Failure rate that doomed Claims

VITAL facts that would have cast doubt on the business plans of failed personal injury specialist Claims Direct were not disclosed to investors when it was floated in July 2000, Financial Mail has established.

Claims Direct was set up by former taxi firm boss Tony Sullman and solicitor Colin Poole. It took on legal claims on a 'no win, no fee' basis.

Now, a series of test cases have been heard in the High Court involving insurance policies taken out by Claims Direct. The policies were to cover the firm if it took on an individual's grievance, but failed to win compensation. The policy would cover costs of the failed action.

A judgment following the cases shows that far more of the actions were failing than the insurers expected. A £7.2m fund was set up to pay premiums for policies if the cost of those premiums could not be recovered.

When it became clear that Claims Direct was winning fewer cases than it had expected, insurers were able to claw back money from the fund. Underwriters had originally expected that a maximum of 5% of cases would fail, but the rate reached almost 25%.

Claims Direct saidmoney paid to underwriters from the £7.2m fund was to cover future cases. In fact, it was to make up for the high failure rate. According to a ruling by the judge who heard the test cases, finance director Paul Doona has admitted that backdated premium increases were wrongly described as 'advance premium payments'.

The judgment cast doubts on the way Claims Direct was run and raises questions about the work carried out by City firms that oversaw the company's stock market listing.

Four months before Claims Direct floated, the underwriting syndicate providing insurance said it wanted to recover some of the £1,250 per case being charged for each new claim being taken on. The plea was not disclosed to investors.

Doona said in evidence to the High Court that he was trying to protect Claims Direct's profit and loss account and did not want to show losses in early years if he could avoid it.

The latest revelations come as legal firm Justica has launched an action group for shareholders who saw their investments wiped out when the firm went into receivership last July.

Richard Field, the US lawyer behind Justica, said: 'We believe information in the prospectus may have been false and misleading and material facts may not have been disclosed.'