As securities litigation becomes increasingly globalized, the Mintz Levin Institutional Investor Class Action Recovery practice is constantly monitoring and participating in jurisprudential developments in a number of countries, both alone and through collaboration with foreign counsel. For example, in Australia, where the procedure to consolidate cases is not uniform, some securities class action cases may overlap, leaving issuers in the undesirable position of having to defend against claims of misrepresentation on two fronts. This scenario recently played out in New South Wales, where the Court found an interesting and workable solution to a problem with concurrent class actions in Smith v. Australian Executor Trustees Limited; and Creighton v. Australian Executor Trustees Limited.
The Court’s decision came in response to the filing of two parallel class actions brought by the lead plaintiffs in both Smith and Creighton against Australian Executor Trustees Limited (“AET”). Both cases arose from the collapse of Provident Capital Limited (“Provident”), for which AET was a trustee. Each class was comprised of holders of Provident debentures, who argued that they suffered losses due to AET’s failure to exercise reasonable diligence in ascertaining the financial position of Provident, and alleged that AET failed to take steps to adequately protect their interests.
While the claims of each class arose from the same basic set of facts, there were several key differences between the classes. Perhaps most relevantly, the Creighton class was “open,” while the Smith class was “closed.” As a result, every member of the Smith class was necessarily a member of the Creighton class (but not vice versa). The precise legal theories relied on by each class varied as well, and both classes claimed different losses based on the date by which each argued AET should have begun to ensure that a receiver was appointed for Provident. In addition, counsel for both classes operated under a different funding framework.
AET, unsurprisingly, was dismayed at the prospect of having to defend against similar claims twice. To that end, it argued that one class should not be permitted to continue, or, in the alternative, that both proceedings should be consolidated. Creighton argued that the Smith claim, which was brought later, should be stayed pending a decision on Creighton’s claim. Smith argued that both proceedings should continue and be heard together under an order that evidence in one action would be evidence in the other.
The Court began with the uncontested notion that it has broad powers of case management in class action litigation under sections 166 and 183 of the Civil Procedure Act 2005. Essentially, the Court has the general power to make orders it believes are appropriate to ensure justice is done, including an order that one or more actions no longer continue. While nothing in the Civil Procedure Act or any other Australian authority offered explicit guidance regarding what should be done in this situation, the Court listed and considered a number of factors relevant to ordering consolidation, including 1) the experience of the practitioners; 2) the costs to be incurred by each class; 3) the terms of the funding for each class; 4) the nature and scope of the causes of action and legal theories advanced in each claim; 5) any conflicts of interest; 6) the size and involvement of the proposed representative plaintiff; 7) the priority of commencement of the actions; and 8) the status of each action. The Court dealt with each consideration, but found that most of the factors were either inapplicable or irrelevant.
The Court agreed with AET that it would be unjust to force AET to defend against two class actions with overlapping class members; as such an outcome would essentially force AET to defend the same claims twice. Thus, it was faced with three possible solutions to this case management problem. It could 1) consolidate the proceedings; 2) allow only one proceeding to go forward; or 3) make orders necessary to prevent debenture holders from being members of more than one class.
The Court immediately ruled out the option of consolidating the proceedings, particularly where counsel for each class was uncooperative with each other. In doing so, the Court showed a reticence to force a consolidation on class members and counsel where such an arrangement might lead to legal representation and strategy that one class – if not both classes – did not plan on. The Court also declined to stay one proceeding, as the Court believed it would be inappropriate to choose one competing proceeding over the other where both were properly brought.
As a result, the Court chose the option which would allow it to perform the smallest amount of case management and decision-making possible: ordering that members of the Smith class, who were necessarily members of the Creighton class, could opt out of one or both classes. In the event that class members did not opt out, the Court would order that they had opted out of Creighton. In other words, a Smith class member could choose to be a member of either the Smith class or the Creighton class, and in the event they did not do so, the Court would choose the Smith class for them. The actions would then proceed together, with all evidence in one action also entered in the other.
This result shows a real reluctance of the Australian Court to exert any more case management over class actions than was absolutely necessary, despite the fact that the Court had very broad power to manage the cases as it saw fit. The Court instead fashioned a solution which would balance AET’s right to not have to defend a claim by the same plaintiffs twice with the plaintiffs’ right to choose the class, representation, and legal theories they preferred. That solution was, essentially, to stay out of the way as much as possible. It will be interesting to see whether other jurisdictions follow the “hands off” approach of the Court in Smith/Creighton going forward.