Imagine a world where you could buy and sell a financial interest in a lawsuit like one does with shares of Microsoft or Ford. Picture yourself looking at the Wall Street Journal to what price your investment in the Jones v. Home Depot case was trading at. Does this sound crazy? Believe it or not, this is not as unlikely as one might think.
When the Dow was in the tank, investors searched for new opportunities that escaped a beaten down and skittish market. One avenue that began to gain ground was the area of lawsuit investments. The upside is clear: big jury verdicts and big settlements mean big winnings. However, much like any casino gamble, the downsides for the borrowers are less obvious and often hidden in the detail.
The Premise
Lawsuit investment is the loaning of cash by a bank or private investor to plaintiff attorneys (and their clients) to help fund a case. With skyrocketing litigation costs, finances for necessary expenditures can be hard to come by. This money goes towards a variety of expenses, including: expert witnesses, demonstratives, scientific testing, consulting and more. Given this need, companies like LawFinance (whose questionable slogan is “We do what banks won’t.”) filled the gap and offered to invest in cases through litigation loans.
It’s easy to see why many support this concept and major players like Citigroup and Bank of America have entered the fray. Plaintiff attorneys that can be easily outspent by corporate defendants see an opportunity for leveling the playing field. This is particularly true for claims represented by small attorneys that deep-pocketed defendants might view as being able to be outspent to a verdict.
Proponents suggest that much like the free market, weaker claims will not get investors because the outcome would be too risky. Conversely, strong claims would receive the funds necessary to mount an effective case and justice is served. While this is true, there is always a catch (or even several).
What’s the Vig?
When discussing a loan of any sort, my Uncle would always ask: “What’s the vig?” (Translation for those of you who deal with more reputable lenders: “Are there interest charges and at what rate do they accrue?”). The answer is always “Yes!” and they are often pretty unseemly. Interest rates can be 24% per year and higher, which can get pretty nasty when you think about the slow wheels of justice. Heck, for that kind of scratch, you might as well put it on your credit card and earn enough points for a free trip to Tahiti to manage litigation stress.
It should also be noted that much like any bank (or loan shark), the interest does not go away if your investment turns sour (bad settlement, outright loss, years of legal delay, etc.). In essence, these can be more like high-interest loans for risky bets with little to no asset backing. Where have I heard this before?
“Pros” (professionals) and “Cons” (con artists)
Don’t get me wrong, there are plenty of times when this is a good idea. Professional investment banks will often devote months of in-depth review and analysis before funding a case. They will put in the research intensity of a Las Vegas odds maker to determine how much should be loaned and at what rate. What is the history of jury verdicts in the area? How often does this defendant (and legal representation) settle? What is the potential length of trial? And many more questions must be answered before a loan is granted.
However, there are also less scrupulous lenders. These are investors who charge outrageous interest fees and sometimes help create lawsuits that they can fund. As with any industry, there is often a seedy underbelly that looks to take advantage of the system and prey upon those who are desperate.
Things that make you go “Hmmmm….”
Despite one’s personal opinion of lawsuit investments, there are serious issues that must be addressed as the practice continues to grow and States pass legislation that allows it to expand.
First off, attorneys are not always required to clearly inform clients that they are getting loans, but can still pass the cost on to the clients. Some lending operations even advertise their services as “free money” because the client gets stuck with the interest charges.
Secondly, there are major issues of privilege as investors want tremendous detail on the case before they will grant a loan. As a litigation consultant, I am keenly aware of what I need to do to help preserve the sacred attorney-client privilege. I think it would be hard to argue that a loan officer at the bank is part of the trial team.
Finally, this practice creates an outside pressure to settle as interest continues to accrue day after day. Even if the attorney does nothing on the case for several months, the cost of the case continues to rise. It is possible that settlement advice could be altered based on the cost of the loan rather than the merits of the case.
Once someone invests in something, they can often sell or pass on their share to someone else. We may not be at the point of mutual funds consisting of high and low risk lawsuits, but the rapid expansion of litigation lending suggests it could be on the distant horizon. Whether this is something we want is still to be determined.
Blogger: Matt McCusker
