Watchstone Defence Filed in Response to Slater and Gordon Claim

We reported, in edition 157 of BC Disease News (here), that Slater and Gordon (S&G) planned to issue proceedings against Watchstone Group Plc, formerly known as Quindell, for the £637 million purchase of Quindell’s Professional Services Division. They claim to have been induced into the transaction as a result of ‘fraudulent misrepresentation’.

Subsequent to this purchase, Quindell were investigated by the UK’s Serious Fraud Office for its historic business and accounting practices.

S&G’s acquisition of Quindell’s professional services group, in 2015, has been persistently featured in BC Disease News editions, as the large-scale deal failed to broker the success anticipated, to the point where S&G shares are now ‘almost worthless’.

We reported, in edition 184 (here), that S&G had issued proceedings against Watchstone. It has since been announced that Watchstone has filed its defence to the claim, which makes several interesting and controversial accusations regarding S&G’s approach to due diligence.[1]

The defence states that, prior to the purchase of Quindell, S&G spent £31.7 million on the ‘most rigorous’ due diligence, over a period of five months. The process involved a collaboration between some of the best respected institutions in the UK, including: the accountancy business, EY; the Law firm, Macfarlanes; and investment banks, Citigroup and Greenhill.[2] Watchstone claim that they allowed:

‘... comprehensive access to its senior staff and its documents, and permitted 70 of its UK lawyers to review 8,000 case files, in order to scrutinise the business, and invited them to draw their own conclusions about it’.

As a result, Watchstone argue that S&G were well aware of all issues facing Quindell at the time. In particular, they were aware of the accounting issues which Quindell had faced prior to the deal being made.

The Group further alleged that S&G had alternative motives for bringing the claim. They submit, in their defence, that S&G’s primary objective was to increase its market share in the UK by capitalising on the distress facing one of its major competitors. S&G believed that it had the expertise and resources to succeed where Quindell had struggled. However, some sixteen months later, days before the end of the warranty period and with S&G now under serious financial and external pressures, it gave notice that it intended to commence a claim based around serious allegations of fraud. Watchstone maintain that fraud accusations had never been mentioned to Quindell and argue that they are not responsible for the difficulties which S&G are encountering.

Watchstone further state that the claim for ‘fraudulent misrepresentation’ is flawed for the following reasons:

  • The claim pleads no primary facts, but instead seeks to make its case by relying on inference, innuendo, email extracts presented out of context, and unparticularised conversations.
  • The claim is based upon alleged representations in Quindell’s management accounts and PowerPoint presentations, sent to S&G, in relation to ‘dilution rates’. However, Watchstone state that Quindell honestly believed that the rates were capable of being achieved.
  • Since the acquisition, S&G have made repeated public announcements that they did not need to, and did not rely on the dilution rates, or other assumptions provided by Quindell. Rather, they boasted publicly that they had carried out their own calculations and made their own judgments, on the basis of comprehensive due diligence.
  • S&G did not use figures provided by Quindell in any of its valuation or financing models and, instead, recalculated Quindell’s financial information using its own, more conservative, accounting policies, with the assistance of its own professional advisers. Further, S&G makes no suggestion that any historic data provided by Quindell was inaccurate or incomplete. 
  • The evidence brought by S&G, in support of alleged fraud, were known to S&G at, or shortly after, completion. However, no claim was brought until more than 24 months later.

Watchstone makes it clear that the allegations are ‘wholly without merit and should never have been advanced’.

We will follow the development of these proceedings with interest.

The summary of Watchstone’s defence can be accessed here.

 

 

[1] John Hyde, ‘Revealed: Slater and Gordon Spent £31.7m Scrutinising Quindell Figures’ (The Law Society Gazette 19 October 2017)< https://www.lawgazette.co.uk/practice/revealed-slater-and-gordon-spent-317m-scrutinising-quindell-figures/5063294.article#commentsJump> accessed 20 October 2017.

[2] Joseph Evans, ‘Watchstone Denies Slater and Gordon’s Accusations of Fraud During Ill-Fated Quindell Deal’( Legal Week 13 October 2017)< http://www.legalweek.com/sites/legalweek/2017/10/13/watchstone-denies-slater-and-gordons-accusations-of-fraud-during-ill-fated-quindell-deal/?slreturn=20170920051948> accessed 20 October 2017.