One of two class actions being launched against Dick Smith Holdings (DSHE) by hundreds of the failed tech retailer’s shareholders has been filed in court.
Bannister Law, the law firm undertaking the legal operation, formally filed a class action against the liquidated entity remaining following the retailer’s collapse early last year -- now under the control of receivers, Ferrier Hodgson -- in the Supreme Court of NSW on 28 September.
The action has also been filed against two of Dick Smith Holdings' former directors, former CEO, Nicholas Abboud, and former CFO, Michael Potts.
The proceedings were filed on behalf of DSHE shareholders who purchased shares during the period 16 February 2015 to 3 January 2016.
The class action, which is being funded by Vannin Capital, alleges that DSHE, Abboud and Potts “contravened the provisions of the Corporation Act as DSHE’s financial statement results published to the market in 2015 were misleading and deceptive”.
Specifically, the action alleges that the DSHE, along with the two former directors, did not give a true and fair view of the financial performance of the company and were not prepared in accordance with Australian Accounting Standards.
In particular, it is alleged that the accounting treatment of rebates by DSHE artificially inflated its reported profit and overstated EBITDA.
“We are eager to pursue this class action so that affected shareholders can be compensated for the misleading and deceptive conduct of DSHE and its two former directors,” principal at Bannister Law, Charles Bannister, said.
“The inflated reported profit and overstatement of EBITDA meant that shareholders did not have an accurate picture of the financial health of the company when they purchased DSHE shares throughout 2015.
“They are all very disappointed to have been let down by a company they believed in so much. We have already had a large number of people register their interest in the class action who purchased shares within the relevant period. They have collectively lost several million dollars,” he said.
The case hinges upon the suspicion that Dick Smith Holdings allegedly made representations in its public listing prospectus, and at various times in the period from its listing on the Australian Securities Exchange (ASX) until the appointment of administrators.
In essence, it is alleged that during 2015, DSHE made decisions about what stock to purchase based primarily on the rebates that could be obtained from suppliers rather than focusing on buying stock that customers actually wanted to buy.
This allegedly led to an increase in bad stock which could not be sold and an increase in debt. In November 2015, DSHE was forced to make an impairment write-down of $60 million of the bad stock.
The collapse of the retailer in early 2016, along with the closure of its stores, followed close behind the write-down.
Indeed, the rebate-focused inventory buying policy was one of the one of the main triggers of the company’s collapse, according to a subsequent creditors’ report.
The filing of the class action in court comes around two months after Bannister Law got the green light by the court to proceed with its legal action.
Meanwhile, a second proposed class action against DSHE is also in the works, with Investor Claim Partner (ICP) which, in partnership with Johnson Winter & Slattery, is in the process of finalising its own class action, also on behalf of Dick Smith shareholders.
The class action, which is being undertaken on behalf of aggrieved Dick Smith investors who suffered losses as a result of the company’s demise is likely to allege breaches of disclosure obligations and misleading and deceptive conduct.
On 1 September, the firm told litigants that is had been granted access to additional disclosure documents associated with Dick Smith’s initial public listing as part of its research into the proposed case.
“After reviewing these documents, it is now likely the claim will include an allegation that had the market been aware of revenue recognition, stock valuation, provision and rebate issues relevant to reported revenue, margins and cost of doing business that were in existence at the time of the prospectus… the listing would not have proceeded or, if it did, it would have proceeded with the issuing of shares at a materially lower value,” the company said in a message to participating shareholders.