Federal Court’s tough justice leaves investors in the dark

New rules restricting access to details of legal clashes have no merit and are a bad outcome for financial markets.

Austrac’s pursuit of Commonwealth Bank led to a hefty fine and cultural shake-up. Picture: NCA NewsWire/James Gourley

Two of the biggest legal actions launched against Australian companies in recent years involved financial crimes ­regulator Austrac pursuing Commonwealth Bank and ­Westpac through separate Federal Court cases. At the end of both cases (which were not contested and were settled by the banks), Austrac had extracted $2bn in penalties and triggered a chain of events that led to a far-reaching cultural shake-up and a board and management upheaval.

Both legal actions also led to heavy share losses, and in Westpac’s case the shares have yet to recover from when the court documents were first filed.

But under changes quietly put through under Federal Court Chief Justice James Allsop on Friday afternoon, access to the details of these claims would have been automatically shut off for potentially months despite the case being filed with the court.

The changes under Allsop, also the presiding judge in the Westpac case, now prevent access to basic but important documents such as a statement of claim to non-parties until after the first directions hearing or a court hearing. This is a classic case of a solution in search of a problem. Except in this case it creates its own serious problems for Australia’s principle of continuous disclosure for listed companies.

Chief Justice of the Federal Court James Allsop. Picture: Renee Nowytarger

For anyone that is a professional investor, from fund managers to super funds with hundreds of billions of dollars under their watch, they should be very worried about this ruling. It means they now face operating in an information vacuum and the stakes couldn’t be higher.

Three of the nation’s top financial regulators: the Australian Competition & Consumer Commission, Australian Securities & Investments Commission and Austrac, which by extension are some of the biggest clients of the Federal Courts, are privately deeply concerned about the implications of the ruling.

This opens the door for well-funded defendants to keep serious corporate offending out of the public eye for years. Each agency is understood to have sought clarification around the ruling in recent days.

The rules were developed by the Federal Court Rules Committee, which is made up of judges of the court. A spokesman for the court says the amended rules were made unanimously.

The new rules were designed to address the prospect of problems arising when parties file an originating application or statement of claim with potentially sensitive or confidential content, the spokesman said.

This is designed to give the respondent time to “make a decision about whether to seek that the documents be suppressed or subject to a non-publication order prior to access by a non-party”.

Without merit

However, the motivation for this decision has no merit. Of the thousands of legal actions filed with the Federal Court each year, the cases where commercially confidential information has been intentionally or inadvertently disclosed is either zero or next to nothing.

Of course, there are sensitive and embarrassing allegations that make it to court, but that is what the legal system is built around.

There are already strict rules in place about what can be reported on and access to sensitive documents such as affidavits. Lawyers too, preparing and filing paperwork, know they face the wrath of the court for abusing the rules of the game. Lawyers already have effective tools available to have confidential infor­mation suppressed.

In the Austrac matters, investors rightly and quickly concluded for themselves how serious the problems were for each bank when it came to failures around money laundering before having to wait for the wheels of justice to slowly turn.

In November, Austrac lodged a case against Sydney’s Star Entertainment, alleging the casino knowingly turned a blind eye to criminal identities and allowed billions in dirty cash to be laundered.

Under the new disclosure rules, this would mean a three-month blackout before any details of the filing could be known. (Star is currently reviewing the Austrac allegations and has yet to file a response.)

The changes also create a major disclosure dilemma for corporations – at what point do they tell investors they’ve been hit with a legal action? When it is first filed with the registry, or should they wait until the first directions hearing before coming clean? And why should investors rely on a company’s own spin over how ­serious the matter is? The gulf between a small corporate matter and a serious one in the Federal Court can range from $1m to $1bn, leaving a lot of guesswork.

On the face of it, the changes now give one party an advantage over how they want even the most trivial of information to be disclosed, or whether it should even be aired at all.

Whether it’s rorting customers or gaming money markets, few companies want their wrongdoing revealed in public and the prospect of disclosure is a powerful force in having them behave as good corporate citizens.

The Federal Court is the pre-eminent court for business matters and has only a tiny criminal jurisdiction. If the court believes it is being used to promote scandalous cases – then take that up with the litigants. Don’t shut the doors on transparency.

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Bubble bursts

Redbubble chief executive Michael Ilczynski badly miscalculated the extent of the online retailer’s growth potential over the past year and has now been forced to slash costs.

The axing of nearly 50 jobs, or nearly 14 per cent of Redbubble’s workforce follows a year of breakneck growth in staff numbers and a decision to chase revenue rather than profit.

Over the past 18 months Redbubble put on 100 new staff and contractors in its operations around the world from San Francisco, Melbourne, New York and Berlin. And just a few months ago the company was complaining that access to talent was limited and competition for staff was high, particularly for technology engineers. Still, this didn’t stop the company’s total workforce swelling by nearly a third.

Redbubble CEO Michael Ilczynski. Picture: NCA NewsWire

A former top Seek executive and graduate of Duntroon Military College, Ilczynski wasn’t alone in thinking Covid had delivered a step change for Ecommerce platforms and the sky was the limit for growth. But surging interest rates sucked the funding lifeblood from tech-based stocks while consumers, faced with a surge in the cost of day to day goods from energy, housing to food, became more discerning in how they spent their money. He warned that consumer demand will remain challenging in the near term.

This time two years ago, Redbubble, known for operating an online marketplace for cool designs on T-shirts, mugs and posters, was worth more than $1bn. Today it is pushing a little over $140m.

Tech-based companies are crashing to earth around the world and names as big as Amazon Meta are slashing staff and putting in hiring freezes to preserve cash. This is only now just starting to hit Australia with names like CoinJar and Whispr slashing jobs.

While funding was cheap, the retailer last year sought to grow revenue over all other things and moved stock by offering discounts and free shipping to customers. Ilczynski said this was in response to the broader demands in the market.

He says customers, while being resilient, appear to be more “value driven” which has eaten into Redbubble’s profit margins.

“The magnitude of the discounts offered by a range of other retailers were deeper than in previous years and the timing was much earlier. We responded by increasing our own promotional activities to attract customers and deliver revenue growth,” he said on Wednesday.

But all this came at a cost with Redbubble’s profit margin being crunched by nearly 18 per cent during the December half. Tighter access to funding means tech companies like Redbubble need to become more disciplined. The company is currently burning more cash than it generates, and with expected $25m in cost cuts, Ilczynski expects this to turn cash flow positive by the end of this calendar year. Even so Redbubble’s shares fell more than 11 per cent to be trading at 50c.

Wednesday’s profit warning from Redbubble contrasts with a broader upbeat mood among traditional bricks and mortar retailers that had generally done it tough through Covid. In recent days there has been modest profit upgrades from JB Hi-Fi and Super Retail Group which both experience robust trading conditions through Christmas and into the new year. But with property prices clearly starting to and the peak in interest rates yet to come, the retail bubble won’t last forever.

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Originally published as Federal Court’s tough justice leaves investors in the dark