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Regulatory Issues

Is Legal Funding to Blame for Rising Insurance Premiums?

There’s been a lot of talk about how well-funded collective actions are driving up the price of liability insurance, particularly for directors in corporate settings. Furthermore, one of the ways to address this issue seems to be increased regulation and more stringent disclosure requirements. But is this an accurate representation of the facts? Andrew Saker, Managing Director & CEO of Omni Bridgeway doesn’t think so. Omni Bridgeway details that oft-repeated warnings of a sudden glut of frivolous class-action suits are not grounded in reality. No funder wants to bankroll a losing case, nor is it in anyone’s best interest to clog court dockets with cases that lack merit. This holds true among most types of collective actions, including shareholder class actions. It is true that Director & Operator insurance premiums have increased in recent years. But is that due solely, or even mostly, to funded class action cases? Saker breaks down these facetious arguments one by one:
  • There has not been a steep rise in shareholder class actions. In fact, according to KWM, there’s been a decrease since 2017.
  • Opportunistic class actions, a common boogeyman argument, do not exist. When the Treasury Department and the AG’s Department were asked to show a real-world example of an opportunistic class action—they produced nothing.
  • Costs of D&O insurance are rising globally, not just in jurisdictions where funding is common. In truth, there’s more risk in the world than ever for businesses—owing largely to cybersecurity concerns, and factors relating to climate and the pandemic.
  • There may not be any causative link between shareholder class actions and D&O premiums. Arguments to the contrary are increasingly difficult to defend.
One likely explanation for rising premiums may be years of underpricing. Correcting this is causing higher prices, and insurers are looking for someone, anyone to blame. And who better than a newer industry that many people don’t yet understand?
Case Developments

London Appeals Court Agrees to Reopen BHP Mining Case

Last week, the London Court of Appeal agreed to reopen a suit against an Anglo-Australian mining company, BHP. The case centers on a 2015 dam rupture that caused the worst environmental disaster in Brazilian history. Reuters explains that the $7 billion lawsuit on behalf of 200,000 claimants was struck down as an ‘abuse of process’ in 2020. Since then, lawyers for the claim have been seeking a resurrection—even after the dismissal was upheld this past March. Three appeals court judges have now given permission for an appeal, in a decision considered highly unusual in the legal community. BHP stated their position that the case should not be heard by UK courts. The far-reaching impact of the Fundao dam spill may suggest otherwise. The collapse killed 19 people, as well as spilling over 40 million cubic meters of mining waste into villages and waters as much as 400 miles away. The case may establish if multinational companies should be liable for the conduct of their overseas subsidiaries. Six years after an unthinkable environmental disaster, citizens will finally have access to justice.
Commercial

The Benefits of Cross-Disciplinary Analysis

Anyone hoping to be a success in the world of legal finance should expect to amass knowledge from multiple industries. Banking, litigation, corporate finance, IP and patent laws, and more. This is why many of the most successful funding entities employ staffers from multiple business disciplines, and why they seek out those with cross-disciplinary skill sets. Profile Investment explains that litigation funding's three foundational pillars are Legal, Quantum, and Enforcement. These are the three knowledge bases that are utilized for each application for funding. Lawyers, financial and valuation specialists, and recovery professionals are all consulted to determine whether a case is a strong candidate for funding. This cross-disciplinary approach to litigation funding is increasingly important as funders pursue claims with varying degrees of specialization. These areas of focus could be based on jurisdiction, legal forums, specific case types, or they may set their sights on a specific industry such as construction. Ultimately, cross-disciplinary analysis is a vital part of any successful litigation funding entity.
Case Developments

Google Faces Class Action in UK Over Illegal Charges in Google Play Store

Nearly 20 million users in the UK may be eligible claimants in a lawsuit against Google, stemming from allegations of illegal charges in its Google Play store. The alleged overcharges impacted UK users of Android phones. Hausfeld reports that the estimated damages sought in the case could be as high as GBP 920 million. According to the claim, Google is alleged to have restricted users from accessing apps from its competitors. Further, it specifies a whopping 30% commission charge on all items purchased digitally. This practice, which also includes various technical and contractual elements restricting access to other platforms, allegedly violates the UK Competition Act section 18, and the Treaty on the Functioning of the European Union article 102. The case is an opt-out model, which means that all eligible claimants are included unless specifically requesting not to be. Major players in this potentially enormous collective action include Vannin Capital, which is funding the case. This funding ensures strong legal representation from Hausfeld, and affirms that claimants endure no upfront costs. Lesley Hannah, a partner at Hausfeld, is the leading litigator in the case. She stated that Google has used its dominance in the Android market to leverage high fees while shutting out competition. Thankfully, consumer protection laws are robust in ensuring fair competition. The class representative is Liz Coll, who explains that while Google has helped consumers in some ways, it’s presenting a closed system as an open one—removing options from consumers in a way that’s unfair and potentially damaging. The claim impacts several popular apps, including Tinder, Uber, Candy Crush Saga, and Roblox, among others. This is not the first time Google has experienced legal trouble over its treatment of Android customers. It was fined over EU 4 billion in 2018 over similar conduct regarding the Google Play Store.
Regulatory Issues

Motion to Dismiss Filed with Appeals Court in Sax v Fast Track Investments

As Litigation Finance regulations evolve, those involved in active cases may change their tactics. On July 19th, a motion to dismiss a pending appeal was filed by the parties in Sax v Fast Track Investments. In this case, legal finance agreements affirm that New York laws apply to the question of whether or not the funding was a loan. Lexology explains that the Ninth Circuit Court concluded that the New York Court of Appeals should make that determination. Several questions about the funding agreement were submitted, ostensibly to determine whether the terms of the agreement equated to usury. This motion to dismiss coincides with multiple decisions which are pending involving third-party legal funding, as well as the enactment of a new disclosure rule in the District of New Jersey. The new disclosure rule requires parties to disclose information about any non-parties providing financial support for a case. This includes funds provided in exchange for a financial interest that’s predicated on the results of the action, or those provided with the expectation of specific types of non-monetary results. The Northern District of California has also imposed a requirement of disclosure of all third-party funding in collective actions. West Virginia and Wisconsin courts have passed similar laws, along with usury-adjacent laws that regulate how much interest may be legally charged. The impact of these changes can be seen in several cases, including Breen v Callagy. In this case, the Third Circuit rejected a claim that the terms of a litigation funding agreement constituted a debt under the Fair Debt Collection Practice Act. The Northern District of California allowed Brice v Haynes Investments LLC to proceed. The case will now determine whether the founders and funders running a “Tribal Lending Scheme” will be held liable for usury violations. It remains to be seen whether these laws will benefit those who make use of legal funding to pursue cases they otherwise could not.
Announcements Fundraising

Leading disruptor in civil litigation finds capital solution to drive unprecedented growth

PURE Business Group (PURE), the multi-discipline legal services business, has today announced a new £multi-million funding facility with Sandfield Capital. PURE, which currently handles over 12,000 new instructions each year, hopes that this move will dramatically accelerate its ability to develop record numbers of cases over the next few years. The agreement is anticipated to deliver dominant market-share in the volume civil litigation space in PURE’s current six case verticals, plus extend then across four new areas of focus. Combined with planned increases in the coming months, PURE will target 30,000 new cases per year from 2022, whilst more than doubling turnover and profit. Group CEO, Phil Hodgkinson commented: “Now in our seventh year of trading, I’m proud to say that our business continues to go from strength to strength. Despite the challenges of the global pandemic, we have remained profitable throughout, and continue to break case settlement records month on month. Aside from fuelling a transformational growth in case volumes, the new funding agreement allows us to launch innovative new products and enter new markets, too. The future is incredibly exciting for this business and our colleagues within it.” Sandfield Capital CEO, Steven D’Ambrosio said: “We are delighted to support PURE in its future. Having run an initial pilot with them from January this year, we have already seen 25% of the total funded book come to settlement resolution. Based upon current data, we will see 100% settlement of the pilot scheme cases within a further six months. That has given us the confidence to extend the facility to a significant eight-figure sum, enabling PURE to increase new case volumes significantly and pursue those cases aggressively on behalf of clients.” About Pure Business Group PURE Business Group was created to provide a unique, innovative and collaborative solution to the civil litigation legal sector. Founded in early 2015 by Phil Hodgkinson, and bringing thirty years’ experience within the insurance and legal sector, the group employs in excess of 450 staff in four UK locations. The group comprises a number of complimentary companies, including an ABS-structured barristers chambers and law firm, a technology business, a specialist vetting business, a claims-handling business and multiple marketing brands. Its unique model centres around non-recourse CCA disbursement loans to customers, which are fully insured by a large panel of A-Rated Insurers and Re-Insurers. This model allows us to concentrate its own cash flow on business growth and taking on new cases. It can also litigate in volume, without constraint, against any defendants who refuse to come to the table and settle valid cases in a reasonable and timely manner. Sandfield Capital has been designed to support individuals pursuing legal claims and facilitate their access to justice. It was launched in 2020 by Steven D’Ambrosio, a former Finance Director at Close Brothers Premium Finance, who has conceived and built a number of highly-successful ventures in the financial and legal sectors and remains extremely passionate about creating and tailoring funding solutions. Sandfield works directly with accredited legal firms to ensure that all clients achieve the best possible outcome, complimented by straight forward, innovative products that support their legal cases.
Commercial

An Investor’s Take on Burford Capital

Burford Capital is the largest Litigation Finance company on Earth. Returns on litigation investments are consistently high, yet investment pros can’t seem to agree whether Burford stock is a big risk or a sure thing. The truth, as always, may be somewhere in between.

Seeking Alpha reports that Andrew Walker of Rangeley Capital interviewed Artem Fokin (AF) of Caro-Kann, a small-cap focused investment firm. The pair discussed the idea that Burford shares are worth much more than current share prices indicate.

Below are some key takeaways from their interview:

Does Burford bring more than just money to the table?

AF: That’s an excellent question. The qualification, when you look at the Litigation Finance space, two types of investment professionals tend to work there—either people coming from a law background, or finance background. Obviously, both have advantages and disadvantages. A good litigator who comes from a top law firm may not necessarily view the world through an investment lens. So they’ll need to make that transition. Similarly, finance people will know all about finances, but they know nothing about law. You need to have a team that combines both.

Burford cannot tell a client to settle or not settle, appeal or not appeal. That’s not allowed because Burford is not a client. The law firm owes the duty to the plaintiff; they are the client. But funders, through the funding agreement, can encourage certain types of behavior.

Are returns to litigation funding sustainable?

AF: Burford isn’t the only funder raising very attractive returns. There are other very skilled litigation finance players who generate returns that are very comparable. We’re not talking about a phenomenon where there’s one player that’s very big and they’re generating returns like nobody else can—and then eventually people will come after them.

The entire industry is doing well, as long as they have skill. Skillful players do well in general. Sure, there is more capital coming in, but at the same time, the penetration and use of litigation finance is expanding. It’s difficult to quantify. But the capital coming in is absorbed.

Litigation funding is expanding the total addressable market. What nobody can calculate with any degree of precision, is that some cases that would have never been brought to court are being pursued now because there are litigation finance providers who are willing to finance it. Consider what would happen with innovation in all tech companies if there were no venture capitalists who were willing to invest.

How do you value Burford?

AF: Earnings from any period may or may not be meaningful. If you have a big settlement or victory, you can get a big payout. Alternatively, it can be very slow with no cases either settled or adjudicated.

If you look historically, the IRR has been around 24%. If you look at Burford's numbers, they report high IRR, around 30. But that includes a case in Argentina where they already made some money.

The future rate should grow over time to the mid-teens. After that, you get to a normalized net income. That’s how I’m getting to 70-75 cents or so, EPS.

What about Burford's Value Component #2: Asset Management?

AF: Burford manages several hedge funds, some of which have already been fully deployed. Some of those pools of capital are being invested as we speak. There’s a variety of assets.

There is this way to calculate, called ‘European Waterfall.' What it means is that until the initial capital has not been returned to limited partners, the litigation funder doesn’t recognize the incentive fee on its booking records. It means if you took $100 million and invested into ten matters, and the first matter comes out, and it’s a home run (I’m using an extreme example) you just made $100 million of profit. You as a litigation finance provider, using European Waterfall structure, will not recognize any incentive fees. You’ll only start recognizing fees when your second matter is resolved.

But that first big win, even though it’s amazing...you recognize zero. And right now, Burford has recognized very few incentive fees from most of the funds. As those funds get more and more into harvest mode, those incentives will be disproportionate.

Commercial

Offshore Asset Recovery in a Post-Pandemic World

Litigation Finance has seen big legal developments over the last year and a half. Especially impacted are insolvency practitioners and those who work in asset recovery. Burford Capital explains that these changes include the Private Funding of Legal Services Act 2020 in the Cayman Islands. This new law, enacted in May of this year, allows law firms to engage in contingency fee arrangements, and permits third-party legal funding in a much wider range of cases than before. John O’Driscoll of Walkers (London) explains that prior to the PFLSA, third-party funding was technically permitted. But court approval was needed for every case, and was granted on an extremely limited basis. Laura Hatfield, Partner at Bedell Cristin, lauds the new law as it negates the need to avoid champerty and maintenance considerations. This keeps costs lower and allows for more meritorious cases to move forward despite financial constraints. Other legal minds chimed in, calling the act “welcome” and “overdue,” while affirming that third-party funding is a necessary aspect of today’s legal landscape. The need for funding is only expected to rise. Clearly, the main impact of the PFLSA will be increasing access to legal remedies for those who have been wronged.  
Case Developments

Tanzania Fends off Claim for AU $127 Million in Ntaka Mining Case

An update to an arbitration relating to the Ntaka Hill Nickel Project against the Republic of Tanzania was recently released by Indiana Resources. Mining Review reports that Nachingwea UK and Ntaka Nickel Holdings and subsidiaries have filed claims with ICSID—part of the World Bank Group. The Memorial submission details the basis for compensation for AU $127 million to be shared among the claimants. This claim will be quantified by Versant Partners’ Travis Taylor. Litigation Capital Management is providing funding for the action, to the tune of up to US $4,653,400. Indiana Resources remains confident of securing a positive result. The case is expected to be completed in 2023.