The Rural Funds Group Ltd (ASX: RFF) share price is up 1% to $2.06 today, but still a long way below the $2.35 share price it closed at on August 5 prior to it being subjected to some explosive allegations by activist short seller Bonitas Research.
The allegations alleged, inter alia, that RFF overstated rental income by $28 million, artificially inflated the value of its agricultural assets to claim more fees and engaged in cross-party transactions designed to benefit management at the expense of shareholders. Furthermore, Bonitas also alleged RFF’s quarterly dividend was partly funded by equity raisings and bank debt.
RFF’s management has dismissed all of the allegations as false and misleading and even took an unusual “Fifth Amendment” approach in refusing to comment on the specifics of the allegations.
Instead it commissioned auditor Ernst & Young to investigate the allegations based on information provided to the auditor by RFF itself.
Ernst & Young largely dismissed the Bonitas allegations as unsubstantiated, with the standard disclaimers that its investigation was limited and under the terms of RFM’s engagement letter.
Despite the ‘consensus’ that the Bonitas report contained errors and false allegations the short seller is sticking to its guns and claims to be pleased by the prospect of legal action as it will result in ‘document discovery’ and the truth coming out.
Legal eagles will be lapping up the prospect of a potential court case brought by RFM under “sections 1041D, 1041E, 1041F and 1041H of the Corporations Act 2001 (Cth)” for loss or damage as result of the conduct of Bonitas.
If RFM is victorious it will have wider implications for the share market as many companies have complained historically about being undermined by short sellers on false or spurious grounds.
Other high-profile targets of short sellers currently include Corporate Travel Management Ltd (ASX: CTD), Bellamy’s Australia Ltd (ASX: BAL) and JB Hi-Fi Limited (ASX: JBH).
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The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and RURALFUNDS STAPLED. The Motley Fool Australia has recommended Bellamy's Australia. 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.