Feltex defendants pour scorn on expert witnesses
By Jonathan Underhill
Jun. 5 (BusinessDesk) - Lawyers for directors in the Feltex Carpets shareholder lawsuit say the plaintiff has failed to draw a link between alleged misleading statements in the carpet maker's 2004 initial public offering prospectus and its eventual failure in 2006.
Alan Galbraith QC told the High Court in Wellington that plaintiff Eric Houghton had presented a "res ipsa loquitur" argument (Latin for" the thing speaks for itself") that Feltex's performance "declined sharply in the second half of the 2005 financial year, and was placed in receivership in September 2006, and so there must therefore have been something badly wrong at the time of the IPO in May 2004 which was not disclosed in the prospectus."
Galbraith was making closing submissions for the directors, the first defendants in a case brought by Eric Houghton, who is suing former directors, owners and sale managers for $185 million on behalf of 3,639 former Feltex shareholders who say they were misled by the 2004 prospectus.
Houghton's lawyers said in their closing submissions this week that the prospectus failed to identify falling sales revenue and volumes, 2004 forecasts and 2005 projections that weren't achievable, use of forward dating to meet revenue targets, increased competition from Godfrey Hirst and the prospect of increased rivalry from imported product as tariffs fell.
In reply, Galbraith said Houghton's team had cherry-picked bad news from individual months in the run-up to the 2004 IPO and wrongly characterised Feltex's position as weakening when it was actually performing strongly. "It is impossible to compare the 2004 financial year result with the 2003 result without recognising the substantial improvement," Galbraith said. He was referring to figures that showed 2004 sales were about $8.3 million ahead of the previous year and earnings before interest, tax, depreciation and amortisation were $8.6 million ahead.
"The real world of a large manufacturing and sales business will always involve ups and downs and good and bad weeks and months and the occasional setback," he told the court. "What matters is the company's overall performance measured in a sensible way."
Houghton bought 11,755 Feltex shares at $1.70 apiece, or $20,000, via brokerage Forsyth Barr in the IPO, drawn to an investment that offered a gross annual dividend yield of 9.6 percent. Within a year the shares were virtually worthless.
But Galbraith argued that Feltex shares traded in a range of $1.50 to $1.75 in the 10 months following the IPO, and paid dividends of 6 cents apiece on October 2004 and April 2005, suggesting nothing untoward about the company was revealed when the market was able to set the share price.
In claiming a loss, Houghton needed to prove not only an untrue statement in the prospectus but also "prove the effect of that untrue statement on the value of the shares he acquired," Galbraith said.
He also rejected the description of participants in the IPO as 'Mum and Dad' investors, even though the high dividend yield on offer meant it was likely to attract retail investors. In fact, only 1.3 percent of the shares on offer were sold direct to the public, while about 64 percent was sold via the firm allocation to brokerages, about 16 percent went to institutions and about 19 percent to holders of the company's bonds.
He argued that bullish statements in the prospectus, including that Feltex had "excellent investment features" were statements of opinion about the future that the plaintiff would need to prove weren't honestly held at the time they were made. He also said claims that the prospectus was distorted by omissions of key information failed the test of showing how it made the document untrue.
Galbraith also attacked Houghton's claim of having relied on the prospectus in making his investment decision, given his evidence to the court that he took an "impressionistic approach" to it, reading "only limited pages." Instead, he had been encouraged by participation in six previous IPOs recommended by Forsyth Barr that had performed well. His broker at the firm had recommended Feltex and "was generally positive about the whole Feltex story," his closing submission says.
Galbraith was scornful of the plaintiff's expert witnesses, including Sue Newberry, associate professor of accounting at the University of Sydney, who penned a 2007 article for Foreign Control Watchdog entitled "The Feltex Debacle: New Zealand's Enron?" That article "propounds a conspiracy theory" and attacked those involved in the IPO "in immoderate and sensationalist terms," Galbraith said. Her testimony in the current court case had been prepared "under extreme time pressure" and she "lacked expertise in relation to the main issue covered in her brief," he said.
Greg Meredith, head of Ferrier Hodgson Forensics in Melbourne, had produced a brief that was based on documents "which appeared to have been selected for him to support the plaintiff's case" and didn't include the evidence of the defendant directors, Galbraith said.
Credit Suisse Private Equity and Credit Suisse First Boston Asian Merchant Partners are the second and third defendants and First NZ Capital and Forsyth Barr, which managed the IPO, are fourth and fifth defendants in the suit.
The case before Justice Robert Dobson is continuing.