Maurice Blackburn will likely have to widen the net of a class action against Slater & Gordon to include its former auditors after the corporate regulator reopened an investigation into the embattled law firm's accounts.
Slater & Gordon revealed last week that Australian Securities and Investment Commission has asked for documents that may show whether the law firm's financial records were "deliberately falsified or manipulated", or whether its "officers have committed offences."
This is critical to Maurice Blackburn's case because if it's proved that Slaters executives engaged in "falsification", insurers would not be liable for any class action claim. Instead, Maurice Blackburn would have to go after other sources, including its auditors, advisors and directors personally.
Maurice Blackburn said in a statement last week: "Slater & Gordon's announcement does indicate that the ASIC investigation is very serious, and we will be watching with interest.
"But in complex class actions like this there are often multiple avenues of recovery, especially considering that Slater & Gordon itself has foreshadowed a cross-claim against other parties, including a warranty claim against Quindell (now Watchstone) and £50 million ($85 million) is still being held in escrow against that claim."
Slaters is planning to sue Watchstone Group – the remnants of British company Quindell – which it paid $1.3 billion in a deal to acquire its troubled professional services division. The stock is trading at 23 cents compared a high of $7.85 18 months ago.
A senior litigation lawyer, who did not wish to be named, said if allegations of falsification are proven, Maurice Blackburn has three options: for the law firm to "stick to the knitting" and allege failure of continous disclosure obligations without raising allegations of falsified accounts; to go after the directors individually; or to seek to recover from third parties including auditors and advisors.
Another senior litigation lawyer said if the corporate regulator finds there has been deliberate falsification of accounts then it is likely Maurice Blackburn would go after third parties including Slaters' auditors. Slaters' former auditors include Pitcher Partners and EY.
"If you have a falsification of accounts and that's done willingly, then insurance exclusions could kick in, which means you have an uninsured loss and have got to find other sources to recover the money from," he said.
"It's much more likely they will also go after somebody who was insured, for example a negligent advisor who was a concurrent wrongdoer. In practice it'll be the accountants who signed off on the accounts, because in theory it's their job to discover things like [falsification]," he said.
In October Maurice Blackburn launched a $250 million plus class action on behalf of more than 3000 shareholders, including over 80 institutional investors and super funds. The size of the class action is significantly more than Slater & Gordon's market cap of just $81.9 million.
The action is backed by litigation funder International Litigation Partners.
Diane Jones, executive of JustKapital, a litigation funder which is conditionally funding ACA Lawyers' planned class action against Slaters, said any claim of falsified accounts is a "significant concern" for any litigation funder because it would render insurance ineffective.
But she said it was likely the ACA class action will proceed even if there is an ASIC investigation under way.
Another litigation lawyer said while the investigation will trigger Maurice Blackburn and other class action litigators to "widen the net" to ensure recoverability, it was unlikely they would go after the personal wealth of the individual directors because "none of them would have the independent wealth to meet a judgment".
misa.han@fairfaxmedia.com.au
jonathan.shapiro@fairfaxmedia.com.au
