Giant multinational law firm Slater and Gordon have been hit by the biggest share holder class action law suit in Australian history. The $250 million dollar law suit has been launched by rival firm Maurice Blackburn Lawyers on behalf of over 3000 investors.
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Slater and Gordon’s woes are said to have begun after they purchased ailing British Law Firm Quindell for 1.3 billion dollars. The doubtful financial records of Quindell should have been a red flag to any astute investor. This concern was coupled with movement in the British legal system to curtail road accident payouts and compensation claims, the core business of Quindell. Less than a year after making the purchase, British compensation laws changed and the bottom fell out of the accident compensation market, leaving Quindell floundering and Slater and Gordons share price plummeting.
Why Slater and Gordon fell so hard
If we rewind prior to this ill-advised purchase and the fall out culminating in the enormous class action looming over Slater and Gordon’s head we can see that the seeds of destruction were possibly sewn much earlier.
Andrew Grech, Slater and Gordon’s enigmatic principle is an ambitious man and worked hard at Maurice Blackburn, before relocating to Slater and Gordon. It only took 2 years to be promoted to partner and in 4 short years Andrew Grech was running the firm. Slater and Gordon became a household name after winning class actions against CSR over asbestos and Dow Corning over breast implants. 3 in 4 Australians knew the name Slater and Gordon.
Flush with cash
Flush with cash after these enormous victories Andrew Grech began buying up small, and not so small law firms in Australia and the UK – Trilby Misso, Russel Jones and Walker, Nowicki Carbone and Keddies just to name a few. On the books the value of Slater and Gordon skyrocketed. The law firm spent over half a billion dollars acquiring over 40 law firms from 2007. In the business world these kind of companies are called roll-ups, and the risk inherent in this kind of business behavior is enormous and unsustainable. Companies like ABC Childcare behaved in exactly the same way, eating more and more smaller companies just to stay afloat.
After the float
After the float of the company in May 2007 Slater and Gordon grew bloated on the corpses of smaller firms. The share price sky rocketed to over 8$ and anyone who had purchased shares or had share options became massively wealthy.
It seemed to any casual observer that Andrew Grech could do no wrong, so when he asked for loans to purchase Quindell, those who he approached had unshakeable faith in the man who had made them rich. A faith not shared by Douglas Tynan a forensic accountant at hedge fund VGI Partners in Sydney. Tynan and his 8 person team investigated Slater and Gordon in April of 2014 and what they found was of tremendous concern. The investigated work showed that Slater and Gordon were pumping up the value of Work In Progress cases. As a No Win No Fee law firm, Slater and Gordon would often not get paid for 18 months to two years after taking a case on its books. So they would place an increased expected value on the cases they were holding, and the cases of those firms they acquired. By inflating the potential profit from these cases, some of which would garner no return at all, Slater and Gordon were able to show dramatic growth year after year.
Tynan and his team uncovered an 80 million dollar short fall in actual returns on these Work In Progress cases in 2013 and a 90 million dollar shortfall in 2014. VGI gambled on a short position on the stock market, betting that the share price of Slater and Gordon would fall. They were not wrong, and as the share price plummeted, Australian investors woke up from their honeymoon with Slater and Gordon groggy and broke.
The fall out took Slater and Gordons share price from $8 down to .37c, with investors losing millions in the meteoric crash. Many of those investors believes they were misled, others that Slater and Gordon mishandled the acquisition of Quindell. One thing that the shareholders are clear about is that they have a case for compensation to claim against Slater and Gordon.
It is yet to be seen if Maurice Blackburn, Slater and Gordon’s arch rival and apparent nemesis will deliver the final blow that will leave Slater and Gordon broken up and sold away, just as happened to ABC Childcare.