Why ASIC chose to make an example of Leighton Holdings

Leighton Holdings (ASX: LEI) has paid $300,000 to the Australian Securities and Investments Commission after being served with three infringement notices alleging the company did comply with continuous disclosure provisions.

ASIC accuses the construction giant of delaying significant public announcements about three of its projects, which had run into significant losses. As well as paying the fines, Leighton has agreed to appoint an external consultant to review its continuous disclosure provisions over the next three years.

The fines draw attention to grey areas around continuous disclosure, according to Tim Sheehy, chief executive of Chartered Secretaries Australia.

In a decision expected to strengthen the shareholder class action being bought by law firm Maurice Blackburn, ASIC has also published the details that formed the basis of its complaint.

ASIC has revealed several unnamed executives met on March 18 and considered the losses on Airport Link project in Brisbane. Although the regulator admits the exact forecast loss had not been finalised at that stage, the previous forecast profit had been “wiped out”. ASIC stated that the company was also aware on March 18 about its losses in the Victorian desalination plant and in the Al Habtoor development in Dubai.

On April 11, Leighton released its profit downgrade. After forecasting a tidy profit earlier in the year, the group flagged $907 million in writedowns, projecting a total loss of $427 million for the financial year. Its share price subsequently dropped 13.9%.

Sheehy says listed companies are under an obligation to immediately report any “material information that will impact the share price”.

“But the dilemma directors are in is that they don’t want to release incomplete or incorrect information in order to meet [ASIC’s] interpretation of immediate. They don’t want to have to issue a correction a week or two later.

“And, it’s understandable that if you’re looking at a profit downgrade, quantifying it might take a little bit of time.”

Part of the difficulty for company directors is the lack of a widely-accepted rule of thumb when it comes to the level of detail required under continuous disclosure. The ASX guidance note gives several examples of how to disclose, but Sheehy says there are wide differences in interpretation.

Before the market opened on Thursday, April 7, 2011, Leighton requested a trading halt until April 11, citing the need to complete a review into its earnings forecasts.

But Sheehy says going into a trading halt does not give companies more time to research their position before making an announcement. Companies are still required to make announcements as necessarily under their continuous disclosure obligations, even if their shares are temporarily not trading on the ASX.

The $300,000 fine was the largest infringement notice of this type issued by ASIC ($100,000 for each of the three offences), but pales in comparison to Leighton’s revenue (more than $19 billion in the 2010/11 financial year).

“The infringement notice regime was bought in so that the market could see a quick resolution,” says Sheehy. “It’s a slap on the wrist, but a public one. So the [amount] of money isn’t the point. It’s the public slap on the wrist.”

On Sunday, ASIC chairman Greg Medcraft told The Australian he would like to see tougher penalties for breaches of disclosure.

Adding to the stresses for company directors and executives around this difficult area of corporate law, the number of shareholder class actions affecting companies accused of breaching their continuous disclosure obligations is rising.

Given Leighton is subject to its own class action, the cost of the delayed announcements may dwarf the ASIC fines. In 2010, Maurice Blackburn settled a class action against another construction firm, Multiplex, for $110 million. That case also involved a failure to immediately disclose a profit downgrade.

In its release announcing its acceptance of the infringement notices on Friday, Leighton Holdings chairman Stephen Johns said the payments were not an admission of liability on Leighton’s part.

“The infringement notices allow Leighton to move on from the events surrounding the earnings downgrade last year,” he said.

“This gives us certainty and we are pleased to bring the ASIC investigation to a close.”