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High Court of New Zealand Decisions |
Last Updated: 25 March 2014
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2008-409-348 [2014] NZHC 423
BETWEEN ERIC MESERVE HOUGHTON Plaintiff
AND TIMOTHY ERNEST CORBETT SAUNDERS, SAMUEL JOHN MAGILL, JOHN MICHAEL FEENEY, CRAIG EDGEWORTH HORROCKS, PETER DAVID HUNTER, PETER THOMAS and JOAN WITHERS
First Defendants
CREDIT SUISSE PRIVATE EQUITY INC (FORMERLY CREDIT SUISSE FIRST BOSTON PRIVATE EQUITY INC)
Second Defendant
CREDIT SUISSE FIRST BOSTON ASIAN MERCHANT PARTNERS LP Third Defendant
FIRST NEW ZEALAND CAPITAL Fourth Defendant
FORSYTH BARR LIMITED Fifth Defendant
Hearing: 4 March 2014
Counsel: A J Forbes QC and P A B Mills for plaintiff
A R Galbraith QC, D J Cooper and S V A East for first defendants
J B M Smith QC, A S Olney and C J Curran for second and third defendants
D H McLellan QC for fourth defendant
A C Challis and H N McIntosh for fifth defendant
Judgment: 10 March 2014
HOUGHTON v SAUNDERS [2014] NZHC 423 [10 March 2014]
RESERVED JUDGMENT OF DOBSON J
Contents
Summary
............................................................................................................................................
[5] Greg Meredith
...................................................................................................................................
[8] Susan Newberry
..............................................................................................................................
[26] Terence Harrison
.............................................................................................................................
[31] John Blakemore
...............................................................................................................................
[40] Peter Hall
.........................................................................................................................................
[45] Arthur Lim
......................................................................................................................................
[52] Alan Coleman
..................................................................................................................................
[57] Brian Russell
....................................................................................................................................
[62] Andrew Harper
...............................................................................................................................
[67] Application to amend the statement of
claim................................................................................
[73] Costs
.................................................................................................................................................
[83]
[1] This judgment deals with the defendants’ pre-trial objections
to admissibility of the plaintiff ’s evidence,
and the plaintiff ’s
application to amend the statement of claim.
[2] The defendants have sought a pre-trial determination on numerous
objections to the admissibility of evidence proposed to
be given on behalf of
the plaintiff. With the exception of one brief (Mr Lim) the briefs for the
relevant plaintiff witnesses were
served between the end of November and early
December 2013. The trial is scheduled to begin on 17 March 2014 so the parties
require
a prompt answer. The plaintiff’s counsel indicated during the
hearing that they may well pursue challenges to certain aspects
of the evidence
proposed on behalf of the defendants, and that is a matter that may need to be
addressed prior to the calling of
at least the majority of evidence for the
plaintiff.
[3] A complication in dealing with the objections to admissibility now is that reply briefs on behalf of the plaintiff were due on 7 March 2014. In a number of respects the response to the defendants’ criticisms included the prospect that features of the briefs potentially rendering them inadmissible could be cured by further evidence to be provided in reply briefs. That is hardly a conventional answer and the foreshadowed course is likely to be opposed. Reply briefs are intended to address matters in the defendants’ briefs that could not reasonably be anticipated in the
plaintiff’s original briefs, whereas the present objections raise
points under the Evidence Act 2006 (the Act) that are unrelated
to the content
of the defendants’ briefs. However, that is not a sufficient basis for
rejecting the prospect of evidentiary
objections being addressed, so the
prospect lessens the ability to determine some objections at this
stage.
[4] The plaintiff has not provided a complete set of briefs, nor a
complete list of the witnesses to be called for the plaintiff.
However, it is
possible to deal with the present objections to admissibility within the context
and content of each of those proposed
witnesses in respect of whom objections
have been raised.
Summary
[5] For the reasons set out below, I uphold the defendants’
objections to admissibility of the following passages of the
plaintiff’s
briefs that were challenged:
(a) Meredith – [74](c), [88](a).
(b) Harrison – [28.1] to [32] inclusive, and the last
sentence of [73].
(c) Lim – the factual content as to Mr Lim’s
involvement at the time of the IPO is inadmissible, except to the extent that
matters
addressed are supported by the contemporaneous documents that would have
been available to him or reflected his views at
the time, and such
documents are provided to defendants’ solicitors one week before Mr
Lim is to be called.
(d) Harper – the defendants’ objection to the
admissibility of the data he has produced is not upheld, but that is subject to
Mr
Harper fulfilling the additional obligations as described in [72] below, to
confer with and assist the defendants’ expert who
it is proposed will
address the same subject matter.
[6] In numerous respects, it has not been possible to make finite determinations on objections to admissibility because of contingencies that are still to evolve. The
rejection of the objections at this stage cannot constitute a
final positive determination of admissibility. I
will hear counsel on renewed
objections when the whole context in which admissibility is to be determined is
known.
[7] I appreciate that deferring final decisions defeats the objective
of removing from consideration aspects of the evidence
that the defendants
consider, on tenable grounds, that they should not be obliged to respond to. At
least in the context of this
case and the range of objections advanced, a
cautious approach needs to be adopted when pre-trial exclusion of evidence may
ultimately
lead to the risk that the plaintiff is deprived of the opportunity to
present all the ultimately admissible evidence in support of
the criticisms of
the defendants’ conduct.
Greg Meredith
[8] Mr Meredith is a chartered accountant in public practice in
Australia. He was instructed by the solicitors for the plaintiff
to consider
and express an opinion on the specific criticisms of the prospectus that have
been pleaded in the third amended statement
of claim (3ASC).
[9] Mr Smith QC, for the second and third defendants, took the lead in advancing objections. He argued that some 62 paragraphs of Mr Meredith’s brief are inadmissible as constituting argument or submission. A series of recent cases, all dealing with expert evidence offered by tax advisers as to how the law ought to be applied to transactions in issue, have recognised that what amounts to a substitute for
legal submissions from counsel has no place in evidence.1 In
the most recent of
those cases, the Supreme Court has observed that it
is:2
... undesirable and wasteful of time and effort of both parties when such
material appears in expert briefs of evidence. The practice
of including it
should stop. If it persists, Courts should require amended briefs to be
filed.
[10] That comment related to the duplication, in evidence from an
accountant expert in tax matters, of what should be legal submissions
heard from
counsel.
1 For example, Commissioner of Inland Revenue v BNZ Investments Ltd [2009] NZCA 47, (2009)
[2009] NZCA 47; 19 PRNZ 553; Penny v Commissioner of Inland Revenue [2011] NZSC 95, [2012] 1 NZLR 433.
2 Penny v Commissioner of Inland Revenue at [32].
[11] Many of the paragraphs in Mr Meredith’s brief objected to on
this ground express views as to why I should find
parts of the
prospectus to have been misleading. They proceed from an analysis of other
documents which Mr Meredith treats
as having a bearing on the accuracy of the
relevant part of the prospectus. Mr Meredith’s opinions all rely, at least
implicitly,
on the perspective he brings to the issues as an accountant.
Although the fact that he is not expressing a view from the perspective
of a
lawyer, or as to how the law should apply to this case, does not of itself make
out the admissibility of his opinion evidence,
it does distinguish those
opinions from the arguments that would appropriately be advanced by
counsel.
[12] Unlike the legal analysis of tax consequences of transactions in Penny, I do not accept that the analysis and views expressed by Mr Meredith could be substituted for counsel’s submissions. Although some of the paragraphs objected to were fairly described by Mr Smith as argumentative or cast as submissions, I am nevertheless satisfied that there is a meaningful prospect that the opinions expressed will be of substantial help in determining issues in the proceedings.3 In the context of this objection, that more fundamental assessment has to take priority over whether the nature of the opinions expressed and the justification for them can be characterised
as a submission, or argument in favour of the case of the party calling the
witness.
[13] Accordingly, I am not prepared to uphold the objection to
the parts of
Mr Meredith’s brief that are objected to as argument or
submission.
[14] Objection was pursued in relation to a much smaller number of paragraphs on the ground that they contain hearsay. Paragraph [74] of the brief cites a KPMG report dated August 2002 in relation to Feltex’s success in increasing prices and removing rebates, primarily in December 2001. Paragraph [74](c) cites a comment from an October 2006 newspaper article attributed to a carpet retailer (Mr Jim Smith) that Feltex had increased prices and reduced terms and conditions “dramatically” in the 18 months prior to the IPO. Mr Meredith could only be relying on these sources for the truth of their content and unless the original makers of the respective statements are also called, there would be no opportunity to test the
accuracy of the sources that Mr Meredith has cited. In this immediate
context, the
3 Evidence Act 2006, s 25.
hearsay status of the first source would seem unlikely to qualify as a
business record that might be admissible without it being adduced
by the maker
of the statement as a business record.4 The second source is
clearly hearsay, unless evidence is adduced from Mr Jim Smith.
[15] Mr Smith advanced a similar objection to the content of paragraph [88] of Mr Meredith’s brief, in which he again cites the newspaper article that quotes the carpet retailer, Mr Jim Smith. That is hearsay and could not be relied on by Mr Meredith unless there is evidence from Mr Jim Smith as the person whose opinion was quoted. As matters stand, I uphold the objection in relation to the references in [74](c) and [88](a) attributed to Mr Jim Smith. If, by some means, first-hand evidence of Mr Jim Smith’s opinions is able to be adduced, then the prospect of Mr Meredith relying on them in his analysis would become legitimate. I was not persuaded that there is such a realistic prospect at the moment, and therefore treat the reliance on Mr Jim Smith’s opinions differently to the reliance on the
KPMG report.5
[16] Paragraph [88] of the brief also cites from an affidavit previously
sworn in the proceedings by Mr Terence Harrison. Objection
to that as hearsay
was taken on the basis that he is not to be called as a witness, but Mr Forbes
indicated that Mr Harrison will
indeed be called and that notice had been given
to the defendants’ solicitors of the intention to do so. In that event,
it
cannot be objectionable hearsay.
[17] Paragraph [88] also cites an August 2001 Feltex board pack. That constitutes a discovered Feltex document. I understand it will be included within the common bundle, in which case it would have provisional status at this stage. Mr Meredith should not be precluded from relying on it, but to the extent this and any other opinions proffered in his brief rely on Feltex documents, such reliance must be treated as provisional. I would find reliance on such document unjustified if the
reliability or accuracy of the document is successfully
challenged.
4 Evidence Act 2006, s 19.
5 See [20] below.
[18] Reliance on the references in [88](b) and (c) should be recast in
provisional terms, subject to the Court being satisfied
of factual propositions
derived from those sources.
[19] All of [132] to [137] of Mr Meredith’s brief are objected to
as hearsay, or being based on hearsay. Paragraph [134]
has to be excluded from
this challenge as it is merely a quotation from the prospectus. In [132] and
[133], Mr Meredith cites from
an affidavit of Mr Stephen Pearce that was sworn
in support of the plaintiff’s position at an earlier stage in the
proceedings.
Mr Pearce has apparently declined to complete a brief since
completing that affidavit, and I was advised by Ms Mills that the defendants
have been put on notice that the plaintiff intends to subpoena Mr
Pearce, using the affidavit previously filed as his
evidence-in-chief, on which
he can be cross-examined. In that event, references in [132] and [133] are not
hearsay, but rather Mr
Meredith’s reliance on them depends on the
propositions cited from Mr Pearce being made out at trial.
[20] Paragraph [135] cites an opinion from the KPMG August 2002 report.
That will be objectionable unless either the maker of
the statement was called
or I am persuaded that the document qualifies as a business record able to be
adduced under s 19 of the
Act. Because of those prospects, it is not
appropriate to uphold the hearsay objections to references to the KPMG report in
[74]
and [135] of the brief at this stage.
[21] This analysis of the boundaries of legitimate reliance Mr Meredith
can place on the sources he has cited would require him
to recast the terms in
which he expresses the opinions in [136] and [137], to acknowledge that the
opinions are dependent on the
propositions relied on being made out.
[22] A further ground of objection to the content of Mr Meredith’s brief was that he has opined on matters outside the area of his expertise. That expertise relates to accounting matters covering valuation, solvency and the interpretation and presentation of financial statements. The defendants object to his opining on matters outside these areas. The challenge on this ground was advanced to [74](d) of the brief which specifies:
A forecast model for Feltex (refer FB.02.1366) includes a settlement
discount figure in FY04 but not in FY05 or beyond.
In my view it is reasonable
to infer that after FY04 Feltex were forecasting to reduce settlement discounts
to nil. This does not
appear to have been disclosed in the
prospectus.
[23] It was argued for the defendants that the inference Mr Meredith is
prepared to draw is a straight question of fact and does
not rely on any
relevant expertise. I am not persuaded that that is so because accounting
experts are better equipped than lay people
to infer reasons for differences
between one year, and an equivalent model for the following years.
[24] In [102] of the brief, Mr Meredith acknowledges that he is able to
analyse components of the prospectus to identify a form
of loss in the second
half of FY04. He qualifies that acknowledgement with the statement that, in his
view, it is doubtful that a
retail investor without accounting skills would have
the required skills to calculate the implied loss. Mr Smith criticised that
as
an opinion falling outside Mr Meredith’s expertise. I disagree. An
accountant experienced in analysing the impact of
content and omissions from a
document such as a prospectus or a set of financial statements is potentially in
a materially better
qualified position to discern whether buried layers of
knowledge requiring interpretive skills would be apparent to someone without
the
skills that that expert has.
[25] I acknowledge that some of the other opinions offered by Mr Meredith
in the course of his analysis do go nearer the boundaries
of subject matter that
depend on his identified expertise. However, I am not persuaded that he is
disqualified from offering those
opinions, particularly when they are assessed
in the context of the essence of his evidence, namely the respects in which he
identifies
what he considers to be the areas of misstatement or material
omission from the prospectus.6
Susan Newberry
[26] The plaintiff proposes to call Professor Susan Newberry who is a
professor of accounting at the University of Sydney. Her
brief begins with
considerations of
6 This form of objection was maintained in respect of [116]–[119], [127], [131], [132]–[137], [224]–[227], [266]–[271], [369]–[374], [391]–[397], [418]–[423], [426], [434] and [437]–[449] of the brief.
compliance with the Companies Act 1993 and Financial Reporting Act 1993
requirements, as well as requirements that are set out in
the relevant financial
reporting standards for prospective financial information. After that,
Professor Newberry analyses the adequacy
of statements in the prospectus about
the trend in Australian sales. The defendants have objected to [50] to [55] in
this part
of her brief, contending that they comprise a submission. The same
objection is made in respect of [66] (addressing changes in Feltex’s
invoicing system and consequences of it), [80] and [81] (Feltex adopting more
aggressive selling practices, and the consequences
of doing so), and [88] to
[91] (other accounting consequences of forward dating invoices).
[27] Criticism can be made of the terms in which Professor Newberry has
chosen to express her opinions. Of itself, however,
that does not make it
objectionable argument or submission. The subject matter remains within the
area of her expertise and it does
not amount to a substitute for counsel’s
analysis of either relevant law, or the facts. The objection on that ground
cannot
be sustained.
[28] A further and somewhat overlapping objection was that Professor
Newberry improperly embarked upon speculation. For
instance, she infers
what Feltex intended by certain accounting practices, and that the board would
have known that the sales
reported for the final three months to 30 June 2004
were more like three and a half months’ sales. The brief includes reasons
for the conclusions the witness has come to and the analysis arises within the
area of her expertise. There is therefore a basis
for the level of knowledge
she attributes to the directors so that it cannot be excluded as objectionable
speculation. Certainly,
attribution of motive in such a context is difficult to
sustain, and unlikely to be substantially helpful to me. However, opinion
evidence of that type is not present to an extent I consider to be
objectionable, and I am not prepared to exclude it at this stage.
[29] Objection was also taken to reliance on hearsay material. Paragraph [58] relies on information or data extracted or reconstructed by Mr Harper from electronic records. I deal separately with the objection to Mr Harper’s evidence, but in the present context I am not satisfied that Professor Newberry’s reliance on data sourced from Mr Harper can be ruled inadmissible as hearsay, at least at this pre-trial stage.
[30] In [75] and [83], Professor Newberry’s analysis relies on
statements made by Messrs Pearce and Harrison. On the basis
that both of them
will be witnesses for the plaintiff, the objection that she could not rely on
them cannot be sustained.
Terence Harrison
[31] Mr Harrison has more than 20 years’ involvement in
retailing carpet in New Zealand, and to a lesser extent
in Australia. He
remains the director of a carpet retailer that was a key customer of Feltex.
In addition to providing some factual
evidence, he applies his experience in the
carpet industry to express opinions about the prospectus as not containing or
conveying
risks that he thinks Feltex was facing.
[32] The first defendants object to many of Mr Harrison’s
criticisms of Feltex as not corresponding with pleaded criticisms
of the
prospectus. By way of response, the plaintiff provided a schedule of the
allegations in the 3ASC that are said to relate
to the criticisms challenged for
relevance. On many of the points, the relevance asserted is tangential. A
range of issues remain
open as to the weight that such opinions should be given,
and the extent to which they can contribute to establishing the pleaded
omissions. However, sufficient potential relevance is available to
answer the challenge that the passages should be excluded
for lack of
relevance.
[33] The second defendants objected to the admissibility of significant
parts of Mr Harrison’s brief on grounds that opinions
expressed go beyond
Mr Harrison’s field of expertise, that he engages in speculation, and that
he relies on other sources that
are themselves inadmissible as
hearsay.
[34] I have considered all these criticisms in light of the plaintiff’s response to them, arguing for the admissibility of all the challenged passages. The proposed evidence in [28.1] to the end of [32] of the brief analyses the perceived impact on Feltex’s business in Australia of proposed reductions in tariff on imported carpets, as that prospect appeared at the time of the prospectus. Those paragraphs cite various sources commenting on the topic, leading to Mr Harrison drawing certain conclusions on the extent of the threat posed by tariff reductions to Feltex’s Australian business, when compared with the acknowledgement of that risk as set out in the prospectus. Those conclusions do not draw on Mr Harrison’s expertise as
a wholesale buyer (and seller at retail) of carpets in the New Zealand
market. The paragraphs comprise an analysis of the apparent
extent of
difference between the risk that tariff reductions would pose for Feltex’s
business as described in other documents,
when contrasted with the extent of
that risk as acknowledged in the prospectus. Unlike the other analyses and
conclusions addressed
by Mr Harrison, there is no suggestion that his particular
area of expertise was relied on to provide the analysis and conclusions.
On
this topic, I am satisfied that such evidence could never be substantially
helpful. Those paragraphs are accordingly inadmissible
and I uphold the
objection to them.
[35] The last sentence of [73] of the brief states:
I believe most strongly that if the independent directors had sought feedback
from key retailers they would have realised that the
prospectus was misleading,
and that retailers considered Feltex to be materially inferior to Cavalier
Carpets, Norman Ellison, and
Godfrey Hirst.
[36] Although I am not prepared to uphold objections in relation to other
parts of the brief where opinions are expressed at least
in part in speculative
terms, this opinion crosses that line. Expression of that opinion by Mr
Harrison could never be substantially
helpful to me. He has not laid any
foundation, such as by the extent of his dealings on other matters with the
independent directors,
as a basis for opining on the extent to which he would
have changed their views about the adequacy of the statements in the prospectus,
had he told them of his own views about the relative merits of Feltex and its
competitors.
[37] Accordingly, the last sentence in [73] is inadmissible.
[38] I have considered the objections to Mr Harrison’s reliance on other sources that appear to be hearsay. In particular, he relies on a report prepared in relation to Feltex by KPMG ([21]), and draws on data from Cavalier, a competitor of Feltex ([35] and [36]). I am not satisfied that these objections based on Mr Harrison’s reliance on hearsay sources can be determined against the plaintiff at this stage. There is a prospect that at least some of the documents in question might qualify for admission without being adduced by the makers of the statements as business records. The plaintiff’s counsel did not exclude the prospect of obtaining leave to
call the makers of some such statements. Accordingly, the objection in
relation to Mr Harrison’s reliance on hearsay cannot
be upheld at this
stage. The plaintiff is on notice as to the difficulties that will ensue with
such passages.
[39] For various reasons, I have come to the same conclusion in relation
to the balance of the various grounds of objection that
were argued in some
detail in relation to much of the Harrison brief.
John Blakemore
[40] Dr Blakemore was retained as a consultant to Feltex, principally in
Australia, between 1999 and 2003. His brief suggests
he was retained for
expertise in improving the efficiency of manufacturing businesses. He
recommended radical changes for the manufacturing
processes at Feltex, at the
core of which was ceasing to manufacture stock in anticipation that there would
be a demand for it, and
instead operating the manufacturing businesses to
respond promptly to demand for particular products as they were
ordered.
[41] Dr Blakemore would say that he encountered significant
resistance from senior management, particularly Mr Magill,
that the innovations
he recommended were only introduced in part, and that they were then abandoned
after his services were dispensed
with. A substantial part of his brief
addresses the recommendations he made in a report that he provided to Mr Magill
on terms that
it was to be referred to the Feltex board in 2003.
[42] The second and third defendants object to substantial portions of
his proposed evidence on the basis that its relevance depends
on factual matters
about the state of Feltex’s business that Dr Blakemore cannot have known
from personal first-hand experience.
It follows that he has relied on others,
with his sources being undefined, and the factual premises on which he expresses
opinions
are therefore hearsay.
[43] I am not satisfied that the terms of Dr Blakemore’s brief do reflect a distance from the primary factual matters that he adverts to. I am certainly not prepared to uphold an objection that it renders his evidence inadmissible at this stage.
[44] The second and third defendants also criticised the brief as
displaying a strength of antipathy towards at least some of
the Feltex
directors, and Mr Magill in particular, that was sufficient to disqualify
Dr Blakemore as an expert able to
discharge his obligations to the Court
with requisite independence. That ground of objection can also not be made out.
It will be
a point validly raised in relation to the weight that might be given
to any opinions that are important to the issues to be determined,
but it cannot
apply at a threshold level to exclude the expert’s evidence prior to
trial.
Peter Hall
[45] Mr Hall is the executive chairman of Hunter Hall
International Limited (Hunter Hall), and chief investment officer
of various of
its entities that operate as investment funds on behalf of investors in them.
Hunter Hall is another claimant in the
larger proceedings. In July 2013, I
dismissed an application that Hunter Hall’s claim be added to Mr
Houghton’s for
the purposes of being determined at the first stage of the
trial.
[46] Mr Hall has completed a brief which describes the nature of Hunter
Hall’s business, the extent of his personal involvement
in the decision to
invest in the IPO, and the circumstances in which its entities that were
shareholders in Feltex elected to opt
in to the proceedings. Thereafter,
Mr Hall identifies the misstatements or misleading omissions from the
prospectus that
are relevant to him as a sophisticated investor.
[47] The first defendants object to the brief on the basis that none of
these matters can be relevant to the issues to be determined
at the first stage
of the trial, and on Mr Houghton’s claim.
[48] The second and third defendants endorse that objection and add that, to the extent the brief addresses reliance by shareholders other than Mr Houghton on alleged misstatements or omissions in the prospectus, such evidence could not have any weight in determining reliance in the case of the present plaintiff. Because the circumstances of Mr Hall’s entities are so distinct from those of Mr Houghton, it was
submitted that factors of concern to such a sophisticated investor must
also be entirely irrelevant.
[49] Mr Forbes QC denied that there is any element in Mr Hall’s
evidence that is intended to make out Hunter Hall’s
discrete claim.
Rather, if Mr Hall’s analysis establishes that a sophisticated investor
was materially misled by the prospectus,
then it ought naturally to follow
that a less skilled retail investor without the resources available to Mr
Hall would
also have been misled.
[50] Adducing evidence of this type from an investor whose claim is to be
determined at a subsequent trial is not without its risks.
However, those
matters do not constitute a bar to its admissibility.
[51] I accept that much of the contextual background cannot be relevant
for its own sake, but does enable an understanding of
Mr Hall’s evidence
as to what he considered to constitute misleading content of the prospectus from
the perspective of a sophisticated
investor. On that issue, his evidence is
admissible. The defendants’ objection to it is accordingly
rejected.
Arthur Lim
[52] Mr Lim is qualified as a chartered accountant and has relevant
experience as an investment analyst and investment adviser.
His brief was
served very late and I have previously heard argument about the forms of
prejudice claimed on behalf of the defendants
on that account. On 29 January
2014, I gave leave for Mr Lim’s brief to be served, on certain terms. The
concerns which were
raised for the defendants at that time still
remain.
[53] At the time of the IPO, Mr Lim was with Macquarie Equities New Zealand Limited (Macquarie) as an investment director, and in that capacity he had relatively close involvement in the IPO. Although Macquarie was not identified as a sub-underwriter, that was effectively the firm’s position because it took a firm allocation of shares to the value of $20 million in the IPO. Macquarie was not able to place all the shares it had committed to before the float closed, but sold the remainder as soon as the shares listed at a loss Mr Lim recalls at $590,000.
[54] Mr Lim’s proposed evidence is a mixture of factual
recollection of his involvement at the time, and the application
of his
expertise to comment on the content of the prospectus. So far as the first
aspect of the proposed evidence is concerned,
I indicated in my judgment of 29
January 2014 that its admissibility was conditional on the plaintiff’s
solicitors exhausting
all reasonable efforts to obtain non-party discovery from
Macquarie. Enquiries made of Macquarie have apparently drawn a response
that
they have no records of the company’s involvement, and have only generic
published Feltex documents. No formal steps
have been taken on behalf of the
plaintiff to test that response.
[55] The defendants submit that that position remains unsatisfactory.
They would wish to cross-examine Mr Lim about the accuracy
of his
recollection of events surrounding the IPO, but cannot do so without checking
his recollection against the contemporaneous
documents that they would expect to
have been maintained, and to be available to them. I accept that there is now
insufficient
time before commencement of the trial for further attempts to
obtain documents from Macquarie, or to source, from other places, the
sort of
documents that would be relied on for the defendants in preparing
cross-examination of Mr Lim.
[56] So far as factual aspects of Mr Lim’s brief are concerned, the
extent of that prejudice is compelling. It will be
inadmissible except to the
extent that the matters he addresses are supported by documents made available
to solicitors for the defendants,
at least a week before Mr Lim is called. If
the position remains that no such documents are made available, then Mr
Lim’s
evidence will be confined to the opinions he offers as to the
content of the prospectus, analysed without his referring to the involvement
he
had at the time.
Alan Coleman
[57] Throughout the relevant period, Mr Coleman was a senior Australian civil servant managing the TCF Policy Group which monitored matters of interest to industries including the carpet industry. He has provided two briefs. His first brief includes relatively extensive background on the context in which reductions in the tariff imposed on carpet imported into Australia, and proposals to wind down
government incentive schemes for strategic investment in targeted industries
(relevantly in this case, the carpet industry), were
being considered. Mr
Coleman has accessed a range of submissions and papers relevant to the
work of the Australian
Productivity Commission dealing with these
matters.
[58] The second and third defendants have led objections to a number of
the references Mr Coleman makes to submissions provided
by both Feltex and its
major competitor, Godfrey Hirst, as well as statistics drawn from records of the
work undertaken for Australian
government bodies in the relevant period. The
objection is that the sources relied on are hearsay.
[59] The plaintiff opposes that objection on the grounds that Mr Coleman’s personal involvement was at a sufficiently detailed level for him to be familiar with the sources, and that the sources cited by him would in any event qualify for admission without being adduced by the maker of the statements under ss 128 and
129 of the Act.
[60] Mr Coleman is relatively precise in cross-referencing his sources in
footnotes to the briefs. In one respect I understood
Ms Mills to acknowledge
that the form in which Mr Coleman had accessed records
(“Department of Industry, Trade
Information System,
Pes.Comm.”) would not be accessible in the same way to the
defendants’ solicitors checking his sources.
However, she advised that
the same materials were able to be accessed by the public from a different
Australian government electronic
source.
[61] I am not prepared to uphold the hearsay objection in relation to the sources relied on by Mr Coleman at this stage. Given the context in which they are cited, together with Mr Coleman’s apparently thorough familiarity with them and the nature of the sources as described in the brief, my provisional view is that there may be a tenable basis for Mr Coleman’s reliance on them to be permissible by reliance on ss 128 and 129. A final decision on the admissibility of the passages of his evidence relying on such sources can be addressed when the evidence is given.
Brian Russell
[62] Mr Russell is qualified as an accountant, having originally been
admitted as an Associate of the Australian Society of Accountants
in 1975. He
is also a Senior Fellow of the Financial Securities Institute of Australia. He
practices in Sydney as a sharebroker.
He has prepared a brief of evidence,
opining as an expert on aspects of the prospectus which he considers would have,
or were likely
to have, misled potential investors.
[63] The defendants have objected to a number of the opinions expressed
by Mr Russell on the basis that they are cast as a submission
or purport to
address the ultimate issue. I do not find the essence of the points made in Mr
Russell’s brief objectionable
on this ground. To advance an
analysis of the content of the prospectus from the perspective of a
sharebroker requires
an expert of that type to opine on whether relevant
statements in, or omissions from, the prospectus are likely to mislead potential
investors.
[64] Within that task, the terms in which the opinions are expressed
cannot render them objectionable.
[65] Particular objection was taken to paragraph [40] of the brief, on
the basis that it amounted to a submission as to what the
law was or ought to be
in applying a threshold for testing misleading content of documents such as a
prospectus. I accept that,
assessed on its literal terms, it can be criticised
as such. It does have another purpose in the context of Mr Russell’s
analysis,
namely to signal the standard by which he measures potentially
misleading content. It will certainly not have any influence on
my analysis of
the legal question as to the standard to be applied in considering whether the
content of the prospectus is misleading.
[66] Accordingly, I dismiss the objections to the content of this
brief.
Andrew Harper
[67] Mr Harper is an IT consultant working in Melbourne. He has been retained on behalf of the plaintiff to electronically interrogate data acquired on behalf of the
plaintiff on a USB thumb drive that I understand to have been stored in a
Global
System Manager (GSM) software programme that Feltex had used.
[68] Substantial difficulties encountered by the defendants when the
source data on the thumb drive was provided to them in its
“raw”
state as part of discovery have been the source of numerous submissions at prior
interlocutory hearings. Each
side has criticised the reasonableness of the
conduct of the other in this regard.
[69] Defendants’ counsel advise that an expert retained on their
behalf (Mr Farley) has not been able to extract the
identical data as it
appears in the reports that Mr Harper has produced by interrogating the GSM
data on the thumb drive.
In those circumstances, the defendants object that the
source data is hearsay and that, without evidence authenticating it (ideally
adduced from a witness or witnesses responsible for its original creation), Mr
Harper’s work extracting reports from the raw
data is inadmissible as it
relies on that hearsay.
[70] Ms Mills’ response was to the effect that
inconsistencies in the reports produced on behalf of the defendants
have been because they use a different software programme to extract the
data. She was confident that the variances could
readily be rationalised and
explained by Mr Harper.
[71] The position is unsatisfactory, but the answer is not to uphold the
objection that the data relied on by Mr Harper constitutes
unacceptable
hearsay.
[72] I direct that Mr Harper is to confer with Mr Farley in the
week of
10-14 March 2014, to identify the reasons for the discrepancies that are of
concern to the defendants. In discharge of his obligations
as an independent
expert assisting the Court, Mr Harper is to provide all reasonable assistance to
Mr Farley to enable him to extract
the same range of data, on the same basis, as
Mr Harper has produced for the plaintiff.
Application to amend the statement of claim
[73] On 26 February 2014, the plaintiff made application for leave to further amend the third amended statement of claim in 12 respects. The amendments sought
numbered 1 to 8 inclusive, and 10, are relatively minor. For the most part,
they seek to correct typographical or descriptive errors,
or to focus
particulars with greater precision. Those proposed amendments were not opposed
and I grant leave for them to be made.
A fourth amended statement of claim is
to be filed forthwith, reflecting those changes.
[74] Amendment numbered 9 is more material, and was opposed. It would
add a fresh allegation of an additional factual omission
from the prospectus.
It proposed a new paragraph 72(a) in the following terms:
By omitting to disclose that Feltex had entered into a material contract in
July 2002 (being a date in the two years preceding
the issue of the
prospectus on 5 May 2004) by engaging KPMG Corporate Recovery to
undertake a review of the projected
financial position of the group for the year
ended 30 June 2003.
[75] Amendments numbered 11 and 12 would be consequential on the
inclusion of this discrete criticism, by including the proposed
new 72(a) among
the grounds relied on for claiming misleading content of the prospectus, or
misleading conduct by the defendants.
[76] It appears that this discrete criticism has arisen out of the
analysis undertaken by Mr Meredith providing his opinion as
to the accuracy of
the prospectus. He treated the omission of any reference to the KPMG report as
an “other matter”
in the brief settled in late November
2013.
[77] Mr Forbes explained that the plaintiff wished to add a criticism of the fact that Feltex’s bank had required KPMG to complete a report on the state of Feltex in July 2002. It would apparently be argued that potential investors would be likely to find it material that, two years before the IPO, Feltex’s bank had been sufficiently concerned to take that step. In responding to the defendants’ claims that it was far too late and caused too much prejudice to them in preparing their defences, Mr Forbes submitted that the potential merit of this additional criticism ought to determine the application. He suggested that if the criticism was found to have merit, then it would be unjust for the plaintiff not to be allowed to add it to the pleaded criticisms.
[78] I am not satisfied that the proposed addition reflects a compelling
additional
omission. It could reasonably be inferred that Feltex’s bank required
a report in mid
2002 because of relatively serious concerns at the company’s
state of financial health. However, two years later
when the prospectus was
issued, it appears that Feltex had the support of that same bank so there is no
immediately apparent basis
on which to infer that the concerns motivating the
initiative two years previously still persisted in May 2004.
[79] Although the defendants have been on notice since November last year
of Mr Meredith’s opinion that the failure
to mention the
bank’s requirement for a forensic accountant’s report in 2002 was
material, they could not be expected
to have prepared a response to that when it
was not a pleaded criticism. The defendants would therefore be left to
re-brief all
their witnesses who might address the point. It relates to events
that occurred 12 years ago, in the context of a challenge to the
prospectus
that was issued 10 years ago. If the allegation were added to the
statement of claim, the imposition on
the defendants in adequately responding to
it would risk compromising the quality of preparation of their defences to the
existing
claims.
[80] In the context of this trial and the delays in preparation for which
the plaintiff has been responsible, I consider it would
be contrary to the
interests of justice to allow the amendment sought.
[81] The second and third defendants oppose this proposed amendment on
the additional ground that it constituted a fresh cause
of action which would be
statute- barred.7 To characterise their allegation as a new cause
of action, it needs to be something that is essentially different from the
existing
pleading.
[82] If it had been necessary to determine this point, I would not have been persuaded that the proposed addition did constitute an essentially different allegation
so as to have the status of a new cause of
action.
7 Relying on High Court Rule 7.77(2) and the analysis of what constitutes a new cause of action in
Commerce Commission v Visy Board Pty Ltd [2012] NZCA 383 at [139]–[142].
Costs
[83] I will not separately address costs on these applications. They
have arisen very shortly before trial and it is appropriate
to defer a
determination on them, pending the substantive
outcome.
Dobson J
Solicitors:
Wilson McKay, Auckland for plaintiff
Bell Gully, Auckland for first to third-named and fifth to seventh-named first defendants
Clendons, Auckland for fourth-named first defendant
Russell McVeagh, Wellington for second and third defendants
Jones Fee, Auckland for fourth defendant
McElroys, Auckland for fifth defendant
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