Last week, Justice Rares delivered judgment in the class action proceedings brought by three Councils (as representative applicants) against Lehman Brothers Australia (formerly Grange Securities Limited). In the judgment, Justice Rares determined that Grange had engaged in misleading and deceptive conduct and was negligent in its promotion of synthetic collateralised debt obligations and breached its duties as a financial adviser to each of the relevant Councils.
The judgment and the proceedings themselves are significant, not only because they represent the first Australian decision commenting on the relative merits of complex collateralised debt obligation products, but also because they represent a marked change in the approach of large investors to class action proceedings.
Securities class actions in Australia have previously been run by plaintiff law firms with a background in industrial law and mass tort, and fronted by representative applicants who are retail investors. Although large institutional and sophisticated investors form part of the class of group members, they remain largely anonymous. The loss alleged to arise for group members in these class actions is based on a theory of “indirect causation” - that the complained of conduct caused the market price for the relevant securities to be inflated above its “true value”. Accordingly, a group member who purchased securities at these inflated prices should therefore be able to claim the difference by way of damages. Importantly, this theory of causation does not require group members to establish that they relied on the impugned conduct of the defendant, nor that such conduct resulted directly in any loss to them.
The advantages of such class actions for institutional and sophisticated investors include that they are able to remain relatively anonymous, and therefore do not run the risk of publicly exposing the extent of any loss suffered, or opening their decision making processes to public scrutiny (which might result in claims for contributory negligence or that the conduct complained of did not cause the loss). Additionally, because such proceedings have traditionally been settled either before or during trial, any issues concerning the strength of individual group members’ claims are never publicly aired.
The disadvantages of these types of proceedings for institutional investors include that they are often large and cumbersome (often involving a very large class made of up relatively minor investors), with increased costs of administration and delays in the efficient conduct of the proceedings, that there is a general lack of control of the conduct of the proceedings and that any negotiated settlement will usually result in damages substantially lower than what might be available on a claim involving a direct chain of causation.
In contrast, the Lehman proceedings herald a significant change in the way investor class actions can be litigated to the benefit of large investors. These proceedings demonstrated a willingness for large investors and their decision makers to personally “get in the ring” and front a class action for direct losses in respect of complex financial products. These sorts of products have traditionally been seen by the financial services market as regulatory lite, given the lack of protections that are otherwise afforded to retail investors and market traded products. Further, while funded by the Australia’s leading litigation funder, the proceedings were conducted by Piper Alderman, a national commercial law firm, rather than one of the traditional plaintiff firms.
Allowing for any appeal, the initial result for the applicants in the Lehman class action will undoubtedly give confidence to other institutional investors who wish to use class action procedures to recover direct losses occasioned by misleading or negligent conduct of counterparties or professional advisors. Allied with the Federal Government’s recent regularising of the licensing requirements associated with litigation funding, it may also presage the moment where class actions move from being more than just a way for “battlers” to obtain “access to justice” and instead become part of the ordinary toolkit of mainstream commercial litigation in Australia.