The fact that Claims Direct – the once all-conquering ambulance chaser – appears to have been in the business world's equivalent of accident and emergency ever since the receivers were called in a couple of months ago, has not kept the notorious claims company out of the headlines. If it's not news of impecunious former clients trying to sue, then it's the investors and franchisees wanting their money back – as it was this month when a new legal broadside was launched.
US lawyer Richard Fields is co-ordinating the Claims Direct Action Group and says that many shareholders and franchisees made substantial investments based on information “that may have been false, misleading and inaccurate”. Two days after The Lawyer visited Fields last week the number of potential claimants has leapt from 843 to more than a thousand. Not bad considering the action has only been up and running for little more than a fortnight. “We reckon that the total losses of the investors are somewhere near £200m,” Fields predicts. “This is not an insignificant damages claim.”
'Where there's blame, there's a claim' was the message of Claims Direct's saturation TV advertising, and it seems to be getting through to those unwittingly drawn into the debacle. Fields is heading the action through his new consultancy company Judica, alongside Manchester firm Betesh Fox. Meanwhile, Class Law has been pursuing an investor/franchisee action for more than a year and now has “quite a few hundred” potential claimants on its books, with new clients coming in everyday. On a different tack, legal actions on behalf of aggrieved accident victims are building up and, so far, Manchester firm Tranters has 150 clients signed up.
The legal profession – practitioners, academics and judiciary – will continue to debate the rights and wrongs of Claims Direct, and where it leaves other claims management companies, for some time. But how did the claims management giant fall so dramatically from grace and how did the City become so enamoured of its business model in the first place?
Two years ago Claims Direct was a classic rags to riches success story. Its co-founders – the poker-loving former cabbie Tony Sullman and his solicitor sidekick Colin Poole – floated the company in July 2000 and its shares leapt from 180p to 353p in the first two months. The flotation was reported to have netted Sullman and Poole £50m and £10m respectively. The firm's market cap peaked at £685m in September 2000 – an impressive start for a company set up only five years before by a man whose main business was running cabs around Reading and Northampton.
But amid this love-in between the pioneering claims company and the investment community, there were sceptics who saw a huge hole in its business model.
“I believe that the Claims Direct model was always flawed because it was too complex and was hard to fathom how the network of relationships worked,” comments Michael Napier, the then president of the Law Society and former president of the Association of Personal Injury Lawyers. “If, as it appeared, it was based upon recoverability in an over-optimistic way, then that was an unwise business risk by the people who took that entrepreneurial route.”
It was the Access to Justice Act 1999 that created the post-legal aid world of litigation funding and allowed the recovery of a reasonable insurance premium. Kerry Underwood, senior partner at St Albans firm Underwoods and no fan of Claims Direct, recalls at that time that after the event (ATE) insurance premiums were anywhere between £85 and £170, compared with Claims Direct's £1,250. In his view the product was “purely taking advantage of recoverability. It was just never going to be the case that it was recoverable – never,” Underwood claims. “This isn't being wise after the event. I said it at the time and others said it too.”
Nor were the sceptics limited to personal injury (PI) lawyers, who clearly had something to lose by the domineering presence of Claims Direct. In fact, there were critical voices in the City from the off. Eamonn Flanagan is an insurance analyst at Charterhouse Securities who was instructed to take a look at the claims company on behalf of its investor clients soon after it floated. A couple of weeks before the value of Claims Direct hit its peak he signed off his report with the following blunt recommendation: 'SELL'. “We believe Claims Direct's earning potential is heavily dependent upon a currently evolving legislative process that can only be described as in a state of flux,” the report argued.
Flanagan visited Claims Direct's headquarters at Telford and met up with Sullman, Poole and their finance director Paul Doona. First impressions were good and Flanagan was impressed with the “state-of the-art-offices”, the “wonderful people” working there and the “seductive story” of its bosses.
But he recalls: “The first thing that struck us was that there was a naivety about them. There was something about these guys – they seemed to think they could stir up the pot and charge a flat fee for every claim they were going to examine.”
He continues: “The naivety was that the insurance industry wasn't going to bat an eyelid. In fact, Mr Sullman seemed to think that the insurance industry would welcome them.”
The Charterhouse report went beyond problems with recoverability and listed seven areas of concern, forewarning, for example, that the Lloyd's insurers could withdraw cover and that the defendant insurance industry could put its foot down and refuse to pay up. The last time Flanagan spoke to the Claims Direct team was via a three-hour telephone conference call explaining why they were urging investors to sell only a few months after going to the market. “It wasn't the easiest conversation I've ever had,” he adds.
The recent ruling by senior costs judge Peter Hurst in the Claims Direct test cases tells an uncensored story of the company's speedy fall from grace. The ruling sought to resolve the impasse between the company and the defendant insurance industry and calculated that £621 of the original £1,250 'premium' could be recovered.
No sooner had the company floated than it was “rocking from one disaster to another” and management was “fire fighting” within weeks, the judge reports. It provides one illuminating insight into the evolution of the business model. Their first model ('the portfolio scheme') ran between 1996 and 1999 and worked on the simple principle that the company would take 30 per cent of any damages recovered and pay for the opponent's costs if the claim were to fail. “There was no element of insurance at this stage. The scheme was very successful,” the judge noted. “By March 1999 Claims Direct was actively considering flotation on the Stock Market. It was, however, advised by its accountants that flotation would be handicapped by the existence of the contingent liability of an uncertain size relating to the costs indemnity which it provided under the Portfolio Scheme,” he continued.
And so Claims Direct number two was built to float, but apparently not to last. The central thrust of the Betesh Fox and Class Law actions is that shareholders and franchisees (many of whom have now settled) were misled by the prospectus prior to the flotation. “It ought to have had evidence which would have made a material difference that was not published. At the end of the day it did make a material difference – namely that the company flopped. Had shareholders been told this they would not have invested so,” explains Class Law's Wynne Edwards.
Poole robustly denies the substance of such allegations. Indeed, he points out that the company went through three sets of due diligence – on its private placement, an abortive AIM float and then the full stock market listing. Professional advisers had gone over “every dot and comma of the report” and it was not a question of “a couple of hicks from out in the country” duping them. He also points to the Department of Trade and Industry inquiry that does not appear to have come up with anything on the company.
“We always knew that this was a company that was going to be under the spotlight – you can't go on television nearly 100 times a day and not be,” Poole continues. “It's very unfortunate what happened to Claims Direct and the people who worked there. The claimants, fortunately, haven't suffered, but people who buy shares know there is a gamble and the prices go up and go down.”
So what are the claims of the shareholders? Judica's Fields says that it is “pretty clear” that Claims Direct knew it was selling ATE insurance prior to the effective date of the Access to Justice Act, and it knew those policies would not be recoverable under the act. There is a well-documented correspondence between Sullman and the Lord Chancellor's Department in July 1999, where Sullman was told that it was “extremely unlikely” that legislation would be backdated to allow the recovery of insurance premiums. Poole counters that it is unfair to take one letter out of context given the volume of correspondence and, he points out, all such records would have been handed over to their professional advisers prior to the flotation and to the DTI in its investigation.
“But this is just the tip of the iceberg I believe,” says Fields. Both Class Law and the Judica/Betesh Fox action are looking at the guarantees between the First National Bank, which provided the funding for loans for the client to pay the premium, and Claims Direct, which (they argue) was not revealed in the prospectus. They are also looking closely at the Hurst judgment, which reveals that the underwriters originally worked on an assumption of a failure rate of between 4 per cent and 6 per cent – Claims Direct had somewhat optimistically pitched it at 3 per cent or less – but according to one witness statement, the rate was in the region of 25 per cent. According to Christine Oxenberg, a partner in Betesh Fox's commercial litigation department: “It appears to us that the company and the insurers were well aware of the problem before the flotation and didn't address it until after wards. So the effect was that the accounts gave a better picture of the company's finances.”
Ever since that September 2000 high, the Claims Direct trajectory was dramatically downhill, pursued tenaciously by the media, including Anne Robinson's Watchdog TV programme and The Sun's memorable 'Shames Direct' campaign. The tabloid told the story of Jason, a bar worker, who was scarred for life after an accident at work involving boiling tea. After a two-year wait he was awarded £1,525, only to receive a cheque for £63. In true Sun style the television celebrity Will Hanrahan, who fronted some of the company's adverts, was on hand to be “outraged”. Sadly, with some 40,000 accident victims left in the lurch, there is no shortage of such tales.
At its height the company's ceaseless TV advertising was attracting 5,000 cases a month, but by March 2001 the company was already in terminal decline and there were only 2,500 new cases a month. The beleaguered company then issued its third profits scare with its shares hitting a low of 7p. Things were only to get worse when Sullman and Poole were given permission to pursue a management buyout, prompting a bitter hostile takeover battle when they offered 10p a share below the prevailing price of 16p.
Simon Ware-Lane, the entrepreneur behind Fitness First gyms and rival PI company Claims Line, tried to pull the company out of its nose-dive last September. But in July this year the company admitted defeat, citing “the total intransigence” of the insurance industry for its demise.
But Poole blames the media witch-hunt for the collapse of the company. “The reason the company got into the situation that it did had nothing to do with recoverability,” he says. “It had to do with a media campaign by the red tops.”
Flanagan believes that there could have been a different end to the story had the company met the insurance industry half way. “Yes, I do think they made genuine mistakes at a number of points as the share prices started to go from top-left to bottom-right,” he says. “But there was more than one point when this company could have been rescued and sorted out.”
|In the spotlight: Colin Poole speaks out|
Last month, Colin Poole, the 37-year-old solicitor who, together with Tony Sullman, founded Claims Direct, opened up to the Shropshire Star and acknowledged a surprising empathy with the country's most famous couple. “I know how Posh and Beckham feel now, with people taking pot-shots at them and the impact it can have on their families,” he told the reporter.
There is a neat irony in that Claims Direct, the company that took the slogan 'no win, no fee' to the masses, is now being pursued by lawyers, on behalf of its investors and franchisees, on conditional fee arrangements (CFAs). The lawyers at both Class Law and Betesh Fox/Judica have drawn up CFAs.