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Australian defence company Electro Optic Systems has announced the settlement of an investigation initiated by the national financial regulator Australian Securities and Investments Commission.
The settlement, announced on 26 November, includes an agreed proposed penalty of $4 million for the approval of the Federal Court after ASIC investigated disclosure matters in 2022 and the company's 2022 revenue guidance.
ASIC has alleged that between May and June 2022, EOS issued earnings guidance to the ASX that it expected its 2022 revenue to equal or exceed $212.3 million; however, by 25 July 2022, EOS became aware that its 2022 revenue was likely to be $164 million with a possibility of an additional $27 million. The company then did not disclose that information for 14 weeks, until 31 October 2022.
“Providing accurate and timely earnings guidance to investors is a core obligation of listed entities and vital to properly informed decision making in our public markets,” ASIC chair Joe Longo said.
“EOS has accepted that it failed to correct its guidance when it became aware that its annual revenue forecast was overstated by tens of millions of dollars.
“Continuous disclosure of market-sensitive information is fundamental to upholding market integrity and supporting a fair and efficient financial system.”
EOS has now reportedly admitted to breaching its continuous disclosure obligations by failing to disclose to the ASX a materially significant decline worth tens of millions of dollars in its 2022 annual revenue forecasts.
ASIC and EOS will ask the Federal Court to impose a $4 million penalty, which reflects the seriousness of the contravention while considering EOS’ ongoing cooperation with ASIC’s investigation and its early admission of liability. The penalty is subject to consideration and approval by the Federal Court.
ASIC will seek declarations of contravention. It is a matter for the court to determine whether the penalties are appropriate and to make other orders.
EOS has stated that it accepts ASIC’s conclusion that it breached its continuous disclosure obligations in the period from 25 July 2022 to 31 October 2022.
EOS supports the declarations and penalty sought by ASIC and recognises the importance of meeting its continuous disclosure obligations, according to Garry Hounsell, chair of the company.
“This outcome represents a constructive resolution with ASIC that allows the business to move forward with clarity, removing the potential of protracted litigation on the matter,” he said.
“We believe this outcome is in the best interests of the company and its shareholders. Since late 2022, we have made significant progress in strengthening our business and remain committed to best-practice and transparent communication.
“As we look to the future, we are well-positioned to execute our strategic priorities and deliver long-term value for our shareholders.”
In addition, ASIC has separately commenced separate proceedings against the former CEO and director of EOS, Dr Ben Greene, for allegedly breaching his director’s duties.
ASIC has alleged that Greene breached his director’s duties in relation to EOS’ failure to disclose changes to its 2022 revenue guidance to the market.
ASIC alleges Greene failed to exercise care and diligence in his consideration of material downgrades worth tens of millions of dollars to the space, communications and defence systems manufacturer’s 2022 revenue forecasts.
Between May and June 2022, EOS issued earnings guidance to the ASX that it expected its 2022 revenue to equal or exceed $212.3 million.
By 25 July 2022, ASIC alleges that Greene knew or should have known that the company’s 2022 revenue was likely to be substantially less than the amount and that EOS was required to disclose an earnings update to the ASX.
Despite this, ASIC alleges Greene failed to adequately inform the board of EOS and voted in favour of EOS board resolutions deferring the disclosure.
“Directors are required to exercise care and diligence in their roles, especially when they are made aware of material changes to financial information and in consideration of continuous disclosures to the market,” Longo said.
“ASIC will allege that Dr Greene was aware of a material change in the company’s guidance but fell short in his consideration of these financials and EOS’ requirements to disclose them to the ASX.
“ASIC will not hesitate to act to uphold market integrity and support a fair and efficient financial system for all Australians in our public markets.”
ASIC will seek civil penalties, disqualification orders and declarations against Greene.
