Slater & Gordon: A Case Study on Financial Troubles and Investigations

This case study discusses the financial troubles and investigations faced by Slater & Gordon, including the ASIC investigation and class action lawsuit from shareholders. It also explores the concept of corporate veil and its applicability in such circumstances.

Slater & Gordon

Table of Contents
Answer i)....................................................................................................................................3
Answer ii)...................................................................................................................................5
Answer iii)..................................................................................................................................7
References..................................................................................................................................8

Answer i)
Issue - In 2015, Slater & Gordon bought a majority of Quindell, and faced a class action
lawsuit from the shareholders. Its share prices also collapsed prompted due to regulatory and
financial issues regarding the acquisition. It was targeted by its rivals ACA Lawyers and
Maurice Blackburn Lawyers. The shareholders of Slater and Gordon lost all hope of
recovering their money from investments made in the law firm.1
The trouble started in 2015; when the firm purchased $1.3 billion worth professional services
division of the UK firm Quindell. Within a few months of the acquisition, Quindell was
subjected to a fraud investigation and was forced to restate its earlier accounts. Above that,
the matter became worse when regulations related to claims changed in the UK. It supported
for less revenue generation on claims, which led Slater to file $1 billion impairment on
acquisition. It was opined by various financial experts that Slater and Gordon was obviously
a successful law firm in Australia, but its capacity to keep hold on its success and to acquire
another firm in some other part of the world was going to create a problematic situation.2
Rule - Slater & Gordon was being investigated by the Australian regulators (ASIC) regarding
its accounting practices while Watchstone, formerly known as Quindell was under
investigation by the Serious Frauds Office in the UK, regarding its accounting practices.3 In
addition, a proposed change in the laws of the UK affected the personal injury market and its
investors in an extremely negative manner.4 Both the companies were investigated under the
law authorities of their respective countries.
1E Stewart, Slater and Gordon Shares Crash To 11C (2017) ABC News <http://www.abc.net.au/news/2017-03-
23/slater-and-gordon-investors-lose-hope-of-recovering-money/8379948>.
2T. Ong, ASIC Investigates Slater and Gordon over Possibly 'Falsified' Financial Records (2016) ABC News
<http://www.abc.net.au/news/2016-12-21/asic-slater-and-gordon/8137940>.
3C. Pash, ASIC Investigates Whether Slater and Gordon's 'Falsified' Its Accounts (2016) Business Insider
Australia <https://www.businessinsider.com.au/asic-investigates-whether-slater-and-gordons-falsified-its-
accounts-2016-12>.
4M. Legg and M. Nehme, Insolvency & Incorporated Law Firms: Lessons from Slater & Gordon's
Troubles (2016) Law <http://www.law.unsw.edu.au/news/2016/07/insolvency-incorporated-law-firms-lessons-
slater-gordons-troubles>.

Applicability - As per the statement given by Helen Vines, general counsel of Slater &
Gordon, in response to the query raised by the ASX, the executives became aware of the
financial information regarding UK trading on 9th of December and stated that the company
was in compliance with the listing rules (Business News Australia, 2016).5 Slater & Gordon
revealed the information in front of the market on 17th of December by calling a meeting of
the board of directors (Crothers, 2016). The company was in compliance with the rules and
regulations along with the process of investigation. According to the analyst at CLSA, the
company was in a serious financial disaster situation regarding its high level of debts, which
were around $670 million for the first half of 2016. The firm also reported a net loss of $425
million for half year and debts of around $740 million (Letts, 2016).6
Conclusion - The Company has been continuously working to restructure its debts; however,
the situation became more critical when its major lenders sold out their investments in huge
losses to secondary lenders.7 It has been stated by the firm that its new lenders wanted to keep
the company floating but it seemed extremely difficult because the company was generating
highly reduced rates of return on its equity and its assets were also overestimated on the
balance sheet made majority of the banks very cautious.8 The situation became highly critical
for the law firm, that the cash flow problem made barristers asking for up-front payments
before doing any work for the company. The main competitor of the firm Maurice Blackburn
left no stone unturned in making the situation worse for Slater & Gordon and launched a class
action lawsuit against the firm.9 They claimed that the company had not informed the
5Business News Australia, FRESH PROBES HIT SLATER AND GORDON AS ASIC INVESTIGATES
RECORDS (2016) Business News Australia <https://www.businessnewsaus.com.au/articles/fresh-probes-hit-
slater-and-gordon-as-asic-investigates-records.html>.
6S. Letts, Slater and Gordon Crashes to A $1B Loss (2016) ABC News <http://www.abc.net.au/news/2016-08-
30/slater-and-gordon-results/7797444>.
7J. Booth, Slater and Gordon's UK Business to Split from Australian Parent (2018) LegalWeek.com
<http://www.legalweek.com/sites/legalweek/2017/08/31/slater-and-gordons-uk-business-to-split-from-
australian-parent/?slreturn=20180324080235>.
8S. Long, Slater and Gordon at the Mercy of Its Bankers (2016) ABC News <http://www.abc.net.au/news/2016-
02-29/slater-and-gordon-at-the-mercy-of-its-bankers/7207990>.
9J Smyth, Slater & Gordon Faces Potential Class Action Suit (2015) Ft.com
<https://www.ft.com/content/7ba6b6da-a911-11e5-843e-626928909745>.

investors about its true financial position before, to protect them from financial loss. It was
insisted upon that the board was responsible for all that happened and the chairman should
resign from the board membership. But at that point of time the best interest for the
shareholders would be the continuation of the existing management, who would be leading
the recovery process.10 Thus, the law firm was investigated by the ASIC considering its
possible involvement with Quindell in fraudulent activities.
Answer ii)
Slater & Gordon is undergoing an investigation by ASIC regarding whether it was possible
that the company ‘falsified’ or ‘manipulated’ financial records as well as accounts. The
corporate regulator is conducting the investigation on Slater & Gordon.11As per the statement
released by Slater & Gordon to the ASX, two notices had been served to the law firm by the
Australian Securities and Investments Commission (ASIC) in order to provide the documents
related to its financial details as well as accounts from December 2014 to September 2015.
Slater & Gordon are continuously being watched and investigated by the corporate regulator
regarding its financial accounts and records. In addition, all the employees of the law firm are
also under investigation whether they have committed any offenses or not.12As stated by the
firm, ASIC has stated that the notices should not be interpreted as an indication that any kind
of law has been contravened by the firm, or should not reflect in such a manner on any person
or entity.13
10Sarah Danckert, Slater & Gordon's Shares Dive on Fresh ASIC Probe (2016) The Sydney Morning Herald
<https://www.smh.com.au/business/investments/slater--gordons-shares-dive-on-fresh-asic-probe-20161221-
gtfof8.html>.
11ASIC, 16-050MR ASIC Notes Slater and Gordon's Decision to Reduce Asset Values | ASIC - Australian
Securities and Investments Commission (2016) Asic.gov.au <http://asic.gov.au/about-asic/media-centre/find-a-
media-release/2016-releases/16-050mr-asic-notes-slater-and-gordons-decision-to-reduce-asset-values/>.
12Sarah Danckert, Slater and Gordon Probe into Its Accounts Dropped by ASIC (2017) The Sydney Morning
Herald <https://www.smh.com.au/business/investments/slater-and-gordon-probe-into-its-accounts-dropped-by-
asic-20170324-gv5ffr.htm>.
13Randall Thomas and Robert Thompson, "A Theory of Representative Shareholder Suits and Its Application to
Multi-Jurisdictional Litigation" (Northwestern University Law Review, 2012)
<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2024508>.

The directors of the law firm stated that the firm will be in compliance with the notices and
will completely cooperate with the ASIC in its investigation process, for the successful
completion of investigation procedures as early as possible. ASIC raised questions regarding
the financial report for half the year of 2015 and concerned the recoverable amount of the
goodwill attributable to the businesses of the company in Australia and UK. In its financial
report for half the year ending in December 2015, Slater & Gordon has;
 Harmed goodwill from the acquisition of the business in the UK from May 2015;
 Harmed goodwill arising through various acquisitions of legal services, businesses in
the UK as well as Australia;
 Reduced the value of work in progress on adoption of accounting standard contracts
with the customers; and
 Improved its provisions against debtor and expenditure assets.
The enquiries of ASIC on revenue recognition and work in progress emphasized on
suitability of the accounting policies adopted and testing of the estimates of work in progress
as well as assumptions against historical data. ASIC discontinued its inquiries regarding the
financial reports of the firm for year end June 2014 and June 2015. The financial reporting
surveillance program of the ASIC continued to emphasize on the impairment of the non-
financial assets, values of the financial assets as well as suitable recognition of the revenue.
In March 2017, the corporate watchdog completed its investigation on debt-strapped listed
law firm Slater & Gordon. The law enforcement agencies investigated all the financial
documents and accounts of the law firm and continued at it for the last one year. After
investigating all the details along with conducting investigations upon every employee
working with the organization, the agency dropped its investigation as it found no evidence
against the firm. There was no evidence that the law firm has manipulated its financial
accounts during its acquisition of Quindell in the UK. It was stated by the law firm itself that

ASIC had concluded its investigation on them with not any kind of enforcement action. As
the company had been working hard on finalizing debt-for-equity exchange with the
distressed debt buyers who were the new senior lenders of the firm, the dropped investigation
would undoubtedly assisted the company. Instead, the debt-for-equity exchange was already
bad news for the shareholders, whose holdings would have been heavily diluted in the future
restructure. In this manner, after availing all the opportunities, the law enforcement
authorities confirmed that the firm was not found to be involved in any kind of fraud in its
activities as well as with the stakeholders. In addition, directors of Slater & Gordon
completely supported the investigation by the ASIC and kept patience for the period of time
till the investigation completed.14Thus, the company was out of all allegations and
accusations of being involved in fraudulent acts after its acquisition with Quindell, and the
brand reputation of the company faced huge loss during the investigation period.
Answer iii)
In my opinion, there should be a corporate veil in circumstances similar to Slater & Gordon
so that a legal concept could separate the corporation from its shareholders and protect them
from being personally responsible for the debts and other obligations of the company. If there
would have been the prevalence of corporate veil, the shareholders would not have suffered
due to the financial problems being faced by the company. However, it can also be taken into
consideration that shareholders are the partners for benefits so they should be the partners in
debts resolution as well. The law firm Slater & Gordon got stuck in a legal issue due to
acquisition with Quindell and faced a huge financial crisis period as well as harm to the brand
reputation and the shareholders. The shareholders of the firm lost all hope of getting their
investments recovered from the law firm already struggling. Majority of the small investors
14ASIC, ASIC’S Compulsory Information Gathering Powers | ASIC - Australian Securities and Investments
Commission (2018) Asic.gov.au <http://asic.gov.au/about-asic/asic-investigations-and-enforcement/asic-s-
compulsory-information-gathering-powers/>.

faced losses in thousands of dollars and were forced to sell their houses and cars to recover
the loss. The small investors suffered a lot but it was a crucial period for the company and
everybody had to go along with each other. The investigation completed with no enforcement
actions on the firm which revealed that the firm was not involved in any fraudulent acts.
Before the collapse of Enron, the SEC, which was the American counterpart of ASIC,
estimated that investors had lost US$100 billion due to faulty, misleading or fraudulent
audits. The auditors of Enron were well aware that the company was inflating its income in
1977. Till 2001, Enron was pressurized to reveal in the market that its profits were going to
be reduced to below 20% in the next few years. In 2001, Enron filed for bankruptcy and the
auditor was charged for obstruction of justice for destroying the documents of the company.
In this case, corporate veil seems essential because the auditors and senior executives of the
company were involved in fraudulent acts and did not disclose the actual position of the
company in front of the shareholders or investors and entangled them as well. They had to
suffer unnecessarily for the misconducts of the company.15 Therefore, the existence of
corporate veil in such circumstances would have prevented the shareholders from going into
loss. Hence, it can be stated that it depends on different situations and circumstances, in
which, the existence of corporate veil seems essentials to protect the shareholders.
References
Thomas, Randall and Robert Thompson, "A Theory of Representative Shareholder Suits and
Its Application to Multi-Jurisdictional Litigation" (Northwestern University Law
Review, 2012) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2024508>
ASIC, 16-050MR ASIC Notes Slater and Gordon's Decision to Reduce Asset Values | ASIC -
Australian Securities and Investments Commission (2016) Asic.gov.au
15Jeremy Cooper, "Financial Statement Fraud Corporate Crime Of The 21St Century" (Australian Securities and
Investments Commission, 2005) <http://download.asic.gov.au/media/1310467/AICD_speech_080605.pdf>.

<http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-
050mr-asic-notes-slater-and-gordons-decision-to-reduce-asset-values/>
ASIC, ASIC’S Compulsory Information Gathering Powers | ASIC - Australian Securities and
Investments Commission (2018) Asic.gov.au <http://asic.gov.au/about-asic/asic-
investigations-and-enforcement/asic-s-compulsory-information-gathering-powers/>
Booth, J., Slater and Gordon's UK Business to Split from Australian Parent (2018)
LegalWeek.com <http://www.legalweek.com/sites/legalweek/2017/08/31/slater-and-
gordons-uk-business-to-split-from-australian-parent/?slreturn=20180324080235>
Business News Australia, Fresh Probes Hit Slater and Gordon as ASIC Investigates
Records (2016) Business News Australia
<https://www.businessnewsaus.com.au/articles/fresh-probes-hit-slater-and-gordon-as-
asic-investigates-records.html>
Cooper, Jeremy, "Financial Statement Fraud Corporate Crime Of The 21St Century"
(Australian Securities and Investments Commission, 2005)
<http://download.asic.gov.au/media/1310467/AICD_speech_080605.pdf>
Crothers, J., Slater and Gordon Faces $250M Class Action from Shareholders (2016) ABC
News <http://www.abc.net.au/news/2016-10-12/slater-and-gordon-lawfirm-faces-class-
action-from-shareholders/7925104>
Danckert, Sarah, Slater & Gordon's Shares Dive on Fresh ASIC Probe (2016) The Sydney
Morning Herald <https://www.smh.com.au/business/investments/slater--gordons-shares-
dive-on-fresh-asic-probe-20161221-gtfof8.html>
Danckert, Sarah, Slater and Gordon Probe into Its Accounts Dropped by ASIC (2016) The
Sydney Morning Herald <https://www.smh.com.au/business/investments/slater-and-
gordon-probe-into-its-accounts-dropped-by-asic-20170324-gv5ffr.htm>

Legg, M. and M. Nehme, Insolvency & Incorporated Law Firms: Lessons from Slater &
Gordon's Troubles (2016) Law <http://www.law.unsw.edu.au/news/2016/07/insolvency-
incorporated-law-firms-lessons-slater-gordons-troubles>
Letts, S., Slater and Gordon Crashes To A $1B Loss (2016) ABC News
<http://www.abc.net.au/news/2016-08-30/slater-and-gordon-results/7797444>
Long, S., Slater and Gordon at the Mercy of Its Bankers (2016) ABC News
<http://www.abc.net.au/news/2016-02-29/slater-and-gordon-at-the-mercy-of-its-
bankers/7207990>
Ong, T., ASIC Investigates Slater and Gordon over Possibly 'Falsified' Financial Records
(2016) ABC News
<http://www.abc.net.au/news/2016-12-21/asic-slater-and-gordon/8137940>
Pash, C., ASIC Investigates Whether Slater and Gordon's 'Falsified' Its Accounts (2016)
Business Insider Australia <https://www.businessinsider.com.au/asic-investigates-
whether-slater-and-gordons-falsified-its-accounts-2016-12>
Smyth, J, Slater & Gordon Faces Potential Class Action Suit (2015) Ft.com
<https://www.ft.com/content/7ba6b6da-a911-11e5-843e-626928909745>
Stewart, E, Slater and Gordon Shares Crash To 11C (2017) ABC News
<http://www.abc.net.au/news/2017-03-23/slater-and-gordon-investors-lose-hope-of-
recovering-money/8379948>