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Australia adopts market-based causation (aka fraud on the market) for the first time

The elephant in the room in all shareholder class actions was whether shareholders had to establish their own reliance on the contravening conduct, or could merely rely on that conduct’s effect on the market, akin to the US concept of “fraud on the market”.

The NSW Supreme Court has taken a step closer towards Australia adapting the US concept of “fraud on the market” by allowing “market-based causation” in the shareholder class action judgment of HIH Insurance Limited (In liquidation) & Ors [2016] NSWSC 482.

In this case, it was held that shareholders who acquired shares at prices which were inflated, due to misleading and deceptive financial results, were able to recover the difference between the false price at which the shares were purchased and real market price, despite not having read or relied upon the financial statements. Although the judgment leaves open the requirement for reliance in many other circumstances, it is almost certain to be appealed. Insurers, directors and companies should all be alive to this evolving brave new world of market-based causation.

Patrick Boardman (Partner) and Jonathon Lees (Special Counsel) discuss the far-reaching impact of the decision and its implications for insurers and insureds in more detail. Click on the link below to read the full update.

© Wotton + Kearney 2016
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