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Revealed Ruling In Dick Smith Case, Brands Who Paid Questionable O&A Named

The shocking actions of former Dick Smith executives have been laid bare in a ruling by a judge sitting in the NSW Supreme Court, he has also revealed some of the brands that paid up with questionable O&A payments and how the Company failed with debts of over $400M.

It’s also been revealed that Michael Potts the former CFO at Dick Smith, who has spent the past couple of years flogging chocolates in the UK now owes the National Australia Bank (NAB) $43M following rulings in the Dick Smith Court case in the NSW Equity Court.

The Court also heard how former CEO Nick Aboud “lost sleep” because his staff were struggling to generate enough O&A payments.

Michael Potts Leaves The Supreme Court: Picture Financial Review

The NSW Supreme Court recently ruled that NAB is entitled to judgment against Mr Potts in the sum of $43,041,295.97 together with interest.

The Court also ruled that Potts engaged in misleading conduct when he told NAB management that the increase in the overdraft at Dick Smith was to fund the acquisition of additional stock for the Boxing Day sales, when the real reason was that he needed to prop up the struggling business.

“Even if that was literally true, that state of affairs had come about because DSH was facing serious problems with its liquidity” the Judge said.

He said that at the time DSH was overstocked and sales had declined substantially.

‘If it required additional stock that was because it was overstocked with product that was selling poorly’ he wrote in his judgement.

To say that DSH needed a temporary increase in its facility to buy additional stock for the Boxing Day sales suggested that the business was otherwise performing satisfactorily and DSH wanted additional funds to capitalise on an opportunity. The true position was that it needed additional funds because it was in financial difficulties.

Now a director of Mrs Potts Chocolate House in Bristol it’s been revealed that the struggling Chocolate business only has nett assets of $41K, with the former Dick Smith CFO now owing millions to one of the former lenders to the Dick Smith retail chain, the question now is What’s next for the former disgraced CFO.

Potts, along with now Mosman resident Nick Aboud the former CEO of Dick were grilled last year in the NSW Equity Court, over their “Dodgy” dealing with consumer electronic brands, who they pressured to keep putting marketing dollars into the struggling business.

Former Dick Smith CEO Nick Aboud

Dick Smith collapsed with debts of over $400M with both Aboud and Potts accused of breaching their duties as directors.

Supreme Court Justice James Stevenson recently approved a $25 million settlement agreement for a trio of class actions brought over the collapse of Dick Smith Holdings but has lamented the low return to shareholders compared with original claims in the hundreds of millions.

The agreement splits the $25 million for three class actions with $18.75 million – or 75 per cent – for the payment of costs in the actions to the litigation funders, who spent $26 million on legal costs during the action.

A little more than $5 million has been split between 2700 shareholders, $40,000 will go to the plaintiffs in the actions.

The rest will be used to pay other costs.

In the case involving the NAB and HSBC Holdings pl a British multinational investment bank and financial services holding company the Judge was scathing of the systems in place to run the Dick Smith retail operation.

The court hear that order to increase the level of O&A rebates, some buyers suggested on occasions that suppliers increase the price of their products and provide the difference in the form of O&A rebates.

An early example of that practice is contained in a series of emails sent in early May 2014 between Mr Brett Leyshon, a buyer with Dick Smith, and others in which Mr Leyshon proposed that Take 2 (a supplier of games) increase the price of a particular game by ten percent so that Take 2 “can show the 10% O&A to your business”.

A number of other suppliers including Belkin Limited, Jackson Industries Pty Limited, Maxwell International Australia Pty Limited, Targus Australia Pty Limited, and Cellnet Group Limited, agreed to that practice.

The court heard evidence that the amounts raised by that practice was sometimes referred to within Dick Smith as a “fighting fund”.

Former Dick Smith Merchandise Manager Carl Bonham, (seen below) now CEO at Force Technology International was also singled out by the Judge in relation to the practices at Dick Smith.

The Judge said in his conclusion that evidence suggests that Mr Bonham was the architect of the practice.

Darren Freeman the former Category Buyer at Dick Smith Electronics and a former Harvey Norman executive gave evidence that the expression “fighting fund” was used openly in the business, including during Mr Aboud’s Monday meetings.

However, it appears that the expression “fighting fund” was used ambiguously to refer both to that practice and more broadly to “a bucket of fund [sic] that a vendor might hold to be drawn down for certain agreed events” (to quote from the evidence of Mr Borg).

The Court ruled that there is no evidence that the board, including Mr Abboud and Mr Potts, were aware of the practice.

There is evidence that on one occasion in December 2014 Mr Bonham became aware of an opportunity to make a purchase from the supplier Kaiser Baas, involving a purchase order of $2 million which would attract an O&A rebate of $400,000, which he raised with Mr Abboud.

Mr Bonham suggested that “we could uplift price to make it $500 collect”.
Mr Abboud replied, “No uplift of product please, I don’t want to play in that space”.

The plaintiffs suggest that this is evidence that Mr Abboud was aware of the practice and was prepared to authorise it on some occasions.

Signage at a Dick Smith electronics store in Sydney, Friday, Dec. 4, 2015. Dick Smith has been struck off the Australian share market’s (ASX) top 200 companies list just as its stores launch a mammoth clearance sale. (AAP Image/Joel Carrett) NO ARCHIVING

In some cases, DSH refused to buy product from suppliers who declined to provide O&A rebates.

In order to meet budgeted EBITDA for the year DSH executives Mr Abboud, Mr Potts, and Mr John Skellern the former Director of Buying Operations developed a plan in April 2014 which involved reducing the marketing expenses for the remainder of FY14 from $9.7 million to $7.6 million and increasing the target for O&A rebates from $10.2 million to $17.2 million.

In order to achieve that increase, Mr Aboud approved an increase in OTB by $20 million and subsequently $23 million.

A substantial number of rebates were obtained in connection with identified marketing and support services that would be provided by Dick Smith in return for the rebate. In all, the written
submissions provided by Mr Abboud and Mr Potts identify 72 instances where that occurred during the period from April 2014 to January 2016.

The Judge said that in many instances, particularly prior to August 2014, the agreement to provide an O&A rebate was recorded in an email which gave no indication of what the rebate was for.

On a number of occasions in connection with the FY14 audit, buyers requested suppliers who had provided O&A rebates to provide emails confirming that the rebates were provided for “marketing support”.

So, for example, on 1 August 2014, Mr Freeman sent an email to Mr Tony Peck of Cellnet saying “To assist our finance team in raising claims for June 2014, could you please re-confirm your approval of marketing support of $111,000 for activity in June”.

Mr Peck replied to the same day “Yep, just confirming back that the below is as per our agreement”.

Similarly, in an email dated 6 August 2014, Mr Frank Kavanagh asked Mr Luke Rochaix of Canon to confirm “ASAP … that Canon agreed to pay 10% O and A for all orders placed in June” coming to a total of approximately $260,000.

Mr Rochaix gave a confirmation to that effect by email on the same day.

Bonham said in cross-examination that in August 2014 buyers, on instructions from Mr Michael Sullivan, General Manager Procurement & Strategic Buying Operations, were collecting information from suppliers which they knew to be untrue to support Dick Smith’s accounting for O&A rebates.

He also gave evidence that buyers were instructed by Mr Abboud, Mr Potts, Mr Skellern and Mr Sullivan about the importance of recording that O&A rebate were paid for promotional support irrespective of the real reason for payment so that the rebates could be recognised as profit immediately.

The Judge said that in many instances, prior to August 2014, the agreement to provide an O&A rebate was recorded in an email which gave no indication of what the rebate was for.

On a number of occasions in connection with the FY14 audit, buyers requested suppliers who had provided O&A rebates to provide emails confirming that the rebates were provided for “marketing support”.

So, for example, on 1 August 2014, Mr Freeman sent an email to Mr Tony Peck of Cellnet saying “To assist our finance team in raising claims for June 2014, could you please re-confirm your approval of marketing support of $111,000 for activity in June”.

Mr Peck replied the same day “Yep, just confirming back that the below is as per our agreement”.

Similarly, in an email dated 6 August 2014, Mr Frank Kavanagh asked Mr Luke Rochaix of Canon to confirm “ASAP … that Canon agreed to pay 10% O and A for all orders placed in June” coming to a total of approximately $260,000.

Mr Rochaix gave a confirmation to that effect by email on the same day.

Bonham said in cross-examination that in August 2014 buyers, on instructions from Mr Michael Sullivan, General Manager Procurement & Strategic Buying Operations, were collecting information from suppliers which they knew to be untrue to support Dick Smith’s accounting for O&A rebates.

He also gave evidence that buyers were instructed by Mr Abboud, Mr Potts, Mr Skellern and Mr Sullivan about the importance of recording that O&A rebates were paid for promotional support irrespective of the real reason for payment so that the rebates could be recognised as profit immediately.

Attached is a 231-page ruling relating to the Dick Smith Court Case click below link.

Dick Smith Ruling Equity Court

 

 

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