Axiom Legal Financing Fund sacks Tangerine Investment Management amidst fraud allegations

The directors of Cayman based Axiom Legal Financing Fund, the embattled fund at the centre of a storm of serious fraud allegations, are reported to have sacked the current investment managers, Tangerine Investment Management.

Last month all redemptions in the fund were suspended following a flood of redemption requests in the wake of allegations made by OffshoreAlert about Tangerine’s boss, Tim Schools, and management of the fund.   The seriousness of the allegations made by OffshoreAlert has escalated over the past couple of months, and now includes claims that the fund appears to be a Ponzi scheme and that investors have been defrauded. 

Mr Schools, Tangerine and the Fund have all strenuously denied any wrongdoing, and Mr Schools has indicated that he will be taking defamation proceedings against OffshoreAlert.  Despite this, Mr Schools stepped down as head of Tangerine following publication of the allegations.  He is separately under investigation by the Solicitors Regulation Authority in England in relation to alleged misconduct at ATM Solicitors, an English solicitors firm he sold last year.  His case has been referred to the Solicitors Disciplinary Tribunal, where it will be heard in due course. The allegations are as yet unproven and again Mr Schools strongly denies any wrongdoing.

KPMG Cayman was appointed by Axiom to carry out an independent review of operations and it was said that Tangerine was “actively cooperating with that review”.  The output of that review was expected by today at the latest, but whilst it is understood that the directors have seen a draft of the report, the final version will be delayed as KPMG have now been asked to provide interim advisory services in the light of Tangerine’s removal and need to focus on this as their priority.  KPMG’s role will be to preserve the fund’s assets, to interact with a panel of law firms to determine their short-term funding requirements for the progression of cases and to gather proposals for the ongoing management of the fund.  The delay of the publication of the report will doubtless be a disappointment to the many investors in the £100 million fund, who are desperate to know whether there investment is safe and whether there is any truth in the allegations.

In a letter dated 14 November, the directors said that an Extraordinary General Meeting will be held in December at which the directors, will present proposals regarding the continued management of the fund.

There is no explanation in the letter as to why Tangerine’s appointment has been terminated.  It is therefore not clear whether the action is because KPMG have found prima facie evidence of wrongdoing, or simply that the step was necessary to restore credibility in the fund’s management in light of the allegations.

Tim Schools to sue OffshoreAlert for defamation re Axiom Legal Financing Fund Claims

According to OffshoreAlert's own website, Tim Schools is to issue legal proceedings against them for defamation in connection with the claims made recently that the Axiom Legal Financing Fund is a Ponzi scheme and that its investors are victims of fraud.  

OffshoreAlert has raised a number of red flags regarding the fund over recent months, but in the last week their publications have included increasingly serious allegations.

Those connected with ALFF have strenuously denied any wrong-doing, and have appointed KPMG to investigate the allegations made.  In view of the ramping up of rhetoric on both sides, the investors in the fund will be anxiously awaiting publication of the report, which is expected by the end of the month.  There is clearly a great deal at stake.

LDC to take a minority stake in Keoghs following ABS licence

Back in September I reported that defendant insurance law firm Keoghs was expected to take external investment from private equity house LDC (part of the Lloyds Banking Group) once it had received its alternative business structure (ABS) licence.  This is now about to come to pass, with the SRA having approved the conversion to an ABS and Keoghs having agreed to sell a 22.5% stake in the business to LDC.  

It is interesting that LDC will take only a minority stake in the business – traditionally PE houses have preferred to take a majority position in target businesses, to ensure a greater degree of control. Perhaps this is the reason why Keoghs switched horses from Bowmark to LDC relatively late in the process?

Keoghs is a defendant insurance claims specialist with 1,000 employees across offices in Bolton and Coventry. Established in 1968, the firm represents insurers and councils and reported fee income of £55m in 2011.  It plans to use the investment funds to invest in technology and potentially acquire some complementary businesses.

Axiom Legal Financing Fund facing serious allegations

The Axiom Legal Financing Fund is rapidly becoming engulfed in a storm of controversy.

The Cayman Islands fund  was established to provide finance to a select panel of UK regulated law firms, to enable them to conduct "no win, no fee" litigation cases. As the legal actions were all to be backed by insurance policies, the fund was offering what appeared to be an attractive, low risk, uncorrelated investment opportunity.  And by all accounts there were plenty of investors happy to put their money in to the venture - it is understood that  well over £100 million has been invested in the 3 years that the Fund has been up and running.
However OffshoreAlert has been raising red flags about the probity of the Axiom fund since August, initially because of its links to Tim Schools, an English solicitor who is being investigated by the Solicitors Regulation Authority for alleged misconduct at ATM Solicitors, an English law firm which he sold last year. The allegations made against Mr Schools, which he strenuously denies, include failing to maintain proper books and records, acting recklessly and without integrity.  As there has not yet been a final hearing into Mr Schools conduct by the SRA, it is not known at this stage whether there is any substance to the complaints, but it was enough for a red flag to be raised and for OffshoreAlert to take a closer look at the dealings of the Axiom fund and its Cayman Islands based investment manager, Tangerine Investment Management.  

Mr Schools was a director of Tangerine until his resignation last week in light of the escalating allegations by OffshoreAlert.  

The claims being made by OffshoreAlert against the Fund became more serious when they alleged that all of the loans which have been made have gone to firms which are affiliated to Mr Schools (some of which are heavily indebted) and that the insurance company backing the loans is an unregulated firm currently fighting a fraud case.

Tangerine has strenuously denied any wrongdoing and has confirmed to investors that it has retained KPMG to provide an outside audit of the legal fund’s assets by the end of the month in light of the press stories.

In the meantime, OffshoreAlert have claimed that the Fund has suspended redemptions and ceased accepting new investments whilst the situation is reviewed, a move which will no doubt leave the existing investors nervously awaiting the outcome of the report.

Law Firms and Private Equity - Uneasy bed-fellows?

Thomson Reuters Sweet & Maxwell has published a survey showing that more than three-quarters of finance directors at leading commercial law firms believe private equity investment is inappropriate.

According to their press release, in a survey of directors at 25 of the top 100 firms, 77% were unhappy with law firms attracting capital through private equity investors. And an even greater number - 88% - felt listing on the stock exchange was inappropriate.

Both options are available to law practices under the terms of the Legal Services Act, but as yet there has only been a limited take up of the opportunities.  Parabis was the first firm to have announced backing from private equity investors, with a £200m from Duke Street and Knights then announced an investment by Hamilton Bradshaw, a fund connected with Dragon’s Den star James Caan. But two deals is hardly a flood. TRSM put this lack of deal flow down to a limited interest being shown by law firms and I am sure that is true to an extent – certainly amongst the larger commercial firms which were included in the survey.  However, it seems the caution works both ways, as I am aware that a number of private equity houses have been approached by law firms seeking investment, but who have ill-thought-out and naive proposals.  All too often, there is a poorly articulated explanation of why investment cash is required, and how it will be used to drive growth in the business, rather than simply enabling a bonanza pay-day for the partners who are holding the equity at the time a deal is struck.  It seems to me that firms sometimes look at the issue through the wrong end of the telescope; they see the opportunity to raise some cash and then work backwards to work out where they could use it, instead of first devising a coherent strategy and then considering whether external cash is needed to achieve it.

There are numerous PE houses which are happy to look at opportunities in the sector, but they are all too well aware of the many complications – such as the need to move from an income stripping remuneration model to one which gives both income and capital in the form of shares and the issue of how to attract and motivate up and coming lawyers.  The model is therefore likely to work best in those firms where the usual partner-to-fee-earner ratios are not applicable, or where technology can make a real impact on productivity and service delivery.  For high end commercial firms where clients want and expect partners to focus on their cases, the PE model is probably not ideal.

It seems though that although the commercial law firms have by and large rejected the private equity model for the time being, they are not completely averse to change, with the poll showing that 20% of the leading firms are considering setting up an ABS.

Direct Line to offer legal services

The Direct Line Group will apply for alternative business structure (ABS) status this year in a bid to “improve efficiencies relating to legal expenses”.

The intention is disclosed in the IPO prospectus produced in preparation for the insurance giant’s forthcoming stock market flotation. 

In a masterpiece of impenetrable management-speak, a spokesperson for Direct Line Group said “In light of possible regulatory changes to remove dysfunctionality from the UK motor insurance market, which we support, we’re looking at a variety of options including legal services to ensure we’re able to sustain our competitiveness and continue to offer customers choice, and great value and service.”  So what does that actually mean?  It seems that Direct Line has earned £110 million in solicitor referral fees over the past three and a half years – a valuable revenue source which will cease once the referral fee ban comes in to force in April 2013 as a consequence of civil justice reforms aimed at reducing fraudulent insurance claims.  Not surprisingly, Direct Line is looking at ways of filling the hole, and it seems that having its own legal capability in house may be the answer.  

Quindell announces its second law firm acquisition

Quindell Portfolio has agreed to acquire high-end consumer claims law firm Pinto Potts for around £14m, subject to SRA and FSA consent.

This represents the second acquisition in the space by Quindell, the first being its acquisition of specialist personal injury practice Silverbeck Rymer earlier this year (a deal which is still awaiting SRA approval).

A consideration of £1.5 million will be paid initially by Quindell, with a further £1.5 million in 12 months time, together with 87.5 million shares in AIM listed Quindell (worth just under £11 million at today’s share price), subject to lock-in provisions. This part cash part share offer is a similar structure to that used in the £19.3 million Silverbeck deal, one of the first instances of a legal practice being acquired by a quoted plc. 

 Pinto Potts has warranted a profit after tax of £2m and operating cash flow of £1.5m for the 12-and-a-half month period ending 31 August 2013.

At the same time, a partnering agreement has also been confirmed which will see Quindell, Pinto Potts and Silverbeck provide a joint-outsourcing offering to the UK insurance claims market, primarily in the areas of personal injury and also other consumer related services including wills, probate, and conveyancing.

Whilst these deals are not huge in financial terms, they are of interest to the wider legal community because, being acquisitions by a listed company, they provide a far greater insight into the financial aspects of the transaction that is normally the case.  In a market where the valuation methodology for law firms is still very immature, these transactions give some interesting benchmark data.