Davis v Wilson
[2025] FCA 108
•21 February 2025
FEDERAL COURT OF AUSTRALIA
Davis v Wilson [2025] FCA 108
File number(s): NSD 862 of 2018 Judgment of: SHARIFF J Date of judgment: 21 February 2025 Date of publication of reasons: 24 February 2025 Catchwords: REPRESENTATIVE PROCEEDINGS – shareholder class action – misleading or deceptive conduct – where applicants alleged they acquired shares in publicly listed company at an inflated price due to misleading or deceptive conduct on part of managing director and auditor of company – where allegedly misleading statements concerned reported value of company’s principal cash generating assets, being Indian Sandalwood trees (biological assets) – where company adopted discounted cash flow model (DCF Model) to value biological assets – where applicants alleged that two inputs in DCF Model were unrealistic, namely assumptions as to expected “heartwood yield” from biological assets and costs of processing sandalwood oil – where biological assets required to be measured at fair value in accordance with Australian Accounting Standards (Accounting Standards) – where respondent director alleged to have made representations in company’s financial reports that accounts complied with Accounting Standards and gave true and fair view of financial position and performance of company, and as to net assets and post-tax profits of company in relevant financial years – where applicants alleged that those representations carried implied representations that opinions were held on reasonable basis and were product of application of reasonable care and skill – where applicants alleged that those representations were misleading because respondent director did not have reasonable grounds for opinions expressed or because opinions were not product of application of reasonable care and skill – where applicants alleged that this was so because assumptions adopted in DCF Model were not assumptions that reasonable market participant would assume, and that this had effect of materially overstating accounts – where respondent director denied making representations and denied that applicants had made out factual predicates of misleading conduct alleged – where respondent auditor alleged to have made representations in company’s financial reports that accounts complied with Corporations Act 2001 (Cth) (Corporations Act), including by giving true and fair view of company’s financial position and performance and complying with Accounting Standards – where applicants alleged that by issuing those opinions, respondent auditor made implied representations that opinions were held on reasonable basis and product of application of reasonable care and skill and formed after auditor had conducted audit in accordance with Australian Auditing Standards (Auditing Standards) – where applicants alleged that those representations were misleading because respondent auditor did not have a reasonable basis for opinions expressed or because opinions were not product of application of reasonable care and skill – where applicants alleged that this was so because respondent auditor did not take steps that reasonable auditor in its position would have taken in conducting audits – where respondent auditor denied making implied representations and denied that applicants had made out factual predicates of misleading conduct alleged – where applicants alleged that as a result of allegedly misleading representations, respondents each contravened ss 1041H and 1041E of Corporations Act and s 12DA of Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) – where applicants further alleged that respondent auditor owed and breached common law duty of care owed to current and future shareholders of company
CORPORATIONS – s 1041H of Corporations Act – whether conduct “in relation to financial product”– liability established – s 12DA of ASIC Act – whether conduct “in relation to financial services” – whether conduct engaged in in “trade or commerce” – liability established in respect of respondent auditor – s 1041E of Corporations Act – essential elements of contravention – cases not established – interpretation and application of Accounting Standards – interpretation and application of Auditing Standards
NEGLIGENCE – duty of care of auditor – no duty owed to non-members at law – duty owed to members but case not established
CAUSATION AND DAMAGES – necessity of establishing pleaded counterfactual case and establishing causally-connected loss for purposes of s 1041I of Corporations Act, s 12GF of ASIC Act and at law – where applicants accepted that in order to establish causation for all causes of action, needed to make out pleaded counterfactual case, including as to specific heartwood yield assumption that should have been adopted by company – where counterfactual case based entirely on expert evidence of sandalwood expert and accounting expert relying on sandalwood expert’s opinions – pleaded case not established – where applicants alleged that they acquired shares in company in reliance on alleged misrepresentations and would otherwise not have done so (direct reliance case) – not possible to resolve direct reliance case where counterfactual case not established – where applicants also alleged that they (and class members) acquired shares in company in market that was artificially inflated by reason of alleged misrepresentations (indirect market-based causation case) – where indirect market-based causation case based on expert opinions that are not accepted – case not established
EVIDENCE – onus – no obligation to accept either party’s case – Jones v Dunkel – orthodox approaches to process of fact-finding and drawing of inferences
PRACTICE AND PROCEDURE – pleadings and particulars – material facts as opposed to particulars relevant to liability – material facts relevant to establish counterfactual case – multiplicity of causes of action pleaded – critical elements not addressed – efficiency of court resources and time
Legislation: Acts Interpretation Act 1901 (Cth)
Australian Securities and Investments Commission Act 2001 (Cth) ss 12BAB, 12BAB(1)(a), 12BAB(1)(g), 12DA, 12DA(1), 12GF, 227(1)(b), 227B(1)(a), 228 and 234A,
Competition and Consumer Act 2010 (Cth) s 82
Corporations Act 2001 (Cth) ss 9, 227(1)(b), 292(1)(a), 295, 295(1), 295(1)(c), 295(4), 295(5), 295(5)(a), 295A, 296, 297, 301, 307(a), 307A(1)(a), 307(b), 307C, 308(1), 308(2), 308(3), 308(3A), 314, 319, 327B, 334, 336, 667C, 667(1)(a), 766A(2), 1041E, 1041E(1)(a), 1041E(1)(b)(i), 1041E(1)(b)(ii), 1041E(1)(b)(iii), 1041E(1)(c), 1041E(1)(c)(i), 1041H,1041I
Evidence Act1995 (Cth) s 140(1)
Federal Court of Australia Act 1976 (Cth) Part IVA, s 33VLegislation Act 2003 (Cth) s 13(1)
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Krogerus M and Tschappeler R, The Decision Book (Profile Books, 2013)Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 1755 Date of last submission/s: 31 January 2025 Date of hearing: 18-22, 25, 27-28 March 2024, 8-12, 15-17, 19 April 2024, 24-27 June 2024, 25-26 July 2024 Counsel for the Applicants: Mr N Hutley SC with Mr C McMeniman and Mr T Liu Solicitor for the Applicants: Piper Alderman Counsel for the Second Respondent: Mr S Lawrance SC with Mr J Sippe Solicitor for the Second Respondent: Mizen + Mizen Counsel for the Third Respondent: Mr J Williams SC with Mr J Entwisle and Mr S Gerber Solicitor for the Third Respondent: Corrs Chambers Westgarth ORDERS
NSD 862 of 2018 BETWEEN: MR GEOFFREY PETER DAVIS
First Applicant
MR GEOFFREY WILLIAM DAVIS
Second Applicant
AND: MR FRANK CULLITY WILSON
Second Respondent
ERNST & YOUNG (A PARTNERSHIP) ABN 75 288 172 749
Third Respondent
ORDER MADE BY:
SHARIFF J
DATE OF ORDER:
21 FEBRUARY 2025
THE COURT ORDERS THAT:
1.On or by 7 March 2025 the parties are to provide to the Associate to Shariff J consent orders, including answers to the Common Questions, giving effect to the reasons for judgment dated 21 February 2025 and, if consent cannot be reached, each party is to by that time provide its competing set of orders (including their respective answers to the Common Questions).
2.The parties are to confer as to the appropriate costs order to be made and, if consent cannot be reached:
(a)any party wishing to make an application for costs must make such an application by sending an email to that effect to the Associate to Shariff J on or by 7 March 2025 and, at the same time, file and serve on each affected party any affidavits and submissions in support of that application (with such submissions not to exceed five pages in length);
(b)on or by 21 March 2025, any party that opposes the costs orders sought by the party that has made an application for costs under Order 2(a) file and serve on each other affected party any affidavits and submissions in support of its position (with such submissions not to exceed five pages in length);
(c)on or by 28 March 2025, the parties are to file any affidavits and submissions in reply to each other, if they consider it necessary to do so (with such submissions not to exceed three pages in length).
3.Unless the Court considers a hearing is necessary, or a party so requests with good reason, any applications for costs will be determined on the papers.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
1 INTRODUCTION
[1]
A. PRELIMINARY MATTERS
[30]
2 AN OVERVIEW OF THE PLEADED CASE
[30]
3 A PRELIMINARY MATTER ARISING FROM THE PLEADINGS
[67]
4 ONUS, INFERENCES, EVIDENCE AND CREDIT
[84]
4.1 Onus and satisfaction
[84]
4.2 Inferences including Jones v Dunkel
[91]
4.3 The lay evidence
[98]
4.4 The sandalwood experts
[109]
4.5 The accounting and auditing experts
[115]
4.6 The loss and quantification experts
[127]
B. FACTUAL MATTERS
[134]
5 THE CHRONOLOGICAL FACTS
[134]
5.1 Sandalwood
[136]
5.2 The cultivation of sandalwood in Australia – the FPC and FWI trials in the ORIA
[144]
5.3 Quintis’ plantations
[156]
5.4 Quintis’ resources and personnel
[165]
5.5 The sandalwood studies
[173]
5.5.1 Brand et al. (2006)
[174]
5.5.2 Brown et al. (2011)
[180]
5.5.3 Brand et al. (2012)
[193]
5.5.4 Barbour et al. (2012)
[199]
(a) Trial 5
[207]
(b) Trial 3
[209]
(c) Trials 1 and 2
[212]
(d) Trial 9
[218]
(e) Trial 6
[222]
(f) Compilation of sandalwood growth with Cathormion umbellatum as primary host
[226]
(g) Trial 7
[229]
(h) Trial 8
[234]
(i) Trial 4
[237]
5.5.5 Conclusions from the sandalwood studies
[241]
5.6 From 1999 to 2012
[244]
5.6.1 The first plantation in 1999
[244]
5.6.2 The second plantation in 2000
[247]
5.6.3 The PDS for 2002
[249]
5.6.4 The PDS for 2003
[261]
5.6.5 The PDS for 2004
[262]
5.6.6 The 2004 IPO Prospectus
[265]
5.6.7 The PDS for 2005
[274]
5.6.8 The PDS for 2006
[275]
5.6.9 The PDS for 2007
[276]
5.6.10 The PDS for 2008
[277]
5.6.11 The PDS for 2009
[279]
5.6.12 The PDS for 2010
[280]
5.6.13 The PDS for 2011
[282]
5.6.14 The FY11 Annual Report
[283]
5.6.15 The PDS for 2012
[286]
5.6.16 The FY12 Annual Report
[290]
5.7 A turning point in 2012 – development of the Heartwood and DCF Models
[293]
5.8 Quintis’ DCF Model – a summary
[296]
5.9 The significant inputs
[301]
5.9.1 Processing costs
[303]
5.9.2 Exchange rate
[305]
5.9.3 Discount rate
[307]
5.10 Annual Tree Counts
[310]
5.11 Predicting heartwood yield – the combined application of the Tree Model and the Heartwood Model
[316]
5.11.1 The Tree Model
[318]
5.11.2 The Heartwood Model
[331]
5.11.3 Applying the Tree Model and the Heartwood Model and yield curves
[338]
5.11.4 Assignment to yield curves
[342]
5.12 The Enigma Presentation
[347]
5.12.1 First data set: 90 tree destructive harvest in 2010 of 19- to 23-year-old trees reported on in Brown et al. (2011)
[349]
5.12.2 Second data set: 32 trees of 16 years old reported on in Brand et al. (2012)
[352]
5.12.3 Third data set: 24 trees of 11 and 12 years old from Quintis’ EKS and TFS2
[354]
5.12.4 Fourth data set: 2011 harvest of 15- to 17-year-old trees grown by Mr Done
[355]
5.12.5 Fifth data set: 11-year-old trees from Elders Estate
[356]
5.12.6 Conclusions from the Enigma Presentation
[358]
5.13 Accounting advice from KPMG
[362]
5.14 From 2012 to the 2014 Inventory Report
[366]
5.14.1 The PDS for 2013
[366]
5.14.2 The FY 2013 Annual Report
[367]
5.14.3 The PDS for 2014
[371]
5.14.4 Email from Mr Brown explaining the Models
[373]
5.14.5 The 2014 EKS harvest
[377]
5.15 The lead up to the 2014 Inventory Report
[382]
5.16 The 2014 Inventory Report
[410]
5.16.1 The executive summary
[412]
5.16.2 Report on the tree count and mortality
[414]
5.16.3 Performance of the “graduating class” of 2009
[420]
5.16.4 Findings as to tree growth
[425]
5.16.5 Conclusions drawn from the 2014 Inventory Report
[428]
5.17 Events after the 2014 Inventory Report including the 2014 audit
[431]
5.17.1 The 2014 Audit Committee papers
[431]
5.17.2 Bentleys’ Audit Report
[437]
5.17.3 Finalisation of the Audit Papers
[438]
5.17.4 The FY14 Annual Report
[440]
5.17.5 The PDS for 2015
[443]
5.17.6 Further email exchanges about plantation performance and the Tree Model
[444]
5.17.7 Email exchanges about yield updates from EKS Harvest
[456]
5.17.8 The FY15 half-year accounts and review
[466]
5.18 The 2015 Inventory Report and its lead up
[473]
5.18.1 Mr Brown’s email to Mr Kimber in February 2015
[473]
5.18.2 Further email from Mr Wilson in February 2015 alleged to have contained an “unguarded admission”
[475]
5.18.3 Issues at Packsaddle and Kingston Rest plantations
[487]
5.18.4 Email from Mr Underwood
[492]
5.18.5 TFS2 heartwood estimates
[497]
5.18.6 The PDS for 2016
[501]
5.18.7 Preparation of the 2015 Inventory Report – June to August 2015
[504]
5.18.8 The 2015 Inventory Report
[536]
5.18.9 Conclusions drawn from the 2015 Inventory Report
[558]
5.18.10 FY15 biological asset valuation
[559]
5.18.11 The FY15 audit, audit committee meeting and full year accounts
[564]
5.19 The 2016 Inventory Report and its lead up
[577]
5.19.1 The FY16 half-year accounts and review
[577]
5.19.2 Lead up to the 2016 Inventory Report
[582]
5.19.3 The 2016 Inventory Report
[578]
5.19.4 FY16 biological asset valuation
[593]
5.19.5 The FY16 audit, audit committee meeting and full year accounts
[595]
5.19.6 Update on 2016 harvest
[605]
5.19.7 After the 2016 audit
[606]
6 THE AUDIT FACTS
[611]
6.1 Introduction
[611]
6.2 Engagement of EY
[612]
6.3 Relevant EY personnel
[615]
6.4 The FY15 audit
[616]
6.4.1 Review of Bentleys’ FY14 audit file
[616]
6.4.2 Planning of the FY15 audit
[618]
6.4.3 FY15 audit procedures
[625]
(a) Assessment of valuation methodology
[627]
(b) Review of the DCF Model and discount rate
[632]
(c) Tree count
[640]
(d) Review of assumptions
[643]
6.4.4 Evaluation of Quintis’ management’s expert for FY15
[651]
6.4.5 The FY15 EY Closing Report
[657]
6.4.6 The FY15 management representation letter
[658]
6.4.7 Publication of the FY15 Financial Report and FY15 Audit Opinion
[660]
6.5 The FY16 audit
[663]
6.5.1 Planning of the FY16 audit
[664]
6.5.2 FY16 audit procedures
[666]
(a) Assessment of valuation methodology
[667]
(b) Review of the DCF Model and discount rate
[668]
(c) Tree count
[673]
(d) Review of assumptions
[675]
6.5.3 Review of Quintis’ management’s expert for FY16
[681]
6.5.4 The FY16 EY Closing Report
[682]
6.5.5 The FY16 management representation letter
[684]
6.5.6 Publication of the FY16 Financial Report and FY16 Audit Opinion
[685]
6.6 The Davis Applicants’ contentions as to the audit facts
[688]
7 THE MARKET ANALYST REPORTS
[703]
7.1 Canaccord
[708]
7.2 UBS
[713]
7.3 Moelis
[718]
7.4 Argonaut
[722]
7.5 Conclusions on market analyst reports
[727]
C. THE APPLICABLE STANDARDS
[729]
8 THE ACCOUNTING STANDARDS
[729]
8.1 Introduction
[729]
8.2 The relevant parts of the pleaded case relating to the Accounting Standards
[730]
8.3 Interpretation of the Accounting Standards
[734]
8.4 AASB 141
[739]
8.5 AASB 13
[744]
8.6 AASB 108
[775]
8.7 Relevant conclusions to be drawn from the Accounting Standards
[780]
8.8 Disputes between the parties about the Accounting Standards
[793]
9 THE AUDITING STANDARDS
[821]
9.1 Introduction
[821]
9.2 The relevant parts of the pleaded case relating to the Auditing Standards
[825]
9.3 ASA 200
[834]
9.4 ASA 500
[842]
9.5 GS 005
[851]
9.6 ASA 540
[856]
9.7 Relevant conclusions to be drawn from the Auditing Standards
[864]
D. QUINTIS’ ACCOUNTS
[871]
10 THE PLEADED ATTACK ON THE DCF MODEL
[871]
10.1 The pleaded case and how it was advanced
[871]
10.2 Preliminary considerations
[887]
10.2.1 Onus and what had to be established
[887]
10.2.2 The inputs that were not disputed
[892]
10.2.3 The Davis Applicants’ submissions about the “market participant” and the relevant question
[896]
10.3 Was the heartwood yield assumption materially higher than that which a market participant would have assumed?
[897]
10.3.1 The Tree Model
[897]
10.3.2 Trees aged five and over and the “garbage in, garbage out” case
[912]
(a) An overview of the process of assigning the plantations aged five and over
[912]
(b) The parties’ contentions
[920]
(c) Examining the approach to the valuation of trees aged five and over
[932]
(d) Did the assigned yield curves adopt the incremental rates of growth from the Tree Model?
[939]
(e) Conclusions about the valuation of trees aged five and over
[970]
10.3.3 Trees aged under five
[981]
(a) The parties’ contentions
[983]
(b) The known data did not support the approach to the valuation of trees aged under five
[994]
(i) Better host management and mitigation of overcrowding
[1005]
(ii) Drip irrigation
[1015]
(iii) Site selection
[1022]
(iv) Genetic improvement of seeds
[1029]
(v) The combination of all of the above improvements
[1040]
(vi) General assessment of Dr Woodall’s and Mr Morton’s evidence as to silvicultural practices
[1042]
(vii) Conclusions as to the valuation of trees aged under five
[1046]
10.3.4Conclusion on whether the heartwood yield assumption was materially higher than that which a market participant would have assumed
[1047]
10.4 Were processing costs understated?
[1066]
11 WAS THERE AN OVERSTATEMENT?
[1074]
12 THE COUNTERFACTUAL CASE
[1101]
12.1 Overview and the pleaded case
[1101]
12.2 A summary of Dr Barbour’s opinions and their criticality to the Davis Applicants’ case
[1108]
12.3 Assessment of Dr Barbour’s opinions and reasons as to heartwood yield
[1122]
12.3.1 General assessment of Dr Barbour’s evidence
[1122]
12.3.2 The Brand Study Reasoning
[1123]
12.3.3 The Figure 21 Reasoning
[1132]
12.3.4 The Figure 25 Reasoning
[1150]
12.3.5 The Barbour Study Reasoning
[1162]
12.3.6 The Destructive Harvest Reasoning
[1167]
12.3.7 The Quintis Harvest Results Reasoning
[1172]
12.3.8 The Multiple Dataset Reasoning
[1177]
12.4 Returning to the Accounting Standards
[1184]
12.5 The West Report
[1189]
12.6 An alternative case?
[1193]
E. LIABILITY
[1205]
13 THE CASE AGAINST MR WILSON
[1205]
13.1 Introduction
[1205]
13.2 Did Mr Wilson make the alleged Representations?
[1208]
13.3 The case against Mr Wilson under s 1041H of the Corporations Act
[1220]
13.3.1 Overview of the pleaded case
[1220]
13.3.2 Applicable principles
[1223]
13.3.3 Consideration
[1238]
(a) Knowledge of the applicable Accounting Standards
[1241]
(b) Knowledge about the Tree Model, the Heartwood Model and the DCF Model
[1247]
(c) Did Mr Wilson know, or ought he reasonably to have known, that significant assumptions were unrealistic or otherwise did not comply with the Accounting Standards?
[1255]
(d) Mr Wilson’s opinions were not based on reasonable grounds or the product of reasonable care and skill
[1296]
13.3.4 Conclusion: did Mr Wilson contravene s 1041H?
[1307]
13.4 The case against Mr Wilson under s 12DA of the ASIC Act
[1309]
13.5 The case against Mr Wilson under s 1041E of the Corporations Act
[1318]
14 THE CASE AGAINST EY
[1342]
14.1 Introduction
[1342]
14.2 The case against EY under s 1041H of the Corporations Act
[1344]
14.2.1 Overview of the pleaded case
[1344]
14.2.2 Preliminary issues
[1356]
(a) Was the pleaded conduct in relation to a financial product?
[1357]
(b) Were the representations made only to members or also to non-members?
[1374]
(c) Did EY make the implied representations that are alleged?
[1389]
14.2.3 Did EY contravene s 1041H?
[1395]
(a) Recognising that the DCF Model was sensitive to significant inputs and identifying the risk of material overstatement
[1398]
(b) Ensuring that staff had the relevant expertise in auditing the fair value of sandalwood plantations and included technical accounting experts with experience in the application of AASB 141 and AASB 13 to biological assets
[1406]
(c) Obtaining evidence concerning the competence and integrity of Mr Brown given that his judgements impacted significant inputs in the valuation model
[1412]
(d) Requiring and obtaining sufficient appropriate audit evidence that the value of the biological assets had not been misstated and compliance with the Auditing Standards
[1425]
(i) What did the Auditing Standards require?
[1427]
(ii) Steps taken to comply with the Auditing Standards
[1432]
(iii) Reasonableness of the Heartwood Model Assumption?
[1436]
(iv) Reasonableness of the Tree Model Assumption?
[1439]
(v) The application of the Tree Model assumption to trees aged five and over
[1476]
(vi) The application of the Tree Model assumption to trees aged under five
[1488]
(e) Other integers in the DCF Model
[1516]
(f) The overall valuation and the “swings and roundabouts” arguments
[1518]
14.2.4 Conclusion: Did EY contravene s 1041H?
[1538]
14.2.5 The counterfactual case against EY
[1539]
14.3 The case against EY under s 12DA of the Corporations Act
[1549]
14.3.1 Were EY’s representations made in relation to financial services?
[1552]
14.3.2 Were the representations in trade or commerce?
[1559]
14.3.3 Was EY’s conduct misleading or deceptive?
[1570]
14.4 The case against EY under s 1041E of the Corporations Act
[1572]
14.5 The case against EY in negligence
[1574]
14.5.1 EY did not owe any duty to non-members
[1576]
14.5.2 Duty to members
[1579]
F. CAUSATION, LOSS AND DISPOSITIVE MATTERS
[1581]
15 CAUSATION AND LOSS
[1581]
15.1 The case fails as the counterfactual case is not established
[1581]
15.2 Overview of the pleaded case
[1584]
15.3 Applicable principles
[1589]
15.4 The direct reliance case
[1597]
15.4.1 Mr Davis Snr’s approach to investments
[1600]
15.4.2 Mr Davis Snr’s investments in Quintis
[1609]
15.4.3 The factual (and counterfactual) causation questions
[1631]
15.5 The indirect market-based causation case (the Davis Applicants and Davis Group Members)
[1660]
15.5.1 The principles and theory underlying indirect market-based causation
[1663]
15.5.2 The Davis Applicants’ case
[1672]
15.5.3 Consideration
[1698]
15.6 Conclusion on causation
[1751]
15.7 Conclusion on loss
[1752]
16 DISPOSITION AND ANSWERS TO THE COMMON QUESTIONS
[1754]
SCHEDULE: GLOSSARY OF DEFINED AND COMMON TERMS AND KEY PERSONS
[]
SHARIFF J:
1. INTRODUCTION
Indian Sandalwood (Santalum album) (sandalwood) is a hemi-parasitic tree belonging to the botanical family Santaceae. It produces fragrant oil which may be distilled from the core of the tree, known as its heartwood, through a process of cultivation and manufacture. The fragrant oil produced from sandalwood trees, and its equally fragrant timber, have been used over many centuries for traditional, religious, ornamental and medicinal purposes, and, in more recent times, in the manufacture of commercial products such as perfumes, soaps and cosmetics.
Sandalwood trees are native to India and Indonesia, but a handful of wild sandalwood trees were discovered to be growing in natural conditions in the Northern Territory. Historically, there had been no commercial plantations of sandalwood trees in Australia or elsewhere, and sandalwood timber and oil was generally produced from wild stocks in forests. That changed in the 1990s. Through various successive agencies of the (then) Western Australian Government, trials were established to determine, amongst other things, the viability of commercial plantations of sandalwood trees in Ord River Irrigation Area (ORIA) in North-Eastern Western Australia and close to the Northern Territory border, and, specifically, at Kununurra. These trials were conducted in various conditions and configurations to test their efficacy. As the results of the early trials started to be reported in academic journals and research papers, commercial operators entered the scene.
Quintis Ltd (Quintis) (formerly TFS Corporation Ltd (TFS)) was one of the earliest operators to have established commercial sandalwood plantations. Its first commercial plantation was established in 1999. By 2004, it was listed on the Australian Stock Exchange (ASX). Under the irrepressible driving force of its founder, Chief Executive Officer (CEO) and Managing Director, Mr Frank Cullity Wilson (Mr Wilson), Quintis had considerable success in the marketplace. By 2006, it had established the largest commercial plantation of sandalwood in the world. Quintis had also secured investments from many sophisticated, high net worth and institutional investors as part of various managed investment schemes (MISs) by which those investors came to own a large portion of the sandalwood plantations which Quintis managed. Quintis directly owned the balance of the plantations. By 30 June 2015, Quintis had 10,583 ha of sandalwood plantations under management, of which it directly owned 2,533 ha. By 30 June 2016, this had grown to an area of 12,182 ha under management, of which it directly owned 2,638 ha.
Quintis also achieved success in the marketplace. Well before its first commercial harvest (which did not occur until 2014) Quintis had entered into contracts for the sale of its products with customers, including a contract entered into in about 2008 with the cosmetics retailer, Lush Ltd. During 2014, it achieved an even greater commercial breakthrough when, through one of its subsidiaries, Santalis Pharmaceuticals Inc (Santalis), Quintis entered into a contract with Galderma SA (Galderma), which, in turn, was a subsidiary of Nestlé SA. The Galderma Contract provided for, amongst other things, the supply of sandalwood oil to Galderma for a period of 20 years at a price of US$4,500 per kg plus annual CPI (capped at 3%). The purpose of the contract was to facilitate the use of sandalwood oil in Galderma’s therapeutic products, including those intended to address skin conditions. Then, in early 2016, Quintis entered into a further substantial contract with a Chinese buyer of sandalwood timber. Together with other agreements said to have been entered into at the time, Quintis announced to the marketplace in an ASX announcement dated 26 February 2016 that it had signed new multi-year agreements to supply sandalwood to buyers in China and India “at prices broadly equivalent to US$4,500 per kg of oil” and that the “signing of these agreements means that 100% of the 2016 and 2017 harvests already owned by TFS, over 300 tonnes of heartwood, has been forward sold”.
Quintis’ share price traded as high as $1.74 and it had a market capitalisation which reached as high as $594,000,000. It was admitted into the “ASX 300”. Various market analysts were covering Quintis, including UBS, and making recommendations to “buy” shares in Quintis at target prices that were above its (then) trading price. Things were, as one might say colloquially, “on the up” and progressing swimmingly. But then things turned. Regrettably for its investors, Quintis’ fate as a publicly listed company proved to be yet another example of a share market Icarus.
On 22 March 2017, Glaucus Research Group California, LLC (Glaucus) released a report valuing Quintis shares at $0 and made several allegations in relation to Quintis’ business and operations (First Glaucus Report). Glaucus alleged, amongst other things, that Quintis exhibited characteristics similar to that of a “Ponzi scheme” and that is assets of sandalwood trees were effectively worthless. On 27 March 2017, Quintis shares were put into a trading halt by the ASX at Quintis’ request. Quintis denied the allegations made in the First Glaucus Report and described Glaucus as a self-interested short-seller seeking to make a financial gain at Quintis’ expense. On 28 March 2017, Quintis announced the resignation of Mr Wilson as Managing Director and, on 29 March 2017, Glaucus released a further report valuing Quintis shares at $0 (Second Glaucus Report).
On 15 May 2017, Quintis shares were put into a further trading halt, following which shares in the company never resumed trading.
On 20 January 2018, Quintis entered voluntary administration. On or about 29 June 2018, the company exited voluntary administration and entered into a deed of company arrangement (DOCA). The DOCA had the effect that Quintis was recapitalised and restructured into a private company. Quintis members at the time of the trading halt received a nil return from the DOCA.
The applicants in these proceedings are Mr Geoffrey Peter Davis (Mr Davis Snr) and Mr Geoffrey William Davis (Mr Davis Jnr) (together, the Davis Applicants). The Davis Applicants are trustees of the Davis Superannuation Fund (Davis Fund) who purchased and sold shares in Quintis, on behalf of the Davis Fund, between 2 November 2015 and 23 March 2017.
The Davis Fund, as with other investors, acquired shares in Quintis which are now worthless.
Other investors acquired shares in Quintis which they sold at a loss.
The Davis Applicants bring the proceedings as representative proceedings pursuant to Part IVA of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and as representatives of an open class (Davis Group Members), each of whom acquired an interest in ordinary shares of Quintis in the period commencing on 31 August 2015 and concluding on 15 May 2017 (including those who already had an interest in ordinary Quintis shares before 31 August 2015).
The proceedings concern alleged contraventions of the Corporations Act 2001 (Cth) (Corporations Act) by Mr Wilson. They also concern alleged contraventions of the Corporations Act and the general law by Ernst & Young (EY), the auditor of Quintis’ accounts in the financial years ending 30 June 2015 and 30 June 2016 (together, FY15 and FY16). Initially, the applicants in the proceedings also claimed against Quintis itself, however, as a result of a settlement between the Davis Applicants and Quintis approved by Lee J on 1 July 2022 (see Davis v Quintis Ltd (Subject to a Deed of Company Arrangement) [2022] FCA 806), the remaining active respondents are Mr Wilson and EY (together, the Respondents).
The proceedings were heard concurrently with another set of representative proceedings brought against the Respondents by Excel Texel Pty Ltd (as trustee for the Mandex Family Trust) (Excel Texel) and Mr Andrew John Wyma (NSD1983/2017, or the Excel Texel Proceedings). On 16 July 2024, after the conclusion of evidence but before closing submissions had been heard, my chambers were informed that the parties to the Excel Texel Proceedings had executed a deed containing a proposed settlement of those proceedings, and an application for approval of the settlement under s 33V of the FCA Act was thereafter allocated to the docket of Wigney J. I took no further part in the Excel Texel Proceedings.
In short, the Davis Applicants alleged that they (and the Davis Group Members) acquired Quintis shares, either on market or via a share purchase plan, between 31 August 2015 and 15 May 2017 at an inflated price due to misleading or deceptive statements made in Quintis’ financial reports for FY15 and FY16 (respectively, the FY15 and FY16 Financial Reports). Those allegedly misleading statements centre on the value of Quintis’ principal cash generating asset, sandalwood trees, which were referred to in Quintis’ financial statements as its “biological assets”. The Davis Applicants alleged that Quintis materially overstated the value of its biological assets in the FY15 and FY16 Financial Reports by reason of various inputs adopted in the discounted cash flow model (DCF Model) which it used to value those assets. These inputs were assumptions which Quintis made for the purposes of measuring and reporting the fair value of its assets, as required by the Corporations Act and the Australian Accounting Standards (Accounting Standards or AASBs).
The allegations of misleading conduct against Mr Wilson (as contained in the Davis Applicants’ Fifth Further Amended Statement of Claim (FFASOC)) can be summarised as the conduct engaged in by him, as a director of Quintis, by joining in the resolutions of the directors of Quintis in each of the FY15 and FY16 Financial Reports, of representing that he was of the opinion that:
(a)the Financial Reports had: (i) been prepared in accordance with the requirements of the Corporations Act, including that they complied with the Accounting Standards; and (ii) gave a true and fair view of the financial position and performance of Quintis; and that those opinions were held on a reasonable basis and were the product of the application of reasonable care and skill by Mr Wilson (together, the Wilson FY15 and FY16 Financial Report Representations);
(b)Quintis had: (i) in FY15, total assets of $1,173,335,000 and net assets of $574,523,000; and (ii) in FY16, total assets of $1,491,958,000 and net assets of $747,222,000; and that those opinions resulted from the application of the Accounting Standards and were held on a reasonable basis and were the product of the application of reasonable care and skill by each director of Quintis, including Mr Wilson (together, the Wilson FY15 and FY16 Assets Representations); and
(c)Quintis had post-tax profit: (i) for FY15 of $113,021,000; and (ii) for FY16 of $90,143,000; and that those opinions resulted from the application of the Accounting Standards and were held on a reasonable basis and were the product of the application of reasonable care and skill by Mr Wilson (together, the Wilson FY15 and FY16 Profit Representations),
(collectively, the Wilson Representations).
As will be apparent from the above, the case against Mr Wilson was that the opinions he expressed carried an implied representation that he had reasonable grounds for the expression of those opinions, and that they were made as the product of the application of reasonable care and skill. The Davis Applicants claimed that each of the Wilson Representations was misleading because there were no reasonable grounds for the opinions Mr Wilson expressed or because they were not the product of the exercise of reasonable care and skill by Mr Wilson. The Davis Applicants asserted that this was the case because the assumption Quintis adopted in its DCF Model as to predicted average heartwood yield was materially higher than that which a market participant would assume; the assumption as to the costs of processing sandalwood oil was understated; and that these assumptions had the effect of materially overstating the accounts as reported in each of the FY15 and FY16 Financial Reports. It was therefore asserted that the accounts did not represent fair value, and that, as a result, there was non-compliance with the requirements of the Accounting Standards.
As a preliminary matter, Mr Wilson denied that he made any of the Wilson Representations, and, therefore, denied that he engaged in any misleading or deceptive conduct in contravention of the Corporations Act. This necessitates resolution of the question as to whether, by joining in the resolutions by which Quintis’ directors came to make the declarations contained in each of the FY15 and FY16 Financial Reports, Mr Wilson personally conveyed the Representations that were alleged against him. Mr Wilson further submitted that, even if he had made the Representations, the Davis Applicants had not made out any of the essential factual predicates to establish that his conduct was misleading and deceptive. Mr Wilson did not give evidence but contended that the evidence before the Court did not support the case advanced by the Davis Applicants as to the alleged flaws in the DCF Model or that he should have known, or ought reasonably to have known, about these flaws.
As for the case against EY, it was common ground that the FY15 and FY16 Financial Reports each contained statements of opinion expressed by EY that these Reports were in accordance with the Corporations Act, including by: (a) giving a true and fair view of Quintis’ financial position and performance; and (b) complying with the Accounting Standards. Those representations were respectively defined in the FFASOC as the FY15 and FY16 Audit Opinions. EY admitted that it expressed these opinions.
The Davis Applicants alleged that, by issuing the FY15 and FY16 Audit Opinions in the circumstances pleaded, EY represented to members and potential investors in Quintis that those opinions were: (a) opinions held on a reasonable basis and the product of the application of reasonable care and skill by EY; and (b) formed after EY had conducted an audit in accordance with the Australian Auditing Standards (Auditing Standards or ASAs). These representations were respectively defined together in the FFASOC as the EY FY15 and FY16 Financial Report Representations. It was contended that these Representations were misleading because EY had not in fact conducted an audit in accordance with the Auditing Standards, and did not have a reasonable basis for expressing the FY15 and FY16 Audit Opinions. That is because, it was alleged, EY did not take the steps that a reasonable auditor in its position would have taken in conducting the FY15 and FY16 audits. EY denied that it made any of these Representations, and further denied that the Davis Applicants had made out the factual predicates of the misleading and deceptive conduct alleged.
As a result of each of these allegedly misleading statements, the Davis Applicants alleged that Mr Wilson and EY each contravened ss 1041H or 1041E of the Corporations Act and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). They also alleged that EY breached a common law duty of care owed to both current and future members when carrying out the FY15 and FY16 audits of Quintis’ accounts.
In respect of each of the cases against Mr Wilson and EY, the Davis Applicants accepted that they needed to establish causation by making out their pleaded counterfactual case. In each case, this required them to establish that the “heartwood yield assumption” that should have been adopted was approximately 6 to 8 kg and that the “processing costs assumption” should have been $229.72 per litre of oil for FY15 and $597 per litre of oil for FY16.
The Davis Applicants advanced a “direct reliance” case, contending that they acquired shares in Quintis in reliance on the alleged misrepresentations by Mr Wilson and EY when they would not otherwise have done so. They also advanced an indirect “market-based causation” case on behalf of themselves and the Davis Group Members, contending that they acquired shares in Quintis in a market that was artificially inflated by reason of the misrepresentations alleged against each of Mr Wilson and EY.
For the reasons which follow, I have concluded that the Davis Applicants’ case and that of the Davis Group Members for the recovery of loss and damage must fail, even though I have concluded that, in part, they have established their case as to liability against each of Mr Wilson and EY. My reasons for so concluding contain many nuances borne of the factual and legal complexity of the proceedings. It is not possible to fairly or accurately summarise all of my reasons by way of an introduction. Limiting myself to the critical reasons, at a high level, and in brief, I have concluded that the Davis Applicants have:
(a)established that the heartwood yield assumption used by Quintis in the DCF Model in respect of trees aged under five was unrealistic and was an assumption that lacked reasonable foundation;
(b)established that Mr Wilson did make the Wilson Representations, and did not have reasonable grounds for making those Representations;
(c)established that the heartwood yield assumption used by Quintis in the DCF Model in respect of trees aged under five was a significant assumption but was not a reasonable one, such that I am satisfied that EY ought reasonably to have evaluated it as an assumption that was not reasonable as that is what a reasonable auditor would have done in the same circumstances, and, further, it was established that EY failed to obtain sufficient appropriate audit evidence so as to, in turn, obtain reasonable assurance that the FY15 and FY16 Financial Reports were free from the audit risk of material misstatement to an acceptably low but not absolute level;
(d)established that EY did not have a reasonable basis to make the EY FY15 and FY16 Financial Report Representations and that they were not the product of reasonable care and skill exercised by EY;
(e)established in light of each of the above (and for the other reasons set out below) that Mr Wilson and EY each contravened s 1041H of the Corporations Act and that EY additionally contravened s 12DA of the ASIC Act;
(f)not established their counterfactual case that the heartwood yield assumption that should have been used was approximately 6 to 8 kg per tree;
(g)not established causally connected loss for the purpose of s 1041I of the Corporations Act and s 12GF of the ASIC Act as against either Mr Wilson or EY, or for the purpose of the negligence claim against EY.
To explain why I have reached these conclusions, the balance of these reasons are set out as follows:
(a)Chapter A concerns a number of preliminary matters:
(i)in Part 2, I set out an overview of the pleaded case against each of the Respondents;
(ii)in Part 3, I determine a preliminary but fundamental dispute between the parties as to the scope of the pleaded case against the Respondents, which came to be referred to by the parties as the “binary issue”;
(iii)in Part 4, I deal with questions of onus and make general findings as to the evidence and credit of the various lay and expert witnesses;
(b)Chapter B concerns factual matters:
(i)in Part 5, I lay out the chronological facts relevant to the proceedings. Many of these facts were not in dispute, but where they were, this section contains my findings on those factual disputes;
(ii)in Part 6, I set out further facts specific to the FY15 and FY16 audits and the allegations against EY, again resolving factual disputes where relevant;
(iii)in Part 7, I set out the reports of a number of market analysts who covered Quintis during the relevant period and make findings as to the significance of these reports;
(c)Chapter C concerns the applicable Accounting and Auditing Standards:
(i)in Part 8, I set out the relevant Accounting Standards and make determinations in respect of the requirements of these standards where these were in dispute;
(ii)in Part 9, I set out the relevant Auditing Standards and similarly make determinations and resolve disputes as to what they require;
(d)Chapter D concerns the accuracy of Quintis’ accounts:
(i)in Part 10, I consider the pleaded attack on the DCF Model by which Quintis valued its biological assets;
(ii)in Part 11, I consider the question of whether Quintis’ accounts were materially overstated and not in accordance with the Accounting Standards for each of FY15 and FY16;
(a)in Part 12, I consider the counterfactual case advanced by the Davis Applicants as to what Quintis’ accounts allegedly should have disclosed;
(e)Chapter E concerns questions of liability:
(i)in Part 13, I turn to the case against Mr Wilson and determine whether the statutory contraventions pleaded against him are made out;
(ii)in Part 14, I turn to the case against EY and determine whether the statutory contraventions and breaches of the general law pleaded against it are made out;
(f)Chapter F concerns questions of causation, loss and relief:
(i)in Part 15, I deal with questions of causation and loss, to the extent they arise; and
(ii)in Part 16, I conclude and dispose of the proceedings.
For convenience, given the length of this judgment, a glossary of terms defined in the judgment (as well as other abbreviations and shorthand of common terms that are not defined) is attached as a Schedule to these reasons. The glossary also identifies the key persons referred to in the judgment.
Before turning to set out my reasons in detail, it is necessary to make some observations at the outset about the Davis Applicants’ case. The trial was heard before me over 24 days including seven days of oral closing submissions (which included some half days). The parties filed hundreds and hundreds of pages of written opening and closing submissions, as well as supplementary written submissions. The proceedings were conducted efficiently and the parties assisted me in getting to the heart of the complex factual issues that were raised. Other than in particular respects to which I will return, the Davis Applicants brought great efficiency to their case by refining their pleadings and abandoning or not pressing various aspects of their case. All parties and their representatives are to be commended for the way in which the proceedings were conducted.
However, as will become apparent from what follows much later in these reasons, it is necessary for me to record one lament at the very outset. The Davis Applicants maintained a case against Mr Wilson under each of ss 1041H and 1041E of the Corporations Act and s 12DA of the ASIC Act, and maintained a case against EY under each of the same provisions as well as a case in negligence. In respect of each of these various causes of action, the Davis Applicants’ factual case was largely the same, with some subtlety. In Australian Securities and Investments Commission v Fortescue Metals Group Ltd [2011] FCAFC 19; (2011) 190 FCR 364, Keane CJ said at [16]:
I should note here that, at trial and in this Court, the case was complicated by ASIC’s presentation of a number of arguments. Some of these arguments are strong, while others are not. The presentation of a range of alternative arguments is not apt to aid comprehension or coherence of analysis and exposition; indeed, this approach may distract attention from the central issues…
The Davis Applicants did not take heed of these observations. Having pleaded a case under s 1041H of the Corporations Act, and (as I will in due course come to in these reasons) another one that they did not adequately address under s 12DA of the ASIC Act, the Davis Applicants additionally propounded a case under s 1041E of the Corporations Act involving a number of considerations that are far from self-evident. The observations made by Keane CJ in Fortescue have as their focus the impact of an over-pleaded case as between the parties to litigation and the Court. I would add to those observations that over-pleading also has a considerable impact upon other litigants. The pursuit of multiple and overlapping causes of action, especially where these are not adequately addressed by the parties, occasions a burden upon the resources of the Court, not just in terms of the time required to address multiple causes of action but also because of the time that is thereby deprived to other litigants.
A. PRELIMINARY MATTERS
2. AN OVERVIEW OF THE PLEADED CASE
The pleadings in this case were complex and lengthy and raised numerous issues for determination. The salient features of the pleaded case against the Respondents, and the key issues which emerged, were as follows.
First, it was pleaded, uncontroversially, that:
(a)Quintis was required to prepare financial reports, including financial statements, for FY15 and FY16, in compliance with the Corporations Act and the Accounting Standards: FFASOC [11]-[13];
(b)each of those financial reports was required to give a fair view of Quintis’ financial position and performance for the relevant year: FFASOC [17]; and
(c)each of the financial reports was required to include a declaration by the Directors of Quintis as to whether, in the Directors’ opinion, the financial statements and notes complied with the Accounting Standards and gave a true and fair view of Quintis’ financial position and performance for the relevant year: FFASOC [18].
Second, the pleadings set out the alleged requirements of each of the Accounting Standards on which the Davis Applicants relied: FFASOC [19]-[25]. One of the issues in the proceedings was the proper construction of these standards and what they required, to which I will return below in Part [8].
Third, the pleadings set out the requirement under the Corporations Act for Quintis to have its financial reports for FY15 and FY16 audited and to obtain an auditor’s report in respect of each financial year, and record the fact that EY conducted such an audit of Quintis’ accounts in FY15 and FY16: FFASOC [30]-[32]. The pleadings then set out the requirements of such an audit, including, importantly, that EY was required to (FFASOC [33]-[40]):
(a)form an opinion and report to members about whether the relevant financial reports were in accordance with the Corporations Act, including by complying with the Accounting Standards and giving a true and fair view of Quintis’ financial position and performance; and
(b)conduct the audit in accordance with the Auditing Standards.
Fourth, the pleadings set out the alleged requirements of each of the Auditing Standards on which the Davis Applicants relied: FFASOC [41]-[65]. Again, the proper construction of these standards and what they required was an issue for determination in the proceedings to which I return below in Part [9].
Fifth, the pleadings provided an overview of Quintis’ business, business model and investment products: FFASOC [66]-[91]. These matters were largely not in dispute and are relevantly set out below in Part [5].
Sixth, the pleadings set out alleged facts surrounding the publication and content of the FY15 and FY16 Financial Reports: FFASOC [92]-[109] and [121]-[137]. Significantly, it was pleaded that issuing each Report included lodging it with the ASX, publishing it on the ASX Market Announcements Platform, publishing it on Quintis’ website and distributing it to Quintis’ shareholders: FFASOC [94] and [122]; and that EY knew that its Audit Opinions would be contained in the Reports: FFASOC [95] and [123].
Seventh, and critically, it was pleaded that the FY15 Financial Report reported that Quintis’ total biological assets had a value of $624,574,000 (which was defined as the FY15 BA Carrying Value), derived using a DCF Model (FFASOC [97]-[99]), and that the significant inputs into that model were, amongst other things (FFASOC [100]):
(a)weighted average heartwood production of 20.8 kg for trees harvested between 14 and 16 years;
(b)expected heartwood per tree at harvest being based on the application of a yield curve to all trees, whereby:
(i)trees less than five years of age were placed on a theoretical yield curve which assumed the trees would yield 100% of the predicted heartwood production of a tree harvested at 15 years;
(ii)trees aged five years or more were each assigned individual yield curves which predicted heartwood production at harvest, being a percentage of the theoretical yield curve, based on data from tree growth obtained from annual tree counts, past harvests, trial results and sample testing, and judgements as to expected tree growth and heartwood yield for particular plantations provided by Quintis’ Head of Research, Mr Andrew Brown (Mr Brown), following each annual tree count;
(c)estimated cost of harvesting and processing of $207 per litre of oil; and
(d)a post-tax average real discount rate of:
(i)14% for trees aged 0 to 5 years;
(ii)13% for trees aged 6 to 10 years; and
(iii)12% for trees aged 11 years to harvest age.
It was recorded that Quintis’ total assets for FY15 were reported as $1,173,335,000 and net assets as $574,523,000: FFASOC [104]; and total post-tax profits for FY15 were reported as $113,021,000: FFASOC [105].
Eighth, it was pleaded that the FY15 Financial Report contained a declaration (the FY15 Directors’ Declaration), that, in the Directors’ opinion, the Report had been prepared in accordance with the requirements of the Corporations Act and the Accounting Standards, and that that declaration had been signed on behalf of each of the Directors of Quintis, including Mr Wilson: FFASOC [106]-[107]. It was also pleaded that the FY15 Financial Report included the FY15 Audit Opinion, and that that opinion was signed on behalf of EY: FFASOC [108]-[109]. There was a corresponding declaration (the FY16 Directors’ Declaration) and a corresponding audit opinion (the FY16 Audit Opinion) for FY16: FFASOC [134]-[135] and [136]-[137].
Ninth, it was pleaded that:
(a)by making the FY15 Directors’ Declaration, Mr Wilson made the Wilson FY15 Financial Report Representation: FFASOC [113]-[114];
(b)by authorising the issuing of the FY15 Financial Report in the circumstances pleaded, Mr Wilson made the Wilson FY15 Assets Representation and Wilson FY15 Profit Representation: FFASOC [115]-[118]; and
(c)by issuing the FY15 Audit Opinion in the circumstances pleaded, EY made the EY FY15 Financial Report Representation: FFASOC [119]-[120].
Whether, by their pleaded conduct, Mr Wilson and EY did make the alleged Representations, were significant issues in dispute between the parties to which I return to in detail below.
Tenth, the pleaded case in relation to the FY16 Financial Report and related Representations was substantively the same, save for the following matters:
(a)Quintis’ total biological assets reported in the FY16 Financial Report had a value of $771,208,000 (defined as the FY16 BA Carrying Value): FFASOC [125];
(b)total assets for FY16 were reported as $1,491,958,000 and net assets as $747,222,000: FFASOC [132]; and total post-tax profits for FY16 were reported as $90,143,000: FFASOC [133].
Eleventh, the pleadings set out alleged facts relating to the publication of Quintis’ financial report for the financial year ending 30 June 2017 (FY17 Financial Report), including that for FY17 (FFASOC [159]-[165]):
(a)Quintis’ biological assets experienced a $307,371,000 loss on revaluation, driven primarily by changes in the significant inputs into the valuation models for FY15 and FY16;
(b)the pre-tax average real discount rates applied to net cash flows were varied to:
(i)17% for trees aged 0 to 5 years;
(ii)16% for trees aged 6 to 10 years; and
(iii)15% for trees aged 11 years to harvest age;
(c)the assumed weighted average heartwood production was varied to 14.6 kg per tree; and
(d)the FY17 Financial Report did not identify any event that had occurred since the FY16 Financial Report was issued which caused the changes to those significant inputs.
Twelfth, and critically, at FFASOC [169] it was pleaded that the DCF Model used to derive the FY15 BA Carrying Value adopted assumptions of inputs that:
(a)assumed predicted heartwood yield per tree that was “materially higher than what a market participant would have assumed”;
(b)assigned a yield curve for trees under 5 that assumed the trees achieving 100% of the predicted heartwood yield at harvest, and trees five years of age and older that assumed the trees achieving heartwood yield as a percentage of the theoretical yield of a tree under five years of age, which did not accurately represent the biological assets in their current location and condition; or
(c)understated the cost of processing per litre of sandalwood oil.
The particulars to FFASOC [169] stated that “the assumptions which should have been adopted [were] approximately”:
(a)as to assumed average heartwood yield for a tree harvested at 15 years, “around 6 to 8 kg”; and
(b)as to assumed estimated cost of harvesting and processing, $229.72 per litre of oil.
The pleadings later set out a counterfactual scenario based on these assumptions, namely that, had the DCF Model been developed and applied in accordance with the Accounting Standards, it would have contained the following, or approximately the following, assumptions (FFASOC [193]-[193A]):
(a)average predicted heartwood yield per tree for a tree harvested at 15 years of “around 6 to 8 kg”; and/or
(b)estimated cost of harvesting and processing at $229.72 per litre of oil for FY15 and $597 per litre of oil for FY16.
It was pleaded that, had those significant inputs been used, the FY15 and FY16 Financial Reports would have recorded materially lower BA Carrying Values, materially lower revaluation gains, materially lower total asset and net asset values, and materially lower post-tax profits than were in fact reported: FFASOC [194]-[195].
A significant dispute arose between the parties as to whether, in order to establish liability on the part of the Respondents for the pleaded contraventions, it was necessary for the Davis Applicants to establish the specific assumptions particularised in FFASOC [169], or if it was sufficient to simply establish that the assumptions used by Quintis were “materially higher” than those which a market participant would have used (as was pleaded). I resolve this issue, which came to be referred to as the “binary issue”, in the following section.
FFASOC [169A] set out the equivalent inputs for FY16 which were substantively the same as for FY15, except that for FY16 the particulars specified that the estimated cost of harvesting and processing should have been $597 per litre of sandalwood oil.
Thirteenth, it was pleaded that, as a result of the above (FFASOC [170]-[176]):
(a)the Directors’ assessments in each of the FY15 and FY16 Financial Reports overstated the fair value of Quintis’ biological assets;
(b)each of the Reports therefore did not comply with the pleaded requirements of the Accounting Standards;
(c)the misstatements of the BA Carrying Values in each Report had the effect of overstating the carrying value of Quintis’ most valuable asset, and therefore Quintis’ assets in each financial year, and of leading to revaluation gains being recognised (FY15 and FY16 Revaluation Gains), and by reason of these matters, overstating Quintis’ income and profit in each financial year; and
(d)each Report did not give a true and fair view of Quintis’ financial position and performance and did not comply with the requirements of the Corporations Act and Accounting Standards.
The particulars to FFASOC [170] specified that:
(a)in the FY15 Financial Report, Quintis’ biological assets were overstated by approximately $448,997,000; and
(b)in the FY16 Financial Report, Quintis’ biological assets were overstated by approximately $560,869,000.
Fourteenth, it was pleaded that, in authorising the issuing of the FY15 and FY16 Financial Reports in the pleaded circumstances, and in making the Wilson Representations alleged against him, Mr Wilson engaged in conduct in relation to a financial product or service within the meaning of ss 1041E and 1041H of the Corporations Act, and in trade or commerce in relation to a financial service within the meaning of s 12DA of the ASIC Act: FFASOC [223]-[224].
Fifteenth, it was pleaded that Mr Wilson (FFASOC [225]-[232] and [256]-[263]):
(a)knew the matters pleaded in FFASOC [100], [128], [169] and [169A] regarding the assumptions in the DCF Model, or ought reasonably to have known those matters;
(b)knew, or ought reasonably to have known, that the significant inputs pleaded at FFASOC [100] and [128] were unrealistic or otherwise did not meet the Accounting Standards;
(c)did not have reasonable grounds for being of the opinion that the BA Carrying Values were fair value;
(d)did not have reasonable grounds for representing that the Financial Reports had been prepared in accordance with the Accounting Standards;
(e)engaged in misleading or deceptive conduct in contravention of s 1041H of the Corporations Act and/or s 12DA of the ASIC Act because he did not have reasonable grounds for representing that the Reports had been prepared in accordance with the Accounting Standards;
(f)further or alternatively, did not have reasonable grounds for representing that the Reports gave a true and fair view of Quintis’ financial position and performance; and
(g)engaged in misleading and deceptive conduct in contravention of s 1041H of the Corporations Act and/or s 12DA of the ASIC Act because he did not have reasonable grounds for representing that the Reports gave a true and fair view of Quintis’ financial position and performance.
Similar allegations were pleaded against Mr Wilson in respect of the FY 15 and FY16 Wilson FY15 and FY16 Assets Representations and the Wilson FY15 and FY16 Profit Representations in each financial year: FFASOC [241]-[243] and [272]-[274].
It was further pleaded that each of the Wilson Representations was likely to either induce persons in the jurisdiction to acquire financial products, being shares in Quintis; or have the effect of increasing, reducing, maintaining or stabilising the price for trading in Quintis’ shares on the ASX, for the purposes of s 1041E of the Corporations Act. It was pleaded that Mr Wilson either knew or ought reasonably to have known that those Representations were materially misleading and that, by making the Representations, Mr Wilson contravened s 1041E of the Corporations Act: FFASOC [246]-[255] and [277]-[286].
Mr Wilson’s state of knowledge for the purposes of these various alleged contraventions was a significant issue in dispute which I make findings on below.
Sixteenth, a series of counterfactuals as to what would have occurred had Mr Wilson not engaged in the conduct pleaded against him were pleaded at FFASOC [287]-[290A], to the effect that the Reports would not have been issued, would only have been issued without the Wilson Representations, or would have been issued with materially lower total and net assets.
Seventeenth, it was pleaded that, in issuing the FY15 and FY16 Audit Opinions in the pleaded circumstances, and in making the EY FY15 and FY16 Financial Report Representations, EY engaged in conduct in relation to a financial product or financial service within the meaning of ss 1041E and 1041H of the Corporations Act, and in trade or commerce in relation to financial services within the meaning of s 12DA of the ASIC Act: FFASOC [291]-[292].
Eighteenth, the Davis Applicants set out what, it was said, a reasonable auditor auditing the FY15 and FY16 Financial Reports would have done, and compared this to what EY allegedly did: FFASOC [293]-[309] and [332]-[348]. Importantly, one step which it was alleged a reasonable auditor would have taken was to engage a suitably qualified independent expert in sandalwood to report on the validity of Quintis’ heartwood yield predictions, in order to obtain sufficient appropriate audit evidence concerning the reasonableness of this input into the DCF Model: FFASOC [301A(d)] and [340A(d)]. Whether this and other steps would actually have been taken by a reasonable auditor, and whether, by failing to take these steps, EY fell below the standard required of it to comply with the Auditing Standards, was a significant issue in the case against EY. Specifically, there was a dispute about whether it was pleaded that EY could have expressed a qualified audit opinion as a true alternative to requiring Quintis to obtain an independent expert.
Nineteenth, it was pleaded that, in light of the above matters, EY’s conduct in making the EY FY15 and FY16 Financial Report Representations was misleading or deceptive, or likely to mislead or deceive, in contravention of s 1041H of the Corporations Act and/or s 12DA of the ASIC Act because the opinions expressed were not held on a reasonable basis and as the product of the application of reasonable care and skill by EY; and/or formed after EY had conducted an audit in accordance with the Auditing Standards: FFASOC [321] and [360]. It was further pleaded at FFASOC [322]-[331] and [361]-[370] that:
(a)the EY FY15 and FY16 Financial Report Representations were likely to either induce persons in the jurisdiction to acquire financial products, being shares in Quintis; or have the effect of increasing, reducing, maintaining or stabilising the price for trading in those shares on the ASX;
(b)those Representations were materially misleading; and
(c)EY knew or ought to have known matters which meant that it ought to have known that those Representations were materially misleading, such that its conduct in making the Representations was in contravention of s 1041E of the Corporations Act.
An audit counterfactual was then pleaded as to what would have occurred had the EY FY15 and FY16 Financial Report Representations not been issued, namely that the Financial Reports would not have been issued, or would only have been issued along with an audit opinion if they did not contain the material misstatements concerning the BA Carrying Values: FFASOC [371]-[374].
Twentieth, it was pleaded that in conducting the FY15 and FY16 audits, EY owed and breached a common law duty of care to existing and potential shareholders in Quintis to exercise reasonable care and skill in the conduct of the audits and in preparing the FY15 and FY16 Audit Opinions, to avoid the risk of harm in the form of economic loss by buying shares or further shares in Quintis in a misinformed market and at above their true value: FFASOC [383]-[388]. Whether such a duty was owed by EY and, if so, whether it was breached and causative of loss, were further significant issues in the case against EY to which I return below.
Finally, the pleadings set out allegations as to causation, loss and damage. The Davis Applicants pleaded a case of direct “reliance-based causation”, specifically that the Davis Applicants in fact relied upon one or more of the FY15 and FY16 Financial Reports, the Wilson Representations and the EY FY15 Financial Report Representations in their decision to acquire interests in Quintis shares: FFASOC [401]-[404].The Davis Applicants pleaded a case of direct “reliance-based causation”, specifically that the Davis Applicants in fact relied upon one or more of the FY15 and FY16 Financial Reports, the Wilson Representations and the EY FY15 and FY16 Financial Report Representations in their decision to acquire interests in Quintis shares: FFASOC [401]-[404].
It was pleaded that the Davis Applicants and Davis Group Members would not have acquired an interest in Quintis shares at the time they did, or for the price they did, or at all, if the pleaded contraventions had not occurred; and that they now either still hold Quintis shares which are worthless, or sold their shares for a loss, and accordingly claim damages to compensate them for that loss: FFASOC [405]-[408].
The Davis Applicants also pleaded a case of indirect or “market-based causation”, specifically that (FFASOC [395]-[400]):
(a)shareholders including the Davis Applicants acquired their interests in Quintis shares in a misinformed market and that if the correct information had been disclosed, it would have had a material negative effect on the price of Quintis shares; and
(b)the pleaded contraventions caused the market price of Quintis shares to be substantially greater than their true value or the market price that would have prevailed but for the contraventions.
The availability of market-based causation and what needed to be established to make good such a case was another issue in dispute which I have addressed below.
3. A PRELIMINARY MATTER ARISING FROM THE PLEADINGS
As adverted to above, there was a dispute between the parties as to the precise effect of the pleadings and particulars at FFASOC [169] and [169A].
The Davis Applicants submitted that their case as to liability required only that they establish that the heartwood yield assumption was materially higher than that which a market participant would have assumed and that the costs of processing per litre of sandalwood oil were understated. The Davis Applicants accepted that their case as to causation required them to establish that a market participant would have used a heartwood yield assumption of 6 to 8kg at 15 years and costs of processing of $229.72 per litre of oil in FY15 and $597 per litre of oil in FY16, but submitted that these counterfactual scenarios did not affect their case as to liability.
The Respondents disputed that the Davis Applicants’ contentions reflected the way the case had been pleaded, particularised and run at trial. The Respondents submitted that unless the Davis Applicants established that a market participant would have used a heartwood yield assumption that 6 to 8 kg of heartwood would be produced at 15 years and the costs of processing would be as particularised at FFASOC [169]-[169A], the case against them as to liability must fail.
Mr Wilson submitted that the various contraventions alleged against him had as their common thread (at FFASOC [225]-[226] and [256]-[257]) that Mr Wilson knew, or ought reasonably to have known, the matters pleaded at FFASOC [100], [169] and [169A] (regarding the assumptions in the DCF Model). Mr Wilson pointed out that, in relation to the alleged contraventions of s 1041H of the Corporations Act and s 12DA of the ASIC Act, the allegations contained in the FFASOC at [225]-[226] and [256]-[257] were expressly pleaded as the “premises” to the allegations that in various respects Mr Wilson “knew or ought reasonably to have known” certain matters and “did not have reasonable grounds for” the various opinions it is alleged he held or expressed, or the representations he made. The allegations contained in the FFASOC at [225]-[226] and [256]-[257] were also the basis upon which it was pleaded that Mr Wilson had contravened s 1041E because it was those paragraphs that were relied upon to support the assertion that he knew or ought reasonably to have known that the various representations made by him were materially misleading. Mr Wilson submitted that these central allegations in the FFASOC at [225]-[226] and [256]-[257] linked directly back to the pleaded assertions at FFASOC [100], [169] and [169A].
Relying upon these matters, Mr Wilson submitted that the Davis Applicants had to prove, relevantly, that Mr Wilson:
(a)knew or ought reasonably to have known that the:
(i)heartwood yield assumption was not only “materially higher than what a market participant would have assumed” but also that the market participant would have adopted an assumption of an average heartwood yield for a tree harvested at 15 years of approximately 6 to 8 kg; and
(ii)cost of processing per litre of sandalwood oil was not only “understated” but that the market participant would have adopted an assumption that the cost was $229.72 per litre of oil in FY15 and $597 per litre of oil in FY16; and
(b)on these bases only, did not have reasonable grounds for the various opinions he was alleged to have held or expressed, or the representations he was alleged to have made.
EY advanced similar arguments. It was submitted that the particulars to the FFASOC at [169] and [169A] were not “mere” particulars as they “are the only content given in the FFASOC to the allegation that a market participant would have used a different heartwood yield assumption”. It was submitted that the purpose of particulars is to limit the issues of fact to be investigated: Mummery v Irvings Pty Ltd [1956] HCA 45; (1956) 96 CLR 99 at 110. It was submitted that the point was one of procedural fairness and that the particulars here defined the issues at trial: Thomson v STX Pan Ocean Co Ltd [2012] FCAFC 15 at [13]; Dare v Pulham [1982] HCA 70; (1982) 148 CLR 658 at 664. In support of these contentions, EY relied on the decision of the High Court in Berry v CCL Secure Pty Ltd [2020] HCA 27; (2020) 271 CLR 151. Berry involved a claim by an agent that he was misled into agreeing to a termination of his agency agreement. The respondent pleaded by way of defence that, in any event, it would have terminated the agency agreement, even if the agent had not agreed to it. Particular emphasis was placed on the reasons of Gageler and Edelman JJ at [72]-[73], where their Honours stated:
[72] “The function of pleadings is to state with sufficient clarity the case that must be met” and thereby to “ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her and … to define the issues for decision”. A plaintiff should be expected to plead all material facts on which the plaintiff relies to constitute the statutory cause of action, including any counterfactual on which that plaintiff relies to establish the requisite causal link between identified loss or damage and identified misleading or deceptive conduct. In the same way, a defendant resisting the statutory action should be expected to plead any different counterfactual on which that party might rely to deny the causal link. Unless and to the extent that the parties choose to depart from the pleadings in the way they go on to conduct the trial, choice between the competing pleaded counterfactuals on the balance of probabilities should then exhaust the fact-finding that is required to be undertaken by the court on the issue of causation.
[73] The error of the Full Court, in an otherwise meticulous judgment, was sourced in the observation that there was “no reason to assume in the counterfactual that Securency would not have acted to terminate the Agency Agreement at the time when that agreement would otherwise have been automatically renewed”. The way the issue of causation had been joined on the pleadings was reason enough to confine consideration of whether Securency would have terminated the Agency Agreement to whether Securency would have terminated the Agency Agreement for the reasons Securency sought to advance through the evidence of Mr Brown. No broader factual inquiry was warranted.
(Emphasis added).
Relying on these passages, EY submitted that the Court would need to make a finding as to the Davis Applicants’ pleaded counterfactual case, which entirely relied upon the expert opinion of Dr Elizabeth Barbour (Dr Barbour). It was submitted that the Court would:
… make a finding on that ‘yes’ or ‘no’, and that exhausts [the Court’s] fact-finding task on the relevant issue. It’s not a matter for [the Court] to determine, in circumstances where neither defendant has put some alternative counterfactual, as to whether it might have been 15 [kg], 16 [kg] or anything else.
The Davis Applicants disputed the way in which the Respondents had construed the pleading and their case. Senior Counsel for the Davis Applicants sought to distinguish between issues relevant to establishing liability and those relevant to causation and loss. Senior Counsel also emphasised that the relevant matters for the purpose of liability were those pleaded in FFASOC [169] and [169A], as opposed to the particulars to those paragraphs. In their written closing submissions, the Davis Applicants argued the point as follows:
7.The central allegation pleaded against Mr Wilson and EY has two components. The first is that the accounting value attributed to Quintis’ biological assets did not comply with the accounting standards (particularly AASB 13 on fair value) and did not give a true and fair view of the financial position and performance of Quintis. The second is that the Respondents each made statements that were false, misleading, or deceptive by: (i) making representations in the FY15 and FY16 financial reports as to the financial performance and net assets of the company – in the case of Mr Wilson; and (ii) making statements that the company’s statutory accounts in FY15 and FY16 were audited in accordance with the auditing standards and that they were free from material misstatement. Those statements of opinion were false, misleading or deceptive because the Respondents knew or ought reasonably have known that the accounting value attributed to Quintis’ biological assets did not comply with the accounting standards (particularly AASB 13 on fair value) and did not give a true and fair view of the financial position and performance of Quintis.
8.That leaves the issues of causation and loss for determination. The Applicants plead counterfactuals which identify inputs they allege should have been adopted in Quintis’ discounted cashflow model. Those inputs arise from the particulars of contravention in [169]-[169A] (4FASOC, CB p. 78-81) and are put disjunctively (such that it is not necessary to establish all of them to find the value was materially overstated) and approximately (such that it is not necessary to establish them precisely): [169]-[169A] (4FASOC, CB p. 78-81). The amount by which the Applicants allege the biological assets were overvalued is then put qualitatively (it is alleged the value should have been “materially less” than what was reported) and quantitative particulars are provided of an approximate “true position”: at [194]-[195] 4FASOC CB p. 98-100.
These issues were further elaborated upon by Senior Counsel for the Davis Applicants during oral closing submissions, as encapsulated by the following exchanges (at T1804.4-8; T1805.4-8, T1806.1-18):
Your Honour, therefore, needs first to determine whether the accounts were prepared in accordance with the Standards. If not, breach or contravention is established. Your Honour then needs to deal with causation. In doing so, determine what the counterfactual accounts would have looked like or, on the balance of probability, what the range would look like.
…
MR HUTLEY: Your Honour, I’m going to come to it. I’m quite happy to be held at a causation damages to the true form of the accounts that should have been put was approximately six to eight. Got no problem with that. That’s the case that’s pleaded. What I have a problem with, and I’m going to, is that is not, however, a contravention breach.
…
HIS HONOUR: But don’t you have to prove that that was materially higher? So that – necessarily, that’s a relative examination.
MR HUTLEY: Quite, and you might – your Honour might say it’s obviously on the face of the evidence that they had before them that the Heartwood yield of 20 was materially higher than they could, on the material before them, reasonable think was able to be supported.
HIS HONOUR: But you have put a case to this court that it was materially higher because a market participant would have assumed approximately six to eight.
MR HUTLEY: With respect
HIS HONOUR: That is the case you’ve put.
MR HUTLEY: Well, your Honour, that – we have put the case that it was materially higher than the market, and I’m content to deal with that at the point of causation, but not at the point of breach.
The Davis Applicants maintained their position that the pleaded case did not require them to establish liability on the basis that the Respondents knew or ought to have known that the assumption a reasonable market participant would have adopted was approximately 6 to 8 kgs of heartwood per tree, but accepted that this would be relevant to questions of causation and loss.
The Davis Applicants’ submissions should be accepted. There is a fundamental difference between the purposes served by pleadings and particulars: Trade Practices Commission v David Jones (Australia) Pty Ltd (1985) 7 FCR 109 at 112–114 (Fisher J). As Fisher J stated in David Jones, it is the purpose of a pleading to assert the material facts and “it is not the function of particulars to take the place of the necessary averments in a statement of claim”: citing Lord Justice Scott in Pinson v Lloyds and National Provincial Foreign Bank Ltd (1941) 2 KB 72 at 75. The function of particulars is to put the opposing parties on guard and prevent them from being taken by surprise at the trial of an action, but the “material facts” must be pleaded: Pinson at 75. The material facts are those that are necessary for the purpose of formulating the cause of action: David Jones at 112-114. This is reinforced by rule 16.02(1)(d) of the Federal Court Rules 2011 (Cth) that provides that a pleading “must” state the “material facts on which a party relies that are necessary to give the opposing party fair notice of the case to be made against the party at trial, but not the evidence by which the material facts are to be proved”. This was reinforced by the Full Court stated in STX Pan Ocean Co at [13]:
It is well-established that the main purposes of pleadings are to give notice to the other party of the case it has to meet, to avoid surprise to that party, to define the issues at trial, to thereby allow only relevant evidence to be admitted at trial and for the trial to be conducted efficiently within permissible bounds: see, eg Dare v Pulham (1982) 148 CLR 658 (at 664-665). However, it is also well-established that pleadings are not an end in themselves, instead they are a means to the ultimate attainment of justice between the parties to litigation: see Banque Commerciale SA (in liq) v Akhil Holdings Ltd (1990) 169 CLR 279 (at 293) per Dawson J who cites Isaacs and Rich JJ in Gould and Birbeck and Bacon v Mount Oxide Mines Ltd (in liq) (1916) 22 CLR 490 (at 517). For these reasons, the courts do not, at least in the current era, take an unduly technical or restrictive approach to pleadings such that, among other things, a party is strictly bound to the literal meaning of the case it has pleaded. The introduction of case management has, in part, been responsible for this change in approach: see the observations of Martin CJ in Barclay Mowlem Construction Ltd v Dampier Port Authority (2006) 33 WAR 82 (at [4]-[8]). Even before the widespread use of case management, the High Court reflected this approach in decisions such as Leotta v Public Transport Commission (NSW) (1976) 50 ALJR 666 (at 668-669) per Stephen, Mason and Jacobs JJ and Water Board v Maustakas (1988) 180 CLR 491 (at 497) per Mason CJ and Wilson, Brennan and Dawson JJ.
More conventionally, debates about the distinction between pleadings and particulars tend to arise in the context of applications for strike out or summary dismissal and usually in relation to whether particulars can fill gaps in the absence of pleaded material facts; and reinforcement of the trite proposition that an opposing party is not required to plead to particulars, as opposed to material facts. However, the central idea remains that the material facts must be pleaded.
Here, the Davis Applicants contended that the material facts that they relied upon to establish liability were those that were pleaded in the FFASOC [169] and [169A], as opposed to those that were particularised. The body of the FFASOC respectively asserted as material facts that the “discounted cash flow model used to derive” the FY15 and FY16 BA Carrying Values and FY15 and FY16 Revaluation Gains “adopted assumptions of inputs” that “assumed predicted heartwood yield per tree at harvest that was materially higher than what a market participant would have assumed” and “understated the cost of processing per litre of sandalwood oil” (emphasis added). Those assertions of material fact were relevant to the further pleaded allegations at FFASOC [170]-[176] including that, by reason of the assumptions that Quintis had used, the Directors’ assessments “overstated the fair value of Quintis’ biological assets in each of the FY15 Financial Report and FY16 Financial Report” (emphasis added): FFASOC at [170]. And, it was pleaded that the overstatement of the biological assets:
(a)did not yield a value of biological assets that represented fair value;
(b)did not yield a value of biological assets that represented the price that would be received to sell the biological assets in an orderly transaction between market participants at the measurement date;
(c)did not yield a value of biological assets that represented the price that would be received to sell the biological assets in their current location and condition;
(d)had the effect of overstating the most valuable asset on Quintis’ balance sheet and therefore overstating Quintis’ assets;
(e)had the effect of overstating the value of the gain recognised in respect of the increase in the fair value of Quintis’ biological assets in the income statement in each of FY15 and FY16 and therefore overstating Quintis’ income and profit in each of the relevant financial years; and
(f)in each of the FY15 Financial Report and the FY16 Financial Report did not give a true and fair view of the financial position and financial performance of Quintis and did not comply with the requirements of the Accounting Standards.
Professor Frino further opined that:
Mr De Cian carries out an analysis of the price movements of Quintis from 31 August 2015 to 12 May 2017. He purports to identify the information releases that, in his opinion, were associated with significant price movements in Quintis.
Based on this analysis, he concludes at paragraph 5.30(a) “The share price of Quintis during the Relevant Period changed with new information released to the market in relation to the Financial Statements, the performance of the business and other price catalyst announcements”. He also concludes at paragraph 5.30(b) that “I have not observed any anomalies in my analysis which would lead me to believe that I should not rely on the price of Quintis shares”. In my opinion, and for the reasons given in the following paragraphs, (1) in contrast to Mr De Cian’s analysis, almost none of the pieces of information released by the company that he identifies in paragraphs 5.8 to 5.30 of his report result in a price movement at the time that they are released or up to one week after they are released when a proper event study analysis is carried out, suggesting that information released by the company often has very little immediate impact on the price of Quintis, (2) that in the analysis he reports, he documents what I regard as numerous anomalies suggesting that the price of Quintis does not properly reflect information as and when its released.
The Davis Applicants submitted that neither Mr Holzwarth’s nor Professor Frino’s analysis involved consideration of material changes in the net assets of a magnitude that would be expected to change the share price. To a like effect, as noted above, the Davis Applicants submitted that it was unrealistic and contrary to principle to accept that a reduction in assets of up to 30 to 50% would not have an impact on Quintis’ share price. It may be accepted that publication of information that disclosed that Quintis’ net assets were continuing to grow may have been merely confirmatory of the market’s expectations and not to be likened to publication of information disclosing a material write down in net assets. However, the difficulty is that even with the latter, questions may arise as to whether the write down was merely confirmatory of the market’s expectations or irrelevant because the market was making different assumptions. These rival points only serve to highlight that seeking to interpolate the market’s reactions to a set of positive or negative news is fraught with difficulty and susceptible to subjective and speculative biases. It is another reason why generally an event study is considered a more reliable method to ascertain market responses.
I entirely accept the Davis Applicants’ submissions that an event study is not an exclusive means by which to prove causation or causally-connected loss and it may not have been available in the present case, but it has advantages when seeking to measure share price inflation or impairment. None of this is to the point here. The onus fell on the Davis Applicants to establish, in the first instance, the relationship between net assets and share price, and then, that by reason of that relationship, the Davis Applicants and Group Members bought shares in an inflated market in that the market price of the shares was substantially higher than what it would have been had the “true position” been disclosed. The Davis Applicants were required to establish that, by reason of that asserted relationship, the share price would have been lower if the restated assets had been published. For all of the reasons I have outlined above, I am not satisfied that the Davis Applicants established their case.
For completeness, it is necessary to refer to some other matters.
To the extent that Mr De Cian relied upon an analysis of companies other than Quintis, it was of limited probative value. First, Mr De Cian plotted the P/NA ratios for other “MIS” companies, being Great Southern Limited, Timbercorp, Wilmott Forest Limited and Forest Enterprises Australia Limited. The chart that Mr De Cian produced was as follows:
Mr De Cian expressed the view that the relationship between share price and the net assets of these “other managed investment schemes operating in the agricultural and forestry sectors prior to their failure” showed that the share prices of these entities traded below their net assets for most of the time. It is unclear what the Davis Applicants urged me to find by reference to this analysis.
Mr De Cian also relied upon four “case studies” relating to QBE, Blue Sky, Lendlease and Newcrest in support of a conclusion that, if the “corrected accounts” had been disclosed, this would have resulted in “a reduction of the Restated Prices more proportional [sic] than the reduction in the net assets” due to, amongst other things, negative news having a “shock” impact on the market. Each of the companies the subject of the case studies were ones in respect of which there had been class actions commenced.
Professor Frino considered each of these examples and pointed out that:
(a)in relation to QBE, Mr De Cian had observed that there was a fall of “circa 8.3% of the net assets as 30 June 2013 and the share price reduction was over 30%”. However, the information released to the market also included a revision of QBE’s earnings guidance such that the group was expecting a net loss after tax of around $250 million compared with a NPAT [net profit after tax] of US$761 million in 2012” being a 32.8% decline in forecast earnings. Professor Frino expressed the opinion that the majority of the price movement in QBE could be accounted for by the revision in forecast NPAT, and not the adjustment to historical net assets. He expressed the view that this was consistent with basic finance theory which holds that investors value shares based on expected future cash flows;
(b)in relation to Blue Sky, Mr De Cian had reviewed a set of announcements which resulted in a decline of “circa 32% of the latest statutory available net assets prior to the announcement… [and] … the Blue Sky share price declined by 85%”. However, the set of information released also included “changes to the Board and Management”, “revised fee earning AUM [assets under management] guidance for FY18 from $4.25-4.75 billion to $4.0-4.25 billion” and “underlying NPAT guidance for FY18 from $34-$36 million to $20-$25 million” which represented a 36% decrease in forecast earnings alone. Professor Frino expressed the opinion that the majority of the price movement in Blue Sky was likely to be accounted for by the revision in forecast NPAT and reduction in AUM, and not any adjustment to its historical net assets;
(c)in relation to Lendlease, Mr De Cian reviewed a set of announcements where the “price fell by more than 25% over the period between 9 November 2018 and 26 February 2019” which he suggested resulted from the reduction in net assets “[r]elative to the group’s reported net assets as at 30 June 2018” where the impairment charge arising from its Engineering and Service Business of Lendlease represented “a circa 5% reduction”. Professor Frino pointed out that Mr De Cian failed to identify that over that four month period, the ASX website revealed that there were over 30 announcements made by Lendlease and many of them could have contributed to the price decline including the large volume of information released with its half-yearly report on 25 February 2019 which was unrelated to the Engineering and Service Business of Lendlease. Professor Frino expressed the opinion that it was impossible to disentangle the effects of the other information released in the four month period ending 26 February 2019 from the information relating to the impairment of assets of Lendlease;
(d)finally, in relation to Newcrest, Mr De Cian had reviewed a set of announcements released on 7 June 2013 including impairment charges of “39% of the last reported net assets” which Mr De Cian suggested caused the “share price decline during the period from and including 28 March 2013 to 7 June 2013 [which] was 44%”. However, Professor Frino pointed out that Mr De Cian identified that the announcements on 7 June 2013 included a downgrade of forecast FY14 gold production and that the company would be paying no final dividend for FY13. Professor Frino expressed the opinion that these two pieces of information were material and are likely to explain a significant proportion of the price decline around the time that the information was announced.
I am unable to draw any relevant conclusion from Mr De Cian’s reliance upon these selected examples that would lead to the acceptance of the Davis Applicants’ indirect market-based causation case.
In the final analysis, I am not satisfied that the Davis Applicants have established their indirect market-based causation case.
15.6 Conclusion on causation
It follows in all the circumstances that I am not satisfied that the Davis Applicants have established their case as to causation, such that they have not established their case as to recovery of causally-connected loss.
15.7 Conclusion on loss
In light of the above, it is not necessary for me to determine what loss, if any, was suffered by reason of the various causes of action that were pleaded. Making an assessment of these matters would involve mere speculation in circumstances where I have not accepted the essential predicates for the Davis Applicants’ case as to causation.
Further, given these conclusions, it is unnecessary for me to consider or determine any of the proportionate liability claims (such as they continued to be maintained) as between Mr Wilson and EY.
16. DISPOSITION AND ANSWERS TO THE COMMON QUESTIONS
By the close of the trial, each party had provided me with their proposed answers to the common questions for determination that had been agreed by them prior to trial (Common Questions). However, in light of my reasons, and the length of this judgment, I will make orders that the parties confer and provide me with consent or competing Short Minutes of Order including their updated answers to the Common Questions which reflect these reasons. I will make an order to this effect.
I will also make orders to allow the parties to make any applications as to costs and propose to determine any applications that are made on the papers, unless I consider that it would be appropriate to hear from the parties or they provide good reason as to why this should occur.
I certify that the preceding one-thousand-seven-hundred-and-fifty-five (1755) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Shariff. Associate:
Dated: 24 February 2025
SCHEDULE: GLOSSARY OF DEFINED AND COMMON TERMS AND KEY PERSONS
Term or person Meaning AASB 108 AASB 108 titled “Accounting Policies, Changes in Accounting Estimates and Errors” AASB 13 Australian Accounting Standards Board Standard 13 titled “Fair Value Measurement” (compilation prepared on 8 August 2014) AASB 141 Australian Accounting Standards Board Standard 141 titled “Agriculture” (compilations prepared on 3 October 2013 and 13 February 2015) Accounting Standards or AASBs The Australian Accounting Standards published by the Australian Accounting Standards Board ACL Australian Consumer Law ADIC Abu Dhabi Investment Council Agreed Facts Statement of Agreed Background Facts filed on 5 March 2024 Alchemia Alchemia Ltd Argonaut Argonaut Securities Pty Ltd ASA 200 Auditing and Assurance Standards Board Standard 200 titled “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards” (compilations prepared on 11 November 2013 and 1 December 2015) ASA 500 Auditing and Assurance Standards Board Standard titled “Audit Evidence” (compilations prepared on 11 November 2013 and 1 December 2015) ASA 540 Auditing and Assurance Standards Board Standard 540 titled “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” (compilations prepared on 27 June 2011 and 1 December 2015) ASIC Act Australian Securities and Investments Commission Act 2001 (Cth) ASX Australian Stock Exchange Auditing Standards or ASAs The Australian Auditing Standards published by the Auditing and Assurance Standards Board Barbour et al. (2012) An article authored by Dr Barbour, Professor Julie Plummer and Mr Norris entitled “Flood-irrigated Tropical Timber Trials in the North of Western Australia”, published by the RIRDC, a statutory corporation, in November 2012 Barbour Reply Report Reply expert report of Dr Barbour dated 15 March 2024: CB Tab 66.01 Barbour Report Expert report of Dr Barbour dated 25 February 2020: CB Tab 31 Basford Report Expert report of Mr Basford, “Volume 1 – Biological Assets Report” dated 4 March 2020: CB Tab 33 Brand et al. (2006) An article authored by Mr John Brand, Mr Kimber and Mr John Streatfield entitled “Preliminary analysis of Indian sandalwood (Santalum album L.) oil from a 14 year old plantation at Kununurra, Western Australia”, published in the March 2006 edition of the Sandalwood Research Newsletter Brand et al. (2012) An article authored by Mr Brand, Mr Len Norris and Mr Ian Dumbrell entitled “Estimated heartwood weights and oil concentrations within 16-year-old Indian sandalwood (Santalum album) trees planted near Kununurra, Western Australia”, published in vol 75(4) of Australian Forestry in 2012 Brown Affidavit Affidavit of Andrew Brown dated 4 May 2023: CB Tab 27 Brown et al. (2011) An article authored by Mr Brown, Mr Jonathon Eatt, Mr Done, Mr Daniel Raymond and Mr Michael Pattinson entitled “Harvest of Indian sandalwood (Santalum album L.) and determination of heartwood yield, sandalwood oil yield and sandalwood oil quality from plantations at Kununurra, Western Australia”, published in the December 2011 edition of Perfumer & Flavorist CA ANZ Chartered Accountants Australia and New Zealand CALM Western Australian Department of Conservation and Land Management Canaccord Canaccord Genuity (Australia) Ltd CEO Chief Executive Officer CFO Chief Financial Officer Common Questions The common questions for determination that had been agreed by the parties prior to trial Corporations Act Corporations Act 2001 (Cth) Corporations Regulations Corporations Regulations 2001 (Cth) Corrected Figure 21 Figure 21 of the Barbour Report, which Dr Barbour corrected and updated in the Supplementary Barbour Report Corrected Figure 25 Figure 25 of the Barbour Report, which she corrected and updated in the Supplementary Barbour Report Davis Applicants Mr Davis Snr and Mr Davis Jnr, collectively Davis Applicants’ Ready Reckoner Davis Applicants’ Quintis Growth Model Ready Reckoner for the 2014 and 2015 Inventory Reports Davis Fund Davis Superannuation Fund Davis Group Members Members of open class who brought representative proceedings, each of whom acquired an interest in ordinary shares of Quintis between 31 August 2015 and 15 May 2017 (including those who already had an interest in ordinary shares of Quintis before 31 August 2015) Davis Jnr Affidavit Affidavit of Geoffery William Davis dated 23 December 2019: CB Tab 21 Davis Snr Affidavit Affidavit of Mr Davis Snr dated 23 December 2019: CB Tab 20 DCF Model Quintis’ discounted cash flow model which it used to value its biological assets:
De Cian Reply Report Reply expert report of Mr De Cian dated 2 November 2022: CB Tab 49 De Cian Report Expert report of Mr De Cian dated 29 May 2020: CB Tab 48 DOB Stem diameter over bark DOCA Deed of Company Arrangement Dr Barbour Dr Elizabeth Barbour Dr Woodall Dr Geoff Woodall EKS2 The East Kimberley Sandalwood project, Quintis’ first commercial plantation established in 1999 Enigma Presentation A presentation which Mr Brown made to Quintis staff and external parties explaining how the Heartwood Model operated, which referred to data collected from five destructive harvests conducted between 2010 and 2012 Evidence Act Evidence Act1995 (Cth) Excel Texel Excel Texel Pty Ltd (as trustee for the Mandex Family Trust) Excel Texel Proceedings NSD1983/2017 EY Ernst & Young EY FY15 Financial Report Representation The alleged representation by EY that the FY15 Audit Opinion was an opinion held on a reasonable basis and the product of the application of reasonable care and skill by EY and formed after EY had conducted an audit in accordance with the Auditing Standards EY FY16 Financial Report Representation The alleged representation by EY that the FY16 Audit Opinion was an opinion held on a reasonable basis and the product of the application of reasonable care and skill by EY and formed after EY had conducted an audit in accordance with the Auditing Standards EY TAS EY Transaction Advisory Services (also known as EY V&BM) FCA Act Federal Court of Australia Act 1976 (Cth) FFASOC The Davis Applicants’ Fifth Further Amended Statement of Claim First Glaucus Report Report released by Glaucus on 22 March 2017 valuing Quintis shares at $0 FPC Forest Products Commission of Western Australia Frino Report Expert report of Professor Frino dated 8 July 2022: CB Tab 52 FVLCS Fair value less costs to sell FWI Frank Wise Institute FY11 Annual Report Quintis’ annual report for the financial year ending 30 June 2011 FY12 Annual Report Quintis’ annual report for the financial year ending 30 June 2012 FY13 Annual Report Quintis’ annual report for the financial year ending 30 June 2013 FY15 Financial year ending 30 June 2015 FY15 Audit Opinion The representation by EY that the FY15 Financial Report was in accordance with the Corporations Act, including by giving a true and fair view of Quintis’ financial position and performance and complying with the Accounting Standards FY15 Audit Plan EY Audit Plan for the year ending 30 June 2015 FY15 BA Carrying Value The carrying value reported for Quintis’ total biological assets for FY15, being $624,574,000 FY15 Closing Report Closing Report to the Audit Committee for the year ended 30 June 2015 FY15 Directors’ Declaration The declaration contained in the FY15 Financial Report that, in the Directors’ opinion, the FY15 Financial Report had been prepared in accordance with the requirements of the Corporations Act and the Accounting Standards FY15 EY Biological Asset Assessment Memorandum EY memorandum dated 22 July 2015 entitled “Biological Asset Assessment” FY15 Financial Report Quintis’ financial report for FY15 FY15 Revaluation Gains The revaluation gains on Quintis’ biological assets for the financial year ended 30 June 2015 as reported by Quintis in the FY15 Financial Report FY16 Financial year ending 30 June 2016 FY16 Audit Opinion The representation by EY that the FY16 Financial Report was in accordance with the Corporations Act, including by giving a true and fair view of Quintis’ financial position and performance and complying with the Accounting Standards FY16 BA Carrying Value The carrying value reported for Quintis’ total biological assets for FY16, being $771,208,000 FY16 Directors’ Declaration The declaration contained in the FY16 Financial Report that, in the Directors’ opinion, the FY16 Financial Report had been prepared in accordance with the requirements of the Corporations Act and the Accounting Standards FY16 EY Biological Asset Assessment Memorandum EY memorandum dated 30 July 2016 entitled “Biological Asset Assessment” FY16 EY Closing Report Closing Report to the Audit Committee for the year ended 30 June 2016 prepared by EY FY16 Financial Report Quintis’ financial report for FY16 FY16 Revaluation Gains The revaluation gains on Quintis’ biological assets for the financial year ended 30 June 2016 as reported by Quintis in the FY16 Financial Report FY17 Financial Report Quintis’ financial report for the financial year ending 30 June 2017 Galderma Galderma SA Galderma Contract Contract signed by Quintis (through its subsidiary Santalis) and Galderma in 2014 providing for the supply of sandalwood oil to Galderma for a period of 20 years at US$4,500 per kg plus annual CPI (capped at 3%) Glaucus Glaucus Research Group California, LLC GS 005 Guidance Statement published by the AASB titled “Using the Work of a Management’s Expert” Heartwood The central core of the sandalwood tree Heartwood Model The model adopted by Quintis to estimate the average heartwood in a tree of a certain size (by reference to DOB at 20cm) and age:
Holzwarth Report Expert report of Mr Holzwarth dated 25 July 2022: CB Tab 50 IAS41 International Accounting Standard 41 titled “Agriculture” IASC International Accounting Standards Committee Indufor Indufor Asia Pacific (Australia) Pty Ltd IPO Prospectus The prospectus issued to potential investors in Quintis shares on 3 November 2004 for its listing on the ASX Joint Report Joint expert report prepared by the auditing and accounting experts dated 30 September 2022: CB Tab 67 McGregor Report Expert report of Mr McGregor dated 8 July 2022: CB Tabs 54 and 55 MISs Management Investment Schemes Moelis Moelis Australia Securities Pty Ltd Mortality The reduction in the number of trees in a plantation over time Morton Report Expert report of Mr Morton dated 8 August 2022: CB Tab 51 Mr Barnes Mr Matt Barners, Quintis’ Deputy General Manager at all material times Mr Basford Mr Wayne Basford Mr Ben Wilson Mr Ben Wilson, Mr Wilson’s son and advisor at Quintis at all material times Mr Blunden Mr Brett Blunden, Quintis’ General Manager of Forestry/Operations at all material times; often referred to in internal correspondence as “Oakey” Mr Brown Mr Andrew Brown, Quintis’ Head of Research at all material times Mr Davis Jnr Mr Geoffrey William Davis Mr Davis Snr Mr Geoffrey Peter Davis Mr De Cian Mr Andrea De Cian Mr Done Mr Chris Done Mr Holzwarth Mr John Holzwarth Mr Kimber Mr Peter Kimber Mr McGregor Mr Warren McGregor Mr Morton Mr Andrew Morton Mr Stevens Mr Alistair Stevens, Quintis’ Chief Financial Officer at all material times Mr Torchio Mr Frank Torchio Mr Wagener Mr Morne Wagener, Financial Controller at Quintis at all material times Mr Westworth Mr Chris Westworth Mr Wilson Mr Frank Wilson, Quintis’ CEO, Managing Director and director at all material times Mt Romance Mt Romance Pty Ltd, a commercial sandalwood distiller acquired by Quintis in 2008 ORIA Ord River Irrigation Area P/NA Method The price to net assets methodology used by Mr De Cian to determine the purported value of Quintis’ shares on the Davis Applicants’ counterfactual case P/NA Ratio The quantitative or mathematical relationship between the closing price of Quintis’ shares and its reported net assets on particular days as derived by Mr De Cian as part of the Davis Applicants’ counterfactual case Partington Report Expert report of Professor Partington dated 8 July 2022: CB Tab 53 PDS Product disclosure statement Professor Frino Professor Alex Frino Professor Partington Professor Graham Partington Quintis Quintis Ltd (formerly TSF) Respondents Mr Wilson and EY, collectively RIRDC Rural Industries Research and Development Corporation Sandalwood Indian Sandalwood (Santalum album) Santalis Santalis Pharmaceuticals Inc, a subsidiary of Quintis Second Glaucus Report Report released by Glaucus on 29 March 2017 valuing Quintis shares at $0 Settlement Decision Davis v Quintis Ltd (Subject to a Deed of Company Arrangement) [2022] FCA 806 SPH Stems per hectare Supplementary Barbour Report Supplementary expert report of Dr Barbour dated 7 April 2024: CB Tab 62:01 Supplementary Torchio Report Supplementary expert report of Mr Torchio dated 16 February 2024: CB Tab 63.01 TFS TFS Corporation Ltd TFS2 Quintis’ second commercial plantation established in 2000 TMM Total merchantable mass, the total mass of wood in a sandalwood tree including both heartwood and sapwood in the trunk or bole of the tree and in branches of greater than 50 mm Torchio Report Expert report of Mr Torchio dated 12 June 2020: CB Tab 63 TPA Trade Practices Act 1974 (Cth) Tree Model The model adopted by Quintis to predict the average annual growth rates of a sandalwood tree over time in a “good performing plantation” (2.5 cm per annum for trees aged 1-5; 1.6 cm per annum for trees aged 5-10; and 0.8 cm per annum for trees aged 11 to 15 years) and the likely size of a sandalwood tree at harvest by assessing its size by reference to the tree’s DOB at 20 cm above the ground (24.5 cm) UBS UBS Securities Australia Ltd WACC Weighted average cost of capital WAFD Western Australian Forestry Department West Report Report dated 31 March 2017 prepared by Professor Phil West on Quintis’ growth models and yield measurement practices in which he proposed a new model for estimating heartwood yield: CB Tab 1606 Westworth Report Expert report of Mr Westworth dated 8 July 2022: CB Tabs 56-61 Wilson FY15 Assets Representation The alleged representation that Mr Wilson was of the opinion that Quintis had total assets of $1,173,335,000 and net assets of $574,523,000 in FY15, and that those opinions resulted from the application of the Accounting Standards and were held on a reasonable basis and were the product of the application of reasonable care and skill by each director of Quintis, including Mr Wilson Wilson FY15 Financial Report Representation The alleged representation by Mr Wilson that he was of the opinion that the FY15 Financial Report had been prepared in accordance with the requirements of the Corporations Act, including that it complied with the Accounting Standards, and gave a true and fair view of the financial position and performance of Quintis, and that those opinions were held on a reasonable basis and were the product of the application of reasonable care and skill by Mr Wilson Wilson FY15 Profit Representation The alleged representation that Mr Wilson was of the opinion that Quintis had post-tax profit of $113,021,000 for FY15 and that that opinion resulted from the application of the Accounting Standards and was held on a reasonable basis and was the product of the application of reasonable care and skill by Mr Wilson Wilson FY16 Assets Representation The alleged representation that Mr Wilson was of the opinion that Quintis had total assets of $1,491,958,000 and net assets of $747,222,000 in FY16, and that those opinions resulted from the application of the Accounting Standards and were held on a reasonable basis and were the product of the application of reasonable care and skill by each director of Quintis, including Mr Wilson Wilson FY16 Financial Report Representation The alleged representation by Mr Wilson that he was of the opinion that the FY16 Financial Report had been prepared in accordance with the requirements of the Corporations Act, including that it complied with the Accounting Standards, and gave a true and fair view of the financial position and performance of Quintis, and that those opinions were held on a reasonable basis and were the product of the application of reasonable care and skill by Mr Wilson Wilson FY16 Profit Representation The alleged representation that Mr Wilson was of the opinion that Quintis had post-tax profit of $90,143,000 for FY16 and that that opinion resulted from the application of the Accounting Standards and was held on a reasonable basis and was the product of the application of reasonable care and skill by Mr Wilson Wilson Representations The Wilson FY15 and FY16 Financial Report Representations, Wilson FY15 and FY16 Assets Representations and Wilson FY15 and FY16 Profit Representations, collectively Woodall Report Expert report of Dr Woodall dated 8 August 2022: CB Tab 62
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