Class action coming for Surfstitch Group Ltd

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.

Why these 5 dividend shares are better bets than the banks - even with their huge yields

Discover The Motley Fool's top 5 ASX dividend stock ideas for 2016 to get you started building a more diversified income portfolio that is paying you back!

The report is free! No credit card required.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. In full disclosure, as an ex-shareholder with a capital loss, I will be registering with the law firm Gadens and will therefore potentially be involved in any class action that occurs. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.