Fairfax denies defaming venture capitalist Elaine Stead, arguing her investments performed poorly
The former head of SA’s Venture Capital Fund is fighting to reclaim her reputation, saying media publisher Fairfax made her out to have made “stupid investments”. Fairfax says it didn’t defame her and that claim is true.
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- Leaked contract details Blue Sky’s massive payday
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Australian Financial Review columnist Joe Aston and his employer have denied defaming venture capitalist Elaine Stead, who says they wrongly made her out to look “cretinously stupid’’.
And while denying articles published by the AFR made her out to be “reckless” or that she “made stupid investments”, Fairfax Media (now owned by Nine Entertainment Co) and Mr Aston argue that “each of those imputations is substantially true’’.
Ms Stead, who until recently ran the South Australian Venture Capital Fund before quitting earlier this year, is suing Fairfax for a series of columns she alleges make her look “stupid” and “reckless”.
Her suit alleges the columns falsely imputed she was “a cretinously stupid person” and “wilfully destroyed the capital of business ventures with which she was associated causing enormous losses to unitholders’’.
Mr Aston’s defence argues he didn’t actually author all of the columns.
And while Fairfax and Mr Aston deny that the columns were “reasonably capable of carrying ... the imputation” set out by Ms Stead in each case, and have denied each publication was defamatory, they have defended their critique of Ms Stead’s abilities as a manager of other people’s money.
The 72-page defence argues that Ms Stead was entrusted with $80 million in shareholders capital, to be invested by way of various Blue Sky Venture Capital (BSVC) funds.
“The investments made by the applicant deploying the capital referred to ... were poor, in that investors did not receive the projected returns and/or did not recover their capital,’’ the defence states.
The defence also argues that “when investments were not performing” Ms Stead “continued to promote the success and likely future success of the funds and/or investment in order to maintain and generate investor confidence’’.
“Despite the failures of the BSVC investments ... the applicant and BSVC were rewarded with: significant fees for the establishment of new funds; and significant management and performance fees for new investments’’.
The defence also says these fees “were paid (in many cases upfront) regardless of the success of the investment or the risk to investors’ funds’’.
In defending the imputation that Ms Stead “wilfully destroyed the capital of business ventures with which she was associated causing enormous losses to unitholders”, the defence lists a number of failed or poorly performing investments made by Ms Stead and the funds she managed.
These include:
► Shoes of Prey, which Blue Sky promoted as “a rapidly growing fashion footwear company” in 2017 – and which was shut down in August 2018 – with total losses to Blue Sky investors of about $10 million;
► An investment in health food store operator Thr1ve which led to a total loss to Blue Sky investors of about $12.1 million;
► Formerly Adelaide-based online wine retailer Vinomofo, which Blue Sky invested $25 million in, valuing it at 50 times its EBIT of $1.84 million in FY2015.
The court documents say the accepted industry standard for investments was a multiple of just five times earnings, and Vinomofo went on to report a pre-tax loss of $3.74 million the following financial year followed by a $6.7 million pre-tax loss.
Despite its poor performance Blue Sky had marked up the value of its equity in Vinomofo by about 10 per cent by December 2016, the defence states.
The defence also makes a claim about the broader Blue Sky group, which Ms Stead was a director of, saying it exaggerated its fee-earning assets under management substantially.
Blue Sky collapsed in May last year, with a total loss of shareholder value of more than $1 billion, after short-seller Glaucus released a report making this same claim.
“BSVC overstated its financial performance by unjustifiably marking up the value of its unrealised; assets in its portfolio, as particularised,’’ the defence documents state.
“The vast majority of BSVC’s reported performance was ... based on its own mark-up of its unrealised investments in its portfolio.
“As its investments were illiquid and not traded on any verifiable stock exchange, BSVC management had considerable discretion over the valuation of these unrealised investments.
“In addition ... the higher BSVC marked its unrealised assets, the higher the management and performance fees Blue Sky could recognise in its financials.
“The ability to report higher fees led to higher reported profits and therefore a higher share price.’’
In response to the imputation that Ms Stead “made stupid investments in two worthless companies, Shoes of Prey and Vinomofo, which had no ... prospects of success’’, the defence argues Ms Stead continued to promote the success of both, when they were not performing, “in order to maintain and generate investor confidence’’.
The defence says the Vinomofo business “stagnated immediately following the BSVC investment, delivering poor results in spite of BSVC’s large investment of capital, and contrary to the positive predictions made by the applicant’’.
Vinomofo was characterised as a “worthless investment’’.
In response the imputation that Ms Stead was not competent to manage SA’s $50 million venture capital fund, Fairfax’s defence is that “in light of the matters particularised, the applicant was not competent to hold the position of manager for the SAVC Fund’’.
In arguing mitigating factors against any award of damages, Fairfax also points out that Ms Stead made public statements “in which she admitted that her reputation had been damaged prior to publication of the matters complained of’’ and that prominent financier Mark Carnegie had made public statements that he intended to employ her.
Ms Stead says in her claim that she suffered “enormous damage in both her personal and professional reputation”.
Ms Stead has previously told The Advertiser that she had filed the suit, “in order to restore my reputation and look forward to the court’s determination of my claim’’. She did not reply to a request for further comment this week.
She has yet to file a reply to the court.
Lawyers for Nine said they were unable to comment as the matter was before the court.