#ASIC – Why not litigate?

| April 5, 2019

Because it could very well expose your shortcomings.  Securities regulators around the world should be paying close attention to a potentially very concerning situation evolving in Australia, writes Colin Stevens.

The recent sweeping reforms of the Hayne Royal Commission have found many deficiencies in the Australian financial system and have recommended that the Australian Securities and Investments Commission (ASIC) take a much more proactive role in prosecuting financial malfeasance. There have been repeated calls for senior bank executives to receive jail terms and for the regulators to pursue aggressive prosecution through the courts. ASIC’s new mantra has become ‘Why Not Litigate?’.

The difficulty is that securities regulators have often historically never had to follow the full basic principles of due process, relying instead on the protections afforded by Qualified Privilege, and, in many instances, essentially playing the role of prosecutor, judge, jury and executioner in their own private administrative tribunals or courts. They can wield enormous power over the financial institutions that they regulate and there are many stories of companies essentially feeling “blackmailed” into compromising settlements to avoid further perceived or threatened regulatory abuse. This is not confined to just one or two countries. These stories seldom get much press as the victims are incented to play along with the charade in order to maintain their business franchise. As a result, prosecutorial standards can easily lapse in such contexts and invariably rot can set in.

While ASIC Chair James Shipton is busy doing the rounds espousing his Fairness Imperative as part of a campaign to justify ASIC’s newly enhanced role and promised additional $400 mm in funding, a starkly contrasting drama is playing out in Courtroom 11D of the Supreme Court of New South Wales.

The Plaintiff is an international equities trading firm that was providing substantial liquidity for hundreds of ASX-listed securities until one day in November 2014 when ASIC enforcement officers allegedly began a surreptitious campaign to defame and effectively blackl‎ist both the firm and its owner from accessing the Australian markets through any local brokers. Worst still, court is now hearing, this was all done without any substantive investigation, notification or due process and was based primarily on “anecdotal” evidence, which turns out to have heavily relied upon a then ten-year old article from a Canadian newspaper concerning the previous owner and predecessor business model.

That the company in question had been purchased in 2012 and transformed into one of the most disciplined and professionalized liquidity providers in the world apparently failed to enter into ASIC’s regulatory calculations. It is almost embarrassing to read the transcripts wherein ASIC staff are now having to admit in open court that they actually had knowledge of this transformation but that they simply decided not to research even their own files before embarking on a rush to judgment.

Even worse, they layered on by accusing the firm’s owner of criminal conduct, in the form of alleged market manipulation, without producing any meaningful evidence of either the complained of actions or intention.

Only this time they crossed a very powerful player in the global capital markets with both the resources and determination to see justice rendered and who felt compelled to stand up for first principles. It has all the hallmarks of a classic ‘David vs Goliath’ battle for justice. The firm is suing for injurious falsehood and the owner for defamation. ASIC’s initial line of defence was that their allegations were true and, in the alternative, that they should be protected by the principle of Qualified Privilege and granted immunity from being held fully accountable for their actions.

Having ASIC analysts admit, under oath in cross-examination, that they really did little effective analysis in advance, even going so far as to insist that they only had “suspicions”, and most definitely not “conclusions”, that were the basis for their superiors taking action is, at best, cringe-worthy. There have been moments of repeated professed amnesia by the defendant’s key witnesses that have involved more than a little eye-rolling.

While ASIC may have intended their ‘why not litigate’ philosophy to contrast with a ‘litigate first’ or a ‘litigate everything’ approach in order to sound more cautious, thorough and pragmatic, the court is hearing allegations that, in practice, the regulator’s behaviour has often been impulsive, heavy-handed, and possibly reckless.

For international securities regulators, a very disturbing message is emerging: how well would your own investigation and enforcement procedures and personnel hold up to the scrutiny of due process in a public court? Some regulators may find it very uncomfortable being exposed to the sunlight of proper legal accountability and public transparency.

Returning to the emerging Australian precedent, that their deficient internal processes should be so graphically aired just as ASIC is about to receive a substantial increase in funding for their expanded mandate could prove very embarrassing. It certainly gives one cause for concern.

Are such questionable policies and procedures what Australians should expect going forward from‎ their newly armed sheriff of the financial markets? Is such “unnatural” justice to be enshrined as the new norm?

At a broader level, it begs the question of who regulates this regulator, or, for that matter, its international counterparts? As Lord Acton once famously said: “Power tends to corrupt; absolute power corrupts absolutely.”


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