Background

Discuss About The Australian Securities Investment Commission.

Issue – In 2015, Slater & Gordon bought a majority of Quindell, and faced a class action lawsuit from the shareholders. Its share prices also collapsed prompted due to regulatory and financial issues regarding the acquisition. It was targeted by its rivals ACA Lawyers and Maurice Blackburn Lawyers. The shareholders of Slater and Gordon lost all hope of recovering their money from investments made in the law firm.[1]

The trouble started in 2015; when the firm purchased $1.3 billion worth professional services division of the UK firm Quindell. Within a few months of the acquisition, Quindell was subjected to a fraud investigation and was forced to restate its earlier accounts. Above that, the matter became worse when regulations related to claims changed in the UK. It supported for less revenue generation on claims, which led Slater to file $1 billion impairment on acquisition. It was opined by various financial experts that Slater and Gordon was obviously a successful law firm in Australia, but its capacity to keep hold on its success and to acquire another firm in some other part of the world was going to create a problematic situation.[2]

Rule – Slater & Gordon was being investigated by the Australian regulators (ASIC) regarding its accounting practices while Watchstone, formerly known as Quindell was under investigation by the Serious Frauds Office in the UK, regarding its accounting practices.[3] In addition, a proposed change in the laws of the UK affected the personal injury market and its investors in an extremely negative manner.[4] Both the companies were investigated under the law authorities of their respective countries.

Applicability – As per the statement given by Helen Vines, general counsel of Slater & Gordon, in response to the query raised by the ASX, the executives became aware of the financial information regarding UK trading on 9^th of December and stated that the company was in compliance with the listing rules (Business News Australia, 2016).[5] Slater & Gordon revealed the information in front of the market on 17^th of December by calling a meeting of the board of directors (Crothers, 2016). The company was in compliance with the rules and regulations along with the process of investigation. According to the analyst at CLSA, the company was in a serious financial disaster situation regarding its high level of debts, which were around $670 million for the first half of 2016. The firm also reported a net loss of $425 million for half year and debts of around $740 million (Letts, 2016).[6]

Rule and Applicability

Conclusion – The Company has been continuously working to restructure its debts; however, the situation became more critical when its major lenders sold out their investments in huge losses to secondary lenders.[7] It has been stated by the firm that its new lenders wanted to keep the company floating but it seemed extremely difficult because the company was generating highly reduced rates of return on its equity and its assets were also overestimated on the balance sheet made majority of the banks very cautious.[8] The situation became highly critical for the law firm, that the cash flow problem made barristers asking for up-front payments before doing any work for the company. The main competitor of the firm Maurice Blackburn left no stone unturned in making the situation worse for Slater & Gordon and launched a class action lawsuit against the firm.[9] They claimed that the company had not informed the investors about its true financial position before, to protect them from financial loss. It was insisted upon that the board was responsible for all that happened and the chairman should resign from the board membership. But at that point of time the best interest for the shareholders would be the continuation of the existing management, who would be leading the recovery process.[10] Thus, the law firm was investigated by the ASIC considering its possible involvement with Quindell in fraudulent activities.

Slater & Gordon is undergoing an investigation by ASIC regarding whether it was possible that the company ‘falsified’ or ‘manipulated’ financial records as well as accounts. The corporate regulator is conducting the investigation on Slater & Gordon.[11]As per the statement released by Slater & Gordon to the ASX, two notices had been served to the law firm by the Australian Securities and Investments Commission (ASIC) in order to provide the documents related to its financial details as well as accounts from December 2014 to September 2015. Slater & Gordon are continuously being watched and investigated by the corporate regulator regarding its financial accounts and records. In addition, all the employees of the law firm are also under investigation whether they have committed any offenses or not.[12]As stated by the firm, ASIC has stated that the notices should not be interpreted as an indication that any kind of law has been contravened by the firm, or should not reflect in such a manner on any person or entity.[13]

The directors of the law firm stated that the firm will be in compliance with the notices and will completely cooperate with the ASIC in its investigation process, for the successful completion of investigation procedures as early as possible. ASIC raised questions regarding the financial report for half the year of 2015 and concerned the recoverable amount of the goodwill attributable to the businesses of the company in Australia and UK. In its financial report for half the year ending in December 2015, Slater & Gordon has;

• Harmed goodwill from the acquisition of the business in the UK from May 2015;
• Harmed goodwill arising through various acquisitions of legal services, businesses in the UK as well as Australia;
• Reduced the value of work in progress on adoption of accounting standard contracts with the customers; and
• Improved its provisions against debtor and expenditure assets.

Investigation by ASIC

The enquiries of ASIC on revenue recognition and work in progress emphasized on suitability of the accounting policies adopted and testing of the estimates of work in progress as well as assumptions against historical data. ASIC discontinued its inquiries regarding the financial reports of the firm for year end June 2014 and June 2015. The financial reporting surveillance program of the ASIC continued to emphasize on the impairment of the non-financial assets, values of the financial assets as well as suitable recognition of the revenue.

In March 2017, the corporate watchdog completed its investigation on debt-strapped listed law firm Slater & Gordon. The law enforcement agencies investigated all the financial documents and accounts of the law firm and continued at it for the last one year. After investigating all the details along with conducting investigations upon every employee working with the organization, the agency dropped its investigation as it found no evidence against the firm. There was no evidence that the law firm has manipulated its financial accounts during its acquisition of Quindell in the UK. It was stated by the law firm itself that ASIC had concluded its investigation on them with not any kind of enforcement action. As the company had been working hard on finalizing debt-for-equity exchange with the distressed debt buyers who were the new senior lenders of the firm, the dropped investigation would undoubtedly assisted the company. Instead, the debt-for-equity exchange was already bad news for the shareholders, whose holdings would have been heavily diluted in the future restructure. In this manner, after availing all the opportunities, the law enforcement authorities confirmed that the firm was not found to be involved in any kind of fraud in its activities as well as with the stakeholders. In addition, directors of Slater & Gordon completely supported the investigation by the ASIC and kept patience for the period of time till the investigation completed.[14]Thus, the company was out of all allegations and accusations of being involved in fraudulent acts after its acquisition with Quindell, and the brand reputation of the company faced huge loss during the investigation period.

In my opinion, there should be a corporate veil in circumstances similar to Slater & Gordon so that a legal concept could separate the corporation from its shareholders and protect them from being personally responsible for the debts and other obligations of the company. If there would have been the prevalence of corporate veil, the shareholders would not have suffered due to the financial problems being faced by the company. However, it can also be taken into consideration that shareholders are the partners for benefits so they should be the partners in debts resolution as well. The law firm Slater & Gordon got stuck in a legal issue due to acquisition with Quindell and faced a huge financial crisis period as well as harm to the brand reputation  and the shareholders. The shareholders of the firm lost all hope of getting their investments recovered from the law firm already struggling. Majority of the small investors faced losses in thousands of dollars and were forced to sell their houses and cars to recover the loss. The small investors suffered a lot but it was a crucial period for the company and everybody had to go along with each other. The investigation completed with no enforcement actions on the firm which revealed that the firm was not involved in any fraudulent acts.

Conclusion

Before the collapse of Enron, the SEC, which was the American counterpart of ASIC, estimated that investors had lost US$100 billion due to faulty, misleading or fraudulent audits. The auditors of Enron were well aware that the company was inflating its income in 1977. Till 2001, Enron was pressurized to reveal in the market that its profits were going to be reduced to below 20% in the next few years. In 2001, Enron filed for bankruptcy and the auditor was charged for obstruction of justice for destroying the documents of the company. In this case, corporate veil seems essential because the auditors and senior executives of the company were involved in fraudulent acts and did not disclose the actual position of the company in front of the shareholders or investors and entangled them as well. They had to suffer unnecessarily for the misconducts of the company.[15] Therefore, the existence of corporate veil in such circumstances would have prevented the shareholders from going into loss. Hence, it can be stated that it depends on different situations and circumstances, in which, the existence of corporate veil seems essentials to protect the shareholders.

References

Thomas, Randall and Robert Thompson, “A Theory of Representative Shareholder Suits and Its Application to Multi-Jurisdictional Litigation” (Northwestern University Law Review, 2012) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2024508>

ASIC, 16-050MR ASIC Notes Slater and Gordon’s Decision to Reduce Asset Values | ASIC – Australian Securities and Investments Commission (2016) Asic.gov.au <https://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-050mr-asic-notes-slater-and-gordons-decision-to-reduce-asset-values/>

ASIC, ASIC’S Compulsory Information Gathering Powers | ASIC – Australian Securities and Investments Commission (2018) Asic.gov.au <https://asic.gov.au/about-asic/asic-investigations-and-enforcement/asic-s-compulsory-information-gathering-powers/>

Booth, J., Slater and Gordon’s UK Business to Split from Australian Parent (2018) LegalWeek.com <https://www.legalweek.com/sites/legalweek/2017/08/31/slater-and-gordons-uk-business-to-split-from-australian-parent/?slreturn=20180324080235>

Business News Australia, Fresh Probes Hit Slater and Gordon as ASIC Investigates Records (2016) Business News Australia <https://www.businessnewsaus.com.au/articles/fresh-probes-hit-slater-and-gordon-as-asic-investigates-records.html>

Cooper, Jeremy, “Financial Statement Fraud Corporate Crime Of The 21St Century” (Australian Securities and Investments Commission, 2005) <https://download.asic.gov.au/media/1310467/AICD_speech_080605.pdf>

Crothers, J., Slater and Gordon Faces $250M Class Action from Shareholders (2016) ABC News <https://www.abc.net.au/news/2016-10-12/slater-and-gordon-lawfirm-faces-class-action-from-shareholders/7925104>

Danckert, Sarah, Slater & Gordon’s Shares Dive on Fresh ASIC Probe (2016) The Sydney Morning Herald <https://www.smh.com.au/business/investments/slater–gordons-shares-dive-on-fresh-asic-probe-20161221-gtfof8.html>

Danckert, Sarah, Slater and Gordon Probe into Its Accounts Dropped by ASIC (2016) The Sydney Morning Herald <https://www.smh.com.au/business/investments/slater-and-gordon-probe-into-its-accounts-dropped-by-asic-20170324-gv5ffr.htm>

Legg, M. and M. Nehme, Insolvency & Incorporated Law Firms: Lessons from Slater & Gordon’s Troubles (2016) Law <https://www.law.unsw.edu.au/news/2016/07/insolvency-incorporated-law-firms-lessons-slater-gordons-troubles>

Letts, S., Slater and Gordon Crashes To A $1B Loss (2016) ABC News <https://www.abc.net.au/news/2016-08-30/slater-and-gordon-results/7797444>

Long, S., Slater and Gordon at the Mercy of Its Bankers (2016) ABC News <https://www.abc.net.au/news/2016-02-29/slater-and-gordon-at-the-mercy-of-its-bankers/7207990>

Ong, T., ASIC Investigates Slater and Gordon over Possibly ‘Falsified’ Financial Records (2016) ABC News <https://www.abc.net.au/news/2016-12-21/asic-slater-and-gordon/8137940>

Pash, C., ASIC Investigates Whether Slater and Gordon’s ‘Falsified’ Its Accounts (2016) Business Insider Australia <https://www.businessinsider.com.au/asic-investigates-whether-slater-and-gordons-falsified-its-accounts-2016-12>

Smyth, J, Slater & Gordon Faces Potential Class Action Suit (2015) Ft.com <https://www.ft.com/content/7ba6b6da-a911-11e5-843e-626928909745>

Stewart, E, Slater and Gordon Shares Crash To 11C (2017) ABC News <https://www.abc.net.au/news/2017-03-23/slater-and-gordon-investors-lose-hope-of-recovering-money/8379948>

some other part of the world was going to create a problematic situation.

the brand reputation of the company faced huge loss during the investigation period.