One of two class actions being launched against Dick Smith Holdings is set to allege that the failed electronics and IT retailer inflated the combined value of its assets and equity by about $150 million, after tax.
The class action is set to be brought against the entity remaining following the retailer’s collapse early last year -- now under the control of receivers, Ferrier Hodgson -- by Johnson Winter & Slattery in partnership with Investor Claim Partner (ICP).
In an overview of the proposed claim against Dick Smith Holdings (DSH), which is set to be launched on behalf of former shareholders in the once publicly-listed company, Johnson Winter & Slattery said that the action will allege DSH made misleading and deceptive statements about its financial standing.
Specifically, the action will allege that DSH omitted information that investors and their professional advisers would “reasonably require to make a properly informed assessment of DSH’s assets and liabilities, financial position, performance and future performance”.
The law firm also said it will allege that DSH engaged in misleading and deceptive conduct and breached its continuous disclosure obligations by making representations and omitting to disclose information.
This, according to Johnson Winter & Slattery, meant that investors allegedly did not have all the information that a “reasonable person would expect to have a material effect on the price of DSH’s shares from the date of the prospectus to the date DSH went into administration”.
The theory that underlies class actions like this one is that the market price of shares is “inflated” due to non-disclosure or misstatement of material information. Accordingly, investors and the market at large value the shares on incorrect or incomplete information.
In this respect, the proposed class action claim will allege that the market price of DSH shares was inflated by reason of the non-disclosure of the Information by DSH, and that the failure to disclose this information caused losses to be suffered by shareholders who purchased shares at the inflated price through the prospectus.
According to Johnson Winter & Slattery, the information in the prospectus alleged to be misleading and deceptive, or omitted information considered material to the value of DSH shares, includes data associated with the company’s assets and liabilities.
In this respect, it is alleged that Dick Smith’s inventory directly after the date of the company’s acquisition by Anchorage was valued at about $102.5 million greater than it was valued by Woolworths, representing an upwards valuation of 49 per cent, with the revaluation of assets by Anchorage being the result of the creation of an undisclosed inventory “provision” of about $58 million.
According to the law firm, this provision was allegedly able to be written down over time, thereby enhancing future reported earnings. Further, the prospectus allegedly failed to disclose the provision or the extent to which inventory revalued upwards upon its acquisition.
As such, it is alleged that the Dick Smith prospectus falsely claimed that between the acquisition and the release of the public listing prospectus, there had been a significant reduction in DSH’s level of obsolete stock.
Broadly, the law firm alleges that DSH inflated the value of its assets and equity by about $150 million, after tax.
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