Two apparently successful negotiated prosecutions do not a successful strategy make. The outline of a flexing of agency discretion within the Australian Securities and Investments Commission (ASIC) has become apparent in recent settlements reached with Leighton Holdings and Commonwealth Bank of Australia. The former relates to breaches of continuous disclosure. The latter focuses on attempts to restrain aggressive but misleading advertising.
Taken together, enforcement action against mainstays of the corporate sector signals an ostensibly tougher approach to enforcement. It is tangible evidence of a recalibration in the use of enforceable undertakings first outlined last month. These note that they will only be used for serious infractions and where the negotiated remedy is more likely to lead to better regulatory outcomes that full court determination. Notwithstanding the argument put forward by ASIC that they “are one of our most flexible and effective remedies to improve and enforce compliance with the law,” efficacy depends on the contractual bargain. Here the evidence of effectiveness is less clear-cut.
The enforceable undertaking agreed by Leighton Holdings last Friday saw it accept a $300,000 fine for three individual breaches of continuous disclosure obligations. The fines related to the tardiness in reporting cumulative losses of $907 million in April 2011. According to ASIC, the parent group was aware of substantial losses in operations related to the Brisbane airport link corridor, cost overruns at a desalination plant in Victoria and a deterioration in the value of an infrastructural investment in Dubai, which was 45% owned by Leighton. These came to light as early as 18 March 2011. Leighton, however, did not request a trading halt pending restatement until 20 days later, on 7 April.
The ASIC Chairman, Greg Medcraft, argued the settlement is an “effective forward looking regulatory result, representing a commitment from Leighton regarding its continuous disclosure procedures”.
The commitment of the firm to the appointment of an external consultant, vetted by ASIC, appears to underline this more interventionist approach. The consultant is to issue periodic reports on the operation of the continuous disclosure compliance program. The commitment, however, is undercut by a press statement released by Leighton Holdings. The statement noted the firm “agreed to accept these infringement notices and pay the penalty as a way to conclude ASIC’s investigation and to avoid additional legal costs…They are not an admission of liability nor a finding of any breach of the law.”
Decoded, for Leighton the settlement appeared to have value insofar as it ended a distraction. Resolution allowed the firm “to move on from the events surrounding the earnings downgrade last year”. Note there is no apology. No regret; rather a reflection that resolution was a necessary cost of doing business.
The individual fines, although the maximum permitted for identified breaches, bear little resemblance to the economic losses claimed by investors involved in a putative class action over the disclosure failures. The failure to extract an admission of wrongdoing, which is a critical feature of the enforceable undertaking mechanism, does not help the class action. It does, however, call into question whether the terms were sufficiently stringent. The limits of intervention are even more pronunced in the CBA enforceable undertaking, where the bank agreed only not to rely on consent forms to raise credit levels and write to individual consumers directly impacted alerting them to the misleading conduct.
The cases highlight a recurrent problem associated with the exercise of discretion: what purpose does it seek to achieve and on what grounds should this be legitimated? This debate has been much more pronounced in the United States, precisely because judicial unease with application of discretion has been so explicitly stated.
Last November, Judge Jed Rakoff refused to sign off on a negotiated prosecution between the Securities and Exchange Commission and Citigroup. The bank was, he argued a “recidivist” offender. It had, he claimed systematically transacted around the enforcement agenda pursued by the SEC.
This course of action triggered the onset of a full trial, scheduled for hearing this coming July. It was justified on the basis that the SEC had failed to include an admission of wrongdoing. This, he argued was “neither reasonable, nor fair, nor in the public interest”. This ruling reinforced an earlier warning in a separate case involving Bank of America in 2009. Then Judge Rakoff had dismissed the strategy as “a contrivance designed to provide the SEC with the facade of enforcement and the management of the bank with a quick resolution of an embarrassing inquiry”.
The SEC appealed the Citigroup decision on the grounds that it presented an additional test that undercut agency discretion. The Second Circuit Court of Appeal appeared to accept the argument last week. It criticised the lower court for its lack of “deference to the SEC’s judgment on wholly discretionary matters of policy.”
This, it argued, represented potential judicial overreach. “It is not the proper function of federal courts to dictate policy to executive administrative agencies,” the Second Circuit opined. It delayed the full Citigroup trial until September at the earliest and spares, at least for the moment, the embarrassment of the SEC.
It does not however, resolve the question of what should be the appropriate use of discretion. If a strategy does not effect change, it risks losing ongoing authority and leigitimacy. The deployment of the enforceable undertaking raises similar unresolved issues here in Australia.
ASIC may have secured a headline-grabbing initiative in its prosecution of Leighton. Indeed, Greg Medcraft has explicitly stated that low fine threshold is problematic. Diplomatically he notes that any strengthening the penalty regime is a matter for Canberra.
Absent an exponential increase in penalties, proportionate with the infraction and, in the shorter term, a much more aggressive bargaining stance, the danger of lack of legitimacy is just as acute for ASIC as it is for the SEC.
As things stand, the jury remains out on whether ASIC’s apparently more muscular strategy represents a seismic shift or should more accurately be seen as an exercise in regulatory posturing. The terms of the CBA undertaking are so low as to make it an exercise in symbolism.
The terms extracted and grudging acceptance by Leighton do little to give confidence that the case will have ongoing demonstration effect. That is much more likely to occur in the event of a successful class action, where the corporate losses could reach multiple millions. The failure to attract wrongdoing staves off that day of reckoning. It also makes ascertaining how to navigate the appropriate channel between reliance on private and public enforcment exceptionally difficult. We remain in uncharted and potentially treacherous waters with regulatory enforcement strategies providing little comfort that they offer more effective restraint.
This article also appears on the UNSW’s Centre for Law, Markets and Regulation portal, which was launched last week. Republished with permission.