The Brisbane-based investment firm was worth over $1 billion in market capitalisation at its peak in 2017 but this plummeted after short-seller Glaucus reported on "wildly exaggerated" assets in the company in March 2018.
By May 2019, the firm's market capitalisation was just $14 million when receivers were brought in.
On Friday, investors filed a Federal Court class action against Blue Sky Alternative Investments seeking compensation and damages for what they say were hyped-up financial statements that portrayed a false, overly rosy view of what was happening at the company before it imploded.
Melissa Morgan, partner at class action law firm Banton Group, said investors suffered loss by relying on information in Blue Sky's financial reports for the 2016, 2017 and 2018 financial years.
This information materially overstated Blue Sky's actual position, she told AAP.
"In particular, the assets of the various funds managed by Blue Sky were overstated, resulting in it improperly recognising performance fees that were subject to material risk and that under its accounting policies and the Accounting Standards ought not to have been recognised."
As well as Blue Sky, the class action also targets former directors John Kain, Timothy Wilson, Nicholas Dignam, Michael Gordon, Philip Hennessy, Alexander McNab, Kim Morison, Robert Shand, Elaine Stead and Mark Sowerby.
They are all accused of knowing that the financial reports were inaccurate and untrue, but doing nothing to correct any misleading or false statements before publishing the reports on the Australian Stock Exchange.
Ernst & Young and auditors Michael Reid and Paula McLuskie have also been sued for allegedly breaching accounting standards and their duty of care by falsely claiming the reports described Blue Sky's "true and fair position".
"The information in the financial reports was distorted so as to present Blue Sky as being in a more favourable financial position than it actually was," investors say in documents filed with the court.
"This appearance caused the price at which Blue Sky's shares traded on the ASX to be higher than the price otherwise would have been."
Investors eligible to take part in the class action purchased shares in the firm between August 19, 2016 and May 20, 2019.
Banton Group declined to say exactly how much investors claimed they had lost due to Blue Sky's alleged misconduct, saying this information was privileged.
In January 2021, Ms Stead successfully sued for defamation over a series of Australian Financial Review articles regarding her time at Blue Sky.
The Federal Court awarded her $280,000 in damages after AFR journalist Joe Aston referred to her as a "feminist cretin", a "stupid person" and a "prodigious destroyer of capital" in a number of Rear Window columns published in 2018 and 2019.
In his defamation judgment, Justice Michael Lee said he had not made findings on why Blue Sky collapsed or on the legal or moral appropriateness of the directors' actions.
Blue Sky Alternatives Access Fund, which broke away prior to the collapse and was purchased by Wilson Asset Management, is still trading and is not involved in the class action proceedings.
