Home World Business CBA class action – barely worth the candle even if it wins

CBA class action – barely worth the candle even if it wins

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Maurice Blackburn has launched a class action claiming CBA breached its continuous disclosure obligations by not informing investors about Austrac’s money laundering allegations.

To win, Maurice will need to jump four legal hurdles.

Austrac has alleged CBA failed to inform authorities about suspect cash deposits at its ATMs. Austrac has alleged CBA failed to inform authorities about suspect cash deposits at its ATMs. Photo: James Elsby

1. Was the ‘Austrac info’ known?

Everyone will probably agree the “Austrac info” was not known by the market before Austrac announced legal action on August 3. Prima facie a tick for Maurice.

But CBA will likely argue it too was caught unawares.

Maurice will argue the information was not “generally available” until August 4 (or even later) because CBA made no ASX disclosure on August 3. But the news spread quickly on August 3.

I distinctly remember watching it on an ABC TV bulletin at about 2pm. Not to put too fine a point on it, there will be a largish fight over when exactly the “Austrac info” became “generally available”. As we’ll see, this is a critical argument.

2. Was it material?

Following US precedent, the share price reaction after the news breaks is considered a good materiality indicator.

A stock fall of 10 per cent is clearly material. But on August 3, the CBA price initially rose. By day’s end it was off a miserly 26¢; less than a 1 per cent move. CBA will likely argue this could be just as easily explained by an Amazonian butterfly flapping its wings.

Maurice will argue strenuously the “Austrac info” was so out of the ordinary and unprecedented it took days for the market to digest its significance. For example by August 7, CBA was near $80, a more interesting 5.4 per cent fall. Ka-ching!

However, this argument defies market practice. Before all major announcements, trading in a company’s shares is temporarily suspended. That could last minutes or even one to two days. This “time-out” allows market participants to digest new information and calculate its price effect.

When the suspension is lifted, the information is considered “generally available”. Investors can deal with it as they please. In this sense, the information was “generally available” on August 3.

Another hurdle is the Efficient Market Hypothesis (EMH). It holds that all new information is quickly discounted into share prices.

Now any market practitioner, including myself, will tell you EMH is a load of rubbish (except perhaps over the long term).

Recent Deutsche Bank research showed it can take up to six months for new information to be discounted into share prices. That accords with my own experience and supports Maurice’s case.

However, our legal system follows US precedent and accepts EMH as gospel. Therefore, if a share price hasn’t reacted almost immediately, then the new information is not material.

I think it will be hard to show losses were more than about $3.50, or the difference between the CBA price before the information became known, and the closing price on August 4. If convinced the information was “generally available” on August 3, a court would probably decide losses were only 26¢.

3. When did CBA ‘know’ it?

This is a critical question. Maurice claims CBA knew about the scandal when first notified by Austrac in July 2015. But in the legal world, a company “knows” information when it reaches the board (or should have).

It is an arguable point as to whether CBA “knows” if only the chief risk officer is aware of the Austrac information. Another bun fight over that.

CBA has said alleged issues relating to “threshold transaction reporting” in its ATMs were brought to the board’s attention in the second half of 2015. But it may well argue the board was unaware Austrac would resort to legal action until August 3, 2017. That’s the same date everyone else “knew”.

In this scenario, a judge might hesitate to rule CBA “knew” before August 3. In that case, CBA’s argument it was as ignorant as shareholders and became aware only on August 3, 2017, might work. Case dismissed, costs awarded against Maurice.

4. What were the losses?

Like almost every aspect of Australian shareholder class actions, how to calculate losses is yet to be settled by a court.

The current legal thinking is that anyone who purchased shares during the relevant period overpaid for those shares by either $3.50 or 26¢ each, depending on when the “Austrac info” became “generally available”.

Over 1.5 billion CBA shares traded from July 2015 to August 2017. A loss of $3.50 a share equates to a staggering $5.5 billion loss. A loss of only 26¢ is still a hefty $410 million.

But these are maximum losses.

Traders who bought and sold during the period didn’t suffer as the “Austrac info” was unknown during both legs of their trading. That might account for 50 per cent of the turnover. For various reasons, perhaps 50 per cent of other investors might not ask for compensation. That reduces potential losses by about 75 per cent, or $100 million to $1.25 billion.

Those potential losses assume a judge decides CBA “knew” in July 2015. If, instead, it’s judged that CBA “knew” only from say June 1, 2017, losses fall dramatically.

The losses are negligible if it’s found CBA “knew” only on the same day as everyone else, ie August 3, 2017. That may be CBA’s argument. The following matrix shows the possible maximum losses assuming 25 per cent of shares bought during the period are compensated.

No shareholder class action has ever been decided by a judge.

Instead these cases elicit a bit of press coverage and much legal argy-bargy. Then someone (usually the company’s insurer) cuts a cheque, everyone shakes hands and gets on with life.

Don’t expect this case to be any different. In my opinion, the huge range of potential outcomes from zero to a billion-plus is way too scary for anyone to actually chance their hand before a judge.

If I’m right, CBA will probably cut a $1 million to $100 million cheque, blame prior management and promise to try harder.

Even $100 million (about 6¢ a share) ain’t much once funders take their cut of around 30 per cent. CBA shareholders better keep their day jobs.

Mike Mangan was a top three rated media analyst for 13 years and has been an expert witness in a number of shareholder class actions. He authored Against the Wind, an exploration of the convict influence on the Australian character.

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