Shares in liver cancer treatment specialist Sirtex Medical Limited (ASX: SRX) have been placed in a trading halt this morning after the company revealed it will be pursued by a law firm for compensation over alleged breaches of its continuous disclosure obligations alongside alleged misleading and deceptive conduct.
The announcement refers to a "representative proceeding" which suggests to me this is a claim being pursued by an aggrieved institutional investor, although the possibility of a broader class action on behalf of retail shareholders remains strong down the line in my opinion.
There were several institutional backers of Sirtex prior to the profit downgrade with high media profiles that may be behind the action and I suspect further information will become available in the near future.
A class action for breach of continuous disclosure obligations generally works by working out the quantum of class action members' losses over the period during which the alleged breaches occurred.
In this instance it is likely to be from the August 24 forecast of "double-digit" sales growth to the shock December 9 downgrade.
When you consider this is a near three-and-a-half-month period over which shares were commonly being bought for prices between $28-$31 you can see that there could be a large compensation bill on the table for losses given that shares now trade for just over $14.
It's also notable that the claim includes other serious allegations of "misleading and deceptive conduct" which suggests possibly more serious trouble for the company and those that have been responsible for its corporate governance.
I have repeatedly warned of the predictability of this chain of events ever since the company revised its dose sales guidance downwards on December 9 and suggested investors avoid buying shares.
Moreover, given that the company has already sacked its CEO (with unvested performance rights forfeited) on the advice of independent lawyers it seems apparent by their own actions that there's an admission of some wrongdoings having gone on.
It also seems likely that a whistleblower of sorts tipped off the regulator to some extent about goings on at the company given the ASX originally queried Sirtex's compliance with its disclosure obligations on December 2 – a week before the announced downgrade.
The company could potentially mount a de facto defence to any cause of action on the basis that it may actually be able to meet its original "double-digit" dose sales guidance across the whole of FY17. In that case all bets would be off, however, it seems from the aforementioned issues of the CEO being sacked and the regulator being tipped off that there may be more bad news ahead as to its continuos disclosure obligations being met.
Please note some of the above is speculation only, but it adds to the picture of a company that may have some skeletons in the cupboard with the regulators and lawyers now poking around.
For now there's still far too much uncertainty and possible serious problems ahead to make Sirtex anywhere near investment grade, with the company itself acknowledging today that the legal claim could be "material".
