18/08/2008

Wealthcare Financial Planning recommended several Westpoint mezzanine investments to Mr and Mrs Pollard. When the investments failed, the Pollards sued Wealthcare.

Wealthcare applied to the court for an order that Westpoint’s auditors, KPMG, and the researcher, Property Investment Research (PIR), be required to allow Wealthcare to look at all the documents held by KPMG and PIR relating to their audit and research report.

Wealthcare was trying to establish a case against them by looking through their documents to find the necessary proof of their negligence in conducting the audit and preparing the report respectively.

In summary Wealthcare had to show that:
➢    Wealthcare might have a case against KPMG or PIR,
➢    Despite reasonable enquiries Wealthcare did not have sufficient information to decide weather to start a case against KPMG or PIR, and
➢    KPMG and PIR had documents relating to the question of whether or not Wealthcare had a case against them and inspection of those documents would assist.

Wealthcare told the court it believed KPMG and PIR had been guilty of negligence in the preparation of the audit and the research reports and, if that were so, then Wealthcare could join them to the case bought by the Pollards and get them to pay at least some (and maybe even most) of any financial judgement in favour of the Pollards.

KPMG and PIR were of course anxious to prevent any such order because it could set a precedent for others who had lost money in the Westpoint crash to make a similar claim.

Wealthcare would eventually have had to prove both KPMG and PIR owed a duty of care to the Pollards and had not performed their role to the required standard.

But the court said it was not required to make a final decision on whether or not KPMG or PIR were in fact negligent but simply to assess whether there was reasonable cause to believe they might have been negligent.

Wealthcare relied on the fact that the audit and the research had not raised any material concerns with the investments so Wealthcare had recommended them and as a result the Pollards had lost money.

Justice John Middleton reached the view that there were enough facts to believe KPMG and PIR might have had a duty to the Pollards. But he felt there was insufficient evidence to support a view that they might have failed to meet the required standard of care.  

The evidence of how they performed was “mere assertion, conjecture and suspicion…  there must be some material to show the inaccuracies or errors arose out of a failure to take reasonable care,” the judge said.

In an action to get access to KPMG’s documents in order to show KPMG had been negligent, the court held that Wealthcare couldn’t see the documents because it couldn’t show that KPMG might have been negligent.

It’s a question of degree.The judge required some evidence at least that showed lack of care, even if it was not enough evidence to hold KPMG guilty at this point.

Presumably Wealthcare and/or the Pollards can still join KPMG and PIR to the proceedings, but they will have to be careful because if they can’t get access to the right documents, or if they do get access and those documents don’t support he allegation of negligence, the legal bill that Wealthcare and/or its insurers could face would be very substantial