A landmark decision of the Australian Full Federal Court will allow the Applicants to plead market-based causation for claims for misstatements and omissions in an IPO and short form prospectus and for misleading and deceptive conduct claims in respect of various audited financial statements issued by the company Arasor International Limited (“Arasor”). The Court upheld the appeal in a securities class action, Caason Investments Pty Ltd & Anor v Simon Cao & OthersNSD 269 of 2015 (“Caason”). Partner Amanda Banton from the Sydney office of Squire Patton Boggs is acting for the Applicants in this case, assisted by Of Counsel Lisa Gallate.

Arasor was publically listed on the Australian Stock Exchange. Investors brought proceedings against the directors and auditors after Arasor was placed in voluntary administration in 2011 and subsequently entered into a Deed of Company Arrangement in 2013.

The Federal Court has granted leave to the Applicants to file a consolidated pleading that alleges a market-based theory of causation. The Applicants can plead misleading and deceptive conduct claims in respect of statements and omissions in two prospectuses for which the directors and auditors of Arasor are allegedly liable, without the Applicants and Group Members having to prove that they individually and directly relied on the contravening conduct. Rather, the claims will now include allegations that the representations formed part of the matrix of information available to investors in Arasor shares, and that investors purchased Arasor shares at an inflated price, regardless of whether they read the prospectuses. The price was inflated because the market was not aware of the falsity of the representations made, or the undisclosed material, which had it been known would have led to the market trading lower on the different information.

Market-based causation has long been a part of the jurisprudence of American securities class actions where it is known as “fraud on the market” theory, which provides that an efficient market will incorporate all available information, including misleading information, into the price of stock. An investor purchasing stock relies on the market and so reliance on the misrepresentation is presumed. This theory was recently re-confirmed by the US Supreme Court in Haliburton Co v Erica P John Fund in which the Supreme Court upheld the applicability of the fraud on the market theory.

The Court did, however, make a further finding that defendants in class actions will be permitted at the class certification stage to present any direct evidence that there was no price impact caused by a market misrepresentation. The traditional approach in Australia has not been based on a fraud on the market theory, requiring reliance on the alleged misrepresentations in order to prove they were causative of the plaintiff’s loss.

The Full Court’s decision in Caason has been highly anticipated, particularly as the primary judge’s decision in Caason saw strike-out applications being threatened in other securities class actions, such as in the Oz Minerals, Treasury Wine Estates, and Melbourne City Investments claims.

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Reliance by shareholders/investors on misrepresentations in financial statements