Is there something amiss at Surfstitch Group Ltd?

I was lucky enough to sell out of my Surfstitch Group Ltd (ASX: SRF) holding last week – before the share price crashed 53% yesterday.

An article in the Sydney Morning Herald on April 26 however, raised my suspicions with one investor suggesting the company’s [recent] actions amounted to a ‘classic pump and dump’. Whether or not it was true, it made me go back and review those actions.

The surprising resignation by CEO Justin Cameron and via a one line email to the chairman caught many by surprise. The fact the CEO quit via email appears odd, and the reports that Mr Cameron was pursuing an opportunity relating to a potential acquisition of the company in conjunction with private equity didn’t quite ring true in hindsight. Although I admit that my initial thoughts were that there was nothing untoward about it.

A cynical reader might even suggest that the statement about a potential bid was an attempt to support the share price when the bad news came out. The surfwear retailer’s share price rallied 11% on the day of the announcement to $1.315.

After going nowhere for a few weeks, a lack of an update from the company, or just general market fear, saw Surfstitch’s share price fell 14% in the week from April 18 to April 22, and then 8% from April 22 to April 27, and I sold out on April 28.

Private briefings should be banned

What is concerning for retail shareholders is an article in the Australian Financial Review over the weekend in which Surfstitch chairman Howard McDonald reported that he had held 30 briefings with shareholders between April 25 and April 29 during which the share price fell 9% (although no reports of how many the week before, when the share price plunged 14%).

Existing shareholders might want to ask the company what information was discussed in those meetings, and whether any of those shareholders sold down or exited their positions prior to the official ASX update. And if it’s really necessary to meet with so many shareholders, why not release an update to the market so all shareholders are equally informed?

The potential for some shareholders to gain an advantage over others is one reason why companies should either ban all private updates to shareholders, fund managers and investors (like Warren Buffett’s Berkshire Hathaway) or make each one available for other shareholders. No wonder some fund managers list one of their key differentiations as the number of companies they meet with.

Foolish takeaway

Life goes on for Surfstitch, but there is still a great deal of uncertainty over the company’s future. Earnings have been marked down savagely in the latest update – another concern for shareholders was the timing of this update – just two months away from the end of the financial year. In fact, it wouldn’t surprise me to see a shareholder class action, given the surprises the company has delivered to shareholders.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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