ASIC appeal upheld — Fortes­cue Met­als Group and Andrew For­rest mis­led investors

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In brief — Full Fed­er­al Court over­turns 2009 ruling

On 18 Feb­ru­ary 2011 the Full Fed­er­al Court unan­i­mous­ly over­turned the 2009 Fed­er­al Court rul­ing which cleared Fortes­cue Met­als Group (FMG) and its Chair­man and CEO Mr Andrew For­rest of mis­lead­ing and decep­tive conduct.

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Frame­work agree­ments with three Chi­nese companies

The appeal relat­ed to con­duct by both FMG and Mr For­rest in rela­tion to a breach of the con­tin­u­ous dis­clo­sure oblig­a­tions under the Cor­po­ra­tions Act 2001 (Act) and of Mr For­rest’s duties as a direc­tor under sec­tion 180 of the Act.

The mat­ter con­cerned three frame­work agree­ments entered into between FMG and three Chi­nese com­pa­nies for the con­struc­tion of a mine and a port in the Pil­bara region of West­ern Aus­tralia. Between August 2004 and March 2005, FMG made a series of announce­ments and state­ments to the mar­ket in rela­tion to these frame­work agree­ments. FMG indi­cat­ed in these announce­ments that the agree­ments cre­at­ed legal­ly bind­ing obligations.

The Aus­tralian Secu­ri­ties and Invest­ments Com­mis­sion (ASIC) brought pro­ceed­ings against both FMG and Mr For­rest, alleg­ing that the announce­ments were mis­lead­ing and decep­tive and breached FMG’s con­tin­u­ous dis­clo­sure obligations.

The tri­al judge dis­missed ASIC’s case, hold­ing that the announce­ments that the agree­ments were bind­ing were an opin­ion which was rea­son­ably held. ASIC appealed to the Full Fed­er­al Court, which upheld the appeal.

Fed­er­al Court findings

The full bench found that:

• FMG’s announce­ment regard­ing the bind­ing con­tracts amount­ed to mis­lead­ing and decep­tive conduct
• FMG breached its con­tin­u­ous dis­clo­sure oblig­a­tions by fail­ing to cor­rect the mis­lead­ing the decep­tive con­duct once the announce­ments were released
• Mr For­rest breached his duties as a direc­tor and con­tra­vened the Act by his involve­ment in draft­ing and releas­ing the announcements

Con­se­quence of contravention

The judge­ment is such that Mr For­rest could ulti­mate­ly be banned from sit­ting on the board of the com­pa­ny he found­ed. Addi­tion­al­ly, he may be fined up to $10 mil­lion dol­lars. ASIC is like­ly to push for the impo­si­tion of both a fine and a ban dur­ing penal­ty hear­ings which are expect­ed to be heard at the Fed­er­al Court in com­ing weeks.

FMG inten­tion to appeal

Mr For­rest has already indi­cat­ed that he and FMG both intend to appeal the deci­sion before the High Court. If an appli­ca­tion is made, penal­ty hear­ings in the Fed­er­al Court would be stayed. Fur­ther, it could take up to six months for the High Court even to decide whether to hear an appeal.

Com­pa­nies need to cor­rect mis­lead­ing information 

ASIC, which com­menced pro­ceed­ings against Mr For­rest and FMG in 2006, pro­claimed the judg­ment as sig­nif­i­cant for investor con­fi­dence. In a state­ment made short­ly after the judge­ment, ASIC chair­man Tony D’Aloisio said that the rul­ing was impor­tant because it rein­forced con­tin­u­ous dis­clo­sure require­ments, which are the ​“bedrock of con­fi­dence in the integri­ty of our markets”.

For com­pa­nies, the judge­ment increas­es the impor­tance of cor­rect­ing mis­lead­ing infor­ma­tion in the mar­ket once they become aware that their pre­vi­ous­ly released infor­ma­tion may be mis­lead­ing. This oblig­a­tion extends to direc­tors who are know­ing­ly involved in the contravention.

State­ments in ASX announce­ments must be cor­rect and ver­i­fi­able. Legal advice on the word­ing of ASX announce­ments should be obtained before they are made. Com­pa­nies should be mind­ful of agree­ments in which terms are yet to be agreed or cer­tain approvals need to be obtained before releas­ing pub­lic state­ments about them.

The judge­ment con­firms that the courts will seek to under­stand how mem­bers of the pub­lic would have per­ceived the infor­ma­tion con­veyed by an announce­ment. In essence, the judg­ment serves to highlight
the respon­si­bil­i­ties of com­pa­nies and their offi­cers with regard to ASX announcements.

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