Brokers ordered to hand over records of Blue Sky share trades

Two brokers have been ordered to hand over records of who was trading Blue Sky Alternative Investments shares in the days leading up to the short attack which destroyed the company.

Former Blue Sky managing director Mark Sowerby.

Brokers Euroz Hartleys and Argonaut will have to hand over their records of trading in Blue Sky Alternative Investments shares in the days leading up to the Glaucus short attack, as part of a bid to build an insider trading case against those involved.

The Australian revealed last week that former Blue Sky managing director Mark Sowerby has lodged a claim in the Queensland Supreme Court, seeking at least $445m in reparations from those allegedly involved in the Glaucus short attack in March, 2018, as well as exemplary damages from the corporate regulator Australian Securities & Investments Commission.

Mr Sowerby’s claim alleges Glaucus Research directors Matthew Wiechert and Soren Aandahl worked in concert with several brokers, Sydney hedge fund Totus Capital, and more as-yet unidentified “insiders” to build short positions in the company, then profited after publishing a report which claimed Blue Sky was effectively a Ponzi scheme.

The claim alleges there was a “conspiracy” to undermine Blue Sky and short its stock, which allegedly amounted to insider trading.

While under US law an insider trading claim must generally involve a company officer, such as a director or employee, under Australian law the definition is more broad and can be used to prosecute individuals who trade on non-public information, whether they are associated with the company or not.

In a judgment handed down in the Supreme Court in Brisbane late last week, Justice Susan Brown ordered the Australian-based brokers to hand over records of trades in Blue Sky shares and their derivatives which they executed from March 20, 2018, until March 28, 2018 - when the short attack occurred.

The judgment also ordered Glaucus director Matthew Wiechert to reveal to the court who received a draft of the Glaucus Blue Sky research before it was revealed publicly, and with whom it was discussed prior to going out.

While the judge noted the “intrusive” nature of the order, she said in her judgment that Mr Sowerby’s company Blue Dog Group had satisfied the preconditions for the order being made.

In an affidavit filed with the court, the judgment says, “Blue Dog has identified evidence that suggests that there was unusual trading in Blue Sky shares in the period shortly before the report was published’’.

“An independent expert, Mr Fehon of McGrath Nicol, has reviewed the trading data and identified that there was a significant increase in short selling activity between 15-28 March 2018 that was ‘unusual and warrants further investigation’,’’ the judgment says.

“The share trading activity occurred through two broking firms, Hartleys and Argonaut, which is said to be unusual and not consistent with prior trading activity of Hartleys and Argonaut in relation to Blue Sky financial products.

“Mr Fehon considers that ... the most likely explanation for the share activity is that those traders, had prior knowledge that Glaucus would publish the report critical of Blue Sky, although he canvasses other possibilities.’’

The judgment says both Argonaut and Hartleys had declined to provide the information sought by Blue Dog “on the basis that they claimed that they could not provide such details on the basis of privacy or confidentiality obligations’’.

“The share trading activity reported by Mr Fehon in Australia just prior to the release of the report gives some limited support to the inference that those trading had been provided with the inside information by one of the Glaucus parties or the trading was at the behest of one of the Glaucus parties or those associated with them,’’ the judgment says.

“For the reasons set out ... I am satisfied Blue Dog may have a right to relief under section 1043A of the Corporations Act against share traders who knew that the Blue Sky report would or may be released and who traded in Blue Sky shares prior to its public release, and the parties who communicated that inside information to them.

“That would extend to those referred to in the Glaucus report who traded in Blue Sky’s shares with knowledge of the inside information.’’

Section 1043A of the Corporations Act relates to the prohibition against insider trading.

None of the respondents in the matter attended court, while the judgment says Mr Wiechert’s father, who has previously acted for him, was contacted, and Mr Aandahl was personally served at his place of business in Texas.

The brokers have been ordered to hand over the trading records by March 26.

Blue Sky, which had billions of dollars worth of investments ranging from a burrito chain to an online shoe retailer, rejected the claims in the Glaucus report, which was released on the morning of March 28, 2018, however, its shares plummeted when they returned to trade the following week, falling from $11.41 to $5.62.

Blue Sky ultimately went into administration the following year, wiping out more than $1bn in equity value for its shareholders.

Two class actions against Blue Sky and its directors were subsequently launched, which are ongoing, having being consolidated into one claim.

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

Argonaut and Euroz Hartleys have said they will not comment on the ongoing legal proceedings.