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Class action spells trouble for Slater & Gordon Limited shares

Tort law practitioner and class action specialist Slater & Gordon Limited (ASX: SGH) is facing a taste of its own medicine with rival law firm Maurice Blackburn likely scrubbed off the Christmas card list after it announced a proposed class action targeting Slater & Gordon.

Ever since late June when Slater & Gordon conceded that its accounting practices were under investigation by ASIC buying its shares with client money would probably mean a one-way bus ticket to Centrelink for professional fund managers, although plenty have been left red faced after taking part in an institutional capital raising at $6.37 per share worth $608 million to fund the prior purchase of the UK claims management division of Quindell PLC.

Retail investors also paid $6.37 a share to make up the balance of the $890 million raised, with Slater & Gordon valuing the business it was buying at $1.225 billion.

If the law firm were proven negligent in its due diligence or full disclosure obligations around risks on the Quindell acquisition for example a class action could spell disaster, although that’s a big if and it’s much more likely Maurice Blackburn is looking at the profit downgrade issued on December 17 only weeks after Slater & Gordon twice confirmed to investors it expected to meet 2016’s guidance for EBITDAW of $205 million.

Slater & Gordon also confirmed it expected to meet 2016 guidance at its August 28 2015 full year results meeting, which is another reported target point for Maurice Blackburn and means the class action has potentially many more members and a higher claim for compensation given Slater’s share price closed at $3.12 on that date.

In a class action over the profit downgrade Maurice Blackburn would seek retail investors who bought shares after the confirmation guidance of November 20 or August 28 only to incur losses afterwards as the law firm retracted that guidance on December 17.

On November 20 shares closed at $2.68 and now trade for around 95 cents, eligible shareholders who believe they were misled will likely be invited to join the action on a ‘no risk basis’ as costs will likely be borne by a litigation funder such as IMF Bentham Ltd (ASX: IMF).

However, before retail investors get too excited about the prospect of compensation it’s worth noting the compensation available (if successful) will be rather small – it will likely be based on a percentage of losses incurred on shares bought at inflated prices over the period in question from when they purchased shares.

The real winners will be the fee-hungry lawyers as the net compensation available to investors will be after the litigation funder has taken a hefty percentage of total compensation awarded and paid Maurice Blackburn its own whopping fees.

In fact class actions have long been a gravy train for fee-gouging lawyers, with Maurice Blackburn also lining up class actions against Cash Converters Ltd (ASX: CCV), Vocation Ltd (ASX: VET) and Treasury Wine Estates Ltd (ASX: TWE) in 2015.

If an adverse ruling were issued against Slater & Gordon or if it were to settle with the litigants over the profit downgrade it would likely face a large one-off compensation bill.

The law firm will likely contest the action however and any compensation bill around the profit downgrade is unlikely to be so large as to have a disastrous impact given the precipitous falls in the share price after August 28 and November 30.

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Motley Fool contributor Tom Richardson owns shares of Slater & Gordon Limited.

You can find Tom on Twitter @tommyr345

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks 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.

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