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IMF Australia profits when others fall

Treasury Wine Estates (ASX: TWE) de-merged from Fosters in 2011, and is an international winemaking and distribution business. About a year ago, on 22 October 2012, the company announced that it expected growth in EBITS for FY2013. (The S in EBITS stands for SGARA –self-generating and regenerating assets.) As it turned out, EBITS decreased in 2013.

In the October 2012 announcement, the company told also investors that they continued to “work with our distribution partners in the USA to reduce the level of inventory carried in fiscal 2013.” Just nine months later, in July 2013, the company announced a $160 million write-down of US inventory, including a provision for the destruction of millions of bottles of wine. The share price promptly dropped from just under $6, to under $5; shares currently trade at $4.49.

Understandably, shareholders are extremely unhappy, and it seems likely that those who lost money will sue the company. Arguably, the directors of Treasury Wine Estates ought to have disclosed to the market the seriousness of the need to reduce the level of inventory. The plaintiffs will likely argue that the combination of forecast growth and the stated intention to reduce inventory failed to adequately fulfil the company’s disclosure operations.

IMF Australia (ASX: IMF) seems to be the only obvious beneficiary of this debacle. The company has recently announced that it is willing to fund a class action against Treasury Wine Estates. In an announcement to the market, IMF said that:

“The claims related to alleged misleading and deceptive conduct and alleged breaches by Treasury Wine Estates of its continuous disclosure obligations in connection with the performance of its United States operations between 17 August 2012 and 14 July 2013 inclusive, although that period may ultimately be extended or shortened.’’

In Australia, the Corporations Act requires companies to keep investors informed of information that a reasonable person would expect would have a material effect on the share price. IMF is generally quite conservative in the actions it funds. Its legal experts would therefore have assessed the disclosure provided by Treasury Wine Estates to have been clearly inadequate.

Treasury Wine Estates denies allegations of wrongdoing and will defend any class actions vigorously. Following the write-down of US assets, the then CEO, David Dearie, left the company.

IMF makes it easier for shareholders to sue companies when the board or management has failed to fulfill its obligations, but it takes a cut of the payout. Other high-profile scandals, such as the selective briefings by Newcrest Mining (ASX: NCM) or the bribery allegations currently dogging Leighton Holdings (ASX: LEI) could also end in class actions.

Foolish takeaway

IMF is an interesting company because it makes its profits from the wrongdoing of others. As litigation becomes more expensive, the need for funders such as IMF will only grow. In my view, IMF is a good stock to buy to diversify your portfolio, because it is quite uncorrelated with the wider market. It is currently trading at a reasonably attractive price.

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Claude Walker does not own shares in any of the companies mentioned in this article. .

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