ACN 117 641 004 Pty Ltd (in liquidation) (formerly Vale Pty Ltd) v S&P Global, Inc
[2020] FCA 1745
•27 November 2020
FEDERAL COURT OF AUSTRALIA
ACN 117 641 004 Pty Ltd (in liquidation) (formerly Vale Pty Ltd) v S&P Global, Inc [2020] FCA 1745
File number(s): NSD 881 of 2020 Judgment of: RARES J Date of judgment: 27 November 2020 Catchwords: PRACTICE AND PROCEDURE – application for service out of the jurisdiction under r 10.43 of the Federal Court Rules – whether prima facie case for relief against respondents to be served in the United States of America established by evidence led by one or both applicants in group proceeding under Pt IVA of the Federal Court of Australia Act 1976 (Cth) – where applicants pleaded respondents had contravened s 1041F of the Corporations Act 2001 (Cth) and committed the tort of deceit – where pleaded loss and damage said to have occurred in Australia – where respondents allegedly represented that ratings assigned to certain financial products were accurate and independent – whether inferences could be drawn to establish prima facie case of reliance by applicant on representations of the respondents – where representations were made by ratings agencies outside Australia in circumstances where natural and probable result was republication of ratings in Australia – determination whether publication for purposes of s 1041F and the tort of deceit occurred in Australia – Held: prima facie case established and leave for service out of the jurisdiction granted Legislation: Corporations Act 2001 (Cth) ss 1041F, 1041G, 1325
Federal Court of Australia Act 1976 (Cth) Pt IVA, ss 33H, 33V, 51A
Federal Court Rules 2011
Limitation of Actions Act 1936 (SA)
Limitations Act 2005 (WA) s 38
Cases cited: Dow Jones and Co Inc v Gutnick (2002) 210 CLR 575
Gould v Vaggelas (1984) 157 CLR 215
Ho v Akai Pty Ltd (in liq) (2006) 247 FCR 205
John Fairfax & Sons Limited v Cojuangco (1988) 165 CLR 346
Kazal v Thunder Studios Inc (California) (2017) 256 FCR 90
Liverpool City Council v McGraw-Hill Financial, Inc (now known as S&P Global Inc) [2018] FCA 1289
Macleod v the Queen (2003) 214 CLR 230
Peters v the Queen (1998) 192 CLR 493
R v Ghosh [1982] QB 1053
Webb v Bloch (1928) 41 CLR 331
Wingecarribee Shire Council v Lehman Brothers Australia Ltd (2012) 301 ALR 1
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 39 Date of hearing: 27 November 2020 Counsel for the Applicants: Mr C Withers SC with Ms A Lyons Solicitor for the Applicants: Banton Group ORDERS
NSD 881 of 2020 BETWEEN: ACN 117 641 004 PTY LTD (IN LIQUIDATION)
First Applicant
CITY OF COCKBURN ABN 27 471 341 209
Second Applicant
AND: S&P GLOBAL, INC. (A COMPANY INCORPORATED IN NEW YORK)
First Respondent
STANDARD & POOR'S INTERNATIONAL, LLC (A COMPANY INCORPORATED IN DELAWARE)
Second Respondent
ORDER MADE BY:
RARES J
DATE OF ORDER:
27 NOVEMBER 2020
THE COURT ORDERS THAT:
1.The applicants have leave to serve the originating application, the statement of claim, and the amended interlocutory application on the first and second respondents in the United States of America in accordance with the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters done at the Hague on 15 November 1965.
2.Up to and including the return date to be fixed following the service referred to in order 1, paragraphs 119 to 121 inclusive of the affidavit of Ross Garland sworn on 25 November 2020 and exhibit RG3 to that affidavit be suppressed.
THE COURT NOTES THAT:
3.The ground for order 2 is that it is necessary to prevent prejudice to the proper administration of justice under s 37AG(1)(a) of Federal Court of Australia Act 1976 (Cth), on the basis that disclosure of the material may reveal information that is confidential.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
(REVISED FROM THE TRANSCRIPT)RARES J:
This is an application for leave to serve the respondents, S&P Global Inc and Standard & Poor’s International LLC, in the United States of America, in accordance with the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters done at the Hague on 15 November 1965 (the Hague Convention) under r 10.43 of the Federal Court Rules 2011. The applicants are a company, A.C.N. 117 641 004 Pty Limited (in liq), formerly known as Vale, which is now in liquidation, and the City of Cockburn, a local government council in the State of Western Australia. Oakvale Capital Limited was a company involved in providing financial advice to clients, including Cockburn, and was also the holding company in Vale.
The originating application is brought under Part IVA of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act) as a representative proceeding. Each of Vale and Cockburn alleges that it invested in one or more synthetic collateralised debt obligations and other structured finance products (the claim CDOs) that received credit ratings issued by one or other of the respondents, which I will refer to collectively, if inaccurately, as S&P. The originating application defined the claim CDOs as comprising all products, apart from the excluded products in schedule 1 of that application, to which S&P had assigned a credit rating of AA or higher using a rating tool called CDO evaluator, versions 3.0, 3.1 or 3.2 (compendiously evaluator 3), that was published, and relied on by persons, in Australia to purchase any of the claim CDOs. The excluded products were synthetic CDOs and similar structured financial products the subject of a trial of several proceedings that I heard in 2018 for 38 days before the proceedings settled during final addresses. In the event S&P agreed to pay the applicants and group members in those proceedings a gross settlement sum of $215 million under a settlement agreement that Lee J approved pursuant to s 33V of the Federal Court Act in Liverpool City Council v McGraw-Hill Financial, Inc (now known as S&P Global Inc) [2018] FCA 1289 (the Liverpool Council proceedings).
The originating application seeks:
(1)declarations that, by reason of the conduct pleaded in the statement of claim, S&P engaged in conduct in contravention of each of s 1041F and 1041G of the Corporations Act 2001 (Cth);
(2)orders, in the event that any of the claims by Vale, Cockburn, or group members may have been statute-barred when the originating application was filed on 7 August 2020, extending the time in which the proceeding can be brought nunc pro tunc pursuant to s 38 of the Limitations Act 2005 (WA) or the Limitation of Actions Act 1936 (SA); and
(3)orders that S&P pay the applicants and group members compensation under ss 1041I and or 1325 of the Corporations Act or compensation, damages for the tort of deceit, exemplary and or aggravated damages at common law and interest, under s 51A of the Federal Court Act.
The originating application alleged, pursuant to s 33H(1)(c) of the Federal Court Act, that the questions common to claims of group members include:
(1)whether S&P’s modelling of the claim CDOs was deficient;
(2)whether S&P committed the tort of deceit in publishing representations that:
(a)S&P had assigned a rating of AA to each of the claim CDOs ratings, on the basis that it had concluded that:
(i)the capacity of the product to pay coupons (ie. interest at particular rates) to each of the noteholders and, at the end of its term, the principal was very strong;
(ii)the product would be able to withstand a severe level of stress; and
(iii)an AA rating differed in a small degree from the highest rated rating for obligors of AAA (the ratings representations).
(b)S&P assigned a credit rating to a claim CDO, it represented to the public, including investors and potential investors in that claim CDO, that the process for rating it and the credit rating generated by that process were objective, independent, uninfluenced by any conflicts of interest that might compromise S&P’s analytical judgment, and reflected S&P’s true current opinion regarding the credit risks that the claim CDO posed to investors (the independence representation).
(3)whether S&P knew that, or was recklessly indifferent as to whether, each of the ratings and independence representations was false;
(4)whether S&P knew and intended that, or was recklessly indifferent as to whether, investors and potential investors in the claim CDOs, such as each applicant, would rely on those representations;
(5)whether S&P’s conduct contravened ss 1041F and or 1041G of the Corporations Act;
(6)whether S&P had engaged in unconscionable conduct;
(7)whether S&P’s conduct in the period after it assigned each of the relevant ratings concealed from each of the applicants and group members who purchased the particular claim CDO the facts and circumstances giving rise to the claims pleaded, including the tort of deceit; and
(8)what are the correct principles for measuring damages for each of the applicants and group members.
The originating application stated, pursuant to s 33H(1)(a) of the Federal Court Act, that the group members to whom the representative proceeding related were persons who acquired interests in one or more of the claim CDOs to which S&P had assigned credit ratings of AA or higher using evaluator 3, and had suffered loss or damage by reason of the conduct of S&P pleaded in the statement of claim, excluding loss or damage caused by the acquisition of any of the excluded products.
The legislative scheme
At the times relevant to this proceeding, s 1041F of the Corporations Act provided:
Inducing persons to deal
(1)A person must not, in this jurisdiction, induce another person to deal in financial products:
(a) by making or publishing a statement, promise or forecast if the person knows, or is reckless as to whether, the statement is misleading, false or deceptive; or
(b) by a dishonest concealment of material facts;
…
Note 1: Failure to comply with this subsection is an offence (see subsection 1311(1)). For defences to a prosecution based on this subsection, see Division 4.
Note 2: Failure to comply with this subsection may also lead to civil liability under section 1041I. For relief from liability under that section, see Division 4.
(2) In this section:
dishonest means:
(a) dishonest according to the standards of ordinary people; and
(b) known by the person to be dishonest according to the standards of ordinary people.
The defined expression “statement”, as used in Ch 7 of the Corporations Act (which includes section 1041F), “includes matter that is not written but conveys a message” (s 9(1)).
Factual background
The nature of the investment in a CDO is that the investor is promised a coupon, being an interest rate above the bank bill swap rate (BBSW) and the return of its principal at the end of the term of the investment, unless a specified number of entities in the reference portfolio or pool default. In that case, depending on the structure of the instrument, some or all of the principal is lost. A reference portfolio or pool in a CDO or structured finance product comprises a collection of actual or synthetic obligations or cash based assets, such as bonds issued by corporate debtors. In effect, the investment in a CDO is a sophisticated bet that the investor makes with the vendor or arranger (usually a bank or financial institution) that sufficient of the reference entities in the pool (often comprised of BBB obligations) will not default during the term of the investment to cause the loss of any principal.
Many reference pools comprised BBB rated products that, when pooled together in a cash or synthetic CDO, could result in the CDO being given a significantly higher rating, such as AA or better, than the individual reference entities. That result occurs because of the use of the pool and the structure of the instrument as I explained in Wingecarribee Shire Council v Lehman Brothers Australia Ltd (2012) 301 ALR 1 at 20–23 [39]–[51]. The theory behind the pooling and the higher rating is that while a lower rating for one product, such as BBB, would make investment in it alone more risky the chance or probability of numerous BBB obligations all defaulting during the term of the investment is less. Therefore, the probability of enough defaults of BBB obligations in the reference portfolio occurring, so as to reach the trigger point for loss of capital, as specified in the CDO, is less and so, the rating of the collection of reference entities in the pool as a whole, will be higher.
A critical factual element in establishing the tort of deceit or a contravention of s 1041F(1) is that the person to whom a fraudulent representation is made must rely on it, as Wilson J explained this in Gould v Vaggelas (1984) 157 CLR 215 at 236, as follows:
1. Notwithstanding that a representation is both false and fraudulent, if the representee does not rely upon it he has no case.
2. If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation.
3. The inference may be rebutted, for example, by showing that the representee, before he entered into the contract, either was possessed of actual knowledge of the true facts and knew them to be true or alternatively made it plain that whether he knew the true facts or not he did not rely on the representation.
4. The representation need not be the sole inducement. It is sufficient so long as it plays some part even if only a minor part in contributing to the formation of the contract.
(emphasis added)
Ross Garland, one of the solicitors for the applicants, set out in his two affidavits (sworn 11 and 25 November 2020) a great deal of material in an attempt to establish a prima facie case for service out of the jurisdiction under r 10.43(4)(c) of the Federal Court Rules 2011 (Cth). He explained, in his 25 November 2020 affidavit, the circumstances in which the applicants first became aware in 2017 that S&P may have engaged in conduct amounting to the common law tort of deceit and the contraventions of s 1041F that would justify pleading, among others, the independence representation based on the ratings that S&P assigned using evaluator 3. That was when the solicitors for the applicants in the Liverpool Council proceedings became aware of documents that provided a forensic basis on which they could allege that S&P, first, knew that there were significant issues as to the integrity of the methodology used in the construction of evaluator 3 for the purposes of assigning ratings, being the basis of the ratings and independence representations and secondly, issued ratings using that tool, that had not been arrived at independently of commercial considerations, being the basis of the independence representation.
Regrettably, Mr Garland’s second affidavit failed to put into admissible form any evidence that Vale relied on any of the alleged representations in purchasing any of the 18 claim CDOs the subject of its pleaded causes of action. The only “evidence” of Vale’s asserted reliance was what he said in paragraph 78, namely:
On information and belief, I understand that Vale would never have authorised investments to be undertaken by Oakvale with S&P ratings had they known S&P ratings were not reliable and or influenced by business considerations.”
That statement could not possibly come within the exception to the hearsay rule in s 75 of the Evidence Act 1995 (Cth). That is because Mr Garland did not adduce any evidence of the source of the information or belief or its basis. The statement was a conclusory assertion from unstated premises. He expressed no belief but only an “understanding”. The paragraph should not have been included in the affidavit. Unfortunately, all too often in recent times affidavits on interlocutory applications have been prepared without proper attention to the requirements for the admissibility of critical evidence.
However, Mr Garland’s evidence did establish that, on a prima facie basis, Cockburn can be inferred to have relied on the independence of S&P’s AA rating for the Aramis CDO when it acquired that product in March 2007. Cockburn had an investment policy that it had adopted on 17 February 1998 and maintained until at least 13 December 2007. That policy provided that the Council’s investments were only to be made with the objective of their being held to maturity, and that the portfolio credit guidelines that Cockburn adopted were based on S&P’s rating system criteria for each investment type. For long term investments, the policy required, among others, products to have S&P ratings of AAA, AA or A for the purposes of Cockburn’s investments. Paragraph 6 of the policy stated (p 1375):
Standard & Poor’s Ratings Description
Credit Ratings:
Standard & Poor’s (S&P) is a professional organisation that provides analytical services. An S&P rating is an opinion of the general creditworthiness of an obligor with respect to particular debt security or other financial obligation — based on relevant risk factors.
Credit ratings are based, in varying degrees, on the following considerations:
•Likelihood of payment.
•Nature and provisions of the obligation.
•Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganisation or other laws affecting creditors’ rights.
The issue rating definitions are expressed in terms of default risk.
…
Long-Term Ratings are:
AAA
An institution rated AAA has the highest rating assigned by S&P. The institution’s capacity to meet its financial commitment on the obligation is extremely strong.
AA
An institution rated AA differs from the highest rated obligations only in a small degree. The institution’s capacity to meet its financial commitment on the obligations is very strong.
(emphasis added)
On 27 March 2007, Erik Gates, a divisional director of Oakvale, emailed Ken Lapham, Cockburn’s finance manager. The email attached a letter and Oakvale’s recommendation “for a new AA rated 5yr security offering” with interest payable every three months at “BBSW+110” (i.e. 1.1% above the three-monthly bank bill swap rate). The email said that “the Merrill Lynch arranged deal references high grade asset backed securities and utilises the skills of two very well-regarded international ABS [asset backed securities] management firms”. The letter to Mr Lapham said that the “the security is rated AA by Standard & Poor’s”. The recommendation said that stress testing analysis on the AA-rated issue revealed that the security could sustain 20 downgrades and four defaults within the portfolio and still be rated A.
Mr Lapham emailed Oakvale back on 29 March 2007 and confirmed that Cockburn would proceed with Oakvale’s recommendation to purchase $1 million worth of the Aramis CDO.
On the basis of Mr Garland’s evidence, Cockburn proceeded with the purchase on about 29 March 2007. The Aramis CDO defaulted on about 3 March 2010, as a result of which Cockburn lost the entirety of its $1 million capital investment, save for $1 which Merrill Lynch paid to it on 3 March 2010.
S&P’s admissions in the US proceedings
On 2 February 2015 S&P entered into a settlement agreement with the United States of America (acting through its Department of Justice) and numerous States of that country to resolve multiple claims filed in federal and State courts. The claims were based on activities of S&P and their related companies, in connection with the issuance, confirmation and surveillance of ratings for structured financial instruments, including modifications and adjustments to the procedures and methodologies used to rate them, statements by S&P concerning the integrity, objectivity, independence and the lack of influence from business concerns of their activities, in connection with those ratings.
Under the settlement agreement, S&P expressly and publicly acknowledged the facts set out in an attached statement of facts and agreed to pay to the various governmental entities USD1.375 billion in settlement of the governmental claims. The statement of facts recorded that:
(1)between 2004 and 2007, the relevant division of S&P (the entity that is now, based on Mr Garland’s evidence, the first respondent and now called S&P Global Inc) was a nationally recognised statistical rating organisation in the United States that, for a fee, provided letter grade ratings of, among other things, CDOs;
(2)S&P made statements summarised in the settlement agreement regarding its processes and controls for the development of criteria for, and issuance and surveillance of, those ratings in publicly available documents that included a formal code of practices and procedures. The code was first published in September 2004 and subsequently revised and reissued in October 2005 and June 2007 in which S&P published similar statements regarding the objectivity, integrity and independence of its ratings process. Relevantly, the code stated that:
(a)S&P’s mission “had always remained the same – to provide high-quality objective, independent and rigorous analytical information to the marketplace”;
(b)S&P endeavours to conduct the rating and surveillance processes in a manner that is transparent and credible and also ensures that the integrity and independence of the rating and surveillance processes are not compromised by conflicts of interest, abuse of confidential information or other undue influences;
(c)In all analytic processes, S&P must preserve the objectivity, integrity and independence of its ratings. In particular the fact that rating services receives a fee from the issuer must not be a factor in the decision to rate an issuer or in the analysis and rating opinion;
(d)Ratings assigned by S&P shall not be affected by an existing or potential business relationship between rating services (or any non-rating business) and the issuer or any other party, or the non-existence of such a relationship.
(3)In February 2006 S&P had published a report on its website entitled Report on Implementation of Standard & Poor’s Rating Services Code of Conduct, that stated, among other things, that:
(a)“[S&P] recognises its role in the global capital markets and is committed to providing ratings that are objective, independent and credible”;
(b)“It is a central tenant of [S&P] that its ratings decisions not be influenced by the fact that [S&P] receives fees from issuers. To reinforce this central tenant committing to those, [S&P] separated in a more formal manner its commercial functions from its rating analytics functions”.
The statement of facts then set out the following under the heading “Decisions Regarding CDO Evaluator Updates”:
4. In 2004 and 2005, S&P was in the process of updating CDO Evaluator, one of the models used by S&P to rate Collateralized Debt Obligations (“CDOs”) to arrive at what would become CDO Evaluator Version 3.0 (“E3”). The initial update efforts, throughout 2004, were directed in part by the then head of S&P's Global CDO group, whose experience was that the risk of losing transaction revenue was a factor that affected updates of CDO Evaluator. He set as goals for the update efforts: (a) small impacts to non-investment grade (“NIG”) cash CDO deals to minimize any negative impact of the updates on this segment of S&P's ratings business; and (b) 2-3 notch improvements for investment grade deals to improve S&P's market share with respect to investment grade synthetic CDOs. In accordance with these goals, during the initial update efforts, he and, according to him the then Managing Director in charge of the Cash CDO group, pushed back against updates to CDO Evaluator proposed by one of S&P’s senior analysts because they believed these changes would have had a significant negative effect on S&P's market share and ratings business. In accordance with these goals, on May 27, 2004, the then head of S&P's Global CDO Group sent the head of S&P’s Research and Criteria Group, the Managing Director in charge of the Synthetic CDO Group, and others an email directing the CDO Group to begin testing with customers a default matrix he had developed. According to the then head of S&P’s Global CDO Group, the decision to test this default matrix was “in part based upon business decisions, considerations.” Ultimately, this default matrix was not adopted, and work on updating CDO Evaluator to arrive at what would become E3 continued.
5. S&P originally scheduled E3 for release “sometime after July 11, 2005.” In preparation for the release, S&P circulated information regarding E3 to a number of investment banks involved in the issuance of CDOs. On July 18 and 19, 2005, a Client Value Manager in S&P's Global CDO Group sent emails summarizing the feedback on E3 that had been received from one of these investment banks as follows: S&P's ratings generated using CDO Evaluator Version 2.4.3 had been the “best” (by comparison to Moody's and Fitch) with respect to CDOs comprised of certain “more lowly rated” asset pools; S&P would be giving up its market advantage with respect to these CDOs by moving to E3; and S&P would not make up for this with any increase in business in “the high quality sector” because with respect to this sector “Moody's and Fitch can do better than E3 already.” After receiving this negative feedback, in a July 20, 2005 “Global CDO Activity Report” that she sent to the Executive Managing Director in charge of S&P's Structured Finance department, the Managing Director in charge of S&P's Global CDO group stated that the roll out of E3 to the market had been “toned down and slowed down” “pending further measures to deal with such negative results,” and described the basis for this decision, noting in particular one investment bank's comments that E3 would result in S&P missing “potential business opportunities.”
(emphasis added)
The 20 July 2005 “Global CDO Activity Report” focused on the impact on structured finance products that contained a reference portfolio or pool of BBB and lower rated obligations of the use of the then prototype for the upgrade to the evaluator, such as the claim CDOs. It stated that:
We have received controlled testing from various cash and synthetic dealers. Our first response from a major synthetics dealer, Bear Stearns, has just materialized and as expected, E3 would not be conducive towards rating low credit quality pools. Importantly, Bear Stearns pointed out that the potential business opportunities we would miss by effectively having to walk away from such high yield structures would NOT be compensated for by any increase in rating volume for highly rated collateral pools. This is because Moody's and Fitch have been far more competitive in this area well before the roll-out of E3. Our subordinations would improve. But it would not be anywhere near enough to pick-up the slack
The main new features are: New default tables, Elimination of adjustment factors, Stochastic recoveries, New correlation assumptions, CDO liability specific default table distinct from asset default table
(emphasis added)
The significance of the admissions in the settlement agreement about the above report is that S&P had to adjust the analytical processes used in the prototype model of evaluator 3 for rating all structured finance products because of its potential for an unfavourable impact on its business. That impact appeared to flow from using the prototype’s methodology. If the methodology were altered in order to generate a higher rating than that produced by the proposed “upgrade”, the integrity of all of the ratings in the altered model as would be affected. The Global CDO Activity Report referred to the “not insignificant impact on” BBB and lower rated products in reference pools. It is a fair inference on the material now before me that S&P acknowledged in the settlement agreement that it had altered the earlier prototype of evaluator 3 so that structured finance products, such as the claim CDOs, in which those pools were used, would have a materially higher rating than they would have had, if S&P’s commercial considerations had not influenced the final form of evaluator 3.
Thus, if, as the settlement agreement noted, S&P’s old evaluator (version 2.4.3) produced the “best”, ie, highest, ratings (by comparison to ratings assigned by Moody’s and Fitch) of “more lowly rated asset pools”, being pools comprising BBB or lower rated obligations, and the then prototype of evaluator 3 did not replicate those higher ratings, there would be a significant commercial threat to S&P’s market position as against its main competitors.
Consideration
Here, the issue is whether, for present purposes, the applicants have established, in accordance with r 10.43(4)(c) that, at least, a party, being Cockburn, has a prima facie case for all or any of the relief claimed in the proceeding. The dictionary to the Federal Court Rules defines “party” as a party to a proceeding. Finn, Weinberg and Rares JJ explained the nature of a prima facie case that an applicant had to make out under the analogue of what is now r 10.43(4)(c) in Ho v Akai Pty Ltd (in liq) (2006) 247 FCR 205 at 208 [10] as follows:
As has been observed on many occasions, the prima facie case requirement has to be met at the outset, usually on an ex parte basis, and without the advantage of discovery and other procedural aids to the making out of a case: see e.g. Merpro Montassa Ltd v Conoco Specialty Products Inc (1991) 28 FCR 387 at 390. It “should not call for a substantial inquiry”: WSGAL Pty Ltd v Trade Practices Commission (1992) 39 FCR 472 at 476; see also Sydbank Soenderjylland A/S v Bannerton Holdings Pty Ltd (1996) 68 FCR 539 at 549. For present purposes it is sufficient to say that a prima facie case for relief is made out if, on the material before the court, inferences are open which, if translated into findings of fact, would support the relief claimed: Western Australia v Vetter Trittler Pty Ltd (in liq) (1991) 30 FCR 102 at 110. Or, to put the matter more prosaically as Lee J did in Century Insurance (in provisional liquidation) v New Zealand Guardian Trust [1996] FCA 376:
What the Court must determine is whether the case made out on the material presented shows that a controversy exists between the parties that warrants the use of the Court’s processes to resolve it and whether causing a proposed respondent to be involved in litigation in the Court in Australia is justified.
(emphasis added)
Thus, it is sufficient if one of the applicants, particularly given that this is a representative proceeding, has a prima facie case of the kind required in r 10.43. Relevantly, I must also be satisfied that the Court has jurisdiction in the proceeding and that it is of a kind mentioned in r 10.42. In the table to r 10.42 are the following items that appear to apply to this proceeding, namely:
Item Kind of proceeding in which originating application may be served on a person outside Australia 12 Proceeding based on a contravention of an Act that is committed in Australia 13 Proceeding based on a contravention of an Act (wherever occurring) seeking relief in relation to damage suffered wholly or partly in Australia 14 Proceeding in relation to the construction, effect or enforcement of an Act, regulations or any other instrument having, or purporting to have, effect under an Act 15 Proceeding seeking any relief or remedy under an Act, including the Judiciary Act 1903
Relevantly, s 1041F(1)(a) proscribes a person in Australia from inducing another person to deal in financial products by publishing a statement that the publisher knows, or is reckless as to whether, it is misleading, false or deceptive. If a person anywhere in the world gives information to someone else in any part of the world, including that recipient, or where the natural and probable result of providing the information is that it will be published in Australia, the person is a publisher of the information in the natural and ordinary meaning of the word “publish”: Kazal v Thunder Studios Inc (California) (2017) 256 FCR 90 at 118–119 [53]–[54] per Besanko, Wigney and Bromwich JJ, applying John Fairfax & Sons Limited v Cojuangco (1988) 165 CLR 346 at 350 per Mason CJ, Wilson, Deane, Toohey and Gaudron JJ and see also Webb v Bloch (1928) 41 CLR 331 at 365 per Issacs J. In Cojuangco 165 CLR at 350 the High Court found that, where a person in the Philippines was the alleged source of information to an Australian journalist for a newspaper article that was published in Australia, the person in the Philippines was a publisher of the article. That was because the natural and probable result of his giving the journalist the information was that it would be (re)published in Australia: see also Dow Jones and Co Inc v Gutnick (2002) 210 CLR 575 at 600–601 [26]– [28], 605–607 [38]–[44], esp [44] per Gleeson CJ, McHugh, Gummow and Hayne JJ.
S&P knew, as its admissions in the settlement agreement demonstrated, that it played a role in the global capital markets. It appreciated that the use of its ratings would not be confined to use in the jurisdiction in which the relevant S&P company issued them. It knew that a rating it assigned would be distributed to the locations in the world where the rated products were to be sold or offered and that persons anywhere could and would invest in financial products on the faith of those ratings.
The evidence also supports the prima facie inference that S&P authorised financial advisers and persons in Oakvale’s position to convey to potential investors, and, therefore republish, that rating (or intention to assign it). On S&P’s admissions in settling the United States proceedings the rating was not objective, independent and credible. That was because ratings produced by evaluator 3, such as that for the Aramis CDO, were influenced by S&P’s business considerations. The tool was constructed to produce a higher rating for a product than it would have had S&P not wanted to prevent itself missing business opportunities.
There is a considerable body of material exhibited to Mr Garland’s affidavits that suggests that there is a prima facie case that evaluator 3 produced ratings that were not independent in the sense that the ratings:
·were uninfluenced by conflicts of interest that could compromise S&P’s analytical judgment; and
·reflected S&P’s true opinion about the credit risks that the claim CDOs (including the Aramis CDO) posed to investors.
In those circumstances, a prima facie inference can be drawn that Cockburn is likely to have relied in the publication here of S&P’s assignment of, or intention to assign, the AA rating as an independent expression of S&P’s opinion about the credit worthiness of the claim CDOs: Gould 157 CLR at 236.
In addition, s 1041F(1)(a) and (b) of the Corporations Act proscribe the publishing of a statement (as defined) (such as the assignment of a credit rating), that induces a person to deal (that is, consider or invest) in financial products such as the Aramis CDO, where the publisher knows that the statement is misleading, false or deceptive or dishonestly conceals material facts. In my opinion, there is a sufficient prima facie case that, in publishing or causing others to republish the AA rating for the Aramis CDO, on which it can be inferred Cockburn relied, S&P induced Cockburn to acquire that product in breach of s 1041F(1)(a): Gould 157 CLR at 236.
In my opinion, there is a sufficient prima facie case that S&P was a publisher, within the meaning of s 1041F(1)(a), of a statement conveying the message that its rating of AA for the Aramis CDO was, relevantly, arrived at independently of commercial considerations that would benefit S&P. It also knew that such a representation was false by reference to its admissions in the settlement agreement. It can be inferred that there was good reason for S&P to make those admissions and agree to pay the various United States governments USD1.375 billion.
In addition, S&P’s failure to disclose that its ratings were not independent, prima facie, would appear to involve a dishonest concealment of the material fact that the rating was not arrived at by an objective and independent process but was influenced by S&P’s desire to preserve its own competitive market position. The concealment of that fact would be dishonest according to the standards of ordinary people, as S&P also is likely to have known.
In Macleod v the Queen (2003) 214 CLR 230 at 242 [36]–[38], Gleeson CJ, Gummow and Hayne JJ discussed the natural and ordinary meaning of whether an act is “dishonest”. They approved what Toohey and Gaudron JJ had held earlier in Peters v the Queen (1998) 192 CLR 493 at 504 [18], namely where:
Necessarily, the test to be applied in deciding whether the act done is properly characterised as dishonest will differ depending on whether the question is whether it was dishonest according to ordinary notions or dishonest in some special sense. If the question is whether the act was dishonest according to ordinary notions, it is sufficient that the jury be instructed that that is to be decided by the standards of ordinary, decent people.
(emphasis added)
As their Honours pointed out, for that purpose it is not necessary that the accused must have realised that the applicant was dishonest by those standards. They rejected the controversial decision in the Court of Appeal of England and Wales in R v Ghosh [1982] QB 1053. However, s 1041F(2)(b) (as in force in March 2007) incorporated a requirement that the person know that his, her or its act was dishonest according to the standards of ordinary people. In my opinion, there is a prima facie basis to conclude that ordinary decent people would regard as dishonest when attempting to induce a person to acquire, or consider an investment in, a financial product on the basis of a rating that the ratings agency represented, contrary to its own knowledge, was an independent, objective evaluation of the product. If the agency concealed the fact that the rating process generating that evaluation was adjusted in order to produce a result that would not injure the agency’s commercial interests, that is, by allowing commercial considerations to influence the rating processes, it would act dishonestly according to the standards of ordinary people. I am satisfied on the evidence before me that, prima facie¸ the inference is open that S&P knew that it was concealing from investors (including persons in Cockburn’s position) that its ratings, including for the Aramis CDO, did not represent its independent opinion as to the products’ financial strength.
I am satisfied that, for purposes of r 10.43(4)(c), Cockburn has established a sufficient prima facie case of reliance on S&P’s AA rating for the Aramis CDO that is of a kind in each of items 12, 13, 14 and 15 in the table to r 10.42, namely that the proceeding:
·is based on a contravention of s 1041F(1)(a) or (b);
· seeks relief in relation to damage suffered in Australia by Cockburn, which is based and lost the value of its investment here;
·involves the construction or enforcement of an Act; and
·seeks relief under the Corporations Act.
In addition, there is material in Mr Garland’s evidence to suggest that the ratings methodology was flawed in the way that the applicants allege.
Conclusion
I am satisfied that the United States is a party to the Hague Convention and that the proceedings can be served in accordance with the Convention as sought under r 10.43(2) and (3).
Of course, in arriving at these findings I have not heard any evidence which S&P may put forward to cast a different complexion on the presently unchallenged facts, and it is highly likely that the whole of the material that Cockburn or S&P might rely on at a trial, is not before me. It is not necessary, as I have explained, for Vale to make out a prima facie case and, of course, once the proceedings are validly served and if service is not subsequently set aside, the proceeding will be able to continue in the ordinary way with S&P present in the jurisdiction.
For these reasons, I will make orders that the applicants have leave to serve the originating application, the statement of claim and the amended interlocutory application, on S&P in the United States of America in accordance with the Hague Convention.
I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Rares. Associate:
Dated: 22 December 2020
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