by Greg Bright
As the number of class actions over financial problems at listed companies grows in Australia, as it has been doing for the past three-four years, so does the pressure on aggrieved investors and their representatives to quantify the damage. The Australian trend is to follow America and leave that decision to the market.
The latest case, which should be of interest to a lot of individual investors and their advisors, is that of Sims Metal. William Roberts Lawyers, with funding by Investor Claim Partner (ICP), is considering a case against Sims Metal for misleading or deceptive conduct and breaches of its disclosure obligations – to put it politely – over 2015-2016, which may have cost shareholders that bought shares in Sims between 21 August 15 and 19 February 16, many millions of dollars.
Taking a helicopter view, the thing about this case, and the claimants’ position, is that it appears to be moving along a typical course. That is that the share market behaviour around certain events would indicate a loss for shareholders compared with if the board and/or management had acted differently. Typically, in cases such as this opposing law firms eventually talk to each other and a settlement is reached, invariably in the favour of the plaintiff’s clients. Believe it or not, in cases brought by shareholders, such as this proposed case against Sims, a pre-judgment settlement has been reached in every single class action against a public company for financial issues in Australia’s history. These cases have never been decided by a court.
Big investors have already backed the case against Sims Metal and ICP and William Roberts are now looking to widen the involvement in the action through wholesale (planners) and retail (SMSFs) markets.
John Walker, the founder and chief executive of ICP and one of the pioneers of the litigation funding sector in Australia, said of the latest class action that there were “thousands” of investors who bought shares in Sims Metal during the problematic period between August 21, 2015 and February 19, 2016. “The sole issue is whether or not the company had a reasonable basis for their forecasts,” he said. “We seek to resolve this issue beforehand [before going to court].”
Of the 40-odd completed class actions relating to ASX-listed companies, Walker’s ICP has been involved with about 15. An accountant and lawyer, his first firm was an insolvency specialist launched in 1998. He then launched in 2001, with business partner Hugh McLernon, IMF Australia, itself an ASX-listed company, which enabled a range of investors for the first time to invest in lawsuits.
With respect to the Sims Metal situation, Walker says that the company should have known its communications, or lack thereof, were misleading because of the publicly available data on the state of the iron ore market. “Scrap metal [such as dealt in by Sims] is a substitute for iron ore,” Walker says, “so it has to be affected by the state of the iron ore market. That’s why we feel they don’t have a reasonable defence.”
Bill Petrovski, a principal of William Roberts Lawyers involved in the proposed action, says once a certain point has been reached, in Australia at least, all similar actions have been settled. Damages in these cases are typically determined by quantification of inflation caused to the market price of the company’s shares by the alleged misconduct.
“The courts in the US have decided to trust the market’s view,” he says, “and we are following that path. We assume that the market is efficient and that all known information is embedded in the stock price. When there is bad news that is withheld, it artificially inflates the price. When the bad news comes out, the market slumps.”
To determine the loss suffered by shareholders from the alleged misconduct, the lawyers and funder do their “events study analysis” to determine the value of the inflation, including the use of regression analysis, as well as discount cash flow analysis. They sound a lot like fund managers. In the case of Sims Metal, Petrovski says, that claimant’s would be looking to recover compensation “in the millions of dollars”.
The Sims Metal case starts with earnings guidance provided by the company to investors on August 21, 2015 and September 9, 2015, which said that EBIT would exceed $142 million for the 2016 financial year, and confirming the target of $321 million in EBIT for 2018. The plaintiffs will allege the company did not have a reasonable basis to make these forecasts, which were, therefore “misleading or deceptive”.
When Sims Metal made a downward revision of its earnings guidance on November 12, 2015, the share price slumped 27 per cent over two days, from $9.58 to $7.00. Then, on February 19, 2016, Sims Metal reported that underlying EBIT was not break-even but, rather, a loss of $4.8 million and downgraded its 2018 EBIT target. Despite saying that it expected an improvement to a similar annualised EBIT by the end of 2016, the share price fell another 14 per cent from the-then $7.76 to $6.65 over the subsequent two days.
The claim periods for the action are split into two, because of the importance of the company’s two separate statements to the ASX. Shareholders eligible to participate are those who purchased shares between August 21, 2015 and February 19, 2016.
They, or their advisors, should contact either ICP: (Email: firstname.lastname@example.org) or William Roberts Lawyers: Bill Petrovski, email – email@example.com or Ding Pan by e-mail – firstname.lastname@example.org; by telephone – 02 9552 2111