Troubled tort law specialist Slater & Gordon Limited (ASX: SGH) is going to court in the UK in an attempt to claim around £600 million ($1 billion) back in compensation from Watchstone Group Plc over its purchase of Watchstone's professional services division known as 'Quindell' in 2015.
Back in 2015 Slater & Gordon agreed to pay around $1.2 billion for Quindell, despite the fact Quindell already operated under a dark cloud of accounting investigations and other regulatory issues around misrepresentations in its business model.
Slater & Gordon also today announced that the UK's Serious Fraud Office has demanded it hand over documents related to Quindell as a company under investigation for fraud.
If the fraud allegations are proven in misleading Slater & Gordon into entering the deal the lawyers may be able to claim some financial compensation in court, although it's unlikely the Watchstone Group has anywhere near like the financial firepower to meet a claim of around $1 billion.
Slater & Gordon may have recourse to compensation via some sort of professional insurance, although as an investor I would not count on that or any court claim succeeding as an elixir for a legal business still carrying around $740 million in debt.
The firm's problems are largely self inflicted with the deal to buy a poorly performing company with serious allegations already existing around it one of the biggest blunders in Australian corporate history. At the time of the deal Slater & Gordon's management team claimed it had conducted some of the most extensive due diligence going, although a simple Google search on Quindell would have shown that multiple serious allegations already existed against it.
In fact if Slater & Gordon's CEO Andrew Grech was taken to court and charged with being a laughing stock, I would not want to be acting for the defence.
The CEO's blunders have destroyed virtually all of the shareholders' wealth in the business and it is now largely reliant on the largesse of a collection of U.S. hedge funds and distressed debt specialists in being able to continue as an operating entity.
Can it get out of jail for free?
The stock has climbed 9.5% today to 11.5 cents, but is still down around 95% since the 2015 deal to acquire Quindell. A successful compensation claim would be a major positive for the business, however, I would not suggest buying shares today as the law firm's mountainous debt pile and recent operating cash out flows remain major problems.
I suspect the most likely end to the sorry Slater & Gordon story is a debt-for-equity swap enacted by the hedge funds that would see existing shareholders all but wiped out in return for its hedge fund creditors writing off a significant part of its debt.
