ation by the Australian Investments and Securities Commission are both very likely outcomes from a review of the failure of the business by Ferrier Hodgson, appointed yesterday as receivers and managers to the stricken retailer. Dick Smith directors and management could also face legal action over the sale of gift cards in the Christmas and new year trading period that were unlikely to be honoured with the retailer quite possibly trading while insolvent and certainly in circumstances that made it an unacceptable practice to promote and sell the cards. Nick Abboud, Dick Smith’s CEO, and Michael Potts, the retailer’s finance director, are facing a very nervous few months as Ferrier Hodgson unravels the retailer’s finances and lodges a report of its findings with ASIC. Abboud is in the greatest danger of legal action by ASIC as he was entangled in the listing of Dick Smith on the Australian Stock Exchange for $520 million, just a year after the private equity firm, Anchorage Capital Partners, acquired if from Woolworths for a fraction of that amount. Potts joined the retailer and its board of directors in August 2014 after executive finance roles with Nick Scali, Sussan, Bunnings and Myer. Abboud had a 19 year career with Myer before joining Dick Smith. The reason Abboud and Potts face a nervous waiting period on legal action is the fact ASIC has demonstrated a tougher stance on financial reporting that does not provide shareholders with accurate reports that allow them to make informed investment decisions and to protect their capital. In 2015, ASIC has initiated legal action against Elmo de Alwis, the former CEO of Sigma Pharmaceuticals, along with the company’s finance director, Mark Smith, for misleading shareholders by falsifying accounts in 2009 and 2010. de Alwis and Smith both pleaded guilty to falsifying the accounts, action they took to enhance the prospect of a $300 million capital raising. They over-stated Sigma’s revenue, inventories, pre-payments and profit after tax in the company’s full-year accounts by a total of around $38 million for the year ending January 2010 which were lodged with ASIC and the Australian Stock Exchange, according to evidence in the County Court in Victoria in July 2015. de Alwis and Smith admitted they provided false and misleading statements to Sigma’s auditors and the company’s board as well as falsifying financial records in 2009. Sigma Pharmaceuticals was forced to pay shareholders almost $60 million in 2012 to settle a class action brought by investors who had relied on the company’s financial projections when deciding to participate in a $300 million capital raising in September 2009. Shareholders lost money when Sigma’s share price plunged in March 2010 when the company announced $424 million write-down that led to a $389 million loss for the 2010 financial year. Sigma was in a position to settle the class action but legal action by Dick Smith investors over misleading financial reporting would be likely to target Anchorage Capital Partners which packaged the retailer for a public listing in just 12 months, reaping a massive profit for an outlay from its own financial resources of just $10 million. A class action against Anchorage Capital Partners would to some extent parallel legal action taken by creditors of the failed discount retail chains, Retail Adventures and Discount Superstores Group, action that targeted the owner, Jan Cameron, rather than the entities themselves which had no money to pay in the event of successful litigation. In the Dick Smith case, Anchorage Capital Partners would appear to be the major culprit in creating a business structure and accounting procedures that would inevitably implode, apparently relying on shareholders capital to prop up profit calculations while extending debt from financiers and from creditors, including suppliers. Dick Smith directors called in McGrath Nicol as administrators on January 4, after entering a trading halt for its shares on the Stock Exchange. A syndicate of lenders to Dick Smith immediately appointed Ferrier Hodgson and forced Dick Smith Holdings and a number of related entities into receivership. The lenders had previously refused to extend further financial support to the retailer after becoming alarmed at the apparent financial disclosures that had claimed an underlying profit of $43.4 million for the 2015 financial year before allowing for $5.5 million in restructuring costs last August and forecast net earnings of more than $45 million for the 2016 financial year. Nick Abboud was bullish about the chain’s growth prospects and financials when he addressed a Bank of America/Merrrill Lynch forum in early October but by the end of the month was announcing writedowns on inventory and profit downgrades. The share price suffered an 80 per cent collapse on those announcements as well as information that suppliers were concerned about delayed payments and demands to forward fund promotional activity so that Dick Smith could generate cash in the business as sales plunged in October and November. It is understood, Dick Smith secured $135 million in funds from National Australia Bank, the Bank of New South Wales and HSBC Bank Australia in November which was secured by property but also advanced on revenue forecasts for a stock liquidation sale that offered discounts of up to 70 per cent. In a statement to the Australian Stock Exchange announcing the appointment of McGrath Nicol on January 4, Rob Murray, chairman of Dick Smith Holdings, conceded the revenue forecasts had not been met. Murray said the retailer had considered alternate funding to allow the company to order new stock over the next four to six weeks but could not achieve that support quickly as a result of the banking syndicate refusing to extend further support. Ferrier Hodgson is seeking expressions of interest for the sale of the business as a going concern but there are question marks over what exactly there is to sell. Inside Retail Weekly understands that the discount sale did reduce inventory levels but that ownership of remaining stock could be in dispute with a number of suppliers claiming ownership of goods that were apparently supplied on consignment after trade insurance on stock was curtailed by insurers. Inside Retail Weekly understands in the lead up to Christmas, some suppliers were only prepared to sell goods to Dick Smith for cash settlement because of concerns about overdue account settlements. James Stewart, a partner in Ferrier Hodgson, said it was too early to clearly identify the primary causes of the company’s current financial position and the reasons for its decline other than saying the business had become cash constrained in recent times. Stewart said it would be business as usual while the receivers look at the restructuring and realisation opportunities for the group, including the sale of the listed retailer to new owners. While Stewart did not comment on store closures, it is expected that unprofitable and underperforming outlets in the 393 store network face closure irrespective of any sale to a new owner. Anchorage Capital Partners  acquired the Dick Smith chain from Woolworths in 2012 with no debt, net tangible assets of $290 million and a streamlined store network after Woolworths itself chalked up $420 million in writedowns on stock, store closures and restructuring. Anchorage Capital Partners funded all but $10 million of an acquisition priced between $94 million and $115 million, the exact amount muddied by the accounting calculations used by the private equity firm to fatten up sales and earnings forecasts to boost returns when the shares were listed for trading on the Australian Stock Exchange. Whatever the price, $94 million or $115 million, Anchorage Capital Partners extracted $520 million from investors, a handsome return for 15 months of ownership and a modest outlay from its own funds of $10 million. Ferrier Hodgson, as receivers, are required to report to ASIC on their review of the business and it is certain their investigation will lead all the way back to the Woolworths sale but particularly examine the financial practices, reporting and disclosures associated with the public float and subsequent financial management and release of information to investors. Stewart said the New Zealand business was profitable and expected it would be attractive to potential buyers but declined to speculate on the prospects of a successful trade sale for the Australian stores or whether the receivers would accept a bid for the Move stores, a female fashion friendly concept launched by the retailer in October 2013. Inside Retail Weekly understands the August 2013 licence agreement Dick Smith struck to operate the electrical departments within David Jones stores will be terminated following the appointment of the administrators. He also stated that due to the financial circumstances of the group, unfortunately, outstanding gift vouchers cannot be honoured and deposits cannot be refunded. Affected customers will become unsecured creditors of the group. As at January 5, Dick Smith Holdings operated  393 stores across Australia and New Zealand under four brands, Dick Smith, Electronics powered by Dick Smith, Move and Move by Dick Smith.  The company has opened a net 70 new stores since it was sold by Woolworths and claimed annual sales of around $1.3 billion. The electronics chain was founded by entrepreneur, Dick Smith, who sold the chain to Woolworths in 1982 for around $25 million. Woolworths progressively expanded the 25 store network, buying the Tandy computer and electronics chain and developing larger format stores as Dick Smith Powerhouse. Want more Inside Retail? Subscribe to Inside Retail Weekly now and get our premium print publication delivered to your door every week.