SYDNEY: 18 MARCH 2013 - Financial product class actions have attracted significant attention due to the success last year of NSW councils in legal proceedings dealing with complex financial products that were at the heart of the global financial crisis. These types of class actions keep coming, with Gloucester Shire Council and Clurname Pty Ltd commencing proceedings against the Commonwealth Bank of Australia over the sale of synthetic collateralised debt obligations (SCDOs).

The success trumpeted in headlines obscures an important question as to whether financial product claims give rise to sufficient common issues that they can be efficiently pursued through class actions.

In Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liquidation), the applicants successfully proved the contravention of a number of causes of action against the investment bank in relation to SCDOs. Meanwhile, in Bathurst Regional Council v Local Government Financial Services Pty Ltd the applicants demonstrated contraventions by a financial advisor, investment bank and credit rating agency in relation to constant proportion debt obligations (CPDOs). However, the utility of class actions turns on the existence of common issues which in the financial product context remains clouded.

In Lehman Brothers, there was no challenge to whether the claims of the group members gave rise to “a substantial common issue of law or fact” or should be discontinued because the class action did not provide “an efficient and effective means of dealing with the claims of group members”. The existence of common issues was accepted.

The liquidator could not be expected to challenge the use of the class action when they needed a court determination that would bind both them and the claimants in relation to whether to admit the claims in the liquidation.

While the Local Government Financial Services proceedings began as a class action, it did not go to trial as a class action. Instead, all of the group members were made applicants and evidence as to their individual circumstances was part of the trial. No occasion arose to contest the use of the class action procedure.

SPECIFIC REASONS FOR INVESTING

The reason that financial product class actions have the potential to give rise to commonality problems is that often the sale of the financial product turns on the specific relationship between buyer and seller and is accompanied by representations specific to the investor, in this case the councils. For a claim to be successfully litigated many individual issues need to be resolved so that even if there are some common issues, they are outweighed by the non-common issues making the proceedings both lengthy and costly.

The efficiencies, or lack thereof, in relation to financial product class actions is well illustrated by Justice Rares judgment in Lehman Brothers, where he sets out the determinations that he had made which he saw as resolving common issues and those which he believes were non-common or idiosyncratic issues. The common issues included such matters as the features of the SCDOs and the construction of a number of legislative provisions, including those regulating investments that local councils were permitted to make.

The non-common issues included such things as the investment strategy of a particular claimant, the contractual obligations and tortious duty of care as these depended on the particular relationship between the group member and Lehman Brothers, the existence of a fiduciary duty as this was also dependent on the particular factual setting in which Lehman Brothers was advising and/or selling financial products and whether there were misleading representations as this was dependent on the particular circumstances, including the actual statements made.

However, Justice Rares commented that in relation to the non-common or idiosyncratic issues, Lehman Brothers’ “sausage” approach to dealing with councils meant that the various documents and representations provided to the councils, as well as the approach to getting them to invest was likely to be similar.

As a result, the findings on such issues as the contractual obligations, tortious duty of care, fiduciary duty and misleading conduct “may have utility” in providing guidance as to the liability of Lehman Brothers in relation to the other group members.

Justice Rares could not put the helpfulness of his findings any higher than “may” because he had of course heard no evidence about what had occurred in relation to the group members whose claims were not before him. Where common issues exist, then their determination once and for all can save time and cost as the issue does not need to be revisited in each and every group member’s case.

However, where the degree of commonality is such that determining the applicant’s case will offer little guidance to the determination of the group members’ claims, then class actions are ineffective.

The high profile cases discussed above did not expressly address the existence of common issues. The approach adopted in Local Government Financial Services suggests that Justice Jagot had concerns as to whether a class action would be an effective way to efficiently resolve the claims in that case.

Whether the class action is an innovative way to deal with multiple financial product claims or one of inefficiency has not been resolved, and indeed, may depend on the particular financial product and how it was sold and marketed. The financial product class action presents many questions rather than an answer.

THIS PIECE FIRST APPEARED IN THE AUSTRALIAN FINANCIAL REVIEW ON 18 MARCH 2013