Four weeks ago when Wal King trounced ASIC in the Federal Court, the exoneration of this business veteran obscured the real significance of the decision.
It is a blunt warning to the nation’s corporate cop.
When it comes to enforcing a key provision of the Corporations Act, the Federal Court ruled against ASIC and said exaggeration “is not a skill which is called for in the drafting of a pleading”.
The fact that such a warning was necessary tells you everything you need to know about ASIC’s case against King and three fellow directors and officers.
The commission handled this case so badly that the judge raised the prospect of ASIC paying the other side’s legal costs on an indemnity basis – which could cost taxpayers millions of dollars.
Indemnity costs orders are only made in exceptional circumstances such as when the losing party pursued a matter that was frivolous or hopeless.
They can require the losing party to compensate the other side for every cent they spent defending themselves.
King, unlike ASIC, has emerged from this case with his reputation intact.
He is a former chief executive of Leighton and was swept up in this affair through his current role as non-executive chairman of listed miner Terracom.
Along with three other Terracom officers and directors, he had been accused by ASIC of authorising false or misleading statements to the ASX, and of failing to act with care and diligence.
On July 4, ASIC failed on every aspect of its own case and was subjected to a sustained critique of the arguments it had presented in court.
Justice Ian Jackman considered some parts of ASIC’s argument to be “untenable”, others were “extraordinary”, one of its arguments “does not make sense” while another part of its case relied upon “very weak evidence”.
Compare this to what the judge said about King.
The judge considered him to be “a witness of credit” and said one aspect of his conduct was “an entirely commendable and proper course”.
The most devastating aspect of Jackman’s critique of ASIC is the suggestion at the end of his judgment that the commission should have known its case had no realistic chance of success.
That is what has opened the door for a possible application for indemnity costs.
“There is a realistic possibility that the successful defendants will seek a special costs order, whether by way of indemnity costs or lump sum costs or both,” Jackman wrote.
“My tentative preliminary view is that properly advised, ASIC should have known that the proceedings against (King and the other Terracom directors and officers) had no realistic chance of success, except perhaps in relation to some minor aspects which would not have significantly affected the amount of costs incurred,” the judge wrote.
Together, King and the others from Terracom had three silks, four juniors and three different firms of solicitors – who look like they might eventually be paid by ASIC with taxpayers’ money.
And that does not include ASIC’s own legal costs.
As well as its internal staff costs, the commission was represented in court by a silk, two juniors and another firm of solicitors.
So that makes a total of four silks, six juniors, four different firms of solicitors, and countless ASIC staffers all beavering away on a case that now looks like a complete waste of time and money.
And taxpayers could eventually be on the hook for the lot.
By now, the parties will have made their submissions on costs and the 28-day window in which ASIC could file an appeal against Jackman’s ruling expires on Friday, August 1.
So we will soon learn how much this disaster is likely to cost the public purse.
All those lawyers don’t come cheap, so nobody should be surprised if the final bill for all sides hits $10m.
So how did this happen? There are two possible explanations.
Because this was a civil matter, ASIC effectively took on the role of investigator and prosecutor without the need to have the Director of Public Prosecutions run an eye over things and make the final call on whether to proceed.
In that sense, there was no institutional check to identify misconceptions and flawed arguments. That left Jackman as the only check on ASIC’s power.
The second explanation concerns the nature of the law concerning misleading statements to the ASX.
Jackman’s judgment points out that ASIC had acknowledged that its pleading “does not allege that the statements in the ASX announcement were themselves false or misleading”.
Yes, you read that correctly.
ASIC’s case had been built not on the carefully drafted words that were contained in Terracom’s announcements, but on meanings “constructed” from those announcements by ASIC.
This is how Jackman put it: “ASIC constructs from the statements in the announcements some alleged representations which it then alleges were false or misleading.”
When the judge examined ASIC’s “constructed” representations and compared them to Terracom’s actual announcements he found that only two of the seven alleged representations were present and neither of those was false or misleading. “It is an unfortunate feature of ASIC’s case that most of the alleged representations which it claims were false or misleading involve an exercise in tendentiously enlarging the text of announcements which were actually made,” the judge said.
Jackman’s judgment suggests something has gone seriously wrong inside ASIC. As the judge says, exaggeration has no place in law enforcement. But facts and rigour certainly do.
