While the Court partly overturned the original decision, finding that CBA had contravened its continuous disclosure obligations in respect of certain aspects of its deemed knowledge of material information, it ultimately dismissed the appeal. The claimants were unable to prove relevant awareness of potential exposure to the AUSTRAC enforcement action, thereby failing to establish causation and loss. 

This decision provides further guidance, and some limitation, on the test for a company's "awareness" of information under the Listing Rules, emphasises the importance of pleadings (and the parties being held to their pleaded case), and, while dismissing the appeal, offers claimants a potential roadmap for establishing causation and loss in future class actions.

In 2012, CBA rolled out "intelligent deposit machines" (IDMs), which allowed customers to anonymously deposit cash or cheques, with the funds instantly credited to the nominated recipient account. This gave rise to a number of regulatory issues regarding CBA's compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act):

• Late TTRs: CBA was required to submit a threshold transaction report (TTR) to AUSTRAC for each transaction with a cash component of not less than $10,000. Due to an error, one of the transaction codes applied to IDMs had not been linked to TTR reporting as it should have been, resulting in over 50,000 TTRs not being reported between November 2012 and August 2015 (2.3% of CBA's overall value of TTRs during that period);

• Risk Assessment: CBA did not carry out an assessment of the ML/TF risks associated with IDMs before their roll out in 2012 (and did not do so until mid-2015); and

• Account Monitoring: From October 2012 to September 2015, CBA failed to conduct account-level monitoring on almost 780,000 employee related accounts.

On 3 August 2017, AUSTRAC announced it had commenced civil penalty proceedings against CBA for serious and systemic non-compliance with the AML/CTF Act (AUSTRAC Announcement) in relation to the above issues and alleged further contraventions. Following the announcement, CBA's share price fell by 5.4%. Ultimately, CBA admitted certain AML/CTF contraventions, and in June 2018, a $700 million penalty was imposed.

In October 2017, the claimants lodged what was labelled Australia's largest ever shareholder class action. The action alleged that between 16 June 2014 and 3 August 2017, CBA's shares traded at an inflated price because CBA did not comply with its continuous disclosure obligations and engaged in misleading and deceptive conduct by failing to disclose the above regulatory and compliance issues, as well as the resultant potential exposure to enforcement action and penalties.

Yates J found in favour of CBA on nearly all issues. Yates J found:

• no breach of continuous disclosure laws;

• the alleged misrepresentations were not in fact made such that there was no misleading conduct;

• the claimants would be held to their pleaded case and the Court is the arbiter of the competing positions and should not fill in any evidentiary gaps; and

• in any event, the claimants had failed to establish any causation or relevant loss.

In summary, Yates J:

• clarified the reasoning of the Full Court in Worley regarding when a company is "aware of information", stating that the correct starting point is "the fact or facts known to a relevant person, or the facts on which a relevant person ought to have formed an opinion or drawn an inference from other known facts." The starting point is not the facts that could or should have been discovered "through an investigation which did not, in fact, take place." He added that "awareness" does not extend to facts that are capable of discovery with the benefit of hindsight. Yates J found that the claimants' case was affected by hindsight and relied on an incorrect approach "based on an abstract inquiry, where the 'existence' of the fact can be ascertained by an ex post facto investigation, divorced from whether a relevant person actually knew the fact at the relevant time or ought to have formed an opinion or drawn an inference to the effect of that fact from other known facts"; 

• found that CBA was not "aware" of all the components of the information the claimants had pleaded should have been disclosed at the relevantly pleaded dates. However, CBA was constructively aware of all elements related to the IDM Risk Assessment issue as of 26 October 2015, and the other pleaded information by April 2017;

• determined, as a threshold issue, that CBA was not required by rule 3.1 of the Listing Rules to disclose the pleaded information in that form to the ASX. He also concluded that the pleaded information was not material to investors; and

• held that, even if the claimants had succeeded in their case on contravention, they would have lost on causation and loss, having failed to establish that, if any part of the pleaded information had been disclosed at any particular time, the market price of CBA shares would have been lower immediately following the disclosure.

Awareness

A critical issue on appeal was when CBA became aware of the "September 2015 Late TTR Information"—the information which the claimants alleged CBA should have disclosed about Late TTRs. In particular, the issue was whether the primary judge erred in finding that CBA became aware of "integer (b)" in January 2016, rather than in September 2015. The Late TTR Information was said to be the "lynchpin" of the claimants’ case, in that it was not suggested that the other forms of pleaded information were required to be disclosed if the Late TTR Information was not required to be disclosed. Ultimately, the Full Court upheld Yates J’s awareness findings.

An entity may be aware of information through either actual knowledge or constructive knowledge (i.e. where an officer ought reasonably to have come into possession of the information in light of their role and the surrounding circumstances). The claimants relied on the observations of Jagot and Murphy JJ in Worley at [178]:

"If the evidence shows that: (a) the information in fact existed, (b) reasonable information systems or management procedures ought to have brought the information to the attention of a relevant company officer, and (c) acting reasonably the company officer ought to have discerned the significance of the information, then s 674 and the Listing Rules deem the company to have had the information. … WOR’s approach would effectively reward a publicly listed company for having such poor information systems and management procedures that the company does not come into possession of important, market-sensitive information and does not form an opinion based on known facts, which it reasonably should have formed. It would also reward a company for its officers holding back from the board an opinion they had formed about such matters." (emphasis added)

The Full Court supported Yates J in concluding that Worley did not "extend the notion of “awareness” to an awareness of unknown facts that are merely capable of discovery through a process of further investigation into their existence, still less to facts that are capable of discovery with the benefit of hindsight": [285]. In drawing that conclusion, the Full Court opined:

• the observations in Worley cited above applied to the circumstances arising in that matter and "not at large", and did not set out "any principle of general application that a fact capable of discovery by interrogating a database and then performing calculations constitutes information of which an entity is aware just because it would be “reasonable” for those enquiries to be made": [273]; and 

• the continuous disclosure rules "do not impose a wide-ranging obligation on listed entities to scrutinise their data just because if they did so, and drew out certain data, someone could then derive a market-sensitive piece of information from that data". Any such obligation may be impossible to fulfil, and it would "tend to support the imposition of continuous disclosure obligations by retrospective, post hoc analysis because the potential to extract data and then make calculations or draw inferences from it would often only be apparent with hindsight, once a particular issue has emerged": [275].

Materiality 
The Full Court found that Yates J erred in:

• failing to conclude that the “scale of the contraventions” and the “magnitude of the failures” were “highly relevant in considering materiality”: [453]–[454]; and

• not finding that certain of the alleged information that was known to CBA was material.

As such, the Full Court found that CBA had breached its continuous disclosure obligations, contravening Listing Rule 3.1 and s 674 of the Corporations Act in two respects.

Causation & Loss
At both first instance and on appeal, the claimants' case was predicated on there being "economic equivalence" between the AUSTRAC Announcement (which triggered the share price drop) and the information which the claimants alleged should have been disclosed earlier (see [561]).

However, the Full Court agreed with Yates J that there was no "economic equivalence" between that information, such that causation was not established:

• the information disclosed by the AUSTRAC Announcement was "much more extensive, and much more damning than the [pleaded] information…. It was also information delivered by a different entity, and in a different manner; and it was different from the information the Bank would have disclosed on the counterfactual": [572];

• had CBA disclosed the pleaded information, "it would have been disclosing that certain events had occurred and that it was potentially exposed to enforcement action by AUSTRAC" which "might result in CBA being ordered to pay a substantial civil penalty": [573]. This is a "far cry" from the AUSTRAC Announcement made by AUSTRAC (not CBA), announcing that legal proceedings had been commenced (not the mere possibility) and contained "detailed allegations that went far beyond, and were much more damning than, the content" of the pleaded information: [574]; and

• the AUSTRAC Announcement was "not materially the same as, nor was it the economic equivalent of, the relevant pleaded information. This is not to focus on the differences in wording, but on the substance of what was conveyed" which "cannot be dismissed as merely adding "colour" or "emotion". The differences are so far-reaching that the conclusion that the two are not equivalent, or materially the same, is obvious and not a conclusion that rests on expert evidence": [579].

The claimants' event study calculated the artificial inflation arising from the AUSTRAC Announcement, having found that the AUSTRAC Announcement contained additional "confounding" information, outside the pleaded information (i.e. there was no economic equivalence), the loss issue was whether it was possible to “strip out” the impact of the confounding information and attribute a portion of the abnormal return to the pleaded information.

The Full Court rejected the claimants' contentions that:

• it was impossible to "strip out" the confounding information and fix a portion of the figures to reflect the market reaction to the disclosure equivalent to the pleaded information: [583];

• it should adopt the full abnormal return figure as the loss: [584]–[585]; and

• CBA bore the onus of "negativing the existence of loss", i.e. establishing that not all of the $3.29 price drop was referable to the pleaded information, on the basis that the difficulties the claimants allegedly faced in quantification were attributed to CBA's own wrongdoing": [583], [600].

The Full Court did not accept that it was "impossible to try and discern the contributions to the price drop referrable to the information that was substantially the same as the pleaded information", opining that:

• the event study "points to precisely the sort of analysis that can, and should, be carried out when a corrective disclosure that forms the basis of an event study differs in material respects from the hypothetical counterfactual disclosure that should have been made. His report acknowledged that it is necessary to consider whether “any portion of the decline in CBA’s share price” could have been caused by other news. Professor Easton’s approach here looked for confounding information, identified a single piece of confounding information (being a Deutsche Bank report), and then analysed the articles or analyst reports, which provided negative commentary on the AUSTRAC lawsuit": [591];

• "the critical question is what that event study reveals about the extent to which the price of an entity’s shares is inflated by reason of the wrongdoing established. We do not consider that treating an “event” as indivisible absolves a party from taking steps to attempt to arrive at a principled basis upon which a price decline that is plainly referable to a raft of “bad news,” going well beyond the pleaded information, can be attributed to the alleged contraventions": [593]; and

• where “two or more items of information are released to the market on the same day, it may be difficult to separate their respective effects on a share price”, and “other techniques” must be employed to “estimate the likely separate price effect of each item of news”: [594].

The Full Court provided two examples of the types of information the claimants could have used to supplement the event study and provide a reasonable estimate of loss referable to the pleaded information, excluding the effect of the confounding information:

• examining qualitative market reactions and commentary in the form of broker and analyst reports, and news articles or other sources of information about CBA, to determine the proportion of a share price decline that was referable to each of two different pieces of information, being a kind of analysis referred to in both TPT and Worley: [591], [595] – [597]; and

• observing market reactions to the disclosure of qualitatively similar information by other companies. For example, in this case, reference was made to the identified market reactions to NAB and Westpac, (two of the other “big four” banks in Australia) when they disclosed AML/CTF violations: [598].

The Full Court's guidance on this type of analysis came with a caveat, with their Honours' stating that the appropriate approach will depend on the circumstances of each case: [601].

The Full Court's decision is another blow to those seeking to advance shareholder class actions. Funders and claimant law firms were looking to claw back some of the defendants' gains in the previous six adverse judgments and build on a favourable bench expanding the ambit of 'awareness' in Worley (which extended to an opinion the company did not have, but reasonably ought to have formed from known facts). Rather than expanding on that criteria, the Full Court confined its application on constructive knowledge, such that it does not extend to awareness of unknown facts capable of discovery through further investigation (which did not occur) or the benefit of hindsight. This arguably goes against Worley's ethos that it would allow companies to 'bury their head in the sand' and deliberately not form the opinion or, in this case, not look for the information, but it does provide a commercial and pragmatic approach to the concerns that companies and their officers should not have to continually review their data to search for matters they do not know about but which they could be criticised for not disclosing.

However, the Full Court gave the claimants some comfort that although, like four out of the six shareholder class action judgments to date, they had again failed on causation and loss (despite establishing breach of duty), the claimants were on the right track. The continued failure to prove causation and loss has led some to question whether event studies are ever capable of being successful and whether discounted cashflow valuations should be used instead. However the Full Court has now said that event studies can be successful, if they correctly address the effect of confounding information (potentially by utilising analyst reports, media articles, and competitor share price movements). Consequently, we expect claimants will now take heed of the Full Court's comments and busily revisit their causation and loss reports to address the confounding information, which is more problematic the longer the class period. The Court has identified a path for claimants to make what they considered an impossible task far more achievable. Contrary to the 6-0 headlines, we expect that the shareholder class action contest is far from over.

Should you wish to discuss this matter further or explore similar issues, please feel free to contact our Insurance team.