On Monday, the Gold Coast-based company announced its losses will double to as much as $11.5 million this year, sending its shares down more than 25 per cent to a new low of $0.07.
Lawyers Quinn Emanuel lodged the class action claim and say that all shareholders who purchased or held shares between 27 August 2015 and 8 June 2016 are included in the open class. Between November 2015 and June 2016, shares in SurfStitch declined from $2.13 to $0.32.
Documents filed with the court allege SurfStitch breached its disclosure obligations and engaged in misleading or deceptive conduct in relation to announcements made to the market concerning its extensive business and brand acquisition regime.
Quinn Emanuel Urquhart & Sullivan partner Damian Scattini says the value of the claim is currently around $100 million.
"Companies need to know that the free market depends on them being upfront with investors," Scattini says.
"Class actions like this send a powerful message to company boards that if you mislead investors, you will be held to account."
Surfstitch attributed the blowout in its latest forecast to weak apparel and footwear sales in its key markets and it forecast that its FY17 EBITDA range had almost halved to just $5-6.5 million.
It also announced it was going to shutter its US office and run its subsidiary SWELL platform from Australia.
Since its much-hyped IPO in 2014, SurfStitch has endured a series of major setbacks with a massive loss in FY16, a share price wipeout and the acrimonious departure of co-founder and CEO Justin Cameron.
The company downgraded its earnings three times, largely because of a dispute with surf technology group Coastalwatch and Three Crown Investments over licencing deals which fell through, and this wiped around $20 million off revenues.
Investors who piled into the IPO at $1.00 a share have suffered a 93 per cent loss.
The claim will be funded by Vannin Capital, one of the largest litigation funders in the world, and it has engaged Quinn Emanuel.
It is believed to be the first shareholder class action under the Supreme Court of Queensland's new class action rules, which became effective on 1 March 2017.
Vannin Capital Director of Investments Pip Murphy says she is confident the class action will be successful for shareholders.
"Shareholders saw the value of their shares plummet by 85 per cent following a series of profit downgrades, slashing its market capitalisation by $500 million," Murphy says.
"This was a clear case of a breach of disclosure obligations and misleading and deceptive conduct, and we are confident in being able to achieve a positive outcome for shareholders."
Never miss a story: Sign up to Business News Australia's free news updates.
Follow us on Twitter, Facebook, LinkedIn and Instagram
Help us deliver quality journalism to you.
As a free and independent news site providing daily updates
during a period of unprecedented challenges for businesses everywhere
we call on your support