Why has well-known Sydney criminal lawyer Christopher Murphy suddenly become a substantial shareholder in struggling drugs distributor and chemist, Australian Pharmaceutical Industries?

His involvement seems to have snuck through most of the Australian investment media despite a substantial shareholding notice being lodged with the ASX on Friday morning.

The move by Murphy is odd given that there’s growing evidence that API is a black hole financially, but it has captured the attention of investors. A company called Cardiac Jolt Pty Ltd has appeared with a 5.33% shareholding in API, much of which seems to have been picked up in the market as another substantial shareholder, Investec sold down its stake in recent weeks.

Cardiac Jolt’s address is listed as the well known criminal law firm, Murphy’s Lawyers at 130 Elizabeth Street in the CBD. And a Christopher Murphy signed the ASX notice.

API has been under takeover offer (sort of, it has been proposed and not lodged) three times in the past three months from bigger rival Sigma. But this morning API rejected Sigma’s latest proposed offer of $2.20 a share and therefore Sigma has withdrawn the offer. API shares were 7c lower at $2.26 at midday.

API’s profit update late last week revealed a first half loss of $7 million. That was after underlying profits of $17 million were eaten up by one off write-offs of $24 million. The company says these were not related to the $17.2 million loss in the last half of the previous financial year that resulted from problems introducing a new computer system. The then CEO and CFO later left the company.

But the board in its update statement made two comments which have shareholders and others wondering about just what is going on at API and whether the board, management and major shareholder, Washington Soul Pattinson, really understand what is happening.

API said: “The one off expenses are related to obsolete stock, stock shrinkage, completion of the FY06 accounts and other restructuring provisions. The company has also reviewed its processes and some of the issues may relate to prior periods. None of the one offs are related to the unreconciled $17.2 million that was part of the 2006 full year financial results.”

Now phrases like “obsolete stock” and “stock shrinkage” are the big worries: the former relates to old stock (worrying in a pharmaceutical distribution company) and indicates that API is not keeping track of stock, while “stock shrinkage” is a euphemism for theft or loss of stock in suspicious circumstances, which again indicates very poor controls and security. So poor stock control, theft, a dodgy computer integration and Chris Murphy or his clients have bought into that!

But it gets worse. API is 22% owned by Soul Pattinson. API is being advised in its takeover by a company called Pitt Capital, in which Pattinson has a stake.

API’s chairman is a bloke called Peter Robinson and two other directors are David Fairfull and Robert Milner. Milner is chairman of Soul Pattinson and Robinson and Fairfull are directors. Pitt Capital’s chairman is Milner, Fairfull is managing director and Robinson is a director. After looking at the way API has been run this year you’d have to call it insider incompetence.