Under Andrew Grech's leadership, Slater & Gordon went from taking on the big end of town to being the big end of town. At one point last year, it was the world's biggest listed law firm. Credit:Slater & Gordon Slater & Gordon became famous for tackling the big end of town: British American Tobacco over lung cancer, CSR over asbestos, Dow Corning over breast implants. Under Grech's leadership as managing director, Slater & Gordon became the big end of town. At one point last year it was the world's biggest listed law firm, a $2.7 billion multinational behemoth, a brand recognised by three out of four Australians. But that was before things went horribly wrong - before, as The Australian Financial Review described it, "one of the biggest falls from grace in Australian business history". In March last year, Grech made his most ambitious move yet. He wanted to buy a British legal business called Quindell for $1.3 billion, using mostly borrowed money. This seemed manageable and, after announcing the plan on March 30, things appeared to be proceeding well. On April 7, Slater & Gordon's shares peaked at $8.07, up from $1 when it became the world's first legal practice to float in 2007. Inside Slater & Gordon, many staff found themselves sitting on salary and share packages worth a small fortune. Even the administrative staff saw the value of their shares balloon to $100,000. At the other end of the scale, Slater & Gordon's key "gang of four" executives - Cath Evans, Ken Fowlie, Hayden Stephens and Grech - watched their personal wealth tip over $30 million each, on paper at least. Many staff listened to Grech's pitch and invested in the Quindell capital raising. Some even mortgaged their houses. Andrew Grech was safe. "It was like, 'Okay, you've done us good so far,' " one Slater & Gordon lawyer says. " 'We trust you.' " "It doesn't particularly give me any joy to see Slater & Gordon in strife," says Andrew Watson, head of class actions at Maurice Blackburn lawyers. I'm sitting in the firm's Lonsdale Street offices in Melbourne wondering if this statement is really true. This is, after all, an incredible opportunity for Maurice Blackburn: its long-despised rival, Slater & Gordon, is on its knees.

"Various analysts bought the Slater and Gordon story, and I believed the back-room operations were fairly robust. For goodness sake, they were lawyers." - Max Lipski. Credit:Edwina Pickles For decades, the two have duelled as Australia's key progressive, Labor-aligned, union-representing law firms. They've hated each other like the Capulets and Montagues - partly due to some big personality fallouts in the 1990s, partly for reasons no one remembers any more - and have competed fiercely over class actions and union work. In the beginning, though, it was different. In the early 1900s, Maurice Blackburn and Bill Slater met in the Prahran Free Library, where Slater was educating himself in law after being caught swimming nude in the Yarra (he told police his mother could not afford to buy swimwear). John Moll received a bill from Slater and Gordon for $26,496 for a largely unsuccessful superannuation claim. He took his case to the Victorian Supreme Court's Costs Court. Credit:Damien Pleming They were, briefly, partners in Blackburn & Slater before the railways union offered Slater all its work and he branched out on his own in 1923. The two friends went on to become firm socialists, temperance advocates and politicians.

In 2007, the partners of Maurice Blackburn were watching closely - and probably with some envy - when Slater & Gordon made world history by listing on the sharemarket, a move made possible by a change to Australian law. (Only a handful of law firms followed Slaters, and only a few have survived.) "It seems they have been routinely blindsided by events that arguably they ought not to have been blindsided by." - Andrew Watson, Maurice Blackburn lawyers. The float was controversial, inside the firm and out. The seven most senior partners, led by Andrew Grech, and including Peter Gordon (the mercurial lawyer and custodian of the firm's working-class values, who is unrelated to founder Hugh Gordon), became multimillionaires overnight, leaving other partners feeling shut out. "It was a confronting situation to be told, 'I am worth this many shares and you are worth this many,' " one senior lawyer told Good Weekend. Outside the firm, there was much hand-wringing in the legal community about a lawyer's hierarchy of duties, which are firstly to the court and secondly to the client. Where would the shareholder fit in this brave new world of law? Maurice Blackburn eventually decided not to follow Slater & Gordon by floating. "We are quite happy with that decision," Watson tells me, allowing himself a modest smile. And why wouldn't he be? His company now has the opportunity to sue its arch-nemesis, to turn the great plaintiff law firm Slater & Gordon into the defendant. "If he [Grech] was wearing snakeskin cowboy boots and driving a Ferrari, people might not have got caught out so badly." - Ben McGarry, hedge fund manager.

Watson, who has clear, tanned skin and white wispy hair, is methodically pulling together a class action on behalf of 3000 Slater & Gordon shareholders. He believes it will reap at least $100 million - right up there with the biggest shareholder-rights cases his firm has run. The case, yet to be filed, will allege that Slater & Gordon failed to fully disclose its true position to the market. "It seems they have been routinely blind-sided by events that arguably they ought not to have been blindsided by," says Watson, in his understated, lawyerly way. Sydney outfit ACA Lawyers is also running a class action, but it's apparent that is not the class action Slater & Gordon is worried about. "I can tell you what happened. One word. Hubris." - Steven Lewis, ex-Slater & Gordon. "If Maurice Blackburn issue proceedings," one close observer tells me, "it is going to be Armageddon.” In the middle of investigating what went wrong with Slater & Gordon, I was chatting to a contact, a high-up sort of fellow in Melbourne's legal community, about the Victorian chief justice's recent ban on wigs in the Victorian Supreme Court. He then asked me what I was working on. "Ah," he said. "They bought that business in the UK which was a basket case, then the British government changed the compensation laws on them and it destroyed the business model. Right?"

Illustration: Igor Morski / The Illustration Room This is certainly the narrative most casual sharemarket observers would recognise: that Slater & Gordon fell because of a singular blunder, Andrew Grech's determination to buy one company. And that is what most people inside Slater & Gordon would also believe. But what is not widely known is that Slater & Gordon was in trouble long before it considered buying Quindell, a strange collection of loosely related insurance, legal and technology businesses that had become one of Britain's largest consumer law firms, dealing in accident and worker compensation claims. Ben McGarry, portfolio manager at hedge fund Totus Capital, recalls someone aptly describing the situation as a "skyscraper of cards", with the Quindell house of cards teetering atop the Slater & Gordon house of cards. In other words, despite the sharemarket hype and rising share price, something was seriously shaky at Slater & Gordon. The first problem was its appetite. Slater & Gordon had, Pac-Man-like, eaten every small law firm in its path in Australia and the UK - Trilby Misso, Keddies, Clark Toop & Taylor, Schultz Toomey O'Brien, Nowicki Carbone, Russell Jones & Walker ... Since 2007, Slater & Gordon had spent half a billion dollars on 40 firms and had become known as a "roll-up" - a company that grows by eating other companies. Business history is littered with the corpses of bloated roll-ups, because in order to grow, they have to keep munching away, making bigger and bigger deals, which almost always proves unsustainable. In Australia, market-watchers had seen this before. The Ferrari-driving Eddy Groves, who ran around in his cowboy boots buying childcare centres for his company ABC Learning, engaged in classic roll-up behaviour before he went broke. Several analysts Good Weekend spoke to drew comparisons between Slater & Gordon and ABC Learning. Crikey has described the similarities between the two as "extraordinary".

The second problem went to the heart of Slater & Gordon's profitability. Perhaps more accurately, to how much the market believed Slater & Gordon was profitable. Investors are looking for a company's "growth narrative" - they want the key figures, the headline numbers, to be as big as possible and on an upward trajectory. Year after year, in his reassuring corporate-speak, Andrew Grech presented to the market lovely fat figures for net profit after tax, earnings per share, and price-to-earnings ratios (the higher these were, the more law firms you could buy). But underpinning these figures was a concept called Work in Progress. Slater & Gordon specialises in "no win, no fee" personal injury cases. This means it does not get paid until a case closes, something that typically takes 18 months to two years. If you sell cakes, you report your revenue when you sell a cake. But how does a law firm report revenue? Slater & Gordon decided to record revenue as cases progressed (Work in Progress), estimating the likelihood of success and how much work had been done. It recorded this as revenue, even though it was yet to get any - and, in some cases, would never get paid. In 2014, Slater & Gordon - which says it explained its methods to investors - declared $467 million of Work in Progress and, in 2015, $826 million. In April 2014, nine months before Slater & Gordon went into negotiations to buy Quindell, a forensic-minded man called Douglas Tynan turned his numbers-loving brain to Slater & Gordon. Tynan, who declined to speak to Good Weekend, works in the Sydney office of an often secretive hedge fund called VGI Partners, which manages $600 million for billionaires and other outrageously wealthy types. A former auditor at the international accounting firm BDO, Tynan had once worked on the books of the law firm Trilby Misso. This meant he understood Work in Progress. Work in Progress is an accounting recipe used by many professional services firms - including the big accountancy companies - largely without incident. But as VGI's research pointed out, it is "trust me" accounting, and gives management huge discretion over the profit they record. VGI's research into Slater & Gordon threw up 10 red flags, including its Work in Progress accounting and its aggressive appetite for smaller law firms. VGI believed Slater & Gordon was buying the undervalued Work in Progress in these firms and pumping up its value on its own books, inflating revenue and profits. Each year, VGI concluded, Slater & Gordon needed to buy larger firms to meet the sharemarket's appetite for growth. The VGI research suggested something even more troubling. Eighteen months to two years after the Work in Progress was declared, the matching cash was not coming through the door. Tynan and his eight-person research team did a run-of-the-mill check, pulling the balance sheets apart and trying to put them back together. But their analysis found black holes in Slater & Gordon's accounts: about $80 million in 2013 and $90 million in 2014. In November 2014, two months before it became known that Slater & Gordon was interested in Quindell, VGI took a multimillion-dollar "short" position in the market, a punt on Slater & Gordon's share price falling. VGI was predicting the Australian firm's romance with the sharemarket was about to end.

A year later, in late November 2015, Slater & Gordon held its annual general meeting in the fourth-floor conference room at the Hilton amid a Sydney heatwave. It had been a tough year for the firm. In late June, the corporate watchdog, the Australian Securities and Investments Commission (ASIC), started investigating Slater & Gordon and its auditors over the 2014 financial accounts and, later, its 2015 accounts. Meanwhile, Britain's Serious Fraud Office had launched an investigation into Quindell. In July, Fidelity, one of the large institutional holders of Slaters stock, commissioned forensic accountant CFRA to look at the firm's books. It found the same concerns as VGI Partners: elevated Work in Progress and "accelerated acquisitions". And in October, Slater & Gordon's chief financial officer, Wayne Brown, resigned. Grech had a lot to explain to his audience, but he began by reflecting on how far his group of Melbourne lawyers had come. "It was hard to imagine," he said in his measured, always-steady voice, "that we would have the opportunity to stand before you today and confirm that this financial year we expect group revenue to exceed $1 billion.” Slater & Gordon's expansion was indeed remarkable, but it had come at a cost. The culture of the old Slater & Gordon - challenging the law and running risky cases - had gone. Lawyers were no longer referred to internally as lawyers. They had become "fee earners". Steven Lewis, who now works at ACA Lawyers after leaving Slater & Gordon in early 2014, says management "ruled by spreadsheet" and the human resources department generated an "absurd" amount of work for itself, at one point producing a laminated document about the safety aspects of ping pong when the Sydney office acquired a playing table. It didn't stop there: there was an unrelenting focus on "file velocity" (resolving cases faster), say several former Slater & Gordon lawyers who have now left the firm. And one senior personal injuries lawyer who spoke to Good Weekend says many of the charges the firm expected lawyers to bill clients were unjustified. In fact, some cases of Slater & Gordon overcharging have begun to pop up in the Costs Court of the Victorian Supreme Court, including the case of supermarket shelf stacker John Moll, who was sent a $26,496 bill for a largely unsuccessful superannuation claim. Moll was also sent a bill for $23,916 for a workers' compensation case that had been put on hold, including $4003 for the firms contact with him via phone, letter and email over 34 months. (Slater & Gordon, when challenged, reduced both bills. Moll paid for his workers' compensation case but still considers his new superannuation claim bill of $13,250 too high.)

It's hard to imagine, Grech said to the shareholders, how far Slater & Gordon had come. He could have added how far he'd come, transforming himself from solicitor to corporate high-flyer. Airport lounges were like a second home. He'd come a long way from northern Melbourne's Broadmeadows, recently selling his imposing white mansion in upmarket Kew, with its designer-landscaped hedges, for more than $10 million. He'd taken a hit as Slater & Gordon's share price fell, but he was still wealthy, and, by extension, so was his family. "Andrew is from a working-class ethnic background, he's that second-generation Australian whose parents worked very hard in Melbourne's northern suburbs to give him an opportunity," says a Slater & Gordon lawyer who has worked closely with Grech. "He has a desire to prove that he is doing something worthwhile, and take his close and extended family with him.” Things could have been better at that November meeting, for sure. But Grech was still proving the doubters wrong. "The legal industry is a very bitchy industry, there are a lot of doubters," says the Slater & Gordon lawyer. "A lot of people regard Slaters as some sort of evil company and there are competitors who chip away at our market. The legal industry viewed him as being out on his own with this law firm that was the first in the world to list. It was his vision for a global law firm, and he was determined to pursue it.” In the shareholder audience that day was a man called Max Lipski. A chatty retired businessman from Sydney's north shore, Lipski, 62, had taken the train on that unseasonably warm spring day and was now sat in the third row of seats. He wanted to get up close to Andrew Grech. "There was a bit of silly buggers going on, if I could use that expression," Lipski tells me. "I wanted to hear it from the horse's mouth. I wanted to look someone in the eye.” Lipski's Slater & Gordon shares had lost tens of thousands of dollars in value. He'd bought shares in April 2015 at $6.95; now, they were $3. "I originally bought shares because various analysts had bought the Slater & Gordon story, and I believed the back-room operations were fairly robust. For goodness sake, they were lawyers. They are the ones who go after other firms in class actions." After moving in with his partner and selling his house, Lipski had invested some of his money in Slater & Gordon. He was hoping this investment, and others, would help provide financial security for his son Ben, who had become a quadriplegic in 2013 after a bicycle accident in a local park.

"He was very confident," Lipski remembers of Grech that day. "He's not a guy easily rattled - but then again, he's a lawyer. I mean, do you know any rattled lawyers? He gave us reassurance, things will be fine." On the back of Grech's "air of confidence", Lipski bought 7000 more shares three days later. In one sense, it's easy to understand why Slater & Gordon bought Quindell. It had a good system of dealing with people's insurance claims in which it up-sold them a mechanic, a doctor, a physiotherapist. But the true mystery is why Slater & Gordon paid $1.3 billion. Most London analysts expected Quindell to go into bankruptcy. "When I first heard Slater & Gordon was interested in buying Quindell, I didn't believe it," Dan McCrum, a London-based business reporter and former Citigroup analyst, tells me. "It seemed crazy to me that anyone would come along and buy this company outside of bankruptcy.” It was no secret that Quindell was on the skids. On April 22, 2014, a brilliant young financial markets professional called Daniel Yu published a report - a demolition, really - of the Quindell business, saying up to 80 per cent of its profits were suspect. Yu's report pricked the interest of McCrum, who wrote for the Financial Times' Alphaville blog. Between April and December of 2014, McCrum wrote 27 blog entries trying to throw some light on the dark corners of Quindell. It was an impressive body of work which was available on the internet to anyone thinking of buying Quindell. Quindell had two problems, says McCrum. The first was that it was paying insurers too much for claims. The second was that in 2013, when it arrived on the scene in full force, the claims business was already in decline. The previous year, David Cameron's Conservative government had announced a crackdown on the UK's "damaging compensation culture," particularly around whiplash claims, the highest in Europe. "Their series of reforms had fundamentally changed the nature of that business and made it less profitable," says McCrum. Quindell had predicted the reforms would curb some of its profits in road accidents, says McCrum, so it aggressively turned to a new and promising source of revenue: 54,000 claims for hearing loss. Quindell was bullish on these rather suspect claims, expecting a 70 per cent success rate when the industry average was 40 per cent.

In 2014's final hours, Andrew Grech negotiated an exclusive window to assess and possibly buy Quindell's professional services division: the insurance claims and legal part of the company (this was the major part of Quindell; the other, smaller, part was called Digital Solutions). In the early weeks of 2015, Grech's counsel of suits joined him in London: banking advisers, outside legal firms, auditors. He gathered 70 Slater & Gordon lawyers to undertake a "bottom-up fundamental assessment" of 8000 files. A senior Slater & Gordon lawyer told Good Weekend they thought Grech was excited by the idea of leaving behind the grind of buying up small UK outfits and converting them to the firm's processes. This deal would be, Grech repeatedly said, "transformative", and would make the firm a big player in the UK overnight. The Slater & Gordon Pac-Man, at least in Britain, could finally rest. Grech later said he was aware of Quindell's problems. He had read Daniel Yu's report, he told The Australian late in 2015. But Slater & Gordon was only interested in the professional and legal services part, he said, not buying the actual listed entity "pregnant with those accounting problems". (Grech actually bought most of Quindell, and it was the legal services division that was pregnant, and gave birth to, many problem children, such as the deafness claims.) He told the UK's Financial Times in April 2015 that he had considered waiting to carve off Quindell's good bits - the straight legal parts - but then the value of its motor services and health care became clear. (In an email in April, Grech said it would not be "appropriate at present" to speak to Good Weekend; a later email went unanswered.) "Maybe it sounds like hubris," he told investors in June, "but those that know us well, know us not to be arrogant but to take a detailed, studied view.” Six days after Grech told Slater & Gordon's November 2015 annual general meeting that he saw no damaging legislative reform on the horizon, further reforms were announced. The UK government, as part of its ongoing crackdown on compensation culture, signalled changes designed to reduce whiplash fraud and deal lawyers out of small claims. Shares fell by 50 per cent. On December 17, Slater & Gordon dumped its profit predictions, citing poor trading results. But no one expected the scale of the announcement which came on February 29 this year, with the firm declaring a $958 million net loss for the six months to December 2015. Its Quindell acquisition had lost $814 million in value. Of this, 73 per cent was because cases, particularly the hearing-loss files, were not being resolved. The rest related to the Cameron government's November reform announcement. Things weren't so good at home either. Slater & Gordon wrote down its Australian businesses by $52 million on lower-than-expected cash flows. Investors wondered if the company would survive, and whether the banks would take it over. "Clearly today's results are very disappointing," Grech said in a statement to the Australian stock exchange.

Market watchers were so gobsmacked by Slater & Gordon's Icarus-like fall that they missed something significant in the February announcement. For months, at the insistence of ASIC, Slater & Gordon had been laboriously going through files and recalibrating its Work in Progress figures. This was sold in the statement to the market as simply an early adoption of a new accounting standard and, on the face of it, it was. But the new accounting standard forced Slater & Gordon to record only revenue that it could class as "highly probable", which triggered a huge writedown in previous Work in Progress - from $467 million to $382 million in 2014, and $826 million to $694 million in 2015. The company admitted the new standard led to a discounting of Work in Progress by 15 to 20 per cent. Slater & Gordon had been overstating its Work in Progress, which fed into its key revenue and profit figures, by up to 20 per cent (although a company spokeswoman says the "underlying value" of its services has not changed). With two class actions against Slater & Gordon already announced, ASIC made a carefully worded statement on February 29 saying that it neither "approved or disapproved" of Slater & Gordon's past Work in Progress accounting. (Meanwhile, Good Weekend understands, VGI Partners pocketed $50 million from its "short" market position on Slater & Gordon.) After this announcement, as his Slater & Gordon shares dropped to 32c each, Max Lipski was so fed up with "the spin" that he joined the Maurice Blackburn class action. "There are a lot of questions left to be answered," he says. "Why did the chief financial officer step down? Why did the external auditors sign off on the accounts each year? And the quality of the due diligence in the UK - did they look deeply enough? Clearly not. Someone needs to be held accountable.” I'm taking the swift and shiny lifts up to level 21 of 120 Collins Street, a Melbourne skyscraper full of blue-chip companies. My destination is the office of Peter Gordon. As president of the Western Bulldogs AFL team, Gordon is a high-profile figure in Melbourne, and was Slater & Gordon's public face until he left in 2009. We are joined in the boardroom by Jack Rush, QC, who recently stepped down as a judge of the Victorian Supreme Court. (Rush is an eminent member of the Melbourne bar and a man whose cross-examination skills have been described as second to none.) There's much at stake now for Slater & Gordon. There's the question of its survival, which is by no means assured. And then there's the legal legacy of a firm much loved in Melbourne. "The history of Slater & Gordon has not been matched by any other firm," says Rush, who has worked on many of Gordon's cases. "The nature, the tradition, the way in which the firm thinks, is different."

We talk about the great cases the firm fought. Of how it risked everything, was on the brink of going broke, in its defence of the underdog. There are several theories about why Slater & Gordon ended up where it is today, with shareholders wiped out, the banks at Grech's heels, and the staff, many of them in financial distress, furious. One is that the firm, as it grew to be one of Australia's top 100 companies, should have upgraded its auditors and senior finance people. Another theory is that Slater & Gordon was in trouble converting its Work in Progress and needed a big acquisition - Quindell - to satisfy the market's relentless desire for a "growth narrative". Another is that the "gang of four" Slaters managers - who had been there most of their working lives, Grech since 1994 - were reinforcing each other's views and started to believe they could do no wrong. And then there's the sense that there wasn't anyone, in the end, who could stand up to Grech. "It was hard to say no to Andrew at that point in time," one insider told me. "The person who historically said no to Andrew was Peter [Gordon]. When Peter left, who was there to say no?" And the last theory, of course, is that the cause is one of the oldest authors of failure, a flaw both ancient and common, one that manifests sometimes in snakeskin cowboy boots and sometimes in a suit. "I can tell you what happened," says former Slater & Gordon lawyer Steven Lewis. "One word. Hubris."









