Australian class action firm announces suit v. Australian class action firm

December 23, 2015

(Reuters) – In 2007, when the Australian class action firm Slater & Gordon conducted an initial public offering and began trading shares on the Australian Stock Exchange, it was supposed to be the beginning of a new era for international law firms. In the U.S., contingency fees and the American rule permit firms representing plaintiffs to take on risky representations and, when their cases succeed, to capitalize more of the same. But in countries where contingency fees aren’t allowed and losing parties are on the hook for their opponents’ fees, the risk analysis is different. By raising capital on a public exchange, Slater & Gordon was testing a new way to spread litigation risk.

Investor money helped Slater & Gordon expand its practice within Australia and move into the U.K. but its public-market model didn’t exactly revolutionize the legal business. A few smaller Australian firms also IPO’ed, and earlier this year, as Reuters reported, Gateley Holdings became the first British firm to go public, raising about $40 million in an IPO on a junior London exchange. The U.S. plaintiffs’ firm Jacoby & Meyers sued over restrictions on public investment in American firms, but (despite support for the idea from at least one admittedly self-interested legal scholar) didn’t make much headway. The rise of well-capitalized third-party litigation funders to insure plaintiffs’ firms against loser-pays disasters has, in many ways, obviated the need for law firms to go public.

Now there’s another reason for firms to be leery of turning to the public market: On Wednesday, Slater & Gordon’s leading rival, the Australian plaintiffs’ firm Maurice Blackburn, called for Slater investors to register for a securities class action against the firm. A different Australian class action firm, ACA Lawyers, has also announced an investigation of Slater & Gordon.

The threatened litigation follows a stunning 90 percent collapse in Slater & Gordon’s share price since last spring, when the law firm raised nearly $1 billion to acquire the professional services division of the British insurance claims processor Quindell. After the acquisition, U.K. regulators announced an investigation of Quindell’s accounting practices that called into question the unit’s viability. Soon after, Australian regulators launched an unrelated inquiry into Slater & Gordon’s Australian auditor.

The firm issued reassuring statements in response to both investigations, but as the American Lawyer detailed in a long piece last July about the firm’s problems, short sellers began circling. Last month share prices fell further when Slater & Gordon withdrew its earnings guidance for the year. In all, according to the Australian Business Review, Slater & Gordon has lost about $2 billion in market capitalization this year.

Those are the kind of losses that inspire securities class actions, as Slater & Gordon well knows. Pretty much every news story I read about prospective shareholder litigation against the plaintiffs’ firm, including Kevin LaCroix’s post this morning at the D&O Diary, worked in the word “irony” in contemplation about the first-ever class action against the first-ever publicly traded plaintiffs’ firm.

Slater & Gordon’s public response to the announcements by Maurice Blackburn and ACA Lawyers was to acknowledge the firms’ “recent media statements” but to inform shareholders that it “has not been notified of any legal proceedings.”

For American law firms, as LaCroix pointed out, Slater & Gordon’s particular pickle – a potential shareholder class action – isn’t anything to worry about because U.S. firms aren’t publicly listed. But as LaCroix’s D&O Diary post mentioned, outside litigation funding, whether it’s for a single case, a docket or a firm itself, is an increasingly common way for plaintiffs’ firms to raise capital and share risk.

Slater & Gordon’s predicament is a scary reminder that other people’s money isn’t free.

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