Closing submissions have been made in the case taken by the Australian Securities and Investment Commission ('ASIC') against Fortescue Metals Group for misleading and deceptive conduct.

The case centres on a series of announcements FMG made to the market between 23 August 2004 and 9 November 2004 concerning certain framework agreements with three major state owned Chinese companies. ASIC alleges that FMG engaged in misleading and deceptive conduct by overstating the substance and effect of agreements with the three Chinese companies, in announcements and media releases made to the market and investors. ASIC also alleges FMG failed to comply with its continuous disclosure obligations under the Corporations Act (the Act) by failing to correct the misleading announcements and disclose the contents of the agreements.

In relation to Fortescue's  CEO, Andrew Forrest, ASIC alleges that he was involved in FMG’s alleged contravention and also that he breached his duty as a director to exercise care and diligence under the Act by failing to ensure that FMG complied with its obligations under the Act.

ASIC claims Forrest was well aware there was a significant and growing ‘gap’ between what the market had been told and what actually appeared in the agreements, but did nothing to correct the position and instead perpetuated the misleading statements over the six month period – the true content of the agreements was not disclosed until March 2005.

ASIC claims the alleged conduct of FMG and Forrest resulted in the markets being seriously misled as to the true status of FMG’s project for over six months. During this period many millions of shares were traded by both sophisticated and unsophisticated investors – all of whom relied on FMG to provide continuous and accurate disclosure. When the true contents of the agreements were disclosed by the media, FMG’s share price dropped by more than 25 per cent in one day.

ASIC is seeking civil penalties against FMG and Forrest. The maximum penalties that FMG and Forrest could be ordered to pay is $6 million and $4.4 million respectively. ASIC has also asked the Federal Court to consider disqualifying Forrest from as acting as a director.

Forrest's Queen's Counsel, Allan Myers, said Forrest should be protected by the business judgment rule, which presumes that a director or executive makes a decision in good faith, for a proper purpose, and after exercising due care and diligence.