A group of investor litigants has been permitted by a Full Court of the Federal Court to plead “market-based causation” in proceedings brought to recover losses which the investors claimed to have suffered as a result of misleading or deceptive prospectus materials and financial statements issued in contravention of the Corporations Act 2001 (Cth).

In Caason Investments Pty Ltd v Cao [2015] FCAFC 94, the investors claimed they acquired shares at a time when the share price was inflated above its true value as a result of the allegedly misleading statements and had suffered losses when the share price was corrected.  In these circumstances, the “market-based causation” theory holds that the necessary causal link between the misleading information and the investors’ losses is established by the investors’ acquisition of the shares in the artificially inflated market.  This allows investors to recover such losses without proving that they in fact relied on the misleading information in acquiring the shares.

As this decision relates to an interlocutory application concerning pleadings, it does not settle the question of whether market-based causation will be adopted by Australian courts, as it has been by the US Supreme Court1.  However, in holding that market-based causation is reasonably arguable, the Court has kept open the prospect of such an argument succeeding and minimised the prospect of a pleading of market-based causation being struck out in other class action proceedings2

In reaching the unanimous conclusion that market-based causation is reasonably arguable, the Court emphasised that:

  •  market-based causation has not been rejected by the High Court or by any intermediate appellate court and has been implicitly endorsed by single judges in some cases;3
  •  reliance is not a necessary (as opposed to sufficient) condition for establishing a right to recover loss or damage resulting from a contravention of s 728 of the Corporations Act.4   Instead, the relevant requirement is that there be a causal link between the contravention and the loss.5 Market-based causation and reliance are both types of such causal links;6  and
  •  market-based causation, which recognises that the market of potential investors reacts to information disclosed by companies offering securities, is not inconsistent with the policy aim of Chapter 6D of the Corporations Act, namely protecting investors (including by ensuring that information disclosed by companies offering securities is not misleading).7

These proceedings will no doubt continue to attract the attention of many, including companies on the receiving end of class actions, and class action lawyers and litigation funders looking to bring such claims, all of whom are awaiting a final judgment confirming or rejecting the adoption of market-based causation in Australia.

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[1] Basic v Levinson 485 U.S. 224 (1988); Halliburton Co v Erica P John Fund Inc 134 S.Ct. 2398 (2014).
[2] Per Gilmour and Foster JJ at [85];  Per Edelman J at [96], [166] and [187].
[3] Per Gilmour and Foster JJ at [63] – [71];  Per Edelman J at [158].
[4] Per Gilmour and Foster JJ at [68] and [77];  Per Edelman J at [153].
[5] Per Edelman J at [153].
[6] Per Edelman J at [93] – [95] and [157].
[7] Per Gilmour and Foster JJ at [80].


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