ASIC v Richards1
On Monday 12 August 2013, a Full Bench of the Federal Court upheld an appeal brought by ASIC, which overturned a decision to approve the settlement of the long-running Storm Financial class action. The appeal was upheld on the basis that the terms of the settlement were unreasonable and unfair to members of the representative class who had not contributed to the funding of the proceeding.
While recent cases indicate that the courts will not simply rubber stamp settlement agreements reached in class action proceedings2, this is the first occasion where the Full Federal Court has exercised its supervisory jurisdiction to overturn an approval of a settlement at first instance. The case also demonstrates that ASIC is prepared to actively oppose the settlement of proceedings where it perceives unfairness to the representative class, even where the settlement agreement has been reached at a late stage in long-running and difficult litigation.
In December 2010, representative (class action) proceedings were commenced on behalf of investors in Storm Financial products against Macquarie Bank. The lead plaintiff was Mrs Richards who, along with a number of other investors (Funding Group Members) retained law firm Levitt Robinson in the class action and agreed to pay a levy to cover legal costs. The levy was calculated on a scale roughly proportionate to those investors’ respective investment losses. There were significantly more group members who did not retain Levitt Robinson (Unrepresented Group Members).
On 3 May 2013, Justice Logan approved a settlement agreement which provided that the plaintiff class receive a total settlement pool of $82.5m. The settlement provided that the 317 Funding Group Members would receive a ‘funders’ premium’ amounting to 35% of the total pool of funds. The net result was that the Funding Group Members would recoup approximately 42% of their investment losses while the 733 Unrepresented Group Members would recoup only 17.6%.
The decision on appeal
The Full Federal Court found for a range of reasons that the settlement was not fair or reasonable (in circumstances where the claims made by each group member were identical). The Court rejected the settlement largely because:
- the prospect that there might be a ‘funders’ premium’ was not communicated to the Unrepresented Group Members until the settlement agreement was reached;
- the funders’ premium was paid to the Funding Group Members in addition to their costs (of about $5.5 million) being recouped;
- the unfairness was exacerbated, in the Court’s view, by the fact that a small group of Levitt Robinson clients who had been exempted from paying the levy were given the opportunity to become classified as ‘Funding Group Members’ with a one off payment of $500, after settlement negotiations had concluded; and
- the calculation of the funders’ premium was inappropriately calculated ‘by reference to the success fees obtained by commercial litigation funders’ and did not mathematically correlate to the amounts contributed by each of the Funding Group Members.
It is important to note that this decision does not preclude arrangements where some group members receive a premium in return for funding class action litigation. However, the Court stressed that such arrangements must be managed fairly as between those who decide to fund and those who choose not to.
This article was prepared with the assistance of James Thomas, lawyer.