22:46, August 09 58 0 theguardian.com

2017-08-09 22:46:03
Stockmarket crash: how Slater and Gordon became a casualty of the neoliberal dream

Surely the high point of neoliberalism arrived when law firms thought it was a good idea to list themselves on the stock exchange. Some of them more than thought about being owned by non-lawyers – they actually did it.

Now, so much of the neoliberal dream is more readily recognised as a hucksters’ mess of pottage and one of its casualties is the once great law shop Slater and Gordon.

After bestriding the consumer end of the common law world like an ink-squirting giant squid it is now in the hands of hedge funds, led by Anchorage Capital, whose business model is to make money from distressed, debt-laden, enterprises.

Slater and Gordon is not without an illustrious history. It came into being in 1935 when William Slater and Hugh Gordon got together to do legal work for unions.

Even before that, Bill Slater and Maurice Blackburn had been partners in Blackburn and Slater. The railways union later offered all its work to Slater and he branched out on his own in 1923.

Ted Hill, who ended up as secretary of the Victorian branch of the Communist party, was an early Slater and Gordon partner. Jennifer Lush, the daughter of Sir George Lush who served on the parliamentary commission of inquiry into Lionel Murphy, was the first female partner.

Much later came Julia Gillard, Adam Bandt, Rob Story and Peter Gordon.

Famous partners attract interesting cases, and Slater and Gordon had a bundle of them: acting for conscientious objectors during the Vietnam war; for hundreds of Wittenoon mine asbestos workers, resulting in an $18.2m payout by CSR to the employees who had not already died; the Ok Tedi litigation on behalf of PNG landowners against BHP and its environmental damage; breast implant cases; the $4.5bn James Hardie asbestos settlement; the Fincorp class action with a $29m settlement; for Thalidomide claimants in Australia and New Zealand, with a settlement worth $89m; and most recently the Manus Island class action where the commonwealth settled for $70m.

In 2007, Slater and Gordon was lured onto the sharemarket and by 2015 its shares traded at $8. Now they’re 8.2 cents. Last year it posted a loss, after write downs, of $1bn. As an investment it is worth almost nothing. About 80% to 90% percent of investors’ capital has been trashed.This was never meant to happen to law firms. They were always businesses, but had the patina of partnerships, of learned professionals – associations of “statutory gentlemen” and ever more so, gentlewomen.

The idea that non-lawyers could own law firms had been foreign for centuries, and for good reason. The lawyers’ hierarchy of duties was always the court, number one, and the client, number two. A duty to shareholders’ need for revenue, profits and dividends, inevitably would create incompatibility.

For the partners, the lure of making a fortune through a share offer proved irresistible.

For a while all went brilliantly. The high share price and buckets of cash allowed for a dizzy array of acquisitions – more than half a billion dollars was splashed by Slaters on snaffling 40 smaller law shops both in Australia and the UK. By 2015, half of Slater and Gordon’s revenue was coming from the UK, where it had lured the partners of sleepy old firms with eye-watering cash and shares. Implicitly, there was a mission to concentrate the market for legal services and to be able to exert control over pricing and outcomes.

Global investment researcher Morningstar predicted total firm revenues of $502m in 2015 and $604m for 2016. Andrew Grech was the person driving this reinvention of legal services. He saw it as a way for Slater and Gordon to fund new services, invest in technology, expand office locations, create better work environments, and have the capacity and scale to do more pro bono work.

The vision was for the firm to have an astonishing 200,000 clients at any one time.

Grech rejected criticism that this was the industrialisation of law by a profit-driven factory seeking to maximise shareholder returns.

“At the end of the day, the structure of our firm will not determine if we succeed or not – that is in the hands of our clients.”

A case study in debacle

What could possibly go wrong? As it turned out Perfidious Albion was partly to blame – an over-hasty expansion in Once-Great Britain. Much of the trouble has been pinned on the 2015 purchase for $1.3bn of the professional services arm of Quindell, a law firm and insurance claims processing business.

This was described by Grech as a “transformative” acquisition – instead it became a case study in debacle.

The legal division, before it was sold to S&G, brought over 62,000 noise-induced hearing loss insurance claims, but because of difficulties associated with determining the cause of the injuries, these cases proved more difficult and more expensive to resolve.

Slater and Gordon was not deterred when it was known at the time of the purchase that Quindell’s accounting practices, according to PwC, were “aggressive and unacceptable”.

Quindell started out as the management company for the Skylark Golf and Country Club in Hampshire. It subsequently acquired a hodgepodge of businesses – call centres, law firms, chauffeur services and tech companies. It also developed a one-stop-shop for insurers and claimants.

The Brits must have seen these colonial suckers coming and couldn’t believe their luck. London’s Telegraph published a scathing article that commenced:

For a bunch of ambulance-chasing lawyers, you might expect the legal brains at Slater & Gordon to know a car crash when they saw one.

Two months after the acquisition Quindell was investigated by the Financial Conduct Authority. Within 18 months of the purchase the entire value of Quindell’s assets had been written off. To make the woes worse, the British government had announced that, in an effort to reduce the cost of motor insurance, it would tighten eligibility for accident compensation.

By this stage S&G’s shares were tanking fast – the class action buzzards were circling and the banks smelt blood.

Slater and Gordon’s own accounts also turned out to be a curious affair. The company recorded estimates of what uncompleted cases would pay, based on the likelihood of success. This was called “work in progress” and entered as revenue on a “stage completion basis” for no win no fee work.

Profit growth became a priority for the company and its lawyers were encouraged to generate as much WIP as possible. For instance, in 2014 Slaters recorded $467m of WIP. The following year it was $826m.

The trouble was that WIP was not being converted into cash quickly enough and in the volumes anticipated in the accounts.

The listed law firm is a curious creature

The whole grand plan is now being recast as the company’s branch offices are being closed in major British cities and many of the firm’s leading partners have decamped in the wake of the disaster. The architect of the triumphs and ultimate catastrophe, Andrew Grech, has gone as group managing director, while the entire board has been given its marching orders.

The lenders who have taken control have required the company to clear the decks of unresolved issues, including their case against the vendors of Quindell. The shareholders’ class action brought by Slater and Gordon’s historic rival, Maurice Blackburn, has been settled for $36.5m – far less the $250m initially sought.

Defendant insurers know that the firm is vulnerable, so can drive harder bargains with settlements, quite apart from which it will be harder to attract talented new lawyers.

And in the wings waits Maurice Blackburn, a strong competitor which resisted Slater’s merger blandishments and the temptation to go public.

The listed law firm is a curious creature. The law is ill-suited to having investors poking and prodding through the sausage making process. Litigation is already vulnerable to investors who stake cases for a return on the outcome.

Access to the law has become so cripplingly expensive and the system so procedurally bloated that lawyers have had to engineer new ways to lure customers who were otherwise shut out of buying their services. This has given rise to stratagems like no win no fee, litigation funding, litigation lenders and a whole battery of “access to justice” contrivances.

In the process, the issue of hyper-inflated fees has been left untouched.

The end product of this financial adventurism was the personal injury law firm that raised capital on the share market. Like Icarus, the apparatus that Slater and Gordon invented turned out to be glued together with wax.