Lawyers for defendants in the Feltex Carpets shareholder lawsuit have questioned whether a key witness selectively chose to include gloomy data in his evidence and whether he had sufficient experience with initial public offerings.
Greg Meredith, head of Ferrier Hodgson Forensics in Melbourne, had given evidence in support of plaintiff Eric Houghton, who is suing former Feltex directors, owners and sale managers for $185 million in a representative action on behalf of 3,639 former shareholders who say they were misled by the company's 2004 prospectus.
David Cooper, representing most of the former directors, asked Meredith why he had changed the formatting of a company graph in his evidence so that it no longer started at zero, which had the effect of exaggerating differences in the data.
"As a forensic accountant you would have some knowledge of what's regarded as misleading," Cooper said. "The way in which you chose to present them created quite a different opinion."
Meredith replied that his version was a better graph. He'd made the changes "to fit in the page" and his graphs were clearly marked, he said.
Cooper also asked why Meredith why he'd relied on submissions from carpet makers including Feltex to the Australian Productivity Commission inquiry into the impact of tariff cuts, given that it would have been in the manufacturers' interests to have "painted a slightly gloomy picture when lobbying for tariffs."
Cooper then cited evidence from former directors Peter Thomas and Sam Magill that lower tariffs weren't such a direct threat to Feltex because it mainly led to an increase in imported carpet tiles and rugs, rather than broadloom and the company had an agreement with US-based Shaw Industries, the world's biggest carpet maker to import carpet itself at favourable prices.
"You do not have the knowledge or expertise to question their judgement, do you?" Cooper said.
Meredith replied: "Clearly company insiders, industry participants, have better knowledge than me."
Justin Smith QC, appearing for Credit Suisse Private Equity and Credit Suisse First Boston Asian Merchant Partners, asked Meredith why he selectively chose negative monthly manufacturing data from the 12 months preceding the May 2004 IPO in a table but didn't include March, April and May figures that showed positive variances.
"If you were looking for information the board had on its plate at the time of the IPO, wouldn't it have been more apt to refer to information current at that time as opposed to months before?" Smith said.
Meredith replied that the table had been to identify where there had been issues prior to the prospectus rather than provide a thorough analysis of the whole time.
Asked how many valuations of companies for the purposes of IPOs he had carried out in his career, Meredith said he'd done more for litigation related to trade sales of businesses.
Both Cooper and Smith quizzed Meredith on whether he had read all of the evidence provided on behalf of the defendants, with Cooper asking if what he'd read was a subset of the documents.
Houghton, the plaintiff, bought 11,755 Feltex shares at $1.70 apiece, or $20,000, in the IPO, drawn to an investment that offered a gross dividend yield of 9.6 percent. All up, vendor Credit Suisse First Boston Asian Merchant Partners raised $193 million, selling 113.5 million shares, and Feltex raised a further $50 million to repay bondholders.
Within a year the stock was virtually worthless, thanks to a series of warnings that the company would miss its prospectus forecasts, and receivers were appointed in September 2006. Australian carpet maker Godfrey Hirst ended up buying the assets.
First NZ Capital and Forsyth Barr, which managed the IPO, are fourth and fifth defendants in the suit.
The case is continuing.
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