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Here’s why the Bellamy’s Australia Ltd share price is plunging (again)

The Bellamy’s Australia Ltd (ASX: BAL) share price is on the nose today, falling 4% before lunchtime.

In an announcement to the ASX, litigation funder IMF Bentham Ltd (ASX: IMF) said it is proposing to fund a claim by shareholders against the infant formula maker.

“IMF Bentham Limited (IMF) announces that it proposes to fund on a conditional basis claims of certain current and former shareholders of Bellamy’s Australia Limited,” IMF’s ASX announcement read.

“The claims relate to alleged misleading or deceptive conduct and an alleged breach by Bellamy’s of its continuous disclosure obligations in connection with its trading prospects and future earnings performance during the period between 14 April 2016 to 9 December 2016.”

Bellamy’s Australia Share Price

Source: Google Finance

Source: Google Finance

During this period, the Bellamy’s share price continued to ride high on investors’ euphoria for a China-focused infant formula producer. The company, which chalked up a number of impressive results, showed no sign of slowing down.

That was until early December 2016, when it flagged slowing growth and lower margins. Then, its shares entered a month-long voluntary suspension and emerged in a weaker position with suppliers. Its chief executive officer (CEO) was shown the door and potential working capital issues came to the fore.

IMF Bentham says law firm Slater & Gordon Limited (ASX: SGH) will conduct the class action on behalf of prior and existing shareholders.

Foolish Takeaway

In my opinion, class actions do not help a company rebuild and serve only as a last ditch attempt to recoup some losses by bitter former investors and line the pockets of lawyers. In fact, it doesn’t even keep company CEOs honest. That’s what the market and ASIC is supposed to do.

No doubt some former investors will look to take part in a class action to get something back for their troubles (I don’t blame them).

In the future, investors should be on the lookout to avoid companies like Bellamy’s altogether.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @OwenRask.

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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