In ASIC v Big Star Energy Limited (No 3) [2020] FCA 1442, Justice Banks-Smith’s clarified key issues surrounding requisite expertise in materiality matters and highlighted what makes a persuasive expert witness in a report and under cross-examination.

Background  

In ASIC v Big Star Energy Limited (No3) [2020] FCA 1442, ASIC accused Big Star Energy Ltd, previously known as Antares Energy Limited (Antares), of breaching its continuing disclosure requirements under s 674 of the Corporations Act 2001 (Cth). 

Antares had entered into agreements to sell resources assets located in Texas, USA. It announced this to the market but excluded the name of the prospective purchaser as well as several other aspects of the purchaser’s financial status (he did not yet have financial approval for the acquisitions) (‘Identity Information’) and his capacity to complete the purchase (‘Cumulative Information’). 

ASIC argued that Antares’ failure to disclose this information amounted to a failure to disclose information that was material to the decision-making of Investors (‘Relevant Investors’) and was therefore in contravention of legal continuing disclosure requirements. 

The Expert Evidence  

ASIC engaged Mr Bowers, a mining equities expert, to present his opinions on the materiality of knowledge of the purchaser’s identity and the materiality of the Cumulative Information.  

Mr Bowers found that both the Identity Information and the Cumulative Information were information that a reasonable person would expect to have a material effect on the price or value of Antares shares. 

Issues with the Expert Evidence

•  Incorrect area of expertise 

The Defendant submitted that since Mr Bowers had no direct experience in buying or selling shares and had not studied market behaviour, he did not have the requisite specialised knowledge to provide evidence on the issue of information material to stock trading. 

The Court took a more holistic approach to the issue of requisite expertise, emphasising the expert’s “range of experience over a considerable time period and the nature of his specialised roles”. [428] The mere fact of having never personally bought and sold stocks does not undermine any expertise in market behaviour that the expert may have gained through other relevant work as an analyst and advisor.

In this instance, Mr Bowers’ experience in mining equity analysis, corporate advice, and mining sales research demonstrated an expert level of engagement with, and understanding of, stock trading in the resources sector. His extensive direct interaction with institutional and retail investors indicated that he possessed knowledge of the behaviour of those who trade stocks. 

Overall, Mr Bowers circumstances were comparable to those of the expert in TPT Patrol v Myer Holdings, where “direct interaction with institutional and retail investors” was a sufficient basis of expertise in market behaviour. [427]-[428] 

• Opinions not based on expertise

The Defendant argued that Mr Bowers’ “opinions were not wholly or substantially based on [his] specialist knowledge” (s 79, Evidence Act). [429] The high level of detail in Mr Bowers’ stock analysis (including an index of all factors that he thought would affect the decision-making of Relevant Investors) was only applicable to Mr Bowers’ personal interpretation of stocks. Relevant Investors would not in reality approach stock analysis so technically.

The Court disagreed with the Defendant. The expert maintained (in his report and in cross-examination) that this level of detail was common amongst all resources sector investors, especially where much larger sums of money were at stake (as they were here). [435] Such detail was also necessary to account for the range of approaches and institutional backgrounds of investors who formed the group of Relevant Investors. 

Justice Banks-Smith found Mr Bowers’s evidence persuasive, particularly in its emphasis on the connection between his opinion and his expertise (his pathway of analysis truly reflected those of people who traded stocks of a similar or relevant kind). 

•  Range of inquiry too narrow  

The Defendant finally questioned the reliability of Mr Bowers’ opinion insofar as his focus on Stock fundamentals risked excluding investors who would have considered a completely different set of factors.  

The court rejected this criticism. Under cross-examination, Mr Bowers vouched persuasively for the rudimentary nature of the fundamentals in assessing stock trading, such that investors who did not have recourse to the fundamentals’ framework made up a negligible percentage of Relevant Investors. 

He adduced his experience in directly working with and advising share traders as proof of the ubiquity of the approach, even by investors who sought marginal investment analysts or bloggers (whom themselves rely on the fundamentals framework). The Defendant hence failed to prove that Mr Bowers scope of inquiry was too narrow. [440]-[444] 

The Decision

The Court accepted Mr Bowers’ evidence and found that Big Star had breached its continuous disclosure requirements.  

The Defendant was not able to effectively challenge  Mr Bowers evidence, which reflected the materiality tests and reasoning processes used by the experts in Grant-Taylor v Babcock and ASIC v Vocation. Mr Bowers had competently shown that the Purchaser Identity Information and the Cumulative Information satisfied the statutory materiality test. [451] 

Takeaways

1. The Court prefers a holistic approach to assessing requisite expertise. An expert opinion on the issue of materiality does not need to possess direct practical experience in buying and selling shares. A witness with direct interaction with the relevant group of investors usually possesses sufficient expertise to provide evidence on continuing disclosure issues.

2. Courts welcome detailed and technical expert reports, as long as experts clearly explain their reasoning and justify their opinions with reference to industry. Experts should use “detailed and accessible terms” in reports that require very sophisticated and technical analysis.

3. Experts should ensure that they are very familiar with the content of their reports. This is just one way for them to stand out in cross-examination – an expert’s confidence in their report will help them to provide direct and certain answers which reassure the court of the expert’s application of their experience.

4. The expert must demonstrate that their evidence satisfies section 79 of the Evidence Act. Experts should explain the logical connection between their expertise and their opinion, e.g., by referencing the academic sources or experiences that ground their assumptions about industry practices.