Mitsub Pty Limited v McGraw-Hill Financial Inc

S&P's submissions 7 In essence, S&P argued that there was no power in the Court to make such an order and that, if there were, it should not be made because: the chief executive officer would need to rely on hearsay, the affidavit would thus be of no probative weight and would not narrow the issues; the order could cause S&P to disclose legally professionally privileged information; there were less intrusive and less onerous means available to elicit a similar response, such as directions for S&P to file submissions; the earlier findings about the Gaussian copula and ratings methodology referred to in the proposed order did not relate directly to any of the structured financial products or SCDOs the subject of any of the eight current proceedings and did not decide that use of the Gaussian copula in rating those products was inappropriate or resulted in the assigned ratings being erroneous; S&P only had to show that there were rational grounds for the assignment of the relevant ratings; there was no evidence, or finding, in the Wingecarribee proceedings 301 ALR 1, that any of S&P's ratings was incorrect; the applicants had not sought the proposed order; there was no limitation on how the contents of the affidavit might be used or what disclosure could be made of its contents; the proposed order was "more akin to a punitive sanction", where there was nothing in S&P's conduct that warranted censure. Moreover, in some of the eight proceedings, the pleadings had not yet closed; S&P had real and genuine grounds for defending its ratings methodology as evidenced in an affidavit made on 12 May 2015 by Cristina Polizu, a managing director and quantitative analyst of McGraw-Hill Financial Inc, the first respondent, in other proceedings brought by City of Swan that have recently settled; and the making of the proposed order would give rise to real and legitimate concerns as to whether I had prejudged the issues in the proceedings, including what will be a live issue as to the use of the Gaussian copula.

The Court's powers 8 The Court has substantive case management powers, some of which are contained in Pt VB of the Federal Court of Australia Act 1976 (Cth). Relevantly, s 37M(1) identifies that the overarching purpose of the civil practice and procedure provisions, under that and any other Act, as well as the Federal Court Rules 2011 (Cth), is to facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible. The objectives of that purpose include the efficient use of the judicial and administrative resources available for the purposes of the Court, the efficient disposal of its overall caseload and the resolution of disputes at a cost that is proportionate to the importance and complexity of the matters in dispute (s 37M(2)). The parties and their lawyers have statutory duties to conduct the proceedings, including negotiations for their settlement, in a way consistent with the overarching purpose (s 37N(1) and (2)). The Court can give directions about the practice and procedure to be followed in relation to the whole or any part of a proceeding, including requiring things to be done (s 37P(2), (3)(a), (7)). The Court's Practice Note CM1, Case Management and the Individual Docket System, also explains that parties and their lawyers can expect the Court to have regard to the desirability of, first, identifying and narrowing the issues in dispute as early as possible and, secondly, ascertaining the degree of difficulty or complexity of the issues really in dispute (see 3.2, (b)). 9 Provisions such as Pt VB have the purpose of ensuring that the conduct of civil proceedings, as French CJ, Kiefel, Bell, Gageler and Keane JJ said in Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Ltd (2013) 250 CLR 303 at 323 [56], "is firmly in the hands of the Court". Their Honours continued (at 323 [56]-[57]) saying of an analogue of Pt VB (being the Civil Procedure Act 2005 (NSW) referred to as "CPA" in the passage below): 56 … It is the duty of the parties and their lawyers to assist the court in furthering the overriding purpose. 57 That purpose may require a more robust and proactive approach on the part of the courts. Unduly technical and costly disputes about non-essential issues are clearly to be avoided. However, the powers of the court are not at large and are not to be exercised according to a judge's individualistic idea of what is fair in a given circumstance. Rather, the dictates of justice referred to in s 58 require that in determining what directions or orders to make in the conduct of the proceedings, regard is to be had in the first place to how the overriding purpose of the CPA can be furthered, together with other relevant matters, including those referred to in s 58(2). The focus is upon facilitating a just, quick and cheap resolution of the real issues in the proceedings, although not at all costs. The terms of the CPA assume that its purpose, to a large extent, will coincide with the dictates of justice. (emphasis added) 10 Having had, in some cases with Wigney J, responsibility for case management of these eight representative proceedings, I formed the preliminary understanding that a substantive issue common to all of them involves the assertion by the various applicants that S&P's use of the Gaussian copula in its ratings modelling for each SCDO or other structured finance product in issue was flawed for the reason articulated by Jagot J in the passage I have quoted from her reasons (Bathurst [2012] FCA 1200 at [2556]). I also formed the preliminary understanding that her Honour's reference to the Gaussian copula's possible underestimation of "the potential for joint severe events" appeared to refer to a similar concept to that identified in the 2005 working group report as "situations in which extreme market events could have unanticipated systemic consequences" and "model risk" (Wingecarribee 301 ALR at 226 [851]) and the similar concept discussed in the Banque de France article (see 301 ALR at 31 [83], [84]). 11 Of course, I have not come to any clear view or understanding of these matters, and there is no evidence about them, in any of the current proceedings before me. Rather, I am seeking to understand how best to give appropriate directions in the future to enable the Court to deal with the real issues, many of which have superficially, at least, some common features. As Sheppard J (with whom Burchett J agreed on this point at 434) said in E I Du Pont de Nemours & Co v Commissioner of Patents (1987) 16 FCR 423 at 424, judges have power "to make, and continue to make, such directions as seem to them best suited properly and adequately to manage and direct the cases in their lists". He said that the Court had a duty to make appropriate directions, even if necessary, against the will of the parties, that were adequate for and suited to the needs of the case. That inherent or implied power of the Court is reinforced by Pt VB and authorities such as Expense Reduction 250 CLR 303. I considered that it would be informative and important to understand, having regard to Jagot J's finding about what S&P knew or ought to have known concerning what she found was the common knowledge of the issues concerning the use of the Gaussian copula in ratings modelling, what, if any, bearing her Honour's finding and the two Central Bank reports, might have on the preparation of the eight current proceedings for trial. 12 Each of the SCDOs or structured products in issue appears to have experienced either some defaults or a wipe out because of extreme market events occurring from 2007, the effects of which are commonly known as the Global Financial Crisis. If (and I stress that at this point the question is based on a preliminary understanding of findings on other, but apparently related, issues after the two lengthy earlier trials) the Gaussian copula seriously underestimated the potential for joint severe, or extreme market, events, then it will be important to understand, at a broad, high level how S&P will defend its alleged use of the Gaussian copula to arrive at the ratings challenged by the various applicants. 13 Given that the trial of the Bathurst proceedings took about three months and the appeal a further two weeks, and the trial of the Wingecarribee proceedings took about one month, the eight current proceedings have the potential to absorb a very large amount of Court time, both in their case management and subsequent trials. I was concerned to ensure that the person within S&P with ultimate management responsibility, namely, the chief executive officer, explain at a high level, and of course without revealing any information that is protected by S&P's right to maintain legal professional privilege, his or her understanding from actually considering the eight proceedings, as to whether the earlier findings referred to in the proposed order applied and, if not, what issues the Court would have to consider in relation to the reliability of S&P's challenged ratings. 14 I was also concerned that Mr Hutley SC, senior counsel for most of the applicants, indicated that they were not aware why, in substance, the finding of Jagot J as to the use of the Gaussian copula in ratings would not apply to S&P's ratings of the SCDOs and any other structured products in issue. He said that his clients would be assisted by such an affidavit as I had suggested. 15 The litigation of those issues, if fully contested in respect of each rated product, is likely to be very expensive and time consuming both for the parties and the Court. I wished to be assured that the chief executive officer, as the person ultimately responsible for the decision to litigate them, had actually turned his or her mind to those issues and explained, at a high level, why the Court, having already spent considerable time and resources on different, but somewhat apparently (on my current understanding) related issues, should revisit those generated in the eight current proceedings involving the use of the Gaussian copula. 16 And, having considered these eight complex cases, the chief executive officer may well have his or her own insights as to how the real issues should be litigated. If there is some matter in the affidavit, when it has been made, that would make it appropriate for an order limiting its, or a part of its, use or publication, of course, S&P will be able to apply for orders to achieve such a purpose.

Conclusion 17 It follows that I reject S&P's submissions. The purpose for which I sought the affidavit is to assist in the case management of the eight proceedings. It is not punitive or any kind of sanction. And, it is in no way based on any prejudgment about any of the complex and, as yet, protean matters potentially in issue. But, for the purpose of case management the Court can require a party, by its proper officer, to explain the reason why it needs to litigate particular issues in the proceedings and thus to require the Court and the other parties to devote resources to deal with those issues. That is why I made the order on 18 May 2016, that substantially reflected the form of the proposed order. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.