EXCLUSIVE: Dodgy Rebates & Prospectus, False Invoice Claims, Dick Smith Court Case Has It All
A day of reckoning is looming for executives of the failed Dick Smith retail chain and their auditors Deloitte, after the Company collapsed owing $400M to appliance and consumer electronic suppliers as well as landlords.
In a Court case set to be heard next month in the NSW Supreme Court Equity Division, allegations will be made by barristers, representing a group of shareholders who lost money, that executives overstated the value of inventory and stock on the DSH’s balance sheet, overstating the reported rate and amount of gross profit and net profit and overstating reported shareholders’ equity.
Claims will also be made that Dick Smith Holdings (DHS) asked suppliers to change invoices to reflect “higher prices” than what the goods were actually worth.
Swept up in the collapse is Deloitte the auditors to the failed retailer who now stand accused of making “false statements” and failing to reveal accurate information regarding the operations of Dick Smith in the Companies accounts.
ChannelNews has obtained a copy of the Statement of Claim, which accuses Nicholas Abboud the former CEO and Mr Michael Thomas Potts the Companies CFO of misleading shareholders.
Also named in the statement of claim are directors, David Cooke, Marcella Davis, Neil Merola, John Skellern and Michael Dykes who is now the General Manager, Retail at The Arnhem Land Progress Aboriginal Corporation after a short stint at Coles.
It will be alleged that statements issued by the Company executives had the effect of artificially inflating the share price of DSH following DSH’s listing on the ASX.
It’s also claimed that IPO was only successful because of the misrepresentations in the Prospectus.
Dick Smith listed on the Australian Stock Exchange on 4 December 2013 at a price of $2.20 per share they collapsed in 2016 with debts of over $400M.
Prior to the listing Dick Smith was owned by Woolworths and in late 2012 it was acquired by Anchorage Capital Partners Pty Ltd (Anchorage), a private equity company.
Anchorage controlled Dick Smith for a period of just over one year and then in November 2013 made a public offering of shares following the publication of a Prospectus.
The Prospectus made various representations to the effect that new management of Dick Smith installed by Anchorage after it acquired Dick Smith had transformed Dick Smith into a successful and profitable business among the management running the business was Nick Aboud who is now the CEO of another retail operation called Cheap As Chips.
Allegations will be made that the initial Prospectus was also rubbery and not prepared to Australian accounting standards and that it was merely a marketing tool designed to drum up investments in the float of the retailer.
It will be claimed that the prospectus was misleading because it stated that the pro-forma financial results for FY13 and 1Q14 were prepared in accordance with Australian Accounting Standards, “when in fact they were not”.
It will also be alleged that the value of inventory was not accurately represented to shareholders and that DSH did not have in place a system for the reliable planning, tracking and recording of rebates accrued and received from vendors and suppliers.
In 2015 Dick Smith management led by Aboud and Merola met with brands and distributors in an effort to get them to pay excessive marketing dollars and additional rebates, what’s now been revealed is that while Merola and Aboud were spruiking suppliers the Company was suffering a cashflow problem.
It will be claimed that DSH’s accounting practices for inventory was so bad that it had the effect of inflating DSH’s gross margins and profits in 2014 and 2015 and that what was presented to the market and suppliers was not a true and fair view of the financial position of the retailer.
Evidence will be presented that prior to both the sale of a product and the receipt of the marketing support shown on the books that no rebate existed.
The Statement of Claim alleges that from at least May 2014 and throughout 2015 the management of DSH pursued a policy of maximising rebates given to DSH by vendors and suppliers.
These included ‘Over and Above Rebates’ (which were purportedly rebates relating to promotional support of products supplied to DSH for sale) and ‘Volume Rebates’ (which were purportedly rebates for DSH agreeing to purchase and sell large volumes of the suppliers’ products).
Another explosive claim is that DSH developed a practice of directing or requesting suppliers to cancel previous invoices that had been issued without rebates and then reissue them at a higher price with rebates applied against the increased cost of the goods, this was called “Switched Invoice Rebates”.
During this period, DSH’s objective driven by executives such as Aboud and Merola was to maximise rebates obtainable from suppliers.
This was a significant driver of purchasing decisions within DSH.
If you dropped money into the Dick Smith purse supplier products were pushed in Dick Smith marketing programs at the expense of suppliers who were not dropping money into the Dick Smith purse.
During this period, it was so bad that purchasing decisions were made by DSH based on the rebates that could be obtained from suppliers and not solely based on anticipating the goods that DSH’s customers wanted.
Evidence will be presented that this practise went on throughoutFY15 and until DSH went into administration in 2016.
These practise which several brands including Samsung, LG and Panasonic refused to take part in to the point that brands such as Panasonic put Dick Smith on Credit hold led an increase in inventory which became increasingly aged and obsolete and “therefore difficult to sell” the claim states.
It also had the effect of increasing DSH’s recorded profit without adequate regard to the potential effect of the purchases on existing or future levels of provision required against inventory.
It’s also been revealed that in November 2015, DSH wrote off the value of its stock by approximately $60
One month earlier both Nick Aboud and Neil Merola told ChannelNews that the Company was “profitable and doing fine” and that a move into appliance retailing which was designed to take on JB Hi Fi Home was being launched by DSH management.
Both Merola and Aboud denied directly to myself at the time that they had no stock problems when in fact they were actually writing off millions of dollars’ worth of stock including house brand stock imported by executives who thought it was a smart move setting up their own buying office in Hong Kong.
Barristers for the shareholders will claim that the publication of the directors’ declarations, that Abboud and Potts claimed were prepared with “reasonable care and skill” were misleading or deceptive in contravention of Australian Consumer Law.
Also set to be criticised is consulting and accounting Company Deloitte with the court set to be told that Deloitte representations made in DSH statements were false or misleading, in contravention of Australian accounting provisions.
Deloitte was retained by Dick Smith Sub-holdings Pty Limited (DSSH) and later DSH to audit the financial statements of DSSH for FY13, and DSH for FY14 and FY15. David White was the lead audit partner for each of Deloitte’s audits.
It will be claimed that by issuing and publishing each of Deloitte’s Audit Reports, White allowed statements to be made which if trusted were likely to induce the plaintiffs and Group Members to acquire shares in DSH or, in the alternative, which were likely to have the effect of increasing, maintaining or stabilising the price for trading in DSH shares on the ASX.
The hearing is set to start on March the 9th and last for 12 weeks.