Securities litigation observers know that class action securities lawsuit in the U.S. rarely go to trial. The same is true in Australia as well. However, in a recent ruling in only the second-ever securities lawsuit to go to trial in Australia, a Federal Court Justice has ruled in favor of the defendant company, the first ever trial verdict won by a defendant in Australia. The recent ruling has a number of interesting and important implications, as discussed below.
The October 22, 2020 judgment in Crowley v. Worley Limited can be found here. The ruling is discussed in Christopher Niesche’s October 23, 2020 Law.com International article (here, subscription required), as well as in Rodd Todd’s October 27, 2020 AmLaw Litigation Daily article (here, subscription). A detailed description of the allegations in the lawsuit and in the Justice’s rulings in the case can be found in an October 22, 2020 memo from the King & Wood Mallesons law firm (here).
Worley Limited is an ASX-listed professional services firm. In August 2013, the company released its 2012 financial year results, reporting a net profit after tax of A$344, and also stating that the company has a “solid foundation to deliver increased earnings in FY 2014.” In October 2013, the company affirmed its earnings guidance from two months previously. However, in November 2013, the company issued revised earnings guidance, lowering the range of expected net profit after tax for both the full year of FY 2014 and for the fiscal year’s first half. The company’s share price declined on the lowered guidance.
In October 2015, Larry Crowley, a Worley investor, filed a securities class action lawsuit against Worley on behalf of investors who purchased Worley shares between August 14, 2013 and November 20, 2013. Crowley’s complaint against Worley alleged that the company had violated its continuous disclosure obligations under Section 674 of the Corporations Act 2001 and Rule 3.1 of the ASX listing rules, and violated federal statutory prohibitions against misleading or deceptive conduct.
The action went to trial before Justice Jacqueline Gleeson of the Federal Court of Australia over the course of five weeks between September and December 2019. Justice Gleeson issued what the King & Wood Mallesons law firm called in the memo to which I linked above called her “highly anticipated judgment” at the end of last week. Her ruling dismissed Crowley’s action and awarded Worley its costs.
In ruling that Crowley had not established the continuous disclosure case, Justice Gleeson held that “at all relevant times, it was not the case that [Worley] did not have a reasonable basis for making the August 2013 earnings guidance statement.” In ruling that Crowley had not established the misleading or deceptive conduct case, Justice Gleeson rejected Crowley’s contentions that the company FY 2014 budget was deficient and further rejected Crowley’s argument that the budget process was not reasonable and that the Board did not have a reasonable basis for relying on it. She also rejected Crowley’s argument that Board was insufficiently skeptical or inquisitive.
The various news reports to which I linked above quote Crowley’s attorneys as saying that they are considering all of their options, including the possibility of an appeal.
The trial verdict in the Worley Limited case is interesting for the simple reason that securities lawsuit trials are so rare, both in the U.S. and in Australia. As the law firm memo to which I linked above notes, Justice Gleeson’s judgment is also very interesting for the insight it provides on how she analyzed the evidence and about her overall fact-finding process.
As I noted above, the Worley case is only the second Australian securities class action lawsuit to go to trial. The first, involving retailer Myer, went to trial in 2019 and resulted in an October 2019 verdict on behalf of the claimants. However, as discussed here, though the trial court concluded that the company had engaged in misleading or deceptive conduct, the court ruled against the shareholders because it was not convinced that the shareholders had suffered a loss. The Worley lawsuit was the second Australian securities class action lawsuit to go to trial, and the first to result in a ruling on behalf of the defendant after a full trial.
Though trials in Australian securities class action lawsuits have been very rare, changed circumstances may mean that more cases may go to trial in the future, particularly in light of the outcome in the Worley case. The Law.com International article to which I linked above quotes one of the defense counsel in the Worley case as saying that it is “inevitable” that more defendants and their insurers will look to take their securities class action lawsuit defenses to trial, “given that the insurance market is under pressure from the large number of shareholder class actions and the settlement size of those actions.”
For U.S. observers and practitioners considering the significance of the defense verdict in the Worley case, it is important to keep in mind that while there are many similarities between the U.S. and the Australian class action system, there are also important differences.
For starters, the Australian system, unlike the U.S. system, does not allow for jury trials in securities class action lawsuit. The Worley trial was a bench trial; Judge Gleeson was able to consider considerations of both fact and law. She is also obviously a highly sophisticated trial observer, able to take a perspective that might well differ from that of a jury of less sophisticated observers.
Another important difference between the Australian system and the U.S. system is that in the U.S. we follow the American Rule, under which each party bears its own costs. Australia not only follows a “loser pays” model, but does not allow for contingency fees. This of course means that there are a host of dynamics involved in the decisions over whether or not to take a case to trial in Australia that are not present in the U.S – although the presence of these dynamics also explains the growth of and importance of the litigation financing industry in Australia as well.
There is a further and even more basic difference between the Australian system and the U.S. system, and that is that the Australian system is based on a “continuous disclosure requirement,” whereas the U.S. system is based on a periodic reporting system. The Australian continuous disclosure system arguably is much more onerous than the U.S. system and arguably exposes Australian-listed companies to the possibilities of much greater second-guessing and what we would call here in the U.S. Monday morning quarterbacking.
But while there are important differences between the two systems, there are also important similarities, among other things including the sheer magnitude of the dollars at stake, as well as the kinds and levels of scrutiny to which corporate defendant’s disclosure decisions are subjected. In that regard, the outcome of the Worley case makes me think that cases based on supposedly misleading forecasts are just as difficult to sustain in Australia as they are in the U.S. In that respect at least, defendants in both countries may be heartened by Justice Gleeson’s verdict in the Worley case.
It may be, as defense counsel is quoted as saying, that the Worley decision will encourage more Australian securities suit defendants to take their cases it trial. It is interesting that, as noted above, she thinks that the current hard market for D&O insurance in Australia might make this possibility even more interesting.
Special thanks to Ross Todd of AmLaw Litigation Daily for providing me with helpful information in connection with this post.