Industry 19 March 2015

Fed Court accepts ‘fraud on the market’ theory

Take-away point

In Grant-Taylor v Babcock & Brown Limited (In Liquidation) [2015] FCA 149, Justice Perram, in obiter, indicated that investors who buy shares in a listed company, where that company has breached its obligation to disclose non-public price sensitive information to the market, could recover damages without proving a direct causal link between the non-disclosure and their decision to invest in the company.  This is akin to the US style ‘fraud on the market’ theory.

This is the first and clearest indication by a judge of the Federal Court that in certain circumstances shareholders or investors may be able to claim losses arising from the conduct of a company without any proof of reliance on information that misled the investor.  This is the clearest indication to date that indirect causation may be sufficient to recover damages in securities litigation in Australia.

However, given the comments are obiter and do not create a binding precedent the position remains uncertain.  That uncertainty presents a risk and is likely a factor in every shareholder class action to date settling prior to judgment.

There are a number of shareholder class actions currently on foot where the issue of causation will be considered.  Those involved with securities litigation will be closely watching any court determinations of those claims.


This was a claim brought by over 70 people or entities who purchased shares in Babcock & Brown (BBL) between 21 February 2008 and 13 March 2009. When the plaintiffs first purchased their BBL shares they were trading at $16.76 per share.  Before trading was suspended they were trading at $0.33.

The plaintiffs alleged that BBL failed to disclose information to the market in breach of its continuous disclosure obligations.  Those obligations are contained in the Corporations Act 2001 (Act) and ASX and required BBL to immediately tell the ASX of any information that a reasonable person would expect to have a material impact on the price of its shares.

The four non-disclosures alleged to give rise to the overvaluing of BBL’s shares were:

  • The 2005, 2006 and 2007 final dividends were unlawfully paid out of capital contrary to section 254T of the Act;
  • The financial reports for the 2005, 2006 and 2007 financial years did not give a true and fair view of BBL’s financial position;
  • By no later than 29 November 2008 BBL’s directors knew that it was insolvent; and
  • The financial dividend in 2007 had been paid out of borrowed funds following asset revaluations.

The decision

Justice Perram rejected the plaintiffs’ allegations finding:

  • As regards the dividend claim, the breach was technical and of no economic consequence to the shareholders of BBL;
  • While the financial reports of BBL did not give a ‘true and fair’ view, BBL was not required to disclose the information that had no financial consequences for the value of shares in BBL;
  • The directors did not know that BBL was insolvent as at 29 November 2008; and
  • The claim dividends were paid out of borrowings from asset revaluations failed for want of evidence and was otherwise already adequately disclosed in the financial reports.

His Honour found that the plaintiff shareholders had suffered no loss as a result of BBL’s conduct noting [at 218]:

“[T]he plaintiffs have suffered no loss in relation to these non-disclosures. Whilst it is, no doubt, distracting that the plaintiffs lost money because of the collapse of BBL, they did not lose a single cent as a result of the events surrounding the payment of the 2005-2007 final dividends. They lost money because of the global financial crisis in 2008.”

Despite the plaintiffs being unsuccessful Justice Perram still considered in obiter the circumstances in which shareholders can recover loss when it is alleged that they bought shares at an inflated price due to non-disclosure.  A summary of those comments is above.

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