B The settlement approval application
3 These proceedings arise out of a failed Ponzi scheme conducted by Mr Michael Samra, a director of ALC Group Pty Ltd (ALC Group). Mr Samra is a rogue who has been made a bankrupt and is currently serving time in gaol.
4 Like many rogues, he has left a trail of destruction, including causing very considerable financial and untold emotional damage to a large number of people, including some of the group members in these proceedings. ALC Group purportedly conducted a private lending business making loans to builders and property developers, but in truth, there was no private lending business and no loan book. ALC Group was wound up in 2009 and there were (as almost invariably appears to be the case in matters of this type) no assets recovered, and no dividends paid to the creditors.
5 The group members, naturally enough, sought to pursue every available avenue to them to recover the losses they suffered. This included providing funding for bankruptcy examinations and obtaining legal advice as to whether or not a Pt IVA representative proceeding should be commenced.
6 To describe the proceeding thereafter commenced as being akin to trench warfare would not be an overstatement. It has been bedevilled by interlocutory controversy, including at intermediate court of appeal level. By way of illustration, the following judgments have been published:
Perazzoli v Bank SA [2015] FCA 373
Perazzoli v Bank SA (No 2) [2016] FCA 260
Perazzoli v BankSA (No 3) [2016] FCA 677
Perazzoli v BankSA (No 4) [2016] FCA 725
Perazzoli v BankSA, a division of Westpac Banking Corporation Limited [2017] FCAFC 204
Perazzoli v BankSA (No 5) [2018] FCA 1187
7 The extent of this disputation, combined with two other factors, has caused very considerable legal fees to be expended. The first additional matter was a change of representation: Griffins initially acted for the applicants and other investors at the time the firm was also acting for the trustee in bankruptcy examinations, and there was an allegation made as to a misuse of documents provided in answer to examination summonses, with the consequence that Griffins voluntarily ceased acting for the applicants in around February 2015. The current solicitors (JWS) took over the conduct of the proceeding from that date.
8 The second factor causing significant expense in the proceeding arises from its very nature. It is unnecessary for the purpose of this application to wade into the brume of allegations made, and it suffices to note that the applicants and group members seek variously equitable compensation, common law damages or statutory compensation based on claims that the respondent bank (Bank):
(1) knowingly assisted in breaches of fiduciary duty and trust obligations owed by ALC Group and/or Mr Samra in his capacity as principal of ALC Group and/or as a director of ALC Group to the applicants and group members;
(2) received moneys obtained by ALC Group by reason of breaches of fiduciary duty and trust obligations owed by Mr Samra as principal of ALC and a director of ALC Group to the applicants and group members;
(3) is liable for the tort of conversion in connexion with a loan, deposit or investment made by cheque paid into the ALC Group bank account operated by the Bank;
(4) in respect of those group members who were also customers of the Bank, has acted in breach of the Bank's contractual duty of care to them; and
(5) engaged in contravening conduct contrary to the statutory norms prohibiting misleading and deceptive conduct.
9 The common thread running through all these claims (at least in a broad sense) is that the applicants and group members allege that the Bank, as banker to ALC Group, Mr Samra and his related entities, was aware of facts and matters sufficient to put an honest and reasonable banker on notice to make further inquiries, a course which the Bank failed to pursue.
10 Merely providing a summary of the above claims gives an indication, detailed at length in a confidential opinion provided by senior counsel for the applicant, of the factual and legal complexities of the matter. Ponzi schemes are notorious for raising complex issues, not only as to liability of third parties, but also as to loss theory. This case is no exception. Following a mediation conducted by the Hon Peter Jacobson QC, a conditional settlement of the proceeding has been reached on the basis that:
(1) the applicants' and group members' claims, save for the applicants' claims consequent on the Bank's credit references, be fully and finally settled on the basis of payment by the bank of $13 million inclusive of interest and costs; and
(2) the applicants' credit reference claims (which are not group claims) be resolved on the basis of a payment to them of $250,000 to be shared pro-rata to the applicants' claimed losses.
11 I am satisfied by reference to the confidential opinion that properly analysed, the applicants' and group members' claims for loss from 1 June 2007 total, at best, $25.314 million plus interest in the amount of $18.794 million. I am further satisfied, having regard to the way in which the proceeding has been defended to date by the Bank, it is expected the Bank will continue to defend stoutly not only the individual claims of the applicants, but also the group member claims, and that very substantial further costs will likely be incurred. In my view, costs for the purposes of the initial trial and any appeals from the decision of the trial judge could be expected to be certainly in excess of $2 million, and perhaps more.
12 It is not necessary for me to descend into the detail provided in the confidential opinion, but some aspects of the case, in my view, presented real challenges in establishing the liability of the Bank - a factor which has been important in forming the view that the proposed settlement is fair and reasonable. I consider, having reviewed the material, and in particular the confidential opinion, that:
(1) there was a high likelihood that the claims made by the group members who were customers of the Bank, as to damages for breach of contract by the Bank would fail;
(2) there were reasonable prospects of establishing the Bank's liability in respect of the conversion claims, but any such claims which are not statute barred are likely to be apportionable (this is a significant factor because the fraudster, Mr Samra, was principally responsible for the losses suffered by the group members);
(3) in relation to the knowing assistance claim (which is not apportionable), it is fair to say that there was substantial risk that liability would not be established by reason of the fact that the alleged fiduciary relationship between Mr Samra, ALC Group and the group members does not fall within an ordinarily accepted category of fiduciary relationship and is further complicated by the fact that Mr Samra and the ALC Group as borrowers had a self-interest in the transactions as distinct from subjugating their interests in favour of investors (which is ordinarily required of a fiduciary); and
(4) how one was to attribute and then categorise the Bank's knowledge for the purposes of establishing legal liability raised particular complications, which would be evident to anyone experienced in litigation of this type.
13 Why these conclusions are important is that the settlement sum is a little under 70% of the group members' most realistic knowing assistance claim without interest and before any deductions. This seems to me, given the overall merits of the claim, to be within the range of settlements which could be properly regarded as reasonable. The difficulty with the settlement is not so much the sum of $13 million, being the amount struck as between the applicants acting in their representative capacity and the Bank, but the fact that only approximately 40% will be distributed to eligible participating group members. This is a function, as would have already been appreciated from what I have stated above, of the significant legal costs that have been incurred together with the fact that this is funded litigation (a matter to which I will return shortly).
14 As is conventional, a settlement distribution scheme has been proposed which provides that, upon approval by the Court, the settlement sum will be distributed first to legal costs.
15 Secondly, a payment to the litigation funder (LCM), being an amount for payment of a funding commission, which if a funding equalisation order is made, will equate to 25.1% of the gross settlement sum together with some disbursements incurred by the funder, including for after the event insurance.
16 Thirdly, a payment to the applicants and four group members, including two group members who appeared before me today, paid by them to Griffins to fund initial investigations.
17 Fourthly, a payment to the administrator of a settlement distribution scheme for costs and disbursements incurred by the administrator in connexion with the administration of the scheme.
18 Fifthly, the balance to group members.
19 The settlement distribution scheme and the methodology adopted for distinguishing between various claims is explained in great detail in the material and seems to me to reflect a rational and sensible approach to the distribution of the residual amount following the necessary deductions. In this regard, the Court has again been assisted by the opinion of senior counsel as to the reasonableness of the operation of the scheme, which, in my view, appears to be cogent.
20 Turning now to the funding arrangements, there were both funded and unfunded group members in the proceeding. The funded group members comprise 104 out of 165 group members. In these circumstances, the funder seeks what has become known in the authorities as a "funding equalisation order". The purpose of such an order is, of course, to provide some equality across the group, reflecting the fact that only some group members are contractually obliged to pay the funding commission. It does not operate so as to augment the amount paid to the funder in total but, rather, spreads the contribution towards that amount over all group members, given it is only through the availability of funding that the matter has been brought to a conclusion.
21 I am satisfied that a funding equalisation order is appropriate in the circumstances of this case.
22 This brings me to the objections that have been advanced, both in writing and before me orally today. Three group members, being Mr Mielke, Mr Niehus and Mr Pizi, have appeared and provided very useful articulation of their subjective perspectives of the settlement.
23 Efforts made by group members in coming along to settlement hearings and expressing their views is of considerable help to the Court. Apart from assisting in testing the Court's discharge of its supervisory and protective role, it brings home the fact that litigation of this type has a human dimension. The present litigation is the result of failed hopes and endeavours and it is important for a Judge, in forming a view as to the fairness and reasonableness of the settlement, to bear steadily in mind that in approving a settlement such as this, one is not dealing with some abstract commercial enterprise, but rather, one is dealing with people's real lives and, in cases such as this, their profound disappointments. I am grateful for the participation and submissions of the group members.
24 The objections can be put roughly into three categories.
25 The first is a particular complaint made by Mr Niehus and Mr Mielke concerning the individual calculations of their figures. It seems to me this objection can be addressed by me making an order requiring the provision to me of a document which summarises the contentions of these objectors and the detailed response of the administrator and reserving liberty to the objectors to relist the proceeding to agitate any concern they have concerning the operation of the settlement distribution scheme.
26 Secondly, the complaint was advanced, particularly by Mr Niehus, concerning losses relating to advances made before 1 June 2007. I am satisfied, however, that advances made prior to 1 June 2007 have been dealt with appropriately. The real problem seems to arise from whether any amounts advanced prior to 1 June 2007, which were said to be "rolled over" on or after 1 June 2007 (that is, where there was no "new" money paid), could be taken into account in assessing loss. In part, this issue is complicated by the fact that generally (although I do not make any specific comment in relation to the case of Mr Niehus and Mr Mielke) there was a lack of documentation and lack of formality in respect of "rollovers" of earlier investments. The cogent view taken ultimately was that these "rolled over" amounts should not be considered in the calculation of losses in light of the nature of the "no transaction case" against the Bank because:
(1) the pleaded case against the Bank is to the effect that had the Bank not allowed Mr Samra to conduct the ALC Group bank account in the way he did, the Ponzi scheme would have collapsed and therefore no new money would have been advanced and there would not have been any further payments of interest or repayment of principal to earlier investors; and
(2) including losses on money advanced prior to the claim commencement date of 1 June 2007, would have been inconsistent with this case theory because the Bank could not have prevented this money being advanced or the related losses being incurred.
27 This is no doubt a disappointment to those with significant pre-1 June 2007 losses, but it seems to me to be the rational approach to loss given the unfortunate circumstances that occurred.
28 The third objection was the strength of the claim against the Bank and whether or not the overall settlement was fair and reasonable. I have addressed the issue of whether the settlement is fair and reasonable above. But I understand the disquiet of the objectors receiving relatively modest amounts out of the settlement given they had understood, at the beginning of the case, that there was a relatively good claim against the Bank. As I said during the course of submissions, litigation is a difficult and unpredictable endeavour at times, and prospects of success can change significantly during the course of proceeding. In my experience I have also observed there is often a human tendency, at the outset of litigious endeavours, to discount or not fully wish to contemplate problems that may become evident as the case goes on. All I can say is that whatever expectations there may have been at the commencement of this class action, the view as to prospects taken by those representing the applicant now is both sensible and realistic.
29 A further issue was raised by Mr Mielke as to obtaining a copy of the confidential opinion of senior counsel. This opinion is, obviously enough, privileged as between the applicants, being clients of JWS (the firm instructing senior counsel) and the firm. I understand that consistently with the maintenance of this claim for privilege, it has not been distributed to group members, but a group member has made a specific request to see the document. In quelling the controversy generally, I am also quelling the individual controversy between the group member concerned, Mr Mielke, and the Bank. He has expressed a consistent interest in seeing the opinion which, as the above reasoning indicates, was a key consideration in me reaching the views I have formed as to reasonableness.
30 Mr Mielke not only sought access to the claim for his purposes, but also to potentially provide it to solicitors. When asked why this was the case, he indicated that he wished to obtain advice as to whether the settlement was fair and reasonable. Ultimately, however, the evaluative task of considering whether the settlement is fair and reasonable is one that falls to me and for the reasons outlined above, I have come to the firm conclusion that this settlement is one that falls within that description. Despite this, I think Mr Mielke has a legitimate interest in understanding why it is that I have reached this conclusion.
31 Subject to the provision of a confidentiality undertaking given to the Court by Mr Mielke, I am prepared to allow him to inspect a copy of the opinion at the offices of the solicitors for the applicant, provided that such a request is made within seven days of the date of this order. I do not, however, think there is any utility in extending this further, in particular, allowing him to discuss it with his solicitors in order to obtain an opinion on a question which has already been authoritatively determined by the settlement approval.
32 The only additional controversy to which I should make reference is an issue that arose concerning the costs of JWS. A referee provided a report as to costs on 8 October 2019. The referee was Mr Roland Matters, a highly experienced costs consultant and someone experienced in preparing reports of this type. The applicants (although having no personal liability, as I understand it, to pay the costs which have already been paid by the funder) opposed the adoption of part of the report, which involved a reduction of costs of $220,927.50 (approximately 5.7%). The applicants submitted that aspects of this proposed reduction should not be accepted because: (a) a reduction for concurrent attendances of various solicitors of some $90,005 is wrong in principle and was fastened upon arbitrarily; and (b) a reduction in legal fees charged because of partial success on an application for leave to amend in May 2018 is wrong in principle.
33 As I explained in CPB Contractors Pty Limited v Celsus Pty Limited (formerly known as SA Health Partnership Nominees Pty Ltd) (No 2) [2018] FCA 2112; (2018) 364 ALR 129 at 145-146 [67]-[68], the principles which deal with the adoption of referee reports are well known and include a discretion to adopt the report where the interests of justice so require. If the report shows an apparently appropriate approach to the assessment of the subject matter of the reference, the Court has a disposition towards the acceptance of the report, for to do otherwise would negate the purpose of the report by delving into only those aspects of the report to which attention has been directed, rather than the overall thrust of the report, which was directed to a broader question.
34 In my view, the report of Mr Matters does not manifest some perversity or manifest unreasonableness in the fact finding, indeed the contrary is the case. In the absence of a patent misapprehension of the type discussed in the relevant authorities, I should accept and adopt the report and not undermine the utility of the process by descending into the detail of what would amount to a "rehearing" of a relatively minor dispute as to whether some costs were unreasonably incurred, particularly when the balance of the costs were otherwise regarded as reasonable and there would be no challenge to this aspect of the report.
35 Nothing about the implicit fact finding upon adoption of the report detracts from the fact that, insofar as I can judge, it appears JWS have acted both properly and conscientiously on behalf of the applicants in the conduct and resolution of this proceeding. For the avoidance of doubt, this finding means that the amount of costs I have implicitly found not to be reasonable are not to be borne by the group members. It is not relevant to the discharge of my current task to deal with any issues of entitlement as between funders and solicitors inter se.