A lawyer’s first duty is to the Court, the second duty to the client. Shine Justice, or Shine Lawyers as they trade, has failed both, and now, with their auditors PwC, have failed ASX investors too. It’s time for an inquiry into “no win, no fee” law firms exploiting the legal system for a buck. Callum Foote and Michael West report.
Earlier this month, Justice Michael Lee of the Federal Court found Shine Justice had preferred its own financial interests over the interests of its clients; the more than 11,000 women victims of Johnson & Johnson pelvic mesh implants.
Shine had tried, without proper disclosure to its clients, to stick their victims’ settlement fund with $30m plus in interest costs on ‘disbursement loans’ to fund the class action. At $300m, the action was the biggest win in Australian legal history, from which Shine was planning to extract $100m in fees.
While Shine had allowed the costs on its mesh loans to run up at interest rates even higher than 30%, compounding monthly, Shine Justice, the ASX entity, was paying dividends to its shareholders, the biggest two being the founders of the firm.
Now the firm is in a battle to survive. Star rainmaker, class action lawyer Jan Saddler, who steered the pelvic mesh victims to a record $300m settlement against the giant of Big Pharma, left the firm in earlier this year, according to sources, in despair at the treatment of the clients.
Shareholders have deserted the stock, driving the price down from $1 when we exposed the firm’s questionable business model in January, to 60c today. And they are running low on cash while they and their auditors PwC play a game of Accounting Standards Twister.
Shine Justice to offload heavy finance costs onto pelvic mesh victims?
But it’s not just exploitation of the law, which is the problem with Shine, it’s the financial shenanigans.
They have addressed some of the concerns raised by reporter Callum Foote in his investigation in June but appear to be fudging their revenue recognition by booking disbursement costs as assets. More on that soon.
The guts of this result today – and bear in mind they delayed their profit announcement for undisclosed reasons, presumably to sort their accounting issues with auditor PwC – is that Shine is running short on cash.
They did get $16m in the door yesterday thanks to a costs order in the firefighting foam (PFAS) class action but have been burning cash at the rate of $16m a month (gross not net which is $2.5m a month) and recorded cash reserves of just $21m, down from $52m at June 30 balance date.
The essential problem with their accounting treatments is that they book un-billed Work in Progress (WIP) as revenue – that’s recognising as revenue earnings from lawsuits which yet to either settle or reach judgement. While they embrace these estimates as revenue and have delivered smooth earnings increases for years, this has not been matched by their actual cash receipts.
Red flags abound for Shine Justice but “no win no fee” law firm no respond, nor PwC
The more fundamental issue is with the law itself.
The first duty of a lawyer is to the court, the second duty – something a lawyer adheres to when they take the oath – is to the client. They appear to be exploiting the Court for commercial reasons while, as Justice Lee framed it, favouring their owns interest over the interests of their clients.
Alas, there is no regulator of substance in the legal fraternity to hold Shine to account. Should law firms be listed? There is a conflict of interest: who do they serve, their clients, the court, or their shareholders?
Shine reclassifies cash outflows as cash outflows, not inflows
Shine has conceded it was in ‘technical’ breach of its loan covenants and, with PwC, has fudged its accounting treatments. Still, AASB 101 says, “An entity shall not offset income and expenses unless required or permitted by an Australian Accounting Standard”. We await clarity on this and other points. Shine mesh clients await clarity on how much compensation they will receive from the class action, and shareholders await clarity on how Shine will fund its operation going forward.
Shine Justice in a dark place as shares tumble on pelvic mesh judgement
Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.
Callum Foote was a reporter for Michael West Media for four years.