McFarlane as Trustee for the S McFarlane Superannuation Fund v Insignia Financial Ltd

[2023] FCA 1628

FEDERAL COURT OF AUSTRALIA

McFarlane as Trustee for the S McFarlane Superannuation Fund v Insignia Financial Ltd [2023] FCA 1628

File number(s):

NSD 206 of 2020

Judgment of:

ANDERSON J

Date of judgment:

20 December 2023

Catchwords:

REPRESENTATIVE PROCEEDINGS – shareholder class action – where share price of respondent fell following publication of various media articles and testimony of Managing Director to Senate Economic References Committee – where media articles contained various allegations of misconduct and unlawful conduct – where applicant has pleaded that respondent was aware of information corresponding with what was revealed in the media articles and Senate testimony – where applicant has not established the truth of all information revealed in media articles and Senate testimony – where there is no evidence as to separate components of inflation of respondent’s share price attributable to individual allegations in the media articles – where applicant has not established materiality of information established to be true either individually or cumulatively – where applicant has not established causation, loss or quantified damages – application dismissed

Legislation:

Australian Securities and Investments Commission Act 2001 (Cth) ss 12BAB, 12DA, 12GF

Competition and Consumer Act 2010 (Cth) s 131A, Sch 2, s 18

Corporations Act 2001 (Cth) ss 9, 674, 677, 764A 1041E, 1041H

Evidence Act 2008 (Cth) s 79

Parliamentary Privileges Act 1987 (Cth) s 16

Cases cited:

Addenbrooke Pty Ltd v Duncan (No 2) (2017) 348 ALR 1

Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (in liq) (2007) 157 FCR 564

Australian Competition and Consumer Commission v Cabcharge Australia Ltd (No 2) [2010] FCA 837

Australian Competition and Consumer Commission v Colgate-Palmolive Pty Ltd (No 4) (2017) 353 ALR 460

Australian Competition and Consumer Commission v Craftmatic Australia Pty Ltd [2009] FCA 972

Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2020) 278 FCR 450

Australian Securities and Investments Commission v Australian Lending Centre (No 3) (2012) 213 FCR 380

Australian Securities and Investments Commission v Big Star Energy Limited (No 3) (2020) 389 ALR 17

Australian Securities and Investments Commission vFortescue Metals Group Ltd (No 5) (2009) 264 ALR 201

Australian Securities and Investments Commission v GetSwift Limited [2021] FCA 1384

Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345

Australian Securities and Investments Commission v Vocation Ltd (in liq) (2019) 371 ALR 155

Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969

Chetcuti v Minister for Immigration and Border Protection (2019) 270 FCR 335

CIMIC Group Ltd v AIG Group Ltd [2022] NSWSC 999

Claremont Petroleum NL v Cummings (1992) 110 ALR 239

Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64

Commonwealth v Fernando (2012) 200 FCR 1

Coshott v Prentice (2014) 221 FCR 450

Crowley v Worley Ltd (2022) 293 FCR 438

Cruickshank v ASIC (2022) 292 FCR 627

Earglow Pty Ltd v Newcrest Mining Ltd (2015) 230 FCR 469

Forrest v Australian Securities and Investments Commission (2012) 247 CLR 486

Grant-Taylor v Babcock & Brown Limited (in liq) (2015) 322 ALR 723

Grant-Taylor v Babcock & Brown Ltd (in liq) (2016) 245 FCR 402

Honeysett v R (2014) 253 CLR 122

Ho v Powell (2001) 51 NSWLR 572

Hung v Warner, in the matter of Bellpac Pty Ltd (Receivers and Managers Appointed) (in liq) [2013] FCAFC 48

Invisalign Australia Pty Ltd v SmileDirectClub LLC [2023] FCA 395

James Hardie Industries NV v Australian Securities and Investments Commission (2010) 274 ALR 85

Jones v Dunkel (1959) 101 CLR 298

Jubilee Mines NL v Riley (2009) 40 WAR 299

Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361

Leyonhjelm v Hanson-Young (2021) 282 FCR 341

Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10

TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361

TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited (2019) 293 FCR 29

Warner v Sampson [1959] 1 QB 297

Division:

General Division

Registry:

New South Wales

National Practice Area:

Commercial and Corporations

Sub-area:

Corporations and Corporate Insolvency

Number of paragraphs:

684

Date of hearing:

5-7, 13-15, 26-27 June 2023

Counsel for the Applicant:

Mr M R Hodge KC and Mr C Conde

Solicitor for the Applicant:

Shine Lawyers

Counsel for the Respondent:

Mr N Owens SC, Mr B Holmes, Mr K Raghavan and Dr E Dunlop

Solicitor for the Respondent:

King & Wood Mallesons

ORDERS

NSD 206 of 2020

BETWEEN:

JOHN DOUGLAS MCFARLANE ATF THE S MCFARLANE SUPERANNUATION FUND

Applicant

AND:

INSIGNIA FINANCIAL LTD

Respondent

ORDER MADE BY:	ANDERSON J
DATE OF ORDER:	20 DECEMBER 2023

THE COURT ORDERS THAT:

1.The originating application be dismissed.

2.Costs reserved.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

ANDERSON J

INTRODUCTION	[1]
BACKGROUND FACTS	[12]
IOOF’s history and structure	[13]
2009 AWM Investigation	[20]
March 2014 complaint	[27]
IOOF’s 2014 Investigation of Max Riaz’s complaints	[33]
December 2014 complaint	[40]
Mr Ung provides his insider trading dossier to IOOF	[43]
IOOF’s investigation of insider trading allegations post 2009	[46]
Publication of Fairfax articles	[49]
Senate hearing	[53]
Subsequent investigations	[56]
IOOF’s FY16 annual report	[60]
EVIDENCE	[61]
OVERVIEW OF MR MCFARLANE’S CASE	[69]
Historical Information	[70]
March 2014 Information	[77]
Compromised Model Information	[83]
Insignia’s awareness of the Alleged Material Information	[87]
Causation, loss and damage	[100]
Quantum	[104]
Mr McFarlane’s submissions on the List of Common Issues and Questions	[105]
Allegations not pressed by Mr McFarlane	[107]
IOOF’s Defence – No Positive Defence Pleaded	[108]
Mr McFarlane’s reliance upon the principle in Jones v Dunkel	[116]
LEGAL PRINCIPLES	[139]
Continuous disclosure	[139]
Misleading and deceptive conduct	[148]
EXPERTS’ REPORTS AND EXPERT EVIDENCE CONCLAVE	[157]
Houston Report 1	[168]
Prowse Report	[190]
Houston Report 2	[193]
Joint Expert Report	[196]
Areas of agreement	[197]
Disagreement regarding the share price effect of language in disclosures to the market	[199]
Disagreement regarding the 22 June 2015 event day	[202]
Disagreement regarding the 7 July 2015 event day	[210]
Disagreement regarding the implications of the FAD	[215]
Disagreement regarding share price inflation	[218]
The expert witness conclave	[219]
Overview of the principles underlying an “event study”	[220]
Scope of Mr Houston’s event study	[224]
Relevance of reputation to IOOF’s share price	[226]
Effect of language on IOOF’s share price	[231]
Tetlock Article	[236]
Garcia Article	[240]
Heston Article	[244]
McKay Price Article	[248]
Chen Article	[251]
Hales Article	[256]
Measurement of the “fundamental value” of securities	[260]
Dr Prowse’s analysis of analyst reactions to the 20 to 22 June 2015 disclosures.	[263]
The possible price reaction to Senator Williams’ calls for ASIC to take action	[267]
Mr Kelaher’s testimony to the Senate hearing	[272]
Mr Houston’s comparative analysis of the ASOC and the media disclosures (Appendix A2)	[280]
Findings in respect of the expert evidence of Mr Houston and Dr Prowse	[291]
Principles underlying an “event study”	[292]
Relevance of reputation to IOOF’s share price	[302]
Effect of language on IOOF’s share price	[305]
Measure of the “fundamental value” of securities	[318]
Price reaction to Senator Williams calls for ASIC to take action	[319]
Mr Kelaher’s testimony to Senate Hearing	[321]
Mr Houston’s comparative analysis of the ASOC and the media disclosures – Appendix A2	[322]
Conclusion on expert evidence	[327]
CONSIDERATION OF CONTINUOUS DISCLOSURE CASE	[328]
Did IOOF contravene s 674 of the Corporations Act?	[328]
Truth of the Alleged Material Information and IOOF’s awareness	[330]
The Historical Information	[331]
ASOC paragraph 20(a) – 2009 First and Final Warning Letter	[332]
ASOC paragraph 20(b) – Conduct resulting in 2009 First and Final Warning Letter	[340]
ASOC paragraph 20(c) – Improper share trading after 2009 First and Final Warning Letter	[346]
ASOC paragraph 20(c1) – Post-2009 improprieties and possible improprieties	[356]
ASOC paragraph 20(c2) – Buying and selling shares preceding research reports	[375]
ASOC paragraph 20(c3) – Particular transactions by Mrs Hilton	[385]
ASOC paragraph 20(c4) – Insider trading and/or market manipulation incident	[398]
ASOC paragraphs 20(c5) to (c8) – Investigation of Mr Youds	[401]
ASOC paragraph 20(c9) – Investigation of Mr Malguri	[408]
ASOC paragraph 20(c10) – Email from Bridges financial planner	[413]
ASOC paragraph 20(c11) – Bridges financial planners banned by ASIC	[416]
ASOC paragraph 20(d) – Unit pricing errors	[421]
The March 2014 Information	[424]
ASOC paragraphs 17 and 22(a)	[424]
ASOC paragraphs 17(a)/22(a) – Selective and preferential treatment	[429]
ASOC paragraphs 17(b), 22(a) and 22(d) – Buy-model	[438]
ASOC paragraphs 17(c) and 22(a) – Password access	[449]
ASOC paragraphs 17(d), (e), (h), 22(a), (c), (e) – Plagiarism, resourcing and deadlines	[452]
ASOC paragraphs 17(g), 22(a), 22(g) – Kaplan and eLearning	[481]
ASOC Paragraph 22(b) – Non-compliance with 2009 First and Final Warning Letter	[485]
ASOC paragraph 22(f) – Failure to notify ASIC	[494]
ASOC paragraph 22(h) – Conflicts of interest	[496]
ASOC paragraph 22(i) – Inadequate internal controls concerning compliance risk	[505]
ASOC paragraph 22(j) – IOOF’s Information Technology systems	[511]
ASOC paragraph 22(k) – Restructure of Research team	[517]
The Compromised Model Information	[531]
Further “Final Warning” Letter and December 2014 Complaint	[545]
Conclusions on truth of Alleged Material Information and date of IOOF’s awareness	[552]
Materiality	[564]
ASOC paragraphs 20(a) and (b) – 2009 First and Final Warning Letter	[566]
ASOC paragraph 20(c) – Improper share trading after 2009 First and Final Warning Letter	[569]
ASOC paragraph 20(c1) – Post-2009 improprieties and possible improprieties	[573]
ASOC paragraph 20(c2) – Buying and selling shares preceding research reports	[578]
ASOC paragraph 20(c3)(iii) – Macquarie Transaction	[583]
ASOC paragraph 20(c4) – Incident relating to ETC involving IOOF’s staff	[585]
ASOC paragraphs 20(c5)-(c6), (c8) – Investigation of Mr Youds	[587]
ASOC paragraph 20(c9) – Investigation of Mr Malguri	[590]
ASOC paragraph 20(c10) – Email from Bridges financial planner	[592]
ASOC paragraph 20(c11) – Bridges financial planners banned by ASIC	[597]
ASOC paragraph 20(d) – Unit pricing errors	[600]
ASOC paragraphs 17(b), 22(a) and 22(d) – Buy-model	[606]
ASOC paragraphs 17(c) and 22(a) – Password access	[610]
ASOC paragraphs 17(d) and (h), 22(a), (c) and (e) – Plagiarism, resourcing and deadlines	[612]
ASOC paragraphs 17(g), 22(a) and 22(g) – Kaplan and eLearning	[614]
ASOC paragraph 22(f) – Failure to notify ASIC	[617]
Materiality of totality of Alleged Material Information established on the evidence	[621]
Conclusion on materiality	[630]
Conclusion on whether IOOF contravened s 674 of the Corporations Act	[631]
The exceptions to ASX Listing Rule 3.1	[632]
CONSIDERATION OF MISLEADING AND DECEPTIVE CONDUCT CASE	[635]
Did IOOF engage in misleading and deceptive conduct?	[635]
Did IOOF make statements that were false and/or without reasonable basis?	[643]
Conclusion on whether IOOF engaged in misleading or deceptive conduct	[655]
CAUSATION, LOSS AND DAMAGE	[656]
CONCLUSION AND ANSWERS TO COMMON ISSUES AND QUESTIONS	[674]
Continuous disclosure case	[675]
Misleading or deceptive conduct case	[679]
Causation, loss and damage	[682]
DISPOSITION	[684]

INTRODUCTION

1. The applicant (Mr McFarlane) claims that during the period from 1 March 2014 to 7 July 2015 (Relevant Period), the respondent contravened its obligation of continuous disclosure pursuant to s 674 of the Corporations Act 2001 (Cth) (Corporations Act) and, or alternatively, engaged in misleading or deceptive conduct in contravention of s 1041H of the Corporations Act and analogous provisions in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and Australian Consumer Law (ACL) as identified in his originating application.

2. The respondent has now re-named itself as “Insignia”.  During the Relevant Period it was known by its former name, “IOOF”.

3. Throughout the Relevant Period IOOF operated a substantial Australian financial services business.  This business involved providing wealth management services and financial advice to clients.  From 2008 and through the Relevant Period, IOOF was operating a “roll up” model, meaning it was acquiring other financial services businesses to build scale and then use its existing infrastructure – including its Research team (referred to in these reasons as the Research team) – to service that increased scale.  IOOF’s Research team provided advice and general recommendations to advisers across the IOOF network.

4. Mr McFarlane claims that IOOF failed to disclose to the market material information of which IOOF was or ought to have been aware during the Relevant Period about problems with that existing infrastructure, particularly the Research team, and therefore with the rolled-up businesses of IOOF.  Mr McFarlane claims that the problems went to the heart of the adequacy of IOOF’s systems, processes and culture, including for governance and compliance.

5. Mr McFarlane claims that there were problems with IOOF’s Buy-model Portfolio.  This purportedly measured the performance of a model investment portfolio put together by reference to the Research team’s “Buy” recommendations.  The portfolio was marketed internally and externally to financial planners.  Mr McFarlane claims that IOOF had materially overstated the Buy-model’s performance from 2010 to 2014.  Mr McFarlane claims that in three of the four financial years during that period, IOOF had said the Buy-model Portfolio beat the relevant index, but the true position was that it had performed worse than the index.  After an investigation, IOOF discovered that the Buy-model Portfolio had been incorrectly calculated since 2001.

6. The problem with the Buy-model Portfolio was one of a number of issues expressly brought to IOOF’s attention by a whistle blower on 4 March 2014 as part of the “March 2014 complaint” pleaded in paragraph 17 of Mr McFarlane’s Amended Statement of Claim filed on 23 November 2021 (ASOC).

7. Mr McFarlane claims that IOOF investigated the March 2014 complaint and was or ought to have been aware during the Relevant Period of the “Historical Information”, the “March 2014 Information” and the “Compromised Model Information” that Mr McFarlane pleads and particularises at ASOC paragraphs 20, 22 and 24.  Taken together, that information is defined in the ASOC as the “Alleged Material Information”.

8. The Alleged Material Information was disclosed publicly to the market via a series of Fairfax media articles and statements by the Managing Director of IOOF, Chris Kelaher, to the Senate of the Federal Parliament between 20 June 2015 and 7 July 2015.  The source of the revelations is identified by Mr McFarlane in Annexure B to the ASOC.  Mr McFarlane alleges that this disclosure of the Alleged Material Information at the end of the Relevant Period, caused abnormal downward movements in IOOF’s share price.

9. Mr McFarlane brings this representative proceeding under Part IVA of the Federal Court of Australia Act 1976 (Cth) on behalf of himself and group members who acquired an interest in ordinary shares in IOOF during the Relevant Period, or who acquired a long exposure to ordinary shares in IOOF by entering into an equity swap confirmation in respect of such shares during the Relevant Period.

10. By his originating application, Mr McFarlane seeks orders that Insignia pay compensation to Mr McFarlane and group members for the market-based losses suffered by them as a result of its share price being artificially inflated during the Relevant Period by reason of its breach of its continuous disclosure obligation and, or alternatively, its misleading or deceptive conduct (prayers 1 and 2).  Mr McFarlane also seeks orders that Insignia pay interest and costs (prayers 3 and 4).

11. The trial of the common issues in this representative proceeding was conducted on the basis of the questions identified in the document styled “List of Common Issues and Questions” that was filed by consent of the parties on 28 April 2023, which provides as follows:

    I.Continuous disclosure case

    1 During the Relevant Period, was Insignia “aware” (within the meaning of ASX Listing Rule 19.12) of any of the following information:

    1.1      the Historical Information;

    1.2      the March 2014 Information; and/or

    1.3      Compromised Model Information?

    (Alleged Material Information)

    2 If the answer to any part of question 1 is “yes”, when during the Relevant Period was Insignia aware of the Alleged Material Information?

    3 Was Insignia, at any time during the Relevant Period, obliged pursuant to ASX Listing Rule 3.1 to tell the ASX of the Alleged Material Information (or any part thereof)?

    4 Did Insignia contravene section 674(2) of the Corporations Act during the Relevant Period?

    IIMisleading or deceptive conduct case

    5During the Relevant Period, did Insignia engage in misleading or deceptive conduct, in contravention of s 1041H of the Corporations Act, s 12DA of the ASIC Act and/or s 18 of the ACL by:

    5.1      failing to disclose the:

    5.1.1    Historical Information;

    5.1.2    March 2014 Information; and/or

    5.1.3    Compromised Model Information;

    5.2 further or alternatively, making the statements that it did to the ASX as set out in Annexure A to the ASOC, unqualified by the:

    5.2.1    Historical Information;

    5.2.2    March 2014 Information; and/or

    5.2.3    Compromised Model Information?

    6If the answer to question 5 is “yes”, when during the Relevant Period did Insignia engage in that misleading or deceptive conduct?

    7Did Insignia make statements to the ASX on:

    7.1      22 June 2015; and/or

    7.2      24 June 2015;

    that were:

    7.3      false; and/or

    7.4      without reasonable basis;

    in contravention of s 1041H of the Corporations Act, s 12DA of the ASIC Act and/or s 18 of the ACL, as pleaded in paragraph 41 of the ASOC?

    IIICausation, loss and damage

    8.During the Relevant Period, did any of the alleged contravening conduct by Insignia cause the market price for ordinary shares in Insignia to be greater than:

    8.1 their true value; and/or

    8.2 the market price that would have prevailed but for the alleged contravening conduct (or any part of it)?

    9If the answer to question 8 is “yes”, by how much was the market price for ordinary shares in Insignia greater than their true value and/or the market price that would have prevailed during the Relevant Period?

    BACKGROUND FACTS

1. The following background facts were summarised by the parties in their chronologies and written submissions and from my review of the documents jointly tendered by the parties.

   IOOF’s history and structure

2. IOOF has been listed on the ASX since 5 December 2003.  In May 2009, Australian Wealth Management (AWM) merged with, and became a wholly owned subsidiary of, IOOF.  At the time, both AWM and IOOF were listed financial service entities which provided a wide range of wealth management services.  At the time of the merger:

   (1)AWM operated through five divisions, including “Wealth Management” which provided financial advisory and stockbroking services through various subsidiary businesses.  Those subsidiary businesses included Bridges Financial Services Pty Ltd (Bridges).  Bridges provided financial advisory and stockbroking services through a network of financial planners.  The Bridges business had a dedicated equities Research team which provided investment research services to its planner network.  The head of the Bridges Research team was Mr Hilton;

   (2)IOOF operated through four business units, one of which was Consultum, which provided financial advice through a network of authorised financial planners.  Consultum’s business included its own equities research division that provided investment research services to its network of planners.

3. Following the AWM merger and until May 2013, Bridges and Consultum continued to operate independently within the merged group’s Financial Advice and Distribution division.  That division was one of four divisions in the merged IOOF group structure, the others being: Platform Management and Administration; Investment Management; and Trustee Services.

4. In May 2013, the research functions of the group were combined to form a single IOOF Research team, which serviced both the Bridges and Consultum businesses.  The Research team was headed by Mr Hilton, and continued to sit within the Financial Advice and Distribution division of the IOOF business.  

5. The role of the Research team was set out in a document styled “IOOF Research Policy” dated June 2014.  The document explained:

   Research provides advice and general recommendations to advisers across the IOOF network (the network).  The IOOF Advice Research objective is to disseminate well-articulated recommendations and opinions such that the network can provide a basis of opinion for client recommendations.  Research recommendations are formulated through top down macro-economic analysis and bottom up investment selection in both direct assets and managed funds.

   IOOF Advice provides services to four Dealer Groups within the IOOF Group.  They are Bridges, Consultum, Plan B and My Adviser.  Advice maintains APLs for Bridges, Consultum and Plan B.  The APL’s are approved by the Dealer Group Investment Committees of which the Head of Research is a member.

   Research is responsible for recommending approvals and removals from IOOF Platform Investment Menus.  These recommendations are approved by the Product Investment Committee (PIC) of which the Head of Research is a member.  The IOOF product offering also includes Australian Executor Trustees (AET) Small APRA Funds (SAFs).  Research is tasked with providing risk ratings on these assets and with managing the Wholesale Access Fund menu which is the approved list for the SAF investors.

   The Research Team comprises the Head of Research, six managed fund analysts, two equity analysts and an administration assistant.

6. The IOOF Research Policy went on to state that the Research team was delegated roles by the Boards of two entities – “Questor” and IOOF Investment Management Limited (IIML).  The policy stated:

   To ensure Questor and IIML perform duties in accordance with the obligations set out by law and regulation, the Board has established the Product Investment Committee (PIC) which delegates responsibilities to the Head of Research.

   Specifically the role of Head of Research includes the following:

   – Review and make recommendations to the Board on Investment Objectives and Strategies for all Products

   – Report to the PIC on performance of appointed MIS funds to investment objectives and benchmarks and advise on any corrective actions

   – Recommend to the PIC appointment and termination of MIS funds

   – Review liquidity analysis of Products (data provided by Investment & Accounting Manager) and provide recommendations to the PIC

   – Review stress testing analysis on Products (data provided by Investment & Accounting Manager) and provide recommendations to the PIC

7. In August 2014, IOOF acquired SFG Australia Ltd (SFGA), a financial advice and wealth management business.  In February 2015, various changes were implemented across IOOF’s advice and shared services divisions.  One of those changes was to appoint Matthew Drennan (who was formerly the Chief Investment Officer of SFGA) as the Group Head of Research and Portfolio Construction, reporting to the head of IOOF’s advice division, Michael Farrell.  Mr Hilton’s title was changed to Head of Advice Research, reporting to Mr Drennan.

8. IOOF derives most of its earnings from fees and charges based on the level of funds under management, administration, advice and supervision (FUMAS).  The level of FUMAS is impacted principally by net inflows (that is, the inflow of new client funds less withdrawals) and market performance (i.e., returns achieved on the investment of its FUMAS).  Profits on IOOF’s FUMAS are generated principally from the Platform Management and Administration division and the Investment Management division.

   2009 AWM Investigation

9. On 24 December 2008, Rob Urwin, who was at the time AWM’s Head of Investigations, was informed by a member of the Bridges stockbroking team, that Mr Hilton had placed an order seeking to sell stock held by his wife in the ING Office Fund (IOF) in circumstances where Bridges had issued a buy recommendation in relation to the stock.  Mr Urwin interviewed the Research team analyst who prepared the Bridges report on IOF.  The analyst reiterated to Mr Urwin that he still considered IOF to be a strong buy.  Mr Urwin then authorised the execution of Mr Hilton’s requested trade.

10. The matter prompted Mr Urwin to investigate Mr Hilton and his wife’s share trading activity (2009 AWM Investigation).  The investigation included the trades which are the subject of Mr McFarlane’s allegations in this proceeding, being the IOF trade in December 2008, a purchase of Macquarie Convertible Preference Shares in July 2008, a purchase of stock in Toll Holdings Limited in August 2008, and the allocation of shares in a Platinum Asset Management placement to Mr Hilton’s wife in May 2007.  On 13 May 2009, Mr Urwin sent an email to Gary Riordan, IOOF’s General Counsel, setting out his conclusions from his investigation and recommendations in relation to, amongst others, Mr Hilton (13 May 2009 Email).

11. The 13 May 2009 Email recorded that Mr Urwin had found that “[i]t has not been proved that [Mr Hilton] was [front running] trades placed on behalf of his wife Shirlene, however, some of the execution was close or coincided with dissemination of Research”.  The 13 May 2009 Email contained no finding that Mr Hilton had engaged in any illegal activity.  However, Mr Urwin recommended that, going forward, Mr Hilton should provide AWM with a current register of interests for himself and his wife on a quarterly basis, and that he should obtain approval from his manager or the company secretary for all future share or investment transactions.  Mr Hilton agreed to do so, and he was issued with a letter recording these outcomes (2009 First and Final Warning Letter).

12. At the time of the investigation, a separate report was received by Mr Urwin in relation to a possible insider trading incident involving an AWM fund accountant, Edward Youds, and a trade he placed in Electronic Media and Telecoms Company (ETC).  Mr Urwin investigated the matter.  The 13 May 2009 Email recorded that Mr Urwin found that it had not been proved that Mr Youds had price-sensitive information in relation to the ETC trade.  The 13 May 2009 Email nonetheless noted that, due to his “position and involvement in the transaction”, Mr Youds “should have due regard to the risks and consequences of his actions”. 

13. Notwithstanding the conclusions in the 13 May 2009 Email, during an interview with Mr Youds on 4 May 2009, Mr Urwin advised Mr Youds that, to make controls more rigorous and transparent, AWM was going to require Mr Youds to provide a register of interests including all his trusts, superannuation funds and individual holdings; require that all of his trades be approved by his immediate manager effective immediately; and require Mr Youds to attend further training.

14. In early May 2009, another employee in AWM’s fund accounting team, Amit Malguri approached Mr Urwin and disclosed that he had on previous occasions up until October 2008 made personal trades through a CommSec account.  At the time, AWM had in place a staff trading policy which required that any staff trades must take place through Bridges stockbroking.  Mr Malguri disclosed that he had not been aware of that policy and the requirement to only trade through Bridges stockbroking, and that since October 2008 he had traded only through Bridges stockbroking.  Mr Urwin investigated the matter.  The 13 May 2009 Email recorded that Mr Urwin had determined that the trades which he had reviewed were “outside embargo parameters”.  Mr Urwin recommended that going forward all of Mr Malguri’s trades needed to be approved by his immediate manager and that Mr Malguri should be required to attend further training.

15. As a result of the 2009 investigation, Mr Urwin determined that none of the matters involving Mr Hilton, Mr Youds or Mr Malguri involved front running or insider trading, or were required to be reported to regulators.  Mr Urwin considered but dismissed the notion that the matters indicated any “systemic” issue.  

    March 2014 complaint

16. On 2 March 2014, Mr Hilton sent an email to Max Riaz, an analyst in the IOOF Research team, in which he raised concerns about some aspects of Max Riaz’s performance.  He indicated to Max Riaz that he wished to discuss those matters with him that week.

17. The email prompted a response from Max Riaz on 3 March 2014 in which he noted his distress at having received such an email, and proceeded to make various criticisms about the IOOF Research team, including that IOOF plagiarised research reports from JP Morgan.  The email relevantly stated:

    I have produced 37 reports in the month of February.  Every report I produce I give due consideration to what I am putting in the report even then the report are highly compromised in the areas of snatching material from other sources without mentioning proper sources.  The financials are plagiarised from JP Morgan without sourcing mentioned.  And you approve these.  Furthermore, ASIC prescribes adequate time must be given to analysts to produce a report.  You had one equities analyst in the office last week fielding planner calls and queries at the same time.  Much of what we produce and distribute to the network and the lack of sufficient resourcing for equities directly contravenes ASIC’s requirements.  The easy option for me will be to re-badge the JP Morgan report and there will be no delays but then please be informed that I will have very updated knowledge of what I am reporting on and it further compromises my professional integrity.  Are you willing to simply re-badge and distribute JPM reports and send to the network.  I have had planners calling me last week and appreciating my work that I have produced.

18. Mr Hilton forwarded Max Riaz’s 3 March 2014 email to IOOF’s head of human resources, Danielle Corcoran.  He also sent her a draft proposed response to Max Riaz.  The draft made clear that he did not agree with Max Riaz’s criticisms of the Research team, however, on Ms Corcoran’s recommendation, the draft was not sent.

19. On 4 March 2014, Ms Corcoran had a meeting with Max Riaz, in which Max Riaz made the March 2014 complaint orally.  Ms Corcoran discussed the complaint with Mr Farrell on the same day.  When making the March 2014 complaint, Max Riaz used as notes for his discussion with Ms Corcoran an email that he had sent to his brother, Zach Riaz, the day before on 3 March 2014.  On 2 April 2014, Max Riaz forwarded the text of that email to Mr Urwin and wrote that the forwarded text “is what I communicated initially with Danielle”.

20. In his ASOC, Mr McFarlane alleges that, taken together, the March 2014 complaint comprised the following allegations:

    (1)that Mr Hilton gave selective and preferential treatment to some of his particular planners and clients by providing them with price-sensitive information whilst leaving other planners and/or clients to face known risks (ASOC [17(a)]);

    (2)that since at least the 2009-2010 financial year, IOOF had materially overstated the performance of its Buy-model Portfolio as compared with the ASX’s performance in both internal and external publications, with the material overstatement arising from IOOF’s under-provision in the model for the proper cost base and that the resulting overstated performance numbers were marketed to clients and planners (ASOC [17(b)]);

    (3)that there had been breaches of password security to and within the Research team, including that Mr Hilton ordered Max Riaz to use the Head of Research’s network password to sign off on non-disclosure forms for capital transactions (ASOC [17(c)]);

    (4)that IOOF plagiarised third party research reports and distributed that research without attribution or taking the time to verify that the research was accurate and/or had a reasonable basis (ASOC [17(d)]);

    (5)that the Research team was inadequately resourced, leading to shortcuts being taken such as the alleged plagiarism, with only two analysts in the department:

    (a)covering all of the ASX200 stocks plus other equities which might come onto that index; and

    (b)during reporting season being expected to produce reports on approximately 300 companies over a three-week period, equating to approximately 14 stock reports per day (ASOC [17(e)]);

    (6)that there had been bullying, intimidation and isolation of subordinate employees in the Research team by the Head of Research, Peter Hilton (ASOC [17(f)]);

    (7)that Mr Hilton had since at least in or about 2010 instructed staff to complete his online Kaplan and eLearning modules for him (ASOC [17(g)]);

    (8)that Mr Hilton imposed impractical deadlines for research reports during reporting seasons which placed client investments at risk by not giving due consideration to the results, a practice which the Australian Securities and Investment Commission (ASIC) explicitly warned against and then became a source of intimidation and harassment (ASOC [17(h)]); and

    (9)that bonus payments had been withheld for improper / bullying reasons (ASOC [17(i)]).

21. Insignia admits that the March 2014 complaint comprised allegations at ASOC paragraphs 17(b)-(i) but says that the allegation in paragraph 17(a) was a more limited allegation made on 2 April 2014 by Max Riaz in relation to the Templeton Growth Fund. 

    IOOF’s 2014 Investigation of Max Riaz’s complaints

22. Between March and April 2014, Ms Corcoran and Mr Urwin investigated the various complaints Max Riaz had raised against Mr Hilton.

23. By early April 2014, IOOF had concluded its investigation in relation to the matters arising from Max Riaz’s complaint, and a “Summary & Action Plan” was prepared by Ms Corcoran and Mr Urwin which recorded the findings and actions to be taken in relation to the matters which had been investigated (Summary & Action Plan).  Although the date of the final form of the Summary & Action Plan is not disclosed on the face of the document, it is apparent that the document was last amended by Mr Urwin on 8 April 2014.

24. The Summary & Action Plan recorded the following findings and proposed actions:

    (1)In relation to “Bullying, harassment and isolation”, that there was no evidence to support these allegations, but the Research team, including Mr Hilton, would be required to attend a training session on bullying, harassment and discrimination.

    (2)In relation to “Breach of password access”, that Mr Hilton had shared his password with staff for the purposes of enabling them to use risk management software on his computer (“SWORD”) and that this matter had in fact previously been disclosed to the risk department (prior to Max Riaz’s complaint).  It was decided that Mr Hilton was to receive a warning letter in relation to this matter; that he was to be required to assure that he had read and accepted IOOF’s password management policies; and that he was to complete online IT competency training.  IOOF also determined that warnings should be given to the staff members with whom Mr Hilton had shared his password.

    (3)In relation to “Instructing a direct report to complete Kaplan and eLearning training”, that Mr Hilton had allowed his direct reports to complete his training requirements.  It was decided that the letter to be sent to Mr Hilton would also advise him of this finding; that he would be required to complete 12 hours of supervised training; that his responsible manager status would be removed immediately as he “no longer qualifies as fit and proper” and that he would be required to re-sit all his eLearning modules.

    (4)In relation to “Plagiarism”, that the manner in which the Research team utilised JP Morgan research was not plagiarism in circumstances where a contract was in place with JP Morgan which permitted IOOF to utilise JP Morgan research on condition that IOOF did not refer to JP Morgan.  However, it was found that there were a number of research presentations which were not correctly sourced or did not have a disclaimer attached.  It was determined that various actions would be taken in response to these findings, including that a policy in relation to plagiarism would be established and rolled out to the Research team; that the IOOF marketing team would review all presentations to ensure they are adequately sourced; and that Mr Hilton would be required positively to assure that each presentation or research report had the appropriate disclaimer attached.

    (5)In relation to “Misrepresented outperformance data”, that: the Buy-model data “ha[d] been wrong i.e. not usual practice since 2001”; the model ought to have been tested more regularly; Mr Hilton should have escalated the matter at the time he was made aware of it; and the matter “is not fraud rather inaccurate”.

    (6)In relation to “Bonus payment”, that Max Riaz received a rating in his online performance review that would not ordinarily warrant a bonus under IOOF’s policy.  IOOF determined that Mr Hilton should implement a structure for setting KPIs, reviewing these with his staff and communicating bonus decisions.

25. The Summary & Action Plan also relevantly recorded the following under the heading “Other comment”:

    Favourable clients – Research must not have different recommendations for the same security throughout the network e.g. Goodman Plus Jan 2014.

26. On 1 May 2014, IOOF issued Mr Hilton the warning letter contemplated in the Summary & Action Plan (2014 Final Warning Letter).  The letter stated as follows:

    This letter confirms the numerous formal discussions with either Danielle Corcoran or myself that commenced on 10 March 2014 and have continued over the last few weeks regarding a number of allegations that had been brought to our attention Issues outlined during our last discussion are highlighted below

    1 Claims of bullying harassment and isolation within the Research team

    2 Sharing passwords for SWORD and the e-learning system

    3 Instructing a direct report to complete Kaplan and e-learning training on your behalf

    4 Plagiarising and incorrect sourcing of research data received from JP Morgan

    5 Misrepresenting outperformance data

    I have considered your responses to each of the matters above and have found that your actions warrant a final warning with respect to items 2 and 3

    As discussed the expectation going forward is that you ensure completion of all items of the attached corrective action plan

    All other items have been dismissed however there are some process improvements required for the division

    Please be aware that failure to improve and maintain adequate improvement in the above areas may result in termination of your employment.

1. IOOF’s human resources team also prepared a spreadsheet, entitled “Research Corrective Action Plan” (Research Corrective Action Plan).  The last dated version of the Research Corrective Action Plan was emailed by Mr Urwin to Ms Corcoran and Mr Farrell on 24 April 2014.  The Research Corrective Action Plan set out action items, with corresponding estimated dates for completion, under the following headings:

   (1)“Bullying, harassment and isolation”;

   (2)“Breach of password access”;

   (3)“Instructing a direct report to complete Kaplan and eLearning training”;

   (4)“Plagiarism”;

   (5)“Misrepresentation of outperformance numbers”;

   (6)“Bonus payment”; and

   (7)“Research structure – question if adequate”.

2. Approximately a year later, a copy of the Research Corrective Action Plan was obtained by Fairfax, who described the spreadsheet in a newspaper article as an “explosive three-page IOOF document” which revealed a “scandal” at IOOF.  

   December 2014 complaint

3. On 12 May 2014, IOOF hired a new analyst in the Research team, Chhai Ung.

4. On 26 November 2014, Mr Hilton informed Mr Ung that a new manager in the Research team had been hired.  Mr Hilton advised Mr Ung that changes would be made to some of the titles and reporting structures within the team.  On 27 November 2014, Mr Ung sent an email to Ms Abercromby which stated:

   I believe this is the wrong path and structure to take–- I raise the following concerns:

   …

   In regards to myself,

   Just as with Morgan Stanley, Aberdeen Asset Management, I am glad Peter has entrusted me with the equities function.  I am extremely delighted to be part of the team and stress I do want a long term career within IOOF

   I have long held in high regard yourself, Peter and Chris–- and I have seen a lot over my last 10 years.  A lot as a fund manager with Aberdeen.

   - When Peter Hilton notified me yesterday of the new hire, I did not initially contemplate why “Merrium” sounded so familiar.  Overnight I recalled that she had applied for one of the junior fund manager roles at Aberdeen to report to myself – I recalled her CV on my desk.  From memory, she had approximately 2 years equity analyst experience and more performance analyst-based experience, had been made redundant from Pengana and had moved from Henderson.  Performance analysis is not relevant to equities or managed funds research.  Performance analysts are well suited to conduct the daily rebalancing for a market neutral strategy – not the research.

   At Aberdeen, we went for the younger candidate.  We felt Merrium amongst others were talented but had changed jobs too often (5 or 6 (?) jobs in as many years in as many years) – should this not have been picked up by IOOF HR?

   - What does this signal to myself, Zach, Robbie, Brad to report to someone who has less relevant experience than we do?

   - This signals to myself that there is no progression within this firm and to look elsewhere.

   - This new team structure casts me aside from what I was hired to do–- research managed funds.  This area was my next level of development.

   - With the managed funds component being outsourced, what will this new hire be doing?

   We should look to promote and train internally.  This new structure and new job description/shift in responsibilities is a morale killer.

   I am keen to hear thoughts before considering my future elsewhere (emphasis original).

5. In around November 2014, Mr Ung obtained Mr Urwin’s hardcopy files in relation to the 2009 and 2014 investigations.  In about December 2014, Mr Ung commenced using Mr Urwin’s files to prepare a dossier accusing Mr Hilton and IOOF of all manner of wrongdoing.  Mr Ung’s allegations were set out in a letter from Mr Ung addressed to Fair Work Commissioner Hampton, copied to Ms Corcoran and Mr Urwin dated 22 December 2014 (December 2014 complaint).  The most serious allegation made by Mr Ung in the December 2014 complaint was that Mr Hilton had engaged in “repeated, systemic and ongoing insider trading/front running of research which demonstrates a culture of constant breaches of fiduciary duty and market manipulation designed to profit at client’s expense”.  Mr Ung further alleged that IOOF had known about but had not acted upon Mr Hilton’s insider trading.  Mr Ung also purported to describe a conversation he had with Mr Urwin.  Mr Ung alleged Mr Urwin told him that he had “a stack of files” on Mr Hilton; that IOOF had known about Mr Hilton’s trading behaviour; that Mr Urwin said to him “next time [Hilton] tells you to do front running, just tell him its insider trading and illegal, he’ll stop”; and that Mr Urwin asked Mr Ung not to discuss the matter with IOOF’s human resources team.

   Mr Ung provides his insider trading dossier to IOOF

6. On 29 January 2015, Mr Ung commenced an anti-bullying application before the Fair Work Commission.  Mr Ung repeated allegations of insider trading against Mr Hilton, although on this occasion it was said that Mr Hilton had, on multiple occasions, asked Mr Ung to commit “insider trading (front running of research)”.

7. On 2 March 2015, Mr Ung sent to Ms Corcoran, Mr Urwin and Mr Hilton, as well as the Fair Work Commission, a copy of the December 2014 complaint.

8. On 4 March 2015, Ms Corcoran sent an email to Mr Ung.  She indicated that IOOF intended to investigate the matters he had raised.  Ms Corcoran noted that, in relation to Mr Hilton’s alleged insider trading, Mr Ung had indicated in his March 2015 document that “I have yet to go through 2010, 2011, 2012, 2013, 2014 and 2015 YTD”.  Ms Corcoran asked that Mr Ung provide the further information he had foreshadowed.  No further information was forthcoming.

   IOOF’s investigation of insider trading allegations post 2009

9. On 30 March 2015, PwC was engaged to investigate Mr Ung’s complaint.  Its scope of work was defined as being to investigate and determine whether “there is any evidence from the past six years that Mr Hilton had engaged in insider trading or “front running” [or] plagiarised material with respect to research reports he has produced”.

10. On 11 May 2015, IOOF terminated Mr Ung’s employment.

11. On 15 May 2015, PwC issued its report to IOOF (PwC Insider Trading Report).  PwC did not identify any evidence indicating Mr Hilton had engaged in front running from 22 December 2008 to March 2015 through research reports released by IOOF/Bridges.  PwC noted that it had identified “no instances of Mr Hilton buying securities through either his or his wife’s accounts ahead of issuing a favourable research report in relation to the same security, or issuing a negative report and buying securities shortly after the price had moved”.

    Publication of Fairfax articles

12. By 15 June 2015, Fairfax had obtained a copy of Mr Urwin’s investigation files.

13. On Saturday, 20 June 2015, and over the course of that weekend, a series of articles about IOOF appeared in Fairfax print and online publications variously under the headlines “Boiler room throws customers to the wolves”, “Insider trading – wrongdoings uncovered – planner hid dodgy trades” and “Litany of wrongdoings at IOOF included insider trading by senior employee”.

14. Following these disclosures, on 22 June 2015, being the first trading day after the first of the revelations in the Fairfax articles, there was an abnormal downward price movement in IOOF’s shares of 13.6%.

15. Over the course of ensuing days and weeks, a number of further articles would be published about the “scandal” at IOOF.

    Senate hearing

16. On 24 June 2015, Senator John Williams made a speech in the Senate concerning IOOF.  The speech set out details of the alleged incidents of misconduct at IOOF previously reported by Fairfax, and disclosed that IOOF’s research processes were not ASIC compliant, it had no conflict-of-interest policy for research reports and no share trading policy. 

17. On 7 July 2015, Mr Kelaher appeared before the Senate Economic References Committee (Senate Committee).  The Committee was chaired by Senator Dastyari.  Senator Williams was also in attendance.  During a hearing before the Committee, Mr Kelaher relevantly stated that:

    [IOOF’s] acquisition strategy over the years … has opened up tremendous long-term opportunities to our customers and our shareholders, but – candidly – it has also thrown up many challenges in respect of: merging IT systems; internal policies and protocols; and, most importantly, creating a single culture among staff coming from often diverse and formerly competitive organisations.

18. On 7 July 2015, there was an abnormal downward price movement in IOOF’s shares of 5.2%.

    Subsequent investigations

19. In July 2015, IOOF also engaged PwC to review its regulatory breach reporting policy and procedures for all regulated entities within the IOOF Group, being IOOF Holdings Limited and its subsidiaries, excluding Ord Minnett and Perennial.  PwC was also to consider the current control environment of the Research Advice division.  On 28 August 2015, PwC issued to IOOF an interim report setting out findings and recommendations arising from its review of the design of systems, processes and controls (PwC Interim Report).

20. Between 20 July 2015 and January 2016, ASIC conducted an investigation in connection with the Fairfax allegations.  

21. On 25 November 2015, ASIC informed IOOF of the outcome of its investigation.  An email from Mr Riordan to, amongst others, Mr Kelaher on that day stated that ASIC had informed him that its market surveillance team had investigated Mr Hilton’s trading activities, had not found sufficient evidence to warrant any further investigation into Mr Hilton, that there would be no formal investigation and that the matter was considered closed.  ASIC confirmed the outcome of its investigation in a letter to IOOF dated 25 January 2016.

22. A representative of ASIC attended a meeting of the Board of Directors of IOOF on 27 May 2016.  Minutes of that meeting record him as having communicated that:

    The insider trading and front running allegations were examined with priority and there was no action for ASIC to take.  This was because there was no price sensitive information being misused, noting that some trading was in breach of IOOF policies.

    IOOF’s FY16 annual report

23. On 30 August 2016, IOOF issued its annual report for FY16.  The report noted that ASIC had finalised its inquiries into allegations against IOOF, and that ASIC had announced that no further action would be taken.  It stated that IOOF had “always maintained that the company had thoroughly investigated the concerns and, where appropriate, took decisive action”.

    EVIDENCE

24. Mr McFarlane’ lay evidence is limited to his affidavit affirmed on 27 January 2021 (McFarlane Affidavit).  Mr McFarlane deposed to having bought shares in IOOF during the Relevant Period on 2 June 2015.  Mr McFarlane recalled reading media articles about IOOF in late June 2015 or early July 2015, which referred to a range of alleged corporate misconduct within IOOF.  Mr McFarlane was unaware of the alleged corporate misconduct concerning IOOF referred to in those articles before reading them, nor of any other information to similar effect.  Mr McFarlane was not cross-examined on his affidavit. 

25. Insignia’s lay evidence is limited to the affidavit of Norika Kalember, the Payroll and Governance Manager in the Payroll Team at Insignia, affirmed on 7 June 2023.  Ms Kalember deposed to the start and finish date of 24 individuals who were former employees of Insignia or its subsidiaries.  Ms Kalember was not cross-examined on the content of her affidavit (Kalember Affidavit).

26. Mr McFarlane relies upon the expert reports of Mr Houston dated 26 September 2022 (Houston Report 1) and a reply report of Mr Houston dated 3 May 2023 (Houston Report 2). 

27. Insignia relies upon the expert report of Dr Prowse dated 23 March 2023 (Prowse Report).

28. The parties also tendered in evidence a joint report of Mr Houston and Dr Prowse, dated 2 June 2023, which was prepared following a series of conferences facilitated by a Registrar of the Court (Joint Expert Report).

29. In overview, Mr Houston opined that the Alleged Material Information was disclosed to the market by the end of the Relevant Period which caused abnormal movements in IOOF’s share price on 22 June 2015 and 7 July 2015.  Mr Houston calculated this movement and used it, in turn, to estimate the amount of inflation in IOOF’s share price during the Relevant Period resulting from IOOF’s failure to disclose the Alleged Material Information to the market.  Mr Houston’s conclusions were based on an event study.  An event study is an empirical technique that seeks to measure the extent to which observed movements in the share price of a company can be attributed to the release of particular information of interest. 

30. Dr Prowse and Mr Houston agreed on the appropriate framework for assessing the price effect of information, the use of an event study and the magnitude of the abnormal price movements on 22 June 2015 and 7 July 2015. The principal disagreement between Mr Houston and Dr Prowse was the extent, if any, to which the language of the various disclosures may itself have affected Mr Houston’s estimate of the price effect of the disclosure of the information of interest on these two “event days”. I summarise the expert evidence at [157]-[327] below.

31. The parties tendered in evidence a substantial number of documents to which I was taken in opening and closing addresses as well as documents referred to in the parties’ written submissions.  These documents were tendered jointly by the parties and marked Exhibit AR-3.  In circumstances where the majority of documents sought to be tendered were IOOF’s internal business records, Insignia only objected to the tender of eight documents, as set out below:

    (1)Insignia objected to the tender of a table titled “IOOF and ASIC Review Report dated 25 January 2016”. That table, which is referred to at [368] below, recorded concerns raised by ASIC in a letter to IOOF dated 25 January 2016, as well as IOOF’s responses to those concerns. During the trial, I ruled that I would receive the table into evidence together with an accompanying covering letter from IOOF to ASIC dated 5 February 2016: T 459.6-8. The covering letter confirmed that, although IOOF did not necessarily agree with some of ASIC’s observations in its letter of 25 January 2016, IOOF was keen to ensure that everything was done to satisfy ASIC that IOOF had responded to and dealt with the matter.

    (2)Insignia objected to the tender of the correspondence comprising the December 2014 complaint.  Ultimately, the parties agreed that the December 2014 complaint would be admitted subject to a limitation that it could not be used for a hearsay purpose other in relation to proof of asserted facts as to the timing and nature of the trades and research reports referred to in the complaint in items 1 to 57: Agreed Ruling on Respondent’s Outstanding Objections dated 27 June 2023, Item 1.

    (3)Insignia objected to the tender of a memorandum titled “Insider Trading/Front Running of Research”.  Ultimately, the parties agreed that the memorandum would be admitted subject to a limitation that the document could not be used for a hearsay purpose: Agreed Ruling on Respondent’s Outstanding Objections dated 27 June 2023, Item 2.  In any case, Mr McFarlane’s closing submissions did not seek to rely on this document.  

    (4)Insignia objected to the tender of a memorandum titled “Unit Pricing Issues”.  Ultimately, the parties agreed that the memorandum would be admitted subject to a limitation that the document could not be used for a hearsay purpose: Agreed Ruling on Respondent’s Outstanding Objections dated 27 June 2023, Item 3.  In any case, Mr McFarlane’s closing submissions did not seek to rely on this document. 

    (5)Insignia objected to the tender of a memorandum titled “Non-ASIC RG79 Compliant Research Report”.  Ultimately, the parties agreed that the memorandum would be admitted subject to a limitation that the document could not be used for a hearsay purpose: Agreed Ruling on Respondent’s Outstanding Objections dated 27 June 2023, Item 4.  In any case, Mr McFarlane’s closing submissions did not seek to rely on this document. 

    (6)Insignia objected to the tender of the PwC Interim Report referred to at [56] above, and the final PwC report on the same matters dated 26 February 2016 (PwC Final Report).  Insignia contended that neither document was admissible to prove opinions expressed by the author in relation to the adequacy of IOOF’s compliance arrangements.  Further Insignia contended that the PwC Final Report could not be used to prove the content of IOOF’s register of interests.  During the trial, I ruled that I would receive into evidence the PwC Interim Report and Final Report without limitation: T 459.8-12.

    (7)Insignia objected to the tender of a newspaper article titled “Litany of wrongdoings at IOOF included insider trading by senior employee” dated 20 June 2015.  Ultimately, the parties agreed that the article would be admitted subject to a limitation that the document could not be used for a hearsay purpose: Agreed Ruling on Respondent’s Outstanding Objections dated 27 June 2023, Item 5.

    OVERVIEW OF MR MCFARLANE’S CASE

32. The Alleged Material Information comprises the “Historical Information”, the “March 2014 Information” and the “Compromised Model Information”.

    Historical Information

33. The Historical Information is comprised of a number of allegations of “incidents” which are alleged to have occurred within AWM and IOOF over the period 1995 to 2014.  IOOF is alleged to have been aware of these matters between 25 March 2014 and 16 April 2014, whilst investigating the March 2014 complaint.  The allegations fall into the following five broad categories.

34. Firstly, the share trades by Mr Hilton and his wife, Shirlene Hilton, Mr Youds and Mr Malguri that was considered as part of the AWM 2009 Investigation discussed above: ASOC [20(a)], [20(b)], and [20(c2)]-[20(c9)].  Specifically, it is alleged that:

    (1)Mr Hilton “had engaged in improper share trading before 19 May 2009 which resulted in him receiving a First and Final Warning Letter” from AWM: ASOC [20(a)] and [20(b)];

    (2)Mrs Hilton bought and sold shares between 1995 and 2014 where purchases preceded positive research and sales followed, and sales preceded negative research released by AWM, in particular in Toll Holdings and IOF in 2009 and in a Platinum Asset Management float in 2008: ASOC [20(c2)];

    (3)Mrs Hilton: (i) made a profit selling shares in Platinum Asset Management and the Challenger Infrastructure Fund, which shares were obtained from an allocation for AWM’s customers; and (ii) bought and sold Macquarie Convertible Preference Shares in circumstances where Mr Hilton had published two positive reports on those shares, in each case where Mr Hilton “did not disclose a conflict of interest”: ASOC [20(c3)];

    (4)there was an “insider trading or market manipulation incident”, being a reference to the ETC trade by Mr Youds referred to at [23] above, which ASIC was not notified of in breach of ASIC Regulatory Guide 238 “which required the reporting of suspicious activity”: ASOC [20(c4)]-[20(c8)];

    (5)AWM investigated Mr Malguri for insider trading in 2009, concluded that Mr Malguri’s trades were outside embargo parameters, and did not notify ASIC of the investigation or outcome: ASOC [20(c9)].

35. Secondly, it is alleged that, on 16 December 2013, a Bridges financial planner sent an email questioning recommendations made by the Research team and stating that “I can’t help but feel our Research team has finally been compromised!!”: ASOC [20(c10)].

36. Thirdly, it is alleged that, since 2009, IOOF financial planning subsidiary companies (including Consultum) had been the subject of regulatory action by ASIC, with a number of planners banned and at least one planner sentenced to prison: ASOC [20(c11)].

37. Fourthly, it is alleged that, in the period 2012-2013, IOOF had at least 16 breaches of its own risk policies: ASOC [20(d)].

1. Fifthly, it is alleged that:

   in and since 2009, there had been multiple incidents within IOOF of impropriety or possible impropriety which arose from one of the following:

   (b)      information barrier breaches (or “Chinese wall” breaches);

   (ii)      non-compliance with IOOF’s staff trading policy;

   (iii)     IOOF staff taking placement allocations ahead clients;

   (iv)      failure to manage conflicts of interest;

   (v)       data integrity and cybersecurity failures;

   (vi)      failures of compliance oversight,

   and are recorded in one or more of the IOOF breach registers; documents passing between IOOF and ASIC during the course of inquiries undertaken by ASIC that commenced in or about July 2015; documents passing between IOOF and PWC during the course of investigations undertaken by PWC that commenced in or about March 2015 and July 2015. (ASOC [20(c1)])

2. Insignia, in its Further Amended Defence filed on 22 December 2021 (FAD), largely denies the substance of these allegations and says that it was not aware of any misconduct or wrongdoing such as insider trading, improper share trading and failures of compliance oversight. Insignia admits some of the allegations, such as the fact that it received the email on 16 December 2013 and that it knew that two Bridges planners were banned by ASIC and that one of those two was also sentenced to a term of imprisonment but says that this information was generally available: FAD [20].

   March 2014 Information

3. The March 2014 Information comprises allegations of various unrelated matters that IOOF is alleged to have been aware of between 25 March 2014 and 16 April 2014.

4. Firstly, it is alleged that IOOF was aware that the allegations comprising the March 2014 complaint were true, namely, the allegations of preferential treatment; Buy-model errors; password sharing; inadequate resourcing of the Research team leading to plagiarism; impractical deadlines for research reports; that Mr Hilton had instructed staff to complete his online Kaplan and eLearning modules for him; bullying, intimidation and isolation; and that bonus payments had been withheld for improper/bullying reasons: ASOC [17] and [22(a)].

5. Insignia admits that as a result of the investigation of the March 2014 complaint IOOF concluded that some of the allegations were substantially true – namely, overstating the performance of the hypothetical Buy-model, breach of password access, failure to properly attribute third party research reports in research presentations and instructing direct reports to complete training: FAD [22(a)(i)].

6. Insignia pleads a number of additional factual matters relevant to those allegations which Insignia contends need to be considered in order to properly understand the “full picture” in relation to those matters: FAD [22(d)], [22(e)] and [22(g)].  Insignia otherwise denies that the allegations in the March 2014 complaint were true or substantially true: FAD [22(a)(ii)].

7. Secondly, a number of other allegations form part of the March 2014 Information including:

   (1)that Mr Hilton had failed to comply with the 2009 First and Final Warning Letter, but had not been dismissed or disciplined (ASOC [20(b)]);

   (2)that there was inadequate resourcing (technological and human) of the Research team (ASOC [20(c)]);

   (3)that IOOF had failed to identify, record and control conflicts of interest [ASOC [20(h)];

   (4)that IOOF had inadequate internal controls to monitor and mitigate compliance risks arising as a result within the Research team, having regard to the Research team’s role ([ASOC [20(i)]);

   (5)IOOF employed manual or other work arounds or temporary patches to resolve incompatibility between legacy IT systems of its various businesses and IOOF’s IT infrastructure ([ASOC [20(j)]);

   (6)that the Research team was the subject of a review and restructure by IOOF’s executive management team ([ASOC [20(k)]).

8. Insignia denies these allegations: FAD [22].

   Compromised Model Information

9. The Compromised Model Information is that the “implementation of the Roll Up Model was compromised in a material way”: ASOC [24].

10. The “Roll Up Model” is defined in the ASOC as IOOF’s strategy of seeking to grow in size and value by combining organic growth with acquisitions and using existing IOOF infrastructure (including IOOF’s Research team) to service both the pre-existing and newly acquired businesses: ASOC [9].

11. IOOF is alleged to have been aware of the Compromised Model Information “[b]ecause of its awareness of the Historical Information and the March 2014 Information”: ASOC [24].

12. The Compromised Model Information is premised on the existence and IOOF’s alleged awareness of the Historical Information and the March 2014 Information.  Insignia denies these allegations.

    Insignia’s awareness of the Alleged Material Information

13. Mr McFarlane contends that Insignia was aware of the Alleged Material Information because:

    (1)firstly, Insignia received and investigated the March 2014 complaint;

    (2)secondly, during the Relevant Period, Insignia was aware of the facts comprising the Historical Information, March 2014 Information and Compromised Model Information; and

    (3)thirdly, officers of Insignia either did, or should have, drawn those facts of which they were aware together for the purposes of ensuring that Insignia complied with its obligation of continuous disclosure and, or alternatively, did not engage in misleading or deceptive conduct.

14. McFarlane relies upon an email from Mr Urwin to Paul Vine, IOOF’s General Manager of Legal, Risk and Compliance, on 30 March 2015 in relation to the investigations conducted in 2014 and noted his and Ms Corcoran’s awareness in 2014, of issues from 2009.  Mr Urwin wrote (emphasis added):

    As per my file note in the email attached I raised the previous matters with Danielle Corcoran as the behaviours of Peter Hilton were systemic and Peter was not exercising skill or diligence in his role.  I needed to point out he should have been on a first and final warning previous and these examples should be taken into account with previous matters. (emphasis added)

15. Mr McFarlane submits that the documentary evidence establishes that most of the matters constituting the Alleged Material Information are true.  In addition, he submits that the Court can conclude that those matters that are true, at least in combination, had a material consequence for the market’s view about IOOF such that (a) they were material and (b) in the absence of their disclosure, IOOF was misleading the market having regard to other representations it had made to the market.  Mr McFarlane contends that the most logical inference is that the Alleged Material Information that is true was material to IOOF’s share price because of three matters:

    (1)IOOF’s value was dependent upon its reputation and important aspects of its reputation were its integrity (because it needed clients and planners to trust it with their money) and the effectiveness of its Roll Up Model;

    (2)the matters constituting the Alleged Material Information were contrary to IOOF’s reputation, integrity, and the effectiveness of its Roll Up Model;

    (3)when information that substantially corresponded to the Alleged Material Information was revealed to the public by Fairfax reports and Mr Kelaher’s senate testimony, IOOF’s share price fell substantially.

16. Insignia disputes that, even if the matters are true, they were material to the value of IOOF.

17. Mr McFarlane also invokes Insignia’s constructive awareness, citing Crowley v Worley Ltd (2022) 293 FCR 438 (Crowley) at [5] (Perram J) and [160(4)], [166] (Jagot and Murphy JJ).

18. Mr McFarlane submits that, on any view, IOOF must have known that it had an undisclosed cultural problem that affected the effectiveness of its systems, governance and compliance.

19. Mr McFarlane submits that during the Relevant Period, the market was unaware of the matters in the March 2014 complaint, the December 2014 complaint, and the other matters comprising the Alleged Material Information.  From the market’s perspective, there was no reason to doubt IOOF’s statements concerning its value and growth based in each case upon its model, as pleaded and admitted (ASOC [10], [14] and Annexure A; FAD [10] and [14]). 

20. Mr McFarlane submits that in the circumstances, during the Relevant Period, IOOF ought reasonably to have formed the opinion that:

    (1)the Historical Information and the March 2014 Information, or a summary of that information, ought to have been disclosed to the market; and/or alternatively

    (2)IOOF’s implementation of its business model was compromised in a material way (i.e., the Compromised Model Information), which ought to have been disclosed to the market.

21. Mr McFarlane submits that the expert evidence of Mr Houston establishes that the Alleged Material Information was disclosed in June and July 2015 and caused material abnormal price movements in IOOF’s share price.

22. Mr McFarlane submits that the documentary evidence tendered makes it clear that IOOF was aware of the Alleged Material Information but failed to disclose it.

23. Mr McFarlane submits that during the Relevant Period, s 674(2) of the Corporations Act and ASX Rule 3.1 required Insignia to make immediate disclosure of information of which it was aware which was not generally available and a reasonable person would expect, if the information were generally available, to have a material effect on the price or value of Insignia’s shares.

24. Mr McFarlane submits that the Alleged Material Information satisfied those criteria. IOOF was required to disclose the Alleged Material Information to the market during the Relevant Period. It did not. As a consequence, IOOF breached s 674 of the Corporations Act.

25. In the alternative, Mr McFarlane claims that IOOF engaged in misleading or deceptive conduct by silence or, alternatively, that IOOF made statements which were false or without a reasonable basis in response to the Fairfax articles.

    Causation, loss and damage

26. Mr McFarlane relies on indirect market-based causation.  If an applicant shareholder can prove that a company’s conduct contravened a statutory norm such that its share price was inflated, then provided that the shareholder was not otherwise aware of the true position, the shareholder has established both loss and a causative link between the company’s conduct and the shareholder’s loss (TPT Patrol Pty Ltd v Myer Holdings Ltd (2019) 293 FCR 29 (Myer) at [1654], [1663].

27. Mr McFarlane deposes to not being aware of the true position: McFarlane Affidavit [11].

28. Mr McFarlane submits that the result of the Alleged Material Information being withheld from the market during the Relevant Period was that IOOF’s share price was inflated as compared with its true value. 

29. Mr McFarlane alleges that the failure of IOOF to disclose the pleaded information caused the decline in IOOF’s share price between 19 June 2015 and 7 July 2015: ASOC [35]-[36]. Mr McFarlane alleges that the failure of IOOF to disclose the pleaded information caused loss and damage to Mr McFarlane and group members: ASOC [39].

    Quantum

30. Mr McFarlane’s case on quantum relies solely on Mr Houston’s expert reports and analysis.  Mr Houston presented his opinion of the estimate of the inflation of IOOF’s share price during the Relevant Period, compared with the true value of those shares had IOOF made a corrective disclosure from 4 March 2014: Houston Report 1, pp 105-115. 

    Mr McFarlane’s submissions on the List of Common Issues and Questions

31. Mr McFarlane submits that the “List of Common Issues and Questions” filed by consent of the parties on 28 April 2023, and set out at [11] above, hinge on the Court’s determination of six key questions:

    (1)whether certain pleaded information about the operations, systems and culture of IOOF was substantively true;

    (2)whether IOOF was aware of the pleaded information that was substantively true during the Relevant Period;

    (3)if so, whether IOOF was required to disclose some or all of that information to the market in accordance with its obligation of continuous disclosure;

    (4)whether in the absence of public disclosure by IOOF of the substantively true information about the operations, systems and culture of IOOF, IOOF engaged in misleading or deceptive conduct having regard to the public statements that it did make;

    (5)whether the contraventions of either the obligation of continuous disclosure or the prohibition on misleading or deceptive conduct caused any loss to Mr McFarlane and other persons who acquired shares in IOOF during the Relevant Period; and

    (6)if the contraventions did cause loss, what the quantum of that loss is or how it should be determined.

32. Mr McFarlane submits that in answering these questions the Court will need to consider the effect of information on IOOF’s reputation.  Mr McFarlane has pleaded that during the Relevant Period, the market value of IOOF’s shares was based on and/or materially affected by its good standing and reputation: ASOC [16(a)]. 

    Allegations not pressed by Mr McFarlane

33. By letter dated 19 June 2023 (after the commencement of the trial on 5 June 2023), Mr McFarlane’s solicitors advised that there were three matters that were no longer pressed:

    (1)firstly, in relation to ASOC paragraphs 17(f), 17(i) and 22(a) – Mr McFarlane maintains that the allegations in paragraphs 17(f) and 17(i) regarding bullying were made, but Mr McFarlane accepts for the purposes of ASOC paragraph 22(a) that they were not found to be true by IOOF at the time and cannot otherwise be substantiated on the evidence;

    (2)secondly, in relation to ASOC paragraph 20(c2) – Mr McFarlane does not press sub-subparagraphs (iv) or (v) which relate to the IOF and Platinum allocations and are covered by other pleadings; and

    (3)thirdly, in relation to ASOC paragraph 20(c4) – the only part of the allegation that Mr McFarlane presses is “that in or about 2009 there was an incident in relation to [ETC], involving IOOF staff” and thus does not press sub-subparagraphs (i)-(iv) or seek to establish that there was an “insider trading and/or market manipulation incident” (as referred to in the chapeau).

    IOOF’s Defence – No Positive Defence Pleaded

34. An initial issue that emerges is whether it is permissible for the Court to consider whether information in the Fairfax articles and Senate testimony of Mr Kelaher other than the pleaded Alleged Material Information may have caused the decline of IOOF’s share price on the relevant event days.  Mr McFarlane’s contention is that Insignia is precluded from advancing such a contention by reason of its articulation of its case in the FAD.

35. In overview, Mr McFarlane pleads at ASOC paragraph 35 that the Historical Information, March 2014 Information and Compromised Model Information (that is, the Alleged Material Information) were disclosed, or discernible from public disclosures, referable to the Fairfax articles and the Senate testimony of Mr Kelaher.  In response to this plea, Insignia relevantly pleads at FAD paragraph 35, as follows:

    (1)subject to limited exceptions, Insignia says that the allegations said to comprise the Historical Information, the March 2014 Information, and the Compromised Model Information were not substantiated: FAD [35(a)];

    (2)Insignia denies that the allegations in the Fairfax articles or the statements made by Mr Kelaher in his Senate testimony amounted to the disclosure of the Historical Information, the March 2014 Information, and the Compromised Model Information “for the reasons stated above in sub-paragraph (a)”: FAD [35(b)]-[35(c)];

    (3)Insignia otherwise denies the allegations: FAD [35(d)].

36. At ASOC paragraph 36, Mr McFarlane pleads that the revelations pleaded in ASOC paragraph 35 (that is, the disclosure of the Alleged Material Information) caused a decline in IOOF’s share price between 19 June and 7 July 2015. Insignia pleads that it does not know, and therefore cannot admit this allegation: FAD [36].

37. Mr McFarlane submits that Insignia at no point expressly pleads that the fall in IOOF’s share price was due to information in the Fairfax articles and statements by Mr Kelaher other than the Alleged Material Information.  On Mr McFarlane’s submissions, having made the choice not to plead a positive case that it was the disclosure of other information that caused the fall in IOOF’s share price, Insignia cannot now submit to the Court that this in fact occurred.

38. I reject Mr McFarlane’s submissions.  Mr McFarlane has pleaded, at ASOC paragraph 36, a positive case that the disclosure of the Alleged Material Information in the Fairfax articles and Mr Kelaher’s Senate testimony caused IOOF’s share price decline.  Insignia has, at FAD paragraph 36, not admitted that plea.  The practical effect of an express non-admission is the same as that of an express denial – that is, the opposing party is put to proof on the issue that is not admitted: Australian Competition and Consumer Commission v Craftmatic Australia Pty Ltd [2009] FCA 972 at [31]; Australian Competition and Consumer Commission v Cabcharge Australia Ltd (No 2) [2010] FCA 837 at [7]; Warner v Sampson [1959] 1 QB 297 at 311 (Lord Denning), 319 (Hodson LJ), 324-5 (Ormerod LJ). Insignia has therefore put Mr McFarlane to proof on the causal link between the disclosure of the Alleged Material Information and the decline in IOOF’s share price.

39. In the present case, Mr McFarlane seeks to prove this causal link by relying on the expert evidence of Mr Houston: see Mr McFarlane’s closing written submissions at [21], [280], [388].  The substance of Mr Houston’s evidence was that, as a result of the Alleged Material Information being withheld from the market during the Relevant Period, Insignia’s share price was inflated as compared with its true value.  That conclusion was based on his event study, which measured the extent to which the movement in IOOF’s share price on 22 June 2015 and 7 July 2015 could be attributed to the disclosure of the Alleged Material Information (or “information of interest”)  As will be discussed further below, Mr Houston’s opinion was that a condition for the performance of any event study was the ability to isolate the effect of confounding news, defined as price-relevant information that becomes known at around the same time as the information of interest. 

40. It follows from the above that the probative value of Mr Houston’s evidence will depend on an assessment of whether his event study properly accounts for any confounding news which became known at the time of the disclosure to the market of the Alleged Material Information.  Such confounding news would encompass price-sensitive allegations in the Fairfax articles and Mr Kelaher’s Senate testimony other than, or different to, the pleaded information constituting the Alleged Material Information. 

41. It cannot be said that Mr McFarlane was not on notice that Insignia’s case would rely in part on a contention that there were material differences between the Fairfax articles and the Alleged Material Information, notwithstanding that Insignia had not specifically pleaded as to these differences in the FAD.  Dr Prowse’s opinion, as stated in the Prowse Report, was that the entire IOOF share price reaction on 22 June 2015 could not be attributed to the information of interest – that is, the Alleged Material Information – because the corrective disclosures in the Fairfax articles in June 2015 contained “value-relevant negative information that was not included in the information of interest”: see Prowse Report, Pt IV(B).  The value-relevant negative information to which Dr Prowse was referring in the Prowse Report was, in overview, the sensationalist language of the Fairfax articles.  That is, of course, different to the value-relevant negative information in the Fairfax articles on which Insignia now seeks to place emphasis, namely, substantive allegations in the Fairfax articles other than, or different to, the Alleged Material Information.  However, in my opinion, having put Mr McFarlane to proof on the causal link between the disclosure of the Alleged Material Information and the decline in IOOF’s share price by FAD paragraph 36, it is open to Insignia to test, in cross-examination, Mr Houston’s evidence to determine if it adequately accounts for the effect of any confounding news.  Such cross-examination can permissibly extend to testing if Mr Houston’s event study accounted for confounding news in the form of price-sensitive allegations in the Fairfax articles and Mr Kelaher’s Senate testimony other than, or different to, the Alleged Material Information as pleaded in the ASOC.  Similarly, I consider that it is open to Insignia to submit to the Court that Mr McFarlane has failed to establish a causal link between the disclosure of the Alleged Material Information and IOOF’s share price decline, because the evidence of Mr Houston has failed to account for confounding news in the form of price-sensitive allegations in the Fairfax articles and Mr Kelaher’s Senate testimony other than, or different to, the Alleged Material Information. 

    Mr McFarlane’s reliance upon the principle in Jones v Dunkel

1. Mr McFarlane, at ASOC paragraph 41, alleges that the above statements were false and/or, to the extent the statements were statements of opinion, they were made without a reasonable basis.  The ASOC does not otherwise identify which aspects of the above statements were false or lacking a reasonable basis.  Mr McFarlane’s closing written submissions at [399]-[402] appear to impugn a single representation, being the representation in the 22 June 2015 media release that the allegations the subject of the Fairfax articles had been “dealt with appropriately”.  By implication, it may be that Mr McFarlane also impugns a representation in the 24 June 2015 media release that “all” of the issues raised in the Fairfax press “have been addressed” (together, the Impugned Representations).  In this respect, Mr McFarlane makes three submissions:

   (1)Firstly, Mr McFarlane observes that the Alleged Material Information had not been disclosed by IOOF.  Mr McFarlane contends that, if information is material and is required to be disclosed, a company cannot escape liability for failing to disclose it by asserting that all underlying issues were later dealt with. 

   (2)Secondly, Mr McFarlane contends that the subject allegations had not been dealt with appropriately, noting that Mr Hilton was Head of the Research team until March 2015, despite not being considered fit and proper from April 2014. 

   (3)Thirdly, Mr McFarlane contends that the terms of reference for PwC’s review of the December 2014 complaint were too narrow, noting that, for the purposes of preparing the PwC Insider Trading Report, PwC only considered trades occurring within six years of Mr Ung’s allegations being received by IOOF.  As noted in that report, the consequence of confining the review period in this way was that, of the 58 trades identified by Mr Ung in the December 2014 complaint, only one fell within the review period for PwC.

2. Consistently with the reasons of French CJ, Gummow, Hayne and Kiefel JJ in Forrest v Australian Securities and Investments Commission (2012) 247 CLR 486 (Forrest) at [33], I do not consider it profitable to attempt to classify the Impugned Representations according to a taxonomy of fact and opinion. Instead, it is necessary to identify precisely what it is that the Impugned Representations conveyed to their intended audience. In Forrest, the plurality held that the intended audience of a company’s letters to the ASX and related media release could sufficiently be “identified as investors (both present and possible future investors) and perhaps, as some wider section of the commercial or business community”: at [36]. In this case, the Impugned Representations were also made in media releases. I will therefore proceed on the basis that the intended audience of the Impugned Representations was present and possible future investors in IOOF’s shares, as well as a wider section of the commercial or business community.

3. The Impugned Representations were that IOOF had “dealt with appropriately” (in the case of the 22 June 2015 media release), or “addressed” (in the case of the 24 June 2015 media release), all of the issues raised in the Fairfax articles.  The Impugned Representations then both went on to identify what this included, stating that it involved, where relevant, “internal and board review, notifying industry regulators, ongoing review of compliance measures and controls, employee education and independent investigations”.  The statements that IOOF had “appropriately” dealt with, or “addressed”, the issues raised in the Fairfax articles cannot be divorced from the summary of the steps taken by IOOF to deal with those issues.  Those steps give content to the representation that IOOF had “appropriately” dealt with, or “addressed”, the relevant issues.  Viewed in this context, it is apparent that, by the Impugned Representations, IOOF made a general claim to having “appropriately” dealt with, or “addressed”, the issues raised by the Fairfax media articles by reason of the investigative or remedial steps it had taken when viewed in their totality.  The Impugned Representations were not a more precise claim about the nature or content of any one of the investigative or remedial steps it had taken.  

4. I will now address each of Mr McFarlane’s contentions in turn.

5. Mr McFarlane is correct to contend that IOOF’s obligations under s 674 of the Corporations Act and ASX Listing Rule 3.1 are not avoided by an assertion that all underlying issues were later dealt with.  However, Mr McFarlane has failed to articulate how such a contention is relevant to an assessment of the truth or falsity of the Impugned Representations.

6. Mr McFarlane’s contention that the Impugned Representations were false because Mr Hilton was not removed as Head of the Research team lacks merit. I have discussed, at [482] above, the regulatory background to IOOF’s finding, as recorded in the Summary & Action Plan, that Mr Hilton should have his responsible manager status removed because he “no longer qualifies as fit and proper”. As noted there, this was a reference to the removal of Mr Hilton’s status as a responsible manager on the financial services licence of IOOF, given his failure to complete his training requirements. IOOF did not, however, make a finding that Mr Hilton was not fit and proper to remain as Head of the Research team. Mr McFarlane did not dispute that, consistently with the recommendation of the Summary & Action Plan, IOOF ultimately did remove Mr Hilton as a responsible manager noted on its financial services license. IOOF’s conduct was in no way inconsistent with its representation that it had “appropriately” dealt with, or “addressed”, the issues raised in the Fairfax articles.

7. Mr McFarlane’s reliance on the allegedly narrow review period adopted in PwC’s review of the December 2014 complaint is also misconceived.  The Impugned Representations did not convey that PwC’s review of the December 2014 complaint was comprehensive.  Instead, as discussed above, the Impugned Representations conveyed a more general representation that IOOF had “appropriately” dealt with, or “addressed”, the issues raised in the Fairfax media articles, having regard to the totality of the investigative and remedial steps identified in the 22 June 2015 media release.  The Impugned Representations cannot be established to be false merely by impugning the efficacy of one component of IOOF’s investigation of the matters raised in the Fairfax articles. 

8. In any case, the PwC Insider Trading Report provided the following explanation for the limitations on the review period:

   The review period was restricted to the six years prior to the employee allegations being received due to a potential limitation period in the Corporations Act 2001, and because Mr Hilton has previously been investigated on more than one occasion by IOOF for similar matters, including in 2009 where aspects of trading through his wife's account were reviewed.

9. The above explanation is cogent on its face.  It is unremarkable for internal company investigations to be temporally limited, having regard to the application of limitation periods and previous investigations undertaken by the company.  The review period applied in PwC’s review of the December 2014 complaint was unremarkable. 

10. For these reasons, I reject Mr McFarlane’s contention that the scope of PwC’s review of the December 2014 complaint establishes that the Impugned Representations were false.

11. In circumstances where Mr McFarlane has not identified any other basis for his contention that the 22 and 24 June 2015 media releases were false or lacking a proper basis, I reject that contention.

    Conclusion on whether IOOF engaged in misleading or deceptive conduct

12. I am not satisfied on the evidence that Mr McFarlane has established that the statements made by IOOF on 22 and 24 June 2015 are misleading or deceptive.

    CAUSATION, LOSS AND DAMAGE

13. I have found that IOOF did not contravene s 674(2) of the Corporations Act by failing to disclose the Alleged Material Information to the market.  I have also found that IOOF did not engage in misleading or deceptive conduct by silence.  I have also found that IOOF’s conduct in making the statements on 22 and 24 June 2015 was not conduct which was misleading or deceptive.  As a consequence, it is unnecessary for me to consider the questions of causation, loss and damage.  Notwithstanding, after considering the evidence, I have come to the view that, even if Mr McFarlane were to establish that certain components of the Alleged Material Information were required to be disclosed to the market (which I have rejected), Mr McFarlane has, in any event, failed to adduce a sufficient evidentiary foundation to establish causation and loss, and quantify damages, with respect to that information.  I am of this view for the reasons that follow.

14. In order to establish causation, Mr McFarlane relies upon “indirect market-based causation.  Indirect market-based causation involves the following causation chain:

    (1)non-disclosure of material information by the company;

    (2)the listed price for the securities being inflated by such non-disclosure; and

    (3)investors purchasing securities “on market” at the inflated price.

15. As to the measure of loss, Mr McFarlane relies on the “inflation-based measure”.  As Beach J observed in Myer at [1503]:

    [t]he inflation-based measure is, in basic terms, measured by reference to the price paid upon acquisition and the market price that would have prevailed absent the alleged contraventions assessed by reference to the level of share price inflation at various points in time identified by the relevant event studies.

16. Critical to Mr McFarlane’s reliance on market-based causation and the inflation-based measure of loss is the need to establish by evidence that there was share price inflation caused by the contravention: Myer at [1670].

17. Beach J explained the nature of such evidence in Myer at [662]-[664] as follows:

    [662] An event study is an empirical technique that measures the effect of a particular “event”, such as the [actual] release of information to the ASX [i.e., the corrective disclosure], on the price of a company’s shares… ……

    [663] The proportion of the share price movement on any particular day that is likely to have been due to the release of company specific news can be estimated by reference to the difference between the observed price movement and that which would have been expected in the absence of any company-specific news.  The extent of movement in a share price beyond that which would have been expected on account of market-wide, sector specific and/or random influences can be described as the abnormal return.

    [664] Where a statistically significant abnormal return arises on the day (or days) following the release of company specific information, it is reasonable to conclude that the relevant portion of the price movement that cannot be attributed to market-wide or sector specific influences was caused by the event of interest.  Providing no other company specific news was released at the same or similar time, the abnormal return can be taken as a reliable estimate of the effect of the disclosure on the value of a company’s shares.

18. In the present case, Mr Houston has undertaken an event study by reference to the Fairfax articles published on 22 June 2015, and the subsequent disclosure in Mr Kelaher’s testimony to the Senate Committee on 7 July 2015, to determine the abnormal return figures for IOOF shares on the dates of those disclosures.  I make three observations about that evidence.

19. Firstly, a critical component of Mr Houston’s event study evidence was his exercise in “matching up” the Alleged Material Information pleaded in the ASOC with the allegations in the Fairfax articles and Mr Kelaher’s statements during the Senate Committee hearing.  That analysis was set out in Tables A2.1 and A2.2 of Houston Report 1 respectively.  Mr Houston explained this exercise as follows in Houston Report 1 (at [262]-[263]):

    Between 20 June 2015 and 22 June 2015, various items of the information of interest were published in media articles.  I have reviewed the media articles that were published during this period and matched the items of information contained in these articles to the information of interest.  Drawing on this matching analysis, I then assess the comparability of the information disclosed in the media articles and the information specified in the Amended Statement of Claim. …

    Between 20 June 2015 and 22 June 2015, various items of the information of interest were published in media articles.  I have reviewed the media articles that were published during this period and matched the items of information contained in these articles to the information of interest.  Drawing on this matching analysis, I then assess the comparability of the information disclosed in the media articles and the information specified in the Amended Statement of Claim.

20. In Houston Report 1, Mr Houston ultimately concluded that, but for some differences in wording, the “information of interest” (that is, the pleaded Alleged Material Information) and the information disclosed to the market was the same in nature: at [268].

21. Secondly, it is evident from Mr Houston’s evidence that his assessment of the abnormal returns on the event days – 22 June 2015 and 7 July 2015 – necessarily relates to the totality of the information released on these days.  In cross-examination, Mr Houston relevantly gave the following evidence:

    Now, what we have here to bring it to the specifics of this is that I identified four items of new information, which perhaps I’m not explicit, but I say have the potential to be value relevant, to affect the value of the stock, and I think I give reasons as to why I formed that view for each of those items of information.  Then I see a price response and I conclude that those items together caused that price response.  I have not, and I’ve – well, I also should say that I’ve satisfied myself that those four items fall within the items of information that we started out with

    What I’ve not been asked to do, and I haven’t done, is to distinguish the relative contribution of any of those four items, and that’s a separate exercise that there are ways to approach that. We have talked about that, but I’ve not – I was not asked to do that and I have not done that. (Mr Houston, T 394-5.41-4)

22. Thirly, as set out above at [224], Mr Houston ultimately also accepted that, in the event that the Court finds that certain allegations as disclosed to the public in June and July 2015 were not made out, his event study analysis could only serve as a starting point for assessing the price inflation of IOOF’s shares.  He also accepted that if there was a matter disclosed in the Fairfax articles and identified in the ASOC that the Court ultimately found should not have formed part of the counterfactual disclosure, the presence of that matter would become “confounding news”.  It is to be recalled that the experts agreed that, in the event that confounding news or information was present, the effect of that information would need to be removed from any calculation of the total abnormal return on IOOF’s share price. 

23. Given the above, Insignia correctly submits that Mr Houston’s event study proceeded on an “all or nothing” basis.  For his event study to have utility, the Court must be satisfied of two matters.  Firstly, there must be a conformity between the allegations contained in the Fairfax articles and Mr Kelaher’s testimony during the Senate Committee hearing the Alleged Material Information (save for the matters identified by Mr Houston in Houston Report 1 at Table A2.3 as the Pleaded Information Without Event Days, which Mr Houston accepts were not disclosed in the Fairfax articles).  Secondly, all of the Alleged Material Information (other than the Pleaded Information Without Event Days), insofar as that information was disclosed in the Fairfax articles and by Mr Kelaher’s testimony to the Senate Committee, must be established to be true.  If either of these matters is not established, then Mr Houston’s event study will necessarily be invalid to prove indirect market-based causation and the inflation-based measure of loss.

24. In the course of the cross-examination of Mr Houston, Insignia exposed a material difference between the content of the Alleged Material Information, as pleaded in the ASOC, and the matters disclosed in the Fairfax articles.  That difference is between the content of ASOC paragraph 17(b), which refers to IOOF’s material overstatement of the performance of IOOF’s “model portfolio [the Buy-model]”, and allegations in two Fairfax articles which Mr Houston considered to contain matching allegations.  The first article, titled “Litany of wrongdoings at IOOF included insider trading by senior employee” dated 20 June 2015, stated that a “research corrective action plan” had highlighted “misrepresentation of outperformance numbers of funds”.  The second article, titled “IOOF’s boiler room throws customers to the wolves” dated 20 June 2015, referred to a “misrepresentation of outperformance numbers”, and further stated that:

    Performance figures are the heart and soul of a funds manager.  They are used in presentations, in reports and to benchmark a fund against other funds, and are used by financial advisers to attract clients to the funds. 

25. The cross-examination of Mr Houston focused on whether the reference to “outperformance numbers of funds” in the first article meant that the allegations in that article materially differed from the allegation in ASOC paragraph 17(b), which concerned the performance of IOOF’s model portfolio.  In Table A2.1, Mr Houston treated the allegations in the first article and ASOC paragraph 17(b) as equivalent.  Under cross-examination, Mr Houston did not accept that the language of the first article would be construed as referring to the performance numbers of an actual investment fund managed by IOOF (as distinct from a hypothetical portfolio).  I found Mr Houston’s evidence unpersuasive for reasons set out at [288] and [326] above.  In my opinion, a reference to a “fund” would ordinarily be understood to mean a reference to a fund under management by IOOF.  There is a significant distinction between IOOF misrepresenting the performance of its model portfolio and misrepresenting the performance of its actual funds in which client money was invested.  If IOOF had misrepresented the returns of its actual funds, depending on the circumstances, this may be a matter of grave concern to planners and clients.  It is a quite different matter to have misrepresented the performance of a model portfolio.  During an extended cross-examination on the topic, Mr Houston failed to acknowledge this difference.  This disconformity between the nature of the allegation in ASOC paragraph 17(b) and the Fairfax articles means that I cannot be satisfied that the Alleged Material Information materially aligns with the disclosures in the Fairfax articles.  The effect of this is that Mr Houston’s event study is invalid to prove indirect market-based causation between any component of the Alleged Material Information which, contrary to my conclusions, would have been required to be disclosed to the market and IOOF’s allegedly inflated share price.

26. Further, I have found that there are a number of allegations comprising the Alleged Material Information other than the Pleaded Information Without Event Days which have not been substantiated or are no longer pressed. I have set out the most notable examples of these findings at [622] above. The disconformity between the allegations in the Fairfax articles and Mr Kelaher’s Senate testimony on the one hand, and what Mr McFarlane has established to be true on the other hand, is a further reason that Mr Houston’s event study is invalid to prove indirect market-based causation.

1. Even if, contrary to my conclusions, Mr McFarlane were able to establish that a component of the Alleged Material Information would have been required to be disclosed to the market, and the failure to disclose that information caused IOOF’s share price to be inflated, and thus caused Mr McFarlane to suffer loss, Mr McFarlane has not supplied a sufficient evidentiary basis to assess damages.  In his closing oral submissions, Mr McFarlane submitted that, in the event that only a subset of the pleaded Alleged Material Information was found by the Court to be required to be disclosed to the market, the Court would “have to do the best [it could] on the basis of the evidence” before it: Mr Hodge KC, T 515.4-5.  I reject that submission.  It is well-established that “mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can” and “[w]here precise evidence is not available the court must do the best it can”: Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 83 (Mason CJ and Dawson J). However, the Court takes a stricter approach in assessing damages where an applicant has not adduced evidence that was apparently available to prove the loss: Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (in liq) (2007) 157 FCR 564 at [36] (Black CJ and Jacobson J), referring to Hayne J’s reasons in Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10 at [38]. The circumstances engaging the Court’s obligation to do the best it can in assessing damages were relevantly stated by Allsop CJ, Middleton and Foster JJ in TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361 at [164] as follows:

   The evidence brought by someone with an onus may be so inadequate in its totality, when the whole context is examined, that there can be said to be no rational foundation for any proper estimate.  In other cases, the court is required to make its best estimate on the materials provided.  The proper approach will, in any given case, be an evaluative one influenced by such considerations as the nature of the question, including its amenability to precise proof or assessment, the availability and control of evidence, and the onus of proof.  Considerations such as the assessment of evidence according to the power of the party to adduce it will be important to such an evaluation

2. In the present case, Mr Houston’s evidence was that:

   (1)he was not asked, and did not attempt, to identify the separate components of inflation that related to particular components of the Alleged Material Information (Mr Houston, T 394-5.41-4);

   (2)in the event that only certain components of the Alleged Material Information were established to be true, his event study analysis could only serve as a starting point for assessing the price inflation of IOOF’s shares.  Subsequent consideration would then need to be given to adjusting his estimate up or down having regard to which components of the Alleged Material Information were established (Mr Houston, T 325.35-8);

   (3)if he were required to disentangle the components of the Alleged Material Information, he would need to apply the principles that inform the event study framework to an advised counterfactual.  This would require subjective judgment and would be a difficult task.  However, it was a task that “has been attempted and engaged with on other occasions”: Mr Houston, T 295.23-29.

3. From the above, it is apparent that it was open to Mr McFarlane to have asked Mr Houston to opine as to the extent that the individual components of the Alleged Material Information contributed to IOOF’s share price inflation.  Mr McFarlane did not do so.  It is also apparent that estimating the extent of share price inflation requires technical expertise founded on the principles of financial economics applied to the information available and the assumptions that the expert is asked to make.  It is not a matter that the Court can undertake without the assistance of expert evidence.  It follows that Mr McFarlane has not provided a rational foundation for any proper estimate of damages even if (contrary to my findings) he was able to establish a contravention of IOOF’s continuous disclosure or misleading and deceptive conduct obligations, causation and loss.

4. Given the above findings, and the “all or nothing” nature of Mr Houston’s evidence, I find that Mr Houston’s event study cannot be relied upon to prove indirect market-based causation and the inflation-based measure of loss, as well as to calculate that loss.

   CONCLUSION AND ANSWERS TO COMMON ISSUES AND QUESTIONS

5. On the basis of the findings that I have made, I express the following answers to the common issues and questions.

   Continuous disclosure case

6. Question 1:  During the Relevant Period, was IOOF “aware” (within the meaning of ASX Listing Rule 19.12) of any of the following information:

   (1)the Historical Information;

   (2)the March 2014 Information; and/or

   (3)the Compromised Model Information?

   Answer 1: IOOF was “aware” of the following:

   (1)the substantial truth of the information pleaded in ASOC paragraph 20(a);

   (2)the substantial truth of the information pleaded in ASOC paragraph 20(b);

   (3)the truth of the information pleaded in ASOC paragraph 20(c);

   (4)the substantial truth of the information pleaded in ASOC paragraph 20(c1);

   (5)the substantial truth of the information pleaded in ASOC paragraph 20(c2);

   (6)the truth of the information pleaded in ASOC paragraph 20(c3(iii));

   (7)the truth of part of the information pleaded in ASOC paragraph 20(c4) namely that in or about 2009 there was an incident in relation to the Malaysian entity, ETC, involving IOOF staff;

   (8)the truth of the information pleaded in ASOC paragraph 20(c5)(i);

   (9)the substantial truth of the information pleaded in ASOC paragraph 20(c5)(ii);

   (10)the truth of the information pleaded in ASOC paragraph 20(c6);

   (11)the truth of the information pleaded in ASOC paragraph 20(c8);

   (12)the truth of the information pleaded in ASOC paragraph 20(c9);

   (13)the truth of the information pleaded in ASOC paragraph 20(c10);

   (14)the truth of the information pleaded in ASOC paragraph 20(c11);

   (15)the truth of the information pleaded in ASOC paragraph 20(d);

   (16)consistently with ASOC paragraph 22(a), the truth of the allegations in the March 2014 complaint pleaded at ASOC paragraphs 17(b), (c), (d), (g) and (h);

   (17)the truth of the information pleaded in ASOC paragraph 22(c);

   (18)the truth of the information pleaded in ASOC paragraph 22(d);

   (19)the truth of the information pleaded in ASOC paragraph 22(e);

   (20)the truth of the information pleaded in ASOC paragraph 22(f);

   (21)the truth of the information pleaded in ASOC paragraph 22(g).

7. Question 2:  If the answer to any part of question 1 is “yes”, when during the Relevant Period was Insignia aware of the Alleged Material Information?

   Answer 2:

   (1)of the Historical Information of which IOOF was aware, IOOF was aware of that information by 25 March 2014;

   (2)of the March 2014 Information of which IOOF was aware, IOOF was aware of that information by 8 April 2014.

8. Question 3:  Was IOOF, at any time during the Relevant Period, obliged pursuant to ASX Listing Rule 3.1 to tell the ASX of the Alleged Material Information (or any part thereof)? 

   Answer 3: No

9. Question 4:  Did IOOF contravene s 674(2) of the Corporations Act during the Relevant Period?

   Answer 4: No.

   Misleading or deceptive conduct case

10. Question 5:  During the Relevant Period, did IOOF engage in misleading or deceptive conduct, in contravention of s 1041H of the Corporations Act, s 12DA of the ASIC Act and/or s 18 of the ACL by:

    (1)failing to disclose the:

    (a)Historical Information;

    (b)March 2014 Information; and/or

    (c)Compromised Model Information.

    Answer 5(1): No.

    (2)further or alternatively, making the statements that it did to the ASX as set out in Annexure A to the ASOC, unqualified by the:

    (a)Historical Information;

    (b)March 2014 Information; and/or

    (c)Compromised Model Information?

    Answer 5(2): No.

11. Question 6:  If the answer to question 5 is “yes”, when during the Relevant Period did Insignia engage in that misleading or deceptive conduct? 

    Answer 6: Not applicable.

12. Question 7:  Did IOOF make statements to the ASX on:

    (1)22 June 2015; and/or

    (2)24 June 2015;

    that were:

    (1)false; and/or

    (2)without reasonable basis;

    in contravention of s 1041H of the Corporations Act, s 12DA of the ASIC Act and/or s 18 of the ACL, as pleaded in paragraph 41 of the ASOC?

    Answer 7: No.

    Causation, loss and damage

13. Question 8:  During the Relevant Period, did any of the alleged contravening conduct by Insignia cause the market price for ordinary shares in Insignia to be greater than:

    (1)their true value; and/or

    (2)the market price that would have prevailed but for the alleged contravening conduct (or any part of it)?

    Answer 8: No.

14. Question 9:  If the answer to question 8 is “yes”, by how much was the market price for ordinary shares in Insignia greater than their true value and/or the market price that would have prevailed during the Relevant Period?

    Answer 9: Not applicable.

    DISPOSITION

15. Mr McFarlane’s originating application will be dismissed.  Costs will be reserved.

I certify that the preceding six hundred and eighty-four (684) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Anderson.

Associate:

Dated:       20 December 2023