Legal Business

Watchstone Group files defence as war of words with S&G over Quindell continues

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Litigation Slater and GordonWatchstone Group

The ongoing Slater and Gordon (S&G) saga shows no sign of abating, as the Watchstone Group (formerly Quindell) in October denied fraudulently misrepresenting itself over the sale of its professional services arm to the beleaguered law firm.

The £637m buyout in May 2015 proved to be the beginning of a downward spiral for S&G as, following the deal’s completion, the Serious Fraud Office launched a probe into Quindell’s accounting practices. As a result, S&G’s shares tumbled.

Legal Business

‘Will defend it robustly’: Slater and Gordon to sue Watchstone over 2015 Quindell acquisition

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Restructuring Slater and GordonWatchstone Group
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Slater and Gordon (S&G) is to sue Watchstone Group, formerly known as Quindell, following the £637m acquisition of the UK company’s professional services division in 2015.

In a statement to the Australian Stock Exchange (ASX), S&G said it had advised Watchstone that it and/or Slater and Gordon UK (SGH UK) intends to bring claims against Watchstone arising from the purchase of Quindell’s professional services division.

The statement added: ‘S&G has previously informed the ASX that £50m of the purchase price for the acquisition would be held in escrow against warranty claims that may arise under the share purchase agreement. If claims made under that agreement cannot be resolved prior to the release date of the escrow (currently 29 November 2016), and subject to compliance with threshold requirements under the share purchase agreement including a merits assessment by an independent barrister, part or the whole of that amount may be retained in the escrow amount subject to resolution of the claim.’

In response, Watchstone said in a statement that it had received a preliminary correspondence on behalf of S&G notifying it of a purported claim and that ‘the company does not believe that there are grounds for a claim to be brought and will defend it robustly.’

In response to the £50m held in escrow, Watchstone added: ‘Following 29 November 2016, monies will be released to Watchstone from the warranty escrow unless, inter alia, Watchstone receives an opinion of a senior independent barrister stating that a given claim is more likely to succeed than not. The opinion will also quantify what such claim, if successfully brought against Watchstone, would be valued at and this amount would then be retained in the warranty escrow until the purported claim was resolved with any excess up to the £50m released to Watchstone.’

In February, S&G announced its plans to restructure its UK operation, as it announced disappointing global results including the goodwill impairment. It had a two month window until the end of March from its banks to deliver a repayment plan by the end of this month for its debt of A$741m, and reached agreement with its banks in May.

At the end of March the firm’s general counsel and company secretary Moana Weir resigned after spending just two months at the firm. In February the firm’s UK chief, Neil Kinsella, announced his retirement as UK head of general law, with Siri Siriwardene replacing him.

kathryn.mccann@legalease.co.uk

Legal Business

SFO opens investigation into Quindell as company revises 2014 legal profits down by £312m

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Litigation Watchstone Group
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The Serious Fraud Office (SFO) has confirmed that it is investigating Quindell’s ‘business and accounting practices’ as the company published revised annual accounts for 2014 showing a £312m swing from profit to loss in its Professional Services Division (PSD).

Accounts released today (5 August) for the year ending 31 December 2014 were adjusted to more conservative accounting policies, adjusting the schedule when revenues and cost were accounted for. The change saw what had been logged as a £175m pre-tax profit for the PSD, which mostly comprised legal services and was sold to Slater & Gordon this year, corrected to a £137m loss.

The accounts also show legal services revenue, which counted as ‘discontinued activities’, for 2014 calculated at £220m instead of the £510m originally declared, while in 2013 re-calculated revenue for the year dropped by £109m to £186m and pre-tax profits changed from £89m to a £55m loss.

Following the release, the SFO confirmed in a statement that it had opened a criminal investigation into the ‘business and accounting practices at Quindell plc.’

Quindell said in statement: ‘The Serious Fraud Office informed the company that it had opened an investigation, which the company understands relates to past business and accounting practices at the company. The company will continue to cooperate with all relevant regulatory and law enforcement authorities.’

‘In addition, the company notes the announcement made by the Financial Reporting Council earlier today and welcomes its statement that, in light of the positive actions taken by the directors in correcting the identified errors, amending accounting policies and providing their undertakings, the committee is closing its review of the 2011 and 2012 report and accounts.’

The company, which sold its professional services division including its legal services to the Australian-listed law firm for £637m, suspended trading in its shares on AIM in June and is conducting a review, along with its auditors, of a number of the company’s historic transactions and acquisitions.

Quindell, which grew through a spate of legal provider acquisitions, brought in PwC in December 2014 to carry out an independent review, evaluating the group’s main accounting policies and cash generation expectations for 2015. Following the review it had identified certain accounting policies which ‘were largely acceptable but were at the aggressive end of acceptable practice’.

The PSD, mostly handling personal injury but also includes marketing and motor services, employs around 1,400 staff, and operates under a range of brands including Silverbeck Rymer, Pinto Potts and The Compensation Lawyers, while the complementary services has around 1,000 staff members.

The saga has also caught the attention of the Financial Conduct Authority (FCA) which confirmed in June it was launching an investigation into the professional services company, and looking at public statements made regarding its 2013/14 financial accounts, a period during which it owned a raft of legal brands.

In the report, Quindell’s non-executive chair Richard Rose, said: ‘I am pleased to say that the new board has made significant progress in consigning the events of 2014 to the past and is well advanced in creating a solid base for the future. A variety of factors led the business to become destabilised.’

Rose added: ‘Investor trust in the company and its board was eroded and it became clear that decisive action was necessary to bring stability back to Quindell and rebuild the confidence of employees, investors, regulators, customers and suppliers alike. A great deal has been done in a short space of time to turn the tide, and I am confident in the company’s long-term future and the potential of our businesses.’

Slater & Gordon declined to comment.

sarah.downey@legalease.co.uk

Legal Business

Quindell suspends shares as financial watchdog launches probe into company accounts

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Regulatory Watchstone Group
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The Financial Conduct Authority (FCA) has confirmed it has launched an investigation into professional services company Quindell, looking at public statements made regarding the company’s 2013/14 financial accounts – covering the period it owned a raft of legal brands.

Quindell, which sold its professional services division including its legal services to Australian law firm Slater & Gordon earlier this year, has also suspended trading in its shares on AIM and is conducting a review, along with its auditors, of a number of the company’s historic transactions and acquisitions.

In a statement, Quindell, which grew through a spate of legal provider acquisitions, said that following PwC’s internal review last year it had identified certain accounting policies which ‘were largely acceptable but were at the aggressive end of acceptable practice’.

The investigation and suspension of shares is the latest in an on-going saga for the company which saw its share price fall last year after a note published by Gotham City Research called into question accounting policies, particularly with regards to its handling of noise-induced hearing cases. The Alternative Business Structure (ABS) then brought in PwC in December to carry out an independent review, evaluating the group’s main accounting policies and cash generation expectations for 2015.

However, in March this year, Quindell sold off its professional services division to Slater & Gordon – a business which it said generated revenues of nearly £180m in just the first half of 2014. The division covered legal services mostly relating to personal injury but also includes marketing and motor services. The legal services piece employs around 1,400 and operates under a range of brands including Silverbeck Rymer, Pinto Potts and The Compensation Lawyers while the complementary services has around 1,000 staff members.

kathryn.mccann@legalease.co.uk

Legal Business

Guest post: Tiger, Plant, Freshfields and the Short Sellers – a look at legal ethics in ABS-owner Quindell’s woes

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ABS Watchstone Group
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Charles Plant, outgoing Chair of the SRA who has led the SRA through one of the more interesting phases in its relatively young life, had some interesting thoughts in a recent valedictory speech (at legal futures).  In particular, flat-earther comments aside, he is reported as having offered this:

‘[‘Solicitor’ is] a brand, he said, which had been the core reason English law firms have conquered overseas markets: “The universal belief that the hallmark of an English solicitor is his or her integrity, honesty and trust… Solicitors understand that they must respect not just the letter of law and the letter of regulation; they understand that they must respect the spirit of regulation.’

Now this is a sentiment with which I have a great deal of sympathy, although I am less certain than Charles that it is a view commonly shared and adhered to in practice. Or rather that there are a number of rather high profile occasions when this has not occurred and we have yet to see the SRA act.* Rather than rehearse those and tire a busy readership, I thought I’d point out a new example. It comes from FT and is on the vexed topic of Quindell, but in fact is about the short sellers, not Quindell itself. Read it here if you have access.

The story says that a hedge fund has been using anonymous shell companies (Cayman Islands naturellement) to short sell Quindell shares. The story quotes a Freshfields partner, Michael Raffan, saying:

 ‘The purpose of the short selling disclose rules was to increase transparency and consistency across Europe…   The use of artificial structures to avoid disclosure is against the spirit of the rules.’

The FT is slightly uncertain on whether any rules have been broken but implies not stating: ‘It is not against the European rules to use a subsidiary but most other hedge funds use their own names.’  They also quote the FCA saying, ‘The EU position is that there’s no requirement for the beneficial ownership to be disclosed to regulators.’ It may be the FCA are taking a narrow legalistic view. Or it may be Mr Raffan is saying that its bad law here rather than suggesting the Hedge fund (or their lawyers) have acted unethically but on the face of it, what has happened here, assuming lawyers were involved (and may have advised against it, yet assisted anyway) it looks like a breach of Mr Plant’s statement on integrity.

*They may be acting on some – we ordinarily do not know until a decision to prosecute is taken.

Richard Moorhead is a professor of law and ethics at UCL, you can read his blog here.

Legal Business

Quindell hires new legal chief as legal services division posts huge growth

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Leadership Watchstone Group
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Alternative business structure (ABS) Quindell has posted a huge revenue increase in the first half of 2014 with its Legal Services Division bringing in £179.6m, 139% up on H1 2013.

Quindell’s legal services division, which trades under several names including The Compensation Lawyers and Compass Law, reported an increase of £104.5m in its revenues from the £75.1m it brought in during the first half of 2013.

The division’s earnings before interest, tax, depreciation and amortisation (EBITDA) grew an enormous 223% to £101m from £31.2m for the same period – more than three times the figure last year. The number of cases also increased considerably from 33,400 to 82,350, up by 146.5%, while gross sales rose by 135.7% from £79.1m to £186.5m.

The company also recruited Stefan Leon Borson as group chief legal and communications officer, who joins from Redbus Media Group where he was chief executive. He has broad experience in law, corporate finance and commercial and operational management. He qualified as a solicitor in 2000 at Addleshaw Goddard.

Quindell chairman Robert Terry said: ‘I am delighted that Stefan is joining Quindell and complements our other recent appointments to strengthen the executive leadership team. His broad experience in combining legal expertise with commercial and operational implementation will be of great benefit to Quindell as we continue to grow.’

Quindell gained its ABS licence from the Solicitors Regulation Authority in December 2012, which saw the company acquire of three law firms Silverbeck Rymer, Pinto Potts and The Compensation Lawyers and has since added further brands.

The insurance market has seen further conversions to ABS’ in the last year UK personal and business insurers in particular entering the race to provide direct legal services to their customers. Some of the more recent entrants include finance company Fairpoint Group, which announced its intention to acquire Leeds-based Simpson Millar in April 2014 – a former acquisition target of Slater & Gordon’s last year – for an initial consideration of £9m payable in cash and shares with a further earn-out consideration of up to £6m payable in cash and shares over the next two years.

Jaishree.kalia@legalease.co.uk