Public and Private Enforcement of Securities Laws

The Regulator and the Class Action in Australia's Continuous Disclosure Regime

Michael Legg

• Publisher: Hart Publishing
• Year: 2022
• ISBN:
  9781509941537
• Edition: 1
• Topic: Derecho
• Subtopic: Procedimiento civil

This book undertakes unique case studies, including interviews with participants, as well as empirical analysis, of public and private enforcement of Australian securities laws addressing continuous disclosure. Enforcement of laws is crucial to effective regulation. Historically, enforcement was the province of a government regulator with significant discretion (public enforcement). However, more and more citizens are being expected to take action themselves (private enforcement). Consistent with regulatory pluralism, public and private enforcement exist in parallel, with the capacity to both help and hinder each other, and the achievement of the goals of enforcement in a range of areas of regulation. The rise of the shareholder class action in Australia, backed by litigation funding or lawyers, has given rise to enforcement overlapping with that of the government regulator, the Australian Securities and Investments Commission. The ramifications of overlapping enforcement are explained based on detailed analysis. The analysis is further bolstered by the regulator's approach to enforcement changing from a compliance orientation to a "Why not litigate?" approach. The analysis and ramifications of the Australian case studies involve matters of regulatory theory and practice that apply across jurisdictions. The book will appeal to practitioners, regulators and academics interested in regulatory policy and enforcement, and the operation of regulators and class actions, including their interaction.

1

Introduction

I.Research Questions

The proper functioning of financial markets, with spillover effects on the economy and a population’s wellbeing, is a matter of significant concern. Australia’s continuous disclosure regime has been identified as ‘critical to protecting shareholders, promoting market integrity and maintaining the good reputation of Australia’s financial markets ($1.84 trillion market capitalisation with an average turnover of $5.9 billion a day)’ with the result that there is ‘increased investor participation and investment, higher liquidity, and lower transaction costs’.¹ Central to the proper functioning of the continuous disclosure regime is the manner in which it is enforced.²

Australia has traditionally relied on a public regulator, the Australian Securities and Investments Commission (ASIC), to enforce its securities laws,³ and since 1994, the enforcement of its continuous disclosure regime which has been regulated by the Corporations Act 2001 (Cth) (‘Corporations Act’) and its predecessor, the Corporations Law. However, shareholder class actions whereby private litigants pursue claims for contravention of the securities laws, including the continuous disclosure regime, have become a growing phenomenon in the Australian legal landscape since around 2002–03.⁴ The advent of the shareholder class action, driven in part by litigation funding, has given rise to overlapping enforcement of the continuous disclosure laws by the public regulator and private citizens.⁵

Because the continuous disclosure regime is subject to both public and private enforcement, there is a pressing need to understand the ramifications of both ASIC and the class action operating in the same regulatory field. The above developments have motivated four main questions for examination in this text.

The first question is to inquire as to the effectiveness of ASIC enforcement and the shareholder class action in achieving deterrence and compensation in relation to a particular category of Australia’s securities law: the continuous disclosure regime. Effectiveness seeks to ascertain if a desired state of affairs is achieved. As the thesis is interested in the coexistence of ASIC enforcement and the class action, the approach to effectiveness is comparative rather than absolute. Put another way, the question is: ‘Is ASIC enforcement more or less effective at achieving deterrence and compensation than the shareholder class action?’ The focus on deterrence and compensation is chosen because these are the areas where ASIC and the class action overlap. The overlap is derived from an examination of the objectives of ASIC and the role of the class action, discussed in chapter two, that puts forward deterrence and compensation for both. As will be explained, the emphasis varies between ASIC and the class action.

The second question asks what the ramifications are of ASIC enforcement and class actions coexisting in relation to the continuous disclosure regime from the perspective of regulatory process and the values of a ‘good’ regulatory process. The consideration of the regulatory process is necessary to determine if desirable regulatory values or norms are complied with or promoted by ASIC enforcement and the class action. Moreover, consideration is given to how action by ASIC and the class action may impact each other; that is, whether they help or hinder each other.

In summary, the first question focuses on outcomes and the effectiveness of ASIC enforcement and the class action in achieving deterrence and compensation. The second question focuses on process and process values.

The answers to these questions are addressed in chapters five and six after the development of an analytical framework in chapter three and the creation of case studies in chapter four The case studies and associated analysis is based on the state of the law as at 31 December 2017. The text presents a multi-dimensional understanding of deterrence, compensation and regulatory process; these are explored through the detail and nuance of the in-depth case studies, including interviews with participants. The text does not seek to give a single answer to each of the research questions, but rather to produce a sophisticated account of the various factors that interact and mediate both outcomes and processes, so as to demonstrate that any answer is complex and contingent on a number of influences and circumstances.

The third question is whether changes in policy settings and legal requirements can encourage or discourage public and private enforcement, and consequently impact the effectiveness of public and private enforcement in achieving deterrence and compensation. This is a re-examination of the first question through the lens of actual policy changes in Australia post-31 December 2017, including changes to ASIC’s resourcing and enforcement approach, regulation of litigation funding and changes to the requirements for there to be a contravention of the substantive law. This analysis, including drawing on further empirical examination of the enforcement undertaken by ASIC and class action activity, is set out in chapter seven.

The fourth question asks how the coexistence of public and private enforcement may be more effectively addressed through some form of coordination. Having identified that ASIC and the class action may impact each other, and the achievement of desirable regulatory values, the text draws on a range of coordination mechanisms from other regulatory regimes to design strategies for coordination.

II.Structure of the Text

A.Background (Chapter Two)

Chapter two provides the background to the relevant substantive law, namely the continuous disclosure regime and the related prohibition on misleading conduct, with an emphasis on the enforcement options or causes of action that the legislature has created. Significantly, both ASIC and the private citizen have standing to pursue actions which allows for overlapping enforcement. This chapter also explains the operation and function of ASIC and the shareholder class action. The literature on the objectives of ASIC and the role of the class action identifies deterrence and compensation as being outcomes that both may achieve. Consequently, ASIC enforcement and the class action can overlap in relation to deterrence and compensation.

B.Analytical Framework (Chapter Three)

Chapter three develops the analytical framework which is applied throughout the text, and in particular to the case studies in chapters five and six. The first part of the framework critically unpacks the literature on deterrence and compensation, including the definition and dimensions of each. It also includes a discussion of the conditions for effectiveness and limitations. This multi-faceted perspective on deterrence and compensation allows for an in-depth analysis of both. The second part of the framework draws on regulatory theory to develop the process values or norms that inhere in a ‘good’ regulatory process. The values identified are: legislative authority; the public interest; accountability; and efficiency. The values provide criteria for evaluating the operation of ASIC action and the shareholder class action, both separately and in relation to each other.

C.Case Studies (Chapter Four)

The thesis employs four case studies. Chapter four explains the case study approach and its use of interviews and document analysis. The choice of case studies is also explained. Chapter four explains the background facts, ASIC enforcement action and class action outcomes for each case study. The case studies are then summarised in Tables 4.3, 4.4 and 4.5 for ease of reference. An overview of each case study examined by the thesis is set out below.

D.Application of the Analytical Framework (Chapter Five)

This chapter then examines the case studies through the lens of the analytical framework: deterrence and compensation; and the regulatory process. The application of the analytical framework involves drawing on the detailed interviews and documentary analysis undertaken for each case study as the primary source of information for evaluating the elements of the framework.

E.Effectiveness and Coexistence of Regulatory Enforcement and Class Actions (Chapter Six)

Chapter six draws together the analytical framework from chapter three and its application to the case studies in chapter five, to answer the first two questions posed for examination in this chapter. The findings are situated within the broader context of all of the publicly reported actions taken by ASIC and by shareholders through the class action in relation to continuous disclosure as at 31 December 2017. The key findings are set out below in section V and summarised in chapter 6, Tables 6.2 and 6.3.

F.Public and Private Enforcement Recalibrated (Chapter Seven)

The extended time period covered by the text provides the opportunity to examine if and how changes to policy settings and legal requirements alter the operation of public and private enforcement. Chapter seven chronicles a range of changes that took place in relation to both ASIC enforcement and class actions from 2018 to 2021 which altered, or provided incentives to alter, the effectiveness of ASIC enforcement and class actions in achieving deterrence and compensation and the ramifications of coexistence.

G.Coordination of Public and Private Enforcement (Chapter Eight)

The logical next step from the coexistence of public and private enforcement and their impact on the regulatory process, and each other, is to consider if they can be more effective through some form of coordination. This chapter examines the existing mechanisms for coordinating enforcement in Australia, which are largely court procedures, and coordination mechanisms from four regulatory regimes in the United States.

The chapter then develops two potential coordination strategies for the public and private enforcement of securities regulation generally, and the continuous disclosure regime specifically.

III.Scope of Study and Text

The focus of the research set out in this text is an investigation of public and private enforcement in a single area of Australian securities law: the continuous disclosure regime. This is a considered choice. Examinations of public and private enforcement in other areas of regulation have warned against the ‘abstract speculation on the functioning or desirability of [private enforcement]’.⁶ This is because:

[T]he desirability of authorizing private actions involves difficult policy judgments and is likely to depend on a number of context-specific factors. Making such determinations therefore requires familiarity with the nature of the particular policy problem, the substantive goals of the regulatory scheme, and the likely interaction of private lawsuits with other elements of the government’s enforcement strategy.⁷

The regulatory regime creates specific incentives and requirements for the regulator and the class action’s proponents. This includes the available enforcement tools, the elements of causes of action and the possible outcomes, such as levels of penalties and available compensation, that may follow. These are important to understanding the ‘how’ and ‘why’ embedded in the research questions.

As this study is interested in the overlapping enforcement of the continuous disclosure laws, the text focuses on those areas where ASIC enforcement and the class action intersect, namely deterrence and compensation. While ASIC has additional objectives to deterrence and compensation, which are identified in chapter two, the text does not develop an analytical framework in relation to those other objectives. The analytical framework draws on a wide array of literature, including a heavy reliance on literature from the United States where the study of the interaction of public and private enforcement is highly developed due to the longstanding existence of the class action. However, the text does not compare jurisdictions, but focuses solely on the Australian continuous disclosure regime. Nonetheless, the arguments and findings made in the text can be extrapolated, or contested, by the reader in relation to other regulatory regimes with which they are familiar.

For the case studies, the population of interest was comprised of entities that had been subject to both ASIC enforcement activity and a class action where the underlying factual matrix included allegations of non-compliance with the continuous disclosure regime. Moreover, as the focus of the research questions is a comparison of ASIC enforcement and the class action, the text does not consider actions brought by the Australian Securities Exchange or individual shareholder actions.

The scope of the case studies and associated analysis is delimited by time in two respects. First, the choice of case studies needed to occur prior to an ethics approval application for the conduct of interviews. As a result, the case studies could only be chosen from a field of ASIC enforcement and class actions that had been completed prior to 17 September 2015 when the ethics application was lodged.⁸ This is explained in chapter four. Second, to enable analysis of the case study findings in the broader context of all of the publicly reported actions taken by ASIC and class actions in relation to continuous disclosure, an end date of 31 December 2017 was chosen for identifying publicly reported actions. However, the text takes account of later developments relevant to the conclusions reached through chapter seven, which examines subsequent changes to policy settings and legal requirements, including changes to ASIC’s enforcement approach, funding and available penalties. Chapter seven also incorporates all publicly reported actions taken by ASIC and class actions in relation to continuous disclosure up to 30 June 2021.

IV.Case Studies

Case studies are employed to understand complex social phenomena or processes, including why or how something occurs. In the current text the phenomena under study is enforcement of the continuous disclosure regime and how that occurs when both ASIC action and class actions are operating, and with what results or effects. The case studies, including interviews with the main participants, are central to the original insights that the text contributes to knowledge.

Four case studies were chosen for examination: Telstra; Multiplex; Centro; and Leighton. The detailed explanation for the choice is set out in chapter four. In short, they involved overlapping ASIC enforcement action and class action activity. They also provided a diversity of ASIC enforcement action and class action outcomes.

Telstra Corporation Limited was Australia’s largest telecommunications provider which, at a time when it was still part owned by government but also publicly listed, was alleged to have made selective briefings and inaccurate profit downgrades. Telstra received a warning from ASIC in relation to potential...