The irking thing about this Centro settlement is that it raises more questions than it answers.
The price to shut this case down is $200 million, a monumental sum. It harpoons the previous record, Aristocrat’s $144 million settlement in 2008 and, in market terms, will be seen as a big win for the plaintiff law firms and litigation funders.
The deal also proves the big end of town has more to fear from shareholder actions than the corporate regulators. In this, the market is working, putting a price on failure, and on legal services for that matter.
Regulation has been effectively outsourced to the private sector, and it is working. There is no way Centro and its auditors PwC would ever have been fined $133 million and $66 million respectively by a government agency.
It was almost one year ago that the Australian Securities & Investments Commission won its civil suit in the same court as the dual shareholder actions.
Victorian Federal Court Justice John Middleton found Centro directors had breached their duties when they failed to notice multi-billion dollar errors in the financial accounts.
But when it came to penalties, the judge deemed that the shame of it all was enough. In a 186 page judgment, he found the directors were “intelligent, experienced and conscientious” and that they relied on extensive advice and processes before approving the dodgy accounts in 2007.
The architect of the reckless Centro empire, Andrew Scott, had to cop a small fine, there was a two-year management ban for the CFO – a well-earned rest you might say – and the other directors got off scott-free.
The price of their multi-billion-dollar failure? Embarrassment.
This week’s deal is no joke. It puts a rocket under auditors and directors. There is a price on failure. The ramifications of this settlement will be an improvement in the vigilance of directors and auditors.
Yet too much is left to the imagination. Had the case proceeded all the way, through the appeals courts to the High Court, important precedent might have been set.
The law would have underwritten causation — that is, who is to blame and in what measure — and the calculation of shareholder losses for years to come.
And even though the judge Michelle Gordon rubbished the PwC defence team for spurious legal arguments, contending that the individual auditor was to blame rather than the firm, there is no precedent otherwise.
What now? When a corporate client signs up Ernst & Young, Deloitte or KPMG to conduct its audit is it buying the blue chip imprimatur of the firm? Or just some audit partner shooting the breeze?
We contacted these firms to find out and are yet to hear back.
Then there is IMF, which funded the Maurice Blackburn case. IMF has won a raft of settlements and built a profitable business from picking the right cases to pursue, but it is yet to proceed to full judgment.
Centro and PwC saw this as a weakness in the plaintiff case. With their deep pockets they could knuckle down and fight this all the way. It is safe to assume they are insured.
But this weakness could just as easily be viewed as a strength, the settlement rate evidence that IMF picks winners.
Had the suit proceeded it would have been a beauty to test some major principles of corporate law. IMF, Maurice Blackburn and the other plaintiff firm Slater & Gordon, knew they had a cracking case, on the facts that is, but the law was less clear.
From a legal perspective the case was still in full swing. In week ten of a trial which was costing an estimated $1 million a week, the principal witnesses had been done with and the experts were in the box.
This was the boring bit. But the high drama of the case had wreaked its damage. The defendants had more to gain, they must have decided, stemming further legal costs and reputational damage than by risking an unfavourable judgment.
So shareholders stand to gain $120 million, the funders pick up one-third of the pot, the plaintiff law firms get their fees, and bragging rights.
Centro has already provided $65.8 million for potential settlement costs in its half-year accounts. It is also said to have $60 million insurance. Centro Retail hedge fund holders get to eliminate uncertainty.
PwC would also have insurance and, as directors and officers rates, are set on the world market, they may even escape paying higher premiums.
They have taken a reputational hit but the “no admissions” aspects of these settlements means they never publicly frame a settlement as a loss, or anything they have to apologise for.
And so, in the wash-up, assuming the final points of this deal are settled, there is still no resolution, no legal certainty on shareholder losses and causation.
Mind you, it is not only the job of the courts to divine the law. The legislature could provide more clarity on these things. But it is yet to do so, in regard of cause of losses and pricing the losses.
After ten years of shareholder cases, none have made it to judgement. But it has been the same argument in the pleadings, on both sides every time: be it Aristocrat, Centro, Concept Sports, AWB or Oz Minerals.
The shareholder cases contend that, instead of ferrying out expensive experts from the US, there should be a fair methodology for quantifying losses.
As to cause, in the US, they call it “fraud on the market theory”. Here it is framed as failure to provide “material information” under the disclosure laws.
The plaintiff argument runs: if the material information had have been disclosed, the market price of the stock would have been lower (in Centro, the stock plummeted 90 per cent when the state of its short terms debts suddenly became widely known).
If the price would have been lower, then the plaintiffs argue that any shareholder who bought was paying an inflated price – inflated because directors had failed to alert the market to material information – and consequently suffered losses.
The defendants counter argument is that class actions should not happen at all because it is impossible to prove what shareholders would have done had they known the material information.
And even if an inflated stock price could be proved, then the individual shareholders would have acted differently. So their claims should be tested individually by the courts.