Hedge Funds Betting on Lawsuits Growing Trend

For better or worse, the lawsuit-finance market continues to grow. Hedge funds and others speculating on litigation are making more and larger bets. Some corporate lobbyists warn that the new financial engineering encourages wasteful courtroom warfare, but investor demand for fat returns—and big law firms’ appetite for business—guarantee the spread of litigation finance.

Burford Capital, the largest player in the nascent U.S. litigation-finance business, reported strong results for 2014. Revenue rose 35 percent, to $82 million, with a 43 percent rise in operating profit, to $61 million, Burford said. Celebrating its fifth anniversary, U.K.-based Burford has built a $500 million arsenal, Chief Executive Officer Christopher Bogart says. All told it has made 32 investments that have generated $209 million in gross recoveries and $78 million net of its invested capital, he adds.

Of broader importance, Burford has helped move litigation finance into the corporate-litigation mainstream. While its most notorious—and least successful—investment supported a class action oil pollution lawsuit against Chevron in Ecuador, Bogart stresses that Burford mainly finances litigation initiated by major corporations and handled by big corporate law firms. Among the well-known law firms that have been involved in Burford- financed cases are Simpson Thacher & Bartlett, King & Spalding, and Latham & Watkins, adds the CEO, himself a former executive vice president and general counsel of Time Warner.

In its third year of operations in the U.S., an Australian- based litigation funder called Bentham IMF reported funding 10 deals in 2014, including “contract disputes, a patent- infringement trial, partnership disputes, and five law firm case portfolios.” Bentham says that for the year it had gross returns of $31 million in the U.S., with net profit of $17 million. “The pace and volume of new funding opportunities have grown sharply in the past year,” says Ralph Sutton, Bentham’s chief investment officer.

That’s exactly what the U.S. Chamber of Commerce fears. “Litigation financing is a sophisticated scheme for gambling on litigation,” Lisa Rickard, president of the chamber’s Institute for Legal Reform, charges in an article posted on the group’s website. Historically, bar associations concerned about conflicts of interest forbade third parties from investing in lawsuits. Britain and Australia set aside those restrictions years ago, allowing litigation finance to take root in those countries. More recently, U.S. bar associations have grown more tolerant of third-party investments.

Rickard condemns all of these developments, alleging that they lead to “more lawsuits, more litigation uncertainty, higher settlement payoffs to satisfy cash-hungry funders, and in some instances, even corruption.” She points to the Chevron case in Ecuador as an illustration.

Burford invested $4 million in the long-running pollution suit in 2010. Led by New York-based plaintiffs’ attorney Steven Donziger, a group of Ecuadorians won a $19 billion judgment against Chevron in 2011. (Ecuador’s top court later halved the amount to $9.5 billion and upheld Chevron’s liability.) The oil company, however, turned the tables on Burford, Donziger, and his clients. In March 2014, Chevron persuaded a U.S. federal judge in New York that the Ecuadorian suit had evolved into an extortion scheme involving coercion, bribery, and fabricated evidence. By then, Burford had sold off its interest in the Ecuadorian judgment to another investor and accused Donziger of deceit.

Donziger has denied Burford’s and Chevron’s allegations of wrongdoing and appealed his defeat in New York federal court. Meanwhile, the whole episode constituted a black eye for Burford and provided ammunition for critics of litigation finance. The Chevron case notwithstanding, Burford’s “business model is helping large corporate litigants monetize legal claims,” Bogart says.

Others unabashedly advertise their commitment to financing suits by the “little guys” against large corporate interests. “We’re about fixing the system and addressing that inequality,” says Bentham’s Sutton.

The Wall Street Journalreported recently that hedge fund mogul Emanuel Friedman’s EJF Capital is preparing to lend hundreds of millions of dollars to law firms to pursue mass- injury class actions. EJF’s initial investment targets, according to the Journal, include litigation related to alleged complications from “transvaginal mesh” treatments and a schizophrenia drug.