SYDNEY: 28 JUNE 2013 - The rise of private enforcement of the securities laws in Australia, usually through the class action, has major ramifications for the interaction between private litigants and the public regulator, the Australian Securities and Investments Commission.  ASIC has responded to this development with two new information sheets:

• Information Sheet 180, ASIC’s Approach to Involvement in Private Court Proceedings (June 2013) (INFO 180); and
• Information Sheet 181, Providing Information and Documents to Private Litigants (June 2013) (INFO 181).

The information sheets demonstrate that the advent of public and private enforcement creates a two-way street – private litigants may seek information from ASIC and ASIC may intervene in private court proceedings.

Private Enforcement

In INFO 181 ASIC observes that:

Enforcing the laws that govern corporate, securities and financial services is not exclusive to ASIC. Private rights and obligations are created by the law and these may be enforced through private litigation, including class actions.

The interplay between private litigants and public enforcement has become a significant issue in Australia since the advent of shareholder class actions and financial product/financial advice class actions.  This is due to the combination of the legislature granting private rights of action to an injured individual so they have standing to sue, statutory enactment of modern class action regimes which make litigation economically viable, and the rise of litigation funding which bankrolls the proceedings in return for a percentage of any recovery. 

Private enforcement may be a useful adjunct to ASIC enforcement, especially in obtaining compensation, as it reduces the calls on the public purse and can fill gaps created by an under-funded or captive regulator.  Equally private enforcement tends to focus on private interests (even though the class action has the capacity to affect large parts of the public) rather than the public interest.  ASIC needs to ensure that the regulatory regime is not harmed by private enforcement and that courts receive input on the regulator’s perspective of what is in the public interest.

Obtaining Information and Documents from ASIC

ASIC has significant coercive investigatory powers, including the power to conduct oral examinations (section 19 examinations), issue notices to produce books and documents, and apply for a search warrant to seize books.

It may release transcripts of oral examinations conducted by it under section 19 and related books to a person’s lawyer if the lawyer satisfies ASIC that the person is carrying on, or is contemplating in good faith, a proceeding in respect of a matter to which the examination related.

ASIC also has a general power to give any person a transcript of an oral examination and related books, but the power is subject to a confidentiality regime in the ASIC Act. It may obtain books under a notice or warrant which ASIC may then use, or permit to be used, for the purposes of a proceeding, including a civil proceeding. ASIC may also be subject to a subpoena.  In the shareholder class action area, this procedure is illustrated by the GIO class action where a subpoena was issued for the production of ‘records of examination and related books in the investigation of the first respondent’, GIO. Similarly, in the Multiplex class action, leave to issue a subpoena that sought documents provided by the respondents to ASIC in the course of an investigation, section 19 transcripts and signed or sworn statements from witnesses obtained by ASIC, was granted.

The ability of private litigants to obtain this information means that ASIC may operate as a “class action compass” that points to potential claims or improves the prospects of success and reduces costs by making evidence available.

ASIC is able to resist the provision of information or documents.  In INFO 181 ASIC observes that “in most cases, [it] will not provide information or documents where to do so could potentially compromise an ASIC investigation or enforcement action”.  ASIC is able to resist the production of materials that are subject to public interest immunity, that is, some other aspect of the public interest, such as the workings of the enforcement and regulatory arms of the executive government are likely to be adversely affected if disclosure were required. In the Multiplex class action, the Full Federal Court held that the public interest in encouraging informers to come forward outweighed the applicant’s interest in obtaining the materials for its proceedings.

ASIC’s Role in Private Litigation

While private litigants can commence litigation, including class actions, ASIC has a broad ability to intervene in that litigation.  For example, section 1330 of the Corporations Act 2001 (Cth) provides that “ASIC may intervene in any proceeding relating to a matter arising under this Act”.  ASIC may also apply to the Court for leave to appear as amicus curiae.

ASIC’s INFO 180 explains that the decision to intervene will be guided by the following four general principles:

• whether intervention is of strategic regulatory significance
• whether the benefits of intervention outweigh the costs of doing so
• whether issues specific to the case warrant intervention
• whether alternatives are available, including appearing as amicus curiae or taking action ourselves.

Further ASIC explains that strategic regulatory significance means:

• a case raises matters that are clearly significant to our statutory objectives or exercise of our functions and powers
• important issues of interpretation of legislation, going to the heart of the legislative policy of the provision or to ASIC’s powers or ability to administer the legislation, arise.

As private litigants in the course of seeking their own remedies may require courts to decide novel points of law that will then form precedents binding ASIC it is in ASIC’s interest to ensure it is heard on these issues.  In particular, ASIC will want the Court to be aware of the broader ramifications that particular outcomes may have.

In Richards v Macquarie Bank Limited [No 4] [2013] FCA 438 ASIC intervened in a class action settlement hearing where it was proposed that a 35% uplift be given to those group members who financed the cost of prosecuting their class action.  Group members who contributed to the legal costs and disbursements involved in running the class action recovered 42% of their losses, while those who did not contribute only recovered 17.602% of their losses.  ASIC raised concerns about the size of the uplift and whether adequate notice had been given to group members of the uplift.  The settlement was still approved and ASIC has lodged an appeal.

The intervention in Richards and the publication of INFO 180 may indicate that ASIC plans on taking a more active role in monitoring and, where necessary, making its voice heard on important issues of public interest.

The Two-Way Street

Since the rise of class action in the securities and financial product/advice space ASIC has been largely reactive.  Class action promoters have seen ASIC as a guide to potential claims to bring and as providing a source of evidentiary short-cuts.  Admittedly with a few hurdles here and there when ASIC was conducting its own investigation or litigation.  It now appears that the interaction between ASIC and the class action promoters is going to be a two-way street. 

ASIC has championed the useful role that class actions can play as part of a larger range of enforcement tools. This does not mean ASIC will be silent.  Private class actions are heavily lawyer and litigation funder driven meaning monetary recovery is a top priority.  This may at times be at odds with a larger public interest in the efficient and effective regulation of financial markets and protection of consumers.  Accordingly, ASIC’s stance of keeping a watching brief to ensure that the public interest is protected is to be welcomed.