The impending legal action against a number of former executives of Claims Direct is to be dramatically widened to include all seven of its directors at flotation and the professional advisers who guided the company when it went public last year.
The case, which will be brought by shareholders and former franchisees, is likely to seek damages of up to £200m from Claims Direct's financial advisers, Investec Henderson Crosthwaite, and its auditors, PricewaterhouseCoopers, as well as from certain senior executives, including the company's founders Tony Sullman and Colin Poole.
The central allegation is that the Claims Direct prospectus did not contain information which showed that there were potentially serious flaws in the company's business model.
Class Law is the law firm which is co-ordinating the action. Wynne Edwards, a Class Law solicitor, said: "We took counsel's advice this afternoon and we intend to institute an action against the former directors and the professional advisers of Claims Direct, relating to liabilities under section 150 of the Financial Services Act."
Claims Direct is alleged to have violated section 150 by not including a warning in its prospectus that its directors knew, or should have been aware, that there was a serious risk that insurance claims used to cover the costs of personal injury cases would not be recoverable from defendants in many cases.
It was the emergence of this problem late last year which caused its share price to implode to a low of 7p and its levels of new business to dry up.
The proceedings, which will be brought within the next couple of weeks, will also allege that negative information relating to Mr Poole's professional history should have been included in the prospectus.
Class Law is still calculating the sum of damages it will seek from the various parties. Many franchisees have been financially crippled after their involvement with Claims Direct because they had to hand over up to £30,000 for a franchise to manage personal accident claims in a certain area of the country.
Yet, after it emerged that many successful clients would have to pay insurance premiums of more than £1,000 out of their compensation, the level of new business declined dramatically and franchisees were not processing enough business to break even after the initial £30,000 payment.
A large proportion of Claims Direct's 2,500 shareholders, which include some major institutions, have also lost substantial sums of money, with many paying more than 300p for Claims Direct's shares before they slumped. It is possible that shareholders who support the action will seek compensation for the sum which is the difference between the price they paid for their shares and the level that they sold at.
Other directors Class Law intends to include in its case include Paul Doona, who led the company after Mr Sullman and Mr Poole were ousted in April, and the company's two independent directors, David Hankinson and David Hickey.
All three condemned as "opportunistic" a move this summer by Mr Sullman and Mr Poole to take the company private again at a 95 per cent discount to the flotation price.
Mr Sullman and Mr Poole in the end agreed to sell control of the business on to a private investor, Simon Ware-Lane, who wants to merge it with another private injury firm, Claimline.Reuse content