The jury's out on class actions

On one side is the financial services giant AMP, a company still bleeding heavily from a series of scandals that have recently claimed the scalps of both its chairman and chief executive, and wiped about 35 per cent off its market value since March.

In startling evidence to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, AMP admitted it charged thousands of customers fees for services it didn’t provide, and that senior advisers and executives misled the Australian Securities & Investments Com­mis­sion on repeated occasions.

Now, AMP is being attacked by a veritable army of specialist class actions lawyers, backed by powerful commercial litigation funders, on behalf of thousands of disgruntled shareholders seeking recompense.

AMP is having to deal with five class actions that have been lodged in both the Federal Court of Australia and the Supreme Court of NSW.

That’s a new record in Australian legal terms, and is adding to calls for a total rewrite of the existing laws governing the lodgement of competing class actions in Australia. Are competing class actions justified, or are they an abuse of the legal process and potentially detrimental to the very shareholders they are meant to be ­protecting?

All of the AMP class actions essentially cover the same ground, except that the dates clarifying which AMP investors are eligible to join the actions varies slightly between the different claims lodged. Most have a starting date for owning AMP shares in April or May 2013, and an end date in May 2018. But the fundamental claims against AMP in the various actions are the same — that it breached ASX listing rules and the Corporations Act.

The five class actions against AMP each have a law firm and a litigation funder:

1. Heavyweight law firm Slater and Gordon, which has teamed up with the Jersey registered litigation funders, Therium.

2. Maurice Blackburn, which has partnered with Singapore-based International Litigation Funding Partners.

3. Shine Lawyers and its British funder Augusta Ventures.

4. Quinn Emanuel and Britain-listed funder Burford Capital.

5. Phi Finney McDonald and ASX-listed litigation funder IMF Bentham.

It’s a legal feeding frenzy in every sense, because the potential financial stakes are so high.

If AMP loses, it could have to pay out huge sums in compensation to the litigants, including the ‘‘conjoined’’ shareholders.

Former Perpetual CEO and leading board executive Graham Bradley spoke for many business leaders a few days ago when he called for a review of the entire sector: Bradley complained that victims in class actions often only receive a fraction of the final payout.

Bradley, who is now chairman of Energy Australia and GrainCorp, said it was time for ‘‘constraint’’ in class actions as a debate flared over whether lawyers should be allowed to compete directly with litigation funds in class actions.

This month AMP went to the Federal Court seeking orders to have all the class actions consolidated and moved to the Supreme Court of NSW. That’s because the Supreme Court has already held a hearing on the Quinn Emanuel action, in which AMP agreed to file its defence to the court by July 20.

But, in a system where legal precedents mean everything, Justice John Middleton of the Federal Court is now waiting on the outcome of an appeal against a landmark judgment in late May on the issue of competing class actions. In that ruling, involving three competing actions against the logistics software company GetSwift, another Federal Court judge did rewrite the legal books by ordering that only one class action against GetSwift could proceed. The other two were permanently stayed.

The outcome of the GetSwift appeal has huge implications for AMP and its five legal opponents, and for other live cases. If the appeal fails, in future only single class actions will be permitted.

Explosion of cases

At March 23, 2018, the Federal Court had more than 85 class actions underway across Australia against corporations, governments and other entities, including 45 in NSW and another 23 in Victoria. Add to those the five actions currently under way against AMP, plus the three against GetSwift. Separately, commercial class actions have been launched in various Supreme Courts around Australia.

Various class actions have been launched against the Commonwealth Bank following Austrac’s investigation into more than 50,000 breaches of money-laundering and terrorism-financing laws. Earlier this month CBA agreed to pay a $700 million penalty to resolve Federal Court proceedings relating to the breaches, the biggest civil penalty in Australian history.

There are also class actions against other major companies including ANZ, NAB, Westpac, Brambles, BHP and Woolworths. A further three class actions have been launched against Blue Sky Asset Management, whose share price has dropped from almost $14 in January to below $1.80.

A report early this year from Nera Economic Consulting examined the growth of class actions in the US over 2017, finding that the number of shareholder lawsuits rose by 44 per cent to 432.

There’s no doubt Australia is heading in the same direction, but aggrieved investors need to give them careful consideration before joining them. In some cases, especially with smaller companies, one would have to question the financial capacity of the company to both defend itself in one or more courts, and to later dole out big compensation payouts to shareholders and their legal teams.

Class actions are expensive to run, for companies to defend, and sometimes shareholders are last in line when it comes to receiving compensation.

A separate consequence is that the increase in the number of class actions in Australia has triggered a sharp rise in the cost of directors’ and officers’ insurance. For smaller companies, these costs need to be funded directly from earnings.

AMP has vowed to fight all the class actions against it vigorously, and to prepare its defence it has assembled its own regiment of high-powered commercial lawyers.

On face value, as the high legal bills are racked up, AMP will be digging deeply into its large legal war chest to pay them. But there’s little doubt that, as legal proceedings wear on, all AMP shareholders could end up paying a financial price, one way or another.

Indeed, AMP will be a great legal case study down the track, not only in terms of its evident failings in corporate governance at the very highest levels of the company, but also in helping to define the future framework for class actions around Australia.

Tony Kaye is the editor of Eureka Report, which is owned by listed financial services group InvestSMART.

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