Melbourne law firm Gadens has announced that it is looking into the possibility of a class action against online retailer Surfstitch Group Ltd (ASX: SRF), following a series of profit downgrades.
In a media release, Gadens says it is particularly concerned about the initial float of Surfstitch in 2014 and the manner in which its affairs have been conducted since.
As the law firm says, "There are issues about the sufficiency of the disclosures made by Surfstitch at the time of the float and the thereafter concerning its extensive business and brand acquisition program and the affect that program would have on its share price."
Surfstitch's share price has crashed from above to $2.00 to around 33 cents as of last week, wiping more than half a billion ($500 million) of value off the company.
Surfstitch's private briefings
Gadens also wonders if Sufstitch complied with its continuous disclosure obligations, particularly after the Australian Financial Review (AFR) revealed on April 29 that chairman Howard McDonald disclosed that he'd held more than 30 meetings with shareholders between April 25 and April 29.
As the AFR reports, "responding to criticism that he had left the market uninformed, McDonald told Chanticleer he takes umbrage with suggestions he has put up the drawbridge. He has had 30 briefings with shareholders this week, with four on Friday afternoon alone."
As law firm Gadens points out, "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."
As we've often pointed out, companies conducting private briefings should make those available for all shareholders to view. We have no idea what was disclosed accidentally or not or inferred, or even by what is not said and how that influences the actions of shareholders privy to those briefings. What we do know is that Surfstitch's share price fell by 9% that week and 14% in the week prior – despite no news being released to the market.
A number of fund managers repeatedly state that they believe their competitive advantage is gained by meeting with company management. But if nothing non-public can be revealed at those meetings, what is the point of them? And if the information is public, why not make it truly available to all shareholders and investors?
Either that or ban private briefings altogether.
Triple downgrades
Gadens is also concerned that the company has made three separate profit downgrades since the start of 2016 and therefore raises questions about the initial profit forecasts in the prospectus and whether they may have been misleading.
Foolish takeaway
We've raised the issue several times about the events surrounding Surfstitch, asking if something was amiss in early May, and why it could be headed for a shareholder class action on two occasions.
The least shareholders could ask of management is a clear explanation of what has been going on.
