A class action lawsuit is coming against directors of Kagara, whose stock price cascaded from $2 billion in market value to zilch in seven years.

Bankrolled by litigation funder IMF and prosecuted by law firm Piper Alderman, the action claims Kagara’s former directors breached their duties to keep the market properly informed under “continuous disclosure” rules.

The collapse of the copper/zinc miner left a trail of destruction with its myriad creditors and suppliers left in the lurch.

More fuel for the ASIC fire

The guts of the claim involves balance sheet shenanigans, particularly an inappropriate conversion policy in the way that “resources” estimates were converted into “reserves” for accounting purposes.

Reserves are more certain estimates than resources, which are more speculative, and therefore lend a higher value to a company’s asset base.

Directors used an 100 per cent conversion rate for resources, even inferred resources, being converted into “reserves”. They also raised capital during the time.

In tarting up the balance sheet via the conversion ratio (which was lowered to 70 per cent in 2011), the effect was to extend the life of the mine: one, by eliminating the need to impair assets as quickly, and two – as miners record expenses as assets – to lessen the amount by which the assets had to be expensed.

The soft underbelly of the regulator