Background Facts and Key Issues
In ASIC v Big Star Energy Limited (No3)  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 two 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 (together, the “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 therefore in contravention of legal continuing disclosure requirements.
The Expert Evidence
ASIC engaged Mr B, 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 B held a Bachelor of Commerce and Laws from the University of Western Australia. He also possessed 10 years of experience as a mining equities analyst and salesperson as well as an additional five ears as a boutique corporate advisor and equity market consultant. -
The expert witness 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
Big Star’s CEO, Mr Cruikshank brought forward several concerns with the expert’s evidence. Justice Banks-Smith’s comments about these concerns clarified some significant issues in identifying the appropriate expertise of witnesses for materiality issues as well as whether the evidence the witness provided is properly based on that expertise.
First Issue – Incorrect area of expertise
Mr Cruikshank submitted that since Mr B 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”.  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 B’s 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. Mr B’s experience indicated extensive direct interaction with institutional and retail investors, such that he could be taken to possess the knowledge of the behaviour of those who trade stocks.
The Court clarified that previous cases on materiality did not exclude expert witness who were not practically experienced in trading stocks. Justice Banks-Smith acknowledged Justice Beach’s praise for Mr Sisson (a share analyse and manager of institutional investments) in ASIC v Vocation Limited (in liq)  FCA 807 and ASIC v Fortescue Metals Group Ltd (No 5)  FCA 1586, but noted that they nonetheless did not require the expert to have actual investor experience. (You can read more on the expert evidence issues in ASIC v Vocation in our Case Summary). Ultimately, Mr B circumstances were comparable to those of the expert in TPT Patrol v Myer Holdings Limited  FCA 1747, where “direct interaction with institutional and retail investors” was a sufficient basis of expertise in market behaviour. -
Second Issue – Opinions not based on expertise
Mr Cruikshank also put to the court that Mr B’s “opinions were not wholly or substantially based on [his] specialist knowledge” as required by section 79 of the Evidence Act.  In particular, the Defendant took issue with the expert’s inclusion of a detailed index of all factors that he thought would affect the decision-making of Relevant Investors. He argued that such level of detail in stock analysis was only relevant to Mr B’s personal interpretation of stocks, whereas Relevant Investors would not approach stock analysis so technically.
On this point, the Court also disagreed with the Defendant.
In his report and in cross-examination, the expert maintained that such detail in stock analysis was common amongst all resources sector investors, especially where much larger sums of money were at stake (as they were here).  Mr B went on to say that 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 persuasive the way in which Mr B regularly outlined the connection between his evidence and his expertise in order to refute Counsel’s accusations that his report contained unrealistically complex analyses of stock trading behaviour. The court therefore found that Mr B’s opinions were based on his expertise to the extent that his pathway of analysis truly reflected those of people who traded stocks of a similar or relevant kind”.
Third issue – Range of inquiry too narrow
Mr Cruikshank finally questioned the reliability of Mr B’s 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 too.
Under cross-examination, Mr B 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 relied on the fundamentals framework). The Defendant hence failed to prove that Mr B’s scope of inquiry was too narrow. -
The Court accepted Mr B’s evidence and found that Big Star had breached its continuous disclosure requirements.
Justice Banks-Smith commented that Mr Cruikshank was not able to criticise the content of Mr B’s evidence, which reflected the materiality tests and reasoning processes used by the experts in Grant-Taylor v Babcock and ASIC v Vocation. Mr B had competently shown that the Purchaser Identity Information and the Cumulative Information satisfied the statutory materiality test. 
- Courts generally accept equities analysts to comment on issues of materiality. An expert opining 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 investors usually possesses sufficient expertise to provide evidence on continuing disclosure issues. Courts prefers a holistic rather than narrow approach to assessing requisite expertise.
- Whilst experts should not hesitate to take the Court through a detailed or technical pathway of reasoning, their approach should be justified by industry standards and clearly explained in their reports. The use of “detailed and accessible terms” is welcome in reports that require very sophisticated kinds of technical analysis.
- Experts should ensure that they have a high level of familiarity with the content of their reports. This is just one way for them to stand out whilst in the box – 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.
- Remind your expert to demonstrate that they are satisfying section 79 of the Evidence Act. Although the expert was specifically cross-examined on whether he had properly applied his area of expertise in his report, it is nonetheless important for experts to explain the logical connection between their expertise and their opinion, for instance, by referencing the professional sources of their assumptions about their industry and their practices in their report.
- Although the cost of an expert can be significant, the cost of not engaging an right expert witness can be far greater. As in Vocation, the Defendants struggled to refute effectively expert evidence without an expert witness to offer substantive opposing views on the other sides’s expert evidence. Where cases involve engagement with complex industry practices and standards, it is best practice to hire an experienced expert witness to present an opinion on the issues of fact, especially where the other side proposes to do so too.