Issue 374 of IFA carried a report of the successful defence by the auditor of Westpoint and a Westpoint researcher in a Federal Court case brought against them by a financial planner keen to assign some responsibility to them for the planner’s recommendation of Westpoint (Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd [2007] FCA 1216).
The reader may have been left thinking the auditor and researcher were now out of the woods. That is not the case and it may be instructive to look at exactly what was decided and why in order to give context to the rollout of responsibility for the Westpoint debacle (a disaster that may well affect the financial services industry for many years to come) and the issues of negligence in this area.
In summary, Wealthcare Financial Planning recommended several Westpoint mezzanine investments to Mr and Mrs Pollard. When the investments failed, the Pollards sued Wealthcare.
The financial planner applied to the court for, among other things, an order that Westpoint’s auditors, KPMG, and the researcher, Property Investment Research (PIR), be required to allow Wealthcare to look at all the documents held by KPMG and PIR relating to their audit and research report. Remember that KPMG and PIR were not parties to the litigation. What Wealthcare was doing was trying to establish a case against them by looking through their documents to find the necessary proof.
The Federal Court rules allow the court to order that a person or company that is not a party to litigation must nevertheless show all their documents to the person making the application provided certain strict eligibility criteria are met. In summary, Wealthcare had to show that:
. Wealthcare might have a case against KPMG or PIR, . despite reasonable enquiries Wealthcare did not have sufficient information to decide whether to start a case against KPMG or PIR, and . KPMG and PIR had documents relating to the question of whether or not Wealthcare had a case against them and inspection of those documents would assist.
Wealthcare told the court it believed KPMG and PIR had been guilty of negligence in the preparation of the audit and the research reports and, if that were so, then Wealthcare could join them to the case brought by the Pollards and get them to pay at least some (and maybe even most) of any final judgment in favour of the Pollards.
KPMG and PIR were of course anxious to prevent any such order because it could set a precedent for others who had lost money in the Westpoint crash to make a similar claim.
To find someone guilty of negligence the court must find that the person owed a duty of care to the person suffering loss and had failed to properly perform that duty.
Wealthcare would eventually have had to prove both KPMG and PIR owed a duty of care to the Pollards and had not performed their role to the required standard. But in the current case (that is, the request to see all of KPMG/PIR’s documents) the court said it was not required to make a final decision on whether or not KPMG or PIR were in fact negligent but simply to assess whether there was reasonable cause to believe they might have been negligent.
Wealthcare relied on a ‘facts speak for themselves’ line of argument; namely that the audit and the research had not raised any material concerns with the investments so Wealthcare had recommended them and as a result the Pollards had lost money.
Justice John Middleton reached the view that there were enough facts to believe KPMG and PIR might have had a duty to the Pollards. But he felt there was insufficient evidence to support a view that they might have failed to meet the required standard of care. There was not enough evidence to say they had not acted appropriately – the evidence of how they had performed was simply “mere assertion, conjecture and suspicion”, the judge said.
Just because the audit report had inaccuracies in it, didn’t mean KPMG had failed to meet the proper standard of care. “There must be some material to show the inaccuracies or errors arose out of a failure to take reasonable care,” the judge said.
So in an action to get access to KPMG’s documents in order to show KPMG had been negligent, the court held that Wealthcare couldn’t see the documents because it couldn’t show that KPMG might have been negligent. It’s a question of degree. The judge required some evidence at least that showed lack of care, even if it was not enough evidence to hold KPMG guilty at this point.
Are KPMG and PIR out of the woods? Presumably Wealthcare and/or the Pollards can still join KPMG and PIR to the proceedings, but they will have to be careful because if they can’t get access to the right documents, or if they do get access and those documents don’t support the allegation of negligence, the legal bill that Wealthcare and/or its insurers could face would be very substantial.
