After flagging a potential class action against water technology group Phoslock Environmental Technologies (ASX: PET) in recent months, Sydney-based legal firm Banton Group has finally launched proceedings on behalf of shareholders targeting the company and its former auditor KPMG.
The Federal Court filing announced by Phoslock today caps off a tumultuous few years for the company which this time last year had sought to sell its assets and delist from the stock exchange – a move that was voted down by shareholders in January this year.
Banton Group, which is led by specialist financial litigator Amanda Banton, has brought the class action on behalf of shareholders who acquired an interest in Phoslock between 11 October 2018 and 17 September 2020.
It was during this period that Phoslock ventured into China and its shares hit a record high of $1.45 as the company talked up its prospects for rising sales and new opportunities in the region. The company’s shares, which have been suspended since August 2023, last traded at 2.5c each.
Banton Group’s class action also represents shareholders with a “long exposure” to Phoslock through equity swaps that may have been entered during this period.
Phoslock, which listed on the ASX in 2002 to leverage business opportunities using technology invented by CSIRO, has worked on hundreds of projects globally since inception to trap phosphates and improve the water quality of nutrient-polluted waterways.
The company’s 2017 entry into China, instigated by a previous board and management team, led to the appointment of a Chinese deputy chairman, a Chinese non-executive director and local staff.
While this move initially created an upbeat outlook for the company, the China venture “ended disastrously”, according to former chairman David Krasnostein in an assessment of Phoslock’s fortunes at an extraordinary general meeting of shareholders in January this year.
After the appointment of Lachlan McKinnon as CEO and Matthew Parker as CFO in the first half of 2020, the company uncovered what appeared to be instances of “widespread fraud, falsified accounting, bribery and corruption, bogus sales, breaches of Chinese and Australian laws, irregular tax compliance, and extensive conflicts of interest and self-dealing”.
Further investigations by the new executives found that the majority of sales attributed to China were not from Phoslock products.
“In some instances, non-Phoslock products such as bacteria’s, zeolites, water blankets and aeration machines were sourced by companies separately controlled by the appointed Chinese directors who then sold them to PET at a significant mark up,” Krasnostein told shareholders at this year’s EGM which was called to vote on the company’s proposed ASX delisting.
“PET then on sold or applied these products to companies such as BHZQ which the same Chinese directors sat on the board of or had effective control over.”
The murky saga led to the company being suspended from trading on the ASX and the resignation of KPMG as auditors, who had been serving Phoslock in China and Australia for three years.
The matter also led to a subsequent Australian Federal Police investigation, after Phoslock self-reported its findings, as well as a probe by the Australian Securities and Investments Commission.
The class action filed by Banton Group has also named former Phoslock chairman Laurence Stephen Freedman as respondent, along with former managing director Robert Paul Schuitema in its claim.
Freedman sold $25.96 million worth of shares in August 2019 while Schuitema sold $4.3 million in shares, according to ASX announcements in September that year. The share price was trading close to record highs at the time.
Phoslock, which appointed Graeme Newing as CEO in September after the resignation of McKinnon as CEO and Parker as CFO in March this year, continues to trade despite its extended stock market suspension.
The company posted a net loss of $2.05 million in FY24 despite revenue lifting 12 per cent to $3.39 million. Underlying earnings before interest and tax were also in the red with a loss of $8.2 million recorded.
In announcing that it has now been served in respect of the class action, Phoslock indicates that it is not going down without a fight.
“The company denies any liability and will vigorously defend the proceedings,” says Phoslock.
Business News Australia has sought further comment from Banton Group on its class action proceedings.
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