By: Amanda Beattie and Zoe Jones

At a glance

• Following its decisions in other shareholder class actions late 2023 and 2024, the Federal Court has handed down yet another unfavourable decision for shareholders (Davis v Wilson [2025] FCA 108).
• The claim alleged that Quintis’ CEO, Frank Wilson, and its auditor, Ernst & Young, engaged in misleading or deceptive conduct by overstating the company’s financial position, causing investors to purchase shares at an artificially inflated price and suffer losses.
• In its lengthy judgment, the Court found that whilst Mr Wilson and EY had engaged in misleading conduct by endorsing financial statements that overstated the company’s biological asset values, the Applicants failed to prove causation and loss as they could not demonstrate what the true or correct financial assumptions should have been or how the misstatements inflated the share price.

Background

The proceeding was a shareholder class action brought by Geoffrey Peter Davis and Geoffrey William Davis (the Applicants) on behalf of investors who purchased shares in Quintis Ltd, an Australian sandalwood company, between 31 August 2015 and 15 May 2017. The claim was brought against Frank Cullity Wilson (Quintis’ former CEO and Managing Director) and Ernst & Young (EY) (Quintis’ auditor) pursuant to provisions of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), alleging that Mr Wilson and EY had engaged in misleading or deceptive conduct and failed in their statutory obligations to shareholders regarding financial reporting and auditing.

Quintis’ financial success and market value depended heavily on the assumed future value of its biological assets, namely its sandalwood trees. The company used a Discounted Cash Flow (DCF) Model to estimate the fair value of these assets, incorporating key assumptions about heartwood yield (the valuable inner part of the tree) and processing costs.

0n 22 March 2017, Glaucus Research Group, a short-selling firm, published a report alleging that Quintis operated like a “Ponzi scheme” and that its sandalwood assets were essentially worthless. Following the release of this report, Quintis’ share price declined by 7.4% the day immediately following the release of the report, and by 24% by the end of that week,¹ prompting a trading halt on 27 March 2017 and the resignation of Mr Wilson as CEO the next day. A second Glaucus report, released on 29 March 2017, reinforced these claims, further damaging market confidence. This resulted in a further drop in share price by 9.6%.²

On 15 May 2017, trading in Quintis shares was permanently suspended, leaving investors unable to sell their holdings. By January 2018, Quintis entered voluntary administration, and following a restructuring process, the company became privately owned, with existing shareholders receiving nothing.

The Applicants claimed the assumptions made and supported by Mr Wilson and EY were unrealistically optimistic, leading to inflated financial reports in FY15 and FY16, which misled investors about the company’s true financial position.

Allegations

In short, the Applicants alleged that Mr Wilson and EY had contravened:

• Section 1041H of the Corporations Act and Section 12DA of the ASIC Act – misleading or deceptive conduct in relation to a financial product or a financial service.
• Section 1041E of the Corporations Act – dissemination of false or misleading information.

As against EY only, the Applicants alleged that EY breached a common law duty of care owed by EY to Quintis shareholders when conducting audits and that EY was negligent in failing to conduct its audit in accordance with the Australian Auditing Standards, leading to materially misstated financial reports.

The Applicants advanced the causation aspect of their case on two bases:

• A ‘direct reliance case’, submitting that they acquired shares in Quintis in reliance on the alleged misrepresentations by Mr Wilson and EY when they would not otherwise have done so.
• An ‘indirect market-based causation case’, arguing that the misrepresentations made by Mr Wilson and EY had artificially inflated the entire market price.

Decision

Breach of duty

Mr Wilson

As to liability, his Honour Shariff J found that Mr Wilson had contravened section 1041H of the Corporations Act. His Honour accepted the Applicants’ submissions that Mr Wilson ought reasonably to have known that the FY15 and FY16 financial reports did not comply with relevant accounting standards and his opinions were not based on reasonable grounds which in turn was misleading or deceptive.

Despite this finding, the Applicants failed to establish a breach of section 12DA of the ASIC Act because they could not establish that his conduct was “in trade or commerce” which is a requirement of that section, but not section 1041H. This was a matter on which his Honour requested supplementary submissions and ultimately accepted Mr Wilson’s construction that the Board’s expression of an opinion is not conduct which “bore a trading or commerce character”, but was incidental to Quintis’ business.

The Applicants also failed to establish that Mr Wilson contravened section 1041E. His Honour found that the claim did little more than repeat the basis for the alleged breach of section 1041H which – his Honour noted – will not always be sufficient to ground a finding that section 1041E has been breached. His Honour also found that there was no attempt to address why the alleged representations were “false in a material particular” or were “materially misleading”, which are essential elements of that provision.

EY

In relation to EY, whilst EY had taken significant steps to evaluate the reasonableness of the assumptions contained in the financial reports, his Honour concluded that in respect of some, but not all allegations, EY did not exercise the level of skill and care of a reasonable auditor when assessing the reasonableness of those assumptions and so had engaged in misleading and deceptive conduct and so contravened section 1041H.

For the same reasons, his Honour accepted the Applicants’ submissions that EY had contravened section 12DA by virtue of the Court rejecting EY’s submission that its conduct was not in trade or commence because it was acting in furtherance of its statutory function under the Corporations Act. His Honour found that the commercial nature of EY’s engagement was not altered by the statutory function of an auditor.

Causation

The Applicants accepted that for causation and loss to be established, they bore the onus of proving their ‘counterfactual case’, this being:

• For the direct reliance case, that the Mr Davis Snr (one of the Applicants) would not have invested in Quintis shares had true accounts of Quintis’ financial position been disclosed in the FY15 and FY16 financial reports (being a substantial and material devaluation from the FY14 position), and
• For the indirect market-based causation case, the specific assumptions that should have been used by Mr Wilson and EY in the FY15 and FY16 reports.

In relation to the direct reliance case, the Applicants argued that they had identified and relied upon the representations that Quintis had significant net assets which had grown year upon year, as audited by EY, and based upon those matters had acquired shares in Quintis. The respondents disputed the nature and extent of the reliance upon the FY15 and FY16 reports, and particularly the specific reliance upon the particular representations made by the respondents in the FY15 and FY16 reports. His Honour did not accept the respondent’s submissions in this regard, and characterised the distinction as “artificial”, as Mr Davis Snr had read the totality of the reports and his Honour accepted his evidence as honest and accurate to the best of his recollection.

However, his Honour found that it is not enough that Mr Davis Snr relied upon Quintis’ reported position and the opinions expressed by the respondents in relation to them, but that the Applicants must show that they would not have made any investments in Quintis had they known the true position. His Honour noted a “high degree of imprecision” in the Applicants’ submissions as to what the precise counterfactual case was (for example, the meaning of a “a substantial and material devaluation”). His Honour also examined the counterfactual calculations at length and concluded that these would have nonetheless shown Quintis to be solvent and continuing to have substantial assets. As a result, his Honour concluded that the Applicants had not sufficiently demonstrated that, despite these matters, they would not have acquired Quintis shares at all.

In relation to the indirect causation case, his Honour noted that whilst there was evidence adduced by the applicants’ expert about what would have been appropriate assumptions, the applicants had not established that the reported value of Quintis shares contained in the FY15 and FY16 financial reports caused Quintis to trade at an inflated share price. As such, his Honour could not positively conclude that the accounts in each of FY15 and FY16 reports did not represent fair value. Accordingly, his Honour found that the Applicants had failed to prove neither a direct nor indirect counterfactual case.

Because the Applicants could not establish causation or loss based upon either counterfactual case, their claim for damages failed despite the findings of liability against Mr Wilson and EY.

Impacts

This judgment represents another loss for plaintiffs and the ongoing difficulties plaintiffs have in establishing their loss in shareholder class action matters.³ As it stands, all six of the shareholder class actions that have gone to trial have been ultimately determined unfavourably for the plaintiffs, in that no loss was established.

The decision highlights the critical role of expert evidence in proving a counterfactual scenario in shareholder class actions.

It underscores the high bar that plaintiffs face in establishing market-based causation. The court’s rejection of the indirect market-based causation theory (i.e., that misleading financial statements inflated the market price) sets a high evidentiary threshold. Plaintiffs will likely need to provide more persuasive economic and statistical analysis linking misstatements to market price inflation. This could make securities class actions riskier for litigation funders and ultimately less attractive for law firms working on a contingency basis.

His Honour’s findings in relation to the pleaded causation case also reinforces that courts will hold plaintiffs to their pleaded case, something that was a feature of the decision in the CBA class action (currently on appeal).

The decision confirms that it is a difficult path for shareholders to obtain damages in these kinds of cases. While that does not necessarily mean that shareholder class actions will not be filed, it will likely contribute further to the decrease in actions we have seen in the past 12 months, especially with a number of appeals on foot. The funder in this matter indicated that it is considering appeal prospects in this case, so we could also see an appeal of this decision in the future.

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