ASIC’s Storm Financial intervention prompts outcry from lawyers

A recent Storm Financial settlement caused quite a bit of controversy and resulted in an appeal from the regulator. Milana Pokrajac finds many in the legal community deem the regulator’s intervention unwarranted and unnecessary.  

Earlier this year a group of former Storm Financial clients received $82.5 million from Macquarie Bank as a result of the Richards class action headed by law firm Levitt Robinson.

But the Australian Securities and Investments Commission’s (ASIC’s) decision to appeal this settlement has upset many in the legal community, especially the law firm which headed the case.

The principal of Levitt Robinson, Stewart Levitt, recently lashed out at ASIC, suggesting the regulator excludes itself from civil cases, believing the appeal inappropriate.

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Levitt added that ASIC interfered with a freely-negotiated agreement that had been approved by the Federal Court.

“ASIC wants a hand in every case and a seat at every negotiating table and to be able to shut down the cases it does not want to proceed,” he said. 

What happened?

The Richards class action – headed by Levitt Robinson – involved over one thousand Storm investors, 315 of whom helped fund the case.

Those investors subsequently not only received reimbursement for their legal costs, but also received approximately 42 per cent of their losses.

Investors who did not fund the class action – some 735 of them to be exact – received about only 18 per cent of their losses.

While the legal community celebrated the outcome and forecast the rise in self-funded class actions as a result of the so-called ‘funder’s premium’, the regulator was not happy.

The funder’s premium (the larger proportion of compensation funds allocated to those who funded the legal action) was, indeed, ASIC’s main concern.

The regulator immediately appealed the settlement in the Federal Court, claiming those who funded the legal action received more than ASIC believed was appropriate.

ASIC based its appeal, in part, on whether a funder’s premium amounted to an ‘unfair advantage’ for some members over the remaining 70 per cent of class action members.

Commenting on the reasons for ASIC’s action, deputy chairman Peter Kell said settlement of a class action should be undertaken in the interests of the class action group as a whole.

Is it unfair?

It is unfair only if people are not given the opportunity to participate in the funding process, according to John Walker, executive director of litigation firm IMF Australia.

“My personal view is that when litigation isn’t going to happen unless people fund it, then it’s important that the party who funds it is remunerated not only for the cost that’s been taken but the risk,” Walker said.

Levitt told Money Management’s sister publication Lawyers Weekly that litigation funders had previously recovered premiums as high as 40 per cent.

Last year, IMF Australia received 40 per cent of the $150 million that went to Maurice Blackburn clients in its class action against Centro.

“ASIC doesn’t second-guess third party litigation funders as taking 40 per cent off the top,” Levitt told Lawyers Weekly.

“Yet it seems to want to discourage direct action by the plaintiff victims themselves, with the regulator seeking to disincentivise consumer victims from taking responsibility and control over their own cases and, in the process, gain tangible recognition of doing so,” Levitt said in an official response to ASIC’s move.

In the Richards class action, some members who were involved enabled the prosecution for the benefit of all, Walker said.

“It’s hard for the ‘all’ to say ‘it’s not fair that you get a bit more’; now, the real question is what is ‘a bit’ – not whether you should get any,” he added.

“But as a matter of principle, I think it is appropriate for the party who takes on the cost and the risk for the benefit of others to be remunerated for that cost and the risk.”

On that point, he said, ASIC’s appeal was unwarranted.

The corporate watchdog, however, brought into question whether those who opted out of financing the proceedings were given enough notice that there would be a funder’s premium.

At the centre of ASIC’s concern seems to be the possibility that class action members did not understand that, when the hat was being passed around, those who placed money in the hat might be better off if they won – nor did they know by how much.

“I think it’s a process issue. I think it should be upfront with full disclosure so people can make their own decisions as to whether to put money in the hat or not – rather than leave it, find out what happens and the deal is done without their involvement,” Walker added.

While Levitt’s firm has an axe to grind and his comments should be taken with a grain of salt, ASIC did recently make it clear that it was still involved in legal action relating to the collapse of Storm Financial, including against Macquarie Bank.

“ASIC’s various actions in connection with Storm continue, including its proceeding (brought in part on behalf of two former Storm investors) against Macquarie Bank, Bank of Queensland Limited, and Senrac Pty Limited, with ASIC alleging unconscionable conduct in connection with their dealings with Storm investors,” the regulator’s announcement said.

The Richards class action was one in a string of Storm settlements we’ve seen over the last few years.

A 2010 class action headed by law firm Slater & Gordon resulted in Commonwealth Bank bringing compensation to 2000 Storm victims.

To be fair to ASIC, over the last 18 months the corporate watchdog also secured quite a bit of money for those who suffered losses on investments made through the collapsed dealer group.

In 2012, the Commonwealth Bank agreed to make $136 million available in compensation – in addition to the $132 million the bank had already provided to Storm investors.

In May this year, the regulator boasted a $1.1 million out of court settlement with Bank of Queensland, Senrac and Macquarie Bank in a high-profile Storm Financial case involving Barry and Deanna Doyle.

But in announcing the Doyle settlement, ASIC said the Richards class action headed by Levitt Robinson was of similar nature, but implied that the regulator achieved a fairer result for plaintiffs.

It is not standard procedure for ASIC to appeal settlements reached by third parties such as law firms, which is why its decision to do so with the Richards case attracted the attention of many industry insiders and commentators.