the Painting with the request that it be offered for sale as a painting painted by Albert Tucker.
31. In Grant-Taylor v Babcock and Brown Ltd (in liq), [64] Perram J accepted, obiter, that a party who acquires shares on a stock exchange could recover compensation for price inflation arising from a failure to disclose material required to be disclosed, so long as they were not themselves aware of the non-disclosed material. His Honour's reasoning included that while on the authority of Digi-Tech and Ingot, a plaintiff may not recover where it knows of the misleading nature of the alleged conduct, those authorities did not mean that C was necessarily precluded from recovering from A where A misled B, and B in consequence misled C (as ABN AMRO established), and a case in which A misled the market (comprised of many Bs) which then bid up the price and thus caused loss to C, was not relevantly different.
32. Caason Investments Pty Ltd v Cao [65] was an application for leave to appeal from a refusal to grant leave to amend a statement of claim to include pleadings of "market-based", as distinct from "reliance-based", causation. Although an interlocutory appeal, the judgments helpfully describe the type of case that the plaintiffs advance here. Gilmour and Foster JJ concluded that none of the authorities relied upon by the respondents (which included Ingot) supported a submission that the applicants' market causation case was not arguable. [66] Their Honours observed: [59] The applicants' market-based causation case argues causation in the specific context of an information effect in an actively traded market. [60] Neither Gardiner nor Woodcroft-Brown were market-based causation cases. Justice Handley in Gardiner, said at [442], in the context of a case where direct-reliance was pleaded, that a "plaintiff relying on a contravention of those sections [ss 995, 996(1), 1023B and 1024 of the Corporations Law] must establish that he relied on the misleading or deceptive conduct, or the false or misleading statement, or that he would have acted differently if the material omission had been disclosed". The Victorian Court of Appeal, in Woodcroft-Brown, another direct reliance case, adopted the whole of this passage at [227]. [61] The applicants' pleading, relevantly, is, as they observe, that they and those group members, dealing on-market, did act differently, in that they acquired Arasor Shares at a price higher than the price that would have prevailed but for the contraventions and/or retained the Arasor Shares in the different circumstances of an inflated market. The applicants further contend that a range of persons, being the market, acted differently. Thus, their causation case relies on the market of investors operating efficiently in that there are sufficient participants making decisions which cause the market to reflect information which was or ought to have been represented or disclosed to the market. [62] The applicants referred to the fact that both Ipp and Giles JJA in Ingot emphasised the distinction between where the plaintiff is a passive victim of misleading conduct and where the plaintiff acts or refrains from acting to his or her prejudice, whose conduct is brought about by the defendant's misleading conduct: at [12], [20]-[22] per Giles JA; at [617]-[618] per Ipp JA The plaintiff's conduct was itself, on the facts in that case, held to be a necessary link. There, the plaintiff sought to recover loss or damage following the issue of a prospectus, even though he knew the truth of the material misstatement or omission and was indifferent. That is not this case. As the Full Court of the Federal Court in ABN AMRO Bank NV v Bathurst Regional Council(2014) 224 FCR 1 said at [1375]-[1376] that "[t]here is no bright-line principle that it is insufficient for a plaintiff to prove that some other person relied on the alleged misleading conduct and that that person's reliance led to the plaintiff suffering loss. Ingot Capital Investments does not stand for that proposition."
33. Edelman J also concluded that the legal argument of market-based causation had reasonable prospects of success and should be allowed to proceed to trial, although whether market-based causation is established as a matter of fact is a different question which would require expert evidence. [67] His Honour explained market-based causation as follows: [93] …The point concerning causation, about which the appellants incorrectly assumed the primary judge had erred, relates to what was described as "market based causation". A market based causation case is not a special sub-category of causation. It is, simply put, an example of indirect causation. One circumstance of market based causation, albeit inadequately pleaded before the primary judge, involves an alleged disclosure of misleading information to the market in a disclosure statement. That misleading information causes the listed price of securities being inflated which, in turn, causes an alleged loss because the investor purchases the securities at a higher price than he or she would otherwise have paid. The primary judge's reasons, properly understood, did not exclude the possibility of a claim based on market based causation.
34. Reiterating that reliance was not a substitute for the essential question of causation, [68] his Honour explained: [154] The concept of market based causation involves a causal relationship albeit one without reliance by the plaintiff investor on a disclosure document. The plea is that a misleading statement or omission in a disclosure document causes the market price for the securities to be inflated so that the investor purchases securities at a price which is greater than the investor would otherwise have paid. The investor then suffers loss including when the release of the omitted information or the correction of the misleading statements causes the market price of the securities to fall. None of these causal links requires the investor to rely on the disclosure document.
35. In my judgment, Digi-Tech and Ingot do not deny recoverability in a case such as the present on the basis of indirect market causation. While there appears to be no authoritative decision that conclusively holds that market causation is available, there are - as the above analysis demonstrates - the decisions of Bergin CJ in Eq and Perram J which, albeit obiter, appear to regard such a theory as available notwithstanding Digi-Tech and Ingot, and the Full Federal Court's decision in Caason v Cao which holds that it is plainly arguable. It may be that Digi-Tech and Ingot are expressed in wider terms than the interpretation afforded them in ABN AMRO and Caason v Cao, and it must be acknowledged, with respect, that (contrary to the suggestion in those decisions) there was not in Ingot any suggestion that the investors actually knew or were indifferent to the true position - although avoiding the potential for investors in such a position to recover was an important influence in Ingot as well as in Digi-Tech. However, Digi-Tech and Ingot must be read in their context: neither involved "market-based causation"; both were concerned with a scenario in which the alternatives were transaction or no transaction, in which the sole causative role of the contravening conduct was in the barest 'but-for' sense to contribute to the creation of the opportunity for the relevant transaction to take place; neither were concerned with a case in which the alternatives were not transaction or no transaction, but transaction at a lower or higher price, in which the contravening conduct had the necessary consequence that the higher price would obtain.
36. The policy that informs Digi-Tech and Ingot is to deny recovery where the contravening conduct did not influence anyone (that is to say, where no-one was deceived or misled by the contravening conduct), and to those who knew, or were indifferent to, the true position. The explanation of those decisions is that (a) if the contravening conduct in fact misleads no-one, then it cannot be said to have caused loss; and (b) where contravening conduct sets in motion or allows to continue a process which culminates in an applicant making a decision to enter a transaction which incurs loss, a decision to enter into the transaction by an applicant who knows the true position or is indifferent to it would break the chain of causation as a novus actus interveniens, so that it could not be said that the loss was incurred "by" the conduct.
37. This is not a case in which, on the relevant hypotheses, no-one was misled: while the contravening conduct did not directly mislead the plaintiffs, it deceived the market (constituted by investors, informed by analysts and advisors) in which the shares traded and in which the plaintiffs acquired their shares. Investors who acquire shares on the share market do so at the market price. In that way, they are induced to enter the transaction (in this case, to their prejudice) on the terms on which they do by the state of the market. Investors who acquire shares on the ASX may reasonably assume that the market reflects an informed appreciation of a company's position and prospects, based on proper disclosure. The notion that a market may be deceived, manipulated and distorted by misrepresentation is well established: in HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd, [69] the High Court spoke of a distinction which is "sometimes difficult to draw, but…is old and fundamental" between 'real', 'true' or 'intrinsic' value on the one hand, and 'market value' on the other, [70] and said that 'market values' that "are 'delusive or fictitious' because they are the result of 'a fraudulent prospectus, manipulation of the market or some other improper practice on the part of the defendant" may be disregarded in ascertaining true value. [71]
38. The plaintiffs bought their shares on the ASX, to which HIH released information, including the FY1999 results, the FY2000 interim results and the FY2000 final results, which formed part of the matrix of information that influenced the trading price of the shares from day to day. If the contravening conduct deceived the market to produce a market price which reflected a misapprehension of HIH's financial position (which is a factual question to be resolved in conjunction with the quantification of damages), then it had the effect of setting the market at a higher level - and the price the plaintiffs paid greater - than would otherwise have been the case. In such circumstances, plaintiffs who decided - entirely oblivious to the contravening conduct - to acquire shares in HIH, were inevitably exposed to loss. Moreover, they were members of the class who would obviously be affected by the contravening conduct. Upon the assumption that the effect of the misleading conduct was, as the plaintiffs allege, that HIH shares traded on the market at a higher price than would otherwise have been the case, it was inevitable that any purchaser of HIH shares would, upon acquiring such shares, incur loss. The case is analogous to the first class described by McHugh J in Henville v Walker, though it is the laws of the market rather than those of nature which dictated that the inevitable consequence of the contravening conduct would be that share purchasers would pay an inflated price - although an investor who was shown to have acquired shares knowing that the results were overstated, or indifferent to it, could not be said to have incurred the loss "by" the contravening conduct - a decision to do so with such knowledge or indifference would break the causal chain. [72] Alternatively put, the plaintiffs would have acted differently if the contravening conduct had not occurred, in that they would have paid a lesser price for their shares than they did.
39. The chain of causation was (1) HIH released overstated financial results to the market, (2) the market was deceived into a misapprehension that HIH was trading more profitably than it really was and had greater net assets than it really had, (3) HIH shares traded on the market at an inflated price, and (4) investors paid that inflated price to acquire their shares, and thereby suffered loss. Thus, the contravening conduct materially contributed to that outcome.
40. This can be tested by a counterfactual inquiry: what would have happened if each contravention had not occurred? On relevant assumptions, the answer is that the market price of the HIH shares would have been lower, and the plaintiffs would have paid less for the shares they acquired.
41. In those circumstances, I do not see how the absence of direct reliance by the plaintiffs on the overstated accounts denies that the publication of those accounts caused them loss, if they purchased shares at a price set by a market which was inflated by the contravening conduct: the contravening conduct caused the market on which the shares traded to be distorted, which in turn caused loss to investors who acquired the shares in that market at the distorted price. In the absence of any suggestion that any of the plaintiffs knew the truth about, or were indifferent to, the contravening conduct, but proceeded to buy the shares nevertheless. I conclude that "indirect causation" is available and direct reliance need not be established.
42. As Edelman J pointed out in Caason v Cao, that does not mean that indirect causation has been established. The above reasoning proceeds on the assumption that the contravening conduct caused the market to be inflated. The plaintiffs must establish, by evidence and/or inference, that the contravening conduct distorted the market price so as to cause the shares to trade at an inflated price. [73] In this case, whether the contravening conduct had the effect of inflating the market price of HIH shares is intertwined with the quantification of the plaintiffs' damages, if any.

Quantification of damages

1. The loss and damage which the plaintiffs are entitled to recover is that which the contravening conduct caused. [74] Thus, the measure of the plaintiffs' damages is closely related to their causation case. On the plaintiffs' theory of causation, which I have held is open, this is not a simple "no transaction" case - that is to say, it is not a case in which the contravening conduct caused the plaintiffs to acquire (or retain) shares which they would otherwise not have acquired; rather, it caused them to pay, for shares which they would have acquired in any event, a price which was inflated above that which would otherwise have obtained. On this approach, the measure of the plaintiffs' damages is not the difference between the price paid and the "true value" of their shares, but the difference between the price they paid and the price they would have paid had the contravening conduct not occurred but all other factors remained constant. [75] This necessitates determining the quantum of the impact, if any, of the contravening conduct, on the price at which HIH shares traded. In that context, "true value" is not necessarily a proxy for what the market price would have been absent the contravening conduct, because there may have been other factors which also influenced (and distorted) the market price.
2. The same exercise will also resolve whether the contravening conduct in fact had any impact on the market price: if the price at which the shares actually traded exceeds that at which, absent the contravening conduct, they would have traded, then indirect causation in fact will be established.
3. In their closing submissions, the plaintiffs advanced for the first time, as an alternative approach to quantification, the "left in hand" approach to valuation - meaning that each plaintiff would be entitled to recover the difference between the price paid for the subject shares and their value in that plaintiff's hands at the date of trial. [76] As the defendants submitted, such an approach had not previously been foreshadowed or particularised, and arose too late to be addressed by evidence that could have affected it. Moreover, such an approach to assessing loss is inconsistent with the causation theory on which the plaintiffs' case depends, which is that they suffered damaged by paying a price higher than they would otherwise have paid to acquire the shares, not that they would not have acquired the shares at all. Thus, it is not correct to say, as the plaintiffs submitted, that by reason of the contravening conduct the plaintiffs are "locked into the property", [77] because (on relevant hypotheses) they would have acquired the shares and continued to hold them in any event. Their loss, if any, attributable to the contravening conduct, is the extra amount that they paid for their shares over that which they would otherwise have paid.
4. Table 1 summarises the approximate prices at which HIH shares traded at the end of each period. Prices fluctuated daily, and generally speaking had declined progressively over the preceding 6 months, although the decline was not necessarily constant: [78] Table 1 31 Dec 98 30 Jun 99 31 Dec 99 30 Jun 00 31 Dec 00 Price $ 2.30 1.80 1.40 1.00 0.20

1. To prove the impact that the contravening conduct had on these prices, the plaintiffs called as an expert witness Dr Jeffrey Coulton, who prepared a report dated 15 November 2013 in the Cuong Ly proceedings, in which he concluded that the true value of an HIH share during the period 29 June 2000 to 26 February 2001 was nil; and reports dated 8 August 2014 in the Baldock proceedings and the De Bortoli proceedings, in which he concluded that the true value of an HIH share was $1.76 during the period 26 November 1998 to 24 August 1999, $0.28 during the period 25 August 1999 to 1 March 2000, and nil after 2 March 2000. For the purpose of those reports, in assessing "true value", Dr Coulton made adjustments to the reported financial results not only for the incorrect accounting treatment of the Hannover Re arrangements, but also for the extensive range of other matters referred to in Chapter 20 of the Report of the HIH Royal Commission in respect of FY1999 and FY2000, which did not form part of the contravening conduct established in the present proceedings.
2. For the defendants, Mr Cullimore Gower prepared a report dated 5 June 2014 in the Cuong Ly proceedings, and a report dated 7 November 2014 in all four proceedings. The Gower reports set out Mr Gower's opinion on issues raised in the Coulton reports and the basis of Dr Coulton's valuation opinions. However, Mr Gower was not instructed to value HIH or the shares in it, and expressed no valuation opinion.
3. On 13 February 2015, pursuant to directions made by the Court, the two experts participated in a joint meeting and subsequently conferred via the exchange of emails, resulting in the preparation of a joint report dated 17 February 2015 setting out the matters upon which they agreed, and those upon which they disagreed, including the reasons for disagreement. Shortly prior to the commencement of the hearing, Mr Gower produced a supplementary report dated 23 February 2015. Mr Coulton then provided a further report dated 24 February 2015 ("the fourth Coulton report"). In this fourth report, unlike his earlier reports, he made adjustments to the reported results only for the incorrect treatment of the Hannover Re arrangements. Mr Gower responded in a further report of 26 February 2015.
4. Dr Coulton's valuation approach involved a conditional relative valuation model, adapted from authoritative work on the valuation of insurance companies in the United States by Professor Nissim. [79] Essentially, Professor Nissim's thesis, adopted with some modifications by Dr Coulton, commences from the position that whereas for the valuation of businesses generally, earnings multiples are usually preferred to book value (net asset backing) multiples, for the valuation of insurance companies, book value multiples (specifically, the price to book ratio) provide a significantly more reliable basis than earnings multiples. [80] A valuation involves, broadly, ascertaining the ratio that the share market price of shares in comparable insurance companies bears to their net asset backing, and applying that ratio to the net asset backing of the subject company to derive a value for its shares. One important reason why book value is a more reliable basis than earnings is the nature of the insurance business, and the way in which they are accounted for - in particular, that insurance assets must be reported in the "book" at net market value.
5. However, Professor Nissim concludes that the accuracy of a valuation using price to book value multiples can be enhanced by conditioning the price to book ratio on recurrent return of equity ("ROE"). This means that while price to book ratio is the dominant influence, it is adjusted having regard to recurrent ROE. Adopting this approach, Dr Coulton developed a model (or equation) for deriving share value, defined as the present value of future earnings, allowing for the required rate of return and future growth. Essentially, Dr Coulton analysed the price to book value of other major Australian insurance businesses (conditioned on their ROE), to generate a regression model of the price to book ratio on ROE, which explains the on-average, over time association between the price/book ratio and the ROE of listed Australian insurance companies. He then applied the output from the regression model to HIH's ROE and book value (net asset backing), to derive a value for HIH shares. In this exercise, as I have mentioned, in his earlier reports, Dr Coulton adjusted HIH's reported results for each of the relevant periods having regard to all the accounting adjustments proposed in Chapter 20 of the Report of the HIH Royal Commission, which were not limited to the overstatement of profit associated with the accounting treatment of the Hannover Re arrangements; however, in his fourth report, Dr Coulton excluded adjustments other than those necessary to substitute the proper treatment of the Hannover Re arrangements. On that basis, his fourth report attributed to HIH shares the values of $0.76 for the period 25 August 1999 to 2 March 2000, $0.71 for the period 2 March 2000 to 17 October 2000, and $0.59 for the period after 17 October 2000.
6. Although there were at first a range of additional disputes about various integers of Dr Coulton's analysis, many of these fell away during the hearing. Thus, with the abandonment of the claim in respect of the prospectus contravention, nothing turned on any period prior to 25 August 1999. The defendants ultimately did not press for an adjustment in respect of interest that would notionally have been derived on the $200 million deposit under the Hannover Re arrangements; and it became common ground that proposed allowances for "outside equity" could be disregarded. The only remaining differences requiring resolution related to Dr Coulton's calculation of "recurrent ROE" and were: (a) annualisation: whether for the purpose of calculating recurrent ROE for the 12 months ending 31 December 1999, the appropriate adjustment (for overstated profit by reference to the Hannover Re arrangements) was $100,375,000 (as proposed by Dr Coulton) or $84,975,000 (as per Mr Gower); and (b) extraordinary and abnormal items: whether reported income should be adjusted (for the purposes of calculating ROE) for abnormal and extraordinary items, in particular by excluding loss on the sale of the Ocal coal mine and a special GST expense, and the profit derived from the sale of FAI Life.
7. As to the annualisation issue, this arises because it is necessary, for the purpose of deriving a value as at 31 December 1999, to ascertain recurrent ROE for the preceding 12 months, which overlaps two financial years. There is no dispute that one half of the agreed overstatement of $108,350,000 for the year ended 30 June 2000 - namely $54,175,000 - should be attributed to the six months ended 31 December 1999. The dispute is whether one-third or one-half of the agreed overstatement of $92,400,000 for the period ended 30 June 2000 should be attributed to the six months ended 30 June 1999. The difference of opinion arises because, on the one hand, the financial statements for the period ending 30 June 1999 were for a period of 18 months; whereas the statement of agreed facts refers to the operating profit for the financial year ended 30 June 1999, which the plaintiffs contend means the 12-month period. In my view the defendants' contention is correct: while it is true that the statement of agreed facts refers to the "financial year", that is really shorthand for the period covered by the financial statements for the 18-month period concluding on 30 June 1999. That also has the virtue of according with the reality of the position, in that the operating profit report reported in those financial statements is for an 18-month, not a 12-month, period. The parties ought not to be regarded as having agreed in the statement of agreed facts to a manifestly incorrect understanding of the financial statements. Thus, the appropriate adjustment to operating profit for the 12-month period ending 31 December 1999 is, as Mr Gower contends, $84,975,000.
8. As to the abnormal items issue, Professor Nissim's work, upon which Dr Coulton's approach relies, uses a concept of "recurring ROE", on the basis that by excluding "onetime items" it is more persistent than simple ROE and provides a stronger relationship between equity value and profitability. He describes such "onetime items" as including "extraordinary items, income from discontinued operations, impairment charges, asset write-downs, restructuring charges, realised gains and losses, and other items which are deemed to be relatively transitory". Dr Coulton explained that there was a distinction between earnings after abnormal and extraordinary items (which were defined accounting terms with specific content), and recurring versus non-recurring items (which involved a more subjective assessment of what was and was not recurring). Thus, calculation of recurrent ROE involves predicting ongoing ROE, and this may require more than only disregarding plainly abnormal items.
9. Although Dr Coulton in cross-examination resisted it (at least at first - he ultimately accepted that the sale of the coal mine would fall within Professor Nissim's described adjustments for calculation of recurring ROE), the plaintiffs ultimately conceded adjustments to net income (for the purposes of calculating ROE) identified by Mr Gower for the abnormal loss on sale of the Ocal coal mine, and an abnormal GST expense, which were reported as abnormal. However, the plaintiffs contended that these should be offset by an abnormal profit on the sale of FAI Life, which Mr Gower had not included in his proposed adjustments, because it was not reported in the financial statements as "abnormal". Mr Gower conceded that it had some features which might warrant treating it as abnormal, but against that argued that it was less than $50 million, and it was an insurance asset, not a non-core asset.
10. The argument that it was not abnormal because it was less than $50 million is unconvincing; at $36 million, it still represented a very significant component of reported operating profit before abnormals and tax for the year in question (which was $102 million). While the argument that it was an insurance asset is more persuasive, it nonetheless represented the sale of a subsidiary, which through its quantum had a markedly distorting effect on net income for the year. The sale of a controlled entity is hardly a recurrent item. In my view, failing to exclude it, while excluding the GST expense and coal mine losses, would result in a distorted net income for the purpose of calculating ROE, and the profit from the sale of FAI Life should be treated as abnormal and excluded from net income for the purpose of calculating recurrent ROE.
11. Once the above resolutions of those issues are incorporated into Dr Coulton's approach, the result is to attribute to an HIH share during the relevant periods the hypothetical prices in the first row of Table 2, which compare to the actual market price in the second row, and represent the percentage of actual market price indicated on the third row: [81] Table 2 30 Jun 99 31 Dec 99 30 Jun 00 Price $ 1.50 1.67 0.93 Market $ 1.80 1.40 1.00 Price/Market % 83 119 93

1. The plaintiffs submitted that from not later than January 2001 HIH was insolvent, and that its shares should be regarded as valueless after that date. There is some evidence to the effect that HIH was by then insolvent. However, even assuming that it is established that HIH was in fact insolvent from January 2001, and that in truth its shares were valueless, that would not inform the assessment of the impact of the contravening conduct on the price at which HIH shares traded. The damages to which the plaintiffs are entitled correspond with the impact of the contravening conduct on the market price - not on the difference between price and "true value", nor on how other matters might have affected the market price.
2. At the commencement of the hearing, and until close to its conclusion, the defendants' position was that Dr Coulton's approach was fundamentally flawed and could not be relied upon. Criticisms of his methodology included, in particular, that he had undertaken no assessment of HIH's business and earnings outlook, nor analysed the comparators to confirm whether they were relevantly comparable with HIH; and that application of the output from the regression model to the comparators resulted in discrepancies between their known values and their theoretical values, so extreme as to demonstrate that the model was unreliable. However, by final submissions, the defendants' criticisms were muted, and in large part they urged adoption of Dr Coulton's approach, subject to the adjustments to which I have referred; in effect, they submitted that I should accept that, absent the contravening conduct, the shares would have traded at the prices referred to in the first row of Table 2.
3. However, as was foreshadowed during the hearing, there are a number of difficulties with the application of Dr Coulton's approach, and attractions in an alternative approach.
4. First, Dr Coulton's methodology produces, for each of the relevant periods, a constant "flat line" price, whereas in fact the market price fluctuated on a daily basis. This fluctuation reflects the impact of other factors - including, presumably, supply and demand - which Dr Coulton's analysis excludes. Secondly, although the defendants became less inclined to emphasise it, there is force in their earlier submission that application of Dr Coulton's methodology to some of the comparators resulted in such a discrepancy between known value and theoretical value as to cast serious doubt on the methodology. Thirdly, although ultimately he used HIH's reported operating profit and net assets adjusted only for the incorrect treatment of the Hannover Re transactions, his methodology sought to infer a hypothetical value for an HIH share, using other insurance companies as comparators, and disregarding the actual performance of HIH shares. While this might well be appropriate in many contexts where the question is "true value" of a share, when the real question is the impact of the contravening conduct on the market price, the actual performance of the shares on the market is not irrelevant; rather, it may be taken as reflecting all inputs and influences known to the market, which would have continued to operate regardless of the contravening conduct, leaving as the critical question the segregation of the impact of the contravening conduct.
5. Fourthly, and fatally, when the outcome of Dr Coulton's exercise after the appropriate adjustments (see Table 2 above), is compared with the actual market price of HIH shares, it fails the reality test: at least as at December 1999, Dr Coulton's methodology produces a hypothetical price higher than (119% of) the actual market price. The notion that the shares would have traded at a price higher than they actually did, had their (inferior to reported) true profitability and net asset position been known, is ludicrous. This demonstrates that the results produced by Dr Coulton's approach fail the reality test. (Although the defendants resisted the proposition that this failed the reality test, they did not endeavour to sustain the contention that the contravening conduct caused the shares to trade at a lower price than they otherwise would have). [82]
6. Mere difficulty in assessing damages does not relieve a court from the responsibility of estimating them as best it can. [83] In the assessment of damages, particularly where hypothetical scenarios are involved, precision is rarely attainable, and speculation is sometimes unavoidable. [84] The defendants rightly suggest that there is a distinction between cases in which sufficient evidence of loss can be but is not adduced, from cases in which the nature of the loss is such that precise evidence cannot be adduced. However, they wrongly submit that the present case is in the former and not the latter category. Precisely how the market would have responded had the Hannover Re contracts been properly accounted for cannot realistically be the subject of precise proof, and necessarily involves hypothesis and a degree of speculation.
7. Generally speaking, the net assets of a company set the floor of its value, and a share is worth its relative proportion of those net assets. Some write-downs and allowances for costs may be necessary in a liquidation scenario, whereas the value may exceed net assets if earnings indicate that the present value of the economic benefits of holding a share exceed its net asset backing. But in the context of an insurance company, book value is the single most important indicator of value.
8. However, even in the case of insurance companies, shares rarely trade on the market precisely at their book value. This is because the market attributes a premium or discount to book value, based on its assessment of the likely future economic benefits of holding the share. As Mr Gower explained, if shares in an insurance company are trading above book value, that indicates that there is a profitable business that promises an ultimate return in excess of current book value. If shares are trading at a discount to book value, that means that the market has perceived that the stated book value is not going to be realised - or that supply exceeds demand. Similarly, Dr Coulton explained that an insurance company's value will be higher than book value if its future return on equity is expected to be higher than its cost of capital (the manager's rating value). In other words, in those circumstances, its price to book ratio would be in excess of one. On the other hand, if the company's return on equity is lower than cost of capital, one would expect a price to book ratio of less than one.
9. At all relevant times, HIH's price to book ratio was less than one, and deteriorating. During the relevant periods, HIH shares were consistently trading at a price to book ratio below 1: 0.91 as at 30 June 1999. 0.75 as at 31 December 1999, and 0.54 as at 30 June 2000. Dr Coulton said that this indicated that the market was lowering its expectation of HIH's ROE, and that the market's expectation of future levels of HIH's ROE was declining; it also bespoke an assumption of a negative ROE. Similarly, Mr Gower interpreted this as indicating that, looking at the future of HIH's business, the market was anticipating that, for some reason, shareholders would not gain a full return on book value.
10. With the price to book ratio below 1, earnings are of reduced significance, and asset-backing assumes the dominant role. Dr Coulton accepted that a notional realisation of assets valuation might be appropriate where, inter alia, the outlook was uncertain, or the capitalised value of future earnings was less than the realisable value of the assets. Mr Gower agreed that generally an earnings-based valuation was appropriate where it would produce a higher value than a book or assets-based valuation, but that if the market was in fact capitalising the company at less than its book value, that pointed against an earnings-based valuation and in favour of a book-based valuation. Here, the price to book ratio of less than 1 means that the market capitalised the company at less than its book value - by from almost 10% as at 30 June 1999 to nearly 50% by 30 June 2000.
11. In those circumstances, the Court hypothesised that the impact of the contravening conduct could be segregated by applying to the adjusted book (adjusted only for the Hannover Re arrangements and consequential adjustments), the same price to book ratio that the market applied to the reported book.
12. Intuitively, it is a reasonable and logical hypothesis that the ordinary and natural consequence of an overstatement to the market of a listed company's financial performance would be to inflate its share price. Moreover, the Morningstar evidence deployed in these proceedings illustrates how analysts use the reported financial statements of listed entities to inform the market of their performance. Mr Gower agreed that, if the market knew that the true book value was less than the reported book value by those proportions, one would expect that a rational market would respond to that knowledge. He then gave the following evidence: Q. The most logical response would be that it would continue to apply a discount to the book value that it was informed of, of the same order that it was already applying to the original reported book value? A. I don't necessarily agree with that your Honour. I think that the marketplace was being driven by all sorts of factors which would be outside of just simply the net assets. Q. Those factors are reflected, aren't they, in the discount that was already being applied to reported book value? A. Yes, your Honour, it would be. It's - it, it's a - the marketplace is driven by supply and demand for the purchase of the shares. The, the market appears to have taken a view that this - these particular assets were not being well run and has taken a view about the price at which the shares, the shares should be placed. I don't think it is a direct equation of net book value by a factor. I think there are many other factors which play into that in terms of the expected future returns of this business. Whether it was going to be turned around, whether it was going to be - how it - whether there was going to be a change of management, whether there was a prospect of an alternative acquirer coming into the marketplace, I think those factors would, would make me certainly very reluctant to apply a fixed ratio to any adjustment to, to net assets.
13. However, the "other factors" referred to by Mr Gower in that answer are hypothetical and theoretical, without practical relevance to this case: in circumstances where the market was discounting book value by between 10 and 50%, it was not anticipating any turnaround, change of management, or takeover; to the contrary, it was anticipating that ROE would be negative, the company would continue to make losses, and book value would not be realised.
14. In answer to a question as to how he would go about predicting the price at which the HIH shares would have traded had the "true" position (that is, the reported financial position adjusted for the Hannover Re arrangements) been known, he at first answered that he would have sought to establish what were the future maintainable earnings. However, when reminded that the market was attributing a price to book ratio of below 1, indicating that it was not much influenced by the prospect of future maintainable earnings, he responded to the effect that earnings were of reduced significance but still had some influence, while net assets underpinned value and was an important factor: It, it tends to suggest that it, it [future maintainable earnings] would have been of lesser value, but I think that it certainly is an influence. As an investor in this company the, the net tangible assets does provide an underpinning and it certainly is an important factor in, in determining the value of a business which is not making money at the moment, but as a shareholder and in the marketplace for these shares you would be looking at - the first thing you would try to do is establish how is this cash going to be realised here? Is it going to be released through dividends, through the ultimate realisation of the business, through the liquidation of the business or through some other process? And the moment one does that it brings into play I think a number of factors which preclude you from just putting a direct relationship of book value to, to, to market price on it. I think that, I think that in a complex group like this I think there are more factors than that.
15. It may well be that there are more factors; but those other factors, so far as they were known to the market, were already reflected in the price the market attributed to the shares. The one factor that was not reflected in that price was that the true profitability and net asset position of HIH was significantly worse than reported.
16. Dr Coulton agreed that such an approach was open. He was asked: Q. Well, assuming that the market's existing perception is relevant - A. Yeah. Q. - what's wrong with using the existing price to book ratio and applying that to the adjusted value? A. You certainly would be able to, to do that. I guess the, the issue that you would be facing is what else was the market - or what else was the market price in other than just price to book, which is where the - and again the, the approach I was taking, consistent with the Nissim approach, your Honour, is that look, there are other variables that are going to be informative about explaining price or, or in this case value. So I, I guess the, my concern, your Honour, would be that you might be restricting yourself to too small a set of relevant facts if you were just doing that. That, that would be the, I guess the - an issue that you might be facing. So he says that it's, so Nissim and I agree that, look, price to book is a good start, but it's not the only, it's not the only thing that would be taken into account. But that would be - it would certainly be preferable for example to looking at say a price to earnings, where I think you would be including far more noise into your analysis, your Honour.
17. Dr Coulton suggested that a shortcoming of this approach was that it used the existing price of HIH shares to infer what their price would have been upon certain assumptions, whereas his approach "quarantined" the actual share price of HIH from the analysis by using the basket of supposedly comparable companies. However, that observation, while relevant if one was engaged in ascertaining the "true value" of an HIH share, has much less force when one is engaged in assessing the impact of certain assumptions on the price at which those shares traded. Indeed, it tends to reinforce the shortcoming of Dr Coulton's approach in focussing more on "true value" of the subject shares than on the impact of the contravening conduct.
18. Dr Coulton also mentioned that the existing price might already reflect the market's awareness that there was an overstatement of book value. While there is no reason to suppose that the market was aware of the incorrect treatment of the Hannover Re arrangements, [85] the possibility needs to be considered that the discount already attributed to book value by the market indicates that, although it might have been unaware of the true position in respect of the Hannover Re arrangements, the market did not believe and did not trust HIH's financial statements. Given that, as Mr Gower pointed out, accounting standards require in relation to insurance companies that insurance assets and liabilities be reported at net market value, the magnitude and growth of the discount suggests that the market was sceptical, and became increasingly so, of the reliability of the HIH book, and for that reason incorporated a substantial discount on book value, which could be regarded as covering perceived risks that the book would not be realised.
19. However, the more probable hypothesis is that a rational market - albeit that it already doubted that its reported book value would be realised - would not have shed those doubts had HIH reported still lower operating profits, and consequentially a lower level of net assets. Although the defendants submitted that the proposition that the obvious effects of particular types of misrepresentations could readily be inferred should be confined to the obvious, and that this was not an obvious case, it seems to the obvious and calculated effect of a representation that an insurance company was operating more profitably than in truth it was, and had materially greater net assets than in fact it had, would be that the market would overprice its shares. A general provision for risk and doubt, such as the price to book ratio reflected, would not evaporate upon materialisation of this specific matter. Indeed, Dr Coulton thought that if the result for the year ended June 99 were in truth $92 million worse than reported, the market would likely form an even more cynical view of future return on equity than it did, resulting in a further decline in price to book ratio; thus if anything, using the price to book ratio that the market in fact applied at the relevant times would risk overvaluing rather than undervaluing the shares. He concluded: Q. So a conservative approach to valuing - well, at the risk of overvaluing the shares but undervaluing the difference between the inferred value and the market value, I could apply the current price book ratio to what Gower shows as the adjusted book value of equity for each of the three periods. A. Yeah, that's correct, your Honour. I guess the other thing that you would be bearing in mind is that if we're talking in particular about period 4, which is the, sort of the final period here that you're considering, your Honour, we kind of we know where - we know what the end point is, and the end point was why we're here. It's like a severe deficiency of net assets. …
20. His qualification about period 4 suffers from the same problem as the "approaching insolvency" argument referred to above, that such an approach would take into account matters and influences additional to the contravening conduct. And again, it illustrates his misdirected focus on the true value of the shares, rather than the impact of the contravening conduct.
21. Accordingly, I conclude that the contravening conduct did inflate the price for HIH shares, and that indirect causation in fact is established. In my judgment, doing the best one can with the available material, the impact of the contravening conduct is represented by the difference between the price at which HIH shares actually traded on the market, and the hypothetical price achieved by applying the price to book value at which they traded to an adjusted book (adjusting for the Hannover Re arrangements). The difference can be calculated for each period from the ratio of "adjusted" book value (adjusted for the Hannover Re transactions) to reported book value, as shown in Table 3: Table 3 30 Jun 99 31 Dec 99 30 Jun 00 Reported $m 946.400 962.600 939.100 Adjusted $m 887.264 871.592 816.220 Adjusted/Reported % 93.75 90.54 86.90

1. These percentages may be compared to the corresponding results of 83%, 119% and 93% obtained from the adjusted Coulton approach, referred to in Table 2. That comparison shows that the approach I favour is more favourable to the plaintiffs in respect of the period to 31 December 1999, but less for the other two periods, than the adjusted Coulton figures; that by reference to 30 June 1999 and 30 June 2000, it is relatively conservative; and by reference to 31 December 1999, that it is less volatile and more internally consistent.
2. This approach has the additional attraction of excluding the effect of any matter other than the contravening conduct, because all other influences on price are reflected in the actual price movements on the ASX, and seeking to identify only the impact of the contravening conduct. It also means that the hypothetical price will fluctuate proportionately to fluctuations in the actual price, rather than being a fixed "straight line" for each six-month period.
3. I have independently concluded that this approach is to be preferred. However, as is apparent from what is already set out, it was tested with both experts, and the parties were invited to make submissions in respect of it. Both parties accepted that this approach was open. In their closing written submissions, the plaintiffs accepted that it was open to the Court to proceed on this basis, and did not seek to raise any argument against its availability. [86] Although the defendants resisted the proposition that logic dictated that, had the market known that the assets were worth 10% less than it thought they were, it would have discounted the price by 10%, the defendants accepted the corollary - that it was a valid and accepted methodology to reason that, if the market applied a price to book multiple of 0.91 to the reported book, it would have applied the same multiple to the "true" book had it known the "true" book was 10% less. [87] As it transpired, this acceptance may have initially been based on an incorrect assumption as to timing, reflected in a graph produced by the defendants. Nonetheless, the defendants agreed that it was an acceptable methodology. [88]
4. Accordingly, in principle, plaintiffs who acquired their shares when the FY1999 results were in circulation are entitled to damages equivalent to 6.25% of the price they paid; those who acquired their shares when the FY2000 interim results were in circulation, to 9.5% of the price paid, and those who acquired their shares when the FY2000 final results were in circulation, to 13% of the price paid.

Conclusion

1. My conclusions may be summarised as follows.
2. The consolidated HIH financial statements incorporated, in the results of the consolidated entity, those of its subsidiaries. Thus, the misleading information ultimately contained in the reported financial results was originally generated by FAI and C&G, included in their financial statements, and carried forward into the consolidated HIH financial statements. The misstatement in the subsidiaries' financial statements was the genesis of the misrepresentations in the reported financial results of HIH. In this way, the treatment of the Hannover Re arrangements by FAI and C&G in their financial statements was a fundamental input to the contravening conduct. "Participation", in the relevant sense, is established.
3. Publication of the subsidiaries' accounts was authorised by Mr Fodera, in both relevant years; accordingly, it is Mr Fodera's knowledge that is relevant. Given his position and role in both HIH and the subsidiaries, his accountancy background and experience, the manifest purpose of the Hannover Re transactions in strengthening the appearance of HIH's financial statements but not in fact removing the risk from HIH, and his involvement in executing transaction documents, hypotheses that he had a mistaken understanding of the Hannover Re arrangements or did not understand their proper accounting treatment, or passively acquiesced in them without forming any considered view as to their effect, are highly improbable. In the absence of any contrary evidence, I am comfortably satisfied on the balance of probabilities that Mr Fodera knew that the treatment of the Hannover Re arrangements in the FAI and C&G financial statements would be replicated in the consolidated HIH results, and, so replicated, would create a misleading and deceptive appearance of HIH's operating profit for the relevant periods.
4. It follows, pursuant to TPA, s 84, that FAI and C&G had the requisite knowledge of the essential facts constituting HIH's contraventions, and by publication of their own financial statements were knowingly concerned in and/or party to the contraventions, so as to incur liability in respect of them as persons involved in the contraventions.
5. Digi-Tech and Ingot do not deny recoverability in a case such as the present on the basis of indirect market causation. "Indirect causation" is available in a case such as the present, and direct reliance need not be established, although the plaintiffs must establish, by evidence or inference, that the contravening conduct did inflate the market.
6. On the remaining issues in respect of Dr Coulton's approach: 1. the appropriate adjustment to operating profit for the 12-month period ending 31 December 1999 is, as Mr Gower contends, $84,975,000; and 2. the profit from the sale of FAI Life should be treated as abnormal and excluded from net income for the purpose of calculating recurrent ROE.
7. Once the above resolutions of those issues are incorporated into Dr Coulton's approach, the result is to attribute to an HIH share during the relevant periods the hypothetical prices $1.50 as at 30 June 1999, $1.67 at 31 December 1999 and $0.93 at 30 June 2000, which represent respectively 83%, 119% and 93% of actual market price at those dates.
8. However, the better approach to evaluating the impact of the contravening conduct on the share price is to identify the difference between the price at which HIH shares actually traded on the market, and the hypothetical price achieved by applying the price to book value at which they actually traded to an adjusted book (adjusting only for the Hannover Re arrangements). On that basis, the shares would have traded at 93.75% of actual price after the FY1999 results were released, 90.54% after the FY2000 interim results were released, and 86.90% after the FY2000 final results were released.
9. That also demonstrates that the contravening conduct did inflate the price for HIH shares, so that indirect causation in fact is established.
10. Accordingly, in principle - subject to issues affecting particular cases which are reserved for further argument - plaintiffs who acquired their shares during the period 25 August 1999 to 2 March 2000 are entitled to damages equivalent to 6.25% of the price they paid; those who acquired their shares during the period 3 March 2000 to 17 October 2000 to 9.5% of the price paid, and those who acquired their shares after 17 October 2000 to 13% of the price paid.
11. I direct that the parties bring in short minutes to give effect to this judgment (including if necessary directions for the resolution of any remaining issues) on a date to be fixed.

Endnotes

1. A case of accessorial liability was also pleaded against another HIH subsidiary, CIC Insurance Limited ("CIC"); but this was not pressed at the hearing.
2. Tanning Research Laboratories Inc v O'Brien [1990] HCA 8; (1990) 169 CLR 332 at 340-1 (Brennan and Dawson JJ).
3. (2008) 67 ACSR 169 at [22].
4. Statements to similar effect appeared in documents entitled "Media Release: 1998/99 Final Result", released by HIH to the ASX on or about 25 August 1999 and 10 September 1999, and HIH's Concise Financial Report for the 18 months ended 30 June 1999, lodged with ASIC on 10 September 1999.
5. Court Book ("CB") vol 1, Tab 4, Smith Defence p 65, para 16.10
6. TPA, s 82(1).
7. TPA, s 75B(1).
8. Corporations Law, s 1005.
9. Corporations Law, s 79.
10. Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 at 668; HIH Insurance Limited (in liquidation) & Anor v Adler [2007] NSWSC 633 at [34] (Einstein J); see also Giorgianni v The Queen [1985] HCA 29; (1985) 156 CLR 473 at 488.
11. Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 at 670.
12. HIH Insurance Limited (in liquidation) & Anor v Adler [2007] NSWSC 633 at [35].
13. HIH Insurance Limited (in liquidation) & Anor v Adler [2007] NSWSC 633 at [37].
14. Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 at 668.
15. Pereira v DPP (1988) 82 ALR 217 at 219.
16. Trade Practices Act s 84(1).
17. There is some controversy as to whether, to incur accessorial liability for contravention of TPA, s 52 and similar provisions, it is necessary that the accessory have knowledge that the representation was false or misleading, or merely knowledge of the facts which render it false or misleading see Keller v LED Technologies Pty Ltd [2010] FCAFC 55 at [336] and Sugarloaf Hill Nominees Pty Ltd atf the Richard and Anna Trust v Rewards Projects Ltd [2011] WASC 19 at [71]. I proceed on the basis of the former, more stringent requirement, which in any event I prefer: a person cannot be said to be knowingly concerned in or party to conduct of another which is misleading or deceptive, without knowing that the conduct is in fact misleading or deceptive, and it is insufficient that he or she "ought to have known" that to be so, which is constructive not actual knowledge - although proof that the putative accessory knew facts, which falsify the representation, may in an appropriate case warrant an inference that he or she actually knew the representation to be false.
18. (1988) 82 ALR 217 at 219.
19. Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514 at 525
20. Henville v Walker [2001] HCA 52; (2001) 206 CLR 459 at [14] (Gleeson CJ), [59]-[61] (Gaudron J), [106]-[109] (McHugh and Hayne JJ), [163] (Gummow J, agreeing with McHugh and Hayne JJ); I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited [2002] HCA 41; (2002) 210 CLR 109 at [27]-[33] (Gleeson CJ), [57], [62] (Gaudron, Gummow and Hayne JJ).
21. [2004] NSWCA 58; (2004) 62 IPR 184.
22. [2008] NSWCA 206; (2008) 73 NSWLR 653.
23. [2003] FCAFC 313; (2003) 134 FCR 522.
24. See Basic Inc. v Levinson (1988) 485 US 224 at 246-7; Erica P. John Fund, Inc. v Halliburton Co. (2011) 131 S. Ct. 2179. This summary is adapted from P Dawson Nominees Pty Ltd v Multiplex Ltd [2007] FCA 1061; (2007) 242 ALR 111 at [11] (Finkelstein J).
25. Erica P. John Fund, Inc. v Halliburton Co. (2011) 131 S. Ct. 2179 at 2185.
26. See the factors identified in Cammer v Bloom (D.N.J. 1989), 711 F. Supp. 1264, 1279 - 87 and Krogman v Sterritt (N.D. Tex. 2001), 202 F.R.D. 467, 478.
27. see P Dawson Nominees Pty Ltd v Multiplex Limited [2007] FCA 1061 AT [11] (Finkelstein J) citing Fine v American Solar King Corporation 919 F 2d 290, 299 (5th Cir, 1990).
28. Johnston v McGrath (2008) 67 ASCR 169 at 180 (Barrett J); Johnston v McGrath [2007] NSWCA 231at [38] (Young CJ in Eq); Boyd Knight v Purdue [1999] 2 NZLR 278, 292 (CA)(Blanchard J).
29. Campbell v Backoffice Investments Pty Ltd [2009] HCA 25 at [143]; (2009) 238 CLR 304; (2009) 257 ALR 610 at 647; (2009) 83 ALJR 903; (2009) 73 ACSR 1 (Gummow, Hayne, Heydon and Kiefel JJ).
30. Kabwand Pty Ltd v National Australia Bank Ltd [1989] 11 ATPR 40-950, 50,378 (Lockhart J); Janssen-Cilag Pty Limited v Pfizer Pty Ltd (1992) 37 FCR 526, 530 (Lockhart J).
31. (1992) 37 FCR 526.
32. (1992) 37 FCR 526 at 529.
33. (1992) 37 FCR 526 at 530.
34. (1992) 37 FCR 526 at 532.
35. [1998] HCA 69; (1998) 196 CLR 494 at 528 [101].
36. [1999] NSWCA 455; (2000) ATPR 41-737.
37. (1997) 150 ALR 488.
38. (1997) 150 ALR 488 at 529-30.
39. [2003] NSWCA 84.
40. [2006] NSWCA 37.
41. Campbell v Backoffice Investments Pty Ltd [2009] HCA 25 at [143]; (2009) 238 CLR 304 at 351; (2009) 257 ALR 610 at 647; (2009) 83 ALJR 903; (2009) 73 ACSR 1 (Gummow, Hayne, Heydon and Kiefel JJ)(emphasis in original).
42. Digi-Tech (Australia) Ltd v Brand [2004] NSWCA 58; (2004) 62 IPR 184; Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2008] NSWCA 206; (2008) 73 NSWLR 653; Ford Motor Company of Australia Limited v Arrowcrest Group Pty Ltd [2003] FCAFC 313; (2003) 134 FCR 522, [105]-[128] (Lander J, Hill and Jacobson JJ agreeing).
43. [2004] NSWCA 58; (2004) 62 IPR 184.
44. [2004] NSWCA 58; (2004) 62 IPR 184.at [149]; see also Ingot v Macquarie at [614].
45. [2004] NSWCA 58; (2004) 62 IPR 184.at 212 [156], [158]-[160].
46. [2003] FCAFC 313; (2003) 134 FCR 522.
47. [1999] FCA 805.
48. Ford Motor Company of Australia Limited v Arrowcrest Group Pty Ltd [2003] FCAFC 313; (2003) 134 FCR 522 at 539 [123] (Lander J; Hill and Jacobson JJ agreeing).
49. [2008] NSWCA 206; (2008) 73 NSWLR 653.
50. [2008] NSWCA 206; (2008) 73 NSWLR 653 at 731-2 [612]-[619].
51. [2008] NSWCA 206; (2008) 73 NSWLR 653 at 731 [615].
52. [2008] NSWCA 206; (2008) 73 NSWLR 653 at 659 [11].
53. [2008] NSWCA 206; (2008) 73 NSWLR 653 at 659-660 [12]-[13].
54. [2008] NSWCA 206; (2008) 73 NSWLR 653 at 660-662 [17]-[22].
55. [2008] NSWCA 206; (2008) 73 NSWLR 653 at 671-2 [80]-[83].
56. (1997) 150 ALR 488.
57. Per Giles JA at [21].
58. Per Giles JA at [22].
59. [2007] NSWCA 235.
60. [2007] NSWCA 235 at [442].
61. (2014) 309 ALR 445 at 726-727 [1374]-[1377].
62. (2014) 309 ALR 445 at 726-727 [1375]-[1376], referring to Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526; 109 ALR 638 (Janssen-Cilag) and Hampic Pty Ltd v Adams (2000) ATPR 41-737; [1999] NSWCA 455.
63. [2014] NSWSC 1729.
64. [2015] FCA 149 at [219]-[220]; (2015) 322 ALR 723; (2015) 104 ACSR 195.
65. [2015] FCAFC 94.
66. [2015] FCAFC 94 at [64].
67. [2015] FCAFC 94 at [96].
68. [2015] FCAFC 94 at [153].
69. [2004] HCA 54; (2004) 217 CLR 640 at 657 [36] (Gleeson CJ, McHugh, Gummow, Kirby and Heydon JJ).
70. (2004) 217 CLR 640 at 657 [36].
71. (2004) 217 CLR 640 at 657 [37].
72. On proof of such a novus actus, the defendants would bear at least an evidentiary onus.
73. Cf Watson, A & J Varghese "The Case for Market-based Causation" (2009) 32 UNSW Law Journal 948 at 962.
74. TPA, s 82(1);
75. Cf Potts v Miller (1940) 64 CLR 282.
76. See HTW Valuers Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 at 666-667 [63]-[65]; cf Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 at 265-267.
77. Cf Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 at 267.
78. Historical share price information for HIH, during the period 1 January 1998 and 15 March 2001, was detailed in an affidavit of Jakeob Gray Brown sworn 5 November 2014, and summarised in a graph prepared by the defendant's expert Mr Gower, from which the figures in the Table are taken.
79. Nissim, D "Relative Valuation of U.S. Insurance Companies", December 2011.
80. The book value of a share is the company's net equity divided by the number of shares.
81. These figures are taken from calculations provided by the defendants after submissions had closed, in accordance with an arrangement made at the end of the hearing. The plaintiffs were afforded an opportunity to agree or comment on this document but did neither. I have checked the calculations against the inputs, and I accept them as correct. If the sale of FAI Life were not excluded as abnormal, the value as at June 1999 would be $1.72.
82. T167.28-44.
83. Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 at [31].
84. Jones v Schiffmann (1971) 124 CLR 303 at 308 (Menzies J); Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 at [31].
85. The defendants accepted that it should not be assumed that the market had insider knowledge of the true position of HIH: T169.48-170.01
86. Plaintiffs' Closing Submissions [73]-[77].
87. See T159-161.
88. T161.45

Amendments 21 April 2016 - Typographical errors: Coversheet, and Paragraphs [13], [45], [71], [94] and [123]. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 April 2016