Federal Court of Australia

Zulic v CMC Markets Asia Pacific Pty Ltd [2023] FCA 469

ORDERS

THE COURT ORDERS THAT:

1.    The Respondent is to give verified discovery of the categories of documents in Annexure A to these orders, and discovery of the categories of data in Annexure B to these orders, by a date to be agreed or determined by the Court in accordance with order 4.  

2.    The Applicants are to give verified discovery of the categories of documents in Annexure C to these orders by a date to be agreed or determined by the Court in accordance with order 4.  

3.    Subject to the agreement or determination of the terms of an electronic discovery protocol and the terms of a confidentiality regime and confidentiality undertakings pursuant to order 4 below:

(a)    the Respondent is to give a tranche of discovery comprising the documents in category B1 of Annexure B and category 30 of Annexure A by 7 July 2023;

(b)    the Applicants are to give a tranche of discovery comprising the documents in categories 1, 3, 4, 5, 8 of Annexure C by 7 July 2023.

4.    The parties are to commence preparatory work in relation to discovery of the remaining categories of documents in accordance with orders 1 and 2 above, including the collection of data to determine the estimated number of documents to review, and confer on:

(a)    the dates by which the Respondent and the Applicants are to complete discovery pursuant to orders 1 and 2 (including whether any further tranches are to be given prior to completion of that discovery);

(b)    the terms of an electronic discovery protocol in accordance with which the parties are to give discovery; and

(c)    the terms of a confidentiality regime and confidentiality undertakings for documents discovered by the parties,

and by 20 June 2023 are to send to the Associate to Justice Jackman agreed, or alternatively competing, orders and short written submissions in respect of those matters.

5.    By 20 July 2023, the Respondent is to:

(a)    notify the Applicants and the Associate to Justice Jackman whether it intends to proceed with its application for an order pursuant to ss 43(3)(h)(i) or 43(3)(h)(ii) of the Federal Court of Australia Act 1976 (Cth) and if so, file and serve any further evidence in support of that application; and/or

(b)    file and serve any other application for security for costs, along with its evidence in support of such an application.

6.    The Applicants are to file and serve their evidence in relation to the application referred to in order 5 by 10 August 2023.

7.    The Respondent is to file and serve any evidence in reply and written submissions by 24 August 2023.

8.    The Applicants are to file and serve written submissions by 31 August 2023.

9.    The hearing of the application referred to in order 5 be listed at 9.30 am on 13 September 2023.

10.    The interlocutory applications of the parties dated 28 March 2023 otherwise be dismissed, with the costs of each application being costs in the cause.

11.    Liberty to apply.

[Note: annexures omitted from judgment]

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

(REVISED FROM TRANSCRIPT)

JACKMAN J

Introduction

1    Before me are two applications for discovery by the respective parties. The proceedings are representative proceedings brought under Pt IVA of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act).

2    The group members, the applicants, are those who:

(a)    at any time during the period from 7 November 2011 to 30 April 2021 (Relevant Period), entered into or acquired an interest in one or more contracts for difference (CFDs) (including margin FX) or binary options (including Digital 100s and/or countdowns) issued by the respondent;

(b)    at any time during that period were “retail clients” within the meaning of s 761G of the Corporations Act 2001 (Cth) (Corporations Act) in respect of their dealings with CMC; and

(c)    suffered loss or damage as a result of their entry into or acquisition of the products referred to.

The Applicants’ Claims

3    The applicants’ claims in these proceedings impugn several practices in which CMC Markets Asia Pacific Pty Ltd (CMC) engaged during the Relevant Period, which they allege were designed to induce them, and Group Members, to commence trading CFDs and binaries on CMC’s online trading platforms, to increase their trading volume and to continue investing despite ongoing loss-making, while they still had funds to lose. Those practices are described in the amended statement of claim (ASOC) as the “CMC System”, which is defined at paragraph 69 of the ASOC to include the following components:

(a)    the sale of highly-leveraged CFDs to retail investors – being complex and significantly risky products which were unsuitable for retail investors;

(b)    the sale of binaries to retail investors in circumstances where such products were unsuitable as an investment or risk management product and whose characterise were akin to gambling products;

(c)    failing to assess adequately applicants’ suitability for initial and ongoing trading in CFDs and binaries;

(d)    charging significant and non-transparent fees and costs;

(e)    permitting retail investors to fund all trading through use of a credit card;

(f)    constructing and operating websites and online trading platforms which facilitated poor decision-making and exploited behavioural tendencies of retail investors to encourage constant or increased trading notwithstanding repeated losses;

(g)    using methods to encourage high-volume and continuous trading and “reactivate” inactive clients, such as inducements and repeated communications; and

(h)    the making of a range of representations (the CMC Representations) as well as withholding or inadequately disclosing a range of information which was important or material to retail investors’ decisions to trade (the CMC Non-Disclosures).

4    Central to the applicants’ contentions and the CMC System is the contention that the products offered by CMC, as well as the trading platforms through which investors could acquire those products, had certain structural characteristics which not only saw the significant majority of retail investors actually lose money when trading such products, but which imbued the products with the inherent probability that retail investors would suffer substantial losses when trading those products over time, as has been recognised by regulators. The nature of the products as inherently loss-making, and CMC’s awareness of that fact, lies at the heart of these proceedings and drives the necessity for many of the documents, and much of the data, sought on this Application.

5    CMC’s conduct comprised in the CMC System is alleged to give rise to four broad categories of claims.

6    First, the applicants allege that CMC engaged in misleading or deceptive conduct in contravention of ss 1041H and 1041E of the Corporations Act and ss 12DA and 12DF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) by reason of its making of the various CMC Representations and its failure to disclose the information comprised in the CMC Non-Disclosures. As a consequence of those contraventions, the applicants allege that they commenced and continued trading in circumstances where, had CMC not engaged in such conduct, they either would not have traded or would have traded differently, thereby avoiding or limiting losses. The applicants separately allege that the CMC Representations and/or CMC Non-Disclosures constituted negligent misstatements which caused them loss and entitles them to damages at common law.

7    Secondly, the applicants allege that the CMC System constituted a pattern of conduct or system of behaviour that was unconscionable within the meaning of s 12CB(1) of the ASIC Act and s 991A(1) of the Corporations Act. Alternatively, the applicants allege that CMC’s conduct constituting the CMC System was unconscionable within the unwritten law of equity.

8    Thirdly, the applicants allege that CMC owed retail investors trading on its platforms a duty to warn them of the significant risks of highly-leveraged CFD and binaries trading and/or a duty to exercise reasonable care and skill in the operation and marketing of CMC’s trading platforms and products, which it breached by reason of the conduct constituting the CMC System.

9    Finally, the applicants allege that they commenced and continued trading in CFDs with CMC under one or more mistaken beliefs as to the suitability of CFD trading which were induced by CMC and which have resulted in the unjust enrichment of CMC and loss by the applicants in trading on the CMC platforms.

The Discovery Applications

Discovery sought by the applicants

10    The parties have communicated fruitfully on narrowing the issues in relation to the applications for discovery, and they are to be congratulated on having refined the issues, so that I need only deal with a small number of matters which have arisen between them. It is conceded by the applicants that discovery ought be given by way of categories, pursuant to r 20.15 of the Federal Court Rules 2011 (Cth) (Rules), rather than by standard discovery pursuant to r 20.14. I approach the question of appropriate discovery mindful of r 20.11, which provides that a party must not apply for an order for discovery unless the making of the order sought will facilitate the just resolution of the proceeding as quickly, inexpensively, and efficiently as possible.

11    The first issue which arises is whether certain of the categories should be limited to the Next Generation platform on which the applicants traded, or should extend also to the platform known as MetaTrader 4 and the legacy platform known as MarketMaker.

12    Mr Withers SC, counsel for the applicants, emphasises the allegations made in the ASOC, particularly paragraph 69, as to a “CMC System”, which embraces all the platforms offered by the respondent. Mr Withers also submits that the question of whether sample group members, or subgroup representatives, should be selected for consideration at an initial trial in the proceedings is a matter which can be dealt with at a subsequent stage, and should not prevent the order for discovery being made now. Mr Withers relied upon the judgment of Gleeson J in Asirifi-Otchere v Swann Insurance Australia Pty Ltd (No 2) [2020] FCA 1355; (2020) 148 ACSR 14.

13    Mr Darke SC, counsel for the respondent, emphasised the differences in the three platforms, which are potentially relevant, by reference to the affidavit of his instructing solicitor, Ms Farrant, of 18 April 2023. Those differences are set out by Ms Farrant on information and belief from her client, but it is not common ground that that is a correct and complete statement of the relevant differences, nor is it common ground that the differences are sufficiently material to adversely impact the applicants’ allegations of a CMC System. It seems to me that they are not matters which I can resolve on the present application, and are likely to have to await the trial for a determination on those matters. The trial of these proceedings is a long way off and there will be considerable debate at future case management hearings concerning the definition of common questions, the question of sample group members or subgroup representatives, and the manner in which the initial trial will be conducted. It seems premature to me to confine the discovery only to documents relating to the Next Generation platform and I agree with the applicants’ submission that such a limitation to the relevant categories should not be made for the purposes of discovery by the respondent.

14    The next issue concerns documents concerning regulatory materials referred to in the ASOC (category 23). Mr Darke resists this category, first, on the basis that the defence filed by the respondent indicates that the respondent admits knowledge of the alleged regulatory material, although there may be a lingering dispute as to what that material in fact discloses. I accept that discovery of the documents contemplated in category 23 would not be necessary to resolve that particular dispute. However, the category may well have a further relevance in that documents which concern the regulatory materials issued by various regulators may well contain admissions as to the fundamental allegations made by the applicants, such as the suitability of the products for retail investors and, on the other hand, they may well contain evidence as to the respondent’s products falling outside what may have been perceived to be general criticisms of offering of products within the industry as a whole.

15    Mr Darke submits that category 25, which concerns documents discussing various risks and features of contracts for difference, is likely to include anything of value which may have been captured by category 23. There is considerable force in that submission. However, I cannot be confident that category 25 renders category 23 otiose, and it seems to me that it would be a useful prompt for the legal representatives of the respondent who are reviewing documents to have category 23 before them so that there is specific attention given to documents which discuss or concern the alleged regulatory materials. Accordingly, in my opinion, category 23 is appropriate, noting that the applicants have deleted in the first line the words “the correctness of” in the course of argument. I therefore allow category 23.

16    Category 32 is headed: “Documents of which CMC has actual knowledge”. Category 32 had its genesis in a category which was akin to one dealt with by O’Bryan J in Kemp v Westpac Banking Corporation (No 2) [2020] FCA 1392 at [41], which sought discovery of “documents that meet at least one of the criteria specified in r 20.14(2) of the Rules and of which [the respondents] are already aware, or become aware, without the need to undertake further searches”.

17    O’Bryan J rejected that category on the grounds that it raised practical problems in terms of the attribution of knowledge to a company of the size of Westpac and also on the ground that the applicant had not shown that such an order was necessary to ensure the fair resolution of the real issues in dispute. The applicants have modified category 32 substantially to deal with the first of those objections and the category in its present form reads as follows:

For the avoidance of doubt there is no obligation on CMC to conduct searches for the documents covered by (a) or (b) above beyond those searches to be conducted in order to gather documents potentially responsive to categories 1-31 above.

18    However, that reformulation does not deal with the second of O’Bryan J’s grounds, namely, that it has not been shown that such an order is necessary to ensure the fair resolution of the real issues in dispute. In particular, categories 1 to 31 appear to me to be comprehensive and bespeak relevance in terms of the fair resolution of the real issues in dispute, and I do not see the need to have a general catch-all of the kind expressed in category 32. In addition, there is a risk that the discovery of documents within category 32 may infringe the respondent’s privilege in advice given to the respondent from time to time in relation to discovery. While the documents would not themselves be privileged, category 32 as reformulated does refer to the identification of documents by the respondent and its legal representatives which adversely affect or support either side’s case.

19    It would be readily apparent from a document produced under category 32 whether it supported or adversely affected a particular party’s case and, to that extent, may well involve the implicit disclosure of privileged advice. A similar point was made by Foster J in Cantor v Audi Australia Pty Ltd (No 3) [2017] FCA 1079 at [79] in relation to a category of discovery which was similar to that considered by O’Bryan J in Kemp v Westpac. For those reasons, I reject category 32.

20    The final issue concerning the discovery sought by the applicants concerns the cash summary data sought in category B2 to the applicants’ interlocutory application, such data being data as shown in annual statements or other documents for the applicants and by account ID for each retail investor across the relevant period. The information pertaining to the applicants will be disclosed in any event pursuant to category B1. I have been taken to an example of such cash summary data, which comprises a high level statement of losses sustained by one of the applicants in a particular period.

21    The applicants contend that these documents are necessary for the just resolution of the real issues in dispute for several different reasons. One relates to the modelling which the applicants propose to undertake in relation to the products and systems of the respondent, but there is no evidence that the discovery sought in category B2 is necessary for that modelling to be done. There strikes me as being great force in the submission made by Mr Darke that any such modelling will depend on the detailed formulae, matrices and inputs, rather than generalised summaries of loss.

22    Second, a number of paragraphs in the ASOC are referred to by the applicants as making allegations as to the number and percentage of customers of the respondent who suffered losses during the relevant period, being paragraph 80(i), paragraph 85(d) and paragraph 230(d). The last of those paragraphs makes allegations of knowledge on the part of the respondent of the losses incurred. As to those matters, category 27(b) of the discovery which has been agreed between the parties requires disclosure of documents sent, received or created by a Director, Head of Compliance or Head of Sales Trading during the relevant period reporting on or summarising relevantly the likelihood or quantum of client losses and the number or percentage of clients experiencing losses or predicted or modelled to experience losses (but excluding reports which show daily trading results that are not specific to losses), and the number of accounts in negative balance and/or client debt owing to CMC. Category 27(c) then extends that category to the topic of identification of any clients with significant or repeated losses. It seems to me at this stage that discovery of documents within category 27 will capture documents of probative value in relation to the overall assessment of the number of customers who suffered losses or the percentage of the total pool of customers who suffered losses without imposing upon the respondent the burden of making new queries of its data in order to extract the relevant data and, in the process, diverting valuable resources from their ordinary business activities.

23    The third basis on which category B2 is said to be relevant is that the statement of annual losses pertains to the assessment of damages and may also facilitate a mediation in the proceedings. In my opinion, it is premature to consider what discovery may be required for the assessment of damages. That is a matter which can await the making of any findings as to liability at the conclusion of the initial trial, and the discovery necessary for quantificationof losses can then be assessed in light of the findings of liability (if any) which have been made. In terms of a mediation, I do not regard that as a proper purpose of discovery. Discovery should be directed to matters which are required for resolution by the court, a point which is reinforced by the terms of r 20.11 of the Rules and its implicit cross-reference to s 37M of the Federal Court Act. Accordingly, in my opinion, category B2 should be rejected, at least at this stage.

24    The applicants raised issues in their interlocutory application concerning the potential of referral of issues to a referee and also a claim for interrogatories to be administered, but the applicants have withdrawn those applications for present purposes. It seems to me that for the sake of good order, I should dismiss those aspects of the interlocutory application, although that is of course without prejudice to the applicants’ ability to renew or modify those applications in a future application.

Discovery sought by the respondent

25    As to the discovery which is sought by the respondent to be provided by the applicants, again, the parties have engaged fruitfully in discussions to minimise the issues which I am required to determine.

26    The first issue concerns whether redactions should be made to financial records such as bank accounts and credit card statements so as to remove matters which do not appear to be directly relevant to trading in CFDs, binaries or other financial products or, for that matter, gambling transactions. In my view, the breadth of the allegations made by the applicants is such that the trading or gambling activities of the applicants need to be assessed in the context of their payments as a whole, and I do not see any reason for redacting the bank statements and credit card statements in order to remove any matters which may not be directly relevant to derivatives trading or gambling. That said, issues of confidentiality may well arise at the hearing of these proceedings, and what I have said for the purpose of discovery should be regarded as an entirely separate question from the question whether any evidence should be redacted or otherwise supressed in order to protect the applicants’ legitimate concerns about privacy at the hearing of the proceedings.

27    An issue arises under category 7 of the discovery sought by the respondents as to whether documents relating to trading in CFDs or binaries should be limited to those which record the amount of time spent by the applicants on such trading. I do not see any reason to limit those documents under category 7(b) to merely records of the time spent by the applicants, again, given the breadth of the pleading as to trading in CFDs or binaries having “consumed” the applicants: see paragraphs 10, 11, 136 and 169 of the ASOC.

28    An issue arises as to whether any records of advice sought or received by the applicants in relation to CFDs or binaries trading should be confined to professional, financial or commercial advice. I do not see any justification for that limitation, and advice, in my view, which was given by a trusted friend or relative may also be relevant and should properly fall within category 12.

29    Finally, there is a dispute as to whether diaries and calendars kept by the applicants for the period in which they traded CFDs or binaries should be confined to entries which relate to CFDs or binaries trading. Again, given the breadth of the allegations concerning the effect on the applicants’ lives of their trading in derivatives, the respondent is justified in my opinion in seeking the whole of the diaries and calendars rather than limiting that discovery to particular entries pertaining to CFDs or binaries trading.

30    As to the costs of the applications, it is agreed between the parties that costs should be costs in the cause. I will stand the matter over to 9.30 am tomorrow for the parties to bring in short minutes which reflect my reasons and which will also provide a timetable for discovery and other impending steps, such as any application the respondents are minded to make for security for costs or for payment of costs up front of discovery pursuant to s 43(3)(h) of the Federal Court Act.

Associate:

Dated:    12 May 2023