FEDERAL COURT OF AUSTRALIA

Crowley v WorleyParsons Limited (No 2) [2019] FCA 1535

REASONS FOR JUDGMENT

GLEESON J:

1    On 20 November 2013, the defendant’s (WOR) share price fell approximately 25% following the company’s announcement of revised earnings guidance. That guidance was markedly different from the company’s mid-August 2013 announcement to the effect that the company had a solid foundation for expecting earnings growth on the FY2013 year’s figure of $322 million. The plaintiff (Mr Crowley) purchased shares in WOR in October 2013 and claims to have suffered loss by reason of his acquisition of those shares at a price that was inflated by reason of WOR’s misleading or deceptive conduct or contravention of continuous disclosure laws.

2    In support of his case against WOR, the plaintiff relies on expert evidence from an economist, Frank Torchio. Mr Torchio’s evidence includes an “event study” analysis, which seeks to explain the component of the change in WOR’s share price on 20 November 2013 that is attributable to company specific information, as opposed to price changes caused by general market movement.

3    From para 145 of his first report (report), Mr Torchio analyses the causes of what he describes as the “excess return for the 20 November 2013 event”.

4    At para 148 and following, Mr Torchio sets out several factual propositions, referring frequently to “the analyst consensus”. I have assumed that this expression is used in the same or a similar way to its use by WOR, that is, the average of estimates of net profit after tax published by 11 market analysts whose analysis is followed by WOR. For example, Mr Torchio states (at para 148):

Although WorleyParsons did not provide a specific range of the FY2014 underlying NPAT guidance on 14 August 2013, after its disclosure, the analyst consensus for FY2014 underlying NPAT was $368 million. Thus, analysts interpreted WorleyParsons’ guidance to mean an approximate 14% ($46 million or $368 million - $322 million) increase in FY2014 NPAT over its $322 million NPAT for FY2013.

5    I admitted the second sentence of para 148 as evidence only of an assumption made by Mr Torchio. To the extent that Mr Torchio sought to give expert evidence by the second sentence, I did not accept that his expertise as an economist permits him to express an expert opinion about the actual interpretations of a group of analysts. Any such interpretations are questions of fact.

6    At para 152, Mr Torchio expressed the following opinion:

As recounted above, this dramatic revision of FY2014 guidance was the principal factor discussed by analysts for their changes in earnings expectations for FY2014, FY2015 and FY2016, rating changes, and changes to their price targets for WorleyParsons. This commentary supports my conclusion that the predominant cause for the share price decline from the 20 November 2013 event was the reduced future profit expectation conveyed to the market from WorleyParsons’ revised guidance for FY2014. In my opinion, the market interpreted the lower FY2014 guidance to be a harbinger of reduced growth expectations for Worley Parsons’ future revenue, earnings and cash flows.

7    From para 154 of his report, Mr Torchio analyses the economic consequences of the information disclosed on 20 November 2013 by reference to Mr Crowley’s case.

8    At para 157, Mr Torchio opines:

WorleyParsons’ 20 November 2013 disclosure provided revised FY2014 underlying NPAT guidance, the mid-point of which was $280 million, which resulted in an analyst consensus for FY2014 underlying NPAT of $279 million (see ¶149).

9    WOR objected to this evidence, contending that it should be read only as an assumption on which Mr Torchio’s subsequent opinions are based.

10    Mr Crowley contended that Mr Torchio’s opinion that disclosure “resulted” in a revision to analyst consensus is an opinion based on his specialised area of knowledge and that Mr Torchio’s underlying reasoning is exposed at paras 142 to 152 of his report.

11    Mr Torchio presents himself as a person with specialised knowledge in the field of event studies, which includes forming opinions about causal relationships between particular events and share prices. Underlying the opinion expressed at para 157 are excerpts of commentary by nine analysts (set out at para 144 of the report) and the opinions recorded at para 152, set out above. I do not accept, however, that Mr Torchio’s report identifies a reasoning process by which he draws a causal connection between the 20 November 2013 disclosure and the “analyst consensus”. In my view, that reasoning process should be articulated in order to clarify the precise opinion that Mr Torchio holds (where the word “resulted” is ambiguous as to the nature of the connection between guidance and analyst consensus); whether it adds anything material to the opinions expressed in para 152 of the report (which are not the subject of any objection) and to demonstrate that the opinion is wholly or substantially based on Mr Torchio’s specialised knowledge: Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705 at [85], approved by the High Court in Dasreef Pty Limited v Hawchar [2011] HCA 21; (2011) 243 CLR 588 at [41].

12    Accordingly, I will read para 157 as an assumption on which Mr Torchio’s subsequent opinions are based and grant leave to Mr Crowley to adduce further evidence to establish that para 157 is admissible as an opinion based on specialised knowledge pursuant to s 79 of the Evidence Act 1995 (Cth) (Evidence Act).

13    WOR took a similar objection to the second sentence of para 158 of Mr Torchio’s first report, in which he states:

Further, as discussed in ¶¶ 150-151, immediately before the 20 November disclosure, analyst consensus FY2014 underlying NPAT was $354 million. Thus, the revised guidance caused an $80 million reduction, or 23%, of the prior NPAT expectations in the market.

14    The same reasoning applies. Accordingly, I will read the second sentence of para 158 as an assumption on which Mr Torchio’s subsequent opinions are based and grant leave to Mr Crowley to adduce further evidence to establish that the sentence is admissible as an opinion wholly or substantially based on specialised knowledge pursuant to s 79 of the Evidence Act.

15    At para 205, Mr Torchio states relevantly (concerning the computation of artificial inflation):

This constant percentage inflation of 24.28% measured at the end of the Relevant Period likely underestimates the inflation percentage at the beginning of the Relevant Period. This is because analysts had a higher expectation of WorleyParsons’ future earnings at the start of the Relevant Period. The excess return of -24.28% on 20 November 2013 is the market’s reaction to an $80 million ($354-$274 million) decline or 23% ($80 million divided by $354 million) in consensus FY2014 underlying NPAT…

(Emphasis in original.)

16    WOR took a similar objection to the second and third sentences of this paragraph.

17    Mr Crowley contends that the second sentence stands or falls with para 157, and is a comparison between the conclusions in paras 148 and 157.

18    As I read the second sentence, it conveys no more than that the analyst consensus (being an average figure) for WOR’s future earnings was higher at the start of the “Relevant Period”. I therefore read it as an assumed fact. To the extent that Mr Torchio sought to give expert evidence by the second sentence, I do not accept that his expertise as an economist permits him to express an expert opinion about the actual expectations of analysts.

19    As to the third sentence, it follows from my earlier rulings that Mr Torchio’s reasoning process should be articulated in order to demonstrate that the opinion is properly based on Mr Torchio’s specialised knowledge.

20    Accordingly, I will read the third sentence of para 205 as an assumption on which Mr Torchio’s subsequent opinions are based and grant leave to Mr Crowley to adduce further evidence to establish that the sentence is admissible as an opinion based on specialised knowledge pursuant to s 79 of the Evidence Act.

Associate:

Dated:    17 September 2019