Houghton v Saunders
[2019] NZHC 2007
•15 August 2019
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2008-409-348
[2019] NZHC 2007
BETWEEN ERIC MESERVE HOUGHTON
Plaintiff
AND
TIMOTHY ERNEST CORBETT SAUNDERS, SAMUEL JOHN MAGILL, JOHN MICHAEL FEENEY, CRAIG
EDGEWORTH HORROCKS, PETER DAVID HUNTER, PETER THOMAS and JOAN WITHERS
First DefendantsCREDIT SUISSE PRIVATE EQUITY INCORPORATED
Second Defendant
CREDIT SUISSE FIRST BOSTON ASIAN MERCHANT PARTNERS LP
Third Defendant
Hearing: 8 August 2019 Counsel:
C R Carruthers QC and P A B Mills for plaintiff
A R Galbraith QC, D J Cooper and M C Harris for first defendants (except Ms Withers)
B D Gray QC and A E Ferguson for Ms WithersJ B M Smith QC, A S Olney and A J W O Lomas for second and third defendants
Judgment:
15 August 2019
RESERVED JUDGMENT OF DOBSON J
[Stage Two Interlocutories]
HOUGHTON v SAUNDERS [2019] NZHC 2007 [15 August 2019]
Contents
Introduction [1]
Claimants’ discovery [4]
ACC [10]
Hunter Hall [12]
Forsyth Barr [14]
Claims by investors’ estates [19]
Delayed briefs [23]
Particulars of claims [30]
Terms of orders for further discovery, briefs and pleadings [37]
Claimants’ default on security for costs [41]
Challenge to admissibility of part of Mr Houston’s brief [56]Summary [82]
Costs [85]
Introduction
[1] This judgment deals with another group of interlocutory applications made on behalf of the defendants affecting the preparation for the stage two trial, which is set down for five weeks commencing on 4 November 2019.
[2] At stage one of the proceeding, all documentation, judgments and minutes referred to Mr Houghton as the representative plaintiff, and this has been the case for the interlocutory documents thus far relating to stage two. However, because it is envisaged that stage two of the proceeding will involve claimants other than Mr Houghton in his representative capacity, Mr Houghton and the stage two claimants will now be referred to as “the claimants”. This is simply for ease of reference and does not require a change in the status of the proceeding.
[3]By application dated 12 July 2019, the defendants sought:
(a)orders consequent on non-compliance with previous discovery orders;
(b)orders consequent on the failure by the claimants to file briefs of evidence in accordance with the timetable;
(c)particulars of individual claims for those claimants whose cases are to be determined at stage two;
(d)further directions given non-compliance by the claimants with existing orders for security for costs in respect of the stage two trial;
(e)a ruling on the admissibility of parts of a brief of evidence served for an economist, Mr Houston, quantifying the impact of the untrue statement on the price of Feltex shares.
Claimants’ discovery
[4]The defendants’ application sought:
(a)confirmation of the exclusion of the claims of those claimants that have not completed discovery;
(b)a direction that further affidavits of documents from the remaining claimants should be filed, containing:
(i)particulars of the steps taken to search for relevant documents, including identification of the categories of documents searched for;
(ii)parts 4 and 5 as prescribed in the form in the High Court Rules 2016; and
(iii)discovery of categories of documents that had been requested in a letter from Gilbert Walker to the claimants’ solicitors dated 13 April 2019, the relevant component of which is annexed to this judgment as schedule A.
[5] A first discovery order required the claimants to provide discovery by 17 May 2019. By agreement between the parties, that was extended so that discovery was to be provided progressively up to 29 May 2019. No discovery was completed by then. At a hearing on 30 May 2019, I was advised that an amended discovery order could be made requiring discovery to be completed by 14 June 2019 for all claimants proceeding at stage two. That order was on terms that failure to provide discovery by
that date would exclude a claimant, subject to leave reserved to the claimants to apply to vary the effect of the order.
[6] As at 14 June 2019, affidavits of documents have been filed and served for 18 claimants, with unsworn lists for three further claimants. Thereafter, four further affidavits of documents were served up to 33 days after the last agreed deadline.
[7] As to the adequacy of the discovery, the defendants complain that the number of documents disclosed by many claimants is improbably small, with inadequate details of the extent of searches undertaken to locate documents. In a number of cases, the only open document disclosed is the opt-in form completed by shareholders to join the representative action.
[8] The prospectus did issue some 15 years ago but the need for claimants to retain documents relevant to their transactions in Feltex shares ought to have been adequately signalled to them many years ago. All the claimants advancing their claims at stage two will contend that, had they known of the untrue statement in the prospectus at the time they committed to purchase, they would have reversed their investment decision. Accordingly, the individual circumstances in which they proceeded with the purchases and then retained the shares will be relevant.
[9] The defendants argued that the deficiencies in discovery for some of the claimants are sufficiently important to warrant those claimants being excluded from the November 2019 hearing. Mr Olney, who spoke to the second and third defendants’ submissions on this part of the application, identified a range of concerns with the discovery provided thus far by the Accident Compensation Corporation (ACC), Hunter Hall Investment Management Limited (Hunter Hall) and the claims by Forsyth Barr discretionary account holders.
ACC
[10] Mr Olney submitted that other than handwritten notes on a draft prospectus, none of ACC’s discovered documents pre-dated its investment in the Feltex initial public offering (IPO) and none of the documents recorded the basis on which ACC decided to invest. Further, there was no document that recorded any consideration by
those within ACC monitoring its investments of the 24 August 2004 announcement of Feltex’s FY04 financial results, or any reaction to it. The announcement included details that revealed the extent by which the untrue statement in the prospectus about the FY04 revenue forecast was wrong. Given public statements about the processes undertaken by ACC’s investment committee, the defendants question the absence of records dealing with its decision to invest in Feltex.
[11] In the affidavit of documents on ACC’s behalf, Mr Nicholas Bagnall, its chief investment officer, affirmed that he “diligently searched for all documents that I am required to discover”. However, given what the defendants perceive to be probable gaps in the discovery, that statement is criticised as inadequate.
Hunter Hall
[12] Hunter Hall was involved in stage one. I declined a late application for it to be joined as a claimant, but a representative still gave evidence in support of Mr Houghton’s claim. It completed discovery in mid-2013 and that has not been updated. Counsel for the claimants submits that the 2013 discovery sufficiently complies.
[13] The defendants’ analysis of the documents discovered by Hunter Hall is that of 29 documents discovered, only four had been produced internally and only one of those pre-dated the subscription for Feltex shares. Given that Hunter Hall went on to invest a total of $22,900,000, the defendants suggest that a competent investment manager would have generated more of a paper trail. Further, the defendants are concerned at the lack of any document recording Hunter Hall’s response to the FY04 result issued in August 2004, given that it revealed the extent to which the FY04 revenue forecast had not been achieved. No documents have been discovered on that topic when Hunter Hall spent some $10,600,000 acquiring further Feltex shares between October and December 2004.
Forsyth Barr
[14] The claimants recently indicated they still intended to include in the stage two hearing two claimants whose investments were made on their behalf by Forsyth Barr
as their broker, in terms of discretionary authorities provided by those investors to Forsyth Barr to undertake share purchases and sales on their behalf.
[15] Although not reflected precisely in the terms of the affidavits of documents completed for those two claimants,1 claimants’ counsel has indicated reliance on the discovery provided by Forsyth Barr at stage one, at which point that firm was a defendant in its capacity as a joint lead manager of the IPO. To the extent that there are other relevant documents in Forsyth Barr’s possession that are not able to be discovered by those claimants, counsel have indicated reliance on such documents which they suggest may be provided either voluntarily or by non-party discovery obligations from Forsyth Barr in the future.
[16] The defendants criticised this as inadequate. The scope of relevant documents discovered by Forsyth Barr when it was a defendant is quite different and likely to be irrelevant to documents they might hold about the investment decisions made on behalf of clients. No attempt has been made on behalf of such claimants to procure non-party discovery and the defendants submit that it would be entirely unrealistic to contemplate undertaking that process and effecting inspection of any disclosed documents sufficiently in time before the November hearing.
[17] The stage two claimants contend that none of the 21 claimants for whom lists of documents have been filed and served should be disqualified from participating in the stage two hearing because of deficiencies in provision of discovery. In addition, the claimants deflect criticism of inadequate discovery by claimants who were clients of Forsyth Barr on contractual terms allowing that broker to operate discretionary accounts on their behalf. They submit that if discovery previously completed by Forsyth Barr when it was a defendant in stage one was inadequate, then issues of non- party discovery orders against Forsyth Barr may be required. That does not meet the defendants’ concern at the limited time for preparation before the hearing.
[18] Given the range of possible arrangements between Forsyth Barr and clients that had given it discretionary authority to deal in securities for them, it is not possible to project with any confidence the nature and extent of relevant documents that might
1 Ms Hilary Bhatnagar and the Gama Foundation (Mr Nelson).
have been retained by Forsyth Barr for the two remaining claimants whose share dealings were undertaken on their behalf by Forsyth Barr. I note that neither claimant has disclosed written terms of any contract with Forsyth Barr that might be expected to spell out the scope of Forsyth Barr’s discretion to undertake transactions for them. Nor have they discovered reports from Forsyth Barr on its reasons for decisions to buy and sell Feltex shares for them. It is appropriate to consider the defendants’ objection to inadequacies in discovery on the premise that discoverable documents relevant to their claims would be disclosed if discovery was required of Forsyth Barr.
Claims by investors’ estates
[19] The proposed stage two claimants include the estates of Michael Craig Norgate, and Mr and Mrs Allan and Margaret Hubbard. In the case of Mr Norgate’s estate, no documents have been discovered that give any indications of the circumstances of the purchase of Feltex shares by Mr Norgate. The brief of evidence served in support of that claim is from the lawyer administering the estate who acknowledges having no knowledge whatsoever of the circumstances of the purchase of, and any subsequent dealings in, Feltex shares. The defendants have also raised concerns as to uncertainty over the entity or entities in addition to, or linked with, Mr Norgate that became legal owners of Feltex shares.
[20] The defendants submit that the position is similar with the estates of Mr and Mrs Hubbard. The solicitor acting in the administration of their estates has completed an affidavit of documents and also served a brief of evidence. That is discerned by the defendants as containing only hearsay evidence as to the circumstances of the purchase. The legal entity or entities linked to Mr and Mrs Hubbard that acquired ownership of Feltex shares, and trading in them, also appears to be unclear.
[21] The defendants cite perceived inadequacies in the affidavits of documents, compounded by the lack of admissible evidence as to the circumstances of purchase, as sufficient grounds for excluding the two estates as claimants properly included in the stage two hearing.
[22] Before resolving the application seeking further discovery orders and consequences of previous non-compliance, it is appropriate to address concerns at
delays in the service of briefs from claimants intended to be included in the stage two hearing.
Delayed briefs
[23] All the claimants’ briefs were due on 5 July 2019. Only three were served by then, totalling some six and a half pages of text. The first component of the expert brief from Mr Houston, an economist of Sydney, was served on 19 July 2019.2 The claimants’ solicitors served a supplementary report from Mr Houston on 6 August 2019.
[24] Further briefs, including two in relation to Active Equities’ claim, that appear to include opinion evidence have continued to be served up to 22 July 2019, at the time the defendants compiled a list for the present hearing. The defendants submit that the delays of now more than a month from the deadline would place undue pressure on them in preparing the defence, if claims were allowed to continue for those claimants where briefs are still to be filed.
[25] Without any application for extension of time, the claimants’ submissions filed on the eve of the hearing provided some explanations for non-compliance, asking for various extensions of time for completion and service of their briefs. In summary:
· Mr Harman – unable to complete his brief because he is absent in Spain. He seeks an extension to complete his brief “by September 2019”;
· New Zealand Anglican Church Pension Board – the chief executive responsible for the brief has broken his leg and required surgery. He could complete the brief after a meeting of the investment committee on 15 August 2019 and an undefined period of extension is sought.
· Accident Compensation Corporation – a brief cannot be completed until a decision from the board investment committee on 28 August 2019. Again, an undefined length of extension is sought.
2 From the terms of instructions annexed to Mr Houston’s brief, it appears that his instructions were only confirmed on 2 July 2019.
[26] Since management of stage two of the proceeding began, it has been recognised that the final number of claimants whose claims would be determined at stage two was likely to be reduced as preparation advanced. Pragmatically, the five weeks’ hearing time was to be used for as many of the claimants whose claims were ready and whose evidence could be reasonably accommodated, allowing time also for the defendants’ evidence and submissions. Some 52 claimants were identified at the end of April, reducing to 31 by mid May. By the time of the current argument, the claimants had conceded a further eight claims should not proceed, leaving a maximum of 24. The defendants suggest a number of those ought also to be excluded from the stage two hearing on account of deficiencies in discovery and/or delayed or non- existent briefs.
[27] Subject to compliance with timetabling requirements, it ought still to be for the claimants’ advisers to select which of the claimants should advance their claims at stage two. I address below the extent of additional orders on discovery and provision of briefs that is to apply for each claimant chosen. That choice may be influenced by the relative difficulty perceived by claimants’ advisers in complying with the orders that I make later in this judgment.
[28] I have not addressed with counsel any projection of the number of claims that might reasonably be accommodated, bearing in mind that the defendants are unlikely to be able to project reliably the extent of time required for evidence they might call before the claimants have proposed a finite list of those claims being advanced at the hearing. For the purposes of working through the impact of orders I am now making, I suggest that an upper limit is likely to be around 15 claimants.
[29] I also raise for consideration and for possible discussion between counsel whether there may be advantages in including at stage two one example of claims advanced on behalf of estates of deceased shareholders, and of shareholders whose decisions to invest and divest Feltex shares were made by Forsyth Barr on their behalf. In doing so, I do not reject the validity of the concerns that defendants’ counsel have raised in preparing to challenge claims of both these types. However, if those difficulties can adequately be managed prior to trial, then a decision on claims of
investors in those circumstances may have utility in reviewing the future of others in the same circumstances.
Particulars of claims
[30] The current (fourth amended) statement of claim on which the parties went to trial at stage one does not plead the individual circumstances of any claimants other than Mr Houghton.
[31] Counsel for the claimants has treated as sufficient the characteristics of four sub-groups of claimants, the details of their shareholdings as appearing from a reproduction of the list of Feltex shareholders immediately after the IPO, plus the characteristics of those sub-groups and the content of briefs of evidence that have recently been served.
[32] The stage two claimants all seek to bring themselves within the particular investment circumstances contemplated in [136] of the Supreme Court’s judgment:3
[136] There may be circumstances in which factors other than market value affect an investor’s decision to invest in securities offered in a prospectus. For example, an investor who is concerned about a particular risk or has a particular risk profile may argue that he or she would not have invested if the existence of that risk had been disclosed in the prospectus, even if the risk was not of such significance as to affect the market value of the securities offered for subscription. Similarly, an investor who has concerns about particular types of investments may argue that he or she had that concern at the time of investing and was misled into believing that the investment was not of a type the investor would consider objectionable. These arguments were not advanced in the stage 1 hearing and we make no comment on them.
[33] Making out a loss on this relatively more extensive basis, described by claimants’ counsel as the “reversal of investment decision group”, will require individual circumstances to be pleaded and tested in evidence.
[34] Mr Carruthers QC confirmed that all of the claimants will rely, as a fallback position, on the more generic or objective analysis of the difference in value attributable to the shares, with and without the untrue statement.
3 Houghton v Saunders [2018] NZSC 74, [2019] 1 NZLR 1.
[35] The defendants sought a pleading of the circumstances of individual claims in the reversal of investment decision group providing the following details:
(a)the name of the claimant;
(b)the number of Feltex shares allotted to the claimant;
(c)whether the claimant acquired those shares under the Public Offer, Enhanced Priority Offer or Priority Offer (as those terms are defined in the prospectus);
(d)if any Feltex shares were subsequently purchased or sold by the claimant, particulars of those transactions including the date of the purchase or sale, the number of shares purchased or sold and the price for which those shares were purchased or sold;
(e)to the extent that the claimant relies on the particulars identified in the claimants’ memorandum of 23 January 2019 and/or at [7] of the claimants’ memorandum of 29 April 2019,4 a pleading of the relevant facts on which the claimant relies;
(f)to the extent that the claimant relies on circumstances and factors of the type referred to at paragraph [136] of the Supreme Court’s judgment of 15 August 2018,5 a pleading of the relevant facts on which the claimant relies.
[36] I accept the defendants’ submissions that at the second stage of a representative action such as this, testing individual claimants’ claims against the generic findings made at stage one does require a basic pleading of the individual circumstances of each claimant. The factual circumstances are individual to each claimant, and need to be defined by pleadings which the defendants will then have to admit or deny. In such
4 Quoted in Schedule B attached to this judgment.
5 See [32] above.
a case, they are indeed “an essential road map for the Court and the parties”.6 I consider the details sought in the defendants’ application to be appropriate and direct that pleadings for each of those claimants whose cases are to be advanced at stage two are to be filed and served, including the items listed from the defendants’ application in [35] above. That is to occur by 28 August 2019. Statements of defence to the pleading for individual claimants are to be filed and served by 18 September 2019.
Terms of orders for further discovery, briefs and pleadings
[37] For each claimant chosen to be included in stage two, supplementary discovery affidavits are to be filed by 28 August 2019 addressing each of the matters specified in [4](b) above.
[38] Any claimant wishing to be among those heard at stage two, and who has not already served a brief of evidence, is to serve a completed brief by 23 August 2019. Alternatively, where compelling reason exists that prevents completion of a final brief by then, a without prejudice draft brief addressing all matters to be adduced in evidence by the claimant is to be served on the defendants’ solicitors by 23 August 2019. In the case of any claimants relying on such a draft brief, a completed and signed brief is to be served by 6 September 2019. The final form of such briefs is not to raise any topics not addressed in the draft. Leave is reserved to the defendants to apply to have declared inadmissible any additional content that could not reasonably have been anticipated as matters of detail following from the content in the draft. With this exception, in cross-examination the defendants are not to challenge the witness on the basis of differences between the draft and final versions of such briefs.
[39] For each claimant seeking to be included at stage two, an individual pleading of that claimant’s circumstances is to be filed and served alleging the matters specified in [35] above, by 28 August 2019. Statements of defence are to be filed and served by 18 September 2019.
6 Price Waterhouse v Fortex Group Ltd CA179/98, 30 November 1998 at 17, adopted in
Low Volume Vehicle Technical Association Inc v Brett [2019] NZCA 67 at [63].
[40] If any claimant does not comply with these requirements for pleadings, further discovery and the service of briefs, then that claimant is to be excluded from the stage two hearing.
Claimants’ default on security for costs
[41] Since the parties engaged on the process for the stage two hearing, counsel for the claimants have acknowledged that security for costs in favour of the defendants on stage two would be appropriate. In my 14 June 2019 judgment, I set the quantum of that security at $1.65 million. I directed that it was to be provided by 12 July 2019 in the form of either cash lodged in court or a solicitors’ trust account or, by agreement between the parties, a bond or a bank guarantee.
[42] Progressing this issue has been complicated somewhat by orders I made in relation to disgorgement of stage one costs previously paid to the defendants, and the need for security to be provided for reimbursement of a part of the gross amount I ordered to be disgorged by the defendants. Non-performance by the claimants in that regard has been a distraction but is not directly relevant to the defendants’ concerns at the failure to have the security for stage two costs in place in a timely manner.
[43] In the context of requests on behalf of the claimants to vary the terms of my orders on costs and security for costs in relation to stage one, in a minute on 3 July 2019 I invited counsel for the claimants to provide an indication of the progress with arrangements for provision of security for costs for stage two, then due to be in place in 12 days’ time.
[44] On 11 July 2019, the claimants filed a memorandum attaching a letter addressed to Mr Gavigan from a firm of New Zealand insurance brokers, describing the preliminary steps that were then being taken to explore the prospect of an after- the-event (ATE) insurance policy to cover the claimants’ liability for adverse costs. The circumstances described in the letter provided no basis for confidence that some alternative form of security to that which I had ordered to be in place by the following day would be available, either in a timely way or at all. That memorandum was not accompanied by any application for an extension of the time in which to comply with the order for security for costs for stage two.
[45] No update of the position on provision of security for costs for stage two was conveyed on behalf of the claimants up to the date of this hearing, and brief submissions filed in opposition to other aspects of the defendants’ applications on the evening before the hearing did not address the topic. During the hearing, I pressed Mr Carruthers for a precise description of the stage that had been reached. Mr Carruthers was careful to avoid any statement projecting the extent of likelihood of the claimants being able to comply with the order, and was similarly not prepared to commit to a time frame by which the issue would be resolved. The effect of his advice was that dialogue with possible underwriters of an ATE policy was on-going.
[46] It is now 12 months since the Supreme Court upheld the claim of an untrue statement in the prospectus, and somewhat less than three months away from the commencement of the five week substantive fixture. It is apparent that the defendants are committing substantial resources to various aspects of preparation for trial.
[47] The defendants raised in their 2 August 2019 submissions for the hearing the need for alternative forms of security, given the delays and lack of any apparent progress. The defendants proposed, first, that at least the larger of the claimants whose individual claims are to be advanced at the November trial should provide security. The defendants acknowledged that the proposal to attribute liability to claimants would be stronger for those who have either large claims, or are known to have significant financial resources. Submissions for the first defendants identified six of the proposed stage two claimants who are either recognisable as having substantial financial resources, or whose claims are for sufficiently large amounts to justify the attribution of at least partial liability for adverse costs.
[48] Alternatively, the defendants proposed an order attributing personal liability to Mr Gavigan as the alter ego of the litigation funder. Mr Gavigan’s company, Joint Action Funding Limited (JAFL), has been instrumental in organising the proceedings as a litigation funder from the outset, but that is a one-man company with no assets.
[49] Mr Carruthers did not advance specific grounds for opposing either of these alternative forms of security. The essence of his position was rather that the claimants’ advisers were doing all that they could as quickly as they could. He submitted that the
Court and the defendants should make further concessions, given that the claimants’ case had merit, deserved to be determined and was being worked on as best as resources allowed.
[50] The dilemma for the defendants is that they do not wish any adjournment of the scheduled fixture, commencing on 4 November 2019. The usual remedy for a defendant where a plaintiff has failed to comply with an order for security for costs is to grant a stay, but that would exacerbate logistical difficulties, inevitably adding materially to the costs the defendants will be incurring in preparing their defence. The claim is a stale one, the prospectus having issued 15 years ago, so there is a greater than usual imperative in achieving finality.
[51] On 9 August 2019, after canvassing the options with counsel during the hearing, I issued a minute setting out the provisional terms of orders for alternative modes of security that I considered were warranted in these circumstances. The relevant terms are as follows:
[1] As discussed with counsel during yesterday’s hearing, I am minded to address the non-compliance with the order for security for costs for the stage two hearing by making further orders to the following effect:
[1] The claimants have until 16 August 2019 to provide security in terms of my costs judgment for the sum of $1.65 million in relation to stage two. I do not discount the possibility that an ATE policy covering adverse costs orders against the claimants in a sum of not less than $1.65 million, provided by an underwriter whose obligations are enforceable in New Zealand and who is deemed reputable and solvent, would be a sufficient form for the security that has been ordered.
[2] If the security as contemplated is not provided by 16 August 2019, then by 23 August 2019 the following alternative to the security previously ordered is to be provided. A number of the largest claimants, being between three and six of them at the claimants’ option, are to provide security severally for the respective portion that each represents of the total of the claims of those contributing, for a total of $1.65 million. Such security is to be provided in cash or by way of bank bond.
[3] In the event that this alternative becomes necessary, then the defendants are also to have the benefit of a guarantee in their favour from Mr Anthony Gavigan, payable on the default by any of the claimants of their several liabilities of the total of $1.65 million.
[4] If the substitute forms of security described in [2] and [3] above become necessary, then the claimants may at any point thereafter, apply to be released from that form of security on provision of the security in favour of the defendants for the sum of $1.65 million in the form originally contemplated or such alternative form as may be reasonably acceptable to the defendants.
[5] In the event that the stage two security is not resolved by 23 August 2019 by one of the specified alternatives, then the defendants will be at liberty to apply at short notice for a stay of the proceedings on whatever terms are contended as appropriate. As discussed with counsel, given the length of the history of this matter and the extent of steps taken since the Supreme Court judgment in August 2018, once a stay is in contemplation, I am unlikely to be persuaded to grant a temporary stay on any open-ended basis.
[2] I invite comment on the terms in which orders having the effect discussed with counsel ought to be varied, to achieve certainty of the intended effect. It is not an opportunity to re-argue the justification for such orders.
[52] I remain satisfied that orders having the effect of those conveyed to counsel are appropriate. The usual dynamic of individual claimants in a class action having amounts at stake that would render pursuit of separate proceedings uneconomic cannot apply in the same way to claims of the larger of the proposed claimants for stage two. They have the advantage of a Supreme Court finding of an untrue statement in the prospectus, with defined bases for now claiming they have suffered loss. If arrangements between claimants and the litigation funder have not been maintained so that the funder can provide security, then there is no material inequity in requiring the claimants themselves to provide that security.
[53] As to the alternative, JAFL’s obligations to the claimants are not being maintained. There was no challenge to the defendants’ characterisation of JAFL as being without sufficient assets to provide a guarantee of any worth, and accordingly the fallback of a guarantee from Mr Gavigan in his personal capacity enables the proceeding to remain on foot pending his further work to comply with the obligations JAFL has assumed to the claimants.
[54] On 13 August 2019, counsel for the claimants advised that they did not seek amendment to the proposed terms. The memorandum foreshadowed that arrangements are still in train to provide security as previously indicated.
[55] On 14 August 2019, counsel for the defendants filed a memorandum in response. That memorandum repeated earlier cautions that grounds may exist for rejecting an ATE policy as an adequate alternative form of security. Adopting an additional paragraph as proposed by the defendants, I will accordingly add the following after para [1] of the provisional orders circulated in my minute of 9 August 2019:
If security is not to be provided wholly in cash, the plaintiff is to file and serve by 16 August 2019 a memorandum annexing copies of all documents, including any ATE insurance policy, bond and/or guarantee, on which he relies to provide security for costs. The defendants will be entitled to comment on the terms of any alternative to cash that the plaintiff may propose.
Challenge to admissibility of part of Mr Houston’s brief
[56] The claimants have retained Mr Greg Houston, a Sydney-based economic consultant, to opine on one measure of the loss suffered by Feltex shareholders. The context for Mr Houston’s analysis is the Supreme Court finding of an untrue statement in the Feltex prospectus on the FY04 revenue forecast. That finding potentially triggers liability under s 56 of the Securities Act 1978, which creates a liability for those relevantly held to be statutorily responsible for the untrue statement to pay compensation to persons who have subscribed for securities on the faith of the prospectus for the loss or damage they have sustained by reason of the untrue statement. Mr Houston has responded to his instructions in a report dated 19 July 2019 and, after objection was taken to the admissibility of part of that, in a supplementary report dated 5 August 2019.
[57] The instructions to Mr Houston, as provided by Mr Gavigan, sought separate analyses of the impact on the price of Feltex shares of the FY04 revenue forecast, and the FY05 revenue projection. Mr Houston was asked to estimate, as at 2 June 2004, whether, and if so to what extent, the Feltex IPO price would have been lower than the actual price at which shares were allotted to investors, had Feltex announced that:
• in relation to its FY04 revenue forecast:
>the FY04 revenue forecast was no longer a probable outcome;
>the assumptions on which the FY04 revenue forecast were based were no longer reasonable;
>the sales revenue in January 2004, February 2004, April 2004 and May 2004 were bad; and
>total sales for FY04 year were likely to be between $7.5 million and
$9 million below the forecast annual total;
• in relation to its FY05 revenue projection:
>it was unrealistic to consider that Feltex could achieve the level of sales projected for FY05;
>a 4.7 per cent increase for FY05 revenue was ambitious, and ‘even more so’ after the results in April 2004 and May 2004; and
>the FY05 sales revenue projection was reasonably within the range of possible outcomes.
[58] Although the defendants will challenge Mr Houston’s analysis and conclusions on the impact of the FY04 revenue forecast, there is no challenge to the admissibility of his report on that topic.
[59] The defendants do object to the separate analysis of the potential adverse impact of errors in the FY05 revenue projection when Mr Houghton’s claim that it constituted an untrue statement has been rejected. In terms of s 56 of the Securities Act, no compensation can be payable as a result of the content of the FY05 revenue projection, assuming it was vulnerable to criticism, when it did not constitute an untrue statement in the statutory sense.
[60] The characteristics of the FY05 revenue projection cited in Mr Gavigan’s instructions are drawn from the Supreme Court judgment on the topic. That contained the following:7
[263] We accept that the FY05 sales revenue projection was not arrived at by adding a percentage increase to the FY04 forecast figure. In our view, however, this does not answer Mr Houghton’s point, which is that it was unrealistic, in light of the history of the company and in particular the bad results in January, February, April and May, to consider that Feltex could achieve the level of sales projected for FY05.
[264] There are a number of points that support Mr Houghton’s submission. The first is that Feltex’s strategy had been to concentrate on margin rather than volume and in particular to concentrate on the middle and premium markets in residential. There does not appear to have been a decision to abandon this strategy. Rather, the increase in volume was projected to occur in those higher
7 Houghton v Saunders, above n 3 (citations omitted).
margin products and not in the mass market. This would make it harder to achieve the one percent increase in market share, which was measured by volume, because the mass market made up the greater proportion of the market. We also accept the submission that a 4.7 per cent increase in revenue was ambitious and that this was even more so after the results in April and May. We also note that the results in the first six months of FY05 would suggest in hindsight that the sales projection was in fact unrealistic.
[61] The Supreme Court’s analysis only endorsed Mr Houghton’s characterisation of the projection as unrealistic by applying hindsight, where the judgment next recorded that there were dangers in judging by hindsight. Further, the terms of instructions to Mr Houston required him to take account of those concerns about the reasonableness of the FY05 revenue projection as if the directors were obliged to provide those acknowledgements on 2 June 2004, without any qualifying comment placing their relevance in context. It was recognised at stage one of the proceedings that the directors would be entitled to balance any negative message sent in making disclosure of adverse events after issue of the prospectus against reasonably made positive observations.
[62] On this topic, when the announcement of the FY04 result in August 2004 revealed the extent by which the FY04 revenue forecast had not been achieved, the directors permissibly downplayed its importance by referring to other factors such as the improved margins achieved on sales that had occurred.
[63] Mr Houston’s analysis proceeds on the premise that the qualifying observations about the FY05 revenue projection set out in Mr Gavigan’s instructions constituted “FY05 revenue information” that ought to have been disclosed to the market on 2 June 2004.8
[64] Mr Houston acknowledges that there was no announcement by Feltex that it would not achieve its FY05 revenue projection until 23 February 2005, at which time the company indicated that it still expected to meet its FY05 EBITDA and NPAT projections,9 and that the shortfall in revenue would be offset by an increase in margins so that there would be no impact on profit.
8 Houston first report at [122], [137].
9 Earnings before interest, tax, depreciation and amortization; net profit after tax.
[65] The defendants argue that Mr Gavigan’s instructions in respect of the FY05 revenue information are misconceived. The relevant sections of Mr Houston’s report analyse the negative impact on share price if the company had been required to provide the market with the FY05 revenue information at 2 June 2004 but without any countervailing observations that would minimise the adverse effect of such an announcement. Liability under s 56 of the Securities Act extends only to losses that shareholders can establish were caused by untrue statements. Mr Houghton failed in all courts in contending that the FY05 revenue projection constituted an untrue statement.
[66] Requesting an opinion from Mr Houston on the financial impact of the FY05 revenue projection would require a revisiting of the final determination at stage one to the contrary effect. The defendants submitted that on either issue estoppel or res judicata, it was not open to the claimants to raise arguments that required a revisiting of findings made at stage one. Authority should not be required for that basic proposition, but I was referred to a recent judgment of the High Court of England and Wales where the Judge somewhat testily responded to an attempt to re-open liability issues in a second stage trial focusing on quantum:10
… That is one of a number of points in respect of which I had made a number of findings adverse to ICI in the liability judgment; but again, those findings did not seem to trouble Mr Boerboom. There are other instances in which ICI’s case at this quantum trial wholly ignored earlier findings of the High Court that did not suit it, not least the approach of its accountancy expert Mr Thompson, which I deal with further below. It goes without saying – or rather, it should – that quantum trials that follow detailed liability findings by the court ought to treat those findings as what they are, namely the final resolution of that particular component of the litigation between the parties.
[67] Mr Carruthers maintained that the whole of Mr Houston’s report was admissible. He submitted that his analysis of the FY05 revenue information did no more than assess the impact on share price of the knock-on effect of the FY05 revenue projection necessarily being rendered less reliable by the acknowledgement required of the directors that their FY04 revenue forecast was materially overstated. The claimants’ written submissions characterised Mr Houston’s report as valuing the loss which compared the share price in the actual undisclosed documents with the share
10 Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd [2018] EWHC 1577 (TCC) at [8].
price in fully compliant disclosure at 2 June 2004. The submission was made that the market would factor in true past and immediate current performance and also re-assess the probable immediate future.
[68] The difficulty with that submission is that it treats the absence of disclosure by the directors on 2 June 2004 of the FY05 revenue information as non-compliant disclosure. That categorisation is contrary to the findings of all courts that the FY05 revenue projection did not contain any untrue statement.
[69] Mr Houston calculated the adverse impact of the FY04 revenue forecast on the Feltex share price as at 2 June 2004 by conducting an event study. Without any discourtesy to Mr Houston, put crudely he has isolated the adverse impact on the price of Feltex shares when the essence of the FY04 revenue information was disclosed to the market with the Feltex FY04 result on 24 August 2004, and then rationalised the possible extent of any difference in the impact of the information, had it been released to the market on 2 June 2004. His conclusion is that the failure to disclose the FY04 revenue information on 2 June 2004 inflated the Feltex IPO price by between $0.07 and $0.08.
[70] Quite separately, Mr Houston has undertaken a different valuation exercise to estimate the price effect if the market had also been told the FY05 revenue information on 2 June 2004, in the terms distilled by Mr Gavigan in his instructions to Mr Houston. In this exercise, Mr Houston has constructed two discounted cash flow valuations, with the difference being that one includes the cash flow effects implicit in the FY05 revenue information, and the other excluding those effects.
[71] I am unable to accept Mr Carruthers’ characterisation that this is a component of calculating the impact of the FY04 revenue information by factoring in some knock-on effect on the market’s assessment of other aspects of the prospectus. The outcome of Mr Houston’s analysis of the FY05 revenue information reflects the separate impact on the market price for Feltex shares on 2 June 2004 that is said to arise from the market not knowing the FY05 revenue information.
[72] Although I am unable to identify a specific acknowledgement of the point in Mr Houston’s analysis, I accept the logic of the defendants’ submission that the knock-on effect on the market’s view of the reliability of the FY05 revenue projection may well be a component of the market’s reaction to disclosure of the untruth of the FY04 revenue forecast.
[73] The grounds for challenging admissibility of the component of Mr Houston’s report dealing with the FY05 revenue projection included both the proposition that it was not relevant because it related to a statement that has not been held to be untrue, and also that it could not meet the test in s 25 of the Evidence Act 2006 which requires expert evidence to be likely to be substantially helpful to the finder of fact in determining facts or an issue in the proceeding.
[74] On the analysis I have undertaken above, I accept that this component of Mr Houston’s report is not relevant, nor is it likely to be substantially helpful to me in determining the loss that claimants can make out arising from the untrue statement in the prospectus. Accordingly, section 6 of his report, and that part of section 7 drawing on his analysis of the impact of the FY05 revenue information, is inadmissible.
[75] It appears that Mr Houston’s supplementary report, which runs to 24 pages, was in response to fresh instructions given to him by Mr Gavigan on 1 August 2019. I was advised that defendants’ solicitors were served with copies of the report late on 7 August 2019, the afternoon before the hearing. The defendants oppose admissibility of all of the supplementary report, essentially on the same grounds as their challenge to part of Mr Houston’s original report.
[76] The further instruction to Mr Houston invited him to revisit the impact of the FY05 revenue information (as defined in his original report) in light of the announcement by Feltex as to its FY05 revenue on 1 April 2005. Further, what impact on Mr Houston’s estimate of value would have been caused by an assumption that Feltex’s FY05 revenue would be less than its FY04 revenue by either two per cent or
3.8 per cent. There was also a question as to the impact of an assumption of Feltex ceasing to be a going concern from FY06 on the terminal value of either zero or
$49.136 million.
[77] Mr Houston’s analysis in his supplementary report does not revisit the analysis made in his original report on the impact of the untrue statement in the FY04 revenue forecast. It traverses different considerations on the assumption that potential investors would have been told different information in respect of the projection of FY05 revenue.
[78] The defendants’ objection was that such issues cannot be relevant because there is no basis for imputing an obligation on the directors to communicate different information on the topic of FY05 revenue projection when all courts have found that the FY05 revenue projection did not contain an untrue statement.
[79] Mr Carruthers defended the admissibility of the supplementary report on the same grounds as he had argued for Mr Houston’s first report.
[80] I accept the defendants’ objection that the supplementary instruction to Mr Houston depended on a factual premise for which there is no relevant basis. It follows that Mr Houston’s opinions on the additional propositions about the impact on value of Feltex shares at the time of the IPO of a different information set on FY05 revenue projection cannot be substantially helpful in resolving the issues at the stage two trial.
[81]Accordingly, I find the supplementary report to be inadmissible.
Summary
[82] On the defendants’ applications, I have made further orders requiring pleadings by individual claimants, further discovery and further directions in respect of briefs of evidence as specified in [36] to [39] above.
[83] I make further orders for security for costs in the terms provisionally indicated in my minute of 9 August 2019, as repeated at [51] above, subject to the inclusion of a new para [2] in the terms set out at [55] above.
[84] I uphold the defendants’ objection to parts of Mr Houston’s report, and to the admissibility of his supplementary report dated 5 August 2019.
Costs
[85] I did not hear counsel on the issue of costs. The defendants have substantially succeeded and will be entitled to an order for costs. Quantification is deferred pending developments.
Dobson J
Solicitors:
Wilson McKay, Auckland for plaintiff
Gilbert Walker, Auckland for first defendants (other than Mr Horrocks and Ms Withers) Wilson Harle, Auckland for Ms Withers
Clendons, Auckland for Mr Horrocks
Russell McVeagh, Wellington for second and third defendants
Counsel:
C R Carruthers QC and P A B Mills for plaintiff
A R Galbraith QC for first defendants (other than Ms Withers) B D Gray QC for Ms Withers
J B M Smith QC and A S Olney for second and third defendants
Schedule A
30
documents to disclose the investor’s purchases and sales of shares in listed New Zealand companies over this period.)
5. AH documents created or received by (or on behalf ofj the investor commenting on the revenue performance of any listed Ney Zealand company in which the investor invested in the period referred to in 4 above.
6. Any documents recording the invesfment policies and piocediaes lot the person or entity which applied in the period from 1 January 2004 to 30 December 2005. (Note: It is acknowledged that such documenis will not exist for most private invesfozs.)
Additional discovery from investors in sub-group B
7. Documents recording the terms of the agreement between the investor and Forsyth Barr.
8. All communications with Forsyth Barr in relation to Feltex (at any time).
Schedule B
The first category is the “Reversal of Investment Decision” group. This category comprises all claimants who converted their 10.25%pa secured bonds into shares in reliance on the Feltex prospectus and on the basis that the Feltex shares were worth
$1.70 each. This category also includes all claimants to which the criteria described in the Supreme Court at paragraphs [135] and [136] apply.
7
1
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