Trending Now
  • An LFJ Conversation with Lauren Harrison, Co-Founder & Managing Partner of Signal Peak Partners

All Articles

3857 Articles
Commercial Investor's Corner Slingshot Capital Special Features

Asset Recovery, Collectability and the Uses of Intelligence in Litigation Finance

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 SUMARY
  • Collectability risk has moved to the forefront of litigation finance as a result of the Covid-19 induced financial crisis
  • Asset recovery and enforcement is a niche area within litigation finance that requires a unique skill set to be successful
INVESTOR INSIGHTS
  • Asset recovery and enforcement is a component of any piece of litigation, but certainly more prominent in certain case types and during times of financial stress
  • There are many risks associated with asset recovery and enforcement actions which give rise to different investor return characteristics – higher volatility, higher potential returns, and longer durations, to name a few.
Expanding on a recent article I wrote about defendant collectability risk in the context of the current Covid-19 induced financial crisis, I have reached out to AVVISO, a firm specialising in enforcement and collection, to discuss some of the challenges litigation finance managers may face in the current environment. The Covid-19 pandemic is forcing many industries to adapt to new realities. The litigation finance industry is no different. As new realities emerge, so do new opportunities, and as the dust settles, we anticipate the following developments:
  • Collectability risk will be assessed as rigorously as legal risk before any commitments are made against sovereigns and commercial counterparties affected by the crisis.
  • A growth in demand for asset recovery and enforcement funding.
This article explores how to effectively assess collectability and maximise returns on asset recovery investments. Key to both is a multidisciplinary approach to supplement the traditional legal one. COLLECTABILITY RISK Let us take a closer look at what it means to assess collectability in the context of the broader litigation finance underwriting process. Woodsford Litigation Funding provides an overview of the assessment process it employs, which is broadly representative of the wider industry. “The funder will focus on six fundamental criteria when evaluating a claimant-side litigation funding opportunity”:[1]
  1. Merits of the claim
  2. Claimant (e.g. motivations for seeking funding and prior litigation history)
  3. Strength of claimant’s legal representation
  4. Litigation budget
  5. Expected damages
  6. Respondents and recovery
Litigation funds are well-equipped to address the first five criteria. Between the formidable in-house legal knowledge of most funds, input from external law firms which are retained to provide opinions on the merits, and input from claimant’s counsel and other experts, funders have this covered. However, fund managers without internal expertise may be on comparatively shakier ground when it comes to that final sixth point, which is concerning at a time when the importance of effectively assessing collectability risk has perhaps never been greater. So why is this? Assets…but not only A sophisticated methodology to properly assess collectability is not just about assets. It is also about humanising problems which are predominantly viewed through a legal lens. Whether the opposition is a state, corporation or individual, we would explore: Key stakeholders
  • Profile and motivations of the main decision-makers
  • What is their level of resource and resolve?
  • How entrenched is their position: are they likely to settle or fight a protracted legal battle?
  • If the former, what do they perceive to be an acceptable settlement range?
  • How politicised is the dispute and how would a change of government impact a state’s attitude towards it?
Modus operandi: disputes
  • Are they currently or have they in the past been involved in other major disputes?
  • If so, what lessons can be gleaned from the experiences of others who have faced them?
  • Do they have a history of avoiding payment of judgment/award debts?
  • Could we face a scenario where we are competing with other creditors over a limited pool of assets?
Assets
  • What assets does the defendant/respondent hold directly in jurisdictions amenable to enforcement?
  • How leveraged are these assets? How has the current financial crisis impaired asset values?
  • What is their asset profile more broadly and how is their ownership of these assets structured (if not held directly)?
  • Would these structures impede our ability to attach key assets if we needed to?
  • Are there any indications that the defendant is actively dissipating assets or otherwise making themselves ‘award proof’?
  • Has the defendant been forced to sell off assets previously thought available for collection as a result of liquidity needs stemming from the financial crisis?
Commercial activities
  • What is the nature and extent of their ongoing commercial operations?
  • How viable are these operations long-term and how concerned should we be about any commercial vulnerabilities (e.g. high customer concentration)?
  • Are there any commercial vulnerabilities which could be exploited as part of a legal or enforcement strategy (e.g. unreported allegations of bribery)?
Enforcement plan
  • What is the proposed enforcement plan if no voluntary payments are made at the conclusion of the litigation/arbitration?
  • Is the proposed enforcement budget realistic?
And so on. These kinds of questions are answered by means of specialised open source research, human intelligence gathering and other investigative means. In short, collectability is at its heart an intelligence problem – not a legal one. This explains why funds are comparatively weaker at addressing this problem – because the underwriting process they employ is mainly underpinned by legal analysis. There are of course powerful legal tools (e.g. discovery to identify bank accounts internationally) which can and should feed into the process of assessing collectability. As long as someone then takes the time to understand the data generated by legal means, and answers the ‘so what?’ question by placing it in the context of the broader intelligence picture. One final point on collectability: it is fluid. Once litigation finance commitments are made, funds would be well-advised to thoroughly monitor how the answers to the above questions evolve over the duration (often years) of major legal disputes. In the same way that investment banks, private equity firms, and major corporations routinely use intelligence to inform their investments and operations, so too will the litigation finance industry, as it becomes more competitive and established. ASSET RECOVERY  We are frequently asked why asset recovery problems are so common. One reason is the ease with which judgment and award debtors can avoid paying what they owe – if they so choose – which must represent one of the most profound shortcomings of the legal process. And it is easy. If a sophisticated fraudster, sovereign state, or hostile corporate makes a commercial or political decision not to pay a debt, then it is fairly straightforward for them to structure their affairs in such a way that makes it difficult, time consuming and costly for creditors to pursue them. The Covid-19 pandemic will only increase the propensity of debtors to follow this path. Another reason is the failed enforcement approach adopted by many creditors. Typically, the legal team which secured an award or judgment goes on to inherit the enforcement problem if the other side refuses to pay. Often, this team is ill-suited to tackle what is a very different problem than winning the legal argument. Indeed, it is not uncommon for legal teams to inadvertently trigger this problem by adopting a process-driven ‘get the judgment’ approach, while failing to engage sufficiently throughout the lifetime of the dispute with the question their clients care about most: how will we get paid? This creates enormous investment potential in the asset recovery space, especially now, yet it remains on the frontier of the litigation finance industry. We anticipate an increase in opportunities to invest in asset recovery and enforcement matters, and for more funds to develop the knowhow to maximise their returns on these investments. For example:
  • Monetising awards and judgments against sovereign states and/or state-owned enterprises
  • Funding and coordinating enforcement efforts against fraudsters and other recalcitrant commercial debtors
  • Providing capital and expertise to governments to assist with their efforts to repatriate proceeds of corruption (e.g. post regime change)
  • Investing in the non-performing loan (NPL) portfolios of financial institutions in emerging markets
  • Funding cross-border insolvencies and restructurings
So, how will we get paid? Major asset recovery situations are complex problems requiring a flexible, coordinated and multi-disciplinary approach. If funds want to play this game well and maximise their returns on investments, then they need to retire the tired lawyer-investigator trope. Below is a sample of the methods in a multidisciplinary asset recovery playbook: Legal
  • Relevant civil legal work in appropriate jurisdictions (e.g. for the purpose of discovery and to attach assets)
  • Criminal remedies (e.g. private criminal prosecutions and confiscation orders)
  • Insolvency tools
Intelligence
  • Open source intelligence (e.g. to map complex offshore structures and identify revenue streams or personal assets)
  • Human intelligence (identifying and developing relationships with individuals who have access to information of potentially critical importance to the recovery)
  • Surveillance (e.g. to establish a debtor’s pattern of life, identify key associates, or to serve documents)
  • Financial intelligence and forensic accounting
  • Software and other tools (e.g. eDiscovery and proprietary asset tracing software)
Stakeholder engagement
  • Diplomatic approaches (e.g. working with ambassadors to facilitate negotiations with governments)
  • Backchannel negotiations with opposition decision makers
  • Well-timed media and PR strategies (e.g. prior to elections in a sovereign enforcement case)
Secondary market solutions
  • Post-settlement monetisation
  • Identifying non-traditional buyers of awards and judgments. Examples include: hedge funds with existing country exposure seeking to strengthen their hand during sovereign debt restructurings; or global commodities companies which can use a sovereign award to offset their tax liabilities in-country.
This list is not exhaustive and every bullet point merits its own separate discussion. The point is that as with collectability, asset recovery is not just about identifying (and in this case pursuing) assets. It is also about creative problem solving and recognising that there are people on the other side of the equation whose commercial or political calculus needs to change. Asset recovery situations should be overseen by asset recovery specialists – professionals who have an awareness and understanding of the uses and limitations of all the tools in the box and are able to deploy the right ones at the right time. Their individual specialisation matters less than their ability to coordinate international teams and provide overall strategic oversight. If funds embrace the complexities of asset recovery and the need for a multidisciplinary approach, then the new frontier will be bountiful. If they follow too narrow a path, then it may prove unforgiving. Investor Insights For investors in the litigation finance asset class, there should be an appreciation that enforcement and asset recovery represents a niche within a niche. Accordingly, these types of investment exposures have a different risk-reward profile than traditional litigation finance as they are much more about collection risk than litigation risk.  Consequently, proficiency in this area requires a different skill set from a fund manager perspective, and that capability can either be internalized or outsourced depending on the frequency of these opportunities. Concerns in this segment of the market are around ultimate collectability and the timelines involved with collection, both of which may be difficult to assess at the outset. Edward Truant is the founder of Slingshot Capital Inc., and an investor in the consumer and commercial litigation finance industry.  Ed is currently designing a product for institutional investors to provide unique access to the asset class. [1] See https://woodsfordlitigationfunding.com/wp-content/uploads/2019/01/A-Practical-Guide-to-Litigation-Funding_ROW.pdf
Commercial

The Power of GCs to Improve Equity

Despite improved awareness, the issue of gender inequity in law has not been satisfactorily addressed. It’s difficult to say precisely where the problem lies. What we do know is that General Counsel can be doing more to close the gender gap. Burford Capital explains the findings in the Equity Project Study report that they commissioned to better understand the issues. What they found was that GCs have the means to turn a whole company toward closing the gender gap, and ensuring that equitable opportunity is the norm. Firms with formal programs to measure diversity in the workplace are still in the minority. In fact, more than 75% of GCs reported that their companies did not have a diversity-forward policy. GCs can address this by requiring firms to provide data on diversity in hiring, partnerships, and other aspects of law. This sends a strong message that diversity is valued and vital to a firm’s bottom line. In-house legal departments should only work with firms that are meeting expectations in terms of gender diversity. As Caren Ulrich Stacy, CEO of Diversity Lab explains, GCs are able to reward firms with diverse teams and refuse to work with those who don’t. Never underestimate the power of the carrot and the stick. Asking about origination credits and their application is essential to GCs who are looking to support diversity efforts. As one managing lawyer asks, ‘Who gets the relationship credit in big firms?’ In some firms, it’s typical for a senior lawyer (almost always male) to retain credit for new cases they aren’t involved in, or clients they’ve never spoken to. The Equity Project has set aside over $50MM in capital to finance commercial cases where litigation or arbitration is female-led, or for women-owned firms.
Commercial

New York Court Sets Champerty Precedent

Champerty is a word we hear often in connection with Litigation Finance. Despite the term being coined in the middle ages, champerty remains a reasonable issue to take precautionary measures against. The original purpose of champerty laws was to keep litigation from becoming a commercialized business. The National Law Review details that a recent New York decision has clarified the champerty doctrine and how it may be applied. Specifically, the court ruled on the separation of champerty versus standing to bring an action—saying that these two are separate and distinct. On June 3 of this year, the court went on to declare that if a champerty defense isn’t raised during the responsive pleading, it is waived and may not be brought up again later. The doctrine of champerty disallows purchasing a stake in a lawsuit with the intent of bringing an action. That can apply to some types of litigation funding agreements. More commonly though, funding agreements with third-parties provide the means to pursue litigation with the promise of giving the funder a percentage of monies awarded. So long as the funders aren’t actively involved in decision making, champerty rules are not violated.
Announcements Consumer

Pre-Settlement Lawsuit Funding Company Tribeca Capital Launches COVID-19 Program

NEW YORK, June 17, 2020 /PRNewswire/ -- In an effort to use its resources to bring relief and hope to those affected by unprecedented global circumstances, Tribeca Capital Group, LLC, an industry leader in pre-settlement lawsuit funding, announces that it has developed an initiative to reach lawsuit plaintiffs who have been touched by COVID-19 or have been negatively impacted by the sharp downturn in the economy.

"We've watched the amazing events unfolding over the last few months, and we know that there are plaintiffs who have filed suits over automobile accidents, defective products, and other wrongs, who have lost their jobs, or they are ill, caring for a sick family member, or staying home with their children. Regardless of their personal circumstances, they've seen their incomes drop, and unemployment payments just aren't covering all their expenses," explains Rory Donadio, Tribeca's founder and owner.

"We're talking about people who had previously filed a case because they've been hurt in some way and need to be compensated for it. Those cases don't necessarily have anything to do with the pandemic, but now the plaintiffs find that the coronavirus is adding insult to injury by robbing them of their ability to make a living. That's where Tribeca comes in."

Litigation funding allows a plaintiff in a lawsuit to gain access to some of their expected recovery before the case is settled or comes to trial. Anticipating that the plaintiff will receive a settlement amount or an award, Tribeca can often provide an advance that the plaintiff can use long before the case is finally resolved.

"Tribeca is willing to wait as long as it takes for the case to finish, even if that's months or years. In the meantime, the plaintiff can use the advance to pay living expenses, medical bills, rent or mortgage payments, whatever they need," says Donadio. "And, if our client doesn't win or receive a favorable settlement, they don't have to pay us back. It's a risk we're willing to take to make sure that these clients can provide for their families during this trying time."

Tribeca Capital has helped hundreds of plaintiffs in all kinds of cases, including: Auto and Truck Accidents Defective Products and Medical Devices Dangerous Drugs Labor and Employment Discrimination Premises Liability Whistleblower Jones Act Railroad Accidents Commercial and Business Litigation

If you are a plaintiff or plan to file a case in the near future, Tribeca Capital encourages you to contact Rory Donadio, Tribeca Capital Group, LLC, at rory.donadio@tribecacapllc.com, (866) 388-2288 to discuss how pre-settlement funding can help you access the funds you need to weather this outbreak.

For more information, please visit Tribeca Capital at their website.

Commercial

Channel Islands See Increase in Litigation Funding

Litigation Finance is poised to experience a boom in demand as the world tries to recover from COVID-19. Rampant financial uncertainty creates a need for the funding that insures access to justice for those of few means. Funders are well-capitalized, and preparing to sift through cases to find those with the best chances of success. This is all very similar to what the legal world experienced during the 2008 financial crisis. Mondaq explains that law firms can better meet their financial goals by accepting a hand from a litigation funder. Businesses can better pursue litigation without investing limited funds in legal matters.  The 2012 decision involving Valetta Trust paved the way for third-party funding in the Channel Islands by disregarding outdated champerty laws. This laid the groundwork for a system where huge entities no longer have the upper hand over less monied plaintiffs. Since the Valetta Trust decision, litigation funding has steadily increased. The upswing is predicted to continue, as it has in much of the developed world.
Announcements Commercial

Parabellum Capital Announces Final Close of Latest Litigation Finance Fund

Total Commitments Exceeding $465 Million

Parabellum Capital LLC ("Parabellum"), a leader in commercial litigation finance, today announced the final closing of its latest private investment fund, Parabellum Partners II, LP (the "Fund"), with over $465 million in commitments. The Fund is Parabellum’s second broadly-offered private investment fund since its founding in 2012.

The Fund’s investment strategy leverages Parabellum’s investment and risk management processes to build a diversified portfolio of single-case, portfolio, and special situations investments. Limited partners in the Fund include endowments, foundations, pension funds, and other institutional investors.

"We are delighted to have raised new capital from investors in our first fund, as well as a range of institutional and high net worth partners, resulting in a highly-diversified investor base," said Howard Shams, Parabellum Co-Founder and CEO.

"Our investment pipeline continues to grow as we expand existing relationships and the market embraces our emphasis on aligned investment structures," said Aaron Katz, Parabellum Co-Founder and CIO. "We have added new team members to accommodate increased demand for our capital and built out practice area specializations that provide added value to our investments and partners. Significantly, this Fund’s capital allows us to address urgent litigation financing needs for both clients and law firms during this period of economic distress."

About Parabellum Capital

Parabellum Capital is a leading financier of commercial and intellectual property litigation. Its principals pioneered commercial litigation funding in the US and remain on the forefront of shaping the asset class as the industry evolves. Parabellum is a trusted financial partner to claimholders and law firms for a wide array of litigation matters in the US, other common law jurisdictions, and international arbitration forums. Founded in 2012, Parabellum’s team includes legal and financial professionals with backgrounds at major law firms, investment banks, accounting firms, and the federal government. Parabellum principals previously founded the Legal Risk Strategies and Finance group at the global investment bank Credit Suisse.

Parabellum manages both separate accounts and pooled private equity vehicles for institutional and high-net-worth investors globally. Based in New York, Parabellum’s team has invested hundreds of millions of dollars in commercial litigation situations. For more information, visit www.parabellumcap.com or contact Katie Hogan at khogan@parabellumcap.com.

Commercial

Nigerian Case Exposes Weaknesses in Asset Recovery Law

Asset recovery is a tricky business in the best of times. When financial professionals misappropriate funds for their own gain, they can be remarkably clever about hiding it. Such was the case with the Federal Republic of Nigeria as they pursued a case against Shell and Eni regarding the OPL 245 deal. Premium Times details that Nigeria’s plan to recover looted funds is not ideal. Outsourcing various recovery claims to a number of private firms does not seem to be a tenable strategy. In fact, the High Court in London has rejected Nigeria’s attempt to pursue a claim of over a billion dollars from Shell and Eni. Now, FRN is even deeper in debt, having spent almost $2 million in the failed pursuit of missing funds. That’s enough money to fund over 15,000 entire families for a year--according to numbers at the National Cash Transfer Programme currently redistributing recovered funds. Initially, it was asserted by Eni that costs for the recovery would be covered by Drumcliffe, a litigation funder. But the barrister on the case stated that the Nigerian government should make the payments and gain any approvals needed to proceed. If that’s true, how might that impact the funder’s payout, not to mention the people of Nigeria? Suspicion has fallen on the Nigerian Minister of Justice, owing to the high-risk nature of their decision making. Incomprehensible documents and months-long delays in disclosure have not filled the Nigerian people with confidence. Nigeria’s asset recovery policy necessitates that all costs and risks associated with assert recovery are to be outsourced to private firms for a 5% share of recovered funds. What does seem to be clear is that a major overhaul of asset recovery law should be undertaken, focusing on clarifying financial norms, disclosure, and the opacity of funding agreements.
Commercial

Southern Response’s Desperate Attempt to Avoid Opt-Out Class Action

Government-owned entity Southern Response is engaged in a last-ditch effort to avoid an opt-out class action over allegations regarding earthquake insurance settlement claims. Policyholders have asserted that Southern Response withheld information allowing them to underpay when settling claims related to the Canterbury earthquake. Stuff NZ reports that as many as 3000 policyholders may have been misled by Southern Response, who may not have disclosed costs for rebuilding and repairs. This led to policyholders being unaware of what they were actually entitled to, and therefore accepted settlements while relying on incomplete facts and figures. Southern Response has appealed an earlier court decision to approve the opt-out. A litigation funder is involved in the case and will receive an undisclosed share of any award stemming from the class action. This is good news, as Southern Response seems willing to drag the case out for as long as possible. Understandable, since losing this class action could lead to New Zealand Government losses in the millions. In New Zealand, laws regarding funding agreements in opt-in vs opt-out cases are still poorly defined. Tuesday is expected to be the last day for the Supreme Court hearing.
Commercial

Russian Oligarch’s Son Loses Bid to Hide Assets from Mother in Burford-Funded Case

The largest divorce settlement in Britain’s history is not over yet. Temur Akhmedov recently lost his effort to keep his money secret from his step-mother—who is still attempting to gain the award settlement from her divorce. Tatiana Akhmedova is utilizing litigation funding from Burford Capital as she pursues her claim. Daily Mail has revealed that Temur Akhmedov is displeased at his step-mother’s use of third-party funding, and had previously demanded that the terms of the funding be revealed. Meanwhile, his attempts to hide his personal financial records have fallen flat. Justice Gwynneth Knowles has ruled that no reasonable grounds were demonstrated that would necessitate challenging Mrs. Akhmedova’s funding arrangement. This is good news for proponents of litigation funding, even as Temur stated he would pursue the matter with an appeals court—which he asserted would be fairer to him. He went on to express frustration with the family court, implying that the ruling was ‘unfair.’ Akhmedov likened the British family court to ‘Imperialism’. To date, Mrs. Akhmedova has received roughly GPB 5 million of the 452 million awarded to her in the divorce—representing about 40% of her ex-husband’s business. Judges confirmed that Temur Akhmedov has not paid out any of his mother’s settlement voluntarily. Temur has stated that he does not recognize the British judge’s ruling because of his father and Tatiana’s 2000 divorce in Moscow.