Here’s why Slater & Gordon Limited shares have been hammered today

In morning trade the shares of Slater & Gordon Limited (ASX: SGH) dropped as much as 7% to 39 cents after reports in the Herald Sun revealed that rival law firm Maurice Blackburn plans to file a landmark $250 million class action suit against it on behalf of around 3,000 investors.

Maurice Blackburn’s national head of class actions, Andrew Watson, told the Herald Sun that:

“The sheer scale of the alleged wrongdoing, its impact on the share price and the number of shareholders affected, mean that this case will be one of Australia’s largest shareholder actions.”

It isn’t at all surprising to hear about the class action plans. After all Slater & Gordon’s shares are down a staggering 86% in the last 12 months after management’s disastrous $1.3 billion acquisition of the professional services division of UK-based Quindell.

Within a year of its purchase Slater & Gordon was forced to slash the value of its United Kingdom assets by $814.2 million. The write-down came as a result of its poor performance and proposed regulatory changes which are likely to reduce revenues from fast-track accident claims. This ultimately led the embattled law firm to report a $1.02 billion full year loss.

In response to the media reports Slater & Gordon released a short statement to the market this morning saying that: “Slater and Gordon has not yet been served with a class action claim. Slater and Gordon will inform the market if a class action claim is served on the Company.”

It appears to be only a matter of time before the class action is served. Which will give the company yet another problem to deal with. Considering the company still has debt of $682.3 million on its books, Slater & Gordon can ill afford another $250 million charge.

Things don’t look good for the law firm and I would suggest investors stay well clear of it. Investors might be better served avoiding law firms altogether and investing in intellectual property service providers such as IPH Ltd (ASX: IPH) or Xenith IP Group Ltd (ASX: XIP) instead.

Alternatively these rapidly growing shares could be even better investments if you ask me. Each has strong earnings growth potential and even pays a fully franked dividend.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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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