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Alternative Investment

Blue Sky directors, auditors and EY face class action

“The financial reports materially overstated Blue Sky’s financial performance and position,” the claim alleges.

“In particular, the assets of the various funds managed by Blue Sky were overstated, resulting in it improperly recognising performance fees that were subject to material risk and that under its accounting policies and the accounting standards ought not to have been recognised.”

The claim alleges the financial reports were not in accordance with the Corporations Act or accounting standards and so failed to reveal a “true and fair view of the financial position and performance of Blue Sky”.

The directors did not have reasonable grounds to believe the financial reports were in line with these standards and so did not take reasonable care in assessing true and fair value, financial position and performance of Blue Sky, the claim alleges.

By releasing the financial reports and failing to correct them, Blue Sky and its directors engaged in misleading conduct, and potentially deceptive conduct under the ASIC Act or Australian Consumer Law, the class action claims.

The legal action makes similar claims against EY and its auditors.

In January 2021, Blue Sky director Ms Stead won a defamation case against The Australian Financial Review for opinion columns that accused Ms Stead of rashly destroying capital causing enormous losses, and making stupid investments which had no prospects of success.

Justice Michael Lee said Blue Sky’s demise “was significant and raised very serious issues of corporate performance and governance”. But the facts that underpinned those opinions were not contained in the columns, so the newspaper’s defence failed.

Rocketing profits

Brisbane-based Blue Sky oversaw funds with assets from a burrito chain to property investments, posting rocketing profits and share prices.

It is alleged revenue was overstated and performances fees were overstated by inflating the value of assets in its underlying fund. The claim also alleges investments in unlisted equity and investment property were overstated.

But the wheels fell off after Glaucus Research, short-sellers that make money from share prices falling, dispatched research in March 2018 casting doubt on areas from how Blue Sky was valuing investments to the assets under management.

Blue Sky rejected the claims but tumbled into administration in May 2019.

“If the financial reports had been prepared in accordance with accounting standards and the Act, the true position information would have been disclosed to the ASX and the market. The financial reports would have revealed that Blue Sky was in a materially less favourable financial position than the reports suggested,” the Banton concise statement said.

“Further, if the relevant directors have complied with their obligations … they would have not issued the declarations in the financial reports or approved the releases of the reports, and they would not have been released until the distorted information had been corrected.”

Similar claims are made against the auditors.

The claim alleges that if the “distorted information” was corrected the price that investors would have been willing to pay to buy and sell Blue Sky shares would have been materially lower, and capital raisings undertaken in the 2016, 2017 and 2018 financial years would have not gone ahead, or would have been priced much lower.

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