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Will Quindell PLC Legal Claim Be The First Of Many?

Soon after insurer Quindell (LSE: QPP) revealed the true state of its accounts for the past few years, including the restatement of 2013’s original after-tax profit of £83m as a loss of £68m, the question of possible legal action by damaged parties was raised — and the launching of an investigation by the Serious Fraud Office added impetus. Were shareholders illegally misled and did they suffer material harm as a result? If so, the damages could be serious.

This week it seems the first of such claims has been kicked off, after Quindell informed us that it has received a “Notice of Intended Claim” from a law firm that apparently intends to commence an action on behalf of a group of claimants under the Financial Services and Markets Act 2000.

The first £18m?

The law firm in question, Your Legal Friend, estimates the value of any such claim as up to £9m before costs, and has also indicated that it has been approached by a second group. The firm has not yet been retained for the second claim, but it’s estimated at a similar value.

In themselves, should claims totalling £18m prove successful, and even after any costs are added on, it would still be a sum that could be comfortably covered by the £535m that Quindell has in cash after selling most of its business to Slater & Gordon for £673m. But as Quindell itself admits, “there can be no guarantee that other claims will not be made“.

In fact, I’d expect just about every investor who trusted ex-chairman Rob Terry and invested in Quindell before the share price collapsed (and before Terry sold his shares while publicly claiming he was buying), to be watching this very carefully, with the phone number of Your Legal Friend already on speed-dial and their thumb hovering over the button.

What about the cash?

In the meantime, the latest action raises yet another big question about Quindell’s stated intention to return at least £500m to shareholders. Such a payment would need the approval of the courts, and Quindell (along with some of its more vocal supporters) seems to have assumed that’s merely a formality.

Quindell itself has said that the latest news does not “adversely impact [its] previously announced intentions regarding a capital return“. But a lack of impact to Quindell’s intentions is not worth the hot air it was spoken with. What counts is whether any legal claims will impact its ability to carry out those intentions — and the courts will surely take that into account.

I reckon that shareholders banking on getting their money need to do some serious thinking. Quindell shares are currently valued at 97.25p. In my view, loss-making subsidiaries Himex and Ingenie are worth less than zero, with the rest of the rump Quindell accounting for very little value if anything.

Not with a bargepole

To my mind, that cash pile is the only thing of value that Quindell has, and if that starts being eroded by legal claims, well… there would surely only be one outcome.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.