Slater & Gordon is now valued at $80 million, a fraction of its $2.75 billion value a year ago. Photo: Jessica ShapiroAn ambitious Australian company spends up big on a massive overseas asset.
It over-reaches, pays too much, books a massive write-down then finds itself the target of a law firm specialising in shareholder class actions.
In 2003, it was National Australia Bank in the stocks over its purchase of US home lender HomeSide – and law firm Slater & Gordon was throwing the rotten fruit.
Slater’s was alleging that NAB had failed to properly inform the market of HomeSide’s dire situation ahead of a $3 billion write-down.
“The same requirement that [NAB and] every other board has in the Australian and the US market, is to provide ongoing and complete disclosure of information that’s relevant to the price of securities,” said then-managing partner Andrew Grech.
The threatened class action came to nothing.
Now it is Grech and Slater & Gordon who have had to go cap in hand to NAB. The hulking write-down on Slater’s UK acquisition Quindell has put the company in a position described by analysts as “financially precarious”.
And it is Slater & Gordon – once known as the union law firm, staffed by true believers wielding their law degrees for the greater good – being accused of laxness in its disclosure to shareholders about its financial and regulatory problems.
The company’s long-time rival Maurice Blackburn is building a shareholder class action against it for this alleged tardy disclosure – along with another from up-and-comer ACA Lawyers, whose staff list includes several former Slater & Gordon lawyers.
BusinessDay can reveal that current and former staff of Slater and Gordon – many of whom have been left with significant debts on the law operation’s more-than-decimated scrip – are among those who have joined the class actions.
Further, Maurice Blackburn has estimated its proposed class action could put a $100 million-plus dent on Slater & Gordon’s future profits.
The company’s problems sparked criticism. These included that it was being run like a personal injury factory, that it is under pressure to settle cases quickly, that its listed model has limited the careers of many of its staff and that its Australian business has stagnated.
But a spokeswoman for Slater & Gordon says there is “no basis” for allegations the company is under pressure to settle cases, that suggestions careers of staff are limited are “completely untrue” and its staff are highly motivated.
This weekend is the deadline for the company to strike a new deal with bankers NAB and Westpac on the $741 million in debt it is carrying – the bulk of which expires in March 2017 making it the company’s sword of Damocles.
Failure to reach a deal with its bankers could spell the demise of the group.
Slater & Gordon’s debt woes relate to its horror acquisition of Quindell – a company beset with accounting issues that the Australian group picked up despite blaring warnings from the UK market.
“One of the enduring mysteries is why they paid the amount they did for it,” says Martin Lawrence of Ownership Matters, the proxy adviser. “They bought a distressed company that was getting overdraft financing.”
If it manages to strike a repayment deal, the 81-year-old Slaters still faces a long list of troubles: the looming class actions, an investigation by the UK Serious Fraud Office, and a share price now wallowing at incredible lows – below 30¢ – having traded at over $8 per share just over a year ago.
While it may resolve its most pressing problem, as far as investors and its banks are concerned the company is likely to be viewed warily for quite some time. True believers
Julia Gillard photographed in 1994, during her time at Slater and Gordon. Photo: Ken Irwin
Over the years Slater attracted bright lawyers who would go on to be politicians including a prime minister, Julia Gillard. Gillard declined to comment on her former employers’ woes.
Former Slater & Gordon lawyer Adam Bandt, who became the first Greens MP to win a lower house seat, says it is disappointing to see the firm in this position.
“I chose to work at Slater & Gordon because of its proud legacy of standing up for working people and I know that’s why many others are there, too,” Bandt says.
“It is disappointing to see Slaters led to this position and I’m sure many people working there are feeling it hard,” Bandt says.
“It would be a step backwards for social justice in Australia if Slaters can’t find a way to keep doing what it has done so well for many years.”
With the help of lashings of debt and ambition, Slater & Gordon was able to catapult itself from socially conscious Melbourne labour law firm to trans-national listed law conglomerate in a little more than a decade.
Along the way, it was a force for good in the lives of countless people, who would have struggled for legal representation without the firm. “They took on large and difficult and complex cases in situations where a lot of others would not have been prepared to do that,” one former senior Slater & Gordon lawyer said this week.
Slater & Gordon had almost gone under twice in recent history but the once-socialist law firm emerged from these crises with an entrepreneurial – some at the time said brash — attitude.
It took advantage of changes to personal injury laws in the early 2000s, to snap up dozens of tiny law firms operating in the field and built scale.
Led by solicitor Andrew Grech – the likeable, confident and charming son of Broadmeadows migrants from Malta –Slater and Gordon floated in 2007 (the first law firm in the world to do so) after swallowing up five firms in two years and personal injury cases became its primary focus.
By 2011, Grech had run out of local law firms to buy and was casting around for opportunities overseas – especially the UK where, he believed, another big opportunity was emerging with changes to personal injury laws there.
Andrew Grech, who joined Slater & Gordon in 1994, is highly regarded despite the company’s woes. Photo: Arsineh Houspian
The first UK acquisition landed in 2012 with Russell Jones and Walker. Others quickly followed.
The acquisition of each firm boosted the “work in progress” line in Slater & Gordon’s accounts, indicating there would be continual growth in the firm’s revenues as each case was settled.
And then came the big takeover – the professional services arm of UK conglomerate Quindell in late March, 2015.
Grech sold it as a “transformative” transaction. It was about as big as Slater and Gordon, but it came with baggage.
In April 2014, US short-selling firm Gotham City Research published a devastatingly detailed report on Quindell’s accounting methods which concluded up to 80 per cent of Quindell’s reported profits were “suspect” and highlighted a host of other concerns including the company’s meteoric rise from a country club in bucolic England to a major legal force.
Slater and Gordon ploughed on, inking the deal on June 1. It funded the $1.26 billion acquisition with an $890 million rights issue – priced at $6.37 a share – and $375 million of new bank debt.
Things went downhill quickly from there.
Within 24 days of the deal being sealed, it emerged Slater & Gordon was under investigation by the Australian Securities and Investment Commission over its books
By the end of June it confessed it had made errors in how it calculated its cash flows sinking its share price further. Quindell would also go on to restate its 2013 accounts pouring more doubt on the acquisition.
Then at its annual results in late August and in the midst of ASIC’s probe, Slater & Gordon said it would reclassify how it dealt with its work in progress (WIP) – cases still on foot that have not settled or reached judgment.
Work in progress is a law firm’s biggest asset.
But, as one senior former Slaters lawyer noted this week, “work in progress at a ‘no win, no fee’ law firm is difficult to value; it’s worth 100 per cent or nothing”.
That same month, the UK’s Serious Fraud Office announced it was investigating Quindell for accounting irregularities.
Martin Lawrence of Ownership Matters. Photo: Christopher Pearce
Sudden departures soon followed, including long-standing chief financial officer Wayne Brown in October. By March this year, eight directors of Slater & Gordon’s UK businesses, including the man who was head of M&A UK at the time of Quindell deal but had not taken up his rights in the capital raising Neil Kinsella, had left.
Short-sellers, which make money when share prices dive, smelled blood and began targeting Slater & Gordon shares.
Then in November the British government announced it was considering changing whiplash injuries from motor vehicle accidents, with clear implications for Quindell sending its shares down 30 per cent. Grech soothed the market and reaffirmed the company’s profit target, for the second time in a few days.
Eighteen days later, on December 17, Slater & Gordon finally withdrew its guidance, admitting it would not achieve its forecast profit.
In February came arguably the biggest blow of all.
The company posted a $958 million first-half loss including a mammoth $876.4 million write-down of its assets, with Quindell accounting for the bulk of it. Its restated cash flows also highlighted its negative operating cash flow – $83.3 million in just six months. Grech’s offer to resign was refused by the board.
ASIC’s confirmation its investigation had closed following the write-downs helped stem the share rout.
But by then so much damage had been done with the $2.2 billion giant now a $100 million shadow of itself and its bankers stepped in. Fall from grace
ACA Lawyers principal and former head of Slater & Gordon’s commercial practice in NSW, Steven Lewis. Photo: Peter Braig
As far as listed Australian companies go, the speed of its fall from grace is hard to top.
“The firm’s intention was to be the [personal injury] factory in the common law world,” says Steven Lewis, who headed up Slater & Gordon’s NSW commercial litigation and class action division until 2014.
“They felt they could industrialise the UK PI legal process, like they did in Australia and it’s come a cropper.”
Just why Slater and Gordon pushed on with the Quindell acquisition remains a mystery. “It’s got to be in the five worst acquisitions of all time in that it has almost killed the company,” says Ownership Matters’ Lawrence.
Highly regarded fund manager and investor Peter Morgan says Slater & Gordon made a mistake going overseas. “It gets back to the basic the fact that Australian companies reckon they can take on the world and it goes pear shaped,” he says.
“It all looked good on paper and now it’s coming home to roost. I’ve never owned any stock. If I want a punt at the races I’ll go out to Randwick on a Saturday.”
Some also maintain the listed law firm model was a mistake from the start.
Sydney investor Peter Morgan. Photo: James Brickwood
“It’s symptomatic of the increasing trend towards the commercialisation of the practice of law, of the traditional model of the lawyer being an independent operator seeking to advance the interests of their client,” one ex-Slater lawyer says.
Another points to how switching from a firm structure to a corporation removed the traditional law firm incentive structure – the tantalising promise of a partnership to strive for. “It’s an age-old career path in law. Slater & Gordon have thrown that out the window.”
A Slater & Gordon spokeswoman say the assertion the career progression of staff was limited was “completely untrue” and it is was false to suggest the group did not want to pay for experienced staff or cap salaries.
Analysts and other market watchers have predicted the firm would be under pressure to quickly settle the thousands of small claim cases Slater & Gordon has on its books to improve its cash flow.
“Let’s face it, they are being run for their banks and the banks are not interested in WIP or anything else, they are interested in cash. How do you generate cash? You settle the case,” Lawrence says.
Slater & Gordon’s bankers are also in a bind. They are dealing with a company whose only asset is WIP that is tied to individual lawyers who can up sticks at any time.
According to one banking analyst, the banks are likely therefore to not on-sell the debt and instead take a 50¢ to 90¢ in the dollar haircut on the debt.
If Slater and Gordon strikes a deal with its banks, it will still need to sell its recovery story to sceptical investors while two potential class actions hang over its head.
“We expect this will certainly rival and possibly exceed some of the larger shareholder actions we’ve run, which historically include the nation’s five and only shareholder actions to settle for over $100 million,” says Maurice Blackburn senior associate Lee Taylor of the firm’s potential action against its rival.
ACA Lawyers principal Bruce Clarke says current and former staff have registered their interest in the action.
“We’ve also had interest from institutional investors both from Australia and the UK. We’ve also had interest from institutions from other countries,” he says.
“There seems to be very strong indication that this is a matter that will proceed.”
Beyond the class actions, key questions about Slater & Gordon’s business model remain, not least of which is whether the rot began and ended with the Quindell acquisition.
While the Australian business at least made a profit in the six months to December 31, of $16 million (before impairments), its expansion was driven, again, by the fruits of its recent acquisitions at home.
Slater & Gordon chairman John Skippen has previously blamed short sellers for the law firm’s woes. Photo: Rob Homer
The February write-down included a $57 million impairment on the goodwill of its Australian operations – an amount dwarfed by the Quindell write-down, but still significant. “If you were saying it is a ‘good Australia, bad UK’ story then you should consider that,” Lawrence says.
However, Slater & Gordon disagrees with these assessments.
“The Australian business is performing better than it has any time in our history. As per our half-yearly results our intention is to continue grow the Australian business, both in the area of personal injury law and general law,” a Slater & Gordon spokeswoman says.
Slater & Gordon’s share price woes have affected more than just mum and dad investors and the institutions invested in the stock that was once a top 100 company.
Over the years Slater & Gordon staff participated in a generous company loan scheme to buy company shares with loans to staff for Slater & Gordon shares topping $8 million at June 30, according to the company’s annual report.
Sources said staff bonuses have often been paid in part shares and scores of staff have plumped up their holdings using margin loans.
“There are some employees who are justifiably pissed off. This is a horror story for employees,” Lawrence says. “And let’s say you’re solicitor who has vended your business into Slater & Gordon for scrip, it’s a horror story.”
While current and former staff and those on the progressive side of politics contemplate a world without Slater & Gordon others point to the group’s resilience.
“They are survivors,” the former senior Slaters lawyer said. “They may well be able to work their way out of this. But it will take a degree of creativity and perseverance.”
What Remains, by Tracey Lee (Xlibris. $32.99). Photo: SuppliedWHAT REMAINS. By Tracey Lee. Xlibris. $32.99.
Reviewer: ROBERT WILLSON
What Remains is the first novel by local author Tracey Lee and is a murder mystery set around Lake George and the Canberra Monaro region. I enjoyed reading it and I am pleased that it is projected as the first of three in a series of mystery/human interest stories.
The central character, who tells her story in the first person, is Lily O’Hara, whose Irish family has lived in the area from pioneering days. One day in 1975, when Lily is a baby only six weeks old, her father Cillian takes his wife Moya, and little Brannen, Lily’s older brother, out onto Lake George for a spot of fishing. Moya and Brannen vanish and are apparently drowned but Cillian can not explain how or why. Did he murder them or not? There is not enough evidence to arrest him and nine months later he hangs himself, which confirms his guilt in the minds of many.
Lily continues to live on the property, raised by loving guardians Billie and Darcy. After an excellent education she gets a job in Canberra, curating exhibits in the National Museum. Then the past suddenly returns to haunt Lily, with the story of the parents she had never known.
A young landscape photographer named Eddie arrives. Lake George is gradually drying up and shrinking to nothing. Eddie ventures out to the last muddy portion of the vanishing lake and there he makes a shattering discovery. He finds two sets of human bones tangled up with a rusted chain. One is clearly an adult and the other a small child. This discovery is to change Lily’s life forever.
Lily feels exposed and haunted. Moya and Brannen are identified after extensive testing and what has been a case of disappearance, presumed drowned, is now pronounced a murder case with Lily’s father Cillian as the murderer. After Lily recovers somewhat from this shocking discovery, she decides to use her research skills to unravel the details of the deaths of parents and brother.
In the course of her research she becomes friendly with Detective Sergeant Phillip Swan, who is in charge of the case. As the novel unfolds we see Lily and Phillip drawn to each other, as one would expect. Slowly Lily sifts through a mass of family papers to discover that all is not as it appears. What Remains is an impressive first novel.
Robert Willson is a regular Canberra Times reviewer.
Ahead of Us by Dennis Haskell
Fremantle Press, $27.95.
Dennis Haskell’s eighth poetry collection Ahead of Us is a tender chronicle of illness and bereavement. The heart of the book is its second section, That Other Country, a series of 23 poems about his wife Rhonda’s long battle with ovarian cancer, her death, and his adjustment to life without her. All royalties from the book are to be donated to the Cancer Council of Western Australia for cancer research.
That Other Country is, as the title poem tells us, the home of those who have a terminal illness. Here there is “no day to day distraction/from the dictatorship of death” and “the economy/ is measured out in medicines and pain”. “No use to declare/stark ignorance of the language./He says the word, ‘cancer’,/and already you are there.”
This is not an easy book to read if cancer has touched you. In wrenching poems like After Chemo, and Who or Why or How or What Haskell focuses on the decay of Rhonda’s body, while Drinking and Six Years speak to his long, hard slog as her primary carer. The imagery is drawn directly from these difficult things: in Plato’s Error, “Cabbage moths white/like torn pieces of skin” are juxtaposed with a description of Rhonda’s own skin, which “slumps on/the mannequin framework of [her] bones”. The two ideas unite at the poem’s end with “…skin/fluttering, peeling its way/out of our lives.”
This section of the book reaches its climax in the long, harrowing sequence Saturday Night and Sunday Morning which narrates Rhonda’s last hours. Haskell’s focus on telling detail is heartbreaking here as, still in the room with her after she has died, he notices the sheet stirring, and realises “…the air conditioning/was breathing as if it were you”.
Some of the book’s most powerful poems actually deal with the aftermath of Rhonda’s death. Haskell has written beautifully about grief before – in Locking the Garage Door, his elegy sequence for his father (from 1993’s Abracadabra) and Temperatures on the same subject (from 2006’s All the Time in the World). This time the loss is even closer to home. In Grief Haskell deploys deft rhyme, adopting a wry, slightly bitter perspective:
“Death shall have no dominion
one poet wrote,
Death, thou shalt not die
Grief will tell you
one was a joke
and the other a lie”.
Haskell switches between describing the grim reality of rituals like cremation (Ashes and Hair), and casting a longing eye back over their relationship. In 64a Princedale Rd he mulls over a photograph of Rhonda from their London days (reproduced on the cover), “the future piling up/in [her] pretty smile”, and visits the same address alone in the present day, unable to “…credit/that it has all gone,/is sealed over …/…in all time’s mystery/and menace…”.
In Widower, Haskell maps his adjustment to his new status (or lack of it) by considering the sound of the word that now describes him: “…such an odd word/like something to do with threshing/or soaring: I caught this morning/morning’s widower, stumbling down/wasted streets…”.
The other main section in Ahead of Us is Chance, comprising 27 poems, just under half of which have appeared in earlier books. Here Haskell has taken the opportunity to collect key poems with a bearing on his relationship with Rhonda, their sons, and themes of death and luck – giving some sense of what, by the end of the book, is lost. These include No-one Ever Found You (“our days will be filled with green/and we will grow together like grass”), The Call, with its sestina-like repeated vocabulary (“silence – sleep – voice – call – breeze – nothing – bush – need”) sustaining a beautiful dreamlike meditation on parental love, and the elegy An Act of Defiance (“[a]lready his presence / is falling out of us/ like dust”).
Some of these poems also set up ideas which return in the cancer poems. The Trees, ostensibly an account of travel in France, unfolds images of mortality and impermanence which speak to the citizens of That Other Country: “…the light/does not seem ours by right/but only borrowed…Near clouds clot the air and early/darkness is closing in like fear”.
Having dwelt for much of the book on the end of life, Haskell ends with a poem about its beginning (Fascination), for his five-month-old grandson. Here Haskell strikes a tender yet sombre note, illuminating the full depth of their connection, while at the same time implying its end: “you curl into me/like a koala bear/into a tree/as if every leaf/were a sap-filled wonder,/as if I could/stand there forever”.
Melinda Smith is The Canberra Times poetry editor.
Ahmad Elrich celebrates after scoring the winning goal against Iraq in Sydney in 2005. Photo: Tim Clayton Once were Wanderers: Tarek Elrich will line up against his old club in the grand final. Photo: Max Mason Hubers
Tarek Elrich with his family at home in Merrylands. Photo: James Brickwood
When Tarek Elrich last played in a grand final, it was meant to be a moment his family would cherish. The man from Merrylands was playing for his new home-town club Western Sydney Wanderers in front of a sell-out crowd at Moore Park but something was missing – and that wasn’t a champion’s ring.
His older brother Ahmad wasn’t there. The former Socceroo star and English Premier League player was in Silverwater Jail serving a four-year term for drug and firearm offences. The 2-0 defeat for Tarek that day hurt, but not as much as it did for Ahmad who had to wait until visiting hours to hear about it.
“For me, going to jail was the best thing that happened to me because I figured out who I was, I figured out there was more to life than football,” Ahmad said.
Throughout Tarek’s childhood, Ahmad was everything; a role model, provider, coach, advisor, guardian and the professional he looked up to.
“I always wanted to emulate him. Everything I did was his style,” Tarek said.
The 28-year-old full-back always knew when his elder brother was watching. As a kid, he had a perfect scoring record when his idol Ahmad was in the stands. To understand why, you only have to take two footsteps into the Elrich family home.
It is distinctly Lebanese. A cedar hangs above the doorbell. Cars sprawl across the front lawn. It’s loud, warm and vibrant and that’s all before the aroma of kebbe fills the room. However, what stands out most is the tale of the two brothers on nearly every wall.
Ahmad’s Fulham jersey is the first in sight next to Tarek’s framed shirt worn in his international debut last year. More memorabilia decorates the family home with the story of their careers, however it’s those from the backyard they remember most fondly.
Tarek used to be a goalkeeper simply so Ahmad and the eldest brother Hafiz could practise shots in the backyard. Despite being six years Ahmad’s junior, Tarek was toughened into a sparring partner.
“In boxing we would say body shots only but I could hit him anywhere. I knew when he had to go because he would hit me in the head, then give me $20 and run off. That was worth a lot of lollies back then,” Tarek said.
Ahmad laughs, knowing, but not revealing, the other side of his character.
“For my parents it was hard for them obviously growing up having six kids,” Tarek said. “Ahmed used to get upset when he would see my mates rock up with new bikes or pocket rocket motor bikes so he would drag me to the shop and buy one for me.”
After gaining his first professional contract with Parramatta Power in 1999, Ahmad also became Tarek’s first employer.
“He was a clean freak, he hated getting dirty,” Ahmad said. “He used to wash my cars, sometimes twice.”
Knowing Tarek, Ahmad would leave pocket money in the glovebox there with instructions for his little brother to keep it.
When they outgrew the backyard, they practiced football moves together in the local park and when Tarek couldn’t afford to live in Newcastle in his fledging football career, Ahmad made that possible.
When he played against his idol for the first time in 2007, such memories made Tarek sick in the stomach.
“We had about 40 or 50 of our cousins come to the game, all his mates, all my mates. I walked out and I felt nervous. I could feel the vomit there,” Tarek said.
Ahmad saw things differently.
“I tackled him. I thought it was funny at the time but the referee didn’t, he gave me a yellow card,” he said.
However, shortly after that, Ahmad’s career fell apart. Injuries took their toll but none more so than the depression that came with an abrupt retirement. A life once solely dedicated to football became devoid of direction and support from the football fraternity.
“I partied for a hundred people. I got caught up in a scenario that, well, I’m just saying you get caught up in things you normally wouldn’t and that’s life,” he said.
Tarek never lost faith in his older brother after Ahmad was arrested in possession of firearms and prescription drugs in 2011. When he signed with Adelaide United, he was offered the coveted number nine jersey most stars fight for. Instead, he requested number 21, the one Ahmad wore throughout his career.
Tarek went on to become a Socceroo and a revelation in the red kit of Adelaide while Ahmad went soul searching in green overalls. The family home provides him with peace but there’s a sense of resentment in Ahmad’s voice when it comes to football. However, when Tarek came to town last January, he couldn’t help himself but return to where it all began, Parramatta Stadium.
“It was awesome and at the stadium I used to play at,” he said.
Amid the noise of all the home fans, Tarek noticed a difference presence just as he did during his teenage years.
“It felt weird because he missed a lot of games when I was playing,” he said.
The hard stools in the visitors area of Silverwater Jail are a far cry from Sunday’s grand final at Adelaide Oval, where Ahmad will watch a brother he too looks up to.
“I’m sure in the way I’m his biggest fan, he’s mine as well,” Tarek said.