QBE’s woes come back to bite as class actions surge

QBE boss John Neal will likely be disappointed but not surprised to find himself on the end of a shareholder claim.

Major securities class action settlements

QBE chief executive John Neal will likely be disappointed but not surprised to find himself on the end of a shareholder claim over the global insurer’s December 2013 profit warning, which wiped $4 billion from its market value.

Just when it looked like he had got on top of a litany of problems — including the sale of the US lenders mortgage insurance business that was the source of so many losses — the company faces revisiting the issues all over again in the Federal Court.

Plaintiff law firm Maurice Blackburn began touting for the action in April last year, drawing a pledge from Neal to shareholders at the annual meeting that the company would vigorously defend any claim over its actions in the lead-up to the downgrade.

Nearly 18 months on the ­company faces a claim from 700 shareholders for more than $200 million in compensation for the 22.3 per cent fall in the share price the day the warning was issued. Shareholders allege the company misled the market by failing to disclose information it knew, or should have known ahead of the downgrade.

The claim is just the latest in a long line of class actions that last year netted plaintiff’s lawyers and funding groups almost $1bn in settlements. Maurice Blackburn has been among the leading proponents, settling five cases for more than $100m, and last month launching a claim against private education group Vocation for withholding information about the loss of a $300m government contract from the market.

To experienced former insurance executive and director John Lamble, the spread of class actions against companies for such alleged lapses are a blight on the market and an offence to the idea that a buyer should beware when buying. “It is a past bruised shareholder effectively suing present shareholders,’’ Lamble says of lead plaintiff Richard Bungey. “And they make out that they are innocent but they shouldn’t be buying shares unless they are properly advised or knowledgeable. I am a strong believer in buyer-beware on shares.’’

That may be a rather old-fashioned view, with Australia now seen as the third most litigious country in the world after the US and Canada and attracting interest from international investors willing to fund claims against companies.

According to the Australian Institute of Company Directors there have been 250 class action cases launched since 2011 when the class action regimen was introduced in the Federal Court. There are a long list of gripes against the spread of class actions: that they distract management from the job of what is usually having to turn around a company having a bad run: that since many are settled before getting to court they amount to little more than a bid for “go-away’’ money; that they only enrich the funders and lawyers; that because the payouts come from the directors’ and officers’ insurance policy rather than the pockets of directors and executives there is little genuine redress, and that they effectively pit one lot of shareholders against the other. The QBE action comes at a time when Attorney-General ­George Brandis is still considering how to respond to last year’s report by the Productivity Commission that calls for changes that corporate lawyers believe will spur the growth of class actions.

That report, on Access to ­Justice, called for the introduction of US-style contingency fees that would allow class action lawyers to take a proportion of any ­financial damages they win for their clients.

Australian lawyers are currently not permitted to use this form of billing. But that rule does not apply to the booming litigation funding industry, which remains relatively unregulated.

While a handful of plaintiff law firms are the public face of the class action industry, the financial backing for most big claims against corporate Australia is generally provided by litigation funding companies in return for a share of the proceeds.

These companies frequently take about 35 per cent or more of whatever companies outlay to settle claims and ensure they do not appear on their accounts as contingent liabilities.

If plaintiff lawyers are allowed to switch to contingency fees, corporate law firm King & Wood Mallesons believes one effect would be to increase the viability of lower-value claims, exposing small- to medium-sized businesses to the sort of litigation risk that currently confronts big business.

“Such a change would increase the number of class actions,” King & Wood Mallesons said in its annual survey of the class action landscape.

In May, another corporate law firm, Allens, warned of a growing tendency for class action law firms to sidestep the oversight of the courts by “launching” class actions in the media — with press conferences and information packs for journalists — before they file official documentation with the courts.

“Of the 29 claims we identified as having been launched by Maurice Blackburn and Slater & Gordon in the period between 2011 and 2013, less than half had been filed by the end of April, 2015,” ­Allens said in a survey of class ­actions over the past ten years.

“At least three ‘launched’ class actions have been settled before they were filed,” the survey said.

Allens partner Ross Drinnan said launching class actions in the media raised real issues because court rules ­require litigants to take genuine steps to resolve disputes before court proceedings are commenced.

Jason Betts of Herbert Smith Freehills said class actions had ­become a mainstay of the litigation environment facing Australian business and new entrants to this sector were looking for areas of commercial activity that had so far remained untouched by this phenomenon.

He believed one of these new areas was claims alleging companies had engaged in “environmental toxic torts”. “Everything builds out of what the litigation funders do. They have focused on shareholder suits to date, but ­consumers and others are next on the horizon.”

Mr Betts, co-author of Class Actions in Australia, said the ultimate question for Australia was whether it was content with policy settings that were having the effect of mobilising domestic and foreign capital for investment in class actions.

“That’s the right question to ask and it is a bit weird we are not having a debate about that question — not just in the legal profession but within the broader community,” he said.

He said Australia had the world’s most developed market for litigation finance. “We are not behind America, we are in front of America. We are it when it comes to litigation funding and we also have probably the lowest level of regulation (for litigation funders) in the world,” Mr Betts said.

The AICD wants the government to rein in class action litigation funders, pegging the rise of commercially-motivated funding as a major problem for corporations. “ ... Many class actions are now promoted by plaintiff’s lawyers and litigation funders, not be aggrieved persons seeking to commence proceeding to quell a real controversy,’’ the AICD said in a submission to the Productivity Commission

But even some critics of class action system acknowledge it serves a purpose. Stewart Levitt of Levitt Robinson says class actions are often filling a void left by the “dereliction of duty’’ by ASIC. The corporate regulator, he says, does not do enough to pursue the top end of town, noting that it is extremely rare for senior executives to ever be sent to jail.

“In this country too much is being left up to motivated individuals to take action themselves and unfortunately ASIC seems to get caught up in peripheral matters,’’ says Levitt, who has run class actions including one against Macquarie Group over the collapse of Storm Financial.

He says the action is about ­vindicating the rights of shareholders to be properly and fully informed when making a decision whether to invest or not ­invest. “There is a public interest in this action. But on the other hand, it might have been more ­appropriate for ASIC to have moved on this one.’’

While that hasn't happened, the downgrade hasn’t gone without consequence for the company. None of the board that was in place in 2012 when John Neal replaced Frank O’Halloran has survived and nine of top 11 executives under him have been appointed on his watch. Belinda Hutchinson fell on her sword as chairman on the same day the dramatic profit downgrade.

Dennis Shore, a company monitor and former director of the Australian Shareholder’s Association, says it is some comfort to investors to see that degree of accountability, but it doesn’t take away the financial loss. “At least with a class action you can expect to have some financial compensation for a wrong that was committed by the company’’.

Alas for shareholders the December 2013 profit warning — which turned expectation of a $1 billion-plus annual profit to a $250m loss — and Hutchinson’s sacrifice was not the last of QBE’s travails. In June last year the company produced yet another profit warning, sparking an 11 per cent fall in the share price in one day and commentary that downgrades from QBE were one of the few certainties in the unpredictable business of insurance.

Brett Le Mesurier, one of the broking analysts who listened in on the series of results calls hosted by Neal that are catalogued in the statement of claim, says the new management was struggling to get its arms around the problem.