A battle looks to be brewing between two rival forces of the investment universe after law firm Slater & Gordon Limited (ASX: SGH) today released a statement rubbishing some of a report in today’s Australian Financial Review that contained some inferences that would support the case of investors with a short position in the stock.
It looks like round one may have gone to the legal eagles after the AFR appears to have heavily amended the report from this morning which referred to unnamed sources suggesting Slater & Gordon’s accounting policies were the potential subject of investigation. This Slater & Gordon made clear is not the case in a release to the market at lunchtime.
Often unnamed or anonymous sources in stories similar to this in the public domain can be traced back to those with a financial interest in seeing the stock fall.
Slater & Gordon is evidently prepared to fight fire with fire and I would not be surprised if it attempts to take the fight directly to the hedge funds and private traders themselves if they seek to promote their own ‘short’ agenda regardless of the facts.
Either way what really matters is whether Slater & Gordon’s transformational Quindell Plc acquisition is a monumental blunder, or magnum opus by an entrepreneurial management team on an acquisitive trail to outstanding success.
At the heart of the criticisms of the law firm are whether it will have the cash flows to back up its stated profits, revenues and accrual bookings.
Listed businesses with perceived mismatches in this area of accounting are a tempting target for short sellers, but will they be left with egg on their face over Slater & Gordon?
The main business of Slater & Gordon is personal injury law (PI) an area of law that has notoriously long time periods for cases to settle and multiple unknowns around potential financial outcomes.
Even a simple PI case can take 6 to 12 months+ to settle with no certain knowledge of success / failure or how much quantum may be won or costs incurred. It all depends on whether a case is won or lost. Usually outcomes are fairly predictable but timescales are not and despite a common law system of using precedent in negotiating quantum exact amounts are not known.
This is why the booking of accruals or future revenues is a complicated accounting issue for high volume / low margin PI law firms.
Slater & Gordon insists it has the expertise and track record to back it up, while any doubters reading between the lines have come to erroneous conclusions.
Time will tell and the Slater & Gordon story is turning into something of a legal thriller itself.
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Tom Richardson owns shares in Slater & Gordon. You can find Tom on Twitter @tommyr345
The Motley Fool has no interest in any company mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.