In a lawsuit filed in the Victoria Supreme Court on September 23, developer Michael Hepburn has sought to inspect Blue Sky’s books and obtain access to any directors and officers liability insurance policies held between July 2015 and July 2020, which could potentially cover class action claims.

“I am concerned that if [Blue Sky] does not have insurance that may respond to cover the claims, or the quantum of the coverage is such that it is likely to be exhausted by legal costs, then it is not likely to be worthwhile to commence proceedings against [Blue Sky],” Hepburn said in an affidavit filed with the court.

“I do not wish to waste my own time and resources (and those of the court) in proceeding against the company in circumstances where success may be unlikely and where the company lacks the financial capacity to pay any judgment and/or costs.”

Hepburn, who purchased 3,800 shares in Blue Sky in February 2018, has retained Gadens to investigate the potential class action. Blue Sky traded as an Australian funder manager until May 2019, when Pilot Partners was appointed administrator and KordaMentha was appointed receiver and manager. Blue Sky was delisted and removed from the Australian Stock Exchange in August 2020.

A request in August this year from Gadens partner Simon Theodore to Gilbert + Tobin, the law firm representing KordaMentha, to obtain the insurance documents was disregarded, Theodore said in affidavit evidence.

Gadens is also seeking a wide range of other Blue Sky documents, including board meeting minutes, board packs, audit committee meeting minutes, asset valuation reviews conducted by KPMG, and audit plans and reports.

Hepburn claims the documents will allow him to make an “informed assessment” about the viability of a class action.

Gadens is one of three law firms considering class actions against Blue Sky, with Shine Lawyers and Piper Alderman also investigating a possible action. In August, Piper Alderman partner Lachlan Lamont said the firm was “well progressed” in its own investigation.

Piper Alderman’s lead plaintiff David Furniss has already obtained over 300 documents from Blue Sky after a successful application for preliminary discovery. The company has claimed privilege over 26 of the documents, and a Queensland Supreme Court judge has said that any privilege battle should be determined once the class action is actually brought.

Furniss, who bought 700 shares in the ASX-listed Blue Sky at $13.80 a share in January 2018, won access to Blue Sky’s books kept from July 2015 to May 2019.

Two months after Furniss purchased his interest in the company, Glaucus issued a critical 67-page report questioning Blue Sky’s financial management and the way it valued its fee-earning AUM. Glaucus said that Blue Sky, which claimed to have almost $4 billion in fee-earning AUM, was overstating the AUM by reporting the gross value of certain assets instead of the fair value of the capital invested. The short-seller estimated that the real value of Blue Sky’s AUM was $1.5 billion.

A year later, Blue Sky’s share price had slumped to $0.185 and the company was placed into receivership and voluntary administration.

Venture capitalist Elaine Stead, who won $280,000 in a defamation suit against the Australian Financial Review over its coverage of her alleged role in the collapse of Blue Sky, could be a target of a class action as a former director of the fund manager. Blue Sky’s auditors Ernst & Young might also be named.

The Gadens case is In the Matter of Blue Sky Alternative Investments Limited (subject to a deed of company arrangement) (receivers & managers appointed).

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