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Commercial

Litigation Capital Management Secures Another Major Funding Agreement

Prominent third-party litigation funder LCM (Litigation Capital Management) has secured a trio of major legal funding agreements in the last seven weeks. These include cases against rail services giant Govia, French electrical retailer Darty, and former Carillion auditor KPMG. As expected, investors have noticed LCM’s success; share prices rose 25%. Many analysts, including Simon Thompson, are lauding the stock and calling it a ‘buy.’ Investor Chronicle details that COVID has created conditions favorable for third-party funders. The increase in insolvencies, restructurings, and business closures drives a spike in funding requests. This, in turn, creates more investment opportunities. LCM anticipates an even larger financial windfall as the company awaits the launch of a $150 million third-party fund. It will see a payout of 25% of profits after an 8% soft hurdle rate. This is considered a very lucrative and achievable revenue stream, especially considering LCM has achieved a 78% IRR during the last ten years.
Consumer

SPAC Deal Seeks to Conjure Tens of Billions

A newly formed SPAC (special purpose acquisitions corporation) unveiled a plan to take MSP Recovery public. Lionheart Acquisition Corp II is valuing MSP at around $32 billion, or roughly 10.5 times the anticipated 2023 revenues. Some are calling this a new high in financial wizardry. If the market jibes with Lionheart’s predictions, CEO John Ruiz would hold a stake worth more than $20 billion, with Frank Quesada (Ruiz’s partner) holding a $7 billion stake. Forbes explains that MSP’s business model begins with buying up medical claims. By determining which claims were paid by governments instead of other responsible entities, MSP will collect the billed amount, which is often different than what was assessed by the healthcare system. There may also be double damages in some instances. MSP has constructed a powerful set of analytics and data infrastructure with which to sort through millions of claims to seek out cases worth pursuing. It’s been suggested by MSP that about 11% of the annual Medicare and Medicaid budget is paid in relation to accidents, misconduct, and fraud—meaning that the government should not be held responsible for paying. Currently, MSP reports owning almost $50 billion in claims from a long client roster that includes hospitals, doctors, and Medicare Advantage insurance companies. It could recover as much as $27 billion from its current portfolio of claims. Some might argue that this is a business model that shouldn’t exist. Money can only be made here due to the failings of the US healthcare payment systems and its lack of effective accountability. Ruiz, however, is not shy about touting the genius of his plan—explaining that this business model exists in a space that is essentially devoid of competition. After receiving $440 million in backing from Virage Capital Management, Ruiz began his pursuit of more than $50 billion in claims.
Consumer

SCOTUS Enforcement Ruling a Boon to CFPB

The Supreme Court case of Collins v Yellen has the Consumer Financial Protection Bureau on alert, largely because it addressed the scope of agency powers--left unresolved after Seila Law v CFPB. Reuters details that the CFPB has seen several of its recent enforcement actions challenged on constitutional grounds. This new ruling is reason for hope. Previously, the Seila case held that it’s a violation of the Constitutional separation of powers to prevent a president to fire the CFPB director at will. The ruling did not address what ought to happen to past cases heard in lower courts. In Collins, the court affirmed that there was no Constitutional defect in the appointment of the FHFA director—so there was no legal basis on which to void his actions. This addresses multiple arguments that have occurred since Seila, with defendants asserting that the CFPB’s original director did not have standing to begin actions against them. CFPB stated that an argument negating the director’s actions lacks the support of precedent and doesn’t hold up to logic. As such, a complaint filed by CFPB against student loan provider Navient will stand. The Bureau affirmed that Navient failed borrowers systemically and illegally, and that the complaint remains as valid now as the day it was filed. Similarly, representatives for American Check Cashing Inc argued that a suit alleging deceptive practices should be tossed. Ultimately, the action was ratified.
Commercial

Guaranteed Rate of Return for Aussie Class Actions Rankles Litigation Funders

A new government proposal has been met with strenuous objections from litigation funders, lawyers and company directors alike. The proposal would mandate that at least 70% of any payout in a class action must go to the members of that action. Some find it telling that the Law Council of Australia stated that such a limit would make claims financially untenable for litigation funders. Financial Review reports that the proposal was made after a joint parliamentary committee in 2020 advised that Australia adopt a guaranteed rate of return for class actions. In May of this year, AG Michaelia Cash and Treasurer Josh Frydenberg requested submissions on this idea. It was also suggested that class actions relating to financial products including shareholders class actions be exclusively heard in Federal Court. These two proposals are intended to ensure that claimants were compensated fairly for their losses, and to prevent funders and legal firms from hoarding a disproportionate percentage of an award. This may seem reasonable from a client’s perspective, but when funders take 100% of the financial risk, surely they deserve a sizable share of the award? There’s also a focus on eliminating so-called ‘forum shopping’ to choose the jurisdiction most favorable to a particular client or case type. Some say it makes more sense to use a sliding scale approach, wherein the minimum payout to claimants increases as the recovery amount grows. At the same time, 50% of the gross award as a proposed backstop is reasonable, according to the AICD. Funders should be permitted to seek a return on their investment, without being hobbled by inflexible laws that don’t consider all relevant factors.
Commercial

AxiaFunder Opens New Doors for Litigation Investors

Litigation Finance has experienced tremendous growth in recent months—owing to the pandemic among other factors. It’s increasingly popular among investors seeking an uncorrelated asset class. However, few mechanisms exist to allow investors to select the cases they fund directly—one of those, is AxiaFunder. UK Investor Magazine explains that AxiaFunder is the brainchild of Cormac Leech, whose experience with legal funding led him to believe investors wanted to be empowered to invest directly in cases of their choosing. Potential returns in litigation funding can be quite high, with AxiaFunder boasting a greater than 20% targeted return on portfolios of cases. While many funded cases can take years to complete, others will be settled much earlier—allowing investors to see returns in as little as 12 months. For investors, one of the most compelling aspects of investments in legal funding is their lack of correlation with traditional markets. Unlike bonds or equities, litigation isn’t affected by economic growth—in fact, trying economic times may create a greater need for funding and a wealth of cases to choose from. While every case is different, AxiaFunder asserts that its funded cases contain a 70-75% probability of a win at trial or via settlement. Funding requests have been robust, and AxiaFunder estimates that about 1 in 20 cases is accepted for funding. Obviously, effective vetting of cases is a crucial component of a successful legal investment. The risk of losses in legal funding stem from unsuccessful cases. This can result in the loss of the entire investment, and could even include an order to pay costs. That’s why ATE insurance is used for all funded cases on the AxiaFunder platform. Additional insurance is sometimes used to protect investor capital to the tune of about 50-80%.
Commercial

Liquidators Can Now Assign Examination Powers to Legal Funders

Australian Federal Court has established that liquidators may assign the right to examine relevant parties and to acquire documents.   MONDAQ details that in 316 Group Pty Ltd, the liquidator transferred its right to sue to a legal funder, with an agreement that the liquidator would receive 15% of any recovery—a typical arrangement. The funder approached ASIC for permission to make an application for summonses and documentation as an ‘eligible applicant.’ This was granted, and the needed documents were obtained. However, under the “Harman” principle, the respondent argued that the funder sought to use the documents for reasons unrelated to why they were produced. Moreover, they asserted that examinations conducted by litigation funders were an abuse of process and represented a pursuit of private purpose. If the actions of the funders were determined to be without benefit to the company itself, that would constitute private purpose. If the purpose of the examination is not to benefit the corporation—that could be an abuse of process. The court found that stance unpersuasive though, holding that the funder didn’t need court permission to use the documents to recover a debt. Debt recovery is the original purpose for the documents, albeit on behalf of another party. The company, via the liquidator, maintained a 15% interest in the recovery, valued at about AU $2.2 million. It was clear from the outset that liquidators had the right to assign claims, as detailed in the Corporations Act. What was not clear was whether liquidators could legally assign their ‘right to sue.’ However, the Insolvency Reform Act 2016 did allow liquidators to assign that right. This was ultimately affirmed by the court, opening the door for many more such arrangements to come.
Commercial

Legal Funding Trends: Mergers, Specialization, Evolution

It’s been fascinating to watch the progression of litigation funding happening around the world. Territories each develop their own regulations based on specific goals, when welcoming the practice. Some are positioning themselves as litigation destinations, while others seek ways for the practice to benefit citizens with the greatest need. Legal Futures details in a guest post from Asertis Chief Executive Ian Madej, that we can expect to see more new entrants into the litigation funding market. Notably, Madej suspects that many of these startups will be unprepared for the harsh realities of the market. A recent case involving British sub-postmasters demonstrated the value of litigation funding to the entire world. The quintessential funded case helped people of average means gain justice when a huge and well-monied entity wronged them. The sub-postmasters lacked the financial means to seek the justice they deserved, and funding worked exactly as intended. Funding startups are popping up with increasing frequency, possibly believing it will be easy to generate big returns early on. In most jurisdictions, barriers to enter the funding space are limited. But success in litigation funding requires the infrastructure to conduct due diligence—including input from litigators, financial professionals, investigators, and experts in a variety of industries. In all likelihood, many of these upstart funders will wash out of the industry due to being inexperienced, over-leveraged, or lacking in a clear investment strategy. Meanwhile, existing funders are adapting to the changing realities of their industry. Some are developing niche practices with specialized staff in order to focus on specific industries. No doubt, this will continue.
Commercial

Demand for Litigation Finance Rises in India

Thanks to the global financial upheaval caused by the COVID pandemic, companies around the world fear a financial shortfall. Litigation funding is one way that corporates alleviate financial pressure. The Leaflet explains that litigation funding provides a level playing field in legal conflicts where one party has far more resources than the other. Without it, plaintiffs may be forced to accept a lowball settlement rather than hold out for a more appropriate award. Legal funding isn’t just a net gain for plaintiffs lacking in financial resources. Before a funder agrees to take on a case, due diligence is applied. No funder wants to back a losing case or even a frivolous one. Funders will vet cases on their merits, risks, complexities, and the defendant’s ability to pay, before deciding whether or not to fund. Currently, India lacks a legislative regime for third-party legal funding. The nation does not allow contingency fee arrangements between lawyers and clients either—which amplifies the need for funding. In 2018, the Indian Supreme Court approved legal funding in Bar Council of India vs AK Balaji. Several states including Gujarat, Karnataka, and Madhya Pradesh, have amended existing rules to clarify the exact circumstances required for funder involvement in a legal matter. A 2017 committee report affirmed the importance of, and need for, litigation funding—particularly in helping India become a preferred jurisdiction for arbitration. This committee examined steps taken in more arbitration-friendly territories like France, Singapore, and Hong Kong. These all include the existence of well-established legislative structures that are welcoming to third-party funders. What’s needed here is for India to focus on domestic markets, which until now has not been emphasized. Aside from a single active funding entity, India is without a formal regulatory structure to govern the practice. Establishing that will likely increase confidence in the Indian legal system around the globe.
The LFJ Podcast
Hosted By Robert Hanna |
In this episode, we sat down with Robert Hanna, co-founder of Augusta Ventures, the largest litigation funder in the UK by case volume. Robert discussed Augusta's recent GBP 250 million fundraise, including how the company plans to invest its capital, how he envisions the global market for litigation funding will evolve post-COVID, and what the large funding round says about the viability of the litigation funding industry. [podcast_episode episode="8266" content="title,player,details"]