Rural Funds to start legal action after EY report

Rural funds Group (ASX: RFF) has announced legal action after EY found the allegations against it were false.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It's the moment nervous shareholders have been waiting for. Rural Funds Group (ASX: RFF) has released the results of the Ernst & Young (EY) report into the allegations that 'short-seller' firm Bonitas Research stunned the market with earlier this month.

Rural Funds Group is an A-REIT (or Australian Real Estate Investment Trust) that specialises in leasing agricultural land and assets for rental income. The company is primarily focused on almonds, cattle and vineyards with some of its 'tenants' including Treasury Wine Estates Ltd (ASX: TWE) and Select Harvests Limited (ASX: SHV).

What happened on 6 August?

On 6 August, short-seller firm Bonitas released an explosive set of allegations against RFF – essentially accusing them of 'cooking the books' and engaging in widespread fraud.

It alleged that RFF had been 'fabricating rental income' and 'overstating the value of its assets by more than 100%, with Bonitas stating "we believe nearly 100% of RFF's reported profits since FY'17 are attributable to either fabricated rental income or non-cash gains from dubious fair value changes applied to RFF's assets."

Further, the firm accused RFF management of siphoning profits away from the company and declared that RFF shares were "ultimately worthless".

RFF halted trading in its shares and released a quick response denying all of Bonitas' allegations, but in lieu of releasing a full response, commissioned accounting firm EY to take an independent look.

What did EY find?

The report from EY was released alongside the RFF FY19 results this morning and it corroborated RFF's position almost unequivocally. Going through each allegation, EY stated time and time again that each Bonitas claim was "not substantiated" and that any potential conflicts of interest or opportunities for mismanagement had been disclosed and systematically pre-empted by RFF management. Indeed, EY pointed out many errors and factual inaccuracies in the Bonitas report.

What's next for RFF?

In its release today, RFF stated:

The independent investigation conducted by EY concludes that the assertions contained within the Document are not substantiated. Further, EY have corroborated the response provided by RFF on 7 August 2019.

It appears that this report by EY – a globally renowned and respected 'Big 4' accounting firm – has put this saga in Rural Funds' history to bed. It pays to remember that Bonitas was short on Rural Funds when its allegations were released and therefore had an interest in seeing RFF shares fall in value. Whilst the RFF share price has yet to fully recover, it appears investors are cautiously regaining confidence in the company's management – perhaps assisted by management's heavy buying of Rural Funds shares after the allegations were made.

Rural Funds has also announced it is commencing legal action against Bonitas for "misleading and deceptive conduct" as a result.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Treasury Wine Estates Limited. 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 Scott Phillips.

More on Share Market News

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Share Gainers

These were the best-performing ASX 200 shares in March

These shares made their shareholders smile in March thanks to some very big gains.

Read more »

Businessman using a digital tablet with a graphical chart, symbolising the stock market.
Opinions

2 ASX shares I have been buying in 2024!

I’m a believer in the long-term outlook of these stocks.

Read more »

Stock market chart in green with a rising arrow symbolising a rising share price.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a massive day for the ASX 200, with a new all-time high recorded.

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Technology Shares

This ASX tech stock rocketed 60% in March! Can it keep on delivering?

After soaring in March, the ASX tech stock is now up 169% since this time last year.

Read more »

Broker Notes

Brokers name 3 ASX shares to buy now

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A young man clasps his hand to his head with his eyes closed and a pained expression on his face as he clasps a laptop computer in front of him, seemingly learning of bad news or a poor investment.
Share Fallers

Why Burgundy Diamond Mines, Clarity Pharmaceuticals, EML, and Zip are sinking today

These ASX shares are ending the week in the red. But why?

Read more »

A young women pumps her fists in excitement after seeing some good news on her laptop.
Share Gainers

Why Mesoblast, Newmont, Pilbara Minerals, and Platinum shares are jumping

These ASX shares are ending the week strongly. But why?

Read more »

a young boy dressed up in a business suit and tie has a cute grin and holds two fingers up.
Opinions

2 of my top ASX 200 shares to consider buying before April

I would happily exchange dollars for these two shares right now.

Read more »