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Betting against the banks: Class actions, litigation funders and risk

James Mitchell
— 1 minute read

EXCLUSIVE Class action lawyers are having a field day following the Hayne royal commission. A top litigation funder reveals how taking Aussie companies to court has become big business.

Maurice Blackburn Lawyers was the first to file a class action against a big four bank following the publication of the royal commission final report in February. The law firm filed a class action against Westpac over alleged breaches of the bank’s responsible lending laws. 

But Maurice Blackburn is now reconsidering after ASIC lost its infamous “red wine and Wagyu steak” case against Westpac last month. 

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Meanwhile, embattled wealth giant AMP is facing multiple class actions in light of the extensive misconduct uncovered by the royal commission. AMP advisers are now preparing their own class action against the group. 

Neill Brennan, the co-founder and managing director of litigation funder Augusta Ventures, believes class action lawsuits improve the regulatory regime. 

“Two of the bigger regulators, the ACCC and ASIC both favor class actions. From an ASIC perspective with shareholder class actions, it acts as a policeman to some extent. So, if there are breaches of rules such as continuous disclosure, ASIC can intervene, obviously, but it's from a regulatory perspective cheaper for an individual group of shareholders to bring an action on their behalf, for themselves,” Mr Brennan explained. 

“Similarly, for the ACCC, there are kind of three prongs to how they regulate. There are obviously penalties that they impose. There are jail terms that can be imposed for cartel activity, et cetera. But also, if there are damages brought by individuals or by groups, that helps with the ACCC control of competition as well. So, from a regulatory perspective, class actions are beneficial.”

In May, Augusta Ventures announced that it would be funding a class action against AMP. 

Herbert Smith Freehills partner Jason Betts said the focus of class actions has largely been about governance issues and corporate malfeasance.

“When we started this journey 25 years ago, I think people thought this will be more a story about traditional products liability, manufacturing defects, or mass disaster, mass tort accidents, natural disasters,” he said. 

“That hasn’t been the story, I think largely because the cost of prosecuting these claims is significant, and in Australia, these claims relied largely but not exclusively on litigation funders to support them. And funders have, again, largely but not exclusively focused on corporate malfeasance.

When you talk about the big cases in Australia at the moment, they are predominately directed toward corporate governance issues like continuous disclosure, like misrepresentation in respect of financial parameters, earnings guidance, impairments, financial calibrated cases.”

We don’t have a lot of guidance in this country on how the law will determine those issues at the moment. Statistically speaking, these corporate governance cases settle. And so we’re in unusual state of opaqueness around how this regime will look in five or 10 years’ time.

Mr Betts said that statistically most corporate governance cases settle. He said Australia’s class action culture, which is very strong, is much like America’s. With a few cost differences. 

“We’ve got a high rate of adult share ownership. We’ve got the high focus on corporate governance issues generally. We don’t have guidance from the law. We’ve got an entrepreneurial funding market, different to really the rest of the globe,” he explained. 

“All of these doctrinal challenges that that raises, there couldn’t be a more interesting time to sort of think about the future of class action litigation.”

Betting on the outcomes of a legal dispute is a risky game. As a litigation funder, Mr Brennan said the stakes are higher for class actions where limited information is available. 

“A funder walks into a situation at the start where legal merit is judged but not obviously absolutely clear. It’s prior to disclosure, prior to witness statements, prior to a lot of information, so you’re making a call with limited information,” he said.

“Then you have question marks over whether or not the case will actually be run, because of multiplicity [of] hearings. And then when it comes to the end of it, the court can actually obviously step in and say, ‘Well, we think the funding commission should be X instead of Y,’ and that’s a hindsight decision. 

“The risks that a funder faces are large, and if it all goes wrong, the money is nonrecourse, so the funder’s not going to be paid anything. And so, the risks a funder faces need to be commensurate with the rewards that they’re going to achieve in a competitive environment.”

 

Betting against the banks: Class actions, litigation funders and risk
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