The regulator's partial win against Vocation (VET)
In a partially successful prosecution, ASIC takes on former listed vocational education provider Vocation regarding whether the company engaged in misleading or deceptive conduct and/or breached continuous disclosure obligations. This matter also concerns whether directors and officers were involved in the company’s contraventions and/or breached directors' duties.
This is an ASIC prosecution arising out of the collapse of former ASX-listed vocational education and training provider, Vocation Ltd (Vocation). Vocation, which was listed on the ASX in December 2013, generated the vast majority of its revenue through the delivery of government subsidised vocational education and training. This training was delivered by a number of Vocation's subsidiary Registered Training Organisations (RTOs) under contracts with various State and Territory Governments. In 2014, approximately 80% of Vocation’s revenue was received pursuant to funding contracts with the Victorian Department of Education and Early Childhood Development (DEECD).
From around July 2013, DEECD began investigating two of Vocation's RTOs, 'BAWM' and 'Aspin', for suspected breaches of their government funding contracts. During the course of its investigations, DEECD withheld all funding to BAWM and Aspin (which together generated more than two-thirds of Vocation's annual revenue at the date of listing) under their funding contracts, and directed them to cease all new enrolments of eligible students. These investigations resulted in Vocation announcing to the market on 27 October 2014 that it had agreed to forfeit $19.6 million in government funding and that BAWM and Aspin would relinquish their government funding contracts from early 2015. Following the announcement, Vocation’s share price fell precipitously, and Vocation ultimately entered into liquidation in January 2016.
In this proceeding, ASIC alleged that:
- Vocation breached its continuous disclosure obligations under s 674(2) of the Corporations Act 2001 (Cth) (CA) by failing to make timely disclosure of the nature and impact of the DEECD investigations and associated contractual measures imposed on BAWM and Aspin by DEECD (Withholding and Suspension Information).
- Vocation engaged in misleading or deceptive conduct in contravention of s 1041H of the CA by making certain representations about the DEECD investigations.
- Vocation’s former CEO (Mark Hutchinson), CFO (Manvinder Gréwal) and Chairman (John Dawkins) breached s 180 of the CA (directors' duty to exercise care and diligence) by permitting certain of Vocation's contraventions.
- Mr Hutchinson and Mr Dawkins aided and abetted or were directly or indirectly knowingly concerned in Vocation's continuous disclosure contraventions.
A shareholder class action against Vocation and its former auditors, PricewaterhouseCoopers, is also currently being litigated jointly by Maurice Blackburn and Slater & Gordon in the Federal Court.
In this judgment, Nicholas J partially upheld ASIC's case against the respondents. His Honour held that:
- Vocation contravened s 674(2) of the CA by failing to disclose the Withholding and Suspension Information in accordance with the requirements of ASX Listing Rule 3.1 – in doing so, his Honour set out (at -) a useful summary of the principles relating to contraventions of s 674.
- Vocation engaged in conduct that was misleading or deceptive or likely to mislead or deceive by providing a due diligence questionnaire (DDQ) to UBS in September 2014 that contained misleading representations about the nature and impact of the DEECD investigations, in circumstances where UBS was considering underwriting a proposed offer of shares under an institutional placement (ultimately, UBS agreed to fully underwrite the institutional placement at a price of $3.05 per share, raising $74 million for Vocation – less than three months later, the price of Vocation’s shares had fallen to just $0.20 (see -)).
- Vocation engaged in conduct that was misleading or deceptive or likely to mislead or deceive by publishing an ASX announcement on 25 August 2014. His Honour held that the announcement misleadingly represented that Vocation’s funding arrangements under its funding contracts were operating normally, Vocation was able to continue to enrol students and deliver training under all of its RTOs’ funding contracts with DEECD (when in fact BAWM and Aspin had been directed to suspend all enrolments), and that the withholding by DEECD of recent payments was not material to Vocation (see -).
- Mr Hutchinson and Mr Dawkins contravened s 180 of the CA by causing or permitting Vocation’s continuous disclosure contraventions.
- Mr Hutchinson also contravened s 180 of the CA by causing or permitting Vocation’s misleading or deceptive conduct contravention in relation to the 25 August ASX announcement and the DDQ.
- Mr Gréwal contravened s 180 of the CA by causing or permitting Vocation’s misleading or deceptive conduct contravention in relation to the DDQ.
However, his honour dismissed ASIC's other claims, holding that:
- Mr Hutchinson and Mr Dawkins were not directly or indirectly involved in Vocation’s continuous disclosure contraventions within the meaning of ss 674(2A) and 79 of the CA. While ASIC did not contend that either Mr Hutchinson or Mr Dawkins knew that the Withholding and Suspension Information was material, it argued that it was sufficient for the purposes of s 79 (which provides for when a person will be 'involved in a contravention') that each of them knew of the underlying facts from which the Court could infer that a reasonable person would have expected such information to be likely to influence an investor deciding whether to acquire or dispose of Vocation shares. His Honour rejected ASIC's construction of s 79, holding that the 'weight of authority' supported the conclusion that, in order to contravene s 674(2A), the defendant must know that the relevant information was not generally available and was information which a reasonable person would have expected, if it were generally available, to have had a material effect on the company's share price (see -).
- While a Cleansing Notice provided by Vocation to the ASX following the institutional placement in September 2014 was defective and false in a material particular (because it included an express statement that Vocation had complied with the provisions of Chapter 2M and s 674 of the CA), Vocation did not contravene s 708A(9) of the CA because the 'directing mind' of Vocation (being its senior officers) did not have actual knowledge that the Withholding and Suspension Information was material and therefore Vocation was not 'aware' of the defect in the Cleansing Notice in the relevant sense.
A particularly noteworthy aspect of this judgment is his Honour's treatment of the expert evidence relied upon by ASIC to establish that the Withholding and Suspension Information was ‘material’ within the meaning of s 674(2)I(ii) of the CA. In order to establish a continuous disclosure contravention, s 674(2)I(ii) (and Listing Rule 3.1) requires that a reasonable person would have expected the information to have had a material effect on the price or value of the entity’s shares, if it had been generally available. Section 677 of the CA provides that this requirement will be satisfied if the information would be likely to influence persons who commonly invest in securities in deciding whether to acquire or dispose of the company’s shares.
ASIC's expert witness in respect of materiality was Mr Andrew Sisson. Mr Sisson is a share analyst and share portfolio manager, who has many years of experience managing share market portfolios in Australia on behalf of large institutions which entrust funds to his company for investment in the share market. Mr Sisson gave evidence of the investing behaviour of institutional investors, and in particular:
- how institutional investors (in 2014 and in any other year in recent times) typically determine whether to acquire or dispose of securities
- what statements made or information disseminated by a listed corporation of the kind similar to Vocation would be likely to influence institutional investors in deciding whether to acquire or dispose of shares in that company
- how institutional investors would have reacted to the disclosure of the Withholding and Suspension Information at particular points in time, including Vocation’s ASX announcements.
The judgment indicates that the respondents did not lead their own materiality expert evidence, but rather preferred to strenuously attack Mr Sisson's evidence. One central criticism raised by the respondents was that Mr Sisson’s evidence, which was only given in relation to the investing behaviour of institutional investors, provided an insufficient basis from which to draw a conclusion in relation to the investing behaviour of persons who commonly invest in securities. In rejecting the respondents' submission, his Honour provided some valuable guidance on the hypothetical reasonable person referred to in s 677 of the CA. His Honour held that this person is an institutional investor, or a person who behaves in a similar fashion to an institutional investor (at -):
Mr Sisson's evidence indicates that institutional investors are most likely to determine the price at which publicly listed securities trade. Further, the use of the word 'invest' rather than purchase or acquire in s 677 suggests that the hypothetical reasonable person referred to in that section will be someone who makes an assessment as to whether to buy or sell securities on the basis of a company's earnings or potential earnings and the potential return the investment offers after making an allowance for risk. I do not think a knowledge of the investing behaviour of speculators and day traders who seek to profit on the back of rumour or momentum rather than company fundamentals would be of any assistance in determining what information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of particular securities. That observation would also hold true for hedge funds at least in circumstances where they are not making their investment decisions based on company fundamentals.
Ultimately, his Honour described Mr Sisson as 'a meticulous witness' (at ), accepted his evidence, and held that the Withholding and Suspension Information was 'material' in the relevant sense (see -).
Australian Securities and Investments Commission v Vocation Ltd (in liq)  FCA 807
- Federal Court of Australia, Nicholas J, 31 May 2019
- Applicant's Solicitors: ASIC
- First Respondent's Solicitors: N/A
- Second Respondent's Solicitors: Allens
- Third Respondent's Solicitors: Baker & McKenzie
- Fourth Respondent's Solicitors: Clyde & Co
- Applicant's Funder: N/A
Read more on Austlii: Australian Securities and Investments Commission v Vocation Ltd (in liq)  FCA 807
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