Several Milford Asset Management funds are invested in beleaguered Australian law firm Slater & Gordon, whose share price dropped 25 percent yesterday after it said errors had been uncovered in the financial reporting of historical cash flow at its UK business.
The ASX-listed law firm is in the middle of a A$1.3 billion acquisition of UK-based Quindell Plc, whose shares were suspended last week as regulators launched an investigation into that company’s accounting. The Australian Securities & Investment Commission is also investigating Slater and Gordon’s relationship with Melbourne-based auditor Pitcher Partners.
Former Australian Prime Minister Julia Gillard worked for Slater & Gordon in the 1980s before moving into politics. It is perhaps best known in New Zealand for joining in the class action against New Zealand’s major banks over fees.
Milford Asset Management has three funds invested in the law firm, with its Milford Dynamic Fund holding a 7.4 percent stake and its Trans Tasman Fund holding 1.4 percent. Slater & Gordon is also the biggest Australian investment for its Active Growth Fund which has a 2.9 percent stake and investors were told in a June portfolio update that the investment had made a negative 5 percent return for the month following a major capital raising to fund its acquisition of Quindell PLC.
Milford Asset Management has had its own troubles, recently reaching a $1.5 million settlement with the Financial Markets Authority over allegations one of its portfolio managers had engaged in market manipulation.
Milford executive director Brian Gaynor said the investment in Slater & Gordon was now under review and the firm had always known it was high risk.
“We have a portfolio of over 100 stocks and some are more high risk than others. Slater & Gordon is higher risk and we’ve done very well to date out of it but there will always be winners and losers,” he said.
Gaynor said it was difficult to know exactly what was going on with the law firm investigation because the regulator doesn’t provide full information on its inquiries.
“We’re still pretty confident that this is something the company will get over but we don’t really know yet,” he said.
In an earlier Herald column he wrote the listing of three law firms, Slater & Gordon, Shine Corporation, and IPH, on the ASX raised the question why there has been no legal IPO in New Zealand. He wrote that it represented a missed opportunity for ambitious New Zealand legal services providers because the clear message across the Tasman was that investors are keen to invest in service companies, particularly law firms.
Slater & Gordon’s 2007 initial public offer on the ASX was a world first for a traditional legal entity.
It is working with Auckland lawyer Andrew Hooker and litigation funder Litigation Lending Services (NZ) in the class action against ANZ Bank, Kiwibank, Westpac Banking Corp, Bank of New Zealand, and ASB, which follows similar actions in Australia.
Hooker, who launched the campaign in New Zealand at the end of 2013, said he hadn’t heard about Slater & Gordon’s accounting discrepancies despite being in Australia on holiday.
He said, in any case, a stay has been put on the New Zealand case pending a court decision in Australia on an application for leave to appeal a March ruling in ANZ’s favour. That ruling overturned an earlier decision that payment fees charged by ANZ were an illegal penalty. The class action was taken on behalf of more than 43,000 bank customers who claimed they have been charged excessive fees for years.
NAB, the Australian parent of BNZ, broke ranks in November saying it would settle with around 30,000 customers who could share in up to $40 million in compensation. The bank said today it was still working with plaintiffs’ lawyers over the settlement and no date had been set for payment.
In an April commentary to fund investors, Milford portfolio manager William Curtayne said when Slater & Gordon completes the acquisition of Quindell’s professional services division it will become the UK’s largest personal injury law firm and jump into the ASX 100 with a market value of more than A$2.5 billion.
Slater & Gordon seized the opportunity to make its takeover offer when Quindell got itself into a cash crisis by aggressively chasing class actions relating to industrial hearing loss cases. It made incorrect assumptions about the profitability and timing of cash receipts for these cases, resulting in it taking on too many cases and running out of cash.
It is funding the Quindell acquisition through a A$890 million two-for-three shareholder rights issue. Curtayne wrote: “Time will tell whether they have bitten off more than they can chew or whether this is one more step on the path to becoming a world-leading law firm”.
The Australian Financial Review reported today that it wasn’t a good look when a global law firm that profits off the mistakes of other corporates and relies on a reputation for accuracy admits to accounting errors stretching back several years. The mistakes, blamed on a spreadsheet error, don’t have an impact on its UK division’s actual net cash results and related to the way receipts from customers and payments to suppliers were reported.
The Sydney Morning Herald said the question for Slater & Gordon shareholders is whether there is more to come. Analysis by VGI Partners, a Sydney-based fund manager that is shorting Slater’s stock, suggests there “are more cockroaches in the kitchen”.
VGI said it was concerned the company’s admission this week of accounting errors throws into question the integrity of the carrying value of its Work in Progress balance and thus the firm’s profitability.
Law firms conduct no-win, no-fee business by booking revenues before they’ve been invoiced in what’s known as Work in Progress, or “trust me accounting”. Any undervaluation of work can be revalued upwards later and improve earnings but the pitfall is that despite growth, there may be a lack of cash coming in the door.
Slater & Gordon’s share price fell to A$3.78 yesterday compared to a high of A$7.85 in April.