By Tom Winnifrith | Friday 6 October 2017
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
In its most recent statement Watchstone (WTG) group suggested that the potential class action against it from folks who lost cash as a result of frauds orchestrated by Rob Terry in the Quindell (QPP) era was minimal. Au contraire. The potential liability was estimated at £9 million but the number of claimants has more than doubled to 1,100 according to a letter sent to claimants which they have been told they must not pass on under threat of legal action. Luckily we have the Winnileaks service.
The letter seeks to diss the £649 million rival claim by Slater & Gordon (SGH) but you would expect that as those behind this class action seek to keep the ball rolling. The letter is headlined
Re: Intended Group Claim against Watchstone Group PLC (“Watchstone”) formerly knowns as Quindell PLC pursuant to s,90a, Schedule 10A Financial Services and Markets Act 2000 (“the Claim”)
In terms of the class action there have been delays but the lawyers still think they will get there, writing:
Although discussing with our proposed funder and issuer have yet to conclude, we remain positive that a successful resolution will be reached. Negotiations are ongoing and we have a conditional agreement for funding and insurance to be provided. We are aiming to resolve the outstanding issues as quickly as possible, through because of the nature of the arrangement it may still be several more months before the new Terms can be launched. In the interim, we are continuing to strengthen clients’ evidence by obtaining their Contract Notes and taking prospective clients through the initial stages of claim set up to ensure they are ready for the new Terms once negotiations conclude.
In total we now have over 1,000 people who have engaged with us, either by being a client or by having gone through our initial sign up process so they are ready to receive the new Terms. This work is vitally important to ensure that the client base is as large as possible to help spread costs and reduce the risk to clients of being part of a litigated case. In a large and complex claim of this nature, the funding of the claim and the insurance of the claimants (against the risks of being charged with the defendant’s legal costs should the claim fail) are key considerations. The costs of running the claim are considerable and need ultimately be in proportion to the claim value for the overall economics to work for all parties involved.
I appreciate that the delay in issuing the claim may be disappointing. To provide some context, you may be aware that a group action was launched last year against tesco as a result of its admission that its profits were overstated by £263m. From what I have read, that claim:
• has a minimum claim threshold that generally makes it only one to institutional clients (i.e. investment firms with all evidence readily available, compared with many of our (retail) clients who have required time and assistance in obtaining their evidence from brokers);
• focuses on a smaller portion of time (18 months compared with our 51 months)
• is dealing with an issue where Tesco admitted wrongdoing (Watchstone by contrast firmly deny any liability); and
• is being pursued by a law firm with only around 125 clients (compared with our client base of around 450 with with hundreds more having gone through the preliminary stages required before being able to review our new Terms).
Despite these comparative advantages it took two years for proceedings to be issued. Although our claim has taken longer than two years I trust you will appreciate that we have been dealing with a much more complex case and a much larger and more complex client base by virtue of our dealing exclusively with retail clients.
We have obtained a copy of S&G’s Particulars of Claim (Particulars) and believe that, whilst it would appear that S&G was intentially misled in the run up to acquiring Watchstone’s Professional Services Division (PDS), it is unlikely that S&G is going to be able to prove that this caused loss. This is because the misleading information relied on in the Particulars was very limited in the context of the amount of information available to S&G and which it claimed at the time to have thoroughly and expertly reviewed. Against such assertions it is very difficult to see how S&G can successfully claim that it was then completely misled by provision of certain information which was produced by Watchstone’s then CEO, Robert Fielding.
By way of example, at the time of the acquisition S&G notified the market that it had undertaken extensive analysis and due diligence of ‘raw’ data, founded upon its considerable experience and knowledge. S&G stated it had carried out “Fundamental, bottom-up analysis of [the] PSD applying Slater & Gordon’s accounting policies that incorporate evidence based milestones” which had been “validated by numerous data points from Slater and Gordon’s existing UK operations and industry knowledge”. This included an assessment of over 8,000 case files.
As previously advised, it S&G believes it has a strong case I would have expected S&G to have issued a long time prior to when it did. S&G had all the information readily available to it, its business was suffering terribly as a result of the acquisition, and it knew Watchstone intended to distribute the overwhelming majority of the sale proceeds to shareholders, preventing S&G from being able to get it back.
The lawyers think they have a case noting
We remain of the view that it is appropriate to continue pursuing your claim against Watchstone on your behalf. We are confident that the claim against Watchstone has good prospects of success and that funding and insurance can be secured on the best possible terms. We believe that the time being taken at this stage will benefit clients in the long term by providing a strong platform on which the claim can be launched.
So Watchstone now looks set to have to fight two very costly cases the costs of which will eat into its cash pile big time. If it loses either that could now swallow up either all, or most, of what is left. That makes its shares a strong sell.
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