While stories coming out of the law world have lately been dismal and draught with headlines of unemployed graduates and legal outsourcing, there is one sector of the legal world that is doing well for itself. Welcome to the world of third party funding. The previously untapped market of high cost corporate lawsuits is now becoming bankrolled by large hedge funds and banks. Born from the era of financial innovation that brought you the subprime crisis; litigation financing offers the opportunities of high rewards at high stakes.
In the most basic sense, third party funders act to provide funds in a claim in exchange for a size of the eventual outcome of the case. For many companies, litigation costs are recurring and often times too high. Litigation funding is an opportunity for them to stay in court and stay fighting while keeping their finances in check. Law firms clearly benefit from this arrangement as well as they can continue keeping clients in active litigation mode, thus racking up millions in services that directly go to the firm. The investors in the field of third-party funders are traditionally hedge funds, institutional money managers, big banks like Credit Suisse, and even some insurance companies. Who is not involved? The government. There has been a recent congressional hearing that called for oversight into this growing field. Otherwise, the area of litigation financing remains outside the peripheries of traditional oversight agencies.
Litigation funding is less of a novel idea in England where third-party financing has been available to pay legal fees since 1967. However, it’s only been recently that large firms that specialize specifically in legal funding have emerged across the pond. Americans also have some experience with lending in the legal sphere when it comes to pre-settlement funding and syndicated lawsuits. The distinction between then and now is that the now concept of litigation funding has grown largely in magnitude, both in scope and dollars.
Types of investment
Although this form of investment is fairy novel, there are already a variety of ways investors can profit off of litigation. It’s not necessarily a winners-win and losers-lose scenario where the investor chooses one side of the suit to bankroll and hedge that they win to pocket the settlement at the end. Gerchen Keller Capital LLC, a group consisting of former lawyers, has started to invest in both sides of the case. The original investment gets paid back in any case, and a bonus from the side that wins.
Perhaps a force for good?
There is an argument to be made that this proliferation of third party funders is just another glaring example of high risk financial investing that taints the professionalism of the legal field. On the other hand, another argument that can be made is that third-party funding allows smaller companies to be on the same playing field as larger corporations with hefty legal funds and in-house legal counsel. In one case, Buford Capital backed an environmental case against Chevron. Although the intent may not have been to support a social cause, the investment allowed an important environmental issue to be played out in court that may have not gained notoriety otherwise.
How can you get in on it?
Unless you have a couple hundred million holed away in the stock market, forget about entering the litigation funding party. The types of cases that successful funds invest in have large upfront costs that start at the very minimum around $10-$20 million. Even if you had enough to make that initial investment, due to the lengthy legal process, it could years before you see any returns.
A reasonable way for the average investor to ride the litigation funding wave without having the capital to put into a hedge fund is by investing in a few of these firms that have gone public like Juridica or Burford Capital.
A case gone wrong
The motivating factor behind the litigation “market” that makes it so appealing is the same one that makes it so volatile. It is not related to the whims of the traditional market. However, the courts can be just as unruly as seen in the case of the litigation surrounding Chevron and the oil spills from the Lago Agrio oil fields in Ecuador. Burford Capitol had originally made a $4 million investment on the plantiff side, expecting 1.5% back once the suit closed. After Chevron filed a counter suit accusing the plaintiffs of buying off judges, wire fraud, and extortion, Burford sold its stake and recently issued a statement denouncing fraudulent behavior. Although litigation funders ideally want to make a third party investment devoid of the turbulence detailed above, it is difficult to not claim a seat at the table when you are financing all the of the chairs.
Some other prominent cases in the media that were funded through third party lenders were for suits that fared much better like the ground zero workers compensation case. Unlike the outcomes of a trial, one thing is definite. The field of third-party funders grows and will continue to grow as more banks, hedge funds, and other financial institutions start delving into this rich and untapped “market”.
Contributed by Amreen Rahman