Feltex defendants knew of sales shortfall before IPO allotment, plaintiff says

Tuesday 3rd June 2014

Defendants in the Feltex Carpets case knew sales were behind prospectus forecasts and should have halted the sale before shares were allotted in the failed company's 2004 initial public offering, the lawyer for plaintiff Eric Houghton said in closing submissions.

Austin Forbes QC told the High Court at Wellington that defendants who attended Feltex's so-called due diligence "bring down", or final, meeting in early June, 2004, knew or had the information available that sales were behind year-earlier levels in four of the first five months of the year, with March the only strong month. But the meeting chose instead to assess the shortfall against a 12-month period which included a predicted rebound in June.

Because 2004 forecasts were unlikely to be met, the projections for 2005 were also in doubt, Forbes said.

"The decision not to notify the shortfall to the market was misplaced," Forbes said. "The sales shortfall was a material adverse circumstance which meant that the prospectus was now misleading. ... Allotment should have been deferred."

Houghton is suing the former Feltex directors, owners and sale managers in a representative action on behalf of 3,639 former shareholders who say they were misled by the prospectus. He bought 11,755 Feltex shares at $1.70 apiece, or $20,000, in the IPO, drawn to an investment that offered a gross annual dividend yield of 9.6 percent. All up, vendor Credit Suisse First Boston Asian Merchant Partners raised $193 million, selling 113.5 million shares, and Feltex raised a further $50 million to repay bondholders.

Within a year the stock was virtually worthless, thanks to a series of warnings that the company would miss its prospectus forecasts, and receivers were appointed in September 2006. Australian carpet maker Godfrey Hirst ended up buying the assets.

"The downgrade and collapse contrast starkly with the picture painted in the combined prospectus and investment statement of 5 May 2004," Forbes told the court. He outlined nine circumstances or risks that were known, or ought to have been known, by the defendants before the IPO but weren't disclosed or were inadequately disclosed in the prospectus.

They included declining sales revenue and volumes, 2004 forecasts and 2005 projections that weren't achievable, use of forward dating to meet revenue targets, increased competition from Godfrey Hirst and the prospect of increased rivalry from imported product as tariffs fell.

Despite Feltex having lost market share for six straight years, the prospectus projected a volume increase for 2005 of 5.1 percent, which Forbes said was "an extraordinary contrast," and a 1 percent increase in market share. The board and due diligence committee "should have held especial concern about the ability of Feltex to grow market share, given its sixth consecutive loss in that regard," he said in his closing submissions.

The long-running case has seen lawyers for both sides bring in expert witnesses, with the plaintiff's including Greg Meredith, head of Ferrier Hodgson Forensics in Melbourne, while Rob Cameron, the founder of Wellington investment bank Cameron Partners and former chairman of the politically bi-partisan Capital Markets Development Taskforce was an expert witness for Feltex's former directors, Credit Suisse Private Equity and Credit Suisse First Boston Asian Merchant Partners, the first three defendants.

First NZ Capital and Forsyth Barr, which managed the IPO, are fourth and fifth defendants in the suit.

The case before Justice Robert Dobson is continuing.

BusinessDesk.co.nz

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