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University of New South Wales Law Journal Student Series |
JACOB ELLIOTT
The availability of market-based causation as a mechanism to convert causation into a common issue for determination in Australian shareholder class actions is highly contentious and unresolved. Its practical efficiency is met with warranted concerns regarding the efficacy of econometric expert evidence and its theoretical foundations which do away with the perennial maxim of caveat emptor. Part II of this article provides a description of the statutory framework in which shareholder class actions are commonly pursued. Part III details the conflicting lines of authority advocated by plaintiffs and defendants to assert or negate the availability of market-based causation. Part IV outlines the efficient market hypothesis upon which market-based causation is founded. Finally, Part V considers the shortcomings of market-based causation and the imprecision of quantifying losses. Part VI concludes.
The crux of an archetypal shareholder class action operates as follows. X, a public company which is listed on a securities exchange, becomes aware of information concerning its business which ought to be disclosed to its shareholders and either omits to disclose that information to the market or makes a statement which misleads the market as to the true state of its affairs. Investors who purchase shares in X after the time at which X ought to have disclosed the information to the market acquire those shares at a price they would not have paid if the misconduct had not occurred. At some point, either by the correcting disclosure by X or otherwise, the market becomes aware of the information which ought to have been disclosed and the value of the shares in X fall as a result. Investors who purchased shares in X between the time at which X ought to have disclosed the information and the time at which disclosure ultimately occurred commence proceedings against X for the loss suffered as a result of the diminished value of their shareholding.
Typically, shareholder class actions are brought against companies for breaching their continuous disclosure obligations,[1] or for engaging in misleading or deceptive conduct.[2] This essay will primarily focus on the latter cause of action, being the engagement in misleading or deceptive conduct under s 1041H of the Corporations Act and its equivalent provisions.[3]
1 Misleading or Deceptive Conduct
Section 1041H proscribes conduct that is misleading or deceptive.[4] In shareholder class actions, dispute seldom arises over whether the defendant company’s non-disclosure or misstatement constitutes conduct which is misleading or deceptive. Instead, substantial argument and judicial attention is expended on determining whether such conduct was causative of the loss suffered by shareholders. Section 1041I provides a right to compensation arising from a breach of section 1041H, but importantly, that right is confined to losses which are suffered ‘by’ the contravening conduct.[5] As the causation element in section 1041H echoes the language of the misleading or deceptive conduct provision under the Trade Practices Act,[6] courts have traditionally sought to interpret it in the same manner, adopting the common-sense approach as set out in March v Stramare.[7] However, recent decisions concerning section 1041I have seen a withdrawal from the common law approach to causation, and instead, “it is in the purpose of the statute, as related to the circumstances of the particular case, that the answer to the question of causation is to be found”.[8]
It follows that an inquiry into the purpose of the Corporations Act may help shed light on the true nature of the causation element in section 1041I and whether it is compatible with the concept of market-based causation. By having regard to the language of the instrument viewed as a whole,[9] section 1041H is couched amongst other provisions in Part 7.10 of the Corporations Act which deal with market manipulation,[10] false trading and market rigging,[11] and insider trading.[12] Part 7.10 is unmistakably targeted at market misconduct, and concomitantly, the protection of market participants. Thus, it is prudent to interpret the causation element in a way which focuses on the damaging effect which misinformation has on the market and investors.[13]
The divergent approaches to causation which are advocated by plaintiffs and defendants in shareholder class actions are rooted in conflicting lines of authority. In essence, defendant companies assert that the causation element in section 1041I requires that plaintiffs establish direct causation, being where person A directly relies on the misleading or deceptive conduct of person B, and A suffers a detriment as a result. In the shareholder class action context, that scenario translates to circumstances where an investor reads and relies upon a misleading or deceptive disclosure by a company (or the nonsensical situation where an investor relies on a company’s non-disclosure) and suffers loss as a result.
Comparatively, shareholders champion the authorities which establish indirect causation as the appropriate test for misleading or deceptive conduct cases,[14] whereby person B engages in conduct in reliance on the misleading or deceptive conduct of person A, and person C sues person A after detrimentally relying on the conduct of person B. It is this principle which ultimately paves the foundation for market-based causation, in which the causal link does not require the investor to rely on the disclosure document (or the absence of one),[15] and it suffices to rely on the market price as an accurate indicator of the value of the company’s shares in light of all publicly available information.
The two lines of authority which Australian courts have produced, and over which plaintiffs and defendants contest, are not easily reconcilable.[16] Frequently, plaintiffs erroneously draw upon concepts and cases from the similar but not identical fraud-on-the-market theory from United States jurisprudence.[17] A consideration of that theory, and its inapplicability in an Australian context, illuminates the nature of market-based causation.
1 Direct Causation
Defendant companies advocate direct causation for two primary reasons. First, if direct causation for each claimant is required, causation becomes an individual issue and “each group member will need to prove that the company’s contravening conduct caused its loss”.[18] Under that approach, claimants must surmount the difficult task of establishing that they read and directly relied on the company’s disclosure, or somehow overcome the insuperable task of proving that they relied on the company’s non-disclosure. The evidential and forensic burden of this requirement would likely eliminate a number of shareholders’ claims, increase costs, decrease settlement offers and reduce the commercial viability of litigation funding. Second, direct causation would exclude two categories of claimants who may otherwise be caught by the class definition in an indirect causation system. Those categories are claimants who would have purchased the shares in the defendant company irrespective of the misstatement or non-disclosure, and those claimants who purchased the shares with actual knowledge of the company’s true state of affairs. The decisions of Digi-Tech[19] and Ingot[20] acknowledge this risk,[21] and are commonly brandished by those in direct causation’s corner.
In Digi-Tech, the plaintiffs invested in a scheme which was centred around the defendant company’s telecommunications products. The defendant company had provided misleading forecasts to its accountants concerning the scheme’s underlying products, who then valued the scheme accordingly. The plaintiffs commenced proceedings against the defendant company under section 52 of the TPA and argued that they relied upon the accountant’s valuation of the investment scheme, the creators of which relied on the misleading and deceptive conduct of the defendant company, and ultimately suffered loss. The New South Wales Court of Appeal drew a distinction between cases where the loss suffered is a ‘natural consequence’ of the misleading conduct, and cases involving inducement into a transaction which causes the plaintiff to suffer loss.[22] In circumstances which fall within the latter category, it was held that direct reliance must be proven.[23]
Four years later, the Court of Appeal came to a similar conclusion in Ingot. The plaintiffs purchased notes in a company which was subsequently wound up. The directors’ decision to issue those notes was influenced by a prospectus which misrepresented the profitability of that approach. The investors commenced proceedings against the persons responsible for the preparation of the prospectus and argued that, but for the misrepresentations in the prospectus, the directors would not have issued the notes and the plaintiffs would not have suffered loss. Giles and Ipp JJA echoed the findings of Digi-Tech and held that, in the misleading or deceptive conduct context, persons who allege that they suffered loss by acquiring something in consequence of misleading conduct “must prove that they were misled by that conduct... were it otherwise, such plaintiffs could succeed on the ground that, by making false representations, the defendants engaged in misleading conduct, even though the plaintiffs knew the truth of the representations or were indifferent to them”.[24] Both Digi-Tech and Ingot relied on the dicta of McHugh J in Henville v Walker who held that misleading conduct “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”.[25]
Although these two decisions have received positive treatment in subsequent decisions,[26] the observations regarding causation were obiter in both cases. Further, the scope of those decisions has been confined to the following proposition: recovery is denied where the contravening conduct did not influence anyone at all, or where an investor knows the true position or is indifferent to it.[27] Therefore, the plaintiffs in Digi-Tech and Ingot failed, not because indirect causation is untenable in law, but because their evidence failed to show that those on whom they relied had themselves relied on the defendant company’s misleading conduct.[28]
2 The US Fraud-on-the-Market Theory
United States courts have grappled with market-based theories of causation in class actions for close to a century.[29] The ‘fraud-on-the-market’ theory of causation was first formally expounded in Basic v Levinson (‘Basic’),[30] and hypothesises that, in an efficient securities market, the price of a company’s shares reflects all available material information regarding the company and its business.[31] Basic held that, in shareholder class actions, plaintiffs are entitled to a rebuttable presumption that “the plaintiffs traded in reliance on the integrity of the market for those securities”.[32]
The Securities Exchange Act of 1934 and its implementing regulations proscribe misleading conduct in connection with the purchase or sale of securities in the United States.[33] Importantly, those statutory provisions assert that reliance must be proved. The US Federal Rules of Civil Procedure provides the infrastructure for class actions, and importantly, rule 23(b)(3) requires that common issues “predominate” over individual issues for a proposed class to be certified. At first glance, those two statutory positions, when considered together, tend to suggest that claims for misleading or deceptive conduct cannot be brought as a class action. If direct reliance must be proven by each claimant, the scales would tip towards individual issues such that they “predominate” over common issues, and prevent the commencement of a class action. Thus, the fraud-on-the-market theory was fashioned as a solution to this statutory obstacle. By converting reliance into a common issue, misleading or deceptive conduct claims may be brought as a class action without breaching the predominance requirement.
There are two primary reasons why, despite claimants’ continued attempts, the fraud-on-the-market theory is inapplicable in the Australian statutory context. The first is alluded to in the preceding paragraph. Unlike the United States, there is nothing in Part IVA of the Federal Court of Australia Act 1976 (Cth) that requires common issues predominate over individual issues. Rather, section 33C provides that there need only be one substantial common issue of law or fact.[34] In Bright v Femcare, a case in which one-third of the time was to be spent on common issues and the remainder was to be devoted to individual issues, Lindgren J asked “[i]s it still not preferable that the common issues be heard and determined once so as to be binding as between each claimant and the respondents rather than many times?”.[35] Whilst defendants have sought to invoke the powers of section 33N of the Federal Court of Australia Act to prevent the proceedings from continuing as a class action on the basis that the predominance of individual issues makes a representative proceeding inappropriate,[36] these attempts have been unsuccessful.[37]
The second aspect of Australia’s statutory regime which makes the fraud-on-the-market theory unsuitable in cases of misleading or deceptive conduct is the absence of a scientier requirement in section 1041H, as is present in the United States regime. Pursuant to SEC Rule 10b-5, for the defendant to be found liable for misleading or deceptive conduct, they must have engaged in the conduct with intent or knowledge of their wrongdoing,[38] and the mental state required by this element is more burdensome than negligence.[39] Thus, the policy argument is often made that a company which intentionally deceives prospective shareholders should be required to compensate for any loss it has caused, but where there has been no intent to mislead, and perhaps even where precautions are taken to avoid that occurring, “the company should not be punished further by having to compensate for loss not caused by its conduct”.[40] It is unclear why advocates for this policy argument believe the best way to reduce the liability of defendants who unintentionally mislead investors is to meddle with the calculus of causation.
Nonetheless, the absence of a predominance requirement, coupled with the divergent statutory requirements, is sufficient to prevent the fraud-against-the-market theory from being directly applied in Australian shareholder class actions. However, the theory has been accepted by Australian courts insofar as it shows the plausibility of the outcome for which plaintiffs contend.[41]
3 Market-Based Causation
The authorities routinely cited by shareholders in support of market-based causation often include, or can be traced back to, Janssen-Cilag.[42] It is a prime example of indirect causation in a misleading or deceptive conduct case, albeit in dissimilar factual circumstances to the archetypal shareholder class action. Janssen-Cilag commenced proceedings against Pfizer for making misrepresentations to the public about Janssen-Cilag’s products which diverted their customers to Pfizer and ultimately reduced their market share. According to Lockhart J, there was no requirement in the TPA that recovery be only available where the claimant themselves rely on the misconduct. Rather, Lockhart J held that “where a corporation engages in conduct which misleads consumers, the natural and direct result of which is to cause the public to buy more of that trader’s product and less of a rival trader’s product, the loss to the rival is direct and immediate; it is not remote or indirect”.[43] This characterisation of causation as a ‘natural consequence’ is what the New South Wales Court of Appeal referred to in Digi-tech when drawing a distinction between natural consequence cases and cases involving an active inducement.[44]
In Haynes v Top Slice Deli,[45] purchasers of a business commenced proceedings against the vendor’s accountants in relation to misleading representations of profitability. The misleading cash flow projection was provided to the purchasers’ bank as part of their loan application. The purchasers did not themselves rely on the document, yet Einfeld J accepted that, but for the misleading cash flow projection, the bank would not have approved the loan and thus the purchasers would not have suffered loss.
A number of decisions followed, each with varying factual matrices, that strengthened the proposition that an applicant may establish causation by proving that a third party relied upon the misrepresentations and that party’s reliance caused the applicant’s damage.[46]
The first sighting of market-based causation in an Australian decision was in the obiter of Finkelstein J in P Dawson Nominees in which, after considering Basic and the fraud-on-the-market theory, he observed that, under the market-based causation theory, “causation may be made out if it can be demonstrated that the contraventions caused the market to inflate the price of securities”.[47] No issue of causation arose in Grant-Taylor v Babcock either, yet Perram J shared the opinion that “a party who acquires shares on a stock exchange can recover compensation for price inflation arising from a failure to disclose material” so long as they are not themselves aware of the non-disclosed material.[48] In Caason Investments,[49] a case involving an application to strike out a statement of claim for failing to plead direct causation, the Full Federal Court held that market-based causation was ‘arguable’ in shareholder class actions.[50] The nature of the strike out application meant that the Court was not required to make a determination as to the correct application of principle, but merely consider whether the applicants’ contentions as to causation were arguable.[51]
In Re HIH,[52] the defendant company, before entering liquidation, published misleading financial results which overstated its profitability. A number of plaintiffs who had purchased shares in HIH prior to its liquidation claimed against it for misleading or deceptive conduct, not because they had relied on the representations contained in the disclosures, but because they had relied on the market. Brereton J drew an important distinction, in line with Campbell v Backoffice Investments,[53] that the misleading and deceptive conduct provision is “one of causation, not of reliance”.[54] Thus, Brereton J was satisfied that HIH had misled the market and, as a result, the shareholders’ claim for loss was available.[55]
Campbell v Backoffice is frequently cited in financial contexts for the proposition that reliance is not the only mechanism by which causation may be established.[56] However, its precedential value in that context has been criticised as being “somewhat out of context”.[57]
And yet, not one of those cases confirmed, as binding authority, that the doctrine of market-based causation was available to claimants in Australian shareholder class actions. It was not until the decision of Beach J in Myer[58] that it was formally recognised as a valid mechanism for the determination of causation.[59] In that case, the claimants commenced proceedings against Myer in relation to optimistic forecasts of profitability which, after being publicly corrected six months later, caused Myer’s share price to fall. The group members, being persons who purchased Myer shares between the initial disclosure and the later correction, relied exclusively on the market-based causation theory.[60] In consonance with Re HIH and Campbell v Backoffice Investments, Beach J held that ‘by’, the causation element in s 1041I of the Corporations Act, did not require direct reliance.[61] Beach J accepted that there were a number of instances between the time of Myer’s misstatement and the eventual disclosure at which it should have made a correcting disclosure. However, despite accepting the availability of market-based causation, the plaintiffs’ expert failed to produce evidence to establish that, if disclosure had been made at each time for which the plaintiffs contended in their counterfactuals, the claimants would have acquired the shares at a lower price than they had paid.[62]
Whilst confirming the availability of market-based causation in Australian shareholder class actions, Myer also provides litigants with a third option to rebut causation. In addition to proving that claimants knew the information which was not disclosed, or proving that shareholders would have purchased the shares even if they had been aware of the information, defendant company’s may disprove causation by adducing evidence to prove that the relevant misstatement or non-disclosure did not affect the market price. Beach J alluded to a fourth way in which defendant companies may disprove causation; by demonstrating that the market for the particular security was not efficient.[63]
The efficient market hypothesis is an economic theory which provides that share prices fully reflect available information,[64] and it comes in three forms. The ‘semi-strong’ iteration of that theory, which posits that shares prices fully reflect publicly available information, provides the underpinnings of market-based causation, albeit with some concessions in light of modern microeconomic understanding. The theory has been successfully argued and adopted in United States and Australian shareholder class actions.[65]
However, since Basic was decided in 1988 in which the majority expressly relied upon the efficient market hypothesis, “overwhelming” empirical evidence has emerged that capital markets are not efficient and public information is not always rapidly impounded into share prices.[66] In the dissenting judgment of White J in Basic, he appropriately cautioned that courts “are not well equipped to embrace novel constructions of statute based on contemporary microeconomic theory”.[67] Thus, in subsequent American decisions, fraud-on-the-market theory is instead based on the “fairly modest” but still questionable premise that “market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices”.[68] Australia has followed a similar trajectory, requiring the parties establish, as a threshold issue, that the market for a particular security is efficient,[69] rather than relying on the efficient market hypothesis as a blanket assumption. Litigants lead evidence often referred to as the ‘Cammer factors’ to establish or disprove the existence of an efficient market.[70] In Cammer, the court provided a number of factors which indicate an efficient market, including a large trading volume, a significant number of reports by securities analysts, the presence of arbitrageurs and a history of immediate share price movements in response to unexpected disclosures.[71] In Myer, Beach J held that the semi-strong form of the efficient market hypothesis can “generally be presumed to be valid for actively traded securities”.[72]
Imagine a scenario in which BHP Group Ltd engaged in misleading and deceptive conduct by waiting to disclose market-sensitive information which was at its disposal until the following day. Without market-based causation, a class action commenced against BHP could require 47,909 group members establish that they each individually relied on BHP’s nondisclosure.[73] Thus, a mechanism which converts the cumbersome task of individual reliance into a common question is logical, pragmatic and consonant with the overarching purpose.[74]
The risk canvassed in Digi-Tech and Ingot that market-based causation may result in some shareholders being compensated despite being indifferent to the truth is a valid concern. Since the emergence of market-based causation, there has been an insurgence in day trading in which short-term profits are pursued and technical analysis is adopted, wherein the fundamentals of a company’s financial position are irrelevant.[75] The theory of market-based causation is consonant with fundamental analysis, wherein the economic environment, industry performance and company performance are examined as the basis for investment decisions.[76] However, technical analysis is increasingly adopted by investors, in which the price of shares are thought to have little correlation with the company’s intrinsic value and in which investment decisions are based on tools and techniques which study historical price data to predict future movements.[77] Where day traders believe that the price of a company’s shares is unrelated to the company’s intrinsic value, it is questionable whether those investors should have standing against a defendant company which engages in misleading or deceptive conduct if the investor did not consider the company’s misstatement and does not believe that company performance is relevant to its share price.
Further, due to the lowered barriers to invest in financial markets, unsophisticated retail investors may also fall within the subset of shareholders who are ignorant to the company’s financial position, make investment decisions based on the company’s share price history, or who make idiosyncratic investment decisions without any rhyme or reason. There is significant evidence of the growth of retail investor participation and its effect on securities markets throughout the last decade.[78] ASIC’s research on retail investors exposes the growth in retail investor participation and the unconventional methods adopted by those investors, with 41% of surveyed retail investors sourcing information from social media and networking platforms upon which investment decisions were made.[79] Convincing policy arguments may be made as to why those investors, who regularly rely on unverified and potentially misleading information, should not compensated for changes in price caused by the defendant company’s misleading conduct. As “noise traders”[80] randomly buy both under-priced and overpriced shares, gains and losses cancel out over time and the policy argument for compensation is weakened.[81]
On the other end of the spectrum of investor intelligence, the development in advanced algorithmic and automated trading creates another category of shareholders which logic would suggest are not worthy of compensation for a company’s misleading or deceptive conduct.[82] Those shareholders, whose investment decisions are automatically made through algorithms which track changes in a company’s trading volume and price movements, are under vastly different circumstances to the conventional investor. Gerard Craddock SC stated that “[i]f there is one thing that can be said with some certainty about [algorithmic trading], it is that the computer programmers are uninterested in market announcements or underlying value”.[83] In those circumstances, the purchase or sale of securities is not an active decision made by the shareholder but rather, it is triggered by an automated algorithm.
Market-based causation turns the caveat emptor maxim on its head, equipping investors who purchase shares without remotely relying on any company information with a valid avenue for recovery of losses coincidentally caused by a company’s misstatement or nondisclosure. These concerns must be countenanced with the cost implications for the court, the parties and their representatives which would otherwise be expended should individual causation be required.[84] It is unclear whether the statutory prominence of efficiency, expediency and costs is sufficient to quell this criticism of market-based causation.
What cannot be easily dispelled are the criticisms directed towards the ability for expert evidence to prove a market’s efficiency or to quantify the inflation-based measure.[85] The determination of loss requires “extensive economic expert evidence”[86] which is often adduced in the form of an event study. An event study is “an econometric technique that seeks to measure the impact of specific events on a company’s share price by removing other unrelated events such as market-wide movements”.[87] Complex mathematical formulae are used to “determine the proportion of the movement in a share price on a particular day (or days) that is likely to have been due to changes in conditions affecting the market in general, or the sector of the market in which the particular company operates, and that which was due to the release of company specific news”.[88] The event study technique involves “a statistical recreation of the counterfactual scenario of a timely announcement based on the actual market reaction to the untimely announcement”.[89]
There are three dominant criticisms of event studies as a determinant of loss. First, event studies have low statistical power to detect an economically meaningful price impact.[90] Overreliance on statistical significance has the practical effect of barring shareholder class actions whose measure of loss falls below an expert’s designated threshold. If the true price effect of a defendant company’s misleading conduct on their share price is -4.0%, and yet an expert’s chosen threshold of significance is -5.0%, an accurate finding of loss may be deemed statistically insignificant. As a by-product of relying on econometric analysis, statistics pervades an inquiry which has traditionally been based on judgement rather than mathematical precision. The mathematical efficacy of event studies is further undermined in circumstances where the shares have little or no price history, such as newly-listed companies, which inhibits the ability to draw useful conclusions.[91] Second, the corrective disclosure is often contained in a company announcement which may comprise other confounding information, such as the announcement of separate news unrelated to the misleading conduct, which skews the reliability of a studied event. Financial economists have long confessed that there is no reliable, mathematically precise method to decompose price changes into the component related to the misleading conduct and the component unrelated to the misleading conduct,[92] and these issues are compounded in instances where the event being studied comprises multiple pieces of information which each would be expected to have independent impacts on investor sentiment. In Myer, Beach J opined that the presence of confounding information in a relevant disclosure will not eliminate the usefulness of event studies altogether, but will require additional techniques such as discounted cash flow analysis and a review of analyst commentary to isolate the price impact of the misstatement.[93] Third, event studies are most reliable when measuring price movement in response to unanticipated disclosures. However, its efficacy is negligible when measuring the share price movement in response to misstatements or non-disclosures which confirm prior misstatements because, in those circumstances, the share price would not be expected to move.[94]
In Bonham v Iluka,[95] Australia’s third shareholder class action,[96] the lead plaintiff was unable to establish reliance on the defendant company’s allegedly misleading representations, but the remaining class members sought to establish causation and quantify loss through expert evidence in the form of an event study. The question of causation was obiter as Jagot J found that the defendant company had not contravened any statutory obligation,[97] yet the judgment provides insight into the fallibility of event studies. Investment strategies and vehicles have become increasingly complex over recent decades and short selling of stocks, whereby an investor benefits from a decrease in the share price, presents a prime example of an event study’s shortcomings. Jagot J stated that the expert’s event study “does not adequately confront the fact that the level of short selling in Iluka shares was among the top five or ten moist heavily shorted stocks included in the ASX 100 index”.[98] The event study erroneously assumed that the trading of shares in a company at a given price is indicative of the value which the market ascribed to those shares, and by extension, the company, at that time. However, the presence of short sellers involves market participants taking a contrary view to ordinary investors which supposes that the market price for the shares was inflated. The existence of both short and long sellers “indicates that the market held a range of views about Iluka’s sales forecasts” and that neither a short nor long position was unreasonable given the volatility in the market.[99] Therefore, the very first step in the expert economist’s analysis, to estimate the market’s actual expectations of Iluka’s sales, was fundamentally flawed.
As publicly listed companies grow in magnitude and the number of market participants continues to increase, individual reliance will prove an unworkable system of causation. Market-based causation provides the judiciary with the key to deliver mass justice without gross expenditure of public and private resources, but it is not without deficiencies. It creates an undesirable by-product whereby shareholders may not be misled and yet still can be recompensed for misleading conduct. Further, an overreliance on expert evidence converts what is otherwise a legal inquiry into a calculation founded on fallible econometrics.
[1] Corporations Act 2001 (Cth) s 674 (‘Corporations Act’).
[3] Australian Securities and Investment Commission Act 2001 (Cth) s 12DA.
[4] Corporations Act 2001 (n 1) s 1041H(1).
[5] Ibid s 1041I(1).
[6] Andrew Watson and Jacob Varghese, ‘The Case for Market-Based Causation’ (2009) 32(3) University of New South Wales Law Journal 948, 952; Trade Practices Act 1974 (Cth) s 82(1).
[7] Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514, 525 (Mason CJ, Dawson, Gaudron and McHugh JJ) citing March v Stramare (E & M H) Pty Ltd [1991] HCA 12; (1991) 171 CLR 506.
[8] Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets (2008) 73 NSWLR 653, 659 citing Travel Compensation Fund v Tambree [2005] HCA 69; (2005) 224 CLR 627, 639 (Gleeson CJ). See also Allianz Australia Insurance Ltd v GSF Australia Pty Ltd [2005] HCA 26; (2005) 221 CLR 568, 596 (Gummow, Hayne and Heydon JJ).
[9] Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355, 381–382; Bropho v Western Australia [1990] HCA 24; (1990) 171 CLR 1, 20.
[10] Corporations Act (n 1) s 1041A.
[11] Ibid ss 1041B, 1041C.
[12] Ibid ch 7 pt 7.10 div 3.
[13] Watson and Varghese (n 6) 963.
[14] To adopt the taxonomy proffered by Beach J in TPT Patrol Pty Ltd v Myer Holdings Ltd [2019] FCA 1747; (2019) 140 ACSR 38 at 316 (‘Myer’), this causal mechanism might be more precisely stated as ‘active indirect causation’ as distinct from ‘passive indirect causation’ in which the claimant’s loss is a natural consequence of the misleading or deceptive conduct.
[15] Caason Investments Pty Ltd v Cao (2015) 236 FCR 322, 352 (Edelman J).
[16] Zamir Golestani, ‘TPT Patrol Pty Ltd v Myer Holdings Limited: Why Shareholders Can Rely on Market-Based Causation’ [2022] UWALawRw 13; (2022) 49 University of Western Australia Law Review 377, 378.
[17] See, eg, Camping Warehouse Australia Pty Ltd v Downer EDI Ltd [2014] VSC 357, [35].
[18] Ross Drinnan and Jenny Campbell, ‘Causation in Securities Class Actions’ [2009] UNSWLawJl 48; (2009) 32(3) University of New South Wales Law Journal 928, 929.
[19] Digi-Tech (Australia) v Brand [2004] NSWCA 58; (2004) 62 IPR 184 (‘Digi-Tech’).
[20] Ingot Capital Investments Pty Ltd (ACN 006 538 147) v Macquarie Equity Capital Markets Ltd (ACN 001 374 572) (2008) 73 NSWLR 653 (‘Ingot’).
[21] Corey Byrne and Michael Legg, ‘Market-Based Causation after TPT Patrol Pty Ltd v Myer Holdings Ltd’ (2020) 37 Company & Securities Law Journal 295, 312.
[22] Digi-Tech (n 19) 211.
[23] Ibid 211–212.
[24] Ingot (n 20) 730.
[25] Henville v Walker [2001] HCA 52; (2001) 206 CLR 459, 492 (McHugh J).
[26] See, eg, Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235, [442]; Manday Investments Pty Ltd v Commonwealth Bank of Australia (No 3) [2012] FCA 751, [28]; Perpetual Trustee Co Ltd v Kwok [2011] NSWSC 422, [36]; Woodcroft v Timbercorp Securities Ltd [2013] VSCA 284; (2013) 96 ACSR 307, 353.
[27] Re HIH Insurance Ltd (in liq) [2016] NSWSC 482; (2016) 335 ALR 320, 348 (Brereton J) (‘Re HIH’).
[28] Myer (n 14) at 31(Beach J).
[29] Michael Duffy, ‘Causation in Australian Securities Class Actions: Searching for an Efficient but Balanced Approach’ (2019) 93 Australian Law Review 833, 851.
[30] Basic Inc. v Levinson, [1988] USSC 36; 485 US 224 (1998) (‘Basic’).
[31] Ibid 241.
[32] P Dawson Nominees Pty Ltd v Multiplex Ltd [2007] FCA 1061; (2007) 242 ALR 111, 114 (Finkelstein J) (‘P Dawson Nominees’).
[33] Securities Exchange Act of 1934, 15 USC § 10(b); SEC Rule 10b-5 codified at 17 CFR § 240.10b-5.
[34] Federal Court of Australia Act 1976 (Cth) s 33C(1)(c).
[35] Bright v Femcare [2002] FCAFC 243; (2002) 195 ALR 574, 589.
[36] Federal Court of Australia Act 1976 (n 34) s 33N(1)(d).
[37] Bright v Femcare (n 35); Wong v Silkfield Pty Ltd [1999] HCA 48; (1999) 199 CLR 255.
[38] SEC Rule 10b-5 (n 33).
[39] Tellabs v Makor Issues & Rights Ltd, 551 US 308 (2007).
[40] Drinnan and Campbell (n 18) 935.
[41] Grant-Taylor v Babcock & Brown Ltd (in liq) [2015] FCA 149; (2015) 322 ALR 723, 726 (Perram J).
[42] Re Janssen-Cilag Pty Ltd v Pfizer Pty Ltd [1992] FCA 437; (1992) 37 FCR 526.
[43] Ibid 532.
[44] Digi-tech (n 19) 211.
[45] Haynes v Top Slice Deli Pty Ltd (1995) 17 ATPR (Digest) 46-147.
[46] McCarthy v McIntyre [1999] FCA 784, [50]; Hampic Pty Ltd v Adams [1999] NSWCA 455; (2000) ATPR 41-737, [35]; Ford Motor Company of Australia Ltd v Arrowcrest Group Pty Ltd [2003] FCAFC 313; (2003) 134 FCR 522, 539; Stockland (Constructors) Pty Ltd v Retail Design Group (International) Pty Ltd [2003] NSWCA 84, [27].
[47] P Dawson Nominees (n 32) 115.
[48] Grant-Taylor v Babcock & Brown (in liq) [2015] FCA 149; (2015) 322 ALR 723, 766.
[49] Caason Investments Pty Ltd v Cao (2015) 236 FCR 322 (n 15).
[50] Ibid 331332 (Gilmour and Foster JJ), 337338 (Edelman J).
[51] Caason Investments (n 15) 325.
[52] Re HIH (n 27).
[53] Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304, fn 80.
[54] Re HIH (n 27) 334.
[55] Ibid 350351.
[56] See, eg, Australian Breeders Co-operative Society Ltd v Jones [1997] FCA 1405; (1997) 150 ALR 488, 529-530.
[57] Gerard Craddock SC, ‘Causation in Securities Litigation’ (2012) 86(12) Australian Law Journal 813, 815.
[58] Myer (n 14).
[59] Even then, Beach J’s findings with respect to market-based causation are technically obiter given his findings on loss, and are therefore vulnerable to attack in subsequent decisions.
[60] Myer (n 14) 52.
[61] Ibid 293.
[62] Ibid 291.
[63] Ibid 155.
[64] Michael Duffy, ‘Fraud on the Market – Judicial Approaches to Causation and Loss from Securities Nondisclosure in the United States, Canada and Australia (2005) 9(3) Melbourne University Law Review 621, 631.
[65] Myer (n 14) 154–155.
[66] Halliburton Co v Erica P John Fund Inc, 573 US 258 (2014), 290 (‘Halliburton’).
[67] Basic (n 30) 253.
[68] Halliburton (n 66) 272.
[69] Duffy (n 29) 850.
[70] See, eg, Myer (n 14) 156–157.
[71] Cammer v Bloom, 711 F Supp 1264 (DNJ) (1989), 1286–1287.
[72] Myer (n 14) 154.
[73] BHP Group Limited FPO (ASX:BHP) was traded 47,909 times on 2 December 2022.
[74] Federal Court of Australia Act 1976 (n 34) s 37N.
[75] Drinnan and Campbell (n 18) 945.
[76] AS Suresh, ‘A Study on Fundamental and Technical Analysis’ (2013) 2(5) International Journal of Marketing, Financial Services & Management Research 44, 44.
[77] Ibid 48.
[78] Menachem Meni Abudy, ‘Retail Investors’ Trading and Stock Market Liquidity’ (2020) 54 North American Journal of Economics and Finance 101281, 1.
[79] Australian Securities Investment Commission, ‘22-215MR ASIC Releases Research About Investment Behaviour’ (Media Release, 11 August 2022).
[80] William Bratton and Michael Wachter, ‘The Political Economy of Fraud on the Market’ (2011) 160 University of Pennsylvania Law Review 69, 96.
[81] Ibid 96–97.
[82] Craddock (n 57) 824–825.
[83] Ibid 825.
[84] Davis Samuel Pty Ltd v Commonwealth [2016] ACTCA 22 [139]–[141].
[85] The ‘inflation-based measure’ is the difference between the price paid for the shares and the price that shareholders would have paid if the contravening conduct had not occurred.
[86] Re Babcock & Brown Ltd (in liq) [2019] FCA 1720, [376].
[87] Taylor v Telstra Corporation Ltd [2007] FCA 2008, [21].
[88] Myer (n 14) 154.
[89] Watson and Varghese (n 6) 962.
[90] Alon Brav and JB Heaton, ‘Event Studies in Securities Litigation: Low Power, Confounding Effects, and Bias’ (2015) 93(2) Washington University Law Review 583, 586.
[91] Duffy (n 64) 637.
[92] Ibid 587.
[93] Myer (n 14) 164.
[94] Jill Fisch, Jonah Gelbach and Jonathan Klick, ‘The Logic and Limits of Event Studies in Securities Fraud Litigation’ (2018) 96 Texas Law Review 553, 556.
[95] Bonham (as trustee for the Aucham Super Fund) v Iluka Resources Ltd (2022) 404 ALR 15 (‘Bonham’).
[96] After Myer (n 14) and Crowley v Worley Limited [2020] FCA 1522.
[97] Bonham (n 95) 179.
[98] Ibid 180.
[99] Ibid.
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