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Embattled engineering and contracting group Downer EDI has been whacked with a proposed shareholder class action over allegations it misled the market over its controversial Waratah train project.

Litigation funder IMF will bankroll the class action, speculated to be as much as $100 million, alleging the company failed to keep the market fully informed between February 2010 and June 1, when it made a shock $190 million writedown related to its Waratah rail project in NSW, forcing it to miss its profit targets.

BusinessDay revealed in August that IMF was considering bringing a class action against Downer over lack of transparency in the months leading up to the June 1 write-downs.

Advertisement: Story continues below The news may become the latest setback for the company's shares ahead of an expected rights issue. In early trading, the stock was down as much as 5 cents, or 1.3 per cent, to $3.96. A year ago, the shares were as high as $8.62.

IMF alleges that during the period the company engaged in misleading and deceptive conduct, and allegedly breached its continuous disclosure obligations, which saw the share price fall more than 27 per cent in one day, wiping out $1.1 billion in market value.

IMF said in a note to the ASX that shareholders who purchased shares in Downer during the period between February 25 and May 31, 2010 may be eligible to participate in the claim, which IMF will fund subject to specific factors set out in the funding document, including a level of participation acceptable by IMF.

In a note, CBA Institutional Equities analyst Ben Brownette wrote: "This is clearly a blow to the company and as we understand has the potential to be widened in relation to the second provision, which appears to be similar circumstances."

In May 2007 IMF bankrolled legal action against Downer alleging the group's profit forecast for 2006 was misleading.

"We understand this (action) was a $100 million claim ? but are unsure of what Downer paid as a settlement (IMF announced at the time it received $6.8million. Given IMF?s commission normally range between 20 per cent and 45 per cent, the settlement was probably only in the order of $15-35 million), Mr Brownette said.

Rights issue

The news of a class action comes ahead of the release of Downer's half-early results, scheduled for February 28, which is expected to include a renounceable rights issue - inviting all investors to participate - which analysts estimate will exceed $200 million.

It follows a shock announcement two weeks ago of a $250 million provision against the Waratah project, bringing the total loss on the project to $440 million.

Downer won the $3.6 billion contract in November 2006 as part of a so-called Reliance Rail consortium, of which Downer is the major equity holder with a 49 per cent stake, and for almost four years told the market through various presentations that all targets relating to the Waratah project were being met.

At its interim profit result last February Downer re-stated that there was no material change to full year earnings guidance and stated: ?The core rail business continues to perform well? and ?the front end manufacturing phase of the NSW Waratah Project increases funds employed?. The shares traded at the time at $7.90.

Then on May 25, 2010, it put out a statement in response to market speculation that Reliance Rail ? the consortium responsible for the Waratah project ? had funding arrangements that were on a non-recourse basis to Downer and the other Reliance Rail shareholders (AMP, ABN Amro and Babcock and Brown). The shares were trading then at $6.45. They closed yesterday at $4.01.

A week later Downer announced that following an assessment of the Waratah train project and review of asset carrying values, it has raised a $190 provision on the $1.9 billion Waratah rolling stock manufacture project and a $70 million pre-tax asset impairment charge.

Profit downgrades, delays, credibility issues and a revolving door for chief executives, directors and senior executives, have been a recurring theme of the group, leaving shareholders out of pocket and seeking compensation.