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Silent Partners: The bankrollers behind the rush of Australia shareholder lawsuits
October 18, 2017 / 6:34 AM / a month ago

Silent Partners: The bankrollers behind the rush of Australia shareholder lawsuits

SYDNEY (Reuters) - After Australian internet company Vocus Telecommunications Ltd gave its second profit warning in seven months, fund manager David Pace received an email from a law firm asking him to join a shareholder class action.

The corporate logo of communications company Vocus is photographed at their Sydney headquarters, Australia, August 22, 2017. REUTERS/Jason Reed/Files

The case, proposed the email, would accuse Vocus of delaying reporting problems it was having bedding down some recent takeovers, and would seek compensation for shareholders.

“I told them flatly, ‘we won’t be participating’,” Pace, whose firm owns 8 percent of Vocus, told Reuters. “It’s just not in my clients’ interests. This is a distraction. My priority is that they just keep focused on turning the business around.”

Pace’s response reflects a growing impatience in Australia’s listed company sector, as local regulations encourage global litigation funders to prosecute more lawsuits of Australian corporates.

Unlike the United States, lawyers in Australia are banned from taking percentage cuts of damages payouts, opening the door for litigation funders to fill the gap.

Australia is now one of the world’s biggest markets for litigation funders, by number of cases and number of participants. Some 30 funders are now vying for a piece of an industry which has seen more than 500 class action lawsuits since 1992, compared to none before then.

The number of shareholder class actions in Australia jumped 115 percent in the five years to 2017, compared to the previous five years. U.S. shareholder class actions rose just 24 percent over the same time.

“Australia is the country where the role played by third party funders in a class action landscape is greater than any country in the English-speaking world,” said Vince Morabito, a law professor at Monash University who specialises in class actions. “It’s the place.”

“EASY TO POINT THE FINGER”

While advocates argue third-party financing improves the ability of aggrieved parties to seek redress, some business groups say the model promotes more lawsuits and want tighter controls.

“Class actions are on the rise, the proportion of class actions that are funded by entrepreneurial litigation funders are on the rise, and we believe that our regulatory environment is particularly conducive to activist class actions and ... profit-driven litigation funders,” said Australian Institute of Company Directors General Manager for Advocacy Louise Petschler.

“A national system of regulation around our class action regime would be a significant improvement.”

Attorney-General George Brandis, who in opposition said greater regulation of litigation funding should be considered, declined to comment.

In 2016, a lawsuit against New Zealand-owned CBL Insurance Ltd generated headlines by winning a A$5 million damages payout, none of which went 300 laid-off factory workers. Litigation funder LCM Finance received A$1.85 million while lawyers, liquidators and auditors split the rest.

The state government has since ordered an inquiry into litigation funding.

LCM Managing Director Patrick Moloney said the lawsuit was brought by the trustees of the collapsed company, not by the factory workers themselves. The trustees were responsible for disbursing the funds recovered, he said.

“It’s easy for everyone to point their finger at the funder, but our job is to fund, to just keep paying the bills. We don’t give instructions, we don’t run the litigation. They have the control over the proceedings.”

PRIVATE EQUITY STYLE

Australian targets of litigation funders include surfwear retailer Surfstitch and the country’s biggest listed company, Commonwealth Bank of Australia. Both are fighting accusations of failing to disclose information that weighed on their share prices.

Treasury Wine Estates Ltd, the world’s largest standalone winemaker, paid A$49 million in August to settle a class action accusing it of failing to disclose problems with a U.S. expansion.

None of those companies would comment. Nor would Vocus, the internet company, or more than a dozen other listed companies which have received or been notified of plans for shareholder class actions in recent years, citing concerns about interfering with unresolved disputes or re-visiting old ones.

IMF Bentham Ltd bankrolled its first class action in Australia in 2001 and now has about two-thirds of Australia’s litigation funding market.

Executive director Hugh McLernon said plaintiffs had received about 60 percent of A$2.1 billion in total payouts from 162 cases funded by IMF Bentham.

IMF Bentham is bankrolling the CBA class action, Australia’s largest with some 800,000 potential complainants.

“I seriously doubt that the class action will drain CBA’s resources but if it does then this will occur in tandem with the concurrent Federal Court allegations of Austrac, the inquiry by APRA, the investigations by ASIC and the tumultuous outcry of the Australian public,” he said in an email, referring to a civil lawsuit by the anti-money-laundering agency and a host of regulatory inquiries.

IMF’s last annual report said it has 65 active matters in Australia, the United States, Canada and Asia, with a “total estimated portfolio value of A$3.8 billion”.

McLernon dismissed as “arrant nonsense” any suggestion his firm’s business model encouraged companies to settle rather than undertake costly, distracting legal battles.

“No board pays out tens of millions of dollars unless there is a reasonable case against them,” he said.

Meanwhile, Pace, the fund manager, said he will use his firm’s top position on the Vocus shareholder register to lobby its board to fight the class action currently being contemplated.

“Just because they try, it doesn’t mean there’s a case to answer to,” he said.

Reporting by Byron Kaye; Editing by Lincoln Feast

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