Deloitte and the data deceit – “extraordinary and troubling”

Application for leave to appeal from orders for discovery / production of audit files – Privilege against self-incrimination or exposure to a penalty – Whether files under control of ‘uninvolved partners’ – Application for leave to appeal granted, but appeal dismissed

This matter concerned an application for leave to appeal from a series of judgments given by the primary judge, Moshinsky J (Sadie Ville Pty Ltd v Deloitte Touche Tohmatsu (A Firm) (No 3) (2018) 357 ALR 695; [2018] FCA 1107; (N0 4) [2018] FCA 1218; and (No 5) [2018] FCA 2066).

The proceeding is a class action on behalf of shareholders in Hastie Group Ltd (in liq) (Hastie), against Hastie’s former auditor (Deloitte), relating to Deloitte’s audit reports for the financial years ended 30 June 2010 and 2011, Deloitte’s review report for the half year ended 31 December 2010, and certain reports prepared by Deloitte and included in a prospectus issued by Hastie in that same period.

At first instance, Deloitte sought to resist production of its files relating to those audits and other engagements (Engagement Files) on the ground that their production would give rise to a real and appreciable risk of exposure to criminal or civil penalty proceedings (and therefore they were entitled to resist production on the basis of privilege against self-incrimination and/or privilege against exposure to a penalty).

The primary judge held that the partners of Deloitte who were directly involved in the relevant engagements (including the lead audit partner, Mr Saayman) were entitled to claim the privilege, and therefore to resist production. However, his Honour held that there was no real or appreciable risk of the other partners of Deloitte (uninvolved partners) being exposed to such proceedings, and because the evidence showed that the uninvolved partners had equal control of the Engagement Files, they can (and should) be ordered to produce them. An order was made accordingly.

However, following the making of that order, the uninvolved partners applied to have it discharged, or for them to be excused from complying with it (Discharge Application), on the grounds that Mr Saayman had, subsequent to the order, taken possession of the hard copy Engagement Files (even though they were meant to be securely stored in a ‘litigation room’ with swipe card access only), and had encrypted (or password protected) the electronic copy of the Engagement Files, such that the uninvolved partners were now unable to comply with the order. However, the evidence led on the Discharge Application provided no details as to how or when Mr Saayman’s had done those things, what (if any) inquiries had been made as to those matters, nor what (if any) requests (let alone demands) had been made for the return of the Engagement Files.

The evidence did, however, include an email exchange between one of the uninvolved partners and Mr Saayman, which purported to evidence that Mr Saayman had taken the Engagement Files, stored them in an undisclosed location away from Deloitte’s premises, and had no intention of handing them back. The email exchange is reproduced in full at [182]-[189] of the judgment of Markovic and O’Callaghan JJ – it was entirely scripted (having been settled by Deloitte’s lawyers), was described by Markovic and O’Callaghan JJ (at [283]) as a ‘contrivance’, and clearly bordered on comical. Unsurprisingly, the primary judge dismissed the Discharge Application.

Deloitte now sought leave to appeal. The principal issues were:

  • whether the primary judge was correct in finding that there was no real and appreciable risk of the uninvolved partners being exposed to criminal or civil penalty proceedings (and therefore they were not entitled to resist production on the basis of privilege against self-incrimination and/or privilege against exposure to a penalty);
  • whether the primary judge was correct in finding that the uninvolved partners had ‘control’ of the Engagement Files; and
  • whether the primary judge ought to have granted the Discharge Application.

The main judgment was written by Markovic and O’Callaghan JJ. Justice Wigney agreed with their Honours’ reasons, but provided separate reasons “by way of elaboration or further elucidation” (at [4]).

In relation to the first issue identified above, both Wigney J and Markovic and O’Callaghan JJ reviewed the various statutory provisions (being provisions of the Corporations Act 2001 (Cth), the Australian Securities and Investments Commission Act 2001 (Cth) and the Australian Consumer Law) which Deloitte had contended could give rise to criminal or civil penalty proceedings against the uninvolved partners. They held that, on their proper construction, there was no possibility that criminal or civil penalty proceedings could be brought against the uninvolved partners under those provisions (as opposed to Mr Saayman and any other partners who were directly involved in the relevant engagements), unless there was some broader principle under the Partnership Act 1958 (Vic) (PA) (or its New South Wales equivalent) or otherwise which might impose vicarious liability on the uninvolved partners for the actions of Mr Saayman for no other reason than that they were partners of his. Their Honours held that there was no such principle. In that regard Deloitte had relied, in particular, on s 14 of the PA, which provides that:

… where by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his or her co-partners loss or injury is caused to any person not being a partner in the firm or any penalty is incurred the firm is liable therefor to the same extent as the partner so acting or omitting to act.

However, their Honours held that that provision did not have the effect of imposing criminal (or civil penalty) liability on all partners for the acts of one partner. In particular, it did not mean that criminal or civil penalty proceedings could be brought against all partners for the acts of one partner. It simply meant that, to the extent that any fines or civil penalties were imposed (against the ‘involved’ partner(s) or the firm), all partners were jointly and severally liable for their payment; or in other words (at [206], [215], [226]):

… [Deloitte’s submission] confuses one partner’s personal criminal liability for an offence, on the one hand, with another partner’s liability to pay, or contribute to the payment of, any penalty imposed upon that partner, on the other hand. They are two separate and distinct things because the latter liability does not involve the attribution of personal, criminal liability…

The “vicarious liability” of a partnership for the acts of a delinquent partner, who has, for example, been found to have contravened a penalty provision and fined, is a liability for the penalty – not for the offence…

… these provisions “are concerned with satisfying debts and liabilities for which a partnership has become liable; they do not operate to impose criminal liability where none has otherwise been established”.

Their Honours also held that, in relation to many of the statutory provisions referred to, any civil penalty proceedings would, by now, be statute-barred in any event.

Finally, even if the above findings were wrong, and there was some risk that the uninvolved partners might face criminal or civil penalty proceedings because of the conduct of the ‘involved’ partners, such a risk was at best theoretical, and was not ‘real and appreciable’.

Accordingly, the first issue identified above was determined adversely to Deloitte.

In relation to the second issue identified above, both Wigney J and Markovic and O’Callaghan JJ held that the evidence before the primary judge amply supported his Honour’s finding that the uninvolved partners (or at least some of them) had ‘control’ of the Engagement Files (at least before they were allegedly taken by Mr Saayman).

In relation to the third issue identified above (being the Discharge Application), both Wigney J and Markovic and O’Callaghan JJ held that Deloitte’s contentions were entirely misconceived. Specifically, it was not for the applicant to prove, or for the primary judge to be satisfied, that the Engagement Files were still in the ‘control’ of the uninvolved partners at the time of the Discharge Application – that finding had already been made when the order for production of the Engagement Files was made. Instead, that order having been made, the onus was now on Deloitte to demonstrate that there had been a material change of circumstances which warranted that order being revisited. This it had singularly failed to do, particularly in circumstances where, as noted above, it’s evidence failed to indicate how or when the files had been taken (or encrypted) by Mr Saayman, what (if any) inquiries had been made as to those matters, nor what (if any) requests (let alone demands) had been made for the return of the files. Further, and in any event, the evidence strongly supported the fact that other copies of the Engagement Files existed elsewhere, and also that the Engagement Files could be retrieved (for example, the Engagement Files were property of the firm, and under the Deloitte partnership agreement, the CEO or the board could simply direct that the files be handed back, and if that request was not complied with, they could expel Mr Saayman from the partnership – needless to say, there was no evidence that such steps had been, or would ever be, taken).

Justice Wigney was particularly critical of the conduct of Deloitte in connection with this aspect of the matter (at [91]-[94]):

The primary judge, with admirable restraint and understatement, described the circumstances created by Mr Saayman’s actions as “extraordinary and troubling” … I would go further. I would not be so charitable. Indeed, I would characterise Mr Saayman’s conduct as outrageous and contumacious, if not bordering on contempt. Deloitte’s conduct was not much better…

Mr Saayman, of course, was not called by Deloitte to explain his actions. His actions were conveniently set out in a series of carefully contrived emails with one of his partners. He was thereby shielded from any prospect of cross-examination. Given the outrageous nature of Mr Saayman’s conduct, it is perfectly understandable why he would not have wanted to front the primary judge to give an account of his actions. It is equally understandable why Deloitte did not attempt to adduce evidence from him.

As for Deloitte’s response to Mr Saayman’s outrageous conduct, the best that could be said is that the evidence revealed that Deloitte had effectively done nothing more than conveniently, if not cynically, rely on the circumstances supposedly created by Mr Saayman’s actions to defeat the production order. The evidence adduced by Deloitte showed that the partnership or its management had shown no apparent interest in finding out how it was that Mr Saayman had been able to take off with the hardcopy documents and encrypt the electronic documents.

The hardcopy documents had been in a secure litigation room, access to which was limited to Deloitte’s in-house litigation team, of which Mr Lee was no doubt a member. The electronic files had been securely maintained by Deloitte’s “IT services team”. Yet none of the witnesses called by Deloitte in support of its application had troubled themselves to ascertain when and how Mr Saayman had been able to enter the secure litigation room and take the documents or when and how Mr Saayman had been able to encrypt files on Deloitte’s supposedly secure IT network.

In the end, although leave to appeal was granted, the appeal was dismissed.

Case details

Deloitte Touche Tohmatsu (A firm) v Sadie Ville Pty Ltd (as trustee for Sadie Ville Superannuation Fund) [2020] FCAF 23

  • Federal Court of Australia, Wigney, Markovic and O’Callaghan JJ,
  • 27th of February, 2020,
  • Applicants’ / Appellants’ Solicitors: Clifford Chance;
  • Respondents’ Solicitors: Phi Finney McDonald;
  • Respondent’s Funder: N/A

Read more about this case on Austlii: Deloitte Touche Tohmatsu (A firm) v Sadie Ville Pty Ltd (as trustee for Sadie Ville Superannuation Fund) [2020] FCAF 23

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