By Associate Professor Michael Legg, UNSW

The latest showdown between sheriff and bounty hunter has been through the recent Multiplex securities class action settlement where the plaintiffs lawyers retained by the funder in that case have been crowing about their recovery of a $100 million settlement compared to ASIC's $32 million enforceable undertaking from Multiplex.

Securities and cartel class actions have been advocated on the basis that the class action promoter seeks out contraventions and makes private litigation economically viable through funding and combining claims to extract maximum compensation.  Further, as contraventions are more likely to result in litigation and its related costs, including payment of compensation and reputational effects, corporations and corporate officers will take greater care not to contravene the law.  Compensation, deterrence and compliance are promoted.  However, there is a concern, as raised by Justice Callinan in Mobil Oil Pty Ltd v Victoria in 2002, that class actions undesirably substitute private for public law enforcement. 

The Multiplex results need to be more closely analysed.  The comparison does not factor in the different scope of the complaints contained in the two matters - both in terms of the time period relating to the Wembley project but also the addition of alleged contraventions about other projects.  It also fails to consider the litigation risks associated with the class action.  The Multiplex class action was almost toppled by the Full Federal Court's decision that the funding arrangements amounted to an unregistered managed investment scheme.  From a compensation perspective it also ignores that 30-50% of the class action recovery goes to the litigation funder which in this case would have been towards the higher end of the range due to the effluxion of time and large number of appeals involved.  Litigation funding agreements usually provide for the payment of a higher percentage the longer the case runs and for an additional increase for each appeal.  In Multiplex the case lasted 4 years and the Full Federal Court delivered judgments on the closed class and public interest immunity in addition to managed investment schemes.

More significantly the comparison does not consider ASIC's regulatory role which involves a greater purview than simply seeking compensation.  Nor is there consideration of the impact of class actions on the now widely accepted approach to enforcement of ‘responsive regulation’, more widely known as the enforcement pyramid.  Responsive regulation is based on the premise that a corporate actors' determination as to whether to comply with the law may be driven by whether it is economically rational to do so i.e. a weighing of potential costs and benefits, but also because they are concerned to do what is right because of their desire to be law abiding corporate citizens that are socially responsible.  Consequently the regulator adopts an enforcement strategy that seeks to utilise both persuasion and punishment.  A strategy based totally on persuasion will be exploited by those corporations who are making decisions based on economic rationality.  Equally, a strategy based mostly on punishment will undermine the goodwill of those actors who are motivated to comply because they desire to be responsible, law-abiding corporate citizens. 

The need for persuasion, education, and rewarding cooperation as part of a larger regulatory scheme that adopts an enforcement pyramid approach may see compromises that do not seek to maximise the amount of compensation to be paid.  The regulator may seek less or no compensation to encourage cooperation with a change to business practices or because the additional costs of having to litigate do not achieve more meaningful levels of education about the operation of a particular law.  The expenditure of public funds must be justified.

In the case of Multiplex the enforceable undertaking did not just include a compensation fund of $32 million but also included requirements that Multiplex seek to procure a majority of independent directors on its Board and engage an external consultant to review Multiplex’s policies and procedures for ensuring a culture of compliance for continuous disclosure and the Corporations Act’s whistleblower regime.  Rather than just extracting a one-off financial payment, the enforceable undertaking sought to improve corporate governance.

In contrast, private enforcement can undermine the enforcement pyramid by always seeking the greatest amount of damages possible.  Regulated entities may have no incentive to negotiate or cooperate with a regulator as substantial damages claims may still follow.  Consequently, the threat of the regulator being able to move ‘up’ the enforcement pyramid so as to procure cooperation may be lost or the regulator may need to demonstrate a willingness to use more potent remedies, such as criminal sanctions or increased fines, if they are available.  There is then a risk that sanctions are seen as capricious or draconian responses. 

Equally from the perspective of investors or consumers that have suffered loss there is no direct benefit from corporate cooperation or fines.  Responsive regulation is cold comfort for someone who has lost their investment or been over-charged.  One response would be to adopt an equivalent to the US Sarbanes-Oxley section 308 Fair Funds provision which might allow ASIC to recover civil penalties through a court judgment or settlement but then use the funds to compensate investors. 

The relative roles of the sheriff and bounty hunter, as well as how they should interact in seeking to right wrongs, is a matter of public interest that requires more detailed consideration.