Law firm Gadens knew about Blue Sky short attack in advance, claim says

Former Blue Sky boss Mark Sowerby’s $445m claim against those who ‘conspired’ to undermine the company says there is evidence law firm Gadens knew of the short attack in advance.

Former Blue Sky managing director Mark Sowerby.

Law firm Gadens had “prior knowledge” that Glaucus Research was about to launch a short attack on Blue Sky Alternative Investments back in 2018, a claim alleging a conspiracy to undermine the company and profit from shorting its stock claims.

The legal action, lodged in recent days by Blue Sky founder and former managing director Mark Sowerby, is seeking $445m in reparations for Blue Sky shareholders from those involved in the alleged conspiracy and exemplary damages from the corporate regulator, the Australian Securities and Investments Commission.

Mr Sowerby’s company, Blue Dog Group, says the actions of Glaucus, those who shorted the stock, and others including Gadens and former AFR columnist Joe Aston, amount to a conspiracy and also in some cases constituted insider trading.

The claim says that Gadens must have known that the short attack was about to be announced prior to its release just before noon on March 28, 2018, and says there is evidence to this effect.

It also says the prior knowledge can be inferred by Gadens’ actions at the time.

The fact that Gadens knew about the coming attack, and was preparing to promote a shareholder class action to benefit from it, was evidenced by the timing of the creation of a web page, Mr Sowerby’s claim says.

Former AFR columnist Joe Aston was successfully sued for defamation over his Blue Sky reporting.

“While the Gadens statement was published on a web page which was created on 29 March 2019, it contained a link to another incomplete and obviously draft web page at which potential claimants could register their interest and which was created on 27 March, 2018, the day before the Glaucus Blue Sky report was published,’’ the statement of claim says.

“The Gadens Statement wrongly stated that the Glaucus Blue Sky report was published on 27, March 2018, whereas the published version was created as a pdf document in Australia on the morning of the 28 March 2018, which implies that the Gadens Statement was pre-prepared based on an earlier version of the report provided to Gadens in anticipation of its publication.’’

Mr Sowerby’s claim says it can also be inferred that Gadens had advance notice of the impending short attack from Glaucus, because of the speed with which the firm announced its proposed class action.

The claim says “there was plainly insufficient time for Gadens, had it been acting in good faith and without prior awareness’’ to source the Glaucus report and take all of the necessary steps to form the opinion that a class action was warranted and then instigate a marketing campaign to promote it.

This would have necessitated, the claim says, “experienced (and likely busy) finance lawyers to become available to read it and then undertake a critical initial investigation of its 67 pages of purported argument, reasoning and evidence, including lengthy public documents referenced but not included in the report itself’’.

“For them to also identify particular and serious breaches of the Corporations Act 2001, ASIC Act 2001 and the ASX listing rules by Blue Sky and one or more of its officers, and two classes of potential claimant that may have suffered compensable loss caused by those breaches.

“To then form, by a consensus of Gadens’ responsible partners, the ‘grave concerns’ that those breaches had in fact occurred, in circumstances where there were strong reasons for any experienced lawyer to be cautious of the Glaucus Parties’ claims, including that they were biased, very heavily conflicted and not subject to Australian regulation or jurisdiction, the emotive and intemperate language used, the numerous allegations of fraud and dishonesty against Blue Sky officers and reputable professional firms, and where Blue Sky had not yet had an opportunity to reply.

“To then form, again by consensus of responsible partners, the view that Gadens, a national law firm of high standing, should be seen to initiate legal action against Blue Sky and its officers, and seek to retain clients to prosecute such action, in circumstances where that news would itself give strong credence to the Glaucus report and drive Blue Sky’s share price down.’’

Mr Sowerby’s claim says the proposed class action was widely advertised including on Google “whereby from 29 March, 2018, any Google search for words including ‘Blue Sky Alternative Investments’ returned a summary of the Gadens statement and a link to it as the top result’’.

Mr Sowerby’s claim, which calls Glaucus’s short selling strategy a “confidence trick”, 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, which the claim says ignored its own advice on what constitutes insider trading and should have intervened.

Mr Sowerby was no longer managing director at Blue Sky when the short attack occurred, having parted ways with it two years earlier, however he still held a substantial number of shares.

Blue Sky never recovered from the short attack and was placed in receivership in 2019.

Gadens has been contacted for comment.