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Hargreaves Lansdown shares and the Neil Woodford saga: here’s what you need to know

In an article last week, I examined the outlook for Hargreaves Lansdown (LSE: HL) shares in the wake of the Neil Woodford scandal.

In it, I said that while I was bullish on the long-term growth story, I was a little concerned about the stock’s near-term prospects. That’s because there was a chance the company could be hit by a regulatory fine for continuing to recommend Woodford’s fund, or by legal action from angry investors that have lost money by investing with Neil Woodford on the back of the group’s recommendation.

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Today, I want to provide an update on the situation as there’s been further developments since my last article on Hargreaves.

Legal action update

After my piece on Hargreaves last week, yesterday I actually received a press release email from law firm Leigh Day – the firm that’s looking into a potential legal claim against the broker. According to the email, the company has already received over 500 enquiries from Woodford investors in relation to a potential claim against Hargreaves Lansdown.

The email goes on to say that the team at Leigh Day believes Hargreaves Lansdown “either knew or should have known that Woodford Funds, in particular, the Woodford Equity Income Fund, were in trouble.” It goes on to say it’s investigating whether Hargreaves “misrepresented the health of the Woodford Equity Income Fund whilst continuing to recommend it.” Leigh Day’s aim is to help those impacted recover their lost investment, plus compensation for the “distress and inconvenience” they’ve suffered.

Bozena Michalowska-Howells, head of the consumer law team at Leigh Day, added: “The more we look at this the stronger our conviction becomes to take this forward. We believe that Hargreaves Lansdown’s continued promotion of Woodford Funds showed a cynical disregard for their customers whose life savings and pensions have been put at risk.”

Reading that press release, the case against Hargreaves appears to be gathering steam. And to make matters worse, another law firm, Slater & Gordon, has also said it’s now investigating claims Hargreaves misled its clients.

Reputational blow

Overall, I see this as bad news for Hargreaves. Of course, at this stage, it’s still too early to determine how legal action (assuming it goes ahead) might impact the broker’s profits. But there are other issues to consider, such as the broker’s reputation. A legal investigation into the company doesn’t good.

All things considered, my view on Hargreaves Lansdown shares is the same as it was last week. In my opinion, the long-term story looks attractive, however, until the Neil Woodford saga blows over, I think there’s risk to the downside, as the stock’s valuation is still quite high (forward P/E ratio of 30). Given the near-term uncertainty, the stock is not a ‘buy’ for me just yet.

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Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.