In late 2015 the then Country Liberal Party NT government awarded sandalwood plantation operator Tropical Forestry Services (TFS – now Quintis Limited) “Major Project Status” that would see a projected tripling of TFS sandalwood production across the NT. At the time, major project status signified that a project was of “major economic importance” and would receive “whole-of-government coordination” to grease the wheels of regulatory approval and assist with the management of economic, environmental and social impacts.

But, as a document leaked to the ABC’s James Oaten in February 2016 revealed, the NT government’s Department of Land and Resources Management warned that there was insufficient water in the NT to supply TFS’s projected needs, noting that “similar forestry schemes have had a record of failure”. TFS was then the largest single water user in the Northern Territory and over the past eighteen months it has increased its water allocations, with government records indicating that Quintis controls, through both direct and indirect water licence allocations, upwards of 35,000 million litres (ML) of NT groundwater.

James Oaten’s revelations were soon followed by a statement by then shadow Minister for Government Accountability—and now Deputy Chief Minister—Nicole Manison, calling, among other things, for the CLP government to release all details about the grant of major project status to TFS.

The activities of TFS/Quintis in the NT have long been the subject of widespread scrutiny and concern, not least because of the perceived close links between the company and the former CLP government. Following the ALP’s victory in the NT general election in August 2016, earlier this year the Gunner government commissioned a review of water allocations by the CLP. The Northern Myth understands that the final report has been provided to government. Enquiries by The Northern Myth as to when the NT government would release either the report or a response have been met with a curious silence, with word on the street that the report has sparked serious divisions within Chief Minister Michael Gunner’s Cabinet.

Similarly curious is the fact that the Gunner government has seen fit to continue Quintis’ major project status. As will become clear, if there were grounds for concern about the company’s activities in the NT eighteen months ago, recent events warrant even closer attention.

Soren Aandahl, co-founder of the Austin, Texas-based short-selling hedge fund Glaucus Research Group, travelled to Australia earlier this year to ground-truth the research his firm had invested more than 700 hours into. He’d come half-way across the world to look for Australian firms that he gleefully described as “follies, frauds and fads”. As the Financial Review reported at the time, Aandahl wasn’t finding “droves of material misrepresentation or really rotten companies,” more a “couple of rotten apples”.

Six weeks later the identity of the first of Aandahl’s “rotten apples” became clear. On 22 March  TFS was busy reinventing itself, morphing from sandalwood grower and managed investment scheme promoter to luxury goods & wellness-ness operator Quintis Limited. As TFS founder, major shareholder and CEO Frank Wilson told Sue Neales at The Australian the day before the glitzy re-boot to Quintis, the TFS tag didn’t match the Quintis re-branding as a provider of “sustainable luxury” and “no longer stands for what we have become.”

But on the very day that Quintis was launched—with awfully exquisite timing that Aandahl insists was purely coincidental—it became obvious that TFS/Quintis was the first of Aandahl’s “rotten apples”. The Glaucus report is worth a read for the casual observer as much for the refreshing—if not uncomfortable—light that it sheds on the soft underbelly of Australian corporate practice and regulation. As John Hempton, founder of Australian long-short hedge fund Bronte Capital Management, told The Fin’s Adam Haigh and David Stringer in February, the arrival of deeply cynical offshore short-sellers was unsurprising, given that the:

… perception from foreigners is that the market is a little dopey and that the corporate regulator is a little soft … You do find frauds here. They make obvious targets.

Crikey alumni Myriam Robin provides a useful explainer on the black arts of short-selling at the Sydney Morning Herald here.

Glaucus described Quintis as having a “Ponzi-like structure,” adding that its major Chinese customer was anything no more than:”a tiny commodities importer with minimal operations and a small balance sheet”.

We believe that once investors scrutinise [Quintis’] misleading forecasts, dubious marketing materials and questionable customers, [Quintis] will lose the confidence of the capital markets it requires to survive … Thus, we value [Quintis’] shares at $0.00.

Quintis shares were worth AU$1.41 the day before the release of the Glaucus report, giving the company a market capitalisation of $552 million.

For Aandahl, Quintis was an obvious target for a curious hedge fund skilled at running a forensic ruler across a corporation’s affairs. The first red rag to the Glaucus bull was the TFS response to a September 2014 report by stockbrokers Taylor Collison. That report, TFS Corporation (TFC): A Foray into Sandalwood Accounting, was distributed to a small group of selected investors, and fell into the hands of Regal Funds Management, then TFS’s largest investor behind CEO Frank Wilson. TFS issued suit in the Western Australian Supreme Court

Dismissing the TFS application for pre-trial discovery and awarding costs to Taylor Collison, Master Sanderson noted the sceptical tone of Taylor Collison’s report and that it “was clear the author was less than enthusiastic about the plaintiff [TFS] as an investment.” In his judgement Master Sanderson went on to note that the Taylor Collison report was:

… a far cry from putting to a reader false information, which in turn could lead to an adverse conclusion about the wisdom of investing in the plaintiff … In my view any claim the plaintiff might bring would be entirely speculative and accordingly I am not satisfied discovery as sought by the plaintiff ought be ordered.

As Aandahl told ABC Kimberley rural reporter Matt Brann earlier this year, the TFS action against Taylor Collison:

… really got our ears pricked up, because healthy, normal companies don’t sue a stockbroker over criticism. Usually what we find in our experience, is that the companies most sensitive to criticism and who immediately lash out at anyone who is critical, are the ones with most to hide.

Quintis rebutted the Glaucus claims, arguing that it contained “substantial and egregious inaccuracies” but that didn’t stop Quintis’ stocks slipping to AU$1.05 within two days of the release of the Glaucus report. The following Monday Frank Wilson resigned as Quintis CEO, taking his estimated 13 per cent of  company stock with him and telling the board he was working on a potential takeover of the company. That sparked a brief rally in Quintis’ share price but by midweek ratings agency Moody’s had moved Quintis debt to a “negative” B2 outlook, noting that the company’s debt was running at about five times earnings and indicating a chance of a downgrade if matters didn’t improve.

A week after the first Glaucus report the prospects of recovery for Quintis  weren’t enhanced by a further report from the hedge fund issued in response to Quintis’ rebuttal. Quintis staggered on through April, slipping to AUS1.18 by the start of May and further to AU$0.60 by May 10, when Quintis issued a statement that sandalwood oil supply contracts between Quintis’ subsidiary Santalis Pharmaceuticals and the Nestlé subsidiary Galderma had been terminated by agreement in mid-December 2016.

Unfortunately nobody had told the Quintis board.

Prior to yesterday’s advice, the fact and details of the contract termination had not been provided to current members of both the Board of Quintis and its senior management (outside of Santalis). Quintis Chairman, Dalton Gooding, said: “It is unacceptable that the current Board was not made aware of the contract termination when it took place. We are taking immediate and appropriate measures to ensure that this type of communication breakdown is not repeated.”

By close of trading on 11 May Quintis shares had dropped a further 14 cents to AU$0.46 and bottomed out for the week on 12 May at AU$0.29.5. On 15 May Quintis asked the ASX to place a trading halt on the firm. Three months later that trading halt continues, being extended on 31 July through to the end of August.

On 26 July S&P Global Ratings announced it had downgraded Quintis’ corporate credit rating from CCC+ to CCC- and placed the ratings on CreditWatch with negative implications. Moody’s followed five days later, downgrading Quintis from Caa1 to Ca and maintained the ratings on review for downgrade. Moody’s Ca rating applies to companies that it regards as “highly speculative” and that are “likely in, or very near, default, with some prospect of recovery of principal and interest.”

In April this year—that is, well after the Glaucus reports and subsequent fallout—the Gunner government was mid-way through a review of the major project status policy framework. The revised framework was released in June—well after Quintis had been placed in a trading halt. Notwithstanding the numerous media reports and Quintis statements to the ASX, the NT Department of Trade, Business and Innovation (one of Chief Minister Gunner’s ministries) determined that the Quintis sandalwood plantations should maintain their status as NT major projects.

In addition to that status—and all the inside-running it affords the company—the NT’s InvestNT website touts Quintis as a suitable investment, noting that Quintis:

… currently manages over 12,000 hectare of Indian Sandalwood plantations across Northern Australia (both on its own balance sheet and on behalf of a wide range of institutional, high net worth and retail investors) with approximately 5,200 hectare in the Katherine / Douglas Daly / Mataranka regions and plans to establish new plantations of circa 1,500 hectare per annum over the next 10 years.

The Northern Myth asked the Department of Trade, Business and information about its continuing support for and promotion of Quintis. In part, (The Northern Myth’s questions and the Department’s full response are included below) the Department advised that:

Quintis shares are currently the subject of a voluntary trading halt which was recently extended to 1 September 2017. The company’s financial position has been the subject of frequent recent media reporting.  These issues are an internal commercial matter for Quintis and it would be inappropriate for the Northern Territory Government to comment at this time.

In mid-October the NT will host the 8th Annual Northern Territory Major Projects Conference. As yet there is no sign that Quintis will be attending or giving a presentation.