Lawsuits hot new option for Wall Street investors

Juliette MICHEL
One litigation finance firm estimates US spending on legal services is more than $350 billion a year, offering a ripe market for their services and a new type of investment vehicle for Wall Street (AFP Photo/Drew Angerer)

New York (AFP) - Lawsuits can provide big payoffs. And betting on the outcome of a lawsuit is becoming a hot new way for Wall Street investors to cash in.

Investment companies specializing in financing legal proceedings are moving in to capitalize on the new business line, allowing one side to finance the costs of litigation -- lawyers and expert witnesses -- in exchange for a percentage of the award either after the trial concludes or from any settlement between the parties.

This practice began in Australia about 20 years ago but has recently gained momentum in the United States.

The simplest way for private investors to get in on the action is to buy shares of the companies that specialize in litigation finance, like heavyweight Burford Capital, which is worth 4 billion pounds on the London Stock Exchange, or Bentham IMF on the Australian Securities Exchange.

But more and more institutional investors, hedge funds and pension funds are buying into the investment vehicles created by these firms that specialize in finding lawsuits with potential for big payouts.

"It's really difficult for a small business to fight a big company," said Ralph Sutton, a veteran of the industry who raised $250 million to launch his own company, Validity Finance, last June.

Litigation funding can "improve their ability to access the legal system more effectively," because it "helps level the playing field and permits cases to be adjudicated on merits and not on money plaintiffs or defendants may have," he said.

- In a few clicks -

On the LexShares internet platform, created in 2014, accredited investors can choose the case they want to bet on, from patent infringement, to breach of contract or theft of trade secrets.

Companies that are filing the lawsuit can, in just a few clicks, raise funds from the site.

But the platform also actively searches for cases that would make attractive investments.

"We created a piece of software that mines in the raw text when cases are filed," said LexShares founder Jay Greenberg.

Using an algorithm with 17 parameters the cases are given a ranking, after which a team of lawyers assesses the merits of the case, the abilities of the lawyers, and verifies that the defendant will be able to pay any compensation.

Of the 80 cases funded by LexShares so far, involving amounts ranging from $35,000 to $4 million, there have been 20 victories in the 24 completed cases.

While an investor can also lose his investment if the ruling goes the wrong way, on average, the return on investment is 65 percent each year, Greenberg said.

And many people want to try their luck.

"Investor demand is very high, we sell out within hours."

- Frivolous lawsuits -

It is difficult to measure the size of this industry since the litigation finance companies are discreet about their business. But America's very litigious society could offer a wealth of opportunities.

Bentham IMF estimates legal services expenditures total $357.6 billion a year in the United States, far ahead of the United Kingdom ($54.9 billion), Canada ($25.72 billion) or Australia ($19.7 billion).

But the company is starting cautiously: Bentham IMF funded only four US cases in the second half of 2018.

But the firm raised another $500 million in December for a fund geared at new cases.

Some observers cringe at this new type of investment, fearing the influx of money could fuels a profusion of frivolous lawsuits.

The American Chamber of Commerce in particular wants to require that plaintiffs disclose if they are using this kind of financing for their cases.

Maya Steinitz, a professor at Harvard University's law school, said giving the plaintiffs the means they need to seek justice is beneficial.

But she acknowledged that the market is "mostly unregulated."

Investors are not subject to the same ethical obligations as lawyers, for example, so they potentially could force a plaintiff to refuse or agree to a financial settlement of the case.

"Finance is a utility which can be used or abused," she said.