Four days ago, Slater & Gordon announced that it was seeking £600 million in damages from Watchstone PLC, the group formerly known as Quindell. The background to Quindell can be read here.
In their ‘letter of intent’ to sue, Slater & Gordon stated that: the claim is worth £600m on the basis that ‘but for fraudulent misrepresentation’ it would not have entered into a deal to buy Quindell’s professional services division.
At the time of the purchase, Andrew Grech, managing director of Slater & Gordon said: the company has completed ‘extensive’ due diligence work and is convinced of the merits of the deal. It was reported at the time that S & G had 70 of their in-house lawyers carrying out due diligence on Quindell.
It would appear that they may have missed something of sufficient importance to interest the Serious Fraud Office. On Monday, one of Slater & Gordon’s UK subsidiaries which was part of the Quindell acquisition, received a formal S2 notice from the UK Serious Fraud requiring it to produce documents.
Today, this news provided a boost to Slater & Gordon’s share price of 4.7% admittedly only taking it to $0.11 – it has been as low as $0.08 but every little helps when you are that far in the hole. Back in 2015 Slater and Gordon shares hit a high of $8.07, valuing the company at $2.8 billion.
In 2015 Slater & Gordon agreed to pay around $1.2 billion for Quindell, despite the fact Quindell already operated under a dark cloud of accounting investigations and other regulatory issues around misrepresentations in its business model – there were similar dark clouds around Slater & Gordon’s accounting methods.
They were the world’s first law firm to go public, and many investors failed to understand that ‘WIP’, as they termed it, was not a guarantee of work in hand but merely an estimation of the likelihood of success and how much work had been done so far. It recorded this as ‘revenue’, even though it was yet to get any – and, in some cases, would never get paid.
If the fraud allegations are proven to have misled Slater & Gordon into entering the deal with Quindell their lawyers may be able to claim some financial compensation – though it is highly unlikely that Quindell/Watchstone actually has sufficient assets to come up with hard cash. S && G may have recourse to compensation via some sort of professional insurance, but even that is unlikely to plug the $740 Australian dollar debt the company is still carrying.
‘The Australian’ reported last weekend that part of Slater’s restructure of that $746 million of debt was sold at 20 cents in the dollar to a group of hedge funds led by ‘Anchorage Capital and Varde Partners’ and they have a first charge over any proceeds on the £600 million claim.
There may be a management professional indemnity insurance policy covering Rob Terry; if that is true it is likely to be invalidated if fraud is proven. Rob Terry at the time, was reported to have taken £50 million out of the company at the time of the sale, and it may be that Slater & Gordon intend to sue him personally for this sum. Chicken fed in terms of the size of their debt, but will bring cheer to some of those who have been bruised by their dealings with Rob Terry in the past.
Watchstone’s have said the ‘groundless’ claim for ‘fraudulent misrepresentation’ was dismissed following a review by an independent barrister in November. This opinion was on the basis of evidence provided by both Slater and Gordon and Watchstone, and stated that a misrepresentation claim had less than a 50% prospect of success.
However, Slater & Gordon are believed to hold ‘key documents’ that have yet to be disclosed which would be relevant to the merits and quantum of its claims, and which may be available to the Serious Fraud Office. Slater and Gordon said it would not have purchased Quindell’s professional services division without the claimed misrepresentation.
Back in March, Westpac, National Australia Bank, Barclays, and Royal Bank of Scotland sold their holdings in Slater & Gordon for as little as 20c in the dollar – they will all be watching these events closely. At the same time, many top barristers were warned of the dangers of taking on new work from Slater & Gordon in an e-mail from David Andrews, the senior clerk of ‘List A Barristers’ – which represents 50 Queen’s and Senior Counsel, and 78 commercial barristers in Victoria, Australia.
“I strongly recommend that if you have any un-billed work you have undertaken on instructions from Slater and Gordon, you prepare and send an account forthwith. I recommend even more strongly that any new work offered to you by Slater and Gordon or ongoing work requested by the firm only be undertaken once we hold funds in OUR trust account.”
The Serious Fraud Office in the UK does not have a good reputation for unravelling these complicated deals – not for nothing is it known as the Serial Farce Office – but it is to be hoped that this time it does do a good job, for many reputable personal injury firms were swallowed up by Slater & Gordon as it made its way across the UK personal injury landscapes, and many senior partners had given up their lifetimes work in return for Slater & Gordon shares which then proved to be near worthless.
Whilst I would personally cheer the demise of Slater & Gordon – they will take down with them the pensions and futures of many decent lawyers who had spent years building up honest practices, only to see them swallowed up in this financial debacle.