VGI and Brisbane-based Corporate Travel clashed late last year after the hedge fund released a critical report which sent the company’s share price sharply downwards.
Corporate Travel has now engaged law firm Arnold Bloch Liebler and is demanding VGI Partners turn over any documents and the names of other people it claims could have assisted the Sydney-based money manager call the company’s finances and operations into question.
Two legal sources with detailed knowledge of the request, circulated in a letter authored by Arnold Bloch Liebler’s senior partner Leon Zwier, said it raised the possibility VGI worked with financial advisors and journalists in writing and releasing a damning report about the company’s conduct.
If Corporate Travel proceeds with the action, which has not yet been lodged in court, it could temper how the county’s investment banks or activist hedge funds challenge the financial reporting of Australian Securities Exchange-listed companies.
VGI Partners, headed by former Caledonia Investments executive director Rob Luciano, in late October circulated to investors a presentation setting out Corporate Travel’s 20 “red flags”, including “supernormal” profits, declining cash flows and changes to how it counts revenue.
It also questioned Corporate Travel’s software patents and the number of offices it had around the world, both of which the company acknowledged were inaccurate.
Threatening to sue is like a red rag to short-sellers.
Bronte Capital’s John Hempton
The presentation, later reported by several media outlets, pushed the share price from $27.64 to a low of $20 in November, although it recovered to $28.50 following the release of strong first-half trading results late last week.
Mr Zwier made a number of claims in his letter to VGI’s lawyers at Clayton Utz including that the hedge fund may have approached employees offering them payments in exchange for information, sources told the Herald.
A major Australian hedge fund manager, Bronte Capital’s John Hempton, said “threatening to sue is like a red rag to short-sellers”.
“In our experience, 100 per cent of the companies who have threatened us have since blow up,” he said.
Corporate Travel was considering commencing pre-trial discovery proceedings if VGI did not hand over documents, text messages and hard drives, Mr Zwier wrote.
If it did, Corporate Travel would be the only company to pursue such legal action since TFS Corporation’s failed Supreme Court pursuit of stockbrokers Taylor Collison in 2015 after another damning report which the sandalwood producer claimed was misleading and deceptive.
TFS, renamed Quintis and once worth around $1 billion, collapsed early last year after it was hit by a second negative report – this time from American hedge fund Glaucus – which suggested the company was worthless.
A Corporate Travel spokesman declined to comment, but the company’s chief executive Jamie Pherous told the Courier Mail earlier this month short-sellers needed to face rules to stop “flimsy analysis and glib assertions”.
The same laws should apply to short sellers as apply to a company director.
Corporate Travel chief executive Jamie Pherous
“There are lots of other high-growth ASX companies at which they could have thrown 20 poison darts … but it needs to be balanced,” Mr Pherous said.
“The same laws should apply to short sellers as apply to a company director.”
VGI also declined to comment, but spoke to the corporate regulator before it released the critical investor report about Corporate Travel. The regulator did not raise any issues, according to sources familiar with the matter.
The hedge fund’s executive director Doug Tynan has previously denied attempting to pay any Corporate Travel employees for information or visiting offices under false pretenses. He has said numerous questions were sent to the company’s chairman Tony Bellas before publication
The rise of American-style corporate activists in Australia has led local companies to re-examine how they deal with an onslaught of negative commentary, with Glaucus also instrumental in the collapse of the share price at asset manager Blue Sky Alternative Investments in 2017.
Forager Funds chief investment officer Steve Johnson, who manages around $370 million, said it was “a very healthy part of a functioning stock market to have people putting negative views out”.
“I don’t think people go and sell the stock just because someone has put a short report out,” said Mr Johnson, whose fund has questioned a number of publicly-listed companies. His fund once labelled the now-failed Dick Smith Electronics as “the greatest private equity heist of all time”.
“You look at the facts they are putting forward and make a decision on whether they are legitimate.”
Other companies, including BHP, have embarked on major public relations campaigns to ward off pressure from investor groups.
The mining giant rebranded from BHP Billiton and sold it’s shale and gas assets after a push from American hedge fund Elliott Associates which began in 2017.
VGI, which invests more than $2 billion in funds, has previously taken views against aged care operator Estia and Danish jeweller Pandora.
It is best known for a publication criticising law firm Slater & Gordon, once valued at $2.2 billion, which led to an Australian Securities and Investments Commission (ASIC) probe into the company’s accounting practices.
Kylar Loussikian is The Sydney Morning Herald’s CBD columnist.