High-Risk, High-Reward Investors Turn to Litigation Financing

Written by Eytan Goldschein on . Posted in Advice Columns

For those investors with a strong stomach, there’s a rapidly growing industry offering an alternative investment strategy for those with a penchant for high-risk, high-reward. Private equity firms are offering financing to attorneys and plaintiffs in return for a percentage of eventual legal fees and rewards. Litigation financing is gaining traction amongst investors searching for a high return unaffected by Wall Street’s market volatility.

On Wednesday, May 30, Information Management Network hosted the first ever litigation financing event entitled “Financing, Structuring, & Investing in Litigation Finance” at the Union League Club in New York City.

The conference brought together litigation funding companies and law firms, as well as an array of private investors. Litigation funding companies represented included Bentham IMF, Orrick, Therium Inc., Kobre & Kim LLP, and Woodsford Litigation Funding. Law firms in attendance included Debevoise & Plimpton, Cooley LLP, and King & Spalding LLP.

Financing law suits and class actions can be a lucrative investment that comes without the risks of market fluctuations. Lawsuits and settlement amounts are not subject to the vagaries of market fluctuation, and by funding litigation for a percentage of return, the benefits can be quite high. One entrepreneur at the conference confided that he expects to make five times his money on these investments.

Litigation financing comes with two glaring caveats. First, the investor can have no influence on the case or decision-making process as it wends its way through the court system. This means any decision to settle, go to trial, ask for an adjournment, file a brief, motion, legal argument, or pleading must have no input from companies and investors that may have thousands or millions of dollars at stake. Second, if the plaintiff loses the case, the investor loses the entire investment.

There are two categories of litigation financing: consumer and commercial. Consumer financing provides working capital to (mostly indigent) plaintiffs in exchange for a percentage of any eventual legal reward for a legal claim. Attorneys can also obtain funding for cases in exchange for a percentage of anticipated legal fees. While this form of funding seems attractive, 62 percent of plaintiffs utilize this funding to stave off foreclosure or eviction. It is a funding of last resort.

It also opens the door to unsavory legal practices. Marina Trubitsky, a Queens-based personal injury lawyer, is being sued by Green Legal Funding, a litigation funding company, for allegedly scamming them out of over $200,000 by filing four bogus or inflated personal injury lawsuits for the purpose of obtaining funding. Once she obtained the funds, she paid shell companies for fraudulent medical examinations as well as billing attorney’s fees. Ultimately, she dropped three of the cases while keeping the cash. The other case is still pending.

Another concern includes anticipated undue pressure from litigation funding companies on influencing litigation. One can easily imagine a worst-case scenario where a judge or jury members own stock in a publicly-traded litigation funding company that funded a case with which they are involved.

Commercial funding services bigger players in the industry including class action lawsuits, international and commercial arbitration, and multi-district litigation. Generally, the plaintiffs and defendants in these cases are larger companies, and attorneys are looking for investment in exchange for a percentage of legal fees.

The industry has also jumped from Wall Street to Main Street. YieldStreet offers crowdsourcing investments to smaller investors from anywhere of up to $5000 to $100,000. They claim to offer up to 12 percent annual interest on legal financing.

The conference included a host of support companies looking to benefit as well. Tech companies offer to provide data and trends in litigation as well as keeping track of case portfolios. The Litigation Finance Journal offers subscription services to litigation funding companies to keep them abreast of all new developments in the industry throughout the world.

As a fundamental principle, the judiciary must be kept separate and apart from Wall Street in order for us, as a society, to have faith that the judicial system is providing and maintaining justice. If the rule of law offers a portfolio of investments, the general public will lose trust in the judiciary and, subsequently, in following law as well. Let’s not give critics another reason to claim the system is rigged. But if this view is rejected ... buy stock quickly!

By Eytan Goldschein

Eytan M. Goldschein is a practicing real estate attorney as well as an ordained rabbi. His inspirations are Aaron HaKohen, Jack Weinstein, Robert Redford, and Uncle Dovie.