A Deloitte partner displayed “outrageous and contumacious” conduct that bordered on contempt in a landmark class action over the quality of the firm’s audit work, and “Deloitte’s conduct was not much better”, the full Federal Court has ruled.
In rejecting an appeal from Deloitte over an order to produce audit documents yesterday, the court described the firm’s evidence as “carefully contrived”, “staggering” and “absurd”.
The judgment is a blow to Deloitte in a long-running class action it faces over its auditing of collapsed construction firm Hastie. When ordered by the court to produce documents associated with the audit, audit partner Reuben Saayman successfully claimed the right against self-incrimination to stop handing them over.
But when the court instead ordered other partners to do so, Mr Saayman allegedly hid the documents in a secret location and encrypted any digital files with a password known only to him. The firm was attempting to claim the privilege against self-incrimination extended across the whole partnership, as partners have joint and several liability over each other’s actions, to deny the new order.
The judgment will have wide-reaching consequences for legal actions against the big four consulting firms, which are growing in number.
But the full Federal Court found that partners who were not involved with the conduct related to a court action did not face a real and appreciable risk of prosecution, as is required to claim the privilege.
“The Partnership Act does not provide that if a partner of a firm commits an offence, all the partners in the firm may also be prosecuted for that offence,” Justice Michael Wigney said. “It simply provides that the partners in a firm are liable to pay any monetary penalty that may be imposed on the rogue partner upon their conviction for the offence.
The court then suggested that Mr Saayman and Deloitte had intentionally sought to deny the court order to produce audit documents.
“The inference that Mr Saayman’s actions were calculated to frustrate or impede compliance with the production order is almost inescapable” and he had “no right” to take the documents, Justice Wigney said.
He said the primary judge’s assessment of the documents’ disappearance as “disturbing and troubling” showed “admirable restraint and understatement”.
“I would go further. I would not be so charitable. Indeed, I would characterise Mr Saayman’s conduct as outrageous and contumacious, if not bordering on contempt.”
The audit partner then sought to shield himself from cross-examination over his “outrageous conduct” through a “series of conveniently contrived emails with one of his partners”.
“Deloitte’s conduct was not much better,” Justice Wigney said.
Deloitte asked Mr Saayman for the documents’ location via email, but did not demand he return them or enable them to access digital copies.
“The best that could be said is … that Deloitte had effectively done nothing more than conveniently, if not cynically, rely on the circumstances supposedly created by Mr Saayman’s actions to defeat the production order,” Justice Wigney said.
“The obvious, if not inescapable, inference, was that … it suited Deloitte and the uninvolved partners to do nothing.”
Phi Finney McDonald principal lawyer Roop Sandhu, who is bringing the Hastie class action on behalf of the trustee of the Sadie Ville super fund, welcomed the decision.