'Ignore that. That's burning old money. This new money's perfectly safe.'
Plexus Law’s private equity backers have agreed to inject millions of pounds into the business after it was blindsided by "extremely serious multi-million pound financial irregularities” and client losses which were "hidden from new management for more than a year”.
The defendant PI firm was originally known as Parabis until it collapsed in 2015 and a group led by original founders Andrew McDougall and Tim Roberts bought it out and rebranded.
Plexus appeared to be heading the same way as Parabis until a private equity group, Origin Equity, invested £15m in 2019. A few months later, Plexus CEO McDougall was out the door, as was Roberts.
Alarm bells rang in January when RollOnFriday pointed out that the firm's accounts were almost a year overdue.
When the accounts finally arrived they contained an admission that the previous year’s filings contained “several errors”.
Those mistakes comprised tiny little things like understating the firm's creditors by over £3m, overstating profit, inflating equity partner's average earnings by £40k, and failing to discount £2m of bad debts.
The accounts also revealed that Plexus paid £13.5m to a company owned by McDougall and Roberts for their shares in the business, and paid another £3m to two Plexus partners, Damon Burt and Anthony Baker.
In January 2022, Baker, Burt, and the company owned by McDougall and Roberts repaid £4.7m to Plexus.
A source with knowledge of Baker and Burt’s position told RollOnFriday that the pair received their £3m windfall on the basis that they were lead lawyers in the firm with major client contacts, whose condition for staying with the business was appropriate remuneration. The source said "a repayment of some monies was made” as a result of "warranty claims" but that Baker and Burt “contributed a nominal amount”.
Plexus had previously insisted that “the business is in robust financial health with a strong balance sheet”. But after rumours of emergency talks reached ROF, the firm said in a statement this week that “the knock-on effects of the legacy issues" had led it to "seek a further injection of capital from its investors to put the business on a stable footing for the long term”. However, it said that “claims that Plexus is about to become insolvent are false”.
The additional funding, understood to be £5m which frazzled private equity backers agreed on Thursday to provide, “represents a continuation of support for the firm by its investors over the past 3 years”, said Plexus.
Using far stronger language than in the past, Plexus laid the blame for its difficulties squarely on the McDougall era.
“The current management team, put in place shortly after the 2019 investment by Origin Equity and Access Capital, discovered extremely serious multi-million pound financial irregularities”, it said.
Those irregularities comprised issues with how WIP was recorded, rental invoices being received but not posted, and the loss of a key insurance client, Ageas, which was "hidden from new management for more than a year”, according to the firm.
An independent investigation by Grant Thornton determined that the intention of the errors was to "increase profits artificially", it said, and as result of the auditor's 18 month investigation Plexus took legal advice and investigated matters itself.
The firm concluded that there was evidence of misconduct, ROF understands, and a source close to current management said that Plexus "complied with all regulatory obligations in relation to this".
Plexus has previously said it was not being investigated by the SRA, although it clarified this week that it “has been in regular communication" with the regulator about its "legacy issues".
The irregularities did not comprise the £13.5m payment to McDougall and Roberts, or the £3m payment to Baker and Burt, said the source close to current management.
While the new bosses have started to slate the old bosses, sources close to the former regime have begun to point fingers at the new lot. One told ROF, “Plexus is where it is now as a result of the management style and behaviours of the PE owners from late 2019 onwards which has seen the firm haemorrhage lead partners, lawyers and clients...Typical PE approach…”.
McDougall could not be reached for comment and Roberts did not respond to a request for comment.