Treasury Wine faces class action over US disclosure

Treasury Wine faces class action over US disclosure

October 28, 2013 – 11:48AM

Eli Greenblat

Wine glut … Treasury Wine Estates booked $35 million to destroy stocks. Photo: Ron Chapple

Litigation funder IMF is calling for aggrieved shareholders to sign up for a possible court action against Treasury Wine Estates, the owner of a portfolio of leading and iconic wine brands such as Penfolds, Wolf Blass and Lindemans, claiming ‘‘deceptive and misleading conduct’’ over disclosures around its troubled US business. Treasury Wine Estates, the world’s largest pure-play winemaker, shocked markets and investors in July when it admitted an oversupply of poor and unwanted wine in the US would trigger a $160 million write-down and include a $35 million charge to destroy past-its-date wine stocks.The profit warning and write-off saw Treasury Wine Estates shares plunge more than 12 per cent and later led to the ejection of its chief executive, David Dearie.

Maurice Blackburn Lawyers has linked arms with IMF in the possible case against Treasury Wine Estates.

In a joint statement from the litigator and law firm, they said this morning the class action would allege that Treasury Wine Estates misled the market and breached its continuous disclosure obligations in relation to the financial impact of over-stocked US distributors.

In a statement to BusinessDay this morning a Treasury Wine Estates spokesman said: “TWE advises that no proceedings have been served against the company at this time.  TWE strongly denies any allegations of wrong doing and will defend any class action proceedings vigorously”.

Institutional investor on board

IMF already have at least one shareholder in Treasury Wine Estates who has signed up to the class action and to kick-start the process. The investor is an institutional shareholder, BusinessDay has learned, but it is unclear at this stage if the institution is local or overseas based.

Under class action rules, IMF will require at least seven former or current shareholders signed up to move to the next stage of the class action. It is believed IMF has already attracted a number of investors to its burgeoning case.

BusinessDay has also learned that IMF first began to inquire into Treasury Wine Estates after its shock profit downgrade and write-off in July, picking up on market disquiet and investor rumblings through its contacts.

IMF does not take on borderline cases and internally, the litigation funder is referring to the claims of deceptive and misleading conduct against Treasury Wine Estates as ‘‘egregious’’.

IMF said in a statement to the Australian Securities Exchange this morning it was acting on behalf of current and former shareholders in Treasury Wine Estates.

‘’The claims related to alleged misleading and deceptive conduct and allege breaches by Treasury Wine Estates of its continuous disclosure obligations in connection with the performance of its United States operations between 17 August 2012 and 14 July 2013 inclusive, although that period may ultimately be extended or shortened.’’

Investors shrugged off the news, pushing up TWE shares 2 per cent to $4.62 in early trade.

IMF said in its statement that investors who bought shares between 2012 and 2013 may be eligible to participate in its claim.

Disclosure issues

IMF investment manager Simon Dluzniak said the core issue related to alleged inadequate disclosure of issues associated with excessive inventory held by Treasury’s US distributors.

“By not disclosing the possibility of a material write-down when we allege it should have, the company caused shareholders to suffer financial loss,” Mr Dluzniak said.

“In the US wine market, the ban on producers selling directly to retailer outlets means that all of Treasury Wines’ products must pass through third-party distributors. The level and make-up of inventory held by Treasury’s distributors is critically important in this action.”

Mr Dluzniak said Treasury Wine Estates had repeatedly assured investors that inventory levels at its US operations were being managed.

“Treasury Wines’ management told the market on multiple occasions throughout the 2013 financial year that the company’s earnings would grow whilst it adequately managed its US distributors’ inventory levels.

‘‘We allege that the market was not told that the US distributor inventory levels of some brands were so high that Treasury Wines was at risk of having to destroy excess stock or give rebates or discounts to the distributors for excess, aged and deteriorating inventory.”

In an interview with BusinessDay Mr Dluzniak said the litigation funder had began to look at Treasury Wine Estates after picking up on investor discontent following from the winemaker’s shock downgrade in July.

‘‘Through our connections in the market we had been informed there has been a bit of disquiet around the 15 July writedowns, so both ourselves and Maurice Blackburn undertook some investigations into what we see as the potential breach of disclosure obligations.’’

Mr Dluzniak said IMF had one shareholder already signed up to the class action case.

‘‘We have a client,’’ he told BusinessDay this morning.

‘‘As to whether they are a current shareholder [in Treasury Wine Estates] I don’t know but they are a shareholder who under the funding agreement and the class action is run is a shareholder that bought shares in the period [August 17 2012 and July 14 2013].’’

Mr Dluzniak said the funding it was preparing to throw at the case was material for it, with the litigation funder not taking on ‘‘border line cases’’.

‘‘We say it’s bad, we have a policy within IMF that we don’t fund what we call border line cases.

‘‘We haven’t funded a shareholder case for a couple of years now, so we are very strict on the view that we are only going to fund shareholder claims where we believe the conduct has been egregious.

‘‘We would say it’s egregious.’’

Maurice Blackburn NSW managing principal Ben Slade said the case highlighted the very serious responsibility listed companies have to disclose material information to the share market.

“Evidence suggests that Treasury Wines knew, or should have known by 17 August 2012 that large write-downs were inevitable,” Mr Slade said. “On that day Treasury Wines projected earnings growth when it must have been able to work out that massive write downs were on the horizon.”

Mr Slade said that investors who buy shares in listed companies are protected by the Corporations Act, which requires companies to act honestly and to inform the market of material facts that might impact on their share price.

If those fundamental protections are breached, shareholders who suffer loss have a right to seek compensation.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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