ON a rubble-strewn construction site on Brisbane’s east side this week, tattered banners of glorious plans for a 107-apartment complex were peeling off security fences.

The banners proclaimed the apartment’s developer as Blue Sky Alternative Investments, the Brisbane-based fund manager that was once a stockmarket darling.

But the “Florence” apartment site in Greenslopes is a mess. It’s more than a year behind the original schedule and investors are yet to get their money back. Local construction workers say nothing has happened on the site for months.

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The project reflects the bedraggled position of Blue Sky itself.

Firstly, shares that had swelled to $14.99 last year had shrivelled below $1 earlier this week, culling $1 billion off the company’s value.

Secondly, lawsuit threats loom against Blue Sky, including one The Courier-Mail can today reveal has been filed by a farming couple. Thirdly, a once-stellar profit record has been stained in $86 million in red ink.

So, this Monday, shell-shocked investors will venture to Blue Sky’s annual general meeting, in a sombre room at the Christie centre in Brisbane’s CBD, perhaps hoping to hear what went wrong.

PARTY’S OVER

It’ll be a totally different vibe to 12 months ago. Blue Sky was then holding its fancy annual investor day at Brisbane’s convention centre.

Eighteen hundred people toured stalls of Blue Sky’s investments, showcasing items such as exquisite leather footwear from men’s fashion outfit Aquila.

Over the years, attendees heard presentations from the likes of Harvard Business School professor Rawi Abdelal or Chloe McCardel, a marathon swimmer who toughed out a triple crossing of the English Channel.

There was, of course, also the business pitch. Blue Sky executives highlighted how annual returns were exceeding 15 per cent annually. It was spectacular stuff for a company that only started in 2006 before listing on the stockmarket in 2012.

The pitch sounded simple: Blue Sky would sniff out various assets — some unorthodox - in which people could invest.

It created dozens of funds for such assets, from water rights to a burrito chain. Blue Sky received fees from these funds, and stockmarket investors could buy shares in the fund manager itself.

The market lapped it up. Profits skyrocketed and shares jumped from their $1 float price.

Top brass became corporate superstars, giving speeches at the elite Brisbane Grammar School or at the stock exchange’s “CEO Sessions”.

Founder Mark Sowerby became the State Government’s first Chief Entrepreneur after leaving Blue Sky in 2016.

But, in the background, not everyone was dazzled. “It was just cutthroat,” says one source with knowledge of Blue Sky’s early days.

The source says a focus was on sales to investors, with a common question being “how much have you raised?”

The media, often boosterish, occasionally picked up on oddities.

One Blue Sky fund, for instance, whose investments included Lenard’s Chicken, performed so badly that investors in 2017 were asked to park their money for longer than planned.

But Blue Sky’s then managing director Rob Shand, 36 and with international experience at massive consulting agency Bain, argued the struggling fund was a rarity and dismissed concerns about performance overall.

“In the context of the investors broadly that invest with us, (the problematic fund is) completely insignificant,” he said at the time.

He was not to know that within months, five California-based researchers would scour Blue Sky’s accounts and put forward devastating theories.

THE SHORT

One researcher was Soren Aandahl, who is what’s called a short-seller. They make money if shares in their target company fall and lose if they rise.

Aandahl, a former lawyer, was a director at short-seller Glaucus Research and had made a name uncovering frauds among Chinese listed companies. Glaucus had also just devastatingly ripped apart the accounts of Australian stockmarket-listed sandalwood producer Quintis, which plunged into receivership.

Quintis had given them a template of which company might be vulnerable to a shorting attack, Aandahl tells The Courier-Mail. They started screening for asset managers with characteristics such as record profits and hard-to-value assets.

Blue Sky jumped out.

“On paper … its investment track record basically was almost too good to be true,” he says.

It was that 15 per cent figure.

“If that were the case, they were essentially one of the best investors over that time in the entire world.”

The next few months were less than sexy. The researchers were at computers, reading through dense, complicated accounts to buttress a hunch.

“It was really difficult to get a sense of the assets in their portfolio,” Aandahl says.

D-Day came on Wednesday, March 28. Emails arrived about 11.50am in stockbroker inboxes from Glaucus, saying they planned to short Blue Sky’s shares. “We present evidence that Blue Sky has overstated its returns on many investments, a practice we believe is systematic,” the damning email said of Glaucus’s claims.

It linked to a 67-page report casting aspersions on everything from a childcare venture’s valuation to whether Blue Sky was gouging fees. Glaucus was not the first bunch of investment experts to question Blue Sky’s model — others in Australia had long scratched their heads - but the short-seller’s vocal attack was the first to heavily undercut the stock. In only 45 minutes, shares slumped more than $1 to $10.40.

Blue Sky quickly tried defending the allegations, and had its shares frozen for breathing room while it prepared a detailed response.

Its retort one week later was a broader denial of allegations, accusing Glaucus of botching calculations. Yet it sometimes did not provide figures to say what the right answer was, and when Shand held a subsequent conference call, railing against the “appalling” situation, he made the crucial mistake of not taking questions.

The market was underwhelmed.

“They ruined their own credibility in terms of … how defensive they were,” Aandahl argues.

MORALE HIT

From Blue Sky’s Eagle Street office, adorned with 1920s US President Calvin Coolidge’s quote “Nothing in this world can take the place of persistence”, top brass put on a brave face, telling market participants it was business as usual and the storm would blow over.

But the stress was discernible. “Morale took a massive hit,” says one person with knowledge of the time. Some Blue Sky people pulled 90-hour weeks. They were tired, maybe irritable. “A lot of people (were) walking on eggshells,” the source says.

While some insiders have a contemptuous memory of Blue Sky, the source says others felt part of an extended family at the office, which supplied small freebies such as breakfast, and genuinely wanted to do right by investors.

It didn’t matter. The ensuing months were a cascade of bad announcements and share falls.

Shand suddenly resigned in April. Other executives left. The childcare venture sold for far less than the value placed on Blue Sky’s books, and some investments, such as student accommodation, were suddenly deemed to be underperforming.

The year ended with an $86 million loss and Blue Sky accepting a $50 million financial lifeline from California-based investment firm Oaktree Capital, known shudderingly in business circles for tough negotiations. The loan included Oaktree earning 15 per cent interest, a $1 million upfront fee, up to 30 per cent of Blue Sky shares and security over assets.

Australian-based investment manager Andrew Brown described it as: “Lower testicles into vice. Turn handle slowly.”

LAWSUITS

That’s not the only squeeze. The Australian Securities and Investments Commission earlier this year started probing Blue Sky’s disclosures and class-action lawyers including Gadens began investigations.

Then last month, in Queensland’s Supreme Court, husband and wife Ged Mullins and Rachael Parkes filed a lawsuit alleging Blue Sky Alternative Investments had dudded them. They had hoped for a joint venture with Blue Sky this year to expand their dairy operation on the Darling Downs.

“Our agreement with Blue Sky has been riddled with problems,” Parkes tells The Courier-Mail. Their claim, for $4 million, alleges Blue Sky “fraudulently misrepresented” its position and used coercion to delay the joint venture commencing.

This delay hurt the proposed business’s value, they allege. They lost milk income and Blue Sky wants their units in a trust valued at $2 million and $630,000 in cash, the lawsuit says.

Parkes sounds worried about the dispute. “It’s our livelihood,” she says. Blue Sky has not yet filed a defence but said it “categorically” rejects the allegations.

LIFE AFTER BLUE SKY

Neither Shand, Sowerby nor Blue Sky’s current top brass wished to speak to The Courier-Mail this week.

Sowerby has retained 4.4 million shares, or 5.7 per cent, in the company, and still owns racehorses with sky-blue livery.

Sowerby told The Courier-Mail he was busy with charity work.

Shand, meanwhile, quietly sold almost all his shares in Blue Sky within a month of resigning.

The shares netted between $470,000 and $740,000, at least twice the stock’s value today.

Eyebrows were further raised when it emerged Shand’s family home had been sold for $1.35 million to the spouse of stockbroking firm Morgans’ analyst Scott Murdoch, who covered Blue Sky.

Morgans says the deal was on normal commercial terms and entered into two months after Shand had left Blue Sky.

“Neither Scott Murdoch or his partner had any direct dealings with Rob Shand or his partner (only the real estate agent) in relation to this transaction,” Morgans says.

Shand moved upscale. His wife Anna bought a $2.5 million four-bedroom home in Brisbane’s leafy western suburb of Brookfield, which has houses with massive lawns and an equestrian club.

Anna in June established a company with a name suggesting a thoroughbred stud interest. Shand, meanwhile, is still on the board of 99 Bikes owner Pedal Group, backed by Flight Centre, alongside fellow Grammar old boy Matt Turner, son of Flight Centre founder Graham ‘Skroo’ Turner.

For those remaining at Blue Sky, one big hurdle is encouraging money back.

There’s a focus now on assets such as agribusiness, which it says has been a strong performer, and more detailed information for shareholders.

But one investor disappointed with his fund would not roll his money into another Blue Sky idea. “No. God no,” he says.

Blue Sky still occasionally sounds him out about new potential opportunities, but the investor says the tone is more chastened than yesteryear’s bullishness.

“They’ve clearly,” he says, “had a dose of reality.”

Contact Liam Walsh

Email: liam.walsh@news.com.au

Phone: +61 7 3666 6413