Online retailer SurfStitch, which has already endured three profit downgrades in six months, the walkout of its chief executive and a collapsing share price, could now be hit with a $500 million shareholder class action lawsuit after law firm Gadens began sifting through the company’s soap opera-like life as a public company.
Gadens partner and chief counsel Glenn McGowan QC is leading the preliminary investigation into SurfStitch, focusing on up to 30 private briefings held with select investors before the surfwear and action sports apparel company’s profit warning in May that sent its stock crashing.
The latest profit downgrade last week, which centred on a mysterious third-party licence that triggered a reversal of $20.3 million in revenue, will also be a target for the law firm’s inquiry, leading to broader questions on SurfStitch management’s basis for fashioning its profit forecasts, which have since been torn up three times this year.
Gadens, one of the nation’s biggest law firms which advises more than a third of the top 200 companies listed on the ASX, believes its investigations could reveal misleading or deceptive conduct contrary to Australian consumer law, as well as the ASIC Act, breaches of the Corporation Act and breaches of the continuous disclosure obligations of the ASX.
The law firm is calling for SurfStitch shareholders to register their interest in a potential class action lawsuit, with the lost value of the company’s market capitalisation, as much as $500 million, a possible basis for a court claim.
“We know from ASX data total value in the company dropped about $500m but actual losses by shareholders might be more than that … the claims might total less than that too, but it’s in that sort of order,’’ Mr McGowan told The Australian.
Mr McGowan said on top of the three profit downgrades, private briefings with shareholders and the unknowns around the $20.3 million licence contract — which represented the best candidates for a class-action lawsuit — there could be other grounds for investigation.
“SurfStitch were very aggressive with their acquisition program and they have already made concessions they couldn’t integrate those new businesses very quickly.
“In fact their new CEO has said that, and I think they probably got a bit of indigestion eating too quickly.
“Whether they all turn out to be actionable, I can’t say.’’
Last week SurfStitch issued its third and latest warning, and appointed a new CEO, Mike Sonand, who has vowed to refocus the company on its core retailing operations and rebuild the failing culture of the business. SurfStitch declined to comment yesterday.
Mr McGowan said he would also direct his inquiry into the sudden departure of SurfStitch co-founder and CEO Justin Cameron in March, who quit via a simple one-line email to the board and was reported to be joining forces with an unnamed private equity firm to make a takeover bid for the company.
“I’m rather puzzled by it. As far as I can tell he has disappeared without a trace and don’t know what he is doing now — it’s really strange.
“I don’t know if he thought better of it and has gone off the idea of making a takeover, or whether the company suffered because of his departure, because it might be said that a number of their problems arose after he left.
“I know there was a downgrade before he left, but I think there have been more problems after he left than before he left, and maybe he regards the business as not as attractive now that it is being managed by others.’’
Gadens is also keen to hear from any investors that were treated to a private briefing in April, just before another profit warning was issued.
“It has been reported that 30 private briefings were conducted with some shareholders between 25 and 29 April 2016.
“This was prior to the ASX update on 3 May 2016 when the profit forecast was downgraded.
“The fact of the private briefings raises questions about why the communications in those briefings were not made public until, at the earliest, 3 May 2016,’’ Gadens said in a statement.
Mr McGowan said he was hopeful of getting documents from those private briefings before he decided whether to issue proceedings against SurfStitch and begin a class action.
Gadens needs at least seven investors to sign up to the class action, with the law firm then to pick a lead litigant and decide if the action is viable.
“Already the responses I have got from mums and dads suggests they have lost quite a bit of money per head, so if that pans out over the next week or so then you would expect I could put together a pleading within a few weeks and could issue next month, but it could take longer.’’
SurfStitch has had a horrendous two years as a public company, with its share price crashing from an offer price of $1 to as low as 25c last week.
