ASIC prepares to bet it all on Star casino legal battle

The regulator’s blockbuster action against the casino’s former directors is about to start. And the stakes couldn’t be higher.

Star’s current financial pressures will need to be isolated from the hearing involving the former directors. Picture: John Gass

Lost in Star Entertainment’s fight for survival is another battle that’s been playing out of sight for more than two years. And the stakes are just as high.

A blockbuster legal action between ASIC and the entire former board of the casino operator is heading to court in just a few weeks, and in many ways the corporate regulator is betting it all on this case.

And if it goes ASIC’s way – there are major implications for all directors.

The Federal Court hearing is set down on February 10 by the way of a civil action and will be overseen by Justice Michael Lee, the judge of the Bruce Lehrmann vs. Channel 10 and others fame last year.

It was that defamation action that turned Lee “He went back for his hat” into a household name (including the publication of his 324-page judgment that dismissed Lehrmann’s claim as a top-selling book). But in legal circles, Lee is highly regarded as among the most commercially minded on the roster of Federal Court judges.

ASIC chair Joe Longo in Perth last week. Picture: Colin Murty

This means if Joe Longo’s ASIC wants to use the Star action to push new territory to reach deeper into the boardroom, it’s going to have to make sure its high stakes case is watertight. On the current facts, it’s well short of a slam dunk.

ASIC’s objectives are as sweeping as the names it’s pursuing stemming out of the casino’s money laundering breaches. It’s going after former board members John O Neill (former Star chair), non-executive directors Kathleen Lahey, Tony Sheppard, Gerard Bradley, Sally Pitkin, Ben Heap (also a former chair) and Zlatko Todorcevski.

The case also names executives including former CEO Matt Bekier, former chief financial officer Harry Theodore and, ambitiously, former group general counsel Paula Martin (more on this shortly).

Unusually, Star itself is not party to proceedings. And through the case it will also be important to separate the serious financial problems where Star now finds itself, from the board that left the casino more than two and a half years ago.

Each of the directors are indemnified by Star, making a potential complication if Star collapses part way through the long-running trial. It’s also going to get expensive very quickly with each director opting for their own barrister and legal team. And that’s even before ASIC’s own costs.

Justice Michael Lee.

Through its filing, ASIC won’t need to prove any laws were breached, nor does it need to prove there were breaches of continuous disclosure obligations or misleading conduct, like it is alleging with key directors of collapsed airline Rex or even ASX (although in this case it is pursuing the company rather than directors).

But in its determination to be “seen to be doing something” while the big casino players fell into money laundering scandals, ASIC may end up doing nothing at all.

As the Star case gets underway, it’s going to be difficult for ASIC to escape the shadow of a similar case it opted not to pursue at rival casino Crown two years ago. There, the governance failures were arguably far greater and known money laundering breaches were on a grander scale than Star.

Even financial crimes regulator Austrac’s own legal filings show the money laundering failures at Crown were endemic and serious and caused significant financial harm. Crown has since been acquired by asset manager Blackstone, and the casino was fined $450m by Austrac. The money laundering regulator has since filed a separate claim against Star, and both have been in long-running settlement talks.

Longo has said with the Crown case the regulator had to weigh up what the non-executive directors knew at the time about wrongdoing going on inside the casino.

A key factor behind ASIC’s Crown decision is the non-executives were entitled to rely on “what they were being told by senior management”, Longo has said.

While this is a good enough reason for deciding not to go against Crown, or even banks caught up in major money laundering actions like Westpac, ASIC has cast aside its very own argument in order to go after the entire Star board. Why Star is different needs to be made clear.

Star’s new multibillion-dollar Queen’s Wharf casino in Brisbane. Picture: Steve Pohlner

Star’s former non-executive directors have argued the entire way through, including through their defence filings, they were not aware of the detail of wrongdoing in the Suncity junket business that was feeding international high rollers to Star, because they relied on management to deliver insights into the operational parts of the business. Yet ASIC’s assertion is they should have been.

Here ASIC alleges that Star’s non-executive directors breached their duty of care by failing to interrogate management hard enough about what was going on with the junket operators used by Star. What level of hard enough remains to be determined.

This means the nub of ASIC’s action against the Star directors appears to rely on the notion that the non-executive directors of Star a) didn’t observe what was happening at Crown, and b) take steps to stop the same behaviour.

Here, ASIC reasons, that given the problems with Crown at the time, Star’s board ought to have known the risks posed by gambling junkets when it comes to money laundering and did not ask management about those critical risks. This, it claims, was a breach of their director duty obligations. It’s a less than watertight argument.

Star’s directors have said they asked these questions in the boardroom and acted on the information they were given, putting the ball in Justice Lee’s court to determine where the law sits.

Indeed, the Corporations Act spells out that directors can reasonably rely on information from company employees in making decisions on the conditions if they believe they are competent and the advice is relied on in good faith.

That being said, it’s not an all free pass – in that there’s an expectation that directors should make their own decisions independent of management’s advice. But this in itself isn’t enough to erase decisions made in “good faith”.

ASIC too, has widened its case alleging that the harm caused by Star directors was “aggravated” by the fact that the activities of The Star were vulnerable to money laundering, which can cause grave harm to the community generally.

If Justice Lee accepts this point about vulnerability and community harm, this would be a very big win for the regulator. And a big regulatory threat for directors.

It could open up legal actions against directors for all kinds of corporate behaviour on non-financial risks, from environmental damage to the potential for workplace accidents that have a “community impact”.

At the same time, the decision to pursue Star’s former general counsel (Paula Martin) dramatically raises the stakes, potentially holding in-house lawyers responsible for preventing misconduct taking place inside a corporation.

By putting the general counsel personally on the hook, this pushes new ground for how top legal executives manage risk inside all businesses.

Indeed, the Star case is being dubbed as a “stepping stone” prosecution for ASIC as it seeks to raise or at least test the bar for governance and directors duties.

It has a look being seen to be doing something, and as far as bets go, this is a big one. Even if the case falls short, it will still represent a costly personal loss for the directors, but even more damaging for ASIC’s own reputation.

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Originally published as ASIC prepares to bet it all on Star casino legal battle