Thursday, May 14, 2020

High noon for cashed-up cowboys of class actions

Wednesday may mark the beginning of the end for the predator’s picnic that is Australia’s litigation funding industry. If all goes to plan, the Morrison government will ask the Parliamentary Joint Committee on Corporations and Financial Services to take a close look at Australia’s ­escalating class action industry, examining especially the role of litigation funders and lawyers’ contingency fees.

The inquiry is so overdue it’s not funny. When a new asset class provides returns on invested capital of 390 per cent, and an internal rate of return of 624 per cent, that ought to be a big fat clue that something is awry.

Welcome to Australia’s litigation funding industry, where Omni Bridgeway, formerly IMF Bentham, confessed to these astronomical returns in the Murray Goulburn class action in its public filings. And that was after the court slapped down the funder’s expected return of 562 per cent.

From being a rarity less than 10 years ago, litigation funders now finance three-quarters of all class actions in Australia. And the plundering of plaintiffs is attracting foreign capital. Global hedge funds, even Harvard’s endowment funds, are piling into Australian-based litigation funds.

The committee might notice the inverse correlation between the riches showered on funders and the returns to the victims who were supposed to benefit from the enhanced “access to justice” that litigation funding was supposed to offer. In its 2017 submission to the Victorian Law Reform Commission, the National Union of Workers highlighted a class action for unpaid redundancies owed to its members. They were awarded $5,107, 259 by the Supreme Court. The entire award went to pay the fees of the funders, lawyers and accountants.

The Australian Law Reform Commission has found class actions involving litigation funders result in an average return to class members of just 51 per cent after commissions and fees. By contrast, the average return to class members of legal actions without litigation funding is 85 per cent.

Promises about offering plaintiffs greater access to justice have become a smokescreen for ripping them off.

As The Weekend Australian reported on Saturday, the Department of Defence settled three class actions arising from leaks of PFAS, a toxic firefighting chemical, from its bases into local aquifers and land.

Of the $212.5m settlement, the lawyers took $30m and Omni Bridgeway raked in $51.5m. One group of plaintiffs, the people of Oakey, whose lawyers had once predicted a $200m pay-off, received only $16.4m to be shared between 450 people — about $36,000 each on average. Many of those plaintiffs had no say in agreeing to this pathetic deal.

That access to justice has become a licence to gouge innocent consumers while tipping untold riches into the pockets of litigation funders is not the only baleful consequence of Australia’s descent into a hellish class action free-for-all.

The torrent of funded continuous disclosure claims has caused an insurance strike among D&O insurers, focusing company directors on self-defence rather than growing productivity, creating jobs and wealth. Eventually more companies will simply delist or move offshore to avoid the avarice of roaming litigation funders.

Five key ingredients have turned Australia’s class action system into a predator’s picnic for litigation funders.

First, there are ridiculously low thresholds to launching a funded class action: law firms and litigation funders need find only one lead plaintiff and believe there are seven more.

Next, litigation funders can magnify the class to include anyone answering a generic description, boosting the settlement figure and thus the funder’s take. Best of all, the class members need not have seen the funding agreement, let alone consented to it.

In any other industry, regulators and politicians would scream blue murder about such a dodgy system. So would a royal commissioner with a remit to investigate the financial services industry.

And that raises the third reason Australia is the destination of choice for foreign-backed litigation funders. They can roam free, happily unencumbered by laws, duties and regulations that apply to all other providers of ­financial services.

Plaintiffs can thank a guileless Labor government for falling for all the guff about litigation funders providing greater access to justice without realising that removing regulation would unleash a new class of predators on to both plaintiffs and defendants.

In 2009 the Full Federal Court in the Multiplex case decided that litigation funders were offering a “managed investment scheme”. Normally that attracts a serious regulatory regime to protect consumers. But when finance minister Chris Bowen granted litigation funders a neat exemption, their ­already booming business model went gangbusters.

Indeed, Labor governments, federally and in Victoria, have shown a remarkable tenderness towards the interests of litigation funders and law firms that benefit from them. Chief among them, Bill Shorten’s alma mater Maurice Blackburn, the Melbourne law firm that has the biggest slice of class actions in Australia, 17.9 per cent; and Slater & Gordon, whose former partners include Julia Gillard, which comes second.

The cosy links between these blue-blood Labor law firms and ALP governments, not to mention the generous donations the law firms have made to the ALP, deserve close scrutiny when asking how we ended up being a paradise for funders and their law firms at the expense of plaintiffs.

The fourth key ingredient is the fact litigation funders face few risks. It’s not as if they need big returns to justify taking on losing cases. Omni Bridgeway bragged to investors in March about an 89 per cent success rate while ­Litigation Lending Services has a 94 per cent success rate.

The final ingredient in the predator’s picnic is ridiculously high returns. While not every case wins Omni Bridgeway a 390 per cent return, it reported to investors in its March 31 update that its cumulative return is 134 per cent. Nice work if you can get it.

There is a real opportunity for the parliamentary joint committee to clean up the gorging by the growing number of litigation funders in this country. It can start by getting rid of funding arrangements and orders that allow litigation funders to co-opt class members into agreements they knew nothing about, in favour of a more honest “opt-in” system. It should consider imposing a duty on funders to act in the best interests of class members, just as other providers of financial services owe their clients. And why not a prohibition on aggregate funding and legal costs from exceeding a reasonable percentage of any award? As for lawyers licking their lips, trying to secure contingency fees so they can muscle in on the action? The parliamentary committee should tell them they’re dreaming if they think that blatant conflict of interest is on the cards.

After all, somebody somewhere should finally put the interests of justice for plaintiffs ahead of a law firm’s burgeoning bank balance and a litigation funder’s juicy rates of returns.



Statistics boss charts Australia's way out of COVID

Like pandemics through history, coronavirus is dividing us by numbers. Statistics tell the story of suffering.

As the nation — and seemingly the entire world — tracks the trajectory of the ubiquitous "curve", the Australian Bureau of Statistics (ABS) is working quietly in the background, measuring the fallout and looking to spot early signs of recovery.

For Australian Statistician David Gruen, COVID-19 crisis means disruption.

"At the moment what we've got is something like 15 per cent average occupancy in our 10 offices around Australia, so most people are working from home," he told The Australian Financial Review.

Through video meetings and regular link-ups with his senior staff, Dr Gruen says the ABS is prioritising data that can offer a near real-time snapshot of where the economy is, including businesses and households.

Now in charge of the ABS's 2300 people, the national census and about 500 annual data releases, Dr Gruen isn't wasting the COVID-19 crisis.

"It has been a huge opportunity and the organisation has risen to the challenge," he says.

"In responding to my questions about what we could do to help, there was a flowering of things suggested. New ideas and ways we could speed things up.

"A lot of technology goes on under the hood. If you're going to run surveys quickly, in order to make them representative, you don't necessarily get a representative sample from over the telephone. In the background you have to weight the survey in such a way that it is representative."

Already the ABS has asked the big four bank bosses to hand over valuable customer transaction data, a part of moves to capture more accurate consumption and business spending patterns during the crisis.

Dr Gruen says that extra data will help "improve our capacity to estimate consumption and spending by businesses", stressing it would not compromise commercial or privacy sensitivities.

"People have been very receptive because I think in a crisis people want to help and there's been a lot of that," he said.

But he has also signalled a push for location-specific data on the coronavirus, information which could be used by state and territory governments to control the spread as lockdown restrictions are eased.

New interactive maps created by the ABS can now identify older populations and those with high levels of chronic health problems, data which could help guide testing, containment and health responses down to the suburban level.

The detailed information can provide a snapshot of age, health problems and other potential challenges during the three-stage lifting of physical distancing rules and the looming new era of public health and hygiene.

The push for alternative data sources comes as tech companies, banks, and data miners have monetised all kinds of information, previously the preserve of organisations like the ABS.

Today in Australia any number of business hoard access to real-time numbers of spending, selling, online behaviour and even physical movement.

"What we can do usefully there is to show where the concentrations are, of both older workers in different industries and also older people with health conditions that potentially put them at risk," Dr Gruen said.

Well-known across the government and top ranks of the public service, he has been consulting widely, including with Treasurer Josh Frydenberg and senior Treasury officials.

Key questions include how the ABS is collecting and shaping data on unemployment – a major statistical point in building monumental policies such as the Coalition's $130 billion JobKeeper program.

The ABS has begun releasing critical payroll data, which gives insights into Australians' job status and employers wage bills.

The Treasurer said this month that ABS data has been critical to the government's management of the pandemic, praising its broad range of detailed data sets.

As Prime Minister Scott Morrison charts the "road out", the work of the ABS will remain central to major policy moves from Canberra.

The ABS has attracted criticism for changes to the presentation of some of its statistical releases, especially in the lead-up to the launch of its new website.

The much-cherished PDF for national accounts have been progressively removed, making it harder for ordinary people to navigate simple headline figures.

The ABS has phased out its PDFs, replacing them with less user-friendly Excel spreadsheets.


Rex takes fight to Qantas and Virgin

Regional Express Holdings will capitalise on the turmoil from Virgin Australia’s collapse and invest $200 million launching capital city services to compete with Qantas, Jetstar and Virgin Mark II.

In a move that could harm the sale price achieved by Virgin’s administrators, the regional airline operator is working on a business plan that includes leasing 10 narrow-bodied jets as well as employing new pilots, cabin crew and ground staff.

Virgin's administrator, Vaughan Strawbridge, has called for indicative bids for Virgin to be lodged by Friday. Industry sources say the business was worth about $1 billion depending on the amount of secured and unsecured debt.

Several consortiums have shown interest. They include Canadian infrastructure investor Brookfield, Wesfarmers, private equity companies Bain Capital and BGH Capital and distressed debt specialist Oaktree.

Rex’s deputy chairman John Sharp said the move by Rex to start a new capital city airline would require about $200 million in capital investment.

This would be achieved through the sale of new shares in Rex, which has been listed on the ASX since 2005. The company is controlled by executive chairman Lim Kim Hai and his business partner and Rex founding shareholder, Lee Thian Soo.

“We have been talking to half a dozen private equity and investment banking entities about investing in this new venture,” Mr Sharp told The Australian Financial Review.

“We are working with those parties and will narrow that down to one in the next three weeks or so.

“The most significant aspect of this is we will be the only capital city operator that is debt-free.”

Three-airline market

Mr Sharp, a pilot and former transport minister in the Howard government, said competition would be good for consumers and the economy. “We may well have a three-airline market,” he said.

Mr Sharp said the new Rex capital city operations would be a cross between Qantas and Jetstar but with a lower cost base.

“This will be halfway between a full-service airline and a low-cost airline,” he said.

The plan is to start flying between Sydney, Melbourne, Brisbane, Adelaide and Perth early next year when the airline industry comes out of the coronavirus freeze.


Queensland university in the pocket of China

Liberal senator James Paterson has taken aim at universities' reliance on international students, using a speech in Parliament to reveal confidential details about the University of Queensland vice-chancellor's pay incentives to deepen ties with China.

In a late-night speech on Tuesday, Senator Paterson said a whistleblower from the university had given him a copy of last year's senior staff remuneration report, which showed vice-chancellor Peter Hoj had received a $200,000 bonus based partly on his success in growing the university's relationship with China.

According to Senator Paterson's read-out of the document, one of the key performance indicators Professor Hoj was judged against was a "sound and strategic positioning in China" because of its growth as a research provider and it being a "very important source of international students" for at least another five years.

The remuneration report noted Professor Hoj had visited China six times over 2018 and 2019 and the demand for UQ courses from Chinese students had "continued to grow strongly and we will likely end up with 63 per cent of commencing international students coming from China in Semester 1, 2020".

Professor Hoj was awarded his "significant" bonus in 2019 even though, Senator Paterson said, he had not been as successful against another key performance indicator seeking "greater diversity" in the international student body to make the university more financially resilient.

"Despite his failure to achieve this KPI, the vice-chancellor was awarded a bonus of $200,000, a significant sum in anyone's language. Perhaps this is because the remuneration committee regarded the achievement of the China KPI as more significant," Senator Paterson said.

"But far from an achievement warranting a bonus paid from student fees and taxpayers dollars, the prospect of 63 per cent of the university's foreign students coming from only one country should have been an alarm bell for the chancellor Peter Varghese, and the governing body of the university, the UQ senate."

Senator Paterson said international students were welcome on campuses and brought a range of positives but universities had not properly managed the risks in the market.

"Even before the coronavirus, there were good reasons to be concerned about this dependence, particularly on students from China," he said.

"There was always a risk of a downturn in this market, whether due to natural economic events or as a result of deliberate policy measures introduced by a foreign government we have limited influence over."

He said over-reliance on China also presented non-financial risks because the authoritarian Chinese Communist Party does not uphold free speech and open academic inquiry. "These non-financial risks are readily apparent at UQ," he said.

Senator Paterson pointed to the matter of Univesity of Queensland student activist Drew Pavlou, who is facing disciplinary action related to his protest activities, which have targeted the university's China ties.

Senator Paterson criticised UQ for its approach to hosting a Chinese government-funded Confucius Institute culture and language centre. He said the original agreement had been "hopelessly inadequate" as it handed too much power to the Beijing-based headquarters.

The university has also offered four courses established with Chinese government funding – an arrangement which has since been ceased.


 Posted by John J. Ray (M.A.; Ph.D.).    For a daily critique of Leftist activities,  see DISSECTING LEFTISM.  To keep up with attacks on free speech see Tongue Tied. Also, don't forget your daily roundup  of pro-environment but anti-Greenie  news and commentary at GREENIE WATCH .  Email me  here

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