16 April 2013
ASIC has received a number of similar letters from Storm investors with queries concerning the ASIC/CBA Settlement. ASIC understands that much of the content of these letters was provided to Storm investors by Levitt Robinson, the solicitors for the applicants in the Sherwood class action brought against CBA and Colonial First State Investments Limited.
On 16 April 2013, ASIC began sending responses to Storm investors addressing their queries.
An example of ASIC's response to Storm investors is as follows:
Storm Financial Limited ACN 064 804 691 (Receivers and Managers appointed) (in Liquidation) ("Storm") – ASIC's settlement with CBA
1. I refer to your letter to ASIC concerning the settlement (ASIC/CBA Settlement) reached between ASIC and the Commonwealth Bank of Australia (CBA) in the proceedings brought by ASIC against Storm and three banks (ASIC's Storm Proceedings). ASIC's Chairman has asked me to respond to your letter on his behalf.
2. I appreciate that much of the content of your letter was provided to you by Levitt Robinson, the solicitors for the applicants in the Sherwood class action against CBA and Colonial First State Investments Limited (Colonial), and that you have probably relied upon Levitt Robinson to ensure that the contents of the letter are accurate and reasonable.
3. I will address matters raised in your letter under the headings appearing below.
Adequacy of the ASIC/CBA Settlement
4. You have asked "Is ASIC prepared to...state that the ASIC Compensation Amount is most likely to exceed any sum which we might be awarded by the Court in our Class Action against the Bank?...[or] that the ASIC Compensation Amount is a better outcome than any negotiated settlement which our own lawyers, independently representing us and without any conflict of interest, could have – or might still be able to – negotiate on our behalf?"
5. ASIC engaged external forensic accountants to develop a compensation model to calculate losses suffered by Storm investors. The forensic accountants reviewed investor data held by Storm in its databases, as well as data obtained from banks and fund managers. The compensation model has calculated the estimated loss for each investor (or investor group, where two or more investors invested jointly in the Storm scheme) by calculating the profit or loss for each investment made, based upon the income and realisation proceeds received on the investment and the cost of financing or otherwise acquiring the investment.
6. Many Storm investors borrowed from more than one bank to invest in the Storm scheme. Consequently, for the purpose of seeking compensation from the banks, the ASIC compensation model has allocated each investor's loss between the banks that funded his or her investments in the Storm scheme. Broadly, an investor's loss is allocated to a bank in accordance with the proportion of an investor's total Storm-related borrowings that were provided by the bank. If an investor only borrowed from one bank to invest in the Storm scheme, all of the investor's loss is allocated to that bank. For a fuller description of the ASIC compensation model and the allocation of loss between banks, see questions 7 and 12 in the FAQ document in the ASIC/CBA Settlement section of ASIC's Storm-dedicated website, https://storm.asic.gov.au.
7. Using the ASIC compensation model, ASIC calculates that the total loss suffered by Storm investors who borrowed from CBA to invest in the Storm scheme to be approximately $478 million. That part of the total loss of $478 million that is allocated to CBA in accordance with the ASIC compensation model is approximately $373 million. 1
8. In around July 2009, CBA established the CBA Resolution Scheme (Resolution Scheme). Pursuant to (or in some cases prior to or outside) the Resolution Scheme, CBA reached a settlement with approximately 1,200 investors or investor groups who used loans from CBA to invest in the Storm scheme. CBA estimates that the compensation it provided to CBA customers under (or in some cases prior to or outside) its Resolution Scheme totalled approximately $132 million. CBA also provided further hardship assistance by means of interest waivers, reduced interest rates and flexible payment arrangements.
9. Under the ASIC/CBA Settlement, CBA has made available up to $136 million of additional compensation. The combined amount of $268 million available as compensation from CBA2 is approximately 72% of the amount of $373 million which represents the total loss of Storm investors that is allocated to CBA under the ASIC compensation model.
10. The amount of $136 million under the ASIC/CBA Settlement, when combined with the amount of $132 million paid under the earlier Resolution Scheme, is intended to ensure that each investor (or investor group) who takes part in the settlement will receive, at a minimum, compensation of approximately 55% of that part of their total Storm investment loss allocated to CBA under the ASIC compensation model. Because the basis upon which CBA paid compensation under its earlier Resolution Scheme was different from the basis of loss calculation under the ASIC compensation model, some Storm investors received compensation from CBA under its Resolution Scheme in excess (and in some cases, substantially in excess) of the 55% level described above. These investors will not receive any further compensation under the ASIC/CBA Settlement.
11. The assessment of prospects of success and the level of compensation that might be awarded in any litigation is often difficult. In any event, it is not appropriate for ASIC to comment on whether the compensation made available under the ASIC/CBA Settlement is likely to exceed any outcome that could be achieved in court, as ASIC's Storm Proceedings are continuing against Macquarie Bank Limited (Macquarie) and Bank of Queensland Limited and the Sherwood class action is continuing against CBA and Colonial. However, I can say that ASIC considers the ASIC/CBA Settlement to be a timely, fair and certain outcome for Storm investors who borrowed from CBA and that ASIC would not have agreed to a settlement unless it thought the compensation was appropriate.
12. In reaching a settlement with CBA, ASIC was very conscious of the benefit of Storm investors receiving compensation now rather than after a prolonged legal process that could include awaiting the trial judgment, appeals to the Full Court of the Federal Court and the High Court, and the assessment of loss by a court on an investor by investor basis. Such a process could take another three to four years.
Settlement between Macquarie and the Richards class action
13. I note that Levitt Robinson have, subject to Court approval, recently reached a settlement with Macquarie in the Richards class action (Richards/Macquarie Settlement).
14. According to documents posted on the Levitt Robinson website, Macquarie has agreed to pay a total of $82.5 million, inclusive of interest and costs, to settle the Richards class action. After deduction of legal and other costs, the amount available as compensation for Storm investors who borrowed from Macquarie appears to be approximately $72.7 million, although some interest will accrue on the settlement proceeds before distribution and that interest will also be distributed to Storm investors.
15. Using the ASIC compensation model, ASIC calculates that the total loss suffered by Storm investors who borrowed from Macquarie to invest in the Storm scheme to be approximately $340 million. That part of the total loss of $340 million that is allocated to Macquarie in accordance with the ASIC compensation model is approximately $278 million. In calculating these aggregate loss figures ASIC has not taken account of losses of excluded persons, as the figures given earlier in this letter in respect of the ASIC/CBA Settlement also do not take account of the losses of excluded persons. Excluded persons did not benefit from the ASIC/CBA Settlement. ASIC is not aware of any intention to exclude excluded persons from the Richards/Macquarie Settlement.3
16. The amount of $72.7 million available as compensation under the Richards/Macquarie Settlement is approximately 26% of the amount of $278 million which represents the total loss of Storm investors that is allocated to Macquarie under the ASIC compensation model. If the amount of $72.7 million were to be distributed to Storm investors in proportion to the losses suffered by those investors and allocated to Macquarie under the ASIC compensation model, each investor would receive compensation of approximately 26% of that part of their total loss allocated to Macquarie. 4
17. As noted above, under the ASIC/CBA Settlement, each Storm investor (or investor group) who takes part in the settlement will receive compensation of approximately 55% (and in some cases more than 55%) of that part of their total loss allocated to CBA under the ASIC compensation model.
18. I should note that the documents posted on the Levitt Robinson website indicate that it is not intended to distribute all the compensation from the Richards/Macquarie Settlement in proportion to the losses suffered by Storm investors. Rather, of the total sum of $72.7 million available for compensation, $28,875,000 will be available only to investors who contributed to the funding of the Richards class action, with the balance of approximately $43.8 million (plus accrued interest) being available to compensate all investors. This will mean that some investors will recover more than 26% of that part of their total loss allocated to Macquarie and some will recover less than 26% of that loss.
19. Of course, although some of the legal and evidentiary issues in ASIC's Storm Proceedings are similar to those in the Richards class action, the issues arising in each proceeding are not identical and there are doubtless various reasons why the settlement outcomes are materially different. In relation to your question about whether Levitt Robinson could have negotiated, or may still be able to negotiate, a better outcome with CBA than the ASIC/CBA Settlement, you may wish to ask Levitt Robinson about the differences in the legal claims against CBA and Macquarie that apparently cause them to regard the ASIC/CBA Settlement as inappropriate and the Richards/Macquarie settlement as appropriate.
Participation of Storm investors in negotiations
20. At the beginning of your letter, you say that the ASIC/CBA Settlement "is the product of negotiations in which neither I nor my legal representatives were invited to participate." You also ask why it was not possible for ASIC to consult or inform investors and their action groups concerning ASIC's negotiations with CBA before the settlement was reached.
21. ASIC brought proceedings against CBA in part so that ASIC could seek compensation for all investors who borrowed from CBA to invest in the Storm scheme and who made losses on their investments; this includes investors who had reached earlier settlements with CBA under its Resolution Scheme, investors who are members of the Sherwood class action and investors who have not settled with CBA and are not in the class action group.
22. It is common for discussions about settling litigation to take place on a confidential basis. The discussions that were held with CBA about a settlement were confidential. It was impractical for ASIC to invite more than 2000 Storm investors (or investor groups) who borrowed from CBA to participate in those confidential commercial discussions.
23. Although ASIC understands Levitt Robinson represent around 300 of the 2000 Storm investors (or investor groups) who borrowed from CBA, a large majority of investors who stood to benefit from ASIC's Storm Proceedings did not retain Levitt Robinson as their solicitors.
24. Because the settlement discussions that were held with CBA were confidential, ASIC is restricted as to what it can reveal about them. However, you may wish to ask Levitt Robinson whether it is accurate to say that they were not invited to participate in negotiations that preceded the ASIC/CBA Settlement.
25. Investors who have not already received compensation from CBA under its earlier Resolution Scheme (including members of the Sherwood class action group) are not bound to accept the compensation made available under the ASIC/CBA Settlement. They have the option either to:
- (a) accept the compensation offer under the ASIC/CBA Settlement and release CBA from Storm-related claims; or
- (b) reject the compensation offer and pursue such legal remedies as are open to them, which for some will include continuing participation in the Sherwood class action.
26. In your letter you say that ASIC "authorised the CBA to act as ASIC's agent to offer me the "ASIC Compensation Amount"". That is not correct. ASIC has not authorised CBA to act as its agent. Any offer that CBA makes to you is made on its own behalf, in exchange for ASIC bringing to a close its legal proceedings against CBA, pursuant to the ASIC/CBA Settlement.
27. You have also asked "Who was representing the Storm Borrowers' interests, if ASIC was being "independent" and "across the range of interests it is seeking to protect," which presumably included CBA's interests - while CBA was clearly acting solely in its own best interests? Essentially, the borrowers' interests were not independently represented at all in the negotiations or discussions between ASIC and CBA. ASIC was clearly conflicted"
28. ASIC rejects any allegation that it had a conflict of interests in the negotiations with CBA or that it was in any way seeking to protect CBA's interests in settling ASIC's Storm Proceedings with CBA.
29. As an independent government agency, ASIC has no private or self interest of its own. ASIC considers that it acted consistently with the public interest, and in particular in furtherance of the statutory objective of the confident and informed participation of investors and consumers in the financial system, in bringing ASIC's Storm Proceedings and in entering into the ASIC/CBA Settlement.
Transparency of ASIC data/calculations
30. At the beginning of your letter, you say that "There has been no transparency with respect to the data used in any loss calculation or the opportunity for my own lawyers to appoint their own forensic auditors, to determine what our total Storm-related losses and my individual losses actually were."
31. The ASIC compensation model and loss calculations relevant to an investor's compensation amount are shown in the attachments to the notification letter sent by CBA to investors in accordance with the ASIC/CBA Settlement. As set out in the notification letter, if an investor accepts the offer and provides CBA with a release (or if the investor has previously settled with CBA and provided it with a release), and the investor believes that his or her compensation has been calculated by ASIC using incorrect information, the investor may be eligible to participate in the compensation adjustment process described in the notification letter.
32. From September 2012 ASIC has set out a detailed explanation of the ASIC compensation model, including the sources of information used to calculate compensation, in the FAQ document in the ASIC/CBA Settlement section of ASIC's Storm-dedicated website, https://storm.asic.gov.au.
33. Further, prior to the ASIC/CBA Settlement ASIC explained to Levitt Robinson the way in which it calculates loss arising from Storm investments. In an article in the Townsville Bulletin entitled "Hope for Storm stricken" published on 18 February 2012 Stewart Levitt of Levitt Robinson is reported as saying "… ASIC was working with Levitt Robinson modelling potential damages claims ahead of court- ordered mediations due to occur with the Commonwealth and Macquarie banks...".
34. It is, and has always been, open to an investor to seek independent legal and financial advice with respect to the data or calculations relevant to his or her compensation amount.
Concern over ASIC's reference to CBA customers who borrowed to invest through Storm as "investors"
35. You have said that "it deeply concerns me that in ASIC's public statements concerning the ASIC compensation amount, ASIC refers to us as "the investors" rather than as "the borrowers"…It is sad when ASIC uses the language of the Bank to make me and other borrowers seem more sophisticated and hence, less the victims, that you know we were".
36. ASIC considers that referring to persons who borrowed to invest in the Storm scheme as "investors" is appropriate. ASIC does not consider that the term "investor" makes a person who borrowed to invest in the Storm scheme seem more sophisticated, or that the term "borrower" makes such a person seem less sophisticated.
37. In thinking about the appropriateness of the term "investor", you may wish to have regard to the following:
- (a) Levitt Robinson have referred to their clients in their Information Bulletins as investors. For example, see Information Bulletin No. 71 dated 28 March 2012, No. 72 dated 18 April 2012, No. 111 dated 28 February 2013, and No. 113 dated 1 March 2013;
- (b) SICAG (Storm Investors Consumer Action Group) refers to such people as "Investors" in its name; and
- (c) the courts have referred to such people as "investors".
38. Further up to date information on the ASIC/CBA Settlement, including in relation to some of the matters raised in your letter, is available on the ASIC/CBA Settlement section of ASIC's Storm-dedicated website, https://storm.asic.gov.au. If you have further questions about the ASIC/CBA Settlement, please contact ASIC by email at email@example.com or by telephone on 1300 300 630.
Chief Legal Officer
1. In calculating these aggregate loss figures ASIC has not taken account of losses of certain persons (referred to as excluded persons) who: (i) were closely associated with the design, implementation or promotion of the Storm investment model or (ii) invested in the Storm scheme jointly with a person of the type referred to in paragraph (i). For a fuller description of excluded persons, see question 11 in the FAQ document in the ASIC/CBA Settlement section of ASIC's Storm-dedicated website, https://storm.asic.gov.au. Excluded persons do not benefit from the ASIC/CBA Settlement.
2. Being $132 million under the earlier Resolution Scheme and $136 million under the ASIC/CBA Settlement.
3. In calculating the aggregate loss figures, ASIC has also excluded losses of Mr and Mrs Doyle, who opted out of the Richards class action and on whose behalf ASIC has brought proceedings against Macquarie and Bank of Queensland Limited. ASIC understands that three other Storm investors have opted out of the Richards class action, but it has not excluded any losses of those investors from the aggregate loss figures as it is not aware of the identity of those investors.
4. This calculation does not take account of the losses of excluded persons or of Mr and Mrs Doyle.