IMF Australia managing director Hugh McLernon discusses the company's decision to fund claims against Bauxite Resources.
Transcript TICKY FULLERTON, PRESENTER: The launch in May of a class action against 12 major banks over their fees has had an overwhelming response from people wanting to take part.
It's probably the first time the internet has been used to organise such a group.
Behind this action there's powerful litigation funder IMF Australia.
On Friday, IMF Australia turns its attention to a new target: Bauxite Resources.
I spoke earlier to IMF Australia's director, Hugh McLernon.
Hugh McLernon, welcome to Lateline Business.
The news on Friday that IMF Australia might sue Bauxite Resources took 20 per cent off its share price. I know you've yet to take action, and there's been plenty of documents flying around, but obviously you think you've got a good case.
HUGH MCLERNON, MD, IMF AUSTRALIA LTD: I think so, yeah. Although, that's for the court to decide eventually, as is usually the case. But we did our due diligence before we agreed to fund it.
TICKY FULLERTON: What's the basis of it?
HUGH MCLERNON: Well, primarily that the officers of the company went on a road trip, presented to a number of investors, said a number of things to them and provided a number of documents that those people then invested and believed that they didn't have the full picture.
TICKY FULLERTON: How do you decide whether a case is worth backing? Is it purely on the likelihood of success, or is there an Erin Brockovich element there?
HUGH MCLERNON: No, we are not white knights; we're in business, Ticky. Our task for shareholders is to look carefully at cases, determine whether they've got a reasonably good likelihood of success, determine that the defendant in question can pay and then agree to fund if there are enough people who want that funding.
TICKY FULLERTON: The cases you're running in 2010 includes Gunns, ABC Learning, Babcocks, and the most high-profile one of course is your class action against 12 banks which started on 12th May. What has the response been since then?
HUGH MCLERNON: Good. We have had people sign up for about 168,000 accounts. Each of those will be between, or average between, 1,000 and 1,500. So, it's up around the $200 million mark at the moment.
TICKY FULLERTON: That's an enormous campaign. I assume the internet helped a great deal.
HUGH MCLERNON: Yeah, no, fantastic. This I think probably around the world is the first class action that has been organised entirely in a digital manner. In other words, people found us on the internet, we supplied them with information, they inter-reacted with us and they signed up, all with no personal contact at all, all through the program that had been written by our in-house IT people. So, it was an interesting experiment in communication, but has worked very well, I've gotta say.
TICKY FULLERTON: It could potentially damage the bank image. Have you seen much of a backlash from the banks? What are they doing?
HUGH MCLERNON: No, we haven't heard anything directly. The banks are all co-operating at the moment in relation to providing us with all of the relevant documents which show the contractual arrangements between those banks and their customers. And I think it will be dealt with in the normal way in the court. The court will look at the - all of the circumstances and make a decision. It's a business question, not an emotional one, I think.
TICKY FULLERTON: Most cases you take on are in fact settled. Do you think this bank action will end up in court?
HUGH MCLERNON: I can't tell, Ticky. We obviously would prefer that it doesn't have to go through the tortuous court process. But if it does, then we're prepared to fund it to the end.
TICKY FULLERTON: You've now got a portfolio of about $1.6 billion in value of claims and a target portfolio of $2 billion by June, 2011. That speaks volumes about the rise of class actions in Australia, doesn't it?
HUGH MCLERNON: Well it's not just class actions, remember. There are a fair number of class actions in that group, but there are also some fairly large individual pieces of litigation. But I think what it does speak of primarily is that for a long time there has been no litigation funding. People have not been able to pursue these sort of claims. I mean, exception fees have been around since the day dot. Banks have been charging them forever, but no-one has been able to take on the banks because there has not been litigation funding. I think that's the real reason why it's such a growth industry.
TICKY FULLERTON: It is a growth industry, and a very high margin business with 25 per cent of the claims you receive as a success fee. Do you see these margins coming down as more players enter the market?
HUGH MCLERNON: That's the usual reaction to competition, so I would imagine any pressure that comes on to margins will be downward pressure. So, you know, it's a matter we'll have to cope with as we go along.
TICKY FULLERTON: Now you must cross paths with ASIC on many of your actions. What do you think of them as a regulator?
HUGH MCLERNON: I think that ASIC in the role it plays and in the very small role we play, which is of a similar nature, ASIC does a reasonable job.
It's a hard industry to regulate. There are plenty of people, including me from time to time, I suppose, who are prepared to criticise and critique the performance. Sometimes you wish they acted a little bit faster and in some cases a little bit more aggressively. But I think as regulators around the world go, they do a fairly good job.
If anyone wants to compare our regulator to say the SEC, they should read the Markopolos book 'No-one's Listening' about the Madoff Affair and they will go to bed easily in a financial sense in Australia compared to what would happen if you were in the US.
TICKY FULLERTON: Hugh McLernon, thanks very much for joining Lateline Business.
HUGH MCLERNON: No problems.
TICKY FULLERTON: And I should add that Bauxite Resources has notified shareholders that it's looking at IMF's proposals to fund claims against the company and recommends against shareholders joining the action until it has studied the documentation and can provide further advice.
BAU Price at posting:
12.5¢ Sentiment: LT Buy Disclosure: Held
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