Major decision in CBA trial to be challenged

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The CBA class action was a shareholder class action that arose out of tens of thousands of breaches of Anti-Money Laundering legislation that occurred between 2012 and 2017. On 3 August 2017, the contraventions were first revealed to the market through an announcement by the regulator, AUSTRAC, that it had commenced a civil penalty proceeding against CBA. In the days following the announcement, CBA’s share price fell sharply.

The applicants alleged that CBA was aware of the AML contraventions (either constructively or subjectively) throughout the period from 16 June 2014 to 3 August 2017, that the contraventions were material, and that accordingly CBA had breached its continuous disclosure obligations. The applicants also alleged that CBA had misled the market by making representations that it had effective systems and processes in place to ensure compliance with its continuous disclosure and regulatory (including AML) obligations.

The applicants’ case on constructive awareness hinged on evidence that: the contraventions had, in fact, occurred by the start of the relevant period; the contraventions could and should have been discovered by the start of the relevant period; and, having been discovered, the contraventions should have been escalated to officer level. The applicants relied on the Full Federal Court’s decision in Crowley v Worley Ltd (2022) 293 FCR 438; [2022] FCAFC 33 to the effect that a company would be aware of information if “reasonable information systems or management procedures ought to have brought the information to the attention of a relevant company officer”.

Justice Yates rejected those arguments, in effect holding that it was irrelevant whether a proposition constituting the information was, as a matter of fact, true. Instead, his Honour held that in order for awareness to be established, and for the principles in Worley to be engaged, information must exist in “in a form whose content was fixed and comprehensible as a matter of ordinary perception”. It is not immediately apparent where the boundaries of this new test lie in the context of modern information systems and databases: in CBA, the information was readily ascertainable from a database query, but no one carried out that query. Accordingly, if this approach is followed it seems likely that the information will either need to exist in collated, written form (for example in a report which existed, and was generated, but which was not read) or be subjectively known by some person.

For that reason, his Honour found that awareness was not established prior to April 2017, when all the integers of the information were subjectively known by officers of CBA.

Despite finding that CBA was aware of the information, his Honour found that there had been no disclosure breach even from April 2017. His Honour accepted the importance of several contextual points raised by CBA (for example, the number of transactions which were correctly reported, the bank’s history of constructive interactions with the regulator, and the size of the bank’s business in general) which he found provided necessary context for the undisclosed information. This approach told against the applicants in two ways. First, it meant that no obligation to disclose the information as pleaded arose, because any such disclosure would have been misleading without that contextual information. Secondly, it meant that a disclosure breach did not arise because, when accompanied by the contextual information, the undisclosed information was not material.

Having found that the information need not be disclosed without context, and that it was, in any event, immaterial with context, his Honour did not need to determine the questions of causation and loss. However, his Honour proceeded to consider them both.

The applicants had led evidence from an event study expert calculating the statistically significant price reaction which followed the regulator’s announcement it was commencing proceedings. The event study was premised on an assumption that information economically equivalent to the alleged corrective disclosure could have been disclosed at any point within the relevant period. That assumption was in turn supported by the evidence of two materiality experts, both of whom opined that the key factor to which the market reacted was the substantial regulatory non-compliance. Viewed from that perspective, the applicants’ materiality experts opined that the commencement of proceedings by the regulator, and variations in the exact number of contraventions, were of minimal significance. Fundamentally, the market would have drawn the same conclusions as to the riskiness of investing in CBA shares from a disclosure at the start of the relevant period (by which time tens of thousands of contraventions had already occurred) as it did from the alleged corrective disclosure (when proceedings had commenced).

As an alternative means of establishing causation and loss, the applicants argued that, by establishing the materiality of undisclosed information, they would then have established that it was a cause, even if not the sole cause, of loss. And in those circumstances, in light of evidence to the effect that it was not possible to parse out the relative contribution of different elements of the information or the economic effects of its variation over time (including as a result of the commencement of proceedings), the applicants should prima facie be entitled to recover loss quantified with reference to the price decline.

Finally, if the Court felt it necessary to disentangle the price impact of the commencement of proceedings (which could not have been disclosed earlier), the applicants relied on academic research showing the relative share price impact of the commencement of proceedings when compared to disclosure of the underlying conduct, and the example of a statistically significant share price reaction experienced by another major bank when it disclosed AML contraventions but no proceedings had been commenced.

His Honour rejected each of these approaches. As to economic equivalence, he found that investors were not concerned with risks or ‘mere possibilities’, and would only be moved in their assessment of CBA’s shares by a ‘real likelihood’ of adverse financial consequences for them. His Honour also held that no such likelihood could arise until AUSTRAC had commenced proceedings, or at least resolved to commence proceedings. In light of that finding, the applicants’ evidence as to economic equivalence was rejected, since the fact of the commencement of proceedings was found to be not only relevant but indispensable to any assessment of the market’s reaction.

His Honour also rejected the argument that, by showing the information was a cause of the price reaction, the applicants had done enough to establish causation. The Court held that “the valuation question … is inextricably bound up with the problem of establishing loss in the first place”, and thus by not valuing (presumably, precisely quantifying) the loss, the applicants had failed to prove that loss had occurred. His Honour also rejected the empirical evidence relied on by the applicants as a way of estimating the effect of the commencement of proceedings, holding that the examples relied on were not sufficiently analogous to the present case.

[Postscript: On 25 June 2024 a notice of appeal was filed by the applicants.]

Zonia Holdings Pty Ltd v Commonwealth Bank of Australia (No 5) [2024] FCA 477

Federal Court of Australia, Yates J, 10 May 2024
Applicants’ Solicitors: Maurice Blackburn & Phi Finney McDonald
Respondents’ Solicitors: Herbert Smith Freehills Applicants’
Funder: Omni Bridgeway & Therium

AustLII link

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