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06 May 2003
In Reiffel v ACN 075 839 226 Ltd the Federal Court found an expert liable
for misleading and deceptive statements in a report contained in a prospectus
for a managed investment scheme.
The action was brought by the applicant as part of a representative proceeding
by investors who acquired interests in the scheme pursuant to applications made
under the prospectus. To date, the use by investors of such proceedings to pursue
claims of this nature has been rare in Australia.
Claims for compensation for loss suffered as a result of the misleading statements
were brought under both Section 52 of the Trade Practices Act 1974 and Sections
995(2) and 1005 of the former Corporations Law. The court's decision was given
on the basis of the latter claim only, due to a question (which was not decided
by the court) as to whether the limitation period for the former action had
Had the facts of the case arisen today, action against the expert would have been
available under the Corporations Act alone, as legislative changes in the past
two years have meant that Section 52 of the Trade Practices Act does not apply
to conduct in relation to the supply of financial services.
The case concerned a prospectus issued in 1997 for a scheme which enabled owners
of apartments in the Goldsbrough Building in Darling Harbour, Sydney, to participate
in an apartment hotel business. All revenues and expenses generated in respect
of participating apartments were to be pooled, and owners would share (on an
agreed basis) the net income (or loss) generated by the business.
The prospectus contained a report by Pannell Kerr Forster Consulting Australia
Pty Ltd (the second respondent in the action), described as an "independent
industry expert's report". The report was commissioned by the directors
of the scheme's promoter (the first respondent in the action), who sought the
expert opinion in relation to certain of the promoter's financial projections
for the scheme which were included in the prospectus.
The expert's report contained a number of statements of opinion, including (i) that nothing had come to the expert's attention which caused it to believe that the assumptions on which the promoter's financial projections were based did not provide a reasonable basis for such projections, or that those forecasts were not reasonable (a negative assurance), and (ii) that the assumptions used in the sensitivity analysis undertaken in regard to the financial projections were reasonable (a positive opinion).
Justice Gyles remarked that "the operation of the scheme can only be described
as disastrous". Its financial results never approached the projected figures.
The trust through which the scheme was operated ceased trading and, in 1999,
an order was made for it to be wound up.
Prior to investing in the scheme Reiffel (the applicant) had co-purchased an
apartment in the Goldsborough Building, which she rented out, using the rental
income to pay expenses (including mortgage payments) relating to her investment
in the apartment. On investing in the scheme, the apartment's rental was managed
as part of the scheme. On the collapse of the scheme, Reiffel took possession
of the apartment and re-let it. She brought an action to recover the loss of
income during the period the apartment was subject to the scheme and for certain
Evidence demonstrated that Pannell Kerr had disagreed with the methodology
used by the promoter in deriving two key variables (room rental charges and
occupancy rates) used to produce its financial forecasts. The expert adopted
an entirely different methodology to derive its forecasts. Pannell Kerr's methodology
produced similar results to the promoter's and, on that basis, it concluded
that the promoter's financial forecasts were within a reasonable range. However,
in its report Pannell Kerr failed to disclose its disagreement with the promoter's
methodology and to explain what it had done (by way of independent investigation
and methodology) in order to form its opinion. By omitting that information,
the expert's expression of opinion as to the reasonableness of the promoter's
financial forecasts was found to be misleading. In other words, Pannell Kerr
did not hold the opinions it expressed in the manner those opinions would be
understood by a reader of the prospectus (namely, that they related to the promoter's
forecasts rather than an entirely separate forecasting exercise undertaken by
A second aspect of the case concerned the expert's opinion on the promoter's
sensitivity analysis, which demonstrated the effect on the promoter's financial
forecasts of variations of plus or minus 5% in the two key variables. Pannell
Kerr's opinion about the sensitivity analysis was found to be misleading because
it conveyed the impression that the upper and lower variations were reasonable
estimates of best and worst-case scenarios, whereas it was established that the
expert had not considered the reasonableness or otherwise of those variations.
Rather, Pannell Kerr had merely verified the arithmetic calculations involved
in determining the impact of those variations on the financial forecasts. It
followed that the expert had no reasonable basis for the positive opinion it
expressed in regard to the promoter's sensitivity analysis.
The expert asserted that, because its opinion on the reasonableness of the
promoter's forecasts was expressed as a negative assurance, it would have no
liability to the applicant unless the applicant proved the expert did not, in
fact, hold the stated opinion. In effect, that would require Reiffel to establish
a fraud case against Pannell Kerr.
The judge rejected that contention. He cited various authorities for the proposition
that, in determining liability for misleading and deceptive conduct, the court
must consider the effect of the defendant's conduct on the plaintiff (ie,
the impression the expert report conveys to readers of the prospectus) as
distinct from the state of mind of the defendant when engaged in the conduct.
The Reiffel Case is further authority for the proposition that an independent
expert impliedly warrants that it will exercise the care, skill and judgment
appropriate to the field in which it claims expertise in forming and expressing
its opinion, but does not warrant the correctness of that opinion.
On the facts, the court did not find the expert liable for failing to use such
care, skill and judgment. However, evidence indicated that the expert was less
diligent than may be considered appropriate in maintaining organized records
of its work in connection with the report.
There was no doubt that the applicant's loss resulted from her investment in
In deciding whether the damage suffered by the applicant was caused by the
expert's misleading conduct, the judge considered (i) whether the applicant
had read the prospectus, including the expert's report, and (ii) whether reading
the unqualified expert's report influenced the applicant in favour of, and contributed
to her decision to make, her investment in the scheme.
A positive finding was made on both matters.
For the expert to be liable to compensate the applicant for her loss, it was
not necessary for its misleading conduct to be the sole or dominant cause of
the applicant's decision to invest - it was sufficient that such conduct materially
contributed to her decision.
Pannell Kerr sought to rely on a statutory defence available under the former
Corporations Law. The particular defence is available in any civil proceeding
brought under that statute against a variety of persons (including experts)
for negligence, default, breach of trust or breach of duty, where it appears
to the court that the person ought fairly to be excused.
Factors which the judge enumerated as militating against use of this defence
in this case included that the report was the result of a professional assignment
undertaken for reward by the expert, which gave its express consent to the use
of its report in the prospectus. The judge also found public policy considerations relevant. Acceptance of responsibility by an expert for the opinions it expresses in a prospectus
is an important aspect of investor protection and only in rare cases will it
be appropriate for a court to relieve an expert from liability. This was not
such a case.
While the decision in the Rieffel Case does not make new law, it is
a reminder of a number of important considerations for the experts whose opinions
are sought in connection with fundraising documents:
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