Ann: Potential Class Action, page-18

The 78-year old retiree taking on SurfStitch


A 78-year old retiree is leading a $100 million class action claim against Surfstitch, which was floated by founders Lex Pedersen (left) and Justin Cameron in 2014. Louie Douvis

It was November 2015 and retiree Warwick Cook and his wife Leonee had just bought their first 5000 shares in online retailer SurfStitch Group.

Mr Cook, 78, paid $2.12 a share – more than double SurfStitch's issue price less than 12 months earlier – encouraged by forecasts by co-founder and chief executive Justin Cameron that earnings were expected to more than double in 2016.

Between August 2015 and November 2015, SurfStitch reaffirmed its forecast (for underlying earnings before interest tax depreciation and amortisation of $15 million to $18 million) on five separate occasions, including at its annual general meeting.

Mr Cook, of Kensington in Sydney, bought another 5000 shares in December 2015 at $1.89 each after SurfStitch announced a share placement to fund the acquisition of a surf accessories business, Surf Hardware International, and upped its profit guidance to between $18 million and $22 million.
It wasn't until February 2016 when things started to go awry.

SurfStitch reported a 40 per cent surge in revenues to $144.9 million and earnings of $13.9 million – almost four times earnings in the previous first-half.

But the shares fell when Mr Cameron, a former investment banker, backed away from full-year guidance, saying EBITDA growth would be based on investment in online content.

Mr Cameron wanted SurfStitch to become the Amazon Prime of the action sports world and use documentaries, interviews with leading surfers, skaters and fashion designers and surf cams to attract and engage customers.

Between December 2014, when the company floated, and December 2015, SurfStitch outlaid more than $120 million in cash and shares on five acquisitions, including $24 million for Surf Hardware, $21 million for Stab, an online surf content platform, Magicseaweed and Rollingyouth, a user-generated surf forecasting network, and $15 million for Garage Entertainment, which makes action-sports films and videos.

Mr Cook snapped up another 25,000 shares in May 2016 at 49¢ after SurfStitch downgraded its profit guidance to between $2 million and $3 million, citing a reorganisation triggered by Mr Cameron's surprise resignation in March.

What Mr Cook and other minority shareholders did not know was that SurfStitch's first-half profits and full-year guidance were underpinned by $20.3 million in revenues from a content deal negotiated by Mr Cameron and co-founder Lex Pedersen with a Sydney based publisher, Kim Sundell's Coastalcoms/Three Crowns Media Group, in February.

Barely a month later, in June 2016, SurfStitch decided to reverse the $20.3 million revenue, leading to an $18.8 million full-year loss.

SurfStitch shares plunged from around 48¢ to 18.5¢ and have continued to lose ground over the last 11 months, closing on Tuesday at a record low of 6.8¢.

Mr and Mrs Cook are now the lead plaintiffs in a $100 million class action claim against SurfStitch on behalf of shareholders who lost money when shares in the much-hyped company tanked.

Vannin Capital, one of the largest litigation funders in the world, and Sydney law firm Quinn Emanuel Urquhart & Sullivan filed the $100 million class action in the Queensland Supreme Court on Monday, accusing SurfStitch of engaging in misleading and deceptive conduct and breaching its continuous disclosure obligations by overstating earnings and profit forecasts.

Quinn Emanuel partner Damian Scattini alleges that SurfStitch made a series of "bad deals" for the primary purpose of disguising a shortfall in revenues.

The claim – the first under Queensland's new class action rules – is on behalf of shareholders who saw the value of their shares plunge 90 per cent, from around $1.85 to 18.5¢, between August 2015 and June 2016, slashing the company's market value by $500 million.

The class action is open to anyone who purchased or held SurfStitch shares between August 27, 2015, and June 8 last year.

SurfStitch shares went into a trading halt on Wednesday while the board assesses the class action claim and considers its response.

The board is now led by veteran retailers Sam Weiss and Mike Sonand, who are desperately trying to fix the many mistakes the former market darling made in the past.

SurfStitch is also being sued by Three Crowns/Coastalcoms over the failed content deal and has launched claims and counter claims against the publisher, alleging Coastalcoms conspired with Mr Cameron to enter into contracts designed to inflate revenues and profits.

Mr Scattini told The Australian Financial Review earlier this month that SurfStitch's legal claim against Coastalcoms would make it difficult for the company to defend the class action.

"It makes it difficult for them to say these things didn't happen," he said.

Mr Cook, who could not be contacted for comment on Wednesday, is expected to give evidence when the case returns to court, possibly early next year.

His SurfStitch shares, which cost $32,362, are now worth just $2380.

"He thought he was buying into Amazon Prime – it was more like the Amazon River," Mr Scattini said.