ASIC acted in ‘bad faith’ by allowing Glaucus to destroy Blue Sky, court claim says

The corporate regulator acted in bad faith by sitting idly by while Glaucus Research savaged Blue Sky Alternative Investments in a short attack, the latter’s former boss says in a new court claim.

Blue Sky founder and former managing director Mark Sowerby.

The corporate regulator failed in its duty by allowing short sellers Glaucus Research to publish a report which included unjustified allegations claiming Blue Sky directors were involved in fraud, and also allowing Glaucus to profit on the basis of that attack, new court documents allege.

Blue Sky Alternative Investments founder and former managing director Mark Sowerby earlier this year launched a $445m class action alleging Glaucus directors Matthew Wiechert and Soren Aandahl worked in concert with several brokers, Sydney hedge fund Totus Capital, and other “insiders” to build short positions in the company, then profit after publishing a report which claimed Blue Sky was effectively a Ponzi scheme.

The short attack on March 28, 2018 almost immediately destroyed half of the value of Blue Sky’s ASX-listed shares, which dropped from $11.41 to $5.62 in the days after the report was released, and Blue Sky eventually called in receivers in May 2019.

Glaucus alleged in its report that Blue Sky was vastly overstating its assets under management, and that companies it had invested in such as wine retailer Vinomofo and Shoes of Prey, which has since been liquidated, were overvalued.

Mr Sowerby has alleged in previous court filings that there was a “conspiracy” designed to profit from attacking Blue Sky, which his lawyer argues constituted insider trading under Australian corporate law.

A consolidated statement of claim has now been lodged in Queensland’s Supreme Court, which also alleges the Australian Securities and Investments Commission (ASIC) acted in “bad faith’’, because it knew of Glaucus’ intentions but decided not to prevent the short selling or subsequently look to the prosecute them following the short attack.

The “bad faith” argument is important as it is understood that government agencies cannot be sued for damages if they carry out their role in good faith.

The statement of claim says that Glaucus’s conduct “was prima facie insider trading’’ under Australian law, which does not require a person or organisation to be an actual insider of a company, only that they trade with foreknowledge of potentially material information.

Given that Glaucus had prepared a short report designed to drive Blue Sky shares lower, and had informed ASIC that it was about to publish the report, Mr Sowerby’s claim argues that insider trading was evident.

The claim says ASIC had the data and powers to identify relevant trades in Blue Sky shares, to identify who was carrying out those trades, the persons who placed the orders, and “act against those persons for insider trading’’.

The claim says Mr Sowerby’s company Blue Dog Group wrote to ASIC “enclosing evidence that the arguments in the Glaucus Blue Sky report were demonstrably false and the short attack ... was plainly illegal’’.

One of Blue Sky’s investee businesses was Shoes of Prey, which allowed customers to customise shoes.

The company asked ASIC to identify what harm the attack caused, and asked it to step in and investigate on the basis of insider trading and also issuing false and misleading statements.

ASIC wrote back, the claims says, indicating it had decided not to take any action.

“Following careful consideration of the issues, including the alleged contraventions ... of the Corporations Act, ASIC has decided not to take any enforcement action,’’ an excerpt purportedly from a letter from the regulator says.

“As set out in out Information Sheet 151 - ASIC’s approach to enforcement - ASIC

may not proceed to enforcement action for a number of reasons, including the regulatory benefits of pursuing misconduct.

“A relevant consideration is also the cost and time required to achieve an appropriate remedy through enforcement action.”

Mr Sowerby’s claim says that “it was not possible in any circumstance for the Ninth and Tenth Defendants (Mr Weichert and Mr Aandahl) to undertake activist short selling in the Australian market without they and their clients engaging in unlawful insider trading’’.

“The Ninth and Tenth Defendants would be heavily conflicted in making those accusations of fraud because they would profit from the subsequent decline in the share prices of those companies,’’ the claim says.

“In the premises above, there was significant risk that the accusations would be false, misleading and defamatory’’.

Mr Sowerby resigned from Blue Sky two years before the Glaucus attack, but still held a substantial of number of shares in the firm.

He is seeking at least $445m in reparations for himself and other shareholders, based on the plunge in the company’s share price from $11.41 before the Glaucus report was released on March 28, 2018, to $5.62 by the time the share market had closed on April 5.

He is also seeking exemplary damages from ASIC.

Two class actions against Blue Sky and its directors are also still ongoing, having being consolidated into one claim.

ASIC has applied to strike out Mr Sowerby’s claim, which would mean that it does not have to file a defence, with a hearing on that issue to be held on September 20.

ASIC has been contacted for comment.