Lee v Bank of Queensland Limited [2014] FCA 1376
IN THE FEDERAL COURT OF AUSTRALIA | |
| First Applicant JANIS JOAN LEE Second Applicant | |
AND: | BANK OF QUEENSLAND LIMITED (ACN 009 656 740) Respondent |
DATE OF ORDER: | |
WHERE MADE: |
THE COURT ORDERS THAT:
1. Pursuant to s 33V and s 33ZF of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”), the settlement of the proceeding between the applicants and the respondent be approved on the terms set out in:
(a) the settlement deed which is confidential exhibit BRI-A to the affidavit of Brett Richard Imlay filed 10 October 2014 (“settlement deed”); and
(b) the settlement scheme which is exhibit BRI-1 to the affidavit of Brett Richard Imlay filed 10 October 2014 (“settlement scheme”).
2. The applicant be authorised nunc pro tunc on behalf of the group members to enter into and to give effect to the settlement deed and the transactions contemplated by them, for and on behalf of the group members.
3. The whole of the proceedings be dismissed.
4. Any orders as to costs previously made in the proceedings be vacated.
5. Each party bear its own costs of the proceedings.
6. Pursuant to s 33V(2) and s 33ZF of the Federal Court Act:
(a) the amount of $1,925,115.83 (inclusive of GST) be approved as the applicants’ costs to be distributed in accordance with cl 37(a) of the scheme;
(b) the amount of $222,572.50 (inclusive of GST) be approved as the approval costs to be distributed in accordance with cl 37(b) of the scheme;
(c) an amount up to $368,258 (inclusive of GST) be approved as the administration costs to be distributed in accordance with cl 38 of the scheme;
(d) Stewart Alan Levitt (“administrator”) is granted leave to apply to the Court for approval of any administration costs in addition to the $368,258 proposed to be distributed under the scheme.
7. Pursuant to s 33V and s 33ZF of the Federal Court Act, liberty is granted to the administrator to apply to the Court in connection with the scheme including for any order, approval or guidance of the kind contemplated by the scheme.
8. The Australian Securities Investment Commission (“ASIC”) is to provide to the administrator data in its possession that records details relevant to the calculation of the group members’ claim amounts and in particular the loss suffered by each group member attributed to the respondent pursuant to the ASIC Compensation Model and the total losses suffered by all group members attributed to the respondent pursuant to the ASIC Compensation Model.
9. Pursuant to s 37AF and s 33ZF of the Federal Court Act, the exhibit marked as confidential exhibit BRI-B to the affidavit of Brett Imlay sworn 9 December 2014 is not to be published to any person other than the applicants (or their legal advisers) without leave of the Court and is to be sealed on the Court file in an envelope marked “Not to be opened except by leave of the Court or a Judge”.
10. None of the orders made in this proceeding under s 37AF of the Federal Court Act shall prevent any person from publishing the whole or any part of these reasons for judgment.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
QUEENSLAND DISTRICT REGISTRY | |
GENERAL DIVISION | QUD 732 of 2012 |
BETWEEN: | ROBERT WILLIAM LEE First Applicant JANIS JOAN LEE Second Applicant
|
AND: | BANK OF QUEENSLAND LIMITED (ACN 009 656 740) Respondent
|
JUDGE: | COLLIER J |
DATE: | 16 DECEMBER 2014 |
PLACE: | BRISBANE |
REASONS FOR JUDGMENT
1 Before the Court is an application under Pt IVA of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”) seeking the approval of the Court for settlement of a representative proceeding. Section 33V of the Federal Court Act specifically provides:
33V Settlement and discontinuance—representative proceeding
(1) A representative proceeding may not be settled or discontinued without the approval of the Court.
(2) If the Court gives such an approval, it may make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court.
Background
2 The matter before the Court involves a representative action (commonly known as a class action) brought against the Bank of Queensland Limited (“the Bank”) by approximately 392 group members. It relates to the Bank’s provision of loans to clients of Storm Financial Limited (“Storm”), a financial advice company based in Townsville which collapsed in 2009. The group members were clients of Storm who had borrowed money from the Bank in the period between 28 November 2002 and 2 December 2008, or increased their borrowings from the Bank, in order to invest in one or more Storm-branded index share funds in accordance with financial advice given by Storm. Of that group 127 members are clients of law firm Levitt Robinson Solicitors, who are representing the applicants.
3 Many of the group members are older people, including married couples, who reside in and around Townsville. The applicants were aged in their late fifties and had invested in the Storm products as a means of securing an income stream for them as they approached retirement. The applicants personally had borrowed the sum of $411,000 from the Bank, which took the form of a home loan, and was secured by a mortgage over the applicants’ home. It is clear from the material before the Court that many of the group members lost almost all, if not all, of their assets in the wake of Storm’s collapse.
4 The applicants filed an originating application on 5 December 2012. In the originating application the applicants claimed (inter alia):
1. Damages for breach of contract.
2. An order pursuant to s 12GF and/or s 12GM of the Australian Securities and Investments Commission Act 2001 (Cth) (“ASIC Act”) that the Bank pay damages to the applicants in respect of the Bank’s unconscionable conduct in breach of ss 12CA, 12CB and/or 12CC of the ASIC Act.
3. An order pursuant to s 82 and/or s 87 of the Trade Practices Act 1974 (Cth) (“TPA”) that the Bank pay damages to the applicants in respect of the Bank’s unconscionable conduct in breach of ss 51AA, 51AB and/or 51AC of the TPA.
4. An order pursuant to s 73(1)(b) of the TPA that the Bank pay damages to the applicants on the grounds that the Bank and Storm were jointly and severally liable to the applicants for the amount of loss or damage suffered by the applicants as a result of breaches of contract and misrepresentations by Storm.
5. An order pursuant to s 1325(2) and s 1325(5) of the Corporations Act 2001 (Cth) (“Corporations Act”) that the Bank compensate the applicants for the loss and damage suffered by reason of the Bank’s involvement in Storm’s contravention of s 601ED of the Corporations Act.
6. Interest.
7. Costs.
5 The statement of claim of the applicants has been amended numerous times. Most recently, on 21 October 2014 I ordered that a fourth further amended statement of claim be filed in these proceedings. The Bank filed a defence on 4 April 2013. The matter was unsuccessfully mediated in May 2013, and more recently was the subject of further settlement negotiations involving the Australian Securities and Investments Commission (“ASIC”). On 19 September 2014 the parties reached an in-principle settlement agreement, and executed a confidential deed of settlement (“settlement deed”).
6 On 3 October 2014 the applicants filed an interlocutory application seeking approval orders in respect of:
a proposed settlement notice and opt out notice pursuant to s 33X and s 33Y of the Federal Court Act;
settlement of the proceeding on the terms set out in the settlement deed and settlement scheme; and
costs of the applicants, the approval costs, and the administration costs.
7 In paragraphs 18-24 of the interlocutory application the applicants also sought orders that, inter alia:
they be authorised nunc pro tunc pursuant to s 33ZF of the Federal Court Act on behalf of the group members to enter into and give effect to the settlement deed and the transactions contemplated thereby for and on behalf of those group members;
the whole of the proceeding be dismissed; and
ASIC provide, to the scheme administrator, data in its possession that records details relevant to the calculation of the group members’ claim.
8 On 21 October 2014 I made an order approving the form and manner of distribution of a notice of proposed settlement which was to be sent out to group members, both directly and by newspaper advertisement. I also made orders directing group members who proposed to object to or support the Court’s approval of the proposed settlement or settlement scheme to file a notice in a prescribed form, as well as group members who wished to opt out to do so by filing a notice in a prescribed form.
9 It is paragraphs 18-24 of the interlocutory application which the Court is now required to consider.
10 I understand that:
no group member has elected to opt out of the action;
sixty-eight notices in support of the settlement have been filed (including two notices filed at the hearing on 12 December 2014); and
six notices of objection to the settlement have been filed.
11 The details of the six notices of objection are as follows:
1. A notice filed by Noelene Hemmling, dated 17 November 2014.
2. A notice filed by Tonie Carroll and Katrina Carroll, dated 11 November 2014.
3. A notice filed by Victor Francis Ainslie and Helen Mary Gillies, dated 28 November 2014.
4. A notice filed by Ian Smith and Amba Smith, dated 1 December 2014.
5. A notice filed by Costas Kilili and Jean Kilili, dated 28 November 2014.
6. A notice filed by Glenn Hovenga, dated 26 November 2014.
12 Mr Ainslie also appeared at the hearing of 12 December 2014, and made submissions.
The Settlement Deed and the Settlement Scheme – relevant principles
13 The proposed terms of settlement are confidential, although copies have been provided to the Court and group members. Attached to the affidavit of Mr Brett Imlay filed 8 December 2014 is a confidential legal opinion prepared by the applicants’ Senior Counsel Mr Campbell QC giving what the applicants describe in their submissions as an unvarnished assessment of the applicants’ and group members’ prospects of success in these proceedings.
14 Principles relevant to the approval by the Court of settlement of a class action were recently explained by the Full Court in Australian Securities and Investments Commission v Richards [2013] FCAFC 89. Materially their Honours observed as follows:
6. Section 33V of the FCA forms part of the statutory scheme established by Pt IVA which regulates what are described as “representative proceedings” but are generally known as “class actions”. Section 33V provides as follows:
Settlement and discontinuance—representative proceeding
(1) A representative proceeding may not be settled or discontinued without the approval of the Court.
(2) If the Court gives such an approval, it may make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court.
(Emphasis added.)
Section 33ZF permits the Court to make any order in a Pt IVA proceeding it thinks “appropriate or necessary to ensure that justice is done in the proceeding”. These are broad powers: McMullin v ICI Australia Operations Pty Ltd (No 6) (1998) 84 FCR 1 at 3-4.
7. Justice will be satisfied where a settlement is “fair and reasonable having regard to the claims made by group members who will be bound by it”: Jarra Creek Central Packing Shed Pty Ltd v Amcor Limited [2011] FCA 671 at [70], see also Australian Competition and Consumer Commission v Chats House Investments Pty Limited (1996) 71 FCR 250 at 258.
8. The role of the Court is important and onerous: Lopez v Star World Enterprises Pty Ltd [1999] FCA 104 at [16]. It is protective. It assumes a role akin to that of a guardian, not unlike the role a court assumes when approving infant compromises: P Dawson Nominees Pty Ltd v Brookfield Multiplex Limited (No 4) [2010] FCA 1029 at [23]; Tasfast Air Freight Pty Ltd v Mobil Oil Australia Ltd [2002] VSC 457 at [4], Carnie v Esanda Finance Corporation Ltd (1995) 182 CLR 398 at 408. In the current context, the Court’s role is to protect those group members who are not represented by Levitt Robinson and whose interests may be prejudiced by their absence: Chats House Investments at 258; Darwalla Milling Co Pty Ltd (ACN 009 698 631) v F Hoffman-La Roche Ltd (No 2) [2006] FCA 1388; (2006) 236 ALR 322 at [41].
15 Following this decision the Chief Justice of the Federal Court reissued Practice Note CM 17 Representative proceedings commenced under Part IVA of the Federal Court of Australia Act 1976 (Cth), effective 9 October 2013. Importantly, paragraph 11 of the Practice Note provides as follows:
11. Court approval of settlement
11.1 When applying for Court approval of a settlement, the parties will usually need to persuade the Court that:
(a) the proposed settlement is fair and reasonable having regard to the claims made on behalf of the group members who will be bound by the settlement; and
(b) the proposed settlement has been undertaken in the interests of group members, as well as those of the applicant, and not just in the interests of the applicant and the respondent/s.
11.2 When applying for Court approval of a settlement the parties will usually be required to address at least the following factors:
(a) the complexity and likely duration of the litigation;
(b) the reaction of the group to the settlement;
(c) the stage of the proceedings;
(d) the risks of establishing liability;
(e) the risks of establishing loss or damage;
(f) the risks of maintaining a representative proceeding;
(g) the ability of the respondent to withstand a greater judgment;
(h) the range of reasonableness of the settlement in light of the best recovery;
(i) the range of reasonableness of the settlement in light of all the attendant risks of litigation; and
(j) the terms of any advice received from counsel and/or from any independent expert in relation to the issues which arise in the proceeding.
11.3 An application for the Court’s approval of a proposed settlement must be made by interlocutory application. The orders which are commonly made on such an application include orders:
(a) for the confidentiality of evidence;
(b) for notice to group members of the proposed settlement;
(c) approving any scheme for distribution any settlement payment; and
(d) disposing of the proceeding (eg. by dismissing the application).
11.4 To the extent relevant, the affidavit or affidavits in support should state:
(a) how the settlement complies with the criteria for approving a settlement;
(b) why the proceedings have been settled on particular terms;
(c) the effect of those terms on group members (ie the quantum of damages they are to receive in exchange for ceasing to pursue their claims and whether group members are treated the same or differently and why);
(d) the means of distributing settlement funds;
(e) the terms of fee and retainer agreements including the reasonableness of legal costs;
(f) a response to any arguments against approval of settlement raised by group members;
(g) any issues that the Court directs be addressed;
(h) a hearing of the application for settlement approval, including consideration of any group members’ objections to the settlement and an order dealing with costs.
11.5 When it is appropriate that notice of the proposed settlement be given to group members, the notice should usually include the following:
(a) a statement that the group members have legal rights that may be affected by the proposed settlement;
(b) a statement that an individual group member may be affected by a decision whether or not to remain as a group member (where the opt-out date has not already passed or where there is a further opportunity to opt out);
(c) a brief description of the factual circumstances giving rise to the litigation;
(d) a description of the legal basis of the claims made in the proceedings and the nature of relief sought;
(e) a description of the group on whose behalf the proceedings were commenced;
(f) information on how a copy of the statement of claim and other legal documents may be obtained;
(g) a summary of the terms of the proposed settlement;
(h) information on how to obtain a copy of the settlement agreement;
(i) an explanation of who will benefit from the settlement;
(j) where all group members are not eligible for settlement benefits - an explanation of who will not be eligible and the reasons for such ineligibility;
(k) an explanation of the Court settlement approval process;
(l) details of when and where the Court hearing will be and a statement that the group member may attend the Court hearing;
(m) an outline of how objections or expressions of support may be communicated, either in writing or by appearing in person or through a legal representative at the hearing;
(n) an outline of any steps required to be taken by persons who wish to participate in the settlement (in the event that affirmative steps are required);
(o) an outline of the steps required to be taken by persons wishing to opt out of the settlement if that is possible under the terms of the settlement; and
(p) information on how to obtain legal advice and assistance.
16 The Practice Note reflects principles developed in decisions of this Court including Williams v FAI Home Security Pty Ltd (2000) 180 ALR 459; Darwalla Milling Co Pty Ltd v F Hoffman-LA Roche Ltd (No 2) (2007) 236 ALR 322; as well as in ASIC v Richards. The Practice Note recognises however that it is necessary to approach each case individually, and that some factors will weigh more heavily in certain circumstances than others (or not be relevant at all).
The Settlement Deed and the Settlement Scheme – relevant features
17 The applicants have filed a number of affidavits in support of orders approving the settlement deed and the settlement scheme. I note in particular the following material:
affidavit of Brett Imlay dated 3 October 2014;
affidavit of Stewart Levitt dated 4 December 2014;
affidavit of Brett Imlay dated 5 December 2014;
affidavit of Terence Potter dated 8 December 2014;
affidavit of Brett Imlay dated 8 December 2014;
affidavit of Joseph Mazzeo dated 9 December 2014;
affidavit of Stewart Levitt dated 11 December 2014.
18 At the hearing Mr Campbell also tendered an email dated 11 December 2014 from Ms Natasha Stowell of ASIC to Mr Imlay (exhibit 2(A)), in which ASIC consented to the following draft order proposed by the applicants:
The Australian Securities Investment Commission (ASIC) is to provide to the Administrator data in its possession that records details relevant to the calculation of the Group Members’ Claim Amounts and in particular the loss suffered by each Group Member attributed to the Respondent pursuant to the ASIC Compensation Model and the total losses suffered by all Group Members attributed to the Respondent pursuant to the ASIC Compensation Model.
19 Key details of the settlement may be identified from the affidavit of Mr Imlay dated 3 October 2014 and the submissions of Mr Campbell. They include the following:
Proposed compensation payable to group members would be based on a compensation model developed for ASIC by Axiom Forensics Ltd (“Axiom”), which calculates losses suffered by former customers of Storm and attributes those losses to the lenders involved in funding the acquisition of investments recommended by Storm, including the Bank (“ASIC Compensation Model”).
The ASIC Compensation Model analyses the losses that a person has suffered as a result of loans from the Bank, but deducts from those loans the benefits that the person receives (for example dividends received on shares), and adds an interest component of 5.5% for loss of opportunity.
The ASIC Compensation Model concludes that the total amount of loss to group members caused by the Bank’s loans is $38,110,044.
The total settlement sum payable by the Bank pursuant to the settlement will be $19,639,694, which includes a 45% return on the total loss suffered by group members.
Should the proposed settlement gain approval, each group member would have the choice of either:
o receiving compensation in accordance with the ASIC Compensation Model, net of costs and disbursements; or
o electing instead to remain on the current terms and conditions applying to their loans. This option could prove more advantageous for some group members than accepting the proposed compensation, particularly in respect of borrowers who entered into separate arrangements with the Bank during the global financial crisis.
Each group member would have the opportunity to seek financial advice in relation to that election.
A separate fund of $2,675,000, being the “settlement scheme”, would be created out of the settlement sum for payment of costs and interests ($2.5 million for costs and $175,000 for interest). This sum would be invested in an interest-bearing account in the joint names of Mr Stewart Levitt (as administrator of the settlement scheme) and Mr David Jenkins (the solicitor for the Bank). Any residue would be distributed to group members at the end of the administration process.
The balance of the settlement sum would be retained by the Bank pending the administration of the settlement scheme. Interest would not accrue on the balance of the settlement sum retained by the Bank. Compensation payments once finalised would in the first instance be applied against any indebtedness owed by each group member to the Bank should a group member elect to accept the compensation payment rather than elect to remain on their current loan terms and conditions.
The settlement scheme includes a review process. A group member who receives a preliminary certificate of their loss attributable to the Bank in accordance with the ASIC Compensation Model can request a review of the amount of that loss.
In addition to a share in the settlement sum, the applicants would be paid a further sum of $15,000 (not from the corpus), being a “lead applicant payment” as compensation for the risk assumed by them and the time they spent in respect of this litigation.
20 In his affidavit Mr Potter gives evidence as to the ASIC Compensation Model.
21 The specific costs for which approval is sought are in three categories, namely:
The applicants’ costs, both billed and unbilled, and including an interest component based on the Federal Court scale. I note that no litigation funder was involved in this proceeding, but rather approximately 125 of the group members funded the litigation. Mr Mazzeo assessed a fair and reasonable sum in this category as $1,925,115.83.
The legal costs and disbursements incurred in connection with the approval hearing and the proposed settlement. Mr Mazzeo assessed a fair and reasonable sum in this category as $222,572.50.
The administration costs payable to the administrator and experts appointed to assist with regard to the administration of the settlement scheme. A fair and reasonable sum can only be estimated at this stage, and was assessed by Mr Mazzeo as $368,258.
22 As Mr Campbell submitted, these sums are now effectively capped unless the parties return to Court. They total $2,515,946.33, being under the sum of $2,675,000 currently set aside for costs.
Is the settlement proposal fair and reasonable?
Complexity and likely duration of the litigation
23 This litigation is still at a fairly early stage. Indeed the statement of claim was amended (again) as recently as two months ago, after numerous iterations. As I noted earlier, there are 392 group members of whom 127 are clients of the applicants’ solicitors. The legal issues raised in the claims of the applicants are complex, and will require consideration by reference to individual group members. Factual issues claimed by the applicants, in particular involving causation, will also require consideration of the individual circumstances of group members and may be difficult for the applicants to prove. I consider it highly likely that, should this matter go to trial, the trial will be lengthy and complex.
24 As I noted earlier the applicants’ case is currently funded by group members rather than a litigation funder. The costs incurred are already clearly substantial, and will obviously escalate should the matter not resolve and the parties prepare for trial. It is certainly possible that group members may lose either appetite or the financial ability to continue to fund this litigation depending on its progress, including any appeals which may flow from a decision at first instance.
25 In light of these factors a settlement of the proceedings at this stage would, in my view, benefit the applicants and group members.
Reaction of the group to the proposal
26 More than 90% of group members who have given a view concerning the terms of the proposed settlement support it. The number of responses relative to the size of the group is relatively modest but could not be described as unrepresentative, being sixty-eight individual responses (and constituting almost 20% of the group membership). There is nothing before me to suggest that the group members who support the settlement would be advantaged over those who oppose it. To the extent that the overwhelming majority of the group members who have responded support the proposed settlement, an inference could be drawn that the settlement is fair and reasonable to group members.
27 As I noted earlier however there are objections from six group members including Mr Victor Ainslie who appeared at the hearing. Mr Ainslie filed a lengthy and detailed objection to the settlement, and spoke eloquently to that objection before me. In particular Mr Ainslie submitted, in summary:
The claimed return of 45% to group members is inaccurate. A more realistic estimate of average returns to group members, taking into account what Mr Ainslie refers to as “Storm fees” and other items deducted by Storm from the loans, is 26% of their respective losses.
The ASIC Compensation Model is seriously flawed because it has adopted an accounting solution which bears no relationship to the facts or the human condition. It leaves group members “high and dry” because they will be worse off than when they started, and defeats rather than serves justice.
On 6 December 2004 the Bank adopted the “Modified Code of Banking Practice 2004”. The Bank clearly breached its own banking code, which creates a contractual relationship with customers.
The owner-managers of a particular branch of the Bank engaged in criminal conduct and a “grab for money”. This particular branch imprudently approved loans to its customers, which have had such an adverse effect on those customers. Those customers frequently had no income to support their particular loans. Further, the practice of Storm supplying its client’s details to the branch and then the branch “doctoring” the loan application form to ensure the loan would go through, involved criminal conduct and a breach of the relevant banking code.
There is authority emanating from the High Court and the Supreme Court of New South Wales to the effect that “low-doc” loans of this nature are toxic.
The case against the Bank is powerful because so much damning evidence is on the public record, including the Bank’s own internal credit reports.
Notwithstanding that it has statutory functions of consumer protection in respect of financial services, ASIC has abandoned group members, and indeed is part of the problem rather than part of the solution. In his book “I Accuse” Mr Ainslie details his view of the role of ASIC in Storm-related matters.
The Court should not endorse this proposal, because it is evidently unfair. The amount offered is paltry, and an indulgence to the Bank for a remission of its sins.
28 In their notice of objection Mr and Mrs Smith made submissions including:
• The money lost by us all in this class action was a result of BQL not following the first basic duty of any Bank – face to face contact with its Customer.
• There has been no duty of care, no due diligence, and they have morally and ethically broken every basic principles [sic] of the Banking Code.
• We all know how much we lost, and have supplied these figures to the appropriate people. Surely the Courts must see that the Settlement figure being offered is demeaning in terms of what we have all lost as a result of the BQLs actions.
• How can the Courts endorse the less than 50% offer, with no admission of wrongdoing, in view of BQL’s actions?
• Full restitution, plus interest and costs, should be the minimum penalty incurred by the Bank. The decision of Court will set the benchmark, financially, for the rest of our lives. The Banks will continue on to bigger and better things without any conscious [sic].
29 Relevantly Mr Hovenga stated:
I am objecting to the proposed settlement by the Bank of Queensland on the grounds that the meaning of the word compensation is that there is a positive outcome for the claimant. After the years of litigation with the Bank, I have continued to pay interest only on my loan & I believe paid more than their so called compensation offer. Therefore there is no penalty to them & no compensation to me.
30 The anguish and anger of group members in light of their personal losses is understandable. However it is the role of the Court to consider the case as a whole, and determine a fair and reasonable outcome in respect of the settlement proposal for the group as a whole. The submissions of group members as to the moral shortcomings of the Bank and the need to “punish” the Bank are not persuasive in circumstances where the applicants and the majority of group members who have provided views to the Court support a negotiated settlement with the Bank. On the material before me I do not accept that the conduct of Bank employees or representatives constituted criminal conduct. Further, while full restitution of losses to objectors (including for example Mr and Mrs Smith) may be desirable to them, the Court is required to consider the fairness and reasonableness of the proposal before it in light of factors including the risks inherent in litigation generally and the claims of the applicants in particular.
31 I will address Mr Ainslie’s submissions concerning ASIC and the ASIC Compensation Model later in this judgment.
Reaction of ASIC to the proposal
32 No appearance was entered by ASIC in respect of this matter, although it was drawn to my attention at the hearing last Friday that Ms Stowell of ASIC was in attendance in the Court. It is clear however from Ms Stowell’s email tendered in Court (to which I referred earlier in this judgment) that ASIC was prepared to consent to the provision, to the administrator of the settlement scheme contemplated by the proposal, of data in its possession recording details relevant to the calculation of claim amounts of the group members, the loss suffered by each group member attributed to the Bank, and the total loss suffered by all group members attributed to the Bank pursuant to the ASIC Compensation Model.
33 From this consent I infer that ASIC supports the settlement proposal.
34 It is possibly trite to note that ASIC administers the ASIC Act as well as significant parts of the Corporations Act and the National Consumer Credit Protection Act 2009 (Cth). It has statutory responsibilities to enforce consumer protection provisions in those statutes. Mr Ainslie submits that ASIC has “left out on a limb” the group members. Such material as is before me does not support this submission. Rather, material before me supports a finding that ASIC has taken an active interest in the applicants’ claim and the interests of group members. That it appears that ASIC supports the settlement proposal before me – or at least does not oppose it – is a factor I consider relevant in determining that the proposal is fair and reasonable.
Assessment of losses of group members
35 A key objection of Mr Ainslie to the proposal concerns the ASIC Compensation Model and the amounts recoverable by individual group members. However detailed evidence concerning the development of the ASIC Compensation Model was provided by Mr Terence Potter in his affidavit dated 8 December 2014. Mr Potter is a director of Axiom, which was engaged by ASIC in 2009 to develop a profit and loss model to measure the loss suffered by Storm investors.
36 In describing the ASIC Compensation Model Mr Potter deposes:
7. The Model calculates loss or profit on a Storm client account basis and for each Storm client account on an investment by investment basis. There are 3,739 Storm client accounts for which calculations are undertaken. The Model calculates a loss or profit for each investment based upon the income and realisation proceeds received on the investment and the cost of financing or otherwise acquiring the investment.
8. The Model allocates loss or profit between the banks by reference to the bank that funded the investment through Storm. The allocation is performed on a Storm client account and investment by investment basis. The allocation is based upon:
a) The actual interest and fees charged by a particular bank to the Storm client account for loans used to purchase investments through Storm; and
b) The proportion of the Storm client account’s total Storm related borrowings that was contributed by that lender.
9. The Model operates by sequentially extracting data relevant to each Storm client account from a database in SQL Server and inputting the extracted data into the Model (a Microsoft Excel template). A unique copy of the Model is saved for each Storm client account. Output data from each iteration of the Model is uploaded back to the database for consolidation into an aggregated compensation calculation …
10. The version of the Model used for the purposes of the settlement is 15.25.
11. Development and refinement of the Model has occurred over the five years between Axiom’s engagement and the creation of version 15.25, reflective of ongoing availability of additional data, amendments to aspects of the Model’s design and evolution of assumptions.
12. The Model calculates a loss allocated to BOQ for 375 client accounts in the amount of $38,110,044.
37 Mr Potter gives evidence at [13] of his affidavit that the ASIC Compensation Model relies on the following sources of information to calculate profit or loss for each Storm client account:
a) Storm’s client database and application software named “Phormula”;
b) Transaction data (including advances, repayments, interest and fees) obtained by ASIC from lenders in respect of margin loans;
c) End of month balance and interest rate data obtained by ASIC from lenders in respect of home loans, personal loans and commercial loans;
d) Investment transaction and unit price information obtained by ASIC from fund managers;
e) Market information provided by ASIC; and
f) Publicly available unit price data obtained by Axiom.
38 In summary, Mr Potter deposes that in calculating each investor’s loss or profit the ASIC Compensation Model totals the costs the investor incurred in investing through Storm and deducts from those costs the benefits the investor received from their investment (at [17]). At [19] and [20] of his affidavit Mr Potter details the types of costs incurred by investors as a result of investing through Storm and the types of benefits to the investor. At [23]-[25] of his affidavit Mr Potter also describes how the ASIC Compensation Model allocates losses or profits between lenders providing funds to purchase investments.
39 The applicants submit that Mr Ainslie’s conclusions as to the return to group members are based on a flawed premise. While I note the force of Mr Ainslie’s submissions I am not satisfied that his submissions have merit or that the ASIC Compensation Model is itself flawed. Further I accept the evidence of Mr Potter as to the soundness of the model. I am satisfied that the ASIC Compensation Model is a fair and reasonable tool for calculating losses of group members in this case.
Settlement Sum
40 The gross settlement sum proposed in this case for the Court’s approval is $19,639,694. I have already made observations concerning the manner in which the gross total loss of group members was calculated and the fairness of the ASIC Compensation Model. I accept that this sum includes a 45% return on that loss.
41 In considering whether a 45% return is a fair and reasonable settlement in the circumstances I note the claim of Mr Ainslie that the case of the group members against the Bank is powerful. I have also had regard to the submissions of the applicants and the Bank, and in particular to the confidential legal opinion of Mr Campbell filed in these proceedings.
42 In noting that the applicants and respondent propose settlement of the proceedings, with the Court approving a settlement sum including a 45% return on the loss attributed to the Bank as calculated in accordance with ASIC Compensation Model after deduction of the cost component, it is useful to note comments of Hayne J in Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603:
It is as well to remember, however, that there are uncertainties inherent in litigation and that predictions of the chances of success in litigation can never be precise. It follows that the comparison between the amount of the settlement and the amount of the claim can never be anything more than a general indication of what the parties see as the risks of continuing the litigation.
43 The applicants and the Bank are represented by experienced solicitors and Counsel. There is nothing before me to suggest that negotiations between the applicants and the Bank were conducted other than with proper care and skill (cf comments of Handley JA in BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72 at [17]), that the applicants were in any way unfairly disadvantaged in those negotiations, or that the settlement sum does not reflect a fair estimate of the applicants’ prospects of success were the case to proceed to trial.
44 While the applicants’ claims have substance, as I noted earlier it is clear that issues raised are complex and difficult, both legally and factually. Mr Couper QC for the Bank provided a detailed summary of submissions as to why the applicants’ claims would not be substantiated. While it is premature to make any conclusive findings as to the merits of the applicants’ case, I am not satisfied at this stage of the proceeding that the applicants would be successful in all claims they currently pressed.
45 Finally, I also note that group members have an option in terms of the settlement proposal of either accepting a lump sum settlement amount or remaining with the current terms and conditions offered by the Bank for the loans.
46 In my view the gross settlement sum is fair and reasonable to all group members taking into consideration the risks for the applicants in pursuing their claims.
Settlement Scheme
47 I have already noted principal aspects of the settlement scheme. I accept the submission of the applicants that the settlement scheme provides for pro rata recovery for each group member based on losses they sustained, attributed to the Bank under the ASIC Compensation Model; that group members are provided with adequate notification of the settlement scheme; and that they are afforded two opportunities for review of their assessed losses.
48 I am satisfied that the settlement scheme provides for a fair and reasonable method of distribution of the settlement sum.
Costs implications – are the costs fair and reasonable?
49 I noted earlier in this judgment that the costs in respect of which approval by the Court is sought are (in summary) the applicants’ costs of the proceeding, costs and disbursements associated with the approval hearing, and administration costs. I have had regard to the affidavit of Mr Mazzeo, a solicitor and legal costs consultant, who has given an expert opinion as an independent costs consultant in relation to the reasonableness of the costs submitted for approval. Mr Mazzeo has also given evidence as to his expertise in the field of costs assessment.
50 There is no dispute in this proceeding in respect of Mr Mazzeo’s expertise or the value of his expert opinion. While it is always for the Court to reach its own view on matters in respect of which expert opinions may be provided, in this case I see no reason not to accept Mr Mazzeo’s opinion as to the fairness and reasonableness of the costs in respect of which approval is sought.
51 I note however that the Court’s approval is also sought in respect of the lead applicant payment of $15,000 to Mr and Mrs Lee. This proposed sum is an extra amount to be paid by the Bank to Mr and Mrs Lee, on top of the settlement sum.
52 In his affidavit dated 11 December 2014 Mr Levitt deposed that one of the major reasons for the delay in commencing proceedings was the difficulty in finding a group member who was willing to take on the lead applicant role in the proceedings. This difficulty was exacerbated by the potential exposure of lead applicants to adverse costs orders in light of s 43(1A) of the Federal Court Act. Mr Levitt also deposed that:
He or his professional staff had spent over 60 hours either engaged in attendances (on the telephone or in conference) on the applicants.
The applicants were required to spend time reviewing the pleadings, reviewing witness statements, discussing the matter between themselves, locating and supplying documents, travelling to and from mediations and conferences in Brisbane, and engaging in the formal mediation and settlement conference process.
The applicants were frequently contacted by other group members, and fielded ongoing progress enquiries concerning the proceedings.
The applicants attended approximately 20 public information meetings held by him for the benefit of his Storm clients.
The applicants engaged in these activities notwithstanding that they were both self-employed.
He observed the anxiety of the applicants as to the possibility of adverse costs orders being made against them.
53 In Darwalla Jessup J was presented with similar circumstances and expressed the following reservations:
[75] I was informed by the applicants that, if such payments are approved as part of the settlement scheme in this proceeding, it will be the first occasion when that approach has been taken in an Australian court. It is a matter, therefore, which I must approach with great care, notwithstanding that the sums involved appear to be fairly modest in the context of the settlement as whole. There are, in addition, other reasons why the court should pause before approving payments of this kind. First, although the claimants are not fiduciaries apropos the generality of group members, they have chosen to remunerate themselves, albeit modestly, ahead of the distribution to group members of a sum which has been calculated by reference to the estimated loss and damage suffered by the latter. The sensitivity of the position in which the claimants find themselves in these circumstances is obvious. Secondly, although courts have long-established procedures, and scales, by reference to which to assess the propriety and quantification of parties’ claims to be compensated for the legal costs and expenses made necessary by successful litigation, the same cannot be said of the payments with which I am presently concerned. I am denied the advantage of court scales and taxation procedures. I have only the claimants’ own evidence on the matter of the reasonableness of the payments, and of the necessity for the work and outlays to which they relate. Thirdly, the court is denied the benefit of the contribution of a contradictor in relation to these payments. Although the same may be said of the settlement distribution scheme as a whole, the problem is particularly acute where the court has only the say-so of those who claim these benefits with respect, for example, to the time occupied on the work to which their claims relate and the hourly rates by reference to which particular categories of personnel should be compensated.
54 However his Honour then continued:
[76] Notwithstanding these reservations, I consider it prima facie reasonable that particular parties who have sacrificed valuable time and incurred expenses in the interests of prosecuting this proceeding on behalf of group members as a whole should be able to look to the corpus of the settlement sum for some degree of compensation and reimbursement. More importantly, perhaps, I would hold that group members who have benefited from the proceeding could not be heard to deny the reasonableness of such a proposition. As the applicants pointed out in their submission, payments of this kind occur frequently in class actions in the United States. There, both the philosophy behind, and the calculation of, the payments concerned are a little different from those relied upon by the applicants in this proceeding. The payments are commonly referred to as ‘incentive payments’, and take account not only of the time and expense involved getting up a case for trial, but also of the exposure and risks to which those who choose to be lead plaintiffs in class actions necessarily subject themselves. There is also on occasion, I detect, a suggestion that, as a matter of policy, there should be some encouragement for people to assume the role of lead plaintiffs, without whom the particular kind of generalised justice embodied in such proceedings could not be achieved.
55 In my view the reasoning of his Honour is applicable in the present context, in the sense that the applicants in this case have clearly sacrificed valuable time on these proceedings and assumed risks for the benefit of the group members as a whole. I note that the amount of $15,000 for which approval is sought is very modest compared with the sums approved in Darwalla. I note further that in this case the lead applicant payment is a separate payment by the Bank to the applicants rather than payment out of the settlement sum, and to that extent does not disadvantage other group members in any way.
56 I am satisfied that the proposed lead applicant payment is also fair and reasonable, and should be approved by the Court.
Conclusion
57 For the reasons set out in this judgment I am satisfied that the settlement sum, the settlement scheme, and the costs claimed by the applicants (including those estimated as well as the lead applicant payment), are fair and reasonable. I am prepared to approve the settlement and to make orders in the terms sought.
I certify that the preceding fifty-seven (57) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Collier. |
Associate:
