RSS feedsIt was a New Year hangover the firm could have done without. In early January 2007, mid-tier firm Moore Stephens, currently ranked 11th in Accountancy Age’s Top 50, found itself on the receiving end of a £90m negligence claim over its role as auditor to Stone & Rolls, a collapsed British company linked to Zvonko Stojevic, a Croatian businessman.
You might think there is nothing particularly unusual in this claim. After all, lawsuits abound when companies fail, and accountants are often on the end of claims as a result of their perceived deep pockets.
What marks this claim out is that it is the largest to have been filed with the help of independent litigation funding. An unconnected third party is putting up the finance to mount the claim. In return, it will expect a share of the proceeds if successful.
The claim itself, which Moore Stephens and its lawyers have dismissed as ‘disgraceful’ and ‘wholly illegitimate’, is being led by Benedict Mackenzie’s Ian Williams, the Stone & Rolls liquidator. But the money to back the claim is coming from IM Litigation Funding, which is said to be heavily targeting this area.
While we might be used to solicitors advertising their services to help victims of workplace accidents and the like, this latest turn of events could send a shiver down the spine of the profession. Will there be a knock-on effect for professional indemnity insurance, for instance, and will it encourage more firms to seek the relatively increased protection of limited liability partnership?
That is certainly the view of Michael Snyder, senior partner of Kingston Smith, who says such cases give an ‘added incentive’ to adopting LLP status.
This will be little comfort to Moore Stephens. The firm has already converted to an LLP, but the case stems from work carried out before this conversion.
Blameworthy?
As the number of insolvencies and distressed companies creeps up, so the number of investors who have lost money will grow as well. And as litigation can be costly and time-consuming, it cannot come as a surprise that disgruntled investors are turning to operations such as IM Litigation Funding for cash support.
Peter Ellingham, a partner at City law firm Kennedys, says: ‘This case illustrates the growing trend of seeking to blame auditors for the results of fraud within companies. In that context, litigation funding is a concern to auditors and their professional indemnity insurers.’
This view is backed by consultant and regular contributor to Best Practice, Phil Shohet. ‘Is it a trend? Yes, I think it most certainly is,’ he says adding that he too can see it having a significant impact on professional indemnity insurance premiums.
And, depending on the outcome of separate litigation currently going through the High Court, he can see the net widening beyond insolvency cases.
Perhaps the key issue here is that there may have been situations in the past where there was a strong case but no funding to fight the case, which would have led to claims being dropped.
But with players such as IM entering the market, as well as rumours of hedge fund interest, there could be more cases to answer. And it is feared that litigation funding could lead to an increase in frivolous claims. But such fears might be overstated. Litigation is risky and professional litigation funders can be held liable for defendants’ costs if the case goes against them.
Jeremy Cole, litigation partner at law firm Lovells, says: ‘The flipside of losing can be severe for the funder. In those circumstances, the funding used to bring the claim has been lost and the funder may well pick up some of the other side’s legal costs. This potential exposure could keep the lid on the funding of marginal claims.’
Odds stack up down under
Australia is widely credited with being the birthplace of litigation funding the country certainly has the most active market in such cases.
It might be controversial, but many believe it is a valuable way to ensure
that claims with merit are pursued and not allowed to die through a lack of
funding.
The biggest player in the Australian market is IMF, which currently has 70 cases
on its books, totalling A$1bn (£400m). In 2003, it claimed the scalps of tobacco
companies BAT and Philip Morris, winning a A$60m settlement in a licence fee
dispute with tobacco retailers.
It is understood the company typically receives a fee equal to 30% of the net settlement 60% of its cases are settled out of court, while 15% are abandoned and, of those that go to trial, it has a claimed success rate of two out of three.
In the UK, the market is still in its infancy, but there are rumours that hedge funds, looking for alternative investments that offer potentially higher returns, are very interested in the market.
One of the attractions could be the people behind IM Litigation Funding in the UK, which has Chris Morris as its chairman. Morris was formerly the head of insolvency at Deloitte and has an impressive track record. He acted as liquidator for, among others, BCCI, Banco Ambrosiano and Polly Peck, so is no stranger to large, complex and litigious insolvencies.
