Eric Preston Pty Ltd v Euroz Securities Limited [2009] FCA 213

FEDERAL COURT OF AUSTRALIA

Eric Preston Pty Ltd v Euroz Securities Limited [2009] FCA 213

ERIC PRESTON PTY LTD (ACN 008 753 348) v EUROZ SECURITIES LIMITED (ACN 089 314 983); EUROZ SECURITIES LIMITED (ACN 089 314 983) v ERIC PRESTON PTY LTD (ACN 008 753 348)

VID 356 of 2008

SIOPIS J

10 MARCH 2009

PERTH

IN THE FEDERAL COURT OF AUSTRALIA

victoria DISTRICT REGISTRY VID 356 of 2008

BETWEEN: ERIC PRESTON PTY LTD (ACN 008 753 348)

Applicant

AND: EUROZ SECURITIES LIMITED (ACN 089 314 983)

Respondent

EUROZ SECURITIES LIMITED (ACN 089 314 983)

Cross‑Claimant

ERIC PRESTON PTY LTD (ACN 008 753 348)

Cross‑Respondent

JUDGE: SIOPIS J

DATE OF ORDER: 10 MARCH 2009

WHERE MADE: PERTH

THE COURT ORDERS THAT:

1. Paragraphs 74, 78‑90 and 106‑111 of the report of Mr Russell Allan McKimm dated 16 December 2008 are struck out. 2. The last sentence of para 16, and paras 17, 19 and 20 of the supplementary statement of Mr Russell Allan McKimm dated 27 February 2009 are struck out. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using eSearch on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA

victoria DISTRICT REGISTRY VID 356 of 2008

BETWEEN: ERIC PRESTON PTY LTD (ACN 008 753 348)

Applicant

AND: EUROZ SECURITIES LIMITED (ACN 089 314 983)

Respondent

EUROZ SECURITIES LIMITED (acn 089 314 983)

Cross‑Claimant

ERIC PREStON PTY LTD (acn 008 753 348)

Cross‑Respondent

JUDGE: SIOPIS J

DATE: 10 MARCH 2009

PLACE: PERTH

REASONS FOR JUDGMENT 1 The respondent, a company providing stockbroking services, has objected to the admissibility of the expert evidence of Mr Russell Allan McKimm, a stockbroker of 30 years standing. The applicant intends to lead the evidence of Mr McKimm in a trial due to commence on Monday, 16 March 2009. Among the allegations made by the applicant is an allegation that the respondent breached its duty of care owed to the applicant, a client of the respondent. The applicant intends to rely on the expert evidence of Mr McKimm in support of this claim. Mr McKimm has provided two reports ‑ the first is dated 16 December 2008, and the second, called a supplementary statement, is dated 27 February 2009. 2 The main objection taken to the admissibility of the reports is that the opinions expressed by Mr McKimm were not wholly or substantially based upon the expert's specialised knowledge. More particularly, what was said was that many of the opinions expressed were bald assertions and did not disclose a reasoned exposition of what a reasonable and competent adviser would have done in the circumstances. 3 In the case of the Australian Securities and Investments Commission v Vines (2003) 48 ACSR 291 (Vines) Austin J has, with respect, very helpfully collected the authorities and set out a number of propositions to be derived therefrom, relating to the admissibility of expert evidence relating to professional standards. 4 In considering the respondent's objections, the following propositions referred to by Austin J in Vines are particularly pertinent to the issues in this case. First, a professional expert may give "evidence about the content of general practices of professionals in his or her field, or to put it another way, evidence about what professionals generally do in stated circumstances". Secondly, a professional may "go beyond evidence of the content of general practices, by expressing an opinion about the practice of competent and careful professionals in specified circumstances which are recurring or typical". Thirdly, expert evidence is admissible as to what "a reasonably competent and careful [professional] would or should do in precisely specified circumstances". This would include evidence of what "in stated circumstances which are out of the ordinary and not amenable to observations about a developed practice, a competent and careful professional would be expected to do". Austin J referred to the case of Rabelais Pty Ltd v Cameron [1993] ANZ Conv R 457 (Rabelais) as authority in support of this proposition. Fourthly, evidence of what the expert would do himself or herself in stated circumstances is inadmissible. Fifthly, when considering objections to expert witnesses in limine on the grounds that the opinion is not based wholly or substantially based on the expert's specialised knowledge, the test is whether the court is satisfied on a balance of probabilities that the opinion is based wholly or substantially on specialist knowledge. 5 In paras 42‑64 of Mr McKimm's first report, Mr McKimm considers the following question: What advice (if any) should a reasonable and prudent securities adviser give in relation to the consideration by or the taking up of by a client of a conventional margin loan facility of the type offered by Commsec, Leveraged Equities Ltd etc? 6 In paras 8‑10 of his supplementary statement, Mr McKimm comments further on this question and relates his opinion to the facts contained in a number of affidavits which have been filed in Court. 7 As mentioned, the respondent took objection to a number of paragraphs of the reports on the grounds that the views stated were bald assertions and not admissible by being demonstrably based on specialised knowledge. Thus, the respondent referred specifically to para 42 which states as follows: In my opinion if the client has not used a margin lending facility before it is very important to get the client to understand the differences between a traditional mortgage loan and a margin lending loan. 8 There are a number of other paragraphs in that part of the report in which the expert proffers his opinion in terms which do not refer to what a reasonable and prudent securities adviser would do. There are also paragraphs where the expert does refer specifically to what a reasonable and prudent adviser should do. When the "bare assertion" paragraphs are read in context and taken as a whole, I am of the view that those paragraphs, albeit poorly expressed, are related to, and form part of, the expert's rationale for his view of what a reasonable and prudent securities adviser should do. The same reasoning applies in relation to the opinions expressed by the expert at paras 65‑76, 91‑96 and 97‑105 of the first report, which are referred to below. 9 Accordingly, I am of the view that the evidence in paras 42‑64 is admissible as being addressed to the practice of a reasonable and prudent adviser and based on specialised knowledge of an experienced stockbroker. 10 As to para 8 of the supplementary statement, the expert opines that a reasonable and prudent stockbroker would have explained to Mr Drummond the difference between margin lending arrangements and a traditional mortgage loan. It is apparent enough that this opinion is based upon the views expressed on this issue in the first report and, in my view, is admissible. 11 As to para 9 of the supplementary statement, the final sentence expresses an opinion without reference to the standards of a reasonable and prudent adviser. However, it appears that this relates back to para 54 of the first report which is expressed by reference to those standards. In my view, therefore, the sentence and the rest of the paragraph is admissible. 12 In paras 65‑76 of the first report, Mr McKimm addresses the question of: What advice (if any) should a reasonable and prudent securities adviser give to a client contemplating moving from a conventional margin loan to a share lending margin loan of the type offered by Tricom, Opes Prime etc? 13 In para 77, the expert refers to the position of an adviser receiving a "trail commission" from the securities margin lender. 14 In paras 11‑13 of the supplementary statement, the expert identifies certain assumptions made in expressing the opinion in paras 65‑76 of the first report. The expert then applies the standards of a reasonable and prudent stockbroker to the assumed circumstances. 15 In para 14 of the supplementary statement, the expert states that on the assumptions made, Mr Caldow's conduct in failing to disclose trading commissions fell short of acceptable industry standards. 16 In my view, in paras 65‑76 of the first report, the expert addresses the question posed by reference to what a reasonable and prudent adviser should do in the circumstances and states his reasons for that view. The expert is a stockbroker of 30 years standing who has held senior management positions and positions on industry bodies and continues to advise clients. In my view, these paragraphs are admissible. 17 Further, the application of that opinion to the assumptions made in paras 11‑13 of the supplementary statement is made by reference to the standards of a reasonable and prudent adviser. The expert's reasons for holding the views expressed by way of the "bare assertion" in the opening sentence of para 13, are set out in the last sentence of that paragraph, by reference to the standards of a reasonable and prudent adviser. I am satisfied that the opinions expressed in these paragraphs are based on the specialist knowledge of the expert and are admissible. 18 I note that in para 74 of the first report, the expert witness purports impermissibly to give evidence of a fact, namely, that the shares in question were transferred into the ownership of a nominee company, "which in the case of Opes Prime, was ANZ Nominees". I strike out para 74. 19 As to the opinions expressed in para 77 of the first report and para 14 of the supplementary statement, as to trailing commissions, I am satisfied that when the two paragraphs are read together, the opinions are based upon the witness's specialist knowledge. The witness does not identify the source of the industry standards to which he refers, but I am satisfied, at this stage, that a witness of 30 years standing in the stockbroking industry occupying the positions Mr McKimm has occupied, would have the specialist knowledge of those standards to provide the opinion expressed. 20 In paras 78‑90, the witness addresses the following question: What advice (if any) should a reasonable and prudent securities adviser give to a client considering a conventional margin loan or a securities lending margin loan in relation to the risks associated with such loans? 21 In these paragraphs, the witness does not purport to address the question by reference to the advice that a reasonable and prudent securities adviser should give. Rather, the witness only identifies a number of risks and refers only to his opinion. In my view, the witness has not answered that question by reference to the standard of a reasonable and prudent securities adviser. Those paragraphs should, accordingly, be struck out. 22 I note that in para 87, the witness again impermissibly purports to give evidence of fact as to the transfer of the shares to "ANZ Nominees". The paragraph should be struck out on that ground. 23 In paras 91‑96 of the first report, the expert addresses the question of: What advice (if any) should a reasonable and prudent securities adviser give to a client contemplating using a conventional margin loan or a securities lending margin loan for acquisition of or trading in stocks in the low market capitalisation/speculative mining sector? 24 In these paragraphs, the witness addresses the question by reference to the standard of a reasonable and prudent securities adviser and gives reasons in support of his view. I am satisfied that the opinions expressed are based on the specialist knowledge of the witness. As previously mentioned, the witness has more than 30 years experience as a stockbroker and he has given his reasons for his view. 25 In paras 97‑105 of the first report, the expert addresses the following question: What advice (if any) should a reasonable and prudent securities adviser give to a client with a securities lending margin loan should the securities adviser first become aware during the course of the loan of the difference between a conventional margin loan and a securities lending margin loan in circumstances where the securities adviser believes the client may not be aware of the difference between such products? 26 The expert has addressed the question by reference to the standard of a reasonable and prudent adviser. Further, the expert gives reasons why a reasonable and prudent securities adviser should act in the manner deposed to. In my view, an expert witness is able to give evidence of this kind on the basis of the principle established in Rabelais. Further, the expert has 30 years experience in the stockbroking industry and has given reasons for his view. I am satisfied, at this stage, that the opinion is based upon the expert's specialist knowledge. 27 In paras 106‑111 of the first report, the witness addresses questions as to what advice the respondent should have given the applicant. The answers given by the expert witness are not given by reference to the standards of a reasonable and prudent securities adviser. Accordingly, paras 106‑111 of the first report should be struck out. 28 In paras 15‑21 of the supplementary statement, the witness addresses the question of "What Euroz should have done on becoming aware that the OP facility was securities lending". The expert says that he has read a number of affidavits and relates his evidence to what he has learned from the affidavits. However, in a number of cases, the expert has expressed his own opinion as to what should have been done rather than what a reasonable and prudent securities adviser would have done. Accordingly, the last sentence of para 16 and the whole of paras 17, 19 and 20 are struck out. 29 In any event, in para 19 the witness purports to give evidence of fact. This is an additional ground of inadmissibility. I certify that the preceding twenty‑nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis.