Slater and Gordon Executive Director Andrew Grech
The investors who stumped up $890 million in new money for Slater and Gordon’s audacious $1.23 billion purchase of the Quindell business in the UK have so far dropped more than $350 million.
The short-sellers have made a killing, but surely one of the world’s most aggressive class action law firms is now in the gun to be on the receiving end of a class action from aggrieved investors.
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It’s one thing for Slaters to buy a business that was plagued by aggressive accounting practices with a pledge to clean it up, but the Slaters board has now admitted that its own UK accounting practices were deficient.
This triggered a share price collapse, which, with any other company, would immediately create a flurry of class action research by the likes of Slaters, IMF Bentham and Maurice Blackburn.
You can’t tell your own investors that everything is fine with your accounts, take $890 million from them at the lofty price of $6.37 a share and then make clarifying statements within three months that sends the share price down to $3.84 this morning.
Slaters have performed magnificently for many years after floating at $1 a share in 2007, but the warning signs have been flashing for a while.
A flurry of progressively larger takeovers have raised eyebrows because service industry consolidation plays have a history of problems and no one had ever attempted this in the legal space before.
Slaters also has two very long-serving executive directors in Ken Fowlie and Andrew Grech, who have together served on the board for a combined 26 years and tend to dominate the business.
They are surrounded by only four independent directors who generally are not the same sorts of names you see sitting on ASX 100 boards.
Indeed, chairman John Skippen was the long-serving finance director at Harvey Norman, which is not a company known for its immaculate corporate governance, strong independent directors and pro-active engagement with shareholders. Harvey Norman still doesn’t have an investor relations section on its website, although this is probably more to do with Gerry Harvey himself, rather than Skippen’s reluctance to communicate.
However, one of the most basic governance issues is knowing how to count to three in terms of which directors are up for election at the AGM. The collective legal might of Slaters wasn’t even able to get that right in 2013, when the chairman’s term had expired but Skippen wasn’t presented for re-election, and hence served an illegal four-year term.
Both Skippen and Grech were a little sheepish about this “administrative oversight” at last year’s AGM and you can see how they explained this unprecedented stuff-up on page 7 of the notice of meeting.
Another common theme with governance snafus tends to be the presence of lower-cost second-tier audit firms.
Pitcher Partners signed off on all those aggressive ABC Learning accounting policies over the years and when the business collapsed in 2009, the Brisbane office was cauterised but the rest of the partnerships soldiered on around Australia.
At the time, I thought Slaters might launch a class action against Pitcher Partners on behalf of ABC Learning investors, but that would have involved suing its own audit firm.
Once Slater and Gordon cracked the ASX 200, it really should have started acting like a big company and hired one of the Big Four firms to audit its books.
Instead, it persisted with Pitcher Partners, in much the same way that ABC Learning never up-graded and Fortescue Metals stuck with small firm BDO until finally calling in PwC for the 2012-13 audit.
The Australian Securities and Investments Commission clearly wasn’t too confident about Pitcher Partners and unearthed the UK problems as part of what was described as a “routine audit”.
ASIC interventions often unearth material that is useful in class actions. Look at the way Slaters launched against Newcrest last year after the ASIC settlement related to selective briefings of analysts about a profit downgrade.
The only thing that might save Slaters is a certain cosiness among the small class-action community. Maurice Blackburn and Slaters have co-operated on some issues (i.e. Centro class action), especially after all these mooted attempts by Attorney-General George Brandis to hamper the class action industry.
So it would be understandable if Maurice Blackburn didn’t want to upset its biggest rival and draw further attention to an industry that many directors and conservative politicians would like to close down.
The same goes for litigation funder IMF Bentham. Australia has achieved international legal fame for producing the world’s most valuable listed law firm and the world’s most valuable listed litigation funder.
It would not be a good look if these two giants went to war.
Then again, the facts look pretty clear. If IMF and Maurice Blackburn jointly launched against Slaters, it would probably make sense for all parties to come to a quick $50 million settlement, which, as is the way with these matters, would largely be funded by the insurers, unless there is some carve-out in the insurance policy related to accounting errors.