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Case Developments

Class Action Against Mayne Pharma

In 2016, anti-trust proceedings were filed against Mayne Pharma, asserting that it conspired with other defendants to artificially inflate generic pharmaceutical prices and restrain trade. This led to a 10% price drop over several days of trading. Phi Finney McDonald explains that Mayne neglected to inform investors that it was in violation of the Sherman Antitrust Act. Now, a shareholder class action is underway, with funding provided by Vannin Capital. The suit alleges that shareholders endured losses and damages as a result of Mayne’s failure to disclose relevant facts. Current and former shareholders who purchased Mayne shares between November 2014 and December 2016 are invited to register interest in the case.
Case Developments

Lloyds of London Class Action Seeks Additional Claimants

Attorneys for a class-action case filed against Lloyds of London are asking other affected businesses to join the action. The focus of the case involves business interruption insurance, and whether or not COVID-related closures should be covered. Jeweller Magazine reports that noted Australian funder Omni Bridgeway is financing the action. This means that there is no upfront cost to impacted parties who wish to sign on as potential claimants. Cody Opal Australia, the parent company of the National Opal Collection, has joined the action. Cody Opal’s claim on the policy was rejected in May of last year despite business losses of more than $3 million. The sticking point here is whether the losses happened because of events taking place within 20km of the business premises, rather than because of the pandemic on the whole.   A town hall-style webinar will be held on August 18th. Interested parties may access the meeting via the attorney’s website: Gordon Legal. One partner at Gordon Legal, Andrew Grech, stated that the insurers have wrongly denied claims, failing to support jewelry and gem merchants when they were at their most vulnerable. Representatives for Gordon Legal advise policyholders to start the normal claim process and seek out their own legal advice. Business owners are welcome to submit their policies to determine eligibility for the class action.
Case Developments

Of Course You Should Always Read the NDA Before Signing!

Sometimes an NDA feels so basic there doesn’t seem to be a need to read it. At the same time, not reading something before you sign is folly—unless you’re talking about iTunes terms and conditions. In a recent case, Harcus Sinclair LLP v Your Lawyers Ltd, a partner in a law firm admitted to not reading the NDA before signing. Not surprisingly, the judges were not amused. This oversight caused pointedly negative consequences for the law firm and the litigation funder. Omni Bridgeway details that the dispute in question involves Volkswagen and the company's emissions defeat device. Your Lawyers was one firm that focused on consumer claims against the German automaker, with an eye toward seeking a Group Litigation Order to pursue a collective action. Your Lawyers teamed up with Harcus Sinclair (a more experienced firm) to seek out funding and insurance. In April of 2016, Your Lawyers sent Harcus Sinclair a largely standard NDA. It contained a provision stating that Harcus Sinclair would not accept instructions for, or act on behalf of, another claimant group without permission from Your Lawyers. This provision would ostensibly last for six years. Essentially, Your Lawyers gave Harcus Sinclair work product, and wanted to ensure that they would not be excluded from the case, should Harcus Sinclair choose to move forward alone. Partnering with a more experienced firm would likely make the case more attractive to funders—but opened up Your Lawyers to risks they wanted to protect themselves against. By October 2016, Your Lawyers' fears became reality, when Harcus Sinclair began their own book building before seeking a GLO of their own. The dispute between the firms ultimately found its way to the Supreme Court. It determined that Your Lawyers should be protected by the NDA, though Harcus Sinclair could have attempted to argue that restraining them from the case could negatively impact claimants. In the end, Harcus Sinclair could not represent clients, and therefore not obtain third-party funding.
Fundraising

AxiaFunder Boasts 100% Success Rate on Completed Cases

Since January of 2019, UK-based AxiaFunder has secured nearly GBP 2 million in funds from investors. So far, the litigation funding platform has funded 13 cases, netting an impressive average investor return of 55%. Hedge Week reports that AxiaFunder has eight active cases at present, including its first international case in Barcelona. Other active cases include a shareholder action and a group claim against two retail banks. Co-founder and CEO Cormac Leech explains that one of the main attractions of litigation funding is its lack of correlation to larger economic conditions. Litigation is simply not impacted by outside economic growth the way that traditional investments are. AxiaFunder also uses ATE insurance to cover adverse costs where applicable. Funded attorneys often are paid in part by conditional fee agreements.
Case Developments Commercial

New Zealand Weather Tightness Case Settles for NZ $1.25 Million

This week, James Hardie Industries announced a settlement in a weather tightness class action heard in Auckland High Court—in the middle of a trial expected to last 17 weeks. James Hardie, a global producer of fiber cement and fiber gypsum, will receive NZ $1.25 million as part of the settlement. Yahoo! Finance details that Harbour Litigation Funding will pay James Hardie’s award, and neither party will make an admission of liability. This represents a final settlement for the ‘White litigation’ regarding Harditex cladding. However, two more claims remain—the Cridge litigation and the Waitakere litigation. Country Manager John Arneil stated that the outcome of the White litigation supports the stance that the allegations were lacking in merit. A ruling in the Cridge litigation is expected sometime this month. An Auckland High Court is not expected to hear the Waitakere litigation until the summer of 2023.
Commercial

Omni Bridgeway Celebrates 35th Anniversary

Leading litigation funder Omni Bridgeway is currently observing multiple significant milestones, including the 35th anniversary of its founding. In addition, 2021 represents 20 years since it was first listed on the Australian Stock Exchange, and the opening of its German arm. Omni Bridgeway explains that 2021 is also the ten-year anniversary of its US launch, and the 5th anniversary of its offices in Canada and Asia. These advancements have significantly raised the company’s global standing while allowing Omni Bridgeway to serve an ever-larger client base. One area of development for Omni Bridgeway over the last two decades is asset tracing. This vital discipline was developed at the company, then called Omni Whittington, by banker Raymond van Hulst and insolvency lawyer Wieger Wielinga. Integrated, state-of-the-art intelligence-gathering and asset-tracing are essential facets of the enforcement of judgments and awards. From these meager beginnings, Omni Bridgeway has since built a team of experienced in-house asset tracers who work in tandem with a global network. The German arm of Omni Bridgeway began as a subsidiary of a legal insurer. Initially, this arm focused on small and mid-sized cases for business and individual needs. Twenty years on, Omni Bridgeway focuses on high-value cases, including collective action and legal funding for corporate clients. The US expansion of Omni Bridgeway began in 2011. Formerly Bentham IMF, its first American office is located in New York City. This arm began funding mid-size single case investments along with commercial litigation. Success in these areas allowed for the expansion into portfolio funding—perhaps heralding an industry-wide rise in portfolio funding. Omni Bridgeway’s expansion into Canada saw its Toronto office open in 2016. It has experienced similar growth to what’s been happening in the United States. Litigation Finance has changed a lot in the past three and a half decades. Omni Bridgeway has remained at the forefront of innovation and tha adoption of products to meet client needs.
Regulatory Issues

Outside Ownership of Law Firms—A Growing Controversy

One Florida committee has suggested changes to its policies on law firm ownership. So far, lawyers are sharply divided. While the Florida committee does acknowledge that many lawyers are resisting reforms in this area, that hasn’t dissuaded them from pursuing it. Law.com explains that one proposed change could permit non-lawyers to own a non-majority share of law firms. This follows a precedent in the state of Utah known as the ‘regulatory sandbox.’ Those who are in it may take advantage of the new rules. This differs from what’s currently happening with regard to non-lawyer ownership rules in neighboring Arizona. That state abolished prohibitions on outside ownership of law firms at the beginning of this year. Essentially, the proposed regulations would allow passive investors more opportunities to hold a stake in law firms. One notable change is that it would allow for fee-sharing, which is currently prohibited. The Florida committee suggests that this new scheme be implemented for three years, one year longer than Utah’s sandbox—which has since been extended to seven years. According to a survey from earlier this year, more than half of respondents (53%) didn’t agree that allowing for fee-sharing among non-lawyers was a good idea. Even more (83%) opposed passive ownership of firms. Why would an outside organization introduce regulations governing law firms that lawyers overwhelmingly oppose? The Florida committee claims that objections are based on unfounded fears. Understandable, but is that really a good enough reason to maintain an unworkable status quo? These recommendations have now been received by the Florida Supreme Court, which has not yet announced how it will proceed. Word is that the Florida committee will spend the next few months developing the program, despite the strong objections.
Regulatory Issues

Woodsford ‘Respectfully Disagrees’ with UNCITRAL Working Group

Litigation Finance powerhouse Woodsford has submitted its response to the Secretariat’s initial draft on the regulation of third-party funding. The proposed reforms include addressing concerns about conflicts of interest, security for costs, or that funders may exert undue influence over decision making or cost-related decisions about the cases they fund. Woodsford Litigation Funding states that it ‘respectfully disagrees’ with the conclusions of the Working Group. The question of whether further regulation is needed has been asked in various jurisdictions around the world. Singapore and Hong Kong legalized litigation funding for various types of proceedings in 2017. In the UK, third-party funding is on the rise—yet the government has not deemed it necessary to introduce new regulations governing the practice. In comparison to other financial industries, litigation funding has seen precious few disputes between funders and those funded. Why then, should resources be used to regulate an industry that shows no need for increased regulation? The Working Group seems to have succumbed to the oft-repeated claim that litigation funding leads to frivolous lawsuits. Of course, this argument does not hold up to logic, since no funder wants to risk money on a meritless claim. Overwhelmingly, legal funding is provided on a non-recourse basis—which means a loss in court implies a total loss of the funder’s investment. Woodsford also takes exception to Draft Provision 3, which requires claimants to affirm that they could not pursue their case without funding. This requirement leaves many questions open to interpretation, and makes no mention of portfolio cases or the myriad ways corporates leverage funding to pursue litigation. Essentially, such a regulation serves no real purpose, is likely to be unevenly applied and interpreted, and adds time and cost to court proceedings. Ultimately, the ILFA and ALF are in a better position to evaluate the ethics of legal funding, and to suggest regulation as needed.
Investor's Corner Slingshot Capital Special Features

Investor – Beware Outliers!

The following article is part of an ongoing column titled ‘Investor Insights.’  Brought to you by Ed Truant, founder and content manager of Slingshot Capital, ‘Investor Insights’ will provide thoughtful and engaging perspectives on all aspects of investing in litigation finance.  Executive Summary
  • Commercial litigation finance does not have the same investor model as venture capital
  • Win rates in the commercial litigation finance industry are approximately 70%, globally
  • Investors need to assess outliers very carefully, as there is much to be learned from their contribution to portfolio returns
  • Outlier outcomes may enhance returns, but should not be counted on as the main contributor to returns
Slingshot Insights:
  • Investors should assess unrealized and realized cases in making their determination about fund manager performance
  • A good manager will understand how to avoid/minimize outlier risk and focus on creating diversified, well-balanced portfolios to deal with the various unknowns inherent in the asset class
Having reviewed over 100 different fund offerings in the commercial litigation finance space over the last five years, I have gained a certain level of insight into the spectrum of results that fund managers have been able to generate through their portfolios (some fully realized, but many more partially realized portfolios).  In the past, I have written about the importance of diversification, the applicability of portfolio theory (articles one, two & three), and the perils of fund concentration; but I also believe that investors in the asset class should understand the perils of relying on outliers to drive fund performance. In the context of a portfolio of litigation finance cases, an outlier can be defined as a case outcome that sits outside a probabilistic range of acceptable (and preferably defined) outcomes within, say, (approximately) 2 standard deviations of (mean - average) expectations.  That is to say, if you target a portfolio of cases with basic value distribution characteristics (such as minimum and maximum values), such a portfolio will produce an average (a mean) and a standard deviation (a dispersion around the mean)1.  Therefore, for a normal bell-shaped distribution (with no skewness / heavy tail), you can assume  that those results that sit beyond two standard deviations should be considered outliers in that they don’t represent what you would typically anticipate to see in such a portfolio, because the result would be outside of a 5% - 95% confidence interval (i.e., the range within which you would expect most case values to fall, on both sides of the average). However, one also needs to be cognizant that for litigation finance portfolios, it is not unusual to see a concentration of lower end cases (those with values well below the average), while outliers on the high end are quite uncommon. Expressed differently, a probability of low end outliers (both for individual cases, and in aggregate) is greater than a probability of high value outcomes.  In this context, assuming a normal bell-shaped distribution of values is an overly-simplistic assumption. In reality, it is rare that an accumulation of below-average cases is more than offset by a big win; although still a possibility.  Practically speaking, portfolio construction should not be based on the assumption of (exaggerated) high values materializing. The other way to think about litigation finance, is that the dataset can be bifurcated into two subsets – there are the losers, which are typically (but not always) complete write-offs, and there are the winners, which can have a wide spectrum of outcomes,. As described above.  In the aggregate, this bifurcated data set makes it difficult to utilize traditional statistic methodologies to apply to the asset class, because the losers skew the averages and the standard deviations, but not as much as the winners do, because the winners have a larger dispersion of results.  Accordingly, one must be careful in applying statistics to commercial litigation finance asset class. The one asset class where similar dynamics exist is the insurance industry, specifically, in the analysis of catastrophic events, and re-insurance and insurance-linked securities.  Investors with an insurance background would be used to dealing with investments that have similar outcome profiles, and to the extent they are working for a large insurer, they have the added advantage of being privy to settlement outcomes where their insurance company was involved in settling the claim.  A competitive advantage indeed! Is Commercial Litigation Finance akin to Venture Capital?  Some have described the commercial litigation finance asset class as having a “venture capital” type risk/reward profile, a contention with which I strongly disagree.  The typical venture capital portfolio model is highly skewed, the outcomes of which can be illustrated in this graph shared by Benedict Evans on Twitter. As one can see from the chart in the above hyperlink, 6% of the deals within a VC portfolio produce 60% of the returns.  In essence, this is a model that is dependent on outliers to drive returns.  So, what’s wrong with that?  Well, the problem is that if you don’t get an outlier in your VC portfolio, the manager will not likely survive to live another day, which is a difficult way for a manager to run a business on a long-term basis.  It also means that for investors, it is difficult to select managers that can replicate outliers on a regular basis, as they are essentially statistical anomalies. This also explains the relatively high failure rate of fund managers in the venture capital industry. Coincidently, those VC managers that produce high end outliers frequently claim to produce high alpha returns (sometimes calling it a “secret sauce”) - while, in reality, their success may have more to do with “luck” than a systemic outcome - but that’s perhaps a topic for another article. So, why do I think this is not an appropriate analogy for the commercial litigation finance asset class? The numbers just don’t support it.  I have been privy to over 1,000 litigation finance case outcomes in different case types, different sizes, different durations, different legal jurisdictions, and different defendants, and the reality across jurisdictions is that cases win (i.e. the manager makes a profit on its investment) approximately 70% of the time, and hence lose about 30% of the time.  This stands in stark contrast to the Venture Capital model where the VC manager is losing over 50% of the time and making less than 2X its investment 70% of the time.  So, whereas Venture Capitalists need to count on having outliers in their portfolio to create sufficient returns, a well-diversified litigation finance fund should not rely on outliers to produce returns, as there should be sufficient wins in their core portfolios (net of losses) to produce acceptable overall returns for investors, given the underlying risk profile of litigation finance portfolios (that are more akin to insurable exposures).  If a manager believes that outliers are necessary to produce returns, then I believe that manager does not understand the benefits of applying portfolio theory to the asset class, and the investor is taking unnecessary risk, because the stark reality is that no manager can tell you which case is going to be a home run case, and hence does not have the ability to include one in their portfolio. While outliers in commercial litigation finance can enhance returns (albeit infrequently due to the low probability of such being the case), investors should not count on outliers for contributing to the majority of the fund’s returns, because the particular case that gave rise to the outlier event could have very easily ‘gone the other way’, especially if the outcome resulted from a judicial/arbitral decision, which are inherently binary outcomes. The ‘Math’ The basic math of commercial litigation finance, although it rarely works out exactly this way, is that managers generally (emphasis added) underwrite to a 3X multiple of invested capital (“MOIC”), and managers win approximately 70% of their cases on average, hence the portfolio should theoretically produce a gross return of 3 X 70% = 2.1 X MOIC, which gets whittled down to say 1.75 x MOIC after management and performance fees and fund operating expenditures. Internal rates of return will then be derived based on the timing of funds deployed and the overall case duration of the portfolio. Some case types having longer duration but a higher probability of outlier returns, and other case types having shorter duration and generally lower potential for outlier returns. In other words, if a high value outlier is obtained, it’s IRR is likely “diluted” by a (much) longer than average case duration, thereby, its impact on the portfolio’s IRR is diminished. In this context, when investors are assessing investing in a commercial litigation finance managers’ portfolio, especially one that mainly consists of single case investments, they should analyze the portfolio from two different perspectives: (i) determine how the fund would have performed if that outlier was not in the portfolio; and (ii) determine how the fund would have performed if that outlier resulted in a loss.  These are “incremental impact” analyses that are designed to capture a true value of such outliers. The first analysis will provide the investor with a perspective on how the fund performed without the benefit of the outlier event.  If the fund still maintained respectable performance, this may illustrate that the outlier event was not significant to the performance of the fund, which tells the investor that the manager was very thoughtful about the construction of a balanced portfolio, which is exactly what you want in a long-term oriented manager.  The second analysis enhances the first analysis by answering the question “Did the manger get lucky?”  If the second analysis shows that the opposite outcome would have decimated the fund returns, then it buttresses the first analysis and also indicates that perhaps the fund was too concentrated in terms of its deployed capital (which can be very different from its committed capital, as I have addressed in a previous article). Corporate and Law Firm Portfolios Fund managers investing in corporate portfolios or law firm portfolios provide yet another layer of complexity.  In the case of corporate portfolios, these portfolios are groups of single cases that have a common plaintiff.   In the case of law firm portfolios, these portfolios are with law firms that have a contingent interest in a group of cases.  By their very construct, portfolio investments are inherently less risky than single cases because the portfolios are generally cross-collateralized, so the risk of having an outlier event within the sub-portfolio is that much more remote.  Nevertheless, investors should assess the component parts of the sub-portfolio’s results, because if the sub-portfolios themselves are generating returns through an outlier event, then the exact same risk exists as a manager that focuses on single cases within their portfolio.  The key difference is that a fund manager that invests in a series of sub-portfolios will have more chances to make errors than one that focuses on a portfolio of single cases. Other Considerations The other thing to consider, is that not all cases and case types are alike.  Each case has its own idiosyncrasies and each case type has its own unique risk/reward profile.  Accordingly, an investor cannot look at a portfolio of single cases and assume that each of the cases within the portfolio has similar risk / reward characteristics.  So, when an investor assesses the outcomes of cases, it is not only important to look at the outliers, but also to look at, among other attributes, (a) the types of cases, (b) the life cycle of the cases (important for determining duration), and (c) how the outcomes of the case were derived (judicial/arbitral outcomes vs. settlements) and the derivation’s effect on returns (a portfolio that derives most of its results from settlements (non-binary) is far superior to a portfolio that derives its results from 3rd party decision makers (binary), but this risk also varies by case type and venue). Portfolio Theory plays a significant role in investing in the commercial litigation finance market, and so investors need to be aware of its application and the various permutations that can arise in the construction of a portfolio, which generally starts with an investment in a ‘blind pool’ type fund.  More active investors can eliminate the risk inherent in a blind pool by selecting individual case or portfolio exposures, but they generally need to have internal resources to appropriately assess risk, or be prepared to incur the cost to outsource those underwriting activities. Equally important is the selection of a business model under which a portfolio is sourced, evaluated, and constructed. A manager philosophy that equates litigation finance investing with venture capital investments can be misguided and possibly result in unrealistic assumptions and faulty portfolio construction that can produce real results quite distinct from the manager’s intentions. 1Standard deviation is the measure of dispersion of a set of data from its mean. It measures the absolute variability of a distribution; the higher the dispersion or variability, the greater the standard deviation and the greater will be the magnitude of the deviation of the values from their mean. Slingshot Insights  For investors, I strongly advise diving deep into both realized and unrealized cases within the portfolio to get a better understanding of the manager’s appreciation for portfolio construction and their appetite for risk.  While it may be cost prohibitive to do deep diligence on every case in the portfolio, analyzing high level data about the nature of the various case exposures can bring an investor a long way to understanding the risks inherent in the portfolio and the manager’s approach to investing.  For the realized subset of the portfolio, understanding the dynamics at play within the case and its contribution to overall fund performance is critical to assessing a fund manager’s ability to replicate results (termed persistency in private equity), which is critical to long-term investing in the space. I don’t believe this is a venture capital asset class, and a manager that tries to convince an investor otherwise is either taking unnecessary risk, or does not understand how the asset class benefits from portfolio theory. As always, I welcome your comments and counter-points to those raised in this article.  Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial litigation finance industry.  Slingshot Capital inc. is involved in the origination and design of unique opportunities in legal finance markets, globally, investing with and alongside institutional investors.