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ASIC slammed in court loss against Fortescue Metals

THE corporate regulator has suffered a third humiliating defeat, with the Federal Court yesterday dismissing its case against mining company Fortescue Metals Group and its chief executive, Andrew “Twiggy” Forrest.

The Australian Securities & Investments Commission was heavily criticised by Federal Court judge John Gilmour, who said the corporate watchdog did not have the proof to back up its serious allegations that Mr Forrest was deliberately dishonest and misled the market in relation to 2004 market releases outlining deals made with several Chinese companies about a planned railway in the Pilbara.

“It is important that allegations of dishonesty should be made only where there is a reasonable evidentiary basis for them,” Justice Gilmour said. “It is my opinion that, on the totality of the evidence available to ASIC, there was no such basis in this case.”

Fortescue had faced a $6.6 million fine, and Mr Forrest a $4.4m penalty and the prospect of being banned from being a company director.

Mr Forrest was briefly Australia’s richest person when his stake in Fortescue reached a value of $9.41 billion in May last year.

ASIC’s Fortescue loss follows the corporate regulator’s defeat in last month’s $92m One.Tel case involving One.Tel founder Jodee Rich, and the rejection of its high-profile case against Andrew Lindberg, the former managing director of the Australian Wheat Board. ASIC is looking at a $16m legal bill in the One.Tel case, although it recently announced it would appeal against the decision.

ASIC will again be forced to pay legal costs following yesterday’s court decision. The legal bill for Fortescue and Mr Forrest will be several million dollars. This is in addition to ASIC’s own legal costs, and also those of external law firm Mallesons, the firm to which it outsourced the Fortescue litigation.

A Fortescue spokesman said yesterday “justice has had its day”, but Mr Forrest’s barrister, Allan Myers QC, was more descriptive during the hearings when he described ASIC’s case as “like a big souffle”.

“There’s a little bit of egg white and a little bit of batter and it’s all whipped up with a lot of hot air to make it bigger than it is,” Mr Myers said.

The court action, launched by ASIC in 2006, related to two releases Fortescue made to the stockmarket, in August and November 2004. In the August announcement, the company said it had “binding contracts” with China Railway Engineering Corporation to build and finance a railway from one of its tenements to Port Hedland in Western Australia. The second announcement said that two Chinese companies were going to build and finance further infrastructure as part of its $1.85bn Pilbara iron ore project.

ASIC alleged 22 contraventions of the Corporations Act by Fortescue and Mr Forrest, including that Fortescue engaged in misleading and deceptive conduct and failed to comply with continuous disclosure obligations by not correcting the information in the announcements.

Mr Forrest was said to have breached his duty as a director to exercise care and diligence by not ensuring Fortescue complied with its obligations.

Justice Gilmour yesterday dismissed all 22 of ASIC’s allegations and said he was only made aware of very important information on the last day of the trial — by Mr Forrest’s barrister Mr Myers.

ASIC had claimed Fortescue had no “genuine and/or reasonable basis for making its claims that the framework agreements were binding” and that there was no evidence Fortescue had obtained any legal advice.

Justice Gilmour said the Fortescue board did have legal advice backing up its position. Emails and minutes of a board meeting referred to the legal advice, but ASIC had not told the judge about this vital information.

“I have, based on this evidence, no hesitation in concluding that FMG and its board, including Forrest, honestly held the opinion that the framework agreements were legally binding in the way described in the disclosures,” the judge said.

“I do not consider there to have been a reasonable basis for ASIC to contend that they were dishonest in this respect.”

The judge also made specific reference to the serious nature of the allegations made by ASIC, saying there was no basis for ASIC’s claims of dishonest behaviour.

Justice Gilmour said allegations of dishonesty “made by the corporate regulator may injure the business of the particular company and will tend to adversely affect the reputations of those against whom the allegations are made”.

“Unless the allegations are withdrawn, the director(s) accused have to wait until trial before these can be tested,” he said. “Meanwhile, they have to live and work in their shadow. In this case, the proceedings have been on foot for more than three years.”

Justice Gilmour also noted that none of the Chinese companies or government authorities had made any corrections to the announcements made by Fortescue.

Mr Forrest was not in court yesterday but was last night celebrating with his family. His lawyer James Scovell said he had told Mr Forrest the good news after the judgment was delivered.

“He was extremely happy, as you can imagine,” Mr Scovell said.

Fortescue chairman Herb Elliott said “the outcome of the ASIC case clearly vindicates the company’s actions in the strong defence of its position”.

ASIC issued a statement saying it was assessing whether or not to appeal against the decision…read more at The Australian