By: Amanda Beattie and Jonathon Ferraro


At a glance

Judgment in favour of CBA was handed down last month1 in respect of two consolidated shareholder class actions2. The actions alleged that CBA breached its continuous disclosure obligations and mislead or deceived shareholders in relation to compliance with anti-money laundering and counter-terrorism financing (AML/CTF) laws.

The Court found that CBA was not aware of information as pled by the applicants. To the extent the Court found CBA was aware of certain information regarding its AML/CTF obligations, such information was:

  • not required to be disclosed to the market and even if it were, was not the type of information that would influence shareholders, and
  • not the type of information a reasonable person would expect to have a material effect on the price or value of CBA shares.

In this note we provide an overview of the CBA decision and consider its impact in the current securities class action landscape.


Background and allegations

Key dates

  • 3 August 2017 – AUSTRAC commenced civil penalty proceedings against CBA for alleged non-compliance with its AML/CTF program.
  • 20 June 2018 – Federal Court granted declarations ratifying AUSTRAC’s agreement with CBA that CBA would pay a $700m penalty for CBA’s non-compliance with its AML/CTF program3.
  • 2017 and 2018 – class actions proceedings were commenced against CBA by Maurice Blackburn and Phi Finney McDonald.

The allegations in the proceedings broadly fell into two categories, failures to disclose information and information published that was misleading or deceptive.

Continuous disclosure allegations

The applicants alleged that CBA was required to disclose a series of matters set out below, which, if disclosed, would have had a material effect on the price of CBA shares (collectively the Information):

  • Late threshold transaction reports (TTR) Information: CBA failed to report approximately 53,506 TTRs to AUSTRAC (aggregate value of approximately $624.7m) between November 2012 and 8 September 2015.
  • Account Monitoring Failure Information: CBA failed to conduct account level monitoring across 778,370 accounts between June 2014 and September 2015.
  • The IDM ML/TF Risk Assessment Information: CBA failed to carry out money laundering and terrorism financing (ML/TF) risk assessments in respect of the risks that its intelligent deposit machines (IDMs) possessed in June 2014 and August 2015, which was a requirement pursuant to CBA’s AML/CTF program.
  • Potential Penalty Information: CBA was potentially exposed to enforcement action by AUSTRAC, which might have resulted in CBA being ordered to pay a substantial civil penalty.

Misleading or deceptive conduct

The applicants alleged two different types of representations:

  • Compliance Representations: that CBA had in place policies, procedures and systems for ensuring compliance with relevant regulatory requirements and had in place risk management systems to ensure monitoring and reporting of compliance activities, and
  • Continuous Disclosure Representation: that CBA had in place procedures to ensure material matters were appropriately reported, including to its CEO and the ASX and that it complied with its continuous disclosure obligations.

Decision

Continuous Disclosure Obligations

While Yates J was satisfied that CBA was aware of certain information by the key dates, he was ultimately not satisfied that CBA was aware of each pleaded component of the Information. In reaching this view, his Honour made the distinction between knowledge at the level of an officer of the company, which is how the case was pleaded, and knowledge of employees, which he notes were many levels below “officer” level. His Honour accepted that with hindsight, there should have been further investigation when issues were known to employees, but found that the test for awareness does not extend to an awareness of unknown facts that are merely capable of discovery.

Further, and critically, he was not satisfied that all of the Information was information that, if disclosed, would be likely to influence investors when deciding whether to buy/sell CBA shares. Put simply, his Honour was not satisfied that the information was information that a reasonable person would expect to have a material effect on the price or value of CBA shares. His Honour also noted that, in spite of CBA’s awareness of certain information, each component of the information was incomplete, and in the absence of its proper context, would more likely confuse, rather than inform investors.

More particularly, his Honour drew attention to the fact that the applicants’ case proceeded on the basis that the pleaded Information was what CBA was obliged to disclose, i.e. each aspect of that information was inseparable. It was therefore not open to the applicants to argue, as they attempted to do in closing submissions, that if the Court found that certain aspect of the Information did not exist or did not need to be disclosed, it could still find that the balance should have been. In effect, the Court found that the whole of the allegation must rise or fall together.4

Misleading or Deceptive Conduct

His Honour was not satisfied the applicants made out their claim for misleading or deceptive conduct, and emphasised that where a representation is said to arise from conduct, the totality of the conduct must be considered when determining whether the representation was made.5

In particular, his Honour accepted CBA’s submissions that a number of the express statements on which the applicants rely had no correlation with the implied representations the applicants allege. Further, his Honour agreed that some documents on which the applicants rely emphasise that CBA was exposed to operational risks including regulatory risks and reputational risks.

Helpfully, his Honour interpreted the word “ensure”, which appeared in various public statements, in context, to be used only as a reference to the objective of CBA’s policies, procedures, and controls, not as a guarantee that CBA had achieved or will achieve compliance through these policies, procedures, and controls.

Causation/loss

Although not required in light of his other findings, his Honour included commentary on causation and loss, on the assumption that market-based causation is an available mechanism (although he notes that CBA did not accept that to be the case) and concluded that the applicants had not established their case on causation and loss. In doing so, his Honour noted that the applicants bear the onus of proving the existence of loss and that he was not satisfied that the applicants’ submission that, had the Information (or any part of it) been disclosed, the market price of CBA shares would have been lower immediately following the disclosure.

The landscape of securities class actions

Until late last year, judgments in shareholder class actions were few and far between. However, the decision in the CBA class actions marks the fifth win (at first instance) for respondents. The previous four securities class action judgments were delivered in October 2019 (TPT Patrol v Myer), October 2020 (Crowley v Worley Limited)6, February 2022 (Bonham v Iluka) and December 2023 (McFarlane v Insignia [previously IOOF]). Of course, this needs to be considered in context. In particular, since the decision in Myer occurred, there has been a significant number of securities class actions that have settled and few have run to hearing.7

At a (very) high level, each of the other actions in which the class actions failed were ‘future representation’ actions about the (respective) company’s published earnings guidance. That is, whether the companies had a reasonable basis to make those statements. By contrast, the CBA class actions centred around CBA’s AML/CTF deficiencies that the applicants contend CBA were aware of and should have disclosed, but did not. However, one common theme in the judgments is the fact that the Court has noted that although not necessary, they would have found against the applicants in relation to causation and loss as well. Those comments, while obiter, are likely to be a further source of concern for plaintiff firms considering shareholder class actions.

There are presently two shareholder class actions on foot that are similar to the CBA matters, being the Crown Resorts8 and The Star9 proceedings. Both concern alleged non-compliance with the respective reporting entity’s AML/CTF programs. It is possible that the decision in CBA may have an impact on how those cases progress and are ultimately resolved. The Court recently ordered soft class closure in the Crown case, but in a departure from the usual approach, has ordered that the parties share the costs associated with it, rather than the plaintiff bearing the costs. Whether the soft class closure order aids a settlement in Crown, in light of the CBA decision, remains to be seen.

More broadly, we have already seen plaintiff firms take a more cautious approach in relation to shareholder class actions and we expect that the recent decisions will result in a more refined approach to the way they are pleaded. It could potentially result in fewer actions in the future and will, almost certainly, result in more confined allegations being made.

What are the possible implications?

  • A slowdown in the number of securities class actions filed is quite likely following the losses for group members since December last year. Representatives at plaintiff firms have publicly said that the landscape has now changed.10 Conversely, we may see fewer settlements and more trials in the actions which have already been commenced.
  • Establishing loss remains elusive for the plaintiffs in shareholder class actions and is an issue that plaintiff firms are going to need to address going forward if settlements are to be successfully negotiated.
  • Plaintiff firms and funders will be watching the outcome of the Worley appeal with interest as it will further inform the fertility of the grounds to bring shareholder class actions. The appeal period is still running in relation to CBA so there may yet be an appeal filed.
  • It could result in a more novel approach to shareholder actions, for example attempts to bring claims against a different set of players, such as professional advisors (which we have seen in a limited capacity to date), directors personally or other third parties.

 

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

[2] Zonia Holdings Pty Ltd v Commonwealth Bank of Australia Limited VID1085/2017 and Philip Anthony Baron & Anor v Commonwealth Bank of Australia (ACN 123 123 124) NSD1158/2018.

[3] Chief Executive Officer of the Australian Transaction Reports and Analysis Centre v Commonwealth Bank of Australia Limited [2018] FCA 930

[4] CBA [383] – [385].

[5] Ibid, [1076].

[6] In respect of Worley, it is important to note that the decision was successfully appealed and remitted to a single judge for determination on a reconsideration of the whole of the evidence. In December 2023, Jackman J found that the applicant had failed to prove he had suffered any loss. That decision has been appealed by the applicant and cross-appealed by Worley.

[7] Court v Spotless Group Holdings Limited [2020] FCA 1730; McKay Super Solutions Pty Ltd (Trustee) v Bellamy’s Australia Ltd (No 3) [2020] FCA 461; Whittenbury v Vocation Limited (in liquidation) [2021] FCA 829; Eckardt v Sims Ltd [2022] FCA 1609; Wills v Woolworths Group Ltd [2022] FCA 1545; Hall v Pitcher Partners (a firm) [2022] FCA 1524; Colin Graham Ingram and Judy Gail Tulloch as trustees for the Ingram Superannuation Fund v Ardent Leisure Limited (ACN 104 529 106) & Ors QUD 182/2020 (reasons not yet published).

[8] Lieberman v Crown Resorts Ltd S ECI 2020 04566, run by Maurice Blackburn.

[9] Da Lynch Pty Ltd v The Star Entertainment Group Ltd S ECI 2022 01039, run by Slater & Gordon.

[10] See https://www.afr.com/companies/financial-services/companies-turn-class-action-tide-with-five-wins-in-a-row-20240219-p5f614