Houghton v Saunders [2019] NZHC 142 (13 February 2019)

Last Updated: 25 February 2019

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2008-409-348 [2019] NZHC 142

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 INCORPORATED Second Defendant CREDIT SUISSE FIRST BOSTON ASIAN MERCHANT PARTNERS LP Third Defendant

Hearing:	7 February 2019
Counsel:	C R Carruthers QC and P A B Mills for plaintiff A R Galbraith QC, D J Cooper and S T Coupe for first defendants (except for separate representation noted below) T C Weston QC for Mr Magill B D Gray QC and A E Ferguson for Ms Withers J B M Smith QC, A S Olney and C J Curran for second and third defendants
Judgment:	13 February 2019

RESERVED JUDGMENT OF DOBSON J

[Directions on issues for determination at stage two hearing]

HOUGHTON v SAUNDERS [2019] NZHC 142 [13 February 2019]

[1] Pursuant to steps agreed during a telephone conference on 10 December 2018, the plaintiff’s solicitors have filed an application for directions to define the nature of the issues and mode of evidence for the stage two hearing.

Mr Houghton’s status

[2] All aspects of Mr Houghton’s individual claim under the Securities Act 1978 were determined at the first trial, being dismissed in my first substantive judgment.¹ The Supreme Court recognised the prospect of Mr Houghton applying for leave to re- open his individual claim under the Securities Act, given that Court’s finding of an untrue statement in the prospectus, and that there may be some unfairness if all remaining claimants can have their claims considered in light of the Supreme Court finding as to an untrue statement, when his was determined without that.² The present application sought leave for Mr Houghton to resume his individual claim under the Securities Act, notwithstanding the grounds on which I held it must fail which have not been overturned. There is no issue that he is entitled to pursue his claim under the Fair Trading Act 1986. The defendants abide the Court’s decision on this aspect of the application.

[3] The Supreme Court’s concern for potential unfairness is understandable, depending on how quantification of losses is determined for other claimants. Mr Carruthers QC accepted that Mr Houghton’s evidence at the stage one hearing would be evidence for the second stage of his claim, but that should not preclude further evidence in light of the Supreme Court judgment. Mr Carruthers also accepted that Mr Houghton could be cross-examined at the stage two hearing by reference to the evidence he had given at the first stage. Counsel for the defendants did not wish to be heard on these prospects for evidence and cross-examination.

[4] In reliance on the status of evidence discussed with Mr Carruthers, I granted the leave sought for Mr Houghton to resume his claim under the Securities Act. The consequence, as agreed with counsel, is that Mr Houghton will continue to be the representative plaintiff in the proceeding.

¹ Houghton v Saunders [2014] NZHC 2229.

² Houghton v Saunders [2018] NZSC 74 at [279].

Sub-groups and scope of evidence

[5] The plaintiff seeks approval for stage two to proceed as a representative action with a number (yet to be determined) of individuals in each sub-group providing evidence of the circumstances in which they invested. The application sought an order that the evidence of such witnesses be treated as the evidence of all claimants within the requisite one of four proposed sub-groups, on the basis that their circumstances are said to be common to all of those in each of the sub-groups.

[6] The plaintiff proposed four sub-groups of claimants, defined as follows: A professional investors;

2. those who subscribed through Forbar Custodians;

100. retail investors who did not sell their Feltex shares; and D retail investors who did sell their Feltex shares.

[7] A material attribute claimed to be common to those in all the sub-groups is that each claimant would not have bought shares in the Feltex initial public offering (IPO) if they had known of the untrue statement as held to exist by the Supreme Court. This will be alleged to be the case, inter alia, because of the importance of accurate information concerning revenue in a trading company. Certain other characteristics considered by the plaintiff to be relevant are also listed, such as the circumstances in which subscription for the shares was made, with distinctions between the groups reflecting the type of investors and whether they subsequently sold the Feltex shares.

[8] The defendants opposed the recognition of sub-groups as defined in the plaintiff’s application, being concerned that the proposed sub-groups do not reflect distinctive characteristics of investor which can be shown to be common to each member of the sub-group. The defendants also opposed with greater vigour any acknowledgement that evidence from any sample of members from each sub-group could be treated as evidence on behalf of all members of that sub-group about the
circumstances of and motivation for their purchase, and how they would have responded to learning of the untrue statement.

[9] The parties have taken very different views on the manner in which the aspect of the claim that has been referred back to the High Court by the Supreme Court should be dealt with. The following passages from the Supreme Court judgment are relevant:³

[86] ... Civil liability will arise only if a person suffers loss by reason of the untrue statement, which could happen only if the untrue statement was of sufficient significance to cause loss. This could arise either because the untrue statement presents the securities that are offered to the public for subscription as having a greater value than they have in fact or because it induces an investor to subscribe for shares when he or she would not have done so had he or she known the true position.

...

[134] We consider that the issue is rather whether loss or damage was sustained “by reason of” an untrue statement in a prospectus. This means that a court must determine whether the effect of the untrue statement was such that the market value of the securities for which the investor subscribed would have been lower than the price paid if the misleading statement had not been made or, put another way, if the prospectus had complied in all respects with the Securities Act and the Securities Regulations. If the price paid by the investor was greater than the price that would have been payable if adequate disclosure had been made in the prospectus, the investor will have suffered loss “by reason of” the untrue statement, assuming the investor has proved he or she invested on the faith of the prospectus in the sense described above.

[135] In some cases, the untruth will be egregious and its impact obvious. In that type of case, subscribers may be able to obtain compensation equalling the full amount of their investment under s 56. Their argument would be that revelation of the truth would have revealed that the securities were, in truth, valueless or of such little value that investors would not have invested had the true position been known. In less serious cases, the inquiry will be on whether the revelation of the true position in the prospectus would have indicated the securities had a lower value than the offer price.

[136] There may be circumstances in which factors other than market value affect an investor’s decision to invest in securities offered in a prospectus. For example, an investor who is concerned about a particular risk or has a particular risk profile may argue that he or she would not have invested if the existence of that risk had been disclosed in the prospectus, even if the risk was not of such significance as to affect the market value of the securities offered for subscription. Similarly, an investor who has concerns about particular types of investments may argue that he or she had that concern at the time of investing and was misled into believing that the investment was not of a type the investor would consider objectionable. These arguments were not advanced in the stage 1 hearing and we make no comment on them.

³ Houghton v Saunders, above n 2 (footnotes omitted).

...

[275] It will be obvious from what we have said above, when discussing the significance of the shortfall as against the forecast for FY04, that we do not agree with the Court of Appeal that the untrue statement relating to the FY04 forecast was incapable of causing loss. Further, the investors, other than Mr Houghton, have not had any opportunity to call evidence on loss. This means that the issue of whether the untrue statement did in fact cause loss must be determined at the stage 2 hearing.

[276] In order for the stage 2 hearing to be able to consider the issue of loss, it is necessary to quash the Court of Appeal’s finding that the untrue statement in relation to the FY04 forecast was not capable of being material to the investment decision and therefore could not have caused loss.

[277] In the normal run of things in order to prove loss at the stage 2 hearing, the investors would need to prove that the $1.70 paid for each Feltex share was greater than the value the shares would have had if the untrue statement had not appeared in the prospectus. As Dobson J foreshadowed, it will be necessary to determine at what date the assessment should be made. The respondents’ arguments that the value of the Feltex shares, as reflected in its market price after the IPO, was at least equal to the IPO price will need to be assessed, as will their arguments that the reasons for the fall in the market price of the shares in Feltex in 2005–2006 were unrelated to the untrue statement in the prospectus. The argument made by Mr Houghton that the shares were worthless from inception will also need to be assessed.

[10] The defendants’ case will be that any loss measured by the difference in value contemplated by [134] of the Supreme Court judgment should determine their liability. The defendants also want determination of their claims to avoid or reduce their liability under s 63 of the Securities Act. The defendants contend that a judgment on any loss quantified as the difference in value between the $1.70 paid for each Feltex share and what the Court determines would have been the fair value of the shares at the IPO had the untrue statement not been included in the prospectus, plus their statutory defence, would substantially narrow what was left to be determined, and might lead to a complete resolution.

[11] From the claimants’ perspective, the difference in value measure of loss is the less attractive of two alternative bases for quantifying their loss. The alternative is to claim that awareness of the untrue statement would have caused each claimant to reverse their investment decision, so the measure of loss is the difference between the
$1.70 per share paid on subscription, and the recovery on sale if the shares were sold before they were worthless. For those claimants who held the shares until they were
valueless, their loss on this approach would be the full amount paid on subscription in the IPO.

[12] The terms of the Supreme Court’s judgment leave no scope for the defendants to dispute, in a general sense, reliance on the prospectus by all subscribers in the IPO, so that the quantification of difference in value would reflect the damages entitlement for those subscribers who are unable to make out the alternative basis of claim, namely that had they been alerted to the untrue statement, they would not have subscribed at all. That does not preclude relevant cross-examination on the nature of individual reliance on the content of the prospectus, in testing claimants’ reconstruction of what they would have done, if informed of the untrue statement.

[13] The proposition that each of the claimants would not have subscribed had they known, at the time of their commitment, that the forecast of earnings for the full year was wrong is challengeable. The defendants would be entitled to test the proposition by cross-examining each claimant, and making out the proposition will depend on the individual circumstances of each subscriber. Without the consent of the defendants, it is novel for the plaintiff to propose that the Court should apply its finding on the individual circumstances of a sample of shareholders in each sub-group as if they were individual circumstances of others within the same sub-group.

[14] In light of the range of concerns set out in written submissions on behalf of the defendants opposing any such order, Mr Carruthers realistically accepted that he could not maintain this aspect of the plaintiff’s application. Instead, he raised the prospect that the plaintiff would adduce evidence from a sample of the claimants in each sub-group (plus expert evidence), the effect of which would have sufficient integrity to persuade the Court that the findings on the basis of that contested evidence should be taken as applying to the circumstances of all other claimants within that sub-group.

[15] Mr Carruthers acknowledged that such an order would be novel, but it was advanced as a practical means of resolving individual claims, without the need for the resources inevitably required to determine more than 3,600 claims on individual bases. This proposal had not been raised with counsel for the defendants prior to the hearing.
[16] Mr Carruthers invited an analogy with the approach adopted by the Supreme Court of the United States in a 2016 decision that focused on the procedural requirements for the Court to approve the pursuit of a class action.⁴ The relevant rule of the Federal Rules of Civil Procedure requires plaintiffs moving for certification of a class action to demonstrate that questions of law or fact common to class members predominate over any questions affecting only individual members.⁵ Mr Carruthers did not provide the Supreme Court decision, but a Law Review article about the prospects for use of evidence from a sample of class action claimants.⁶

[17] The US litigation involved a substantial number of workers in a meat processing plant who pursued a class action claiming different payment treatment for the period when they got ready for, and then disrobed and cleaned up after, periods of time actually working on carcasses. The two periods were described as “donning on” and “donning off”. Certification of their claims as a class action had been granted on the basis of a sampling of the length of periods they were occupied for a relatively small number of the workers seeking to join the class action. The reliability and integrity of the data gathered from that sample had been supported by expert evidence analysing the methods used. It appears that although relied on initially to support arguments that issues common to all the claimants would predominate, the application of average periods for which members of the class were “donning on” and “donning off” was also relied on to establish the quantum of damages to which individual claimants would be entitled. The addition of average periods for donning on and donning off meant that the claimants worked for more than 40 hours per week and were therefore entitled to overtime.

[18] The authors of the article acknowledge that permissibility of sampling evidence to provide class wide damages, and especially individual damages, remains “uncertain and controversial”. The Supreme Court held the sample evidence was a permissible means of establishing hours worked in a class action by showing that each class member could have relied on that sample to establish liability, had each brought an individual action.

⁴ Tyson Foods, Inc v Bouaphakeo 577 US 14-1146 (2016) (unofficial).

⁵ Federal Rules of Civil Procedure, r 23(b)(3).

6. Hillel Bavli and John Felter “The Admissibility of Sampling Evidence to Prove Individual Damages in Class Actions” (2018) 59 BCL Rev 655.

[19] A critical difference between the subject matter of the sampling in Tyson and what is contemplated in the stage two hearing here is that the subject matter of the samples there was objectively measurable physical activity. If necessary, time and motion personnel could have monitored each of the claimants for a given period of, say, two or more days and recorded the specific times for each individual spent donning on and donning off. The Court could then be invited to treat the specific evidence of work patterns on those days as applying generally to the claimants’ pattern of work. Expert evidence could confirm the integrity of the manner in which the objectively measurable statistics had been gathered. In contrast here, the activity sought to be reflected in the sampling is the mental activity of responding to advice that the prospectus had included an untrue statement. Such processes are subjective and idiosyncratic and likely to be largely unrecorded at the relevant time.

[20] There are distinguishing features between each of the proposed sub-groups that are likely to be material in resolving the scope of stage two issues. I am accordingly prepared to authorise pursuit of the stage two claims on the basis of those sub-groups.

[21] However, I am only prepared to do so on the basis that individual circumstances, such as the claimed relevance of certain features of the proposed investment, sources of advice or discussion, the subjective weighting given to matters of perceived importance and other considerations relevant to each shareholder’s decision to subscribe, cannot be treated in advance of the stage two hearing as applying to the circumstances of any claimant other than the single individual giving evidence and being tested on those propositions.

[22] As discussed with Mr Carruthers during the hearing, it is not appropriate at this stage to rule out entirely the initiative he has foreshadowed of producing evidence from a sample of each sub-group of claimants, and then adducing additional evidence, including expert evidence, as to the integrity of that evidence justifying the application of my findings on that evidence to others in each of the sub-groups. On the basis of matters considered thus far, my provisional view is that the prospects of making out this novel proposition in the context of these claims are extremely forlorn. A more likely outcome is that the findings in relation to the investment decisions of any
successful claimants who have been cross-examined will provide a basis for post- judgment discussions with counsel for the defendants.

[23] Counsel for all parties need to be mindful that the available window for hearing stage two is the five weeks from 4 November 2019 and I urged counsel to focus their preparation so as to use that time to best advantage. My doubts about the utility of the plaintiff seeking to rely on the evidence from a sample of claimants in a particular sub-group to make out the circumstances of decision-making for any others in the sub-group warrant the viability of that aspect of the claim (if it is pursued) being revisited prior to the substantive hearing.

[24] At the conclusion of the hearing, I left counsel to liaise about the timetable that would see relevant aspects of the claim adequately prepared for the stage two hearing, and to come back to me with an agreed timetable, or with the skeleton of an agreed timetable and identified reasons for items on which agreement has not been reached. I also proposed that the timetable should include the prospect of a hearing to revisit the viability of the foreshadowed reliance on sampling evidence.

[25] With that qualification, I have directed that the stage two hearing should be advanced for Mr Houghton, and for the individuals who give evidence from each of the four sub-groups identified by the plaintiff, to resolve the following issues:

(a) quantification of loss for individual claimants on either the difference in value measure contemplated in [134] of the Supreme Court judgment, or on the total loss of value basis contemplated in [135] of the Supreme Court judgment;

(b) the availability for any defendants of a defence under s 63 of the Securities Act;

(c) claims under the Fair Trading Act of misleading conduct in reliance on the untrue statement as identified by the Supreme Court, including all matters raised in defence of those claims as to liability and quantum.
[26] I also anticipate that counsel will co-operate on the preparation of a hyperlinked electronic bundle of documents relevant to stage two.

[27] On receipt of the contemplated memoranda, I will review the need for further case management, ideally by way of telephone conferences.

Dobson J

Solicitors:

Wilson McKay, Auckland for plaintiff

Bell Gully, Auckland for first defendants (other than Mr Horrocks and Ms Withers) Wilson Harle, Auckland for Ms Withers

Clendons, Auckland for Mr Horrocks

Russell McVeagh, Wellington for second and third defendants

Counsel:

C R Carruthers QC and P A B Mills for plaintiff

A R Galbraith QC for first defendants (other than Mr Magill and Ms Withers) T C Weston QC for Mr Magill

B D Gray QC for Ms Withers

J B M Smith QC and A S Olney for second and third defendants