The Full Federal Court has handed down a decision which at least opens the door to the adoption of market-based causation in Australian securities claims. On 29 June 2015, the Court upheld an appeal by the applicants in Caason Investments Pty Ltd & Anor v Simon Cao & Others (Caason), thereby permitting them to plead market-based causation in respect of claims that prospectus materials and financial statements contained omissions and misleading and deceptive statements. The Court's reasons were published on 3 September 2015 and are available here.
The doctrine of market-based causation holds that where misleading or improperly withheld information causes the market to inflate the price of securities beyond the true value which would have prevailed but for the contraventions, the act of purchasing shares in such a market is sufficient to make out the causal nexus between the misleading information and investors' losses. The doctrine means that investors may not need to prove that they purchased securities with express knowledge of and reliance upon the misleading information. Market-based causation derives from the 'fraud on the market' theory, which was adopted by a majority of the US Supreme Court in 1988.
Market-based causation is commonly pleaded in securities class actions but has yet to be applied by an Australian court.
In Caason, investors brought proceedings against directors and auditors of Arasor International Ltd (Arasor), alleging misleading and deceptive conduct under s 1041H of the Corporations Act, s 12DA of the ASIC Act and s 9 of the Fair Trading Act (Vic) with respect to financial statements of Arasor, and alleging misleading or deceptive statements in prospectuses for the company's securities under s 728 of the Corporations Act.
The applicants made an interlocutory application on 21 March 2014 seeking, among other things, orders granting leave to amend their pleadings by removing references to reliance on representations made by the respondents, and to instead plead market-based causation. They claimed that the contraventions by the respondents had caused the market to inflate the price of Arasor shares beyond their true value at the time the applicants purchased the shares, resulting in losses when the share price was corrected. At first instance, Farrell J disallowed most of the proposed amendments regarding the misleading prospectus claims, but granted the applicants leave to amend their pleading concerning the misleading and deceptive conduct claims.
The applicants appealed the Court's decision to the Full Federal Court, which comprised Gilmour, Foster and Edelman JJ. The appeal was unanimously allowed, although Edelman J issued a separate judgment in which he considered that the parties had misconstrued Justice Farrell's decision and that she had not in fact excluded the applicants from pleading market-based causation in respect of the prospectus claims. In granting the applicants leave to amend their claim, the Court relevantly provided that:
- whilst there has been no decision by the High Court or an intermediate Court of Appeal on market-based causation, there were a number of decisions by single judges which sufficiently demonstrated that the applicants' market-based causation arguments were not incapable of succeeding (per Gilmour and Foster JJ at ; per Edelman J at );
- reliance is not the only method available to establish causation. For instance, causation may be established without reliance in circumstances where misleading conduct by trader A results in customers being diverted from trader B, causing trader B to suffer loss and damage (per Gilmour and Foster JJ at ; per Edelman J at -); and
- market-based causation is 'not a special sub-category of causation' but rather 'an example of indirect causation'. As a result, there is no sharp contrast with reliance-based causation, which may also be indirect in certain circumstances. Edelman J referred, by way of example, to cases where an investor's financial advisor, rather than the investor, relies on the false information (at -);
As Caason was an interlocutory pleadings dispute, the Court only considered whether market-based causation was arguable and did not conclude that it is established law in Australia. Accordingly, the law in this area remains unsettled. Nevertheless, the decision provides a basis for existing or prospective investor litigants to plead market-based causation with minimal risk that those claims would be liable to be struck out.