Reported Decision : (1999) 33 ACSR 307 New South Wales Supreme Court CITATION : Leadenhall Pty Ltd v Peptech Ltd [1999] NSWSC 1180 CURRENT JURISDICTION : Equity Division Commercial List FILE NUMBER(S) : 50080/99 HEARING DATE(S) : 21.10.1999, 22.10.1999, 27.10.1999, 28.10.1999, 29.10.1999, 1.11.1999, 2.11.1999 JUDGMENT DATE : 3 December 1999 PARTIES : Leadenhall Australia Ltd & Advent Investors Pty Ltd & Noble Investments Pty Ltd v Peptech Ltd JUDGMENT OF : Hunter J COUNSEL : Plaintiff: Mr D J Hammerschlag Mr V F Kerr Defendant: Mr J B Simpkins SOLICITORS : Plaintiff: Aleco Vrisakis Defendant: Clayton Utz CATCHWORDS : Misleading conduct - Trade Practices Act 1974 (Cth); s 1005 Corporations Law; s 68 Fair Trading Act 1987; Contract to subscribe for shares and the granting of options in listed corporation; Body of shares in corporation subject to restriction agreements under ch 9 of Listing Rules of Australian Stock Exchange; Existence of shares not known to subscriber of shares; Annual and half yearly reports of corporation omitted references to restricted shares; Wrongly described all of corporation's issued shares as quoted shares; Subscriber misled by conduct of corporation; Whether insider trading; s 1002G(2) Corporations Law; Damages; no causation nexus between misleading conduct and subscriber's losses. Corporations Law ACTS CITED : Trade Practices Act 1974 (Cth) Fair Trading Act 1987 (NSW) Potts v Miller (1940) 64 CLR 282 Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 Mister Figgins Pty Ltd v Centrepoint Freeholds Pty Ltd (1981) 36 ALR 23 Gould v Vaggelas (1985) 157 CLR 215 Neilsen v Hempston Holdings Pty Ltd (1986) 65 ALR 302 CASES CITED : Trade Practices Commission v Collings (1996) 142 ALR 43 Collings Construction v Australian Competition & Consumer Commission (1998) 43 NSWLR 131 Marks v GIO Aust Holdings (1998) 73 ALJR 12 March v Stramare (E. & M.H) Pty Ltd (1991) 171 CLR 506 Medlin v State Government Insurance Commission (1995) 182 CLR 1 Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) ATPR 40-822 DECISION : Summons dismissed. Plaintiffs ordered to pay defendant's costs. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST HUNTER J 3 DECEMBER 1999 50080/99 LEADENHALL AUSTRALIA LIMITED & ADVENT INVESTORS PTY LIMITED & NOBLE INVESTMENTS PTY LIMITED v PEPTECH LIMITED REASONS FOR JUDGMENT 1 Leadenhall Australia Limited (Leadenhall), Advent Investors Pty Ltd (Advent) and Noble Investments Pty Ltd (Noble), the plaintiffs, are related corporations which may be regarded as being under the control of Timothy Owen Lebbon (Lebbon) who is a director of each. In these proceedings the plaintiffs seek damages pursuant to section 1005 of the Corporations Law; section 82 of the Trade Practices Act 1974 (Cth) and section 68 of the Fair Trading Act 1987. 2 The allegations central to each, in substance, are the same, namely of misleading conduct by Peptech Limited (Peptech) in relation to the decision of Leadenhall to enter into agreements with Peptech for the allotment to Leadenhall of shares in Peptech and the granting to Leadenhall of options to subscribe for shares in Peptech. 3 Under the first agreement made on 31 July 1997 (the allotment agreement) Leadenhall agreed to subscribe for 5,254,542 shares at an issue price of 62 cents and Peptech agreed to allot those shares and to grant options to Leadenhall to acquire an equal number of shares at an exercise price 62 cents and a further 1,313,635 shares at an exercise price of $1.00. The acquisition price of the shares was payable as to $1,000,000 by 5 August 1997 and, as to the balance of $2,257,816, by 1 September 1997. The options were exercisable up to 25 June 2002, with provision for adjustment of the exercise price by a formula designed to protect against dilution of Peptech's issued shares during the first three years of the option period. 4 Leadenhall did not meet its obligations to make timely payments under the allotment agreement, and there resulted a further agreement between Peptech and Leadenhall of 25 September 1997 (the substitution agreement) under which the allotment agreement was terminated and Peptech agreed to allot to Leadenhall 1,612,903 shares in consideration of a payment of $1,000,000 which Leadenhall had made under the allotment agreement. In addition, Peptech granted Leadenhall 1,612,903 options at an exercise price of 62 cents and 403,225 options at an exercise price of $1.00 as the same terms and conditions as the allotment agreement. 5 Under the allotment agreement Peptech was to pay Leadenhall "the sum of $250,000.00 by way of commission….in consideration of (Leadenhall) subscribing and procuring subscriptions for [the subject] Shares". Under the substitution agreement that entitlement to commission was waived and Leadenhall and Peptech granted mutual releases in the following terms: "4. Leadenhall releases Peptech from any claims or causes of action which it has or might otherwise have had against Peptech in respect of the allotment agreement or anything in any way relating to that agreement. 5. Peptech releases Leadenhall from any claims or causes of action which it has or might otherwise have had against Leadenhall in respect of the allotment agreement or anything in any way relating to that agreement." 6 It was acknowledged that the substitution agreement was by way of an "irrevocable and unconditional agreement of Leadenhall to terminate the allotment agreement". Leadenhall contends that it entered into the substitution agreement on a 'take it or leave it' stance of Peptech and while Leadenhall continued to be influenced by the misleading conduct of Peptech. 7 The case against Peptech is attractive in its simplicity. The allegations are that, in contravention of the listing rules (the listing rules) of Australian Stock Exchange Limited (the ASX), Peptech, in its Annual Report for the year ended 30 September 1996 (the 96 report) failed to disclose that some 14,976,825 of its securities were restricted securities (the restricted shares) within the meaning of the listing rules and failed to disclose the terms of those restrictions: that in its half yearly report for the period ended 31 March 1997 (the half yearly report) Peptech incorrectly reported that there were 134,159,197 ordinary shares issued and the same number quoted, whereas 14,976,825 of those securities were restricted shares and not capable of being quoted: that, in negotiations with Leadenhall, Peptech failed to disclose that certain of those restricted shareholders proposed to sell those shares when released from escrow in August-September 1997 and that the chief executive officer of Peptech proposed to facilitate those sales (the misleading conduct). 8 There is a related cause of action based upon s1002G(1) of the Corporations Law (the insider trading claim). The insider trading claim pursuant to s1005 of the Corporations Law seeks damages for misleading conduct by Peptech in failing to disclose to Leadenhall information which fell within the ambit of Division 2A Pt 7.11 of Ch 7 of the Corporations Law: Peptech being an insider within the meaning of s 1002G(1). The insider information is said to be: (a) the existence and terms of the restrictions of the restricted shares; (b) instructions given on behalf of Peptech to its solicitor in relation to the manner in which the restricted shares would come out of escrow; and (c) the likelihood that certain shares in which Dr Roger Aston (Aston), a director and chief executive officer of Peptech, held a beneficial interest, would be sold upon those restricted shares coming out of escrow. In general terms those securities could not be traded under various restriction agreements prior to, respectively, 29, 30 August, 2,3,3,4,6 September 1997. 9 It is the plaintiffs' case that, on 25 September 1997, Advent resolved to acquire from Leadenhall the beneficial interest in the options, the subject of the substitution agreement, and was influenced in acquiring that interest by Peptech's misleading conduct: further, that, on 25 September 1997, Noble resolved to acquire 900,000 of the shares allotted to Leadenhall under the substitution agreement at an exercise price of 46 cents per share and that it, also, was influenced in acquiring the beneficial interest in those shares by Peptech's misleading conduct. 10 The dates upon which the restricted shares were to come out of escrow gained added significance from the terms of Leadenhall's agreement (the on-sale) with an un-named Western Australian investor (the on-sale investor). That was an agreement entered into about the same time as the allotment agreement and provided for the investment by the on-sale investor of $1,000,000 in the acquisition from Leadenhall of Peptech shares. The number of shares to be acquired was determined by the acquisition price which was the lesser of Leadenhall's acquisition price of 62 cents under the allotment agreement, or the average share price for the period 1 September - 5 September inclusive. There were mutual undertakings by the on-sale investor and Leadenhall not to trade on the stock exchange any shares in Peptech in that last mentioned period. No mention was made, either in the on-sale agreement or the allotment agreement, of the fact that some 14,000,000 shares in Peptech would be coming out of escrow in that period. 11 The restricted shares were the result of an issue of 14,976,825 ordinary shares in Peptech to certain shareholders in Peptech (UK) Limited (Peptech UK), as part of the acquisition by Peptech of the whole of the issued shares in Peptech (UK). The Peptech UK transaction was disclosed in the 96 report without any reference to the attendant embargo on trading in the restricted shares imposed pursuant to the listing rules. The nature of the transaction between the Peptech (UK) shareholders and Peptech was such as to bring the Peptech shares issued to the Peptech (UK) shareholders within the definition of restricted securities within the meaning of Ch 19 of the listing rules. Pursuant to Ch 9 of the listing rules, restriction agreements were entered into precluding any dealings in those restricted shares up to the times above mentioned. 12 Reginald Arthur Charles Keene (Keene) was called in the plaintiffs' case to give expert opinion of the likely market effect of the restricted shares coming out of escrow in August / September 1997. He is a private client adviser with Credit Suisse First Boston Australia Equities Private Limited. He has been a stockbroker for over 30 years. He was a director and managing director of Hattersly & Maxwell Limited and committee member of the ASX and its Vice-Chairman for a period of two years. He was on the Sydney Listing Committee for a period in excess of 20 years, including a period as its Chairman: it being the committee which was consulted by the National Listing Committee of the ASX. Of the existence and terms of the restricted shares in Peptech he gave the following opinion evidence: 13 "3. In my opinion : (a) the existence and terms of the Restricted Shares in Peptech Limited ("Peptech") were material matters to be known by a person acquiring shares and options in Peptech on 31 July 1997 and on 25 September 1997 for the reasons set out below. (b) The fact that 14,976,825 of the 134,157,197 issued shares in Peptech were restricted securities that could not be dealt with until on or about 6 September 1997 and that could be dealt with after that date, on 31 July 1997 and on 25 September 1997, was information, if generally available, likely to have a material effect on the price or value of the issued shares of Peptech in that it would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, buy or sell shares in Peptech. 4. It can be expected, and the market anticipates, that when restricted securities come out of escrow, that is, cease to be restricted securities and become tradeable, the holders of those securities, who have been prevented from dealing with those securities, will sell them or a substantial number of them as soon as, or shortly after, they cease to be restricted securities. It can, therefore, be anticipated that with the selling pressure so created the market price of the shares, of which the restricted securities form part, will fall, before (in anticipation) and after (by effect), the restricted securities become tradeable. The effect on the market, which is to depress the share price, is likely to be greater than it otherwise would be if the price of the shares was already in decline, as in the case of the Peptech shares in the relevant period, as may be seen from the graph which is annexure A to this statement. 5. Neither a short term investor nor a medium or long term investor would normally choose to acquire securities in a company in which a significant proportion of the capital is represented by restricted securities which will become tradeable soon after the investment, because of the probability that the market price of the shares will decline before and after the restricted shares became tradeable. The normal and prudent course in such a situation is to wait until after the restrictions on trading are lifted, to see what happens in the market and, if there is an increase in volume of selling, indicating a sale of former restricted shares, to wait until most of the former restricted shares have been cleared…" 14 In cross examination he gave the following further evidence: "A. …almost certainly when other things being equal, when stock comes out of escrow, especially if the amount is a significant proportion of the issued capital, as was the case in this stock and is the case generally in mining companies where this is more prevalent, generally speaking the market price does fall, sometimes very substantially. Q. Can we take it step by step, please. The market price falls, may I take it, because what happens on those occasions that you have in mind is that after the shares are released from escrow there are sales on market? A. From the escrow stock, yes. People who have been tied up, they haven't been able to deal in the stock for one years, two years, whatever, generally speaking they are pretty anxious to cash in. … Q. …There will be occasions when the market view is that the shares coming out of escrow will be sold? A. Yes. Q. And where, notwithstanding that expectation, after the shares come out of escrow either they are not sold or not many are sold? A. Sometimes. Q. If the price has dampened in anticipation, it will rise after the termination date? A. No. Hardly - I couldn't imagine of a circumstance where that would occur. Q. You say it always drops? A. Yes. Q. Never known it to rise? A. Never known it to rise. Q. Never known the anticipation to be of sales and there in fact to be no sales? A. Not to my knowledge, no." (T 191.7 - 191.22 …T 192.14 - 192.37) 15 I do not understand it to be an issue that the holders of the restricted shares included investors who were either anxious to sell or were under some financial pressure to sell, particularly in the case of a Russian institute group of shareholders whose institute was operating on half capacity due to a lack of financial resources. These matters were known to Aston. In the interests of those restricted shareholders, who may have wished to sell upon the expiration of the escrow period, he gave instructions within Peptech to facilitate an early sale. Inquiries made by Lebbon at the end of 1997 disclosed that, in fact, there were sales by some of the holders of restricted shares in the months following the lifting of the restrictions. 16 Peter George Kennedy (Kennedy) was called in Peptech's case. He is the managing director of a public company involved in funds management. He has some 19 years experience in the financial and equity markets. It was his evidence in chief that the information regarding the restricted securities was not material to a decision to invest in the shares or options of a company where the investment is based upon the company's perceived fundamental value: it would only become material if it was reasonably contemplated that the shares or options the subject of the investment were themselves to be sold at a time when it was reasonably contemplated that the restricted securities also would be sold upon being released from escrow. 17 In cross examination he acknowledged that it was necessary to distinguish between a long term and a short term investor, accepting that in the case of a short term investor the information concerning the expiry of the period of escrow could be material. More pertinent to the facts of this case, Kennedy gave the following evidence in cross examination: "HAMMERSCHLAG: Q. Let's take an example… A potential buyer of Peptech shares agrees that he will supply to a client - let's assume it's someone in your position as a specialist in boutique financial products. He will supply to a client of his so many shares as are represented by a million dollars, based on the weighed moving average price of those shares for the first five trading days in September. You follow what I'm asking you? A. Yeah, I know exactly what you are asking. Q. Information about that escrow would be crucial to such a person, wouldn't it? A. I would have to say that these things are very obvious in hindsight. Q. Yes, I'm not suggesting otherwise. But it would be crucial ? A. It would be one of a number of factors which would be important. … Q. What I am suggesting is that a prudent investor who knew that a large parcel of shares was coming on to the market not previously listed, who had no pressure to invest, would wait to see what happened? A. Yes. Q. Because we are agreed, I think, that those shares coming on to the market could have a profound affect - we can't talk about what will happen, but as a matter of prudence it must be envisaged that that could be an effect? A. Yes." (T 357.17…T 357.21 - 357.38…T 363.22- 363.32) 18 He concluded his oral evidence as follows: "HIS HONOUR: Q. It seems to me that where this mythical (hypothetical) investor is on-selling under an arrangement to sell at his or her acquisition price, or the average price, in this case in September 1997, whichever was the less, that hypothetical investor would be taking a very, very, big risk of the share price being adversely effected, albeit for a very short time, at a very critical stage in his on-selling arrangements? A. Yes. I mean - yes. Q. Why should he take that risk? A. The timing is really the crucial aspect there. HIS HONOUR: I agree." (T 367.17 - 367.30) (altered to correct transcript of evidence) 19 In my view there was very little difference in the expert evidence adduced in both cases. The evidence reinforced a lesson in logic that if a very significant body of shareholders are legally precluded from trading in shares for a period of twelve months, the release from that restriction will inevitably carry with it the possibility that some, if not all of those shareholders, will visit their investment alternatives, included amongst which would be the option of disposing of their shares. I have no doubt that the fact of the restricted shares coming out of escrow at the very time that Leadenhall had fixed a pricing mechanism for the on-sale represented a risk to Leadenhall and one which a prudent investor would not ordinarily choose to undergo. 20 Lebbon was put forward in the plaintiffs' case as an expert in securities. He holds a diploma from the Securities Institute of Australia and is a fellow of that Institute. He is a contributor to an industry publication called Business Sales Digest concerned with the valuation of options and shares in corporations. He is a fellow of the Institute of Chartered Accountants in England and Wales; of the Australian Society of CPAs and of the Australian Institute of Company Directors. His experience in the securities industry extended over 16 years. He is the Executive Director of Leadenhall which holds a dealers licence under the Corporations Law entitling Leadenhall to carry on a securities business. It is common ground that he is a highly experienced participant in the securities industry. 21 In those circumstances one has to ask why he would undergo the risk of striking a price for on-selling Leadenhall's shares in Peptech by reference to a market in Peptech's shares prevailing at the very time that some 14,000,000 shares were coming onto the market after twelve months in escrow. Counsel for Peptech points to aspects of the allotment agreement that reflect a willingness on the part of Lebbon to undertake risks. Under that agreement Leadenhall was committed to acquire several million shares in Peptech at a time when Lebbon had no investor under contract to take the whole of those shares and where he had no immediate access to funds which would enable Leadenhall to perform its obligations under the allotment agreement in a timely way. More significantly, it has been submitted that there has been no misleading conduct by Peptech: that Lebbon was well aware of the existence of the restricted shares and the period of escrow: this prior to the allotment agreement. 22 The latter submission has more substance, in my view. Whatever conclusion is reached on the issue of liability, I think, it is clear from the evidence that due diligence would have alerted an experienced dealer in securities, such as Lebbon, to the existence of the restricted shares, and in turn, the terms of those restrictions. The questions that have to be determined are whether Lebbon was in fact made aware of the existence of the restricted shares and their period of escrow: if not, whether, as he asserts, he would not have caused Leadenhall to enter into the allotment agreement in its terms, but for the misleading conduct of Peptech: and, if so, whether his shortcomings in investigating material available to Leadenhall concerning the affairs of Peptech should debar Leadenhall from recovering the damages sought as not flowing from the misleading conduct of Peptech. The resolution of those matters is bound up with the credibility or reliability of Lebbon and of witnesses in the Peptech case. As to that, nothing turns on my ability to assess the evidence of those witnesses from their demeanour in the witness box. If each of those questions is answered in favour of Leadenhall, I think there remains a challenging question as to the measure of the plaintiffs' damages. 23 In posing the issues raised in those terms I have not addressed the insider trading claim. I have proceeded on the premise, however, that the existence of the restricted shares and the terms of those restrictions were material to the decision of Leadenhall to invest in Peptech. I think it is clear from the evidence that Leadenhall's interest in Peptech's shares and options reflected a mixture of short, medium and long term objectives and was based on a perception that the shares in Peptech were undervalued. The evidence established that, initially, Leadenhall did not intend to be a long term shareholder in Peptech. As I understand Lebbon's evidence, once he had satisfied himself as to the underlying value of Peptech's shares, he embarked upon an acquisition of several million shares and options with the objective of: (a) disposing of the shares in an orderly way through investor clients or institutions and retaining the options at a price represented by the difference between the acquisition price under the allotment agreement and the price Leadenhall could achieve on on-sale; (b) in conjunction with Peptech, embarking upon a course designed to increase the market value of Peptech shares and options by: (i) publishing the above-market price placement of Peptech shares under the allotment agreement; (ii) undertaking "presentations" to possible investors of the perceived value of Peptech's shares; and (iii) effecting a secondary listing of Peptech's securities on the London market. At the time of the allotment agreement, the acquisition price under the agreement represented a premium of approximately twelve cents on the prevailing market price. 24 I am not entirely clear on the full extent of the due diligence exercise carried out by Lebbon. However, the evidence established that a keystone to any analysis of Peptech's affairs lay in the obtaining of a technical assessment of its substratum which was in the nature of a 'bio-technological' business described as having the objective of : "identify[ing] and develop[ing] clinically important, peptide-based drugs for the treatment of diseases in the areas of cancer, inflammation and infection… [and of] becom[ing] a world leader in the development and registration of peptide-based veterinary products for use in the management of animal health and fertility." Peptides were described as "small-length chains of amino acid residues" having therapeutic qualities. 25 For this purpose Leadenhall retained Story Pharmaceutics Pty Limited to undertake an evaluation of Peptech's portfolio of pharmaceutical and veterinary products through the services of Dr M J Story (Story), who reported to Leadenhall on 30 July 1997 (the Story analysis). It is apparent from that report that any successful long term investment in Peptech was dependent upon its potential in its subject fields of research and development being realised. To that extent, investment in Peptech would have to be classified as speculative. However, the conclusions reached in the Story analysis were favourable and lent support for the view that the underlying value of Peptech's business was not adequately reflected in its share price. 26 Lebbon's evidence was that, in carrying out his examination of Peptech's affairs, he placed significant reliance upon the contents of the 96 report and the half yearly report, in conjunction with Story's analysis and a publication of the ASX, Shares, in deriving a theoretical value of Peptech's shares. In that exercise the nature of Peptech's capital structure as revealed by Peptech's reports and Shares was important to Lebbon. I accept that evidence which I think was supported by his contemporaneous file notes. I think it is also clear that examination of the reports of Peptech would not have revealed the existence of the restricted shares. 27 The only indication in those reports, in my view, of the possibility of there being such a class of shares was to be found in the note to the accounts as follows: "In August 1996 an issue of 14,976,825 shares at 54¢ per share was made in consideration for 5,955 fully paid ordinary shares in Peptech (UK) Limited." There is nothing that I can see either there or elsewhere in the 96 report or the half yearly report to indicate that the shares issued for the acquisition of shares in Peptech (UK) involved a transaction to which Ch 9 of the listing rules would apply. 28 There is some inconsistency in the 96 report in relation to its description of Peptech's issued shares. In note 20, the issued and paid up capital is identified as 134,157, 197 shares in addition to 179,995 ordinary shares paid up to 1 cent. However, in the listing of the largest holdings "as Recorded in the Share Register at December 9 1996", and the percentages "of the total issued shares" which those shareholdings were said to represent, the number of issued shares so calculated was in the order of 119,000,000. If this discrepancy had been picked up during an analysis of the 96 report and the discrepancy referred to Peptech, it is probable that the existence of the restricted shares would have been revealed, based upon the evidence of Dawn Mills (Mills) who had been the Financial Controller for Peptech for the period from 30 January 1989 to 23 February 1998. 29 It was Mills' evidence that in the initial preparation of the draft of the 96 report she obtained information from Peptech's share registry and that it was only after the audit manager at Price Waterhouse brought her attention to the existence of the restricted shares that she included those securities in the 96 report without disclosing that any of those issued shares were the subject of escrow under the rules of the exchange. Certainly, there had been no intentional concealment by her of the fact that there existed that class of shares, as Peptech had circulated all of its shareholders with that information in letters of 21 June 1996. She was ignorant of the obligation to disclose in Peptech's report the existence of the restricted class of shares. 30 However, I would not regard the failure of Lebbon to detect this discrepancy in the 96 report as representing a lack of care in performing Leadenhall's due diligence exercise. Reading the 96 report and the half yearly report in isolation, Lebbon was entitled to proceed on the basis that there were no Peptech shares to which Ch 9 of the listing rules applied. 31 At one stage of the hearing I think counsel for Leadenhall toyed with the possibility of making a case against Peptech on the basis of a deliberate failure on its part to disclose material matter in relation to its issued shares. I am satisfied that, although there were serious omissions and mis-statements in Peptech's reports, relating to its share structure, they were inadvertent. 32 The nature and extent of the information concerning the restricted shares which was available to Leadenhall prior to the allotment agreement and, in turn, the substitution agreement, was the subject of dispute. In substance, Peptech's case is that Lebbon was told on more than one occasion about the existence of the restricted shares, and was provided with written material concerning Peptech which contained references to the restricted shares. Most of this information, it was said, was provided prior to the allotment agreement with some written material furnished in the time that elapsed between the two agreements. Some of that evidence is uncontroversial. 33 It was the evidence of David Baker (Baker), a principal of the stockbroking company, Baker Young Stockbrokers Limited, of Adelaide, that he introduced Lebbon to the prospects of investment in Peptech at a meeting of 22 May 1997 and that following upon an expression of interest in the company by Lebbon, Baker forwarded to Leadenhall in May 1997 a Reuter's release and a broker report from each of Paul Morgan Securities, Ord Minnett and Bell Securities in relation to Peptech (the broker reports). 34 Baker said that he had obtained that information from Darryl Mellish (Mellish), the then Chief Operating Officer of Peptech. Mellish confirmed that he provided information of that kind to Baker for the benefit of an unnamed prospective investor in Peptech. I think there was some confusion in the evidence as to which of several such reports in evidence were the particular ones said to have been forwarded to Leadenhall in May 1997. Nothing, in my view, turns on that aspect. 35 The Paul Morgan report was dated 14 June 1996. It consisted of some 14 pages which outlined the background of Peptech, then known as Peptide Technology Limited, and summarised the history of Peptech. In that section there was included the following: " PTD Interest in Peptech (UK ) PTD initially held a 75% interest in Peptech (UK), the remaining twelve minority interests included the original Russian developers of the drug GMDP and Dr. Roger Aston. PTD now holds 100% of Peptech (UK). Minority interests have recently sold their 25% stake in Peptech (UK) for 15,000,000 newly issued shares in PTD to be escrowed for one year." The company's structure, its board members, and the products with which it was involved, were covered in the report which offered a value per share ranging between 80 cents to $1.70, based on all fully paid up shares, including the restricted shares. 36 The Ord Minnett paper was along similar lines offering a value per share of $1.65 based on "Shares on issue" of "134 m". In a note to that estimate the following clarification appeared: ""Shares on issue" includes 14.976m shares to be issued in exchange for the outstanding 23.7% of Peptech (UK) for PTD to own 100% of GMDP." It made no mention of those shares being held in escrow. However, under a section of the report dealing with financials, the following appeared: "The acquisition of the outstanding shares in Peptech (UK) is to be funded by the issue of 14.977m shares in PTD at 54¢ per share which will be held in escrow for at least one year." Ord Minnett's report was more extensive than Paul Morgan's report and comprised some 19 pages covering most aspects of the activities of Peptech. It was also issued in June 1996. 37 Bell Securities' report was dated April 1997 and covered similar territory to the other two reports, noting that the shares issued for the acquisition of the minority interests in Peptech "were escrowed for one year". 38 Lebbon does not dispute that the broker reports were sent as evidenced by Baker. He simply has no recollection of receiving them prior to the allotment agreement and, in any event, he said that he would not have regarded their contents as having any particular value. Even had he noticed the reference to the restricted shares, he would have satisfied himself that those were of historical value only, having regard to the dates of the broker reports and the contents of the 96 report and the half yearly report. I have some difficulty with that evidence as examined later in these reasons. 39 According to Mellish he had a five hour meeting with Lebbon on 18 July 1997, prior to Lebbon travelling to the United Kingdom to meet Aston, as part of, or preparatory to, the carrying out of Leadenhall's due diligence exercise. The meeting was attended by Anthony Bates (Bates), the then Chairman of Peptech, Mills, and another employee of Peptech, Timothy Trigg (Trigg). Bates and Trigg were not present for the whole meeting. It was Mellish's evidence that Lebbon made an inquiry of one of Peptech's products, a peptide known as GMDP, in response to which Mellish made the following statement: "You are right, GMDP is an important asset for the company, this is why Peptech recently acquired the minority interests in Peptech (UK), the company that holds the GMDP intellectual property. Approximately 15 million new Peptech Limited shares were issued to the minority shareholders and remain in escrow until September 1997." 40 According to Mellish, Lebbon received that information without comment and without any display of surprise. None of that evidence is corroborated by Bates or Mills. Trigg was not called. Bates gave evidence of his meeting with Lebbon on 18 July 1997 in the following terms: "11. At the time of the 18 July 1997 meeting with Tim Lebbon I was aware of the Peptech shares held in escrow. I did not consider this to be an important issue and paid very little attention to it. In the context of Peptech's overall shareholding and its scientific activities, the fact that some shares were held in escrow seemed to me to be entirely commonplace and insignificant. If the escrow period was mentioned at the meeting I would have paid no particular attention to it." 41 Bates was unable to corroborate the evidence of Mellish concerning any discussion with Lebbon about the restricted shares. Bates further clarified par 11 of his statement in cross examination as follows: "[Hammerschlag] Q. I have some difficulty in understanding what you have said in par 11 of your statement. I will tell you what it says: You say that you didn't consider escrow to be an important issue and paid very little attention to it in the context of the Peptech overall shareholding and its scientific activities. The fact that some shares were held in escrow seemed to you to be entirely common place and insignificant. I have a little difficulty in understanding that given your agreement that that could be of substantial importance to a potential investor. Could you assist me? A. Could I explain the situation? In my statement I did say that I did not think it was overly relevant. I saw that meeting as being a briefing meeting; a discussion meeting. I did not see it as being you know the core discussion around which an investment would be made and I did assume that that matter would have been covered elsewhere. It was not. Q. You were not intending to make light of the issue of a possible escrow shareholding I take it? A. That is not my intention. Q. Because you as an experienced man of commerce would understand that knowledge about that subject could be crucial to a potential investor? A. Yes, that is correct. Q. Especially if a large parcel of shares were coming onto markets at or about the time that the investor was about to make his decision? A. Yes. Q. And your experience would be I assume that when a large parcel of shares previously in escrow hit the market it is almost inevitable that there will be a depression of the share price? A. I honestly couldn't say that I could state that. Q. That would be consistent with what your view of the market would be wouldn't it? A. Well, again, can I explain it a little bit in terms of the nature of the escrow, the nature of the shareholders who held the escrowed stock, the timing and the interest of the prospective investor I didn't see it being that significant to my discussion. Q. Is this the discussion on 18 July of 1997? A. Yes. Q. Perhaps, I have put the question badly, what I was asking you was that, let me just go back a step: Your perception of this 18 July meeting was it was some preliminary exploration meeting? A. Yes, if I could say I saw that as an opportunity for Mr Lebbon to meet with the Australian core prior to him going overseas. Q. It was not your perception where it was a serious meeting where Mr Lebbon would make any decisions based on what was told to him there? A. I saw the meeting as part of his due diligence to get to understand the people in the company and it was not a meeting to make that decision." (T 341.33 - 342.36) 42 However, it was clear from Bates' further cross examination that he understood the importance of the existence of the restricted shares to an investor such as Leadenhall and the importance of the errors in Peptech's public documents, as appears from the following: "[Hammerschlag] Q. As a professional director knowing that there were that many shares on issue which were escrowed you would have ordinarily have expected that to feature in the report? A. Yes, I would have expected that to be in the financial sector of the report in the normal format of such disclosure. Q. Did you understand that Mr Lebbon was going to be restricted to information that was in the public domain? A. Can I clarify, at the time of that meeting? Q. Yes? A. Yes, I knew that the due diligence would be confirmed to that which was in the public domain. Q. And you as a professional director would know that the most important public disclosure of any listed entity is annual financial statements? A. Yes. Q. And perhaps second most important disclosure document is its half yearly reports to the A S E. A. Yes, together with the on going disclosure documents. … Q. At this point in time something like 14 million of the number issued were not in fact quoted because they were in escrow, were you aware of that? A. No. Q. You were aware that a large portion of shares were in escrow? A. Yes. Q. This section is intended to convey to the reader, I take it you will agree with me, the distinction between those shares which are issued and those which are quoted, right ? A. Yes. Q. That matter of the difference would be a matter that you as an experienced company director would recognise as being quite important, wouldn't you? A. Yes. Q. Yet this document incorrectly states that the number quoted equals the number issued? A. (Witness nodded) Q. Right ? A. Yes. Q. Is this something that has been drawn to your attention for the first time now? A. Yes. Q. As a professional director do I take it that you would view that as a quite important omission? A. I would view that as an important mistake. Q. Especially to a person who, restricted to public information, was about to participate in a big private placement in this entity at a premium to market ? A. Yes. … Q. As you understood it at the time, and I suggest you would understand it now, in the context of future capital requirements, the coming on stream in the short term of a large escrowed parcel could be an important feature? A. Yes. Q. it would be important for anybody who was about to invest in an entity to have complete information about a large parcel of escrowed shares about to be released, you would agree with that, wouldn't you? A. Yes. Q. It would be necessary for him to know precisely when they were coming out, wouldn't it? A. I would think so. Q. Who held them? A. Yes. Q. What the likely intentions of those persons were, with respect to selling them. A. If that was available, yes. Q. And especially if there was knowledge that some one or more of those escrowed shareholders were very keen to sell ? A. If that was known. Q. Yes, if it were known? A. Mm. Q. That kind of information would be crucial, would it not, for any proposing investor to know? A. I would assume so. Q. That would be particularly the case, I suggest, in the case of an investor whose investment was going to turn, amongst other things, on the weighted price of the shares concerned in the very week that the shares came out of escrow, do you understand what I'm putting to you? A. No, I don't understand the timing aspect of your question. Q. I want you to assume the following and I'm seeking your, in effect, as a professional director, view on the following proposition. I want you to assume the following facts, an investor takes a private placement in a company. A. Mm. Q. He enters into a back to back transaction with someone else to pass on part of that private placement at a price calculated to be the weighted average of the shares during a particular week? A. Mm. Q. And during that very week 10 per cent of the company share capital is about to come on the market because it was previously escrowed. A. Mm. Q. To make that kind of decision, he would really have to have complete information about the escrow, wouldn't he ? A. Under that circumstance, yes, he would. … Q. You would have understood that the details of and concerning escrow would have been important to Mr Lebbon? A. Yes. Q. You would have expected there to be made available to him the escrow agreements, wouldn't you? A. I believe so, yes. Q. You would have expected there to be made available to him the resolutions relating to the issue of the escrowed shares, wouldn't you? A. Well, I say yes but I also get concerned about our ability to disclose. Q. Yes, I'm talking about stuff that is in the public domain? A. Public domain, absolutely. Q. The terms of the escrow agreements, the escrow agreements between Peptech and the stock exchange? A. As is in the public domain, yes. Q. You would expect those documents being made available to Mr Lebbon as being crucial to his investment? A. I would believe so. Q. Did you have a belief that had occurred? A. I worked on the assumption, I had no evidence to say that it had occurred. Q. Yes? A. I just assumed it would have occurred as part of the introduction to the company. Q. Because you would have assumed that those who were representing Peptech in the negotiations would have made that stuff available to Mr Lebbon, wouldn't you? A. I certainly didn't see myself as the deal negotiator there. I just saw myself as part of the meet the faces and I didn't see our meeting as being, you know, a commercial meeting as such." (T 342.45 - 343.8 …T 344.44 - 345.23…T347.1 - 348.3…T350.5 - 350.45) 43 Aston gave similar evidence of his meetings with Lebbon and Baker in England between 23 and 25 July 1997. In one of these meetings which was held at Cirencester, attended by a scientist and others in the employ of Peptech, Aston said that he gave a presentation on Peptech's technology portfolio in which the subject of GMDP was also raised. It was Aston's evidence that this gave rise to the following interchange: "During this presentation I reiterated the mechanism by which Peptech acquired rights to GMDP from the Shemyakin Institute. I also made special reference to Robert Bomford's key role in speaking Russian and being the link with the Institute. In the course of the presentation I said words to the effect: 'When Biokine was formed it had no cash to pay for acquisitions; as such, in order to acquire the rights/patents to GMDP, it issued shares to the Shemyakin and the investors Ivanov and Andronova. The founders of Biokine: Bomford, Schober, McMillan and myself also had stock in the company. Shemyakin and the Russian investors are still major share holders." Following this presentation in the boardroom we moved into another office for a round table discussion. Towards the end of the meetings on that day Tim Lebbon lent across to me and said words to the following effect: " Have any of the people who received shares in Peptech reduced their shareholding?" And then I replied with words to the following effect: "I am sure some individuals may well have liked to sell a few of their shares but this is not possible until the end of the escrow period associated with the Peptech shares issued in relation to the Peptech UK shareholdings. The escrow period terminates in September 1997." Tim Lebbon then inquired with words to the following effect: " What do you think the Biokine minorities will do? Do you think they will sell?" I replied with words to the following effect: " I think that some shares will be sold by individuals but by and large I believe that the minority shareholders are supporters of Peptech and I don't think there will be any dumping of shares. Organisations such as Shemyakin, which are major shareholders in Peptech, are likely to sell some shares as they are desperate for cash to sustain the functions of the Russian Institute. The Institute runs its electricity at half power in order to be economical at the moment."" 44 No other witness in Peptech's case corroborated that evidence of the meeting. In cross examination Aston said that that was the only occasion in which he had a clear recollection of conveying information to Lebbon concerning the restricted shares, while having a recollection of the matter being raised with Lebbon in other meetings which he could not precisely identify. Lebbon denied that any such conversations took place. 45 Aston's credibility has been challenged on the basis that his evidence is untrue. However, I am not prepared to reject that evidence, at least to the extent that I accept that at some stage in Aston's dealings with Lebbon and probably at the meeting at Cirencester there was discussion about the former Peptech UK shareholders and their loyalty to Peptech. In cross examination Aston gave the following evidence: "[HAMMERSCHLAG] Q. Incidentally, you were aware that the 1996 annual report was a document given to Mr Lebbon and in respect of which he was placing reliance in his consideration of whether to invest in Peptech? A. Yes, that's true. Q. You knew that he was going to rely on that document? A. He was, yes. Q. Why didn't you tell him it was wrong in respect of your shareholding? A. I had mentioned that to him. Q. You had mentioned to him that the document was wrong in respect of your shareholding? A. Can I elaborate? We had discussed the issue of the escrowed shares on various occasions. Q. Just hold on. HIS HONOUR: Q. Just complete your answer? A. I was always very open with Mr Lebbon. We discussed the shareholding in Fiduciaire Rico (sic). We discussed the escrow shares. We discussed issues such as shareholding the Shemyakin, the Russian institute. So I felt although that there was an error in the annual report of 1996 as records my shares, I believe he was aware of the reason for that. HAMMERSCHLAG: Q. One second Dr Aston, do you say that you discussed the escrowed share position in respect of Peptech UK with Mr Lebbon for more than one occasion? A. I did indeed, yes. Q. In your statement, which the correctness you have sworn this morning, there is reference to only one such conference, isn't there? A. That is true. Q. What is the reason for the fact you have left out other conversations on that subject? A. Peptech's counsel advised me to only refer to the instances of which I had 100 per cent certainty of." (T 286.5 - 286.46) This was again referred to in later cross examination of Aston as follows: "HAMMERSCHLAG: Q. June 1997. Although this was not said to the market, you already had it in your mind and discussed it with Mr Bates and Mr Mellish that the London listing might be delayed. A. It was delayed. We were always at risk, yes. Q. You were considering Mr Lebbon's position in the context of him perhaps providing interim funding if that occurred? A. Yes. Q. You were well conscious of the fact that that almost 11 per cent of the company's share capital was coming out of escrow in about a month's time. A. Yes. Q. You were well aware of the fact that those shares coming out of escrow could have a profound effect on the price of Peptech shares? A. They could have if they were sold, yes. Q. And you were also aware that Messrs McMillan and Shober were keen sellers? A. I believe they might have wanted to sell, yes. I don't know if they were keen. Q. You knew they had been unhappy with the lock up of their shares from the start? A. I believe we all were, yes. Q. You included? A. Locking is not financially beneficial to the owner of a share, yes. Q. You understand, of course, that the escrow provisions are there for the benefit of the shareholders as a whole, don't you? A. Absolutely, yes. Q. And you understood that to some extent you were in a position of personal conflict? A. Indeed, yes. Q. And by 30 June 1997 the fact that the shares were coming out of escrow shortly was a major factor being considered by the board of directors in relation to its fund raising strategy, wasn't it? A. I don't recollect that but I believe that, yes. Q. It would be consistent with your understanding, wouldn't it? A. Yes. Q. You agree with the proposition that the escrow period was coming to an end at an important time for the company? A. Yes. Q. Mr Mellish had, after a meeting at which you were present in the week ended 30 July 1997, suggested that the directors should be rebriefed on the subject, do you recall that? A. Vaguely, yes. Q. That was because it was understood by you and the other directors to your knowledge that the coming out of the shares from escrow could have a profound effect on the company's prospects of raising capital? A. Can I explain? Q. Do you agree with the proposition or not? A. Not really, no. HIS HONOUR: Q. If you have an explanation to offer, what is that? A. Of course the shares coming out of escrow, if everyone was to sell their shares they would have a serious impact on the share price of the company, there was no question there but, at the end of the day, I knew all the minorities well and I believed Peptech had their support as loyal supportive shareholders, and it was my understanding that there would be no aggressive selling, or dumping as one might say, of shares at the time. I would say that the coming off escrow of those shares was not a major issue in my mind as regards the company's share price. HAMMERSCHLAG. Q. It was a significant issue though, wasn't it? A. It was one that we certainly had to consider, yes. Q. For a full understanding of that position one needed to know the details about the escrow shares, didn't one? A. Yes. Q. This was something that was discussed with the directors in the we (sic) very week Mr Lebbon made his investment, isn't that right? A. I believe so, yes. Q. Why wasn't Mr Lebbon taken into your confidence about that? A. Well, I did inform him that the shares were in escrow and I believe he knew when they were coming off escrow. Q. From what did he know that? A. Both from my discussions in July and my belief was from previous discussions I had with him. Q. You say that you had previous discussions with him about the shares in escrow? A. (Witness nodded) Q. Is there any note you have which supports that proposition? A. No, I am afraid not." (T 288.16 - 290.11) 46 The fact that those "previous discussions" were not evidenced in Aston's statement of evidence in chief, I think, is sufficient indication of a lack of any emphasis in those discussions upon restricted shares. One thing that does come out of that evidence is the failure of Lebbon to pick up the fact that the Russian institute shareholders and Fiduciaire Ryco as a shareholder, or for that matter Aston's shareholdings, did not appear in the listing of the largest holdings in Peptech's share register as set out in the 96 report. While a number of the largest shareholders are listed in the 96 report as nominee holdings, it would not have been particularly surprising for Lebbon to have checked that list against his knowledge of Aston's holdings and, probably, of the other one time shareholders in Peptech UK. 47 The passing statements which Mellish and Aston are said to have made to Lebbon concerning the restricted shares stand in strong contrast with the recognition within Peptech, as to the possible effect of the restricted shares coming out of escrow upon Peptech's need to raise further working capital to support its product development program. Peptech was in urgent need of funds at the time of its negotiations with Lebbon, notwithstanding statements to the contrary made to Lebbon during negotiations. I think it is fair to say that the board of Peptech in considering its capital requirements in mid 1997 viewed the situation concerning the restricted shares as germane to those considerations. 48 In my view that is reflected in the letter from Henry Davis York to Mellish of 30 July 1997 and the memorandum to board members from Mellish of 4 August 1997. The terms of those documents follow: Henry Davis York to Mellish of 30 July 1997: "PEPTECH (UK) LIMITED In consequence of the discussion on Monday with several directors about the final phase of the acquisition of Peptech (UK) Limited you suggested that it would be appropriate for a re-briefing to take place. To this end I enclose copies of: - chairman's letter to shareholders dated 21 June 1996; - notice of general meeting held in Sydney on 16 July 1996; and - sample Restriction Agreement It will be seen from this material that Peptech Limited acquired 5,955 ordinary shares in Peptech (UK) Limited (being the only issued shares in the capital of that company which it did not then own) in exchange for the issue of a total of 14,976,825 new ordinary shares in its own capital at the rate of 2,515 shares for one Peptech (UK) Limited share. In accordance with the Listing Rules, the ASX imposed a one year escrow period in respect of the new shares issued by Peptech Limited. As a result the recipients of those shares have been prohibited from any dealings in the shares for a period of one year which expires on various dates in September 1997. The terms of the escrow arrangement are set out in the Restriction Agreement. The scrip for these shares, together with the Restriction Agreements, were lodged with the National Australia Bank Limited at Brookvale for the duration of the escrow period. They will be released in September 1997 on the written authority of the ASX following which the shareholders will be free to trade the shares. For the purpose of calculating the consideration for these transactions the new shares in Peptech Limited were deemed to have a market value of 54¢ each which was determined by reference to the closing prices for on-market sales during the month of March 1996. The possibility that some of the shareholders concerned may wish to realise their shares once the escrow period expires needs to be factored into the time line of likely events for Peptech Limited over the next six months." 49 The memorandum of Mellish to the Peptech board of 4 August 1997: "CONFIDENTIAL … At the last board meeting we discussed various fund raising strategies involving the issuing of shares. We also touched upon the possible options for restructuring the capital of the Company - for example, by consolidation, reduction of capital, etc. It was noted that the number of total Peptech shares on issue within 9 months could be in the order of 200 million. The "plan" that was developed on the whiteboard has now been reproduced for your perusal (copy attached). The timetable is rather tight and needs closer analysis. The meeting also resolved to request management attempt to identify the beneficial owners of Peptech shares for some of the larger nominee holders. The method of undertaking the process and a review of the possible consequences is underway. For a full understanding of our shareholding, especially for our new directors, I have attached information about the 15 million Peptech shares currently in escrow, which supplement the material circulated with the last board papers. I am sure that fund raising/ share structure/ shareholder attitudes will be an important item at our next meeting. Also attached is a summary of our authorised capital and current options." 50 Mellish's oral evidence underlined the significance of the restricted shares coming out of escrow in Peptech's consideration of "fund raising strategies" in mid 1997. His evidence in cross examination follows: "Q. I apologise and withdraw that question. In 1996, at the time of the take out of the Peptech minorities and onwards, one of the priorities at Peptech was the raising of further capital, wasn't it? A. Yes. Q. Peptech was long on prospects but short of cash, wasn't it? A. It was short of cash. Q. By 30 July of 1997, I'm now jumping forward, you understand ? A. Yes. Q. Very high on the agenda at Peptech was its strategy to try and get money in by way of investment or injection of capital, wasn't it? A. Yes, it was. Q. Dr Aston considered that that was a matter of urgent priority, didn't he? A. Yes, he did. Q. The question of fund raising strategies was discussed at the board meeting of the company which was held in the last week of July of 1997. Do you recall that? A. Yes. Q. What you discussed at that board meeting were the fund raising strategies involving issues of shares? A. Yes. Q. There was discussed possible options for restructuring the capital of the company? A. Yes, I think there was. Q. Important in that context, namely fund raising strategies involving the issue of shares, was the fact that 15 million shares in Peptech were then in escrow, but were about to come out? A. Yes, I think we were looking at the total picture. Q. At this meeting of the board of directors, it was suggested by you that the directors be formally briefed with respect to the circumstances relating to the shares coming out of escrow because that would have, amongst others, potentially a profound effect on your capital raising strategies. Would you agree with that? A. I don't think it was the main purpose of the brief but it was part of it, yes. Q. In fact, your view was --- HIS HONOUR: Q. Was it a purpose? A. The main purpose of the brief was to look at assumptions and projections of the total number of shares that would be out there and whether there was a sensible platform going forward. So there was a number of different factors in that and I think the ones in escrow were just part of that total picture. Q. On the basis that they could well be coming on to the market when they came out of escrow? A. Yes. HAMMERSCHLAG: Q. In fact, your view was that for a full understanding of the process that was going to be undertaken, amongst others - I'm not saying it was the only consideration - but amongst others an important consideration was the information concerning the 15 million shares about to come out of escrow? A. Yes. … Q. And one of the things you understood was that strategy could be profoundly affected by the fact that something like 11 per cent of the company's share capital was coming on to the market in a month's time from 30 July ?" (T 226.46 - 227.58…T 229.23 -229.27) 51 Given the evidence of Keene, Kennedy, and Bates and the recognition by Peptech in its internal records of the significance of the restricted shares coming onto the market in the context of planned capital raising, it is very difficult to reconcile the full knowledge of Leadenhall of the details concerning the restricted shares with the pricing mechanism of Leadenhall's on-sale. In that context it is not too difficult to give some credence to Lebbon's evidence that information related to Peptech's share structure was material to his analysis of the advantages offered by investment in Peptech. 52 Assuming Lebbon knew of the existence of the restricted shares, acting prudently, Lebbon would have required to be satisfied that the emergence of the restricted shares onto the market would not materially affect the terms of the allotment agreement and the on-sale. This could have been done by ascertaining the restricted shareholders' attitude to their investment once released from escrow, or by just waiting for developments at the listing of the restricted shares. 53 How does one then approach the conflicting evidence of what, if anything, was said about the restricted shares at the meetings in Australia and the United Kingdom in mid July 1997 between representatives of Peptech and Leadenhall. There is something internally difficult about the evidence in chief of both Mellish and Aston. In the case of Aston's evidence, as quoted earlier in these reasons, the subject matter was raised by Lebbon's question, namely: "Have any of the people who received shares in Peptech reduced their shareholding ?" It is an unlikely question from someone who was aware of the escrow conditions affecting the restricted shares. This unlikelihood was not removed in the following cross examination of Aston: "Q. But on what you tell his Honour, you understood that Mr Lebbon already knew that the shares were in escrow because you had had that discussion before? A. Indeed, yes. Q. Why didn't you say it to him, well, as you know? A. I'm not quite sure what you mean. Q. Well, you say Mr Lebbon asked you about this, why didn't you say, well, I told you before? A. I think he wanted to ascertain what the Shemyakin would do once the escrow period came off. If you are asking me the phraseology of the question, it was rather ad hoc, as I think I indicated. You know, what do you think the Shemyakin will do when the escrow period was up. He key concern was the Shemyakin was, what you call, a weak shareholder in the company and that was his primary concern. Q. Was his question, did he ask you what will the Shemyakin people do? A. I believe he did, yes. Q. He didn't ask you have any of these people who have shares in the Peptech UK sold? A. He asked me that on other occasions, yes. He asked me that for my own shareholding. Q. That, of course, would be a nonsense question if he knew the shares were in escrow, didn't he? A. The opportunity that I recollect is the first discussion I had with Lebbon, which is not in my witness statement. It was one of the ones that I was not 100 per cent certain of. Q. You say he asked you what will the Shemyakin people do? A. Yes. Q. He didn't ask you, did he, have any of the people who received the shares in Peptech reduced their shareholdings? A. On that occasion? Q. Yes? A. I don't believe he asked me that, no. Q. Why do you say he asked you that in your statement at page 6, Dr Aston? A. I would have to relook at the statement? Q. Yes, go back to the statement? A. Could you tell me where it is? Q. Yes, page 6. HIS HONOUR: It's a separate document not in the folder. HAMMERSCHLAG: Q. You got your statement? A. I do not. HIS HONOUR: Q. Had you been in contact, Dr Aston, with the Shemyakin principals about that time? A. I was in regular contact with all the Russian shareholders, and the individual representatives. Q. And the owners and the neighbours in a sense are in the one interest, are they? A. Yes, essentially. Q. And who would you deal with in relation to those people? A. Almost exclusively Professor Ivanov, who was the director of the institute. Q. In relation to that did you specifically discuss with him the institute's intentions in relation to their shareholding? A. I had on occasions, yes. Q. When was the last occasion before the end of July? A. It would certainly around there I would have talked to them about it, yes, and enquired as to what their intent and financial needs were, yes. Q. And the impression you were given was they were under financial pressure? A. Indeed they were, yes. Q. Wouldn't that indicate that they would be obliged to dispose of all of their shares? A. I knew the Russians on a personal basis very well and I felt comfortable enough to discuss with them their shareholding, and Professor Ivanov had often said to me, "You advise me whether it's - if you want me to hang on then I will hang on, I will be a loyal shareholder." So I genuinely felt under no circumstances would the Shemyakin go out into the marketplace and start unloading their shares. Q. Nevertheless they were operating at half capacity because of lack of funds? A. Indeed, yep. Q. Pressure would be fairly significant on them, wouldn't it, to dispose of these shares whether they liked it or not, despite loyally (sic)? A. That is correct. There was a lot of pressure on them but they were good friends, good loyal shareholders and I believe I persuaded them to hang on. Hammerschlag: Q. Your statement is in front of you. Have a look at page 6 Dr Aston? A. Okay. Q. You tell his Honour that Mr Lebbon lent across to you on this occasion that you recall so vividly and he asked you have any of the people who received shares in Peptech reduced their shareholding. You say he never said that? A. He did obviously. Q. That would be a nonsense question, wouldn't it? A. Could you point out where it says that? Q. Yes, at the foot of the page. HIS HONOUR: What page? HAMMERSCHLAG: Q. Page 6? A. It would appear so. Q. It would have been a nonsense question, wouldn't it? A. It would appear so, yes. Q. You didn't think this through, did you, before you signed this statement? A. No, I don't think it's that. I mean, Mr Lebbon was very tired on that day. He may well have not thought of what he was asking. Q. Without looking at your statement, what is the best of your recollection of what you responded to that question which you now accept appears to be a nonsense? A. I believe I would have said that none of the shareholders would have disposed of any of their shares. Q. Did you say that some people would like to? A. I'm sure I would have said that, yes. Q. Who were they? A. That would have been the Shemyakin primarily. Q. Did you tell him when the escrow period terminated? A. I can not recollect off hand. I believe he already knew that it was September at that point. I may have said it again." (T 295.38 - 298.12) 54 Mellish's evidence in chief suffers from a similar difficulty in that it places his statement about the restricted shares in the context of an inquiry by Lebbon concerning one of Peptech's products. According to Mellish his response contained the following statement: "Approximately 15 million new Peptech Limited shares were issued to the minority shareholders and remain in escrow until September 1997". He added the observation that "Lebbon did not appear surprised by the escrow period and made no comment on the fact that the shares were held in escrow". 55 The thing that strikes me about that evidence is that it seems out of context with the matter being discussed and is a little unusual when put into the context of Mellish's evidence in cross examination, that at the time of that meeting, it was his understanding that the 96 report and, presumably, the half yearly report, disclosed the existence of the restricted shares: that on his understanding this information was known to Lebbon as well as through other material published about Peptech. Given that understanding, I would have expected discussion on the subject matter of the restricted shares to be expressed in somewhat different terms. For that matter, I would have expected there to have been some detailed discussion about the restricted shares coming out of escrow, given Peptech's recognition of the importance of that event to Peptech's prospective capital raising. 56 As a matter of credibility I would not be prepared to reject, in toto, the evidence of Mellish, Aston or Lebbon on this issue of disclosure. As stated, in assessing credibility I gained no assistance from observing those witnesses in the giving of their evidence. I think it comes down to a question of emphasis and what was assumed to be known by Lebbon at the time of the July discussions. I am satisfied that these were discussions involving Lebbon which dealt with the loyalty to Peptech of the major erstwhile shareholders in Peptech (UK) and that, in passing, some reference was made to shares in escrow. I am satisfied that there was no detailed discussion on that aspect and that Lebbon was not alerted to the possibility of 14,000,000 shares being listed, out of escrow in September 1997 to coincide with the timing of the determination of the acquisition price under the on-sale. 57 My principal reason for coming to that conclusion is that, if there had of been a full and unequivocal disclosure in those meetings that some 14,000,000 shares in Peptech were unlisted, were being held in escrow and that they were about to come out of escrow in August/September 1997, I find it extremely difficult to accept that Lebbon would have treated that information with comparative disinterest. 58 Additionally, there is no suggestion in the evidence adduced by Peptech that there was any substantial discussion in relation to the restricted shares at any of these meetings with Lebbon. That is clear from the evidence of Aston and Mellish and from the absence of evidence from the other representatives of Peptech to corroborate the fact that there was any discussion at all concerning the restricted shares. Baker had been present at the July 1997 meeting in England, and having regard to his involvement in the allotment of shares and options to Leadenhall, I find it surprising that he was unable to corroborate discussions with Lebbon concerning the restricted shares. 59 Further, none of the contemporaneous notes of those meetings record any discussion concerning the existence of the restricted shares. 60 I am also of the view that there was no motivation on the part of Peptech's representatives to emphasise this aspect of Peptech's shareholding: that much I think is clear from the internal records of Peptech showing the importance of the effect of the restricted shares coming onto the market in the board's consideration of Peptech's estimated capital requirements and possible capital restructuring. In that context it should be kept in mind that at the time of the July 1997 negotiations, Peptech was in urgent need of funds. 61 When the strength of the evidence is taken into account as to the importance in the market of the restricted shares coming out of escrow, as to the particular sensitivity of that aspect in the context of the terms of Leadenhall's on-sale and to the reliance placed by Lebbon on the 96 report and the half yearly report which made no mention of any shares being held in escrow and which included the restricted shares in the shares reported upon as being both issued and quoted, in my view, Leadenhall was entitled to expect more than passing references to the restricted shares in discussions between representatives of Peptech and Lebbon prior to the allotment agreement. 62 The provision to Leadenhall of the broker reports I think occurred some time about May 1997. There is some doubt about the accuracy of Baker's evidence that, in the week of his initial meeting with Lebbon on 22 May 1997, he forwarded the broker reports on Peptech. There is no record of them having been sent. There is a note of a communication from Lebbon to Baker of 24 May 1997 which commenced with "thanks for info" and then there followed a series of notes by Lebbon which all appear to be based upon the 96 report and give no indication of reliance on any of the broker reports. 63 As far as I have been able to discern there is nothing in the communications between Leadenhall, on the one hand, and Baker or Peptech on the other, up to the time of the allotment agreement, which refers to the information in the broker reports. 64 It is reasonably clear that in addition to the broker reports there was also provided to Leadenhall a summary of announcements relating to Peptech (the Peptech announcements) on 8 and 9 August 1997, by facsimiles respectively from Mellish to Kevin Mak (Mak), Leadenhall's business analyst, and from Baker to Lebbon. The significance of the Peptech announcements is to be found in the references to the restricted shares in the following terms: "16/07/96: RESULTS OF MEETING: On 16/07/96, both resolutions proposed to the meeting were passed, authorising allotment of ord. shares as consideration for the sale by the allottees of shares in Peptech (UK) Ltd. New shares are likely to be subject to escrow conditions as restricted securities. To consult with the ASX on this issue." 65 While Lebbon denied any knowledge of the existence of the restricted shares via the broker reports prior to the allotment agreement, he admitted that by 12 August 1997 he had seen in the Peptech announcements some 1996 reference to shares of Peptech being held in escrow and that from his knowledge of the listing rules, he would have understood the period of escrow to have been one year. 66 Mak was not called to give evidence, a matter that was commented upon in the submissions of counsel for Peptech. In reply, counsel for Leadenhall stated from the bar table that no consideration had been given to calling Mak. That statement was accepted by counsel for Peptech. If an adverse finding is open to be made in relation to the absence of Mak from the witness box, I do not see that agreement as affecting deliberation of the appropriate inference to be drawn. 67 12 August 1997 is a date of some significance in that, in early August 1997, there was a significant drop in the share price of Peptech shares which drew inquiries of Peptech from Lebbon and the ASX. Mellish responded to Lebbon's inquiries by informing him that the Peptech directors shared Lebbon's concern about the fall in the share price. At the same time he informed the ASX that Peptech was not able to offer any explanation for the movement in Peptech's shares. It was Lebbon's evidence that he did not associate the drop in share price with the restricted shares coming out of escrow. So far as he was concerned, there were no shares held in escrow, notwithstanding the information brought to his notice, shortly prior to 12 August 1997. 68 For reasons later examined, I am not satisfied that the existence of the restricted shares, or their advent onto the market had any measurable effect upon the on-market share price in the last four months of 1997. 69 The approach I have adopted to the effect of this evidence is to determine on the probabilities what the situation was at the time of entry into the allotment agreement, and in that context to take into account whatever significance there is in Lebbon's conduct in early August 1997 to the extent that it may throw light on the pre-allotment agreement conduct. Further, I think it is necessary to establish the rights and liabilities in relation to the events surrounding the allotment agreement before passing to an examination of the effect on those rights and liabilities of the substitution agreement. 70 The evidence of Lebbon is unequivocal that he had no recollection of seeing any broker report prior to the allotment agreement which made any reference to the restricted shares. He did not deny that the broker reports concerning Peptech may have been received from Baker prior to the allotment agreement. Lebbon's position in relation to the reports is substantially caught in the following transcript of his evidence in cross examination; "Q. Again, can I suggest to you that if you had had both these reports in your possession and read in both of them statements that the shares were held in escrow, if you were concerned about that fact one matter that you would have certained to clarify the position with Dr. Aston if you spoke to him, is that right? A. Not necessarily because there were other reports that made no reference to escrow securities, other reports to say, use conditional words and the annual report does not disclose them. Q. You say, do you, that if you had seen these reports and read them in the period from May to July 1997 that because the references to shares being held in escrow appear only in some reports and because there was no reference to such shares in the annual report you would have acted upon the footing, do you say, that there were not restricted securities? A. I would have relied on the annual report. With hindsight had I been aware of that I cannot categorically say I would have raised the issue with Aston. I mean in doing research there are certain milestones, if you like, which you take as gospel, as major markers. The annual report is one of those and very much one takes the attitude that in order to be efficient with one's time one goes back to the last full disclosure by the company, be it financial, science, information or whatever and work towards an interest in that. This is why we say look at annual report as being the last complete matter. It is the Nomura report of June 1996 because that was a fairly comprehensive document. Q. Do you accept the possibility that the two reports I have taken you to may well have been read by you prior to 31 July 1997? A. It is a possibility. Q. And do you say that if you read those reports and saw within them a reference to shares held in escrow you would have disregarded such references because you had other reports which made no references to such shares and because you had an annual report also which made no reference to such shares? A. What I am saying is if I had these before July 1997, and I can't recall that and had I read them I would not have paid any particular attention to that because that corporate information is confidential information. I would have looked and relied on from the annual report. There is nothing there that flashes a red flag at me to say this is a real problem. I don't recall reading those reports before then and I would have relied on the annual report because that is the marker I talked about. Q. Just trying to understand - you mean by that answer what you are seeking to suggest is that it is entirely possible you read these reports but just ignored the reference to them in escrow for the reason you stated? A. Had I read them, yes, but I don't accept that I read them. Q. Why is that you don't accept that you read them? A. Why? Because I can not recall the precise date that I read them and the focus of our investigation was not - by the way the brokers report, the focus of your investigation was by way of Michael Story's investigation of the science and my review of the financials. I had no particular need to review broker's reports. It was in the main stay an important component of our research that changed in August." (T 106.44 - 107.53) 71 I have some difficulty in accepting the validity of that reasoning. It is common ground that Lebbon possessed expertise in market analysis of shares. Leadenhall's interest in Peptech shares was not a simple market transaction. It involved a sophisticated technical analysis of Peptech's underlying value, upon which was dependent a substantial private placement of shares and options in favour of Leadenhall at prices well above ruling market prices. It was contemplated that Peptech, with the assistance of Lebbon, would stimulate interest, and hence a price rise, in Peptech shares by publicising the placement at a premium and Story's favourable technical review, or at least the non-confidential elements of it: by arranging presentations relating to Peptech's potential value to prospective investors in various Australian capital cities and by the listing of Peptech shares on the London market. It was contemplated that Leadenhall would on-sell shares allotted to it. Leadenhall's interest accordingly was both short and medium to long term and the success of the transaction lay in developing market awareness of the potential of Peptech's underlying business and the intrinsic value of its shares. That strategy was expected to result in a significantly increased market value of Peptech shares. In that setting the importance of the existence of the restricted shares and of their emergence from escrow is evident. 72 The view I have come to is that, if the broker reports, and, in particular, the references in them to the possibility of the shares of Peptech being held in escrow, had come to the attention of Lebbon prior to the allotment agreement, it would have been incumbent upon Leadenhall to raise the matter with Peptech, notwithstanding the misleading nature of the 96 report and the half yearly report. 73 In my view, prudence would have dictated that course given the "fundamental" importance of the possible existence of a substantial body of Peptech shares being held in escrow; particularly so when, in Lebbon's understanding of the operation of the listing rules, any such restricted shares would have been due to come out of escrow in mid 1997. 74 I think that conclusion is called for, notwithstanding Lebbon's evidence, which I accept, that in "doing research there are certain milestones, if you like, which you take as gospel, which you take as major markers", principal among which are the target company's published reports. 75 The evidence is, I think, unclear as to what happened within Leadenhall to the broker reports forwarded by Baker prior to the allotment agreement. I think it is reasonably clear, both from Lebbon's evidence and his contemporaneous records, that he paid no particular regard to them in his due diligence exercise in relation to the Peptech shares. It is possible that they were handed over to Mak, as Leadenhall's business analyst. However, it was not suggested in cross examination of Lebbon that Mak, or any other member of Leadenhall's staff, had reported to Lebbon in relation to the broker reports and, in particular, to the references in those reports to shares held in escrow. I think that, in those circumstances, no adverse inference should be drawn from the absence of Mak from the witness box. 76 However Lebbon's evidence explaining his treatment of the information in the Peptech announcements challenges credulity when regard is had to the movement in Peptech's share price at the time of that receipt of that material in early August 1997. I would have thought that information referring to the possibility of restricted shares having been created in mid 1996 with a likely escrow period of twelve months warranted an enquiry by Lebbon of Peptech: particularly in a climate of falling share prices. Lebbon's evidence in cross examination was as follows: "Q. Do you agree with this, that by no later than August 1997 you had at least read something about shares being held in escrow within Peptech? A. That came to my knowledge by then, yes. Q. Did you consciously turn your mind, when you read the reference to the conditions of escrow, whether you should pursue some further enquiry about the matter? A. No. Q. Did you, when you saw the reference to escrow conditions, enquire how that could be reconciled with what appeared in the annual report? A. No. Q. Do you say, when you read the reference to escrow conditions, you just read it and thought nothing of it? A. Correct. Q. Can I suggest to you that either at about the same time or before 31 July you read references to escrow in analysts' reports and also thought nothing of it, is that right? A. No. Q. Can I suggest to you that if you had known of shares being held in escrow before you made the investment on 31 July, you also would have thought nothing of it? A. Absolutely not, I would not have done the investment; it would have been so fundamental to the transaction. Q. Can I ask you to turn next to page 831? This is a letter that you wrote to Peptech on 12 August 1997 expressing some concern about how the market had dropped? A. Yes. Q. By this date you had read, had you not, at least in the last document I took you to, some references to shares being held in escrow? A. Yes. Q. You knew from the annual report that the resolution in relation to the Peptech UK allotted shares was made in July of 1996? A. Yes. Q. You used your knowledge of the Australian Stock Exchange Listing Rules that if there were vendor securities which were restricted to the escrow period, the period would have been most likely one year? A. Yes. Q. If you were otherwise minded to disregard a reference to escrow, didn't it occur to you, if you were concerned about it by 12 August 1997, that a possible explanation for a price drop might have had something to do with the shares being in escrow? A. No, that's why I asked the question. Q. You didn't think in August 1997 that shares being held in escrow and becoming released from -- A. In August 1997 I wasn't aware there were shares in escrow. Q. Can I suggest to you that was for the reason you well knew, that the market had an understanding that there were shares in Peptech that were restricted to securities? A. I beg your pardon? Q. You don't understand the question? A. No, I don't. Q. You knew, didn't you, from the various brokers' reports to which I have taken you that it was widely known within those participating in the market that there were restricted securities in Peptech? A. No, I don't accept that. Q. Can I ask you to go to the document at page 833? Peptech provided you on 12 August with a copy of the letter that had been written to the Stock Exchange referring to a similar year, is that right? A. Yes. Q. And you read that letter that Peptech didn't have an explanation for the price drop? A. Yes." (T 113.1 - 114.28) 77 I think the reality is that Lebbon paid scant regard to that material, mainly because it was provided in response to Mak's request for information for the preparation of Lebbon's presentations that had been scheduled for August 1997 and which were aimed at enlivening the market in Peptech shares. I think this is reflected in Lebbon's evidence that follows: "Q. …Do you have any recollection at all of Mr Mak approaching you some time on about 8 August 1997 and showing you the handwritten note and the detailed analyst's reports described on the following page? A. I have no specific recollection of that. Q. You don't have any recollection at all of assisting Mr Mak to locate the materials described in the attached document headed, "Detailed analyst's reports"? A. I don't have a specific recollection of it, no. Q. Do you accept that consistently with your instructions to Mr Mak to help you get the information, that by no later than early August 1997 the probabilities are Leadenhall had within its possession each of the three reports which I've taken you to? A. No, I don't. Q. You know, don't you, from the tenor of this letter that what Mr Mak was after was in particular any broker's research report? A. Yes. Q. You know that the response that he got back from Peptech included a listing of the detailed analyst reports of which Peptech were aware? A. Yes. Q. You know from this document that what Mr Mak was told was that you ought to have each of the reports described? A. Yes. Q. The probabilities are, aren't they, that Mr Mak sought out from you and, if necessary, from other sources the analysts' reports that Peptech had identified. A. He would have sought them out. Mr Mak was doing lots of other things at that time and some things fell by the wayside. Q. We know in the circumstances you can't explain how each of those three reports found their way into the possession of Leadenhall? A. Yes. Q. If they hadn't been received before 8 August 1997 the probabilities are, aren't they, that they were received shortly after? A. No. They may have been received shortly after. There were a number of things Mr Mak had left to do. This was leading up to the presentations and he was very busy." (T 109.47 - 110.38) 78 This adverse market movement in Peptech shares resulted in Leadenhall releasing the on-sale investor from the agreement to purchase a portion of Leadenhall's shareholding in Peptech. In doing so Leadenhall was exposed to the somewhat daunting prospect of satisfying it's commitment to find over three million dollars for the shares allotted to it. I think that is the context in which the following evidence of Lebbon should be viewed: "Q. Can you turn please to page 813? This is the document I took you to yesterday, you might recall. It's a facsimile from Mr Baker to you of 9 August which attached a summary of reports made by Peptech and you might recall I took you at page 815 to the entry about halfway down the page for 16 July 1996 described as, "Results of meeting"; do you see that? A. Yes. Q. You told us yesterday that you in fact thought you glanced at this document but did, in glancing, read that entry? A. Yes. Q. You agreed, as I recall it, that although you read in that entry a reference to the new shares likely to be subject to escrow conditions, you didn't act upon that matter by making any enquiry of Dr Aston or anyone else about what had happened? A. Correct. Q. Was that for the reason, do you say, that you continued to prefer what was in the annual report over any other piece of information that you might come into possession of relating to shares being held in escrow? A. I think that would have been for a number of reasons: One, we had already done the deal, this being August, the transaction being done some two weeks earlier, secondly, it is not definitive, its says, "Likely to be subject to escrow"; thirdly, there's no subsequent announcement saying they are in escrow. Q. You don't seriously suggest, do you, in relation to the fact that you had already done the deal that you would remain you (sic) mute about the complaint relating to shares being held in escrow? A. If I thought they were in escrow I wouldn't have remained mute, you're correct. Q. You say the reason you didn't pursue it was because you did not think the shares were likely to be in escrow and there's no such announcement? A. And I relied on the annual report." (T 110.40 - 111.24) 79 The view I have come to concerning this August 1997 conduct of Lebbon is as follows. In the absence of any satisfactory explanation, the failure of Lebbon to associate the possible coincidence of restricted shares coming out of escrow with the fall in the price of the Peptech shares brings into question his credibility in relation to his asserted reliance upon the materially incorrect published reports of Peptech. 80 However, the view I have reached is that in August the reference to escrow shares in historical documents relating to Peptech "didn't jag in (Lebbon's) mind" for the reason that the documents were received in a different context, namely for the preparation of material by Mak for Lebbon's August presentations. 81 My reasons for preferring that view are that it was not necessary for Lebbon to make any admission as to sighting that August material. He had no difficulty in denying knowledge of the content of the broker reports provided prior to the allotment agreement. In August 1997 he had the opportunity, in the face of the fall of the Peptech share prices, to opt out of any further commitment to Peptech on the basis of the misleading nature of its 96 report and the half yearly report, instead of accepting a compromise in the form of the substitution agreement. I am reasonably satisfied that his attention was directed in August to the tasks ahead of Leadenhall in enlivening interest in Peptech's shares in the face of a challenging resistance in the market place. 82 If Lebbon is to be taken as unscrupulous in raising in these proceedings a reliance upon the materially false, or misleading contents of Peptech's reports, it was open to him to adopt that course both prior to and following the substitution agreement. In fact, when relations between him and Peptech became strained it led to Lebbon asserting, in his facsimile of 5 November 1997, that he had been "conned" by Peptech in relation to the private placement of Peptech shares. 83 However, there is no reference in Leadenhall's lengthy facsimile to Aston to the false nature of Peptech's reports. It is a wide ranging facsimile and if it had been present to the mind of Lebbon in November 1997 that there existed restricted shares, I would have expected him to have relied upon Peptech's incorrect reports to the public in his facsimile of 5 November 1997. The facsimile opens with the following paragraphs: "I write to you with great concern and a formal request for some answers Background Leadenhall and its associates have invested $A1 million in Peptech and have spent close of $A0.25 million in costs - many of which were incurred for the benefit of the company, Peptech, for which no reimbursement has been received. Since we made our investment, we have seen the share price drop to less than 30% of that which was paid and, to date, we are facing a loss of approximately $A1 million - all this in the space of three months and with no communication from the company explaining matters. This state of affairs is unhealthy and can not be allowed to continue. David Baker and ourselves are receiving a number of comments from shareholders and criticisms which I, at least, am not in a position to defend. I and a number of shareholders would like answers to a range of questions, including, but not limited to, the following issues. A copy of this fax to you to (sic) is being sent to David Baker as he was present during my visit to Cirencester in July 1997." There then followed four pages of questions concerning Peptech's products; Peptech's appointment of a London broker; its engagement of consultants and a finance director; suggested conflicts of interest of Peptech's secretary; conduct of Peptech in the context of shareholder relations; strategies in place for capital restructuring or in regard to takeovers and matters concerning management and presentations to stockbrokers. Under the heading "shareholders" there appeared the following: "Shareholders Has the company received satisfactory responses to all its Section 719 notices sent out by the ASC? What was the shareholding of the top 20 shareholders as at the end of 31 July 1997, 31 August 1997, 30 September 1997 and 31 October 1997? How have they changed and why? What is the company doing to keep in touch with its top 20 shareholders? What is the company doing to keep the share market informed of progress?" 84 If the falsity of the Peptech's reports was present to the mind of Lebbon at that point, I think the probabilities are high, that he would have resorted to that criticism. His facsimile concluded with the following paragraphs: "In summary, there is an enormous amount to be done and little sign of anything happening. Shareholders could be excused if they vote with their feet and/or dump the existing Board and management. On a personal level, I feel that I was "conned" and that urgent answers are required to convince me otherwise. Whilst I acknowledge your desire to be friendly and to have lunch next time you are in Australia, a lunch alone will not solve the million dollar problem - there needs to be other things done and value restored. We find ourselves in a far, far different position today than the position that was painted to me in Cirencester. I look to you personally to restore value to our investment." 85 The facsimile has the earmarks of an extremely disenchanted investor and is in terms that, I think, reflect a keen willingness to explore avenues of escape from the transaction. I find it very hard to believe that if Lebbon had been aware of the existence of the restricted shares and of the fact that they had come out of escrow in August/September 1997, he would not have made full use, at that stage, of the false statements in the published reports of Peptech. 86 Nothing had gone right in relation to Peptech's shares. They had fallen into the twenties, that is cents: Peptech had got no closer to a listing on the London market and an important step in the raising of new capital failed to eventuate when Allergen Pharmaceuticals Ltd (Allergan) declined to exercise its option rights in relation to Peptech's shares . 87 Lebbon's facsimile of 5 November 1997, I think, marked the beginning of his investigation into shareholdings in Peptech, and one aimed at seeing what that would turn up, without knowing precisely what an investigation into shareholding would reveal. I doubt if litigation was far from his thoughts. 88 Initially, I think, Lebbon was aiming in the direction of shareholdings that Aston and those associated with him may have had and disposed of following the allotment agreement. I do not know whether Lebbon was completely open in his evidence about his conduct in November 1997, as reflected in the following transcript: "Q. You had asked Dr Aston in the letter that you wrote to him on 5 November to provide information as to who the substantial share holders were as at 31 July, 31 August, 30 September and 30 October? A. Yes because one of the issues that we had discussed earlier was the nominee holdings and that Peptech should try and get behind some of those nominee holdings. Q. You wishing to know who the top forty shareholders were as at late November 1997, what do you say your reason was in seeking that out? A. I had no other specific reason other than just looking at it for general information. Q. It was not for the purpose of seeking to explore ways that you might assert that somehow you had been conned? A. No, it wasn't. HIS HONOUR: Q. What was it? You must have had a reason? A. Well, we were faced with the situation where there had been substantial trades in August. I had asked the company to make inquiries about who the nominee companies were, Mark Potter had sent me an updated register I think on 31 August. There had been speculation and comment made by Baker as to who had been buying and selling and in the context of trying to understand where the company was at I naturally asked for the top twenty." (T 150.34 - 151/2.2) 89 Other steps taken by Lebbon included a recourse to the broker reports which had been in Leadenhall's possession for several months. Lebbon fixed the time for that examination as the end of November 1997. At the same time, he obtained from Peptech's share registrar, a list of the top forty shareholders in Peptech. This was provided by facsimile of 26 November 1997. He compared that printout with a similar record provided to him by Mellish on 18 July 1997 which provided details of shareholders as at June 1997. 90 This comparison revealed a group of shareholders that had not appeared in the June list. These, as it happened, included holders of the restricted shares. Since there had been no share trading or private placement to account for that change and given Lebbon's reference back to the broker reports it is not too difficult a step to conclude that Lebbon had a shrewd idea at that stage of how those new shareholders had come onto the list. 91 Lebbon also revisited the 96 report and in doing so he "discovered by accident" that the percentage of shareholding attributed to Peptech's principal shareholders reflected an issued share capital of 119,000,000 shares, not 134,000,000 as stated in the 96 report. I have some doubt about that exercise being performed other than in the context of Lebbon chasing up the trail of the restricted shares, although he claimed that as at 28 November 1997 he had "no view (and) was fishing for information." 92 According to Lebbon he did not make the connection between the restricted shares and the change in shareholding until 1 December 1997. Perhaps nothing much turns on the space of a few days. However I entertain little doubt that Lebbon had a pretty fair idea of what had happened to explain the change in shareholding in the two lists provided to him by that date. The 1 December date coincided with the receipt by Lebbon from the ASX of the Peptech notice of meeting of 21 June 1996 to approve the allotment of the restricted shares. That notice of meeting was forwarded by the Manager in Adelaide of the ASX and was forwarded in the following circumstances: "Q. Had you prior to receiving the document at page 1238, dated 1 December 1997, spoken to someone at the Australian Stock Exchange asking for a document? A. No I do not think I did, no. Q. Do you see the document at page 1238, the notice of meeting as discussed? A. Yes. Q. Apparently, a fax sent to you by David of the Australian Stock Exchange? A. Yes. Q. Had you spoken to David before this? A. Yes. Q. Had you asked for a copy of the notice of meeting concerned? A. Yes. Q. Had you asked specifically for a copy of the notice of meeting proposed to be held in July 1996? A. Yes. Q. This was proposed to be held then? A. Yes. Q. Where did you get that information about the meeting from? A. The circumstances surrounding that is David, while the manager of the Australian Stock Exchange, he is the manager of the Australian Adelaide stock Exchange. I had known him for some time and I telephoned him and discussed the difficulty I had in terms of this anomaly and I think he then looked at his internal data base and said there was the notice of meeting, and that is how it came to be sent to me. Q. It was not because, because you had read in a document that you received in August that there was a meeting to be held in July 1996, at which consideration was to be given to shares being issued? A. No I do not think it was. Q. You say do you that your recollection now is that David White was the one who made reference to that meeting as being a potential explanation? A. Yes Q. Did you recall what you had read of it in the document that you had been given in August? A. No." (T 159.38 - 160.30) 93 It is clear from the facsimile of Lebbon to Baker of 2 December 1997 that he was well aware of the existence of the restricted shares by that time and that he was investigating ways of extricating Leadenhall from an unsatisfactory investment. He forwarded a facsimile to Peptech on 2 December 1997 which was in the following terms: "We acknowledge receipt of your facsimile dated 26 November 1997 under cover of which you sent a copy of the top 40 shareholders as at November 1997. We have obtained from the ASX a copy of a Notice of Meeting of 16 July 1996 and enclose a copy for your reference. There appear to have been some shareholding changes from those shares which were allotted pursuant to the meeting of 16 July 1996 compared with the shareholding list as at 26 November 1997. Accordingly, we would be pleased if you would kindly provide us with the following information 1. What are the current shareholdings of: - Malcolm Douglas McMillan - Agnes Therese McMillan - Theresa Bomford - EBC Nominees (Jersey) Ltd - Swiss Bank (London Office Nominees) Ltd - Wharton Shober 2. On what dates and in what quantities were disposals of shares made by Integro Fiduciaire SARL - you will note that their shareholding has apparently dropped from 2,263,500 to 391,000 as at 26 November 1997. 3. On what date and in what quantities were disposals of shares made by Fiduciaire Ryco SARL - you will note that their shareholding has apparently dropped from 3,143,750 to 1,571,875 as at 26 November 1997. 4. What were the dates on which each of the shareholdings listed in the Notice of Meeting of 16 July 1996 were available for sale through the ASX, i.e. were any or all of these securities restricted securities and, if so, for what period?" 94 In the absence of a response, Leadenhall's solicitor forwarded the following facsimile to Peptech on 22 December 1997: "I act for Leadenhall. My client discovered earlier this month that the 14,976,825 shares issued by Peptech Technology Limited (the "Company") pursuant to a resolution passed on 16 July 1996 were "restricted securities" within the meaning of the ASX Listing Rules, with an escrow period of twelve months. My client was not informed of this material fact in its negotiations with the Company for the issue to it of shares and options pursuant to its application made on 31 July 1997. Had my client known the facts as to the restricted securities it would not have subscribed for the shares. Furthermore: 1. There is no reference in the Company's annual report dated 13 December 1996 to the number of restricted securities on issue and the date from which they cease to be restricted securities. This, inter alia, is a breach of ASX Listing Rule 4.10.14. 2. The Company's notice of meeting dated 21 June 1996 convening a general meeting of shareholders to pass the resolution for the issue of the shares does not disclose that the shares proposed to be issued will be restricted securities. I note that your letter to ASX of 16 July 1996 states: "The new shares are likely to be subject to escrow conditions as restricted securities…" 3. It appears from your letter of 19 July 1996 to ASX, that the notice of meeting referred to above was not given in draft form to ASX prior to its dispatch to shareholders, as required by ASX Listing Rule 15.1.4. The failure of the Company to inform my client of the facts as to the restricted securities constitutes deceptive and misleading conduct in breach of Section 995 of the Corporations Law and Section 52 of the Trade Practices Act. My client is entitled to recover damages from the Company, and from Messrs R Aston, A R Bates, G A Hilton and D J M Mellish as persons involved in the contraventions, pursuant to Section 1005 of the Corporations Law and Section 80 of the Trade Practices Act. I have also advised my client that it is entitled to make application to the Court under Section 1114 of the Corporations Law in respect of the Company's breaches of the ASX Listing Rules. My client's loss, as far as it can presently be quantified, is $885,276, made up as follows: Subscription cost $1,000,000 Costs and expenses of investigation of the Company $ 205,260 Other costs & expenses in respect of the "investment" $ 8,104 Opportunity cost $ 61,489 SUB-TOTAL $1,274,853 Less: Net proceeds of sale of 350,000 shares in the Company $ 116,835 Present value of remaining holdings $ 272,742 SUB-TOTAL $ 389,577 $ 885,276 My client requires, without delay, an acknowledgment of liability and an undertaking to compensate it for its loss and damage." 95 Peptech responded by its solicitor's facsimile of 24 December rejecting the claim and asserting that Lebbon had been "made aware of the existence and terms of the restricted securities, both in Cirencester, UK and in Sydney, during the course of the extensive due diligence investigations which he undertook on behalf of Leadenhall." 96 Consideration of Leadenhall's case, I think, may start with a series of findings against which its entitlements may be gauged: A. The 96 report and the half yearly report were important tools in Lebbon's "view of the financials" of Peptech. Each report was misleading in a material respect, either by omission of reference to the existence of the restricted shares or by incorrect description of Peptech's issued shares as quoted shares. B. Lebbon clearly placed reliance upon that material causing Leadenhall to enter the allotment agreement. C. Prior to the allotment agreement it did not register with Lebbon that the restricted shares existed. His mid July discussions 1997 with representatives of Peptech did involve discussions relating to the holders of shares who happened to be holders of restricted shares. Lebbon would have known that the Peptech UK shareholders had been bought out in an exchange of shares and it was almost inevitable that discussion would have arisen, as Aston has said, over their loyalty to Peptech. I accept that in such discussions mention, in passing, was made of the fact that their shares were in escrow for the time being. I accept that in those discussions it did not register with Lebbon that there were some 14,000,000 shares in escrow and due to be listed. Whether it should have is another matter. D. Peptech officers were clearly aware of the potential impact on its planning for possible capital restructuring and capital raising of the listing of the restricted shares and of the fact that some restricted shareholders proposed to dispose of their holdings and that others were under pressure to sell. In comparison with the concentration by Peptech's board on these matters about the time of the allotment agreement, statements made to Lebbon by Peptech, in relation to Peptech shares were, in my view, less than fulsome on the subject of restricted shares. E. Leadenhall was in possession of the broker reports which would have put Lebbon on notice of the existence of the restricted shares and of their pending release from escrow. I accept that he did not notice any such references in material provided to Leadenhall until early August 1997. Whether he should have been aware of their contents is another matter. F. By 12 August 1997 Lebbon was aware of reference in the Peptech announcements to the existence of the restricted shares. Given his preoccupation with promoting Peptech shares, he took no action to clarify that matter in the light of the fallen price of Peptech shares. Whether he should have taken some action is another matter. G. Notwithstanding that the reference to restricted shares in the Peptech announcements came to his notice in early August 1997, Lebbon did nothing to clarify the position before causing Leadenhall to enter into the substitution agreement. Whether he should have done so is another matter. H. Had Lebbon been aware of the existence of the restricted shares and of their terms of restrictions I do not accept that he would have abandoned negotiations, given the favourable evaluation of Peptech's potential by Story. I do accept that he would have deferred concluding negotiations. Lebbon's interest was short term in so far as Leadenhall aimed to on-sell shares received under the allotment agreement: and medium to long term in relation to any shares retained and the options exercisable until 2002. The release of the restricted shares onto the market was pertinent to the on-sale of the allotted shares. I suppose, if the whole of the substituted shares had been dumped on the market in an unorderly exiting of the former Peptech UK shareholders, there could have been a medium term effect if the exodus led to a complete lack of shareholder confidence. In that case recovery of Peptech's share price may have taken more than what could have been achieved by the Story analysis, Lebbon's capital city presentations, listing on the London market and Allergan exercising its option rights. I. Had Lebbon acted prudently he should have: (i) treated the broker reports received some time about May 1997 with more regard and made himself aware generally of their contents and, in particular, he should have been alerted to the possible existence and likely period of escrow of the restricted shares: (ii) being put on notice, clarified with Peptech whether there were in fact any restricted shares amongst its issued shares and required Peptech to reconcile that information with Peptech's reports: (iii) taken similar action in August 1997 in relation to the reference in the Peptech announcements to the possibility that Peptech had issued shares which were the subject of restriction agreements; and (iv) taken action to protect Leadenhall's position other than by entering into the substitution agreement. J. While those failures represented a lack of care on the part of Lebbon contributing to Leadenhall's acceptance of the terms of the allotment agreement, I am satisfied, on the probabilities, that Leadenhall entered the allotment agreement under the influence of the omissions and incorrect statements in the 96 report and the half yearly report. 97 Whether the plaintiffs suffered recoverable damages "by" that conduct, in my view, presents a question that is not readily answered. I expressed the view on a question of principle, during the course of submissions that this case was not a 'Potts v Miller' situation. That was in response to submissions on behalf of Peptech that the measure of damages to which the plaintiffs may be entitled was the difference between what was paid for the allotment of shares and the granting of options and the true value of those securities unaffected by the misleading conduct of Peptech as measured at the date of the transaction. On that basis it was submitted that the damages would be nil. 98 If the principle espoused in Potts v Miller ((1940) 64 CLR 282) applied to the facts of this case I think the conclusion drawn by counsel for Peptech would be correct. The presence of the restricted shares and their impending release from escrow were not facts affecting the intrinsic value of the Peptech shares. They were factors that, in the short term at least, were capable of affecting the market price of Peptech shares. 99 It was not inevitable or, in my view, even a matter of probability that those facts would adversely affect Peptech's share price. The real significance of those factors was the risk that the body of restricted shareholders would exit the company in an unceremonious dumping of shares soon after the restricted shares came out of escrow. If that did not eventuate, then the structure of Peptech's share capital would have been unremarkable. 100 Further, the possibility of an inordinate disposal of the hitherto unrestricted shares in the weeks following their release from escrow resulting in a depressed market price may have said little about the underlying value of the shares to a prospective long term investor: particularly one taking a position with long term options over shares in Peptech. 101 The favourable Story analysis; the anticipated exercise of option rights by Allergan; the anticipated secondary listing of Peptech's shares on the London market; the announcement of Leadenhall's above market placement and the strategy of sparking a share price increase by a series of presentations emphasising those things, were a combination of events that could have made a depressed share price in August/September 1997 a favourable platform for investment in Peptech: provided that the premium to be paid on allotment of shares to Leadenhall reflected the depressed share price. 102 Part of Lebbon's evidence concerning the significance of the restricted shares was as follows: "Q. Can I suggest to you that if you had known of shares being held in escrow before you made the investment on 31 July, you also would have thought nothing of it ? A. Absolutely not, I would not have done the investment; it would have been so fundamental to the transaction". (T 113.26 - 113.30) 103 I have difficulty in accepting that evidence at face value in the light of my findings as to the market significance of the existence of the restricted shares and of their release from escrow. However, the evidence lies uncomfortably beside other evidence of Lebbon in cross examination. 104 As to the effect of gaining knowledge of the restricted shares prior to the allotment agreement, Lebbon gave the following evidence: "Q. You tell his Honour, don't you, that in May of 1997 you were still in the process of trying to work out whether you would spend money getting a scientific report done? A. Correct. Q. And you hadn't really formulated any particular proposition whereby you might require either shares or options? A. Correct. Q. And without you having formulated what your proposal might be, may I take it if you had read in any of the reports Mr Baker provided to you that there were shares in escrow, it wouldn't have mattered? A. It would have mattered. Q. In what sense? A. As to the timing and pricing and also as to whether I had proceeded at all. At that stage we hadn't fixed timing or price." (T 37.44 - 38.4) 105 Later in his cross examination Lebbon gave evidence to similar effect as follows: "Q. You say, do you, that if you had known that there were restricted securities which might be released on to the market in late 1997 in Peptech that you would have bargained for some different option price, do you? A. If I had proceeded with the deal I would have looked at a different price, yes. Q. What price do you say you would have looked at? A. I don't know. I haven't contemplated that. Q. What work would you have done to try and work out what price would be appropriate? A. Good question. I'm not sure offhand. There would be a number of things I would have done, I think. HIS HONOUR: Q. One would have been to get Mr Story on the job? A. Yes, your Honour, but this issue then is not just about fundamental values, which is what Dr Story's report is about, it is about pricing mechanisms and how the market might react. My inclination -- Q. You are talking about the fact that Mr Story's exercise wouldn't know the results of it? A. Certainly if I had proceeded with the transaction or contemplation of the transaction I would still had a report done, but my initial reaction would be that I would not have done the transaction at that point of time. I would have waited to see the effects of this for the price to have weakened and then negotiated something." … A. It is a fairly complex set of issues you deal with. There's no precise answer, which is why you would wait until the effects were known. This was a transaction where there was risk involved and significant risk, and I was putting in a significant amount of money of my own, that had I been aware of the risks I would have waited. You know the saying you can go broke making a profit, but nobody went broke not doing a deal. I would have waited. … Q. But if you had not known, I want to come to some communications which suggest you did know, but if you had not known that there were restricted securities but were informed immediately before the allotment agreement that there were, you say, do you, that you would have forgone the opportunity to enter into this arrangement and deferred reflecting upon it for some number of months to wait and see what the market did? A. In hindsight, if you asked me that question what would I have done, I believe I would have waited." (T 95.23 - 95.52…T 98.50 - 98.57…T 99.24 - 99.33) 106 I think that evidence accords with the opinion evidence of Keene as to the significance to the market of restricted shares in a listed corporation. 107 I think the correct conclusion to be drawn from Lebbon's evidence is that he would not have abandoned negotiations with Peptech had he been aware, prior to the allotment agreement, of the existence of the restricted shares and their impending listing. 108 I also take the view that Leadenhall would have proceeded with the allotment in one form or another having regard to the height of Lebbon's expectations in relation to Peptech's future share price. Based upon the Story analysis and Lebbon's own workings he had formed the opinion that the net worth of Peptech was in the order of $260,000,000 which reflected a potential value per share of between $1.90 to $2.00. It is of particular significance, in my view, that, in the second half of August 1997, he was still of the opinion that there was a "huge upside" in prospect with Peptech's share price. 109 Leadenhall's presentation to prospective investors "based on information believed to be reliable as at 14th August 1997" is an insight into Lebbon's thinking in the second half of August 1997. It is a twenty seven page "bullet" type document published under Lebbon's name as executive director of Leadenhall. It outlined the history of Leadenhall's investment in Peptech, ascribing to the allotment price of 62 cents per share a premium value over market price of approximately 16 cents. It dealt with the Story analysis and the 'product portfolio' of Peptech in some detail, including the quality, 'stage of advancement' and valuation of it "as per…. Story Base Case $256 million." It outlined "Project Milestones" including Allergan's anticipated exercise of option rights and provided "Anticipated Corporate Milestones". Included in the latter were the appointment of a Finance director; the appointment of a London Stockbroker to "manage secondary listing" and, in 1998, the listing of shares on the London market. In a "summary" which posed the rhetorical question 'why did Leadenhall invest' ; the answers provided included the following: "- share price at historical low - huge upside…for (factors) not priced into current share price - London listing within 12 months" 110 If Lebbon is to be taken as honestly presenting the Peptech case in the second half of August 1997, which I accept his presentation represented, it leaves little room for speculation when it comes to deciding whether Lebbon would have proceeded with the allotment had he been aware of the existence of the restricted shares. When it is recalled that by mid-August 1997 the Peptech share price had fallen significantly, the implication is strong that Lebbon had not been deterred by that market setback and had been prompted to describe the share price, being at an historical low, as an incentive to investment in Peptech. 111 In trying to assess the consequence of finding that Lebbon would have deferred concluding an allotment agreement with Peptech and would have caused Leadenhall to enter into such an agreement at a subsequent time, although not necessarily on the same terms as the allotment agreement, I think one is entitled to look at the events relating to the release of the restricted shares. 112 The restricted shares and their respective shareholders were as follows: "Shemyakin Institute of Bio-organic Chemistry - 4,527,000 ordinary shares Vadin Tichonovich Ivanov - 880,250 ordinary shares Tatyana Michaylovna Andronova - 880,250 ordinary shares Malcolm Douglas McMillan - 565,875 ordinary shares Agnes Therese McMillan - 377,250 ordinary shares Robert Harold Raymond Bomford - 402,400 ordinary shares Theresa Bomford - 402,400 ordinary shares EBC Nominees (Jersey) Limited - 150,900 ordinary shares Swiss Bank (London Office Nominees) Limited - 188,625 ordinary shares Wharton Shober - 251,500 ordinary shares Integro Fiduciaire SARL - 2,263,500 ordinary shares Roger Aston - 490,425 ordinary shares Paula Aston - 452,700 ordinary shares Fiduciaire Ryco SARL - 3,143,750 ordinary shares …" 113 There is some discrepancy between those figures, taken from the notice of general meeting of Peptech to approve the issue of the shares to the Peptech UK shareholders, and other records in evidence: a discrepancy which I regard as of no significance. As earlier noted, on receipt by Lebbon of the top 40 shareholders in Peptech as at 26 November 1997 he compared that schedule with the comparable schedule of shareholders as at 30 June 1997. That comparison, in substance, pointed up the listing of the restricted shares by their appearance on the 26 November 1997 schedule in contrast with their omission from the 30 June 1997 schedule. 114 Lebbon carried out a further analysis of Peptech shareholding by a comparison of the 26 November 1997 schedule with shareholdings as at 4 December 1997. What comes out of that comparison is that the Shemyakin Institute and associated shareholders of the Institute had retained their shareholding: the McMillans and Shober had disposed of their shares; the Bomfords half of their holding. Fiduciaire Ryco had transferred one half of its holding and Integro Fiduciaire had transferred nearly three million of its shares. 115 Further evidence of sale of the restricted shares is to be found in a Mellish note of 18 December 1997 which disclosed that the McMillans had disposed of their holdings on 1 October 1997: Theresa Bomford sold her holdings, except for 9,000 shares, on 7 November 1997: EBC Nominees had disposed of 150,900 shares on 20 October: Swiss Bank had sold 188,625 shares on 24 October: Wharton Shober sold a total of 251,500 shares between mid September and 24 October: Integro Fiduciaire "had a balance of 391,000 but (had) steadily sold them from 27/10/97": Fiduciaire Ryco "had 2 holdings (1) 1/9/97 1,571,875 (2) 1/9/97 1,571,875 sold 25/9/97" 116 Mellish's note to Aston in relation to this information was that it had not been given to Lebbon. It will be remembered that Lebbon had requested of Peptech details of current shareholdings of the McMillans, Bomford, EBC, Swiss Bank and Shober, in addition to details of the disposal of shares by Integro Fiduciaire and Fiduciaire Ryco, together with a statement as to the dates on which the shareholdings listed in the 16 July 1996 notice of meeting were available for sale through the ASX. 117 The details of movement of the restricted shares is not readily discernible in that certain of the beneficial owners resorted to Jersey Island trusts and Jersey Island companies as repositories for their shares and used broker nominee entities for trading on the stock exchange. Merrill Lynch (Australia) Pty Ltd (Merrill Lynch) appeared to be the broker used by Peptech and several of its principal shareholders. 118 Edward Darryl Codd (Codd) was a stockbroker within Merrill Lynch. He was called to give evidence in the plaintiffs' case by leave, no statement of evidence having been filed. He had declined to provide a statement on grounds of confidentiality. His evidence was not particularly illuminating, largely as a result of the recourse of Merrill Lynch's clients to Jersey Island trusts and Jersey Island companies with some greyness in the identity of the persons holding beneficial interests under those trusts or in those companies, and from whom Merrill Lynch received instructions. For example, in relation to the holding in the name of Fiduciaire Ryco, it appeared that, although those shares were treated as Aston's holding in the 1996 report, he only had a beneficial interest in half the shareholding held by that trust, the remainder being "held by a completely independent trust", in respect of which Aston did not know "who the beneficiaries (were) but (he did) know the family associated with it" were the McMillan interests representing "precisely half of what is documented". 119 Aston freely accepted that what was stated in the 1996 report was incorrect in relation to the declaration of his shareholding. It was his evidence that, in the face of his inability to provide precise details of other interests in the Fiduciaire Ryco shareholding, Peptech's secretary, Geoffrey Allan Hilton (Hilton), a partner in the law firm, Henry Davis York, advised him to treat the whole of the Fiduciaire Ryco shareholding as his own. The credibility of Aston has been challenged partly on the basis of this evidence. However, I have had no difficulty in accepting the substance of Aston's explanation, although I think some unstated motives may have made the course taken in relation to the disclosure of his shareholding in the 96 report more preferable than disclosing details of the Jersey trust holdings. The method of recording those holdings in Jersey trusts or Jersey companies did not readily lend itself to the identification of the beneficial interests involved, where those interests were held in entities identified by various numbers and not by names. 120 The evidence established that there was an off market movement of shares in Fiduciaire Ryco with the McMillan interests being transferred to a Merrill Lynch nominee entity. Putting that transfer aside, there appears to have been a movement on the market of restricted shares, beginning in October 1997, of something in excess of 3,800,000. 121 When one compares those transactions with the trading in Peptech shares between July and the beginning of December 1997, I think it is drawing a fairly long bow to relate the deterioration in the price of Peptech shares to the restricted shares coming out of escrow or to their disposition. 122 In July there were some 4,424,000 shares traded at prices varying between 44.1 and 50 cents, averaging 46.6 cents. In August there were some 9,598,000 shares traded at an average of 42.9 cents, the price ranging between 39.5 and 51.4 cents. In September the total was 3,825,000 averaging 37.5 cents, with the price varying between 35.2 and 39.2. In October the quantity traded was 6,722,000 at an average of 26.1 cents, the price varying between a low of 17.5 and the highest price of 34 cents. In November 4,390,000 shares traded at an average of 18.4 cents, the range being 17.2 up to 19.4. Finally, in the first few days of December, the trade totalled 570,000, with an average of 17.1 cents. 123 In summary there was a total trade of approximately 29,000,000 shares in Peptech between July and November 1997, of which, a little over 3,800,000 shares would have been the previously restricted shares. 124 I think there is some interest in Merrill Lynch's trading during that time and that of Baker Young. Throughout that time Baker Young was a net buyer of some 4,355,000 shares. It was a net buyer of shares for all months except December. Merrill Lynch was a net buyer of shares in July, selling 880,000 and buying 1,666,000. In August, it was a net seller of 2,440,000. In September it was a net seller of nearly 300,000. In October, again it was a net seller of 524,000, selling at an average of 26.2 cents. It was a net buyer of 156,000 shares in November. It is not possible to link up those sales with any particular body of shares in Peptech and no attempt has been made to identify those particular trades. However, those sales do not reflect a mass exodus of restricted shareholders from their investment in Peptech. 125 On those facts I doubt if any movement in the Peptech share price during those months should be attributed to either the existence of the restricted shares coming out of escrow, or to the disposal of any of those shares on the market. 126 Leadenhall has developed part of its case on the basis that Aston had withheld material information from Lebbon in negotiations relating to the attitude of shareholders of these restricted shares. Aston had taken steps, about the time of the allotment agreement, aimed at batching into one the various groups of restricted shares which were due to come out of escrow at different times during August and September 1997. The objective was to effect one entry of the restricted shares onto the market to facilitate the sale of restricted shares by those wishing to dispose of their holdings. He gave instructions to put in place a mechanism by which the shares could be promptly listed upon coming out of escrow. To the knowledge of Aston, the McMillans, Shober and, I think, the Bomfords were shareholders intending to sell restricted shares once they were released from escrow. 127 In addition, Aston was aware that the shareholders associated with the Russian institute were under pressure to liquidate their interests, due to the harsh economic conditions in which they were operating in Russia. That was reflected in their ability to operate at only half capacity. However, it was Aston's evidence, which I accept, that he had been in close contact with the Russian institute shareholders and was confident of their loyalty and of their willingness to stay with Peptech. The evidence I think disclosed that Aston's confidence in their expression of loyalty was well founded. 128 I do not regard any failure to disclose to Lebbon information of the intention of restricted shareholders to dispose of their holdings or the steps taken by Peptech to facilitate sale of restricted shares as significantly adding to Leadenhall's case which is founded upon Lebbon's assertion that he was not informed of the existence of the restricted shares and was provided with misleading information in the form of the 96 report and the half yearly report. The fact that Aston knew there were some holders of restricted shares who were intending to sell was not, in my view, of particular moment nor were his actions in facilitating the listing of those shares: other than to underscore the obvious, namely that there was a likelihood that some holders of restricted shares would be interested in selling their holdings when those shares were released from escrow in September 1997. 129 It is convenient at this stage to deal with another aspect of Leadenhall's case that depends upon breach of the Corporations Law, and the misuse of insider information by Peptech. In my view nothing turns on that cause of action that is not disposed of by my findings in relation to the Trade Practices Act count. 130 Implicit in that proposition is my view that the existence of the restricted shares and the fact that they were coming out of escrow in the third quarter of 1997 were not matters which could be described as insider information. They could have been matters of which Lebbon was unaware. 131 Clearly, they were not matters unknown in the public domain. That much is clear from the broker reports which disclosed either the existence or the possibility of the existence of the restricted shares. The same may be said of the Peptech announcements as provided to Lebbon in August 1997. 132 It was argued on behalf of Leadenhall that publication of a private share broker analysis of Peptech for the purpose of dissemination of material to selected clients, no doubt to encourage trades, does not put that material into the public domain so as to divest it of the quality of insider information. I do not agree. Lebbon no doubt, had reservations about the utility of a broker report of that kind, but it is, I think, beyond argument that a diligent examination of matters of record would have revealed the existence of the restricted shares in much the same way as the broker reports gleaned that information. I do not understand it to be suggested that the content of the broker reports contained anything in the way of confidential information relating to Peptech. 133 In summary, I am of the view that the release of the restricted shares on to the market in the last quarter of 1997 had no measurable effect on the Peptech share price. I think that is so whether one examines the pattern or volume of trading. The volume of trading I have examined. The pattern of trading may be seen from the graph of price movement and volume of trading in Peptech shares as evidenced by Keene. 134 If an explanation is to be found for the fall in Peptech's share price from the high of 1993 to the low of 1997 it is to be located, in my view, outside of the influence of the existence and release of the restricted shares from escrow. The price had undergone a sustained erosion from mid-1993 to the end of 1995. In 1996 there was a correction in mid year which coincided with a sharp increase in the volume of trading. From that point there was a steady decline, accentuated in October/November 1997. I am not persuaded to associate that decline to the release of the restricted shares from escrow, particularly having regard to the long history of decline and the comparatively insignificant number of restricted shares traded. Rather, I think that decline was due to market forces unrelated to the subject mater of Peptech's misleading conduct. 135 I think that the findings so far made in these reasons require consideration of three facets of the evidence: (1) Was Lebbon's failure, prior to the allotment agreement, to pick up the references to the restricted shares in the broker reports and in passing references during discussions with Peptech representatives in July 1997 such as to break the nexus between Peptech's misleading reports and the losses Leadenhall faced on its investment with the collapse of the Peptech share price ? (2) If that position is answered "no", what is the effect of my findings that: (a) its release of the restricted shares from escrow had no measurable effect on the Peptech share price: (b) the fall in the share price was due to other unspecified market factors and (c) had he known of the existence of the restricted shares, Lebbon would have deferred concluding negotiations until a later assessment could have been made of the likely effect of the existence of release from escrow of the restricted shares on the Peptech share price. (3) In any event, what is the effect of the substitution agreement? 136 I have preferred to address question (3) as subsidiary to the issues raised in relation to the allotment agreement, subject to the effect of the mutual releases given under the substitution agreement. 137 As to (1): The essential impediment in Leadenhall's case is Lebbon's ignorance of the existence of the restricted shares, notwithstanding references to them in the broker reports and in discussions with Peptech representatives. Without that ignorance the inaccuracies in Peptech's 96 report and the half yearly report cease to have a misleading nature. 138 While I accept that Lebbon's assessment of Peptech apportioned secondary importance to the broker reports, I take the view that a diligent approach to that assessment would have involved recourse to the broker reports as a starting point or as background for the more informative studies which he commissioned or carried out. 139 I do not accept the validity of Lebbon's assertion that, even had the reference to the restricted shares in the broker reports come to his attention prior to the allotment agreement, he would have relied upon the contents of Peptech's most recent published reports as discounting the historical references in the broker reports. 140 If the evidence of Lebbon, Keene, Kennedy and Bates is to be accepted as to the significance to the share market of the release of the restricted shares from escrow, then any references in the broker reports to the possibility of there being some 14,000,000 shares held in escrow should have been sufficient to initiate an investigation by Lebbon into that aspect of Peptech's share structure. 141 The same observation applies to the disclosures during the July 1997 meetings. In that respect I think one has to proceed on the basis that discussions concerning the former Peptech UK shareholders placed little emphasis on the fact that their shareholdings were subject to restrictions under the listing rules. Even so I fail to see how any such references could have gone unheeded without a significant failure on the part of Lebbon in carrying out a careful assessment of Peptech. 142 The conclusion I have come to is that Lebbon, hence, Leadenhall, should have been alerted to the possible existence of the restricted shares prior to the allotment agreement. Once on notice as to the possibility that the buy out of the Peptech UK shareholders may have resulted in the imposition of restrictions on the trading of Peptech shares issued in connection with that buy out, it would have taken the simplest enquiries, either of Peptech, or the ASX, to establish the existence of the restricted shares. I think the correct approach in principle to that situation is to be found in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 at 96; Mister Figgins Pty Ltd v Centrepoint Freeholds Pty Ltd (1981) 36 ALR 23; Gould v Vaggelas (1985) 157 CLR 215; and Neilsen v Hempston Holdings Pty Ltd (1986) 65 ALR 302. 143 Although I am far from satisfied that the application of that approach leads to a just conclusion in this case, it is my view, that the chain of causation was not broken by the shortcomings of Lebbon in performing a diligent examination into the affairs of Peptech prior to the allotment agreements. 144 I accept that Lebbon acted upon the correctness of the information contained in the 96 report and the half yearly report and that the information contained in those reports was materially incorrect. Lebbon should have been aware of the existence of that falsity by due enquiries into the affairs of Peptech. On the probabilities, he was not. 145 As to (2): I think the correct approach to the assessment of damages is that followed by me in Trade Practices Commission v Collings (1996) 142 ALR 43 as approved by the Court of Appeal (Collings Construction v Australian Competition & Consumer Commission (1998) 43 NSWLR 131 at 144 et seq: cited with approval by Kirby J in Marks v GIO Aust Holdings Ltd (1998) 73 ALJR 12 at 42). 146 The application of that approach to damages would not present a particular difficulty had I accepted the way in which Leadenhall presented its case, namely, as one based upon the proposition that it would not have entered into the allotment agreement but for the misleading conduct of Peptech. The conclusion I have reached is that, had Leadenhall been aware of the existence of the restricted shares, it would have deferred concluding negotiations for the allotment of Peptech shares and the taking of options. 147 The problem that such a conclusion presents, I think is compounded by my finding that the release of the restricted shares from escrow had no measurable effect on the Peptech share price. 148 One way of approaching that problem is to conclude that Leadenhall, in the absence of any dumping of the restricted shares on the market, would have negotiated an agreement not materially different from the allotment agreement. There is considerable justification for that approach on the basis of the terms of Lebbon's investor presentations in August 1997 in the face of known slippage in Peptech's share price. Before resolving that question I think it is preferable to address the issues raised under question (3). 149 As to (3): One does not get any assistance from the fact that the parties released each other from the allotment agreement and replaced it with the substitution agreement. I accept Lebbon's evidence that he caused Leadenhall to enter into the substitution agreement in circumstances where he regarded Leadenhall as committed to Peptech under the allotment agreement and was confronted with a 'take-it-or-leave it' stand by Peptech. 150 Peptech has relied upon the mutual releases as a release of Peptech from the subject claims. While the words of the release are wide enough to embrace the claims brought in these proceedings, in my view, the terms of the releases should be read down to express the intention of the parties to limit the release to possible claims within the contemplation of the parties. Clearly, upon the findings reached in these reasons, that contemplation did not extend to claims of the nature made in these proceedings. 151 There is a further threshold question raised in relation to the association of any losses suffered by the plaintiffs with Peptech's conduct. As earlier stated in these reasons, Lebbon acknowledged that in early August 1997 he received the Peptech announcements and noted the reference to the possibility that the shares issued to the Peptech UK shareholders may be subject to escrow. 152 In addition to that, I think Lebbon has to live with his rosy description of Peptech as an investment opportunity as at 14 August 1997 in his presentation to prospective investors, notwithstanding Peptech's August share price drop. That was an unequivocal expression of Lebbon's continued confidence in the value of an investment in Peptech. 153 One has to take Lebbon's word that any connection between the fall in Peptech's share price and the reference in the Peptech announcements to the possibility of shares being held in escrow didn't 'jag' with him. However, I have accepted that evidence and sought a rational explanation for Lebbon's failure to relate the two things to his pre-occupation with preparation for and delivery of capital city presentations to prospective investors in Peptech. 154 As it happened, in my view, there was no material connection between the price drop and Peptech's shares coming out of escrow. The only rational basis for such a connection in August trading would lie in a market awareness of the impending release of the restricted shares from escrow. As to that, I think the following observations should be made: (1) It is difficult to reconcile that proposition with Lebbon's case of a complete unawareness of the existence of the restricted shares on his part: he being a highly experienced dealer in shares engaged in a due diligence exercise into the affairs of Peptech. On that view, the market, as with Lebbon, would be taken as being unaware of the restricted shares. However, the reality is that the existence of the restricted shares was, I think, in the public domain well prior to the allotment agreement. (2) The August 1997 slide, when seen in the context of Keene's graph, is part of a general slide that had been afflicting Peptech shares from mid-1996 and, before that, more dramatically from early 1993. The continued slide in Peptech share prices after August 1997, in my view, should not be associated with the disposal of the restricted shares on the market, but should be attributed to other market forces. (3) In my view, any awareness by the market of the effect of the impending release of the restricted shares would have been built into the Peptech share price by August 1997. 155 The conclusions I have come to are that the awareness by Lebbon of the reference in the Peptech announcements to restricted shares coupled with his failure to pursue that topic before causing Leadenhall to enter into the substitution agreement, while representing significant carelessness on Lebbon's part, should not be treated as breaking the chain of causation between Peptech's misleading conduct and any losses suffered by the plaintiffs: that the picture of Peptech as an investment opportunity in Lebbon's presentation to prospective investors should be treated as Lebbon's confirmed view of the worth of Peptech, notwithstanding the August 1997 fall in Peptech's share price: that although the substitution agreement was entered into on a take-it-or-leave-it basis, it probably reflected Lebbon's continued view of the value of investment in Peptech: that the losses suffered by the plaintiffs were losses which would have been sustained whether or not there existed restricted shares in Peptech's share structure. 156 The way in which the plaintiffs' losses have been calculated, I think, lends emphasis to that last mentioned finding: Leadenhall retained, at a cost of $352,129.08, 712,903 shares of the 1,612,903 shares allotted to it under the substitution agreement and sold those securities between 29 December 1997 and 16 January 1998 for $146,723.12, yielding a loss of $205,405.96. Advent took up the balance of the allotment, 900,000 shares at a cost of $414,000 which were sold over a period, from 30 September 1997 to 5 February 1998 for a return of $236,288.75, resulting in a loss of $177,711.25. Noble acquired 1,612,903 options from Leadenhall at an exercise price of 62 cents for the cost of $233,870.92, which it sold off the market to a related corporation, Chi Investments Proprietary Limited (Chi) on 27 May 1998 for $16,129.03, namely at 1 cent per option. Noble had also acquired from Leadenhall 403,225 options exercisable at $1 which it also sold on 27 May 1998 to Chi for a consideration of $403.23, resulting in a loss to Noble of $217,338.66. One has to ask why those transactions are the measure of the loss of Leadenhall and its related corporations. To take a glaring example, after the options were in the hands of Chi, the evidence disclosed that the Peptech share price rose to 98 cents, without Chi exercising its option rights. That also raises the question why the date of sale between related corporations should be the point of measurement of loss. 157 While it may be said that the losses claimed by Leadenhall would not have been suffered "but for the wrongful act or omission" of Peptech, that cannot be said to be the test of causation. The 'but for' test ignores the complexity of some of the factors making up a relevant cause. The 'but for' test is more in the nature of a pre-condition test: or a "negative criterion of causation" (March v Stramare (E. & M.H.) Pty Ltd (1991) 171 CLR 506 at 515) " which will commonly (but not always) exclude causation if not satisfied" (Medlin v State Government Insurance Commission (1995) 182 CLR 1 at 6). 158 As earlier stated, I am not satisfied that Leadenhall would not have entered into an allotment agreement had it known of the existence of the restricted shares. I am satisfied that an allotment agreement, possibly of a modified form, would have been negotiated and, further, that losses sustained by the plaintiffs were of a kind that would have ensued regardless of the existence of the restricted shares and of their release from escrow. There may have been a reduced consideration negotiated for the shares and options under such an agreement. However no attempt has been made to quantify any such reduced consideration. In my view, Lebbon's August 1997 presentation to prospective investors would indicate that any reduction would not have been significant. 159 I think a distinction is to be drawn between the losses associated with the effect of market forces on Peptech's share prices following the substitution agreement and the losses associated with the "inherent weakness" of a business, the purchase of which has been induced by misleading conduct. The latter class of losses was the subject of consideration by Wilcox J at first instance in Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) ATPR ¶40-822. The distinction lies, I think, in the area of remoteness of the losses sought to be recovered. In the Collins Marrickville type case, damages resulting from the susceptibility of the subject business to the vicissitudes of the economic climate in which the business has to operate are perceived to be not too remote, even though not directly related to the subject matter of the misleading conduct. 160 Once it is concluded in these proceedings that Leadenhall would have deferred concluding negotiations and negotiated an allotment agreement at a later time, the losses claimed by the plaintiffs fall into a category of losses that would have been incurred regardless of the existence of the restricted shares: save only the extent to which there may have been a reduced consideration agreed upon. In my view, there is no basis upon which a finding could be made as to the amount of any such reduced consideration other than by having regard to the glowing post 14 August 1997 presentation by Lebbon of Peptech as an investment opportunity. On that basis I think one is entitled to conclude that any reduction in consideration would not have been significant. 161 It is for these reasons that, in my view, Leadenhall's case fails and, with it, the respective cases of Advent and Noble. It was not submitted otherwise. 162 For these reasons the plaintiffs' claims are dismissed and judgment given for the defendant. The plaintiffs are to pay the defendant's costs of the proceedings. 163 In the event that I am in error and that the plaintiffs are entitled to damages, I am of the view that the following is the correct approach to the assessment of losses: assuming that the plaintiffs are entitled to losses attributed to the fall in Peptech shares, regardless of the market factors affecting that drop in price. 164 As earlier stated I do not regard the measure of damages to be applied is that as applied in Potts v Miller. I think the correct approach, on the assumption that Leadenhall would have abandoned the pursuit of Peptech shares and options, once it knew of the existence of the restricted shares, is to assess the losses sustained in the reasonable disposal of those shares following ascertainment of that fact. 165 On that basis the shares were disposed of, in the case of Leadenhall, between 29 December 1997 and 16 January 1998 at market price and by Advent between 20 September 1997 to 5 February 1998. Although those sales of Advent were commenced prior to Lebbon becoming aware of the existence of the restricted shares, it is not suggested that this premature sale increased the losses that would have been suffered through a post November 1997 sale. Clearly, the period of disposal of those shares is otherwise reasonable and made at market price. 166 However, I think the losses on the disposal of shares should be measured against the stated consideration for those shares under the substitution agreement, namely, at 62 cents per share. In theory, I do not think it is open to Leadenhall to advance a case based upon the arrangements it entered into with Noble and Advent, in quite the way presented. Under those arrangements Leadenhall sold 900,000 shares to Advent at 46 cents per share and disposed of the options to Noble at a price per option of 14 cents, in the case of the options with an exercise price of 62 cents per option, and at a price of 2 cents per option in the case of those options exercisable at $1.00 per option. The total price of those transactions was $233,870.92. Leadenhall appropriated the difference between the $1,000,000 acquisition price of the 1,612,903 shares allotted under the substitution agreement and the total of $647,870.92 paid to it by Advent and Noble, namely $352,129.08, to the cost to it of the balance of the shares allotted to it under the substitution agreement, namely 712,903 shares. That happens to work out at a little over 49 cents per share. 167 I am satisfied that the allotted shares and options granted to Leadenhall under the substitution agreement were dealt with in those ways as between the three related corporations. However, the way in which the substitution agreement was structured, namely a striking of the acquisition price at 62 cents per share, I think, requires first that the proceeds of sale of the shares by Leadenhall after the substitution agreement be measured against the $1,000,000 acquisition price paid under that agreement. On that basis there was a loss on the sale of the shares of $616,988.13. Against that, Leadenhall would be required to allow the proceeds of on-sale to Advent and Noble amounting to $647,870.92 and the proceeds of further sale of the balance of 712,903 shares, namely, $146,732.12, resulting in a loss of $205,405.96. 168 Mathematically there is nothing to criticise in the Leadenhall calculation, which may be described as a shorthand method of computation of damages. I have presented it in a different way not, I trust, for any pedantic reasons, but to keep at the forefront of the analysis the true nature of the terms of the substitution agreement as one proceeding at an acquisition price of 62 cents per share: a deliberate structure to imbed in the substitution agreement, as in the allotment agreement, an allotment at a premium of between 12 cents and 16 cents per share. 169 Otherwise, the method of calculation of losses by each of Leadenhall, Advent and Noble in the sale of shares and options is mathematically correct in the end result. 170 The way in which the options have been treated by the plaintiffs presents something of an anomaly, in my view. In the first place, the on-sale of the options to Noble, in one sense is a windfall to Leadenhall in the context of the terms of the allotment and the substitution agreements which ascribed the consideration to the allotment of Peptech shares. 171 Further, the sale by Noble to Chi has an air of unrealism about it: being a transfer between related corporations without any apparent commercial necessity on the part of Noble to enter into the transaction. The anomaly lies in the potential of one of Lebbon's corporations to benefit from the granting of the options without any recognition of that benefit being ascribed to Peptech under the substitution agreement: unless the $16,532.26 sale price of the options to Chi is said to reflect that benefit. 172 While I consider the evidentiary basis of Leadenhall's valuation of those options to be sketchy, Kennedy's attempt to challenge that valuation was not notably successful. Given the depressed market in which the sale of the options was negotiated and the comparatively high exercise price of the options, I doubt if any sophisticated analysis of the value of those options would be a particularly rewarding exercise. Accordingly, I would accept that sale price of the options as a reasonable one. 173 A further head of damage, consisting of lost opportunity costs, is based upon the financials of the plaintiffs, the investment policy of Leadenhall and the trading activities of Noble and Advent. The opportunity cost is calculated on a weighted average return on investment of 56.3% after adjustment by way of exclusion of the losses represented by the Peptech transaction and after allowance made for receipt of proceeds on sale of the securities. The rate of return is a weighted average of the respective rates of return of the plaintiffs as disclosed in the plaintiffs' financials for year ended 30 June 1998. 174 As a mathematical exercise I do not understand the defendant to challenge the accuracy of that calculation. However, I have some difficulty with the plaintiffs' approach. In the case of Advent, the evidence was that its business was to "invest and trade in listed shares". The financials for year ended 30 June 1998 show that it purchased securities to the value of $1,362,440.83 and sold securities to the value of $1,416,829.03. There does not appear to be much sign of investment in those activities. The realised surplus of $152,796.49 was used to derive a rate of return of 34.3% (before adjustment for the Peptech transaction) on the value of the opening portfolio of $445,417.43. I notice that the pattern of trading was similar to that of 1997, although of a much reduced order in 1997, with purchases of $966,118 and sales of $898,840. The "Opening Listed Investments" was $151,393. I also note that interest paid in 1998 was $174,689.61 as against $9,633 in 1997. The 1998 interest expense did not appear to reflect related corporation transactions and left open the indication that it may have been related to the trading activities of Advent. 175 The notion involved in the opportunity cost calculation, that the funds applied to the Peptech transaction, would have been applied to further increased trading activities, I think fits uncomfortably into the increased trading pattern reflected in the comparison of the 1997 and 1998 figures. 176 Further, I think the speculative nature of the Peptech transaction is not reflected in the method of calculation of opportunity costs. When added to my view that the slide in Peptech share prices was the product of market forces unrelated to the misleading conduct of Peptech, I would not be persuaded to allow opportunity costs to Advent. 177 In the case of Noble: Its business was described as investing, predominantly, in listed shares. The opportunity cost has been calculated by reference to a surplus of $363,599.81, before adjustment for the Peptech transaction, as disclosed in its share portfolio. I have been unable to reconcile that figure with the financials of Noble for the year ended 30 June 1998. In particular, the "Investment - Securities" in listed Corporations is shown as standing at $1,384,213 as at 30 June 1998 and $1,203,484 as at 30 June 1997. That value is stated in the accounts as being the "net market value" and that "movements in the net market value of assets are recognised in the Operating Statement in the periods in which they occur." 178 In note 2 to the accounts, movement in net market values of investments is shown as including "Investments Realised During the financial year - Securities in Listed Corporations", for the 1998 year, $363,600 and for the 1997 year $606,907 giving a net amount of $258,000 in 1998 and $13,146 in 1997. 179 Had I taken a different view of the reasonableness of including the opportunity cost in the assessment of damages I would have required clarification of the financials and the associated share portfolio of Noble before being satisfied as to the reasonableness of the plaintiffs' computations of a reasonable rate of return. For the reasons earlier advanced, I am not persuaded that opportunity costs should be allowed. 180 Leadenhall's policy in relation to the surplus funds was described as one of investing in listed shares or of prepayment of management fees to Noble. Its principal business activities "were the provision of corporate advisory and management consulting services and trading investments". Its operating revenue for the year ended 30 June 1998 was $1,264,732. That was made up principally of "Professional services revenue" of $616,300 and of "Gross proceeds from sale of investments", in the sum of $608,889. The principal difference from the 1997 year lay in the gross proceeds from sale of investments amounting only to $176,434. The rate of return used in the calculation of opportunity cost was based upon a "realised surplus" of $58,345.82 on an opening portfolio value of $221,437.94. As in the case of Noble, I would have preferred clarification of Leadenhall's financials had I taken a different view of the plaintiffs' entitlement to opportunity costs. 181 Leadenhall also claimed $327,901 by way of costs associated with its investigation of Peptech and in relation to the subject transaction with Peptech. As in the case of the opportunity costs, I do not understand the defendant to challenge the mathematical correctness of the calculations of the "Associated Costs". In my view, Leadenhall would have been entitled to those costs, save for the pre-allotment agreement costs which in my view would have been incurred, for the most part, in any event. There is no satisfactory evidentiary basis for isolating any pre-allotment agreement costs as falling outside that classification of excluded costs. 182 A final area of dispute relates to Leadenhall's release of the on-sale investor from the on-sale. I have been provided with competing calculations as to the effect of that release: Peptech contending that it involved self-inflicted losses upon Leadenhall that should not be visited on Peptech. Clearly, in the events prevailing at the time of the release, there was no obligation on the part of Leadenhall to release the on-sale investor. Leadenhall advanced calculations in support of a submission that the release involved no detriment to Peptech in Leadenhall's assessment of its losses. It is not necessary, in my view, to resolve that different methodology of calculation of the effect of the release. Had Leadenhall been entitled to damages under s 82 of the Trade Practices Act it would have been entitled to damages assessed on the basis of the reasonableness of its release of the on-sale investor. A contrary approach would result in Leadenhall being entitled to damages for Peptech's misleading conduct and the on-sale investor held to a bargain, on Leadenhall's case, structured on that misleading conduct. In my view, the release by Leadenhall of the on-sale investor was a reasonable commercial act and called for no adjustment to the assessment of damages that Leadenhall may have incurred by the conduct of Peptech. ********** Last Modified: 12/08/1999 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.