ASIC hits ASX with Federal Court action over alleged misleading statements

The ASX faces penalties of hundreds of millions of dollars if the corporate regulator succeeds in a landmark legal broadside against the market operator.

ASIC chair Joe Longo said any failure by the ASX to properly manage the CHESS replacement project could lead to a ‘lack of confidence’ in Australia as a market. Picture: Aaron Francis/The Australian

The ASX may face penalties of hundreds of millions of dollars if the corporate regulator succeeds in a landmark legal broadside against the market operator, alleging ASX made “misleading and deceptive” statements about a key technology upgrade.

In a stinging statement on Wednesday, the Australian Securities & Investments Commission said it had kicked off Federal Court proceedings against ASX given a “collective failure” by the company’s board and executives to keep investors, the public and stakeholders properly informed.

In the latest of an embarrassing turn of events for the ASX, ASIC claims statements made by the exchange operator in February 2022 were “misleading and deceptive” around how its CHESS replacement project was tracking.

The statements related to the ASX’s bungled Clearing House Electronic Subregister System replacement project, which had sweeping ramifications for the company, including hundreds of millions of dollars in writedowns. The project – which was to upgrade key but ageing technology underpinning the nation’s share trading and settlement system – was eventually shelved by the ASX in late 2022.

ASIC alleges statements made by ASX in market announcements on February 10, 2022 that the CHESS project remained “on-track for go-live” in April the following year and was “progressing well” were misleading.

“The project was not tracking to plan and ASX did not have any reasonable basis to imply the project was on track to meet future milestones,” ASIC said.

The court documents show there were numerous warning signs for the ASX about the CHESS upgrade lacking functionality and being behind schedule from around December 2021. That included a red “RAG” overall status being assigned by the ASX’s tech partner Digital Asset Holdings’ given its delivery plan on the project was out of sync with a published program plan.

The red “RAG” status reflected a material risk to the project proceeding as planned.

ASIC’s allegations state it wasn’t until late March 2022 - more than a month after the ASX said the CHESS program was on track - that the exchange conceded to investors it was highly likely there would be a delay to the April 2023 go-live date for the project.

ASIC chair Joe Longo told journalists he believed the ASX misled the market and Australian public about the critical infrastructure upgrade and in doing that created “significant cost” to market participants such as stockbrokers, and to the ASX itself.

“Australian investors, consumers and businesses expect ASX, as the listing authority and as the listed entity itself, to uphold the highest standards of integrity and corporate governance,” he said.

“Whether you’re ASX or any other listed entity, there’s a fundamental principle of clean markets, of orderly markets, of markets we can all have trust and confidence in.

“But the technology aspect ... at a time when there’s so much emphasis placed on improving technology, we cannot be misleading the public about it.”

Deputy ASIC chair Sarah Court said while it was too early to be pondering the exact penalties the ASX could face, maximum fines for breaches of the law in this area were significant.

“There is a formula in the ASIC Act as to what the maximum penalty would be if ASIC makes out its case. It’s certainly, you know, in the hundreds of millions of dollars,” she added. “But it is really premature to be talking about penalties.”

Ms Court said no entity was “above the law” when it came to making accurate market disclosures.

The ASX’s shares tumbled 3.7 per cent to $63.45 on Wednesday, bucking a 0.3 per cent gain in the S&P/ASX200.

Mr Longo took aim at the exchange operator, saying ASX’s statements went “to the heart of trust in the integrity of our markets”.

“We expect the ASX to be a place to list and invest with confidence. When the ASX falls short, it has wide ranging consequences.”

The regulator is yet to determine the exact penalty it will seek for ASX’s alleged contraventions of the law, but is seeking declarations, penalties, costs and an adverse publicity order.

ASX chairman Damian Roche and CEO Helen Lofthouse have said it co-operated with the ASIC investigation.

Ms Court noted the Federal Court would determine whether a contravention of the law had occurred and define the facts of the case, before deciding whether to impose penalties.

Earlier this year, ASX paid a penalty of $1.05m in light of an ASIC investigation into its compliance with the market integrity rules. The regulator also earlier imposed licence conditions on the market operator and sought audited reports on the latest CHESS upgrade program.

In a statement on Wednesday, the ASX acknowledged that civil proceedings were filed in the Federal Court the previous day.

“We recognise the significance and serious nature of these proceedings. We co-operated fully with ASIC’s investigation and are now carefully reviewing and considering the allegations,” said Helen Lofthouse, ASX’s chief executive.

“We play a critical role at the centre of Australia’s financial markets and continue to focus on supporting and delivering for customers. We are committed to taking ASX forward, and have made strong progress as an organisation over the past two years.

“ASX will keep the market informed.”

The ASX reports full-year earnings on Friday, when it may provide a more detailed response to the legal action being pursued by ASIC.

The legal case initiated by ASIC is targeted at the company rather than individual board directors or executives.

Mr Longo said it would be “inappropriate and unfair” to single out individuals for liability over the ASX’s actions.

“This is an organisational failure... what we’re saying is you can’t sheet home responsibility to one or two or three individuals,” he added.

Mr Longo stressed that any failure by the ASX to properly manage the CHESS replacement project could lead to a “lack of confidence” in Australia as a market, and its ability to attract investment. He wouldn’t rule out imposing further licence conditions on the ASX.

The ASX has drafted in Indian giant TATA Consultancy Services to design and rebuild its technology. Picture: Britta Campion

It is highly unusual for a regulator to pursue legal action against a national exchange, but did occur on a smaller scale in the United States, which led to a settlement in May this year.

The Intercontinental Exchange Inc - which counts the New York Stock Exchange as a subsidiary - agreed to pay the Securities and Exchange Commission a US$10 million penalty to settle charges over its failure to inform the regulator of a cyber intrusion in a timely fashion.

The Australian legal action comes after ASIC released a consultation paper last month that among other things flagged imposing external assurances over the exchange operator’s pricing power and barriers to competition. The regulator called for comments on the report by September 10.

The intense scrutiny of the ASX comes after the company botched the upgrade of its CHESS system, prompting a retreat from a plan that was based on distributed-ledger technology. The failed plan was plagued by delays, triggered writedowns and also led to the departure of its former CEO Dominic Stevens.

Mr Stevens last year had more than $3.14m in long-term bonus payments axed, and the ASX’s executive team also took a remuneration haircut after the failed technology upgrade attracted a rebuke from regulators.

Ms Lofthouse took the reins as ASX CEO in August 2022 and last year confirmed it had drafted in Indian giant TATA Consultancy Services to design and rebuild the bourse’s underlying technology.

It’s not the first time the corporate regulator has taken legal aim at a large, listed company and its board.

In late 2022, ASIC started Federal Court civil penalty proceedings against 11 current and former directors and officers of Star Entertainment for alleged breaches of their duties under section 180 of the Corporations Act.