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Commercial Deals

CIO Roundtable: Art of the Deal from Terms to Returns

A panel consisting of Sarah Johnson, Senior VP and Co-Head of Litigation Finance at D.E. Shaw, Aaron Katz, Co-Founder and CIO of Parabellum Capital, David Kerstein, Managing Director and Senior Investment Officer at Validity Finance, and Joe Siprut, CEO and CIO of Kerberos Capital Management, discussed the various investment aspects of litigation funding as an asset class. The panel was moderated by Steven Molo, Founding Partner of MoloLamken.

The conversation began with new trends in the industry. Price compression came up early. Joe Siprut of Kerberos Capital Management noted he has witnessed price comparison over the past couple of years, including having seen multiple term sheets that were mis-priced. Litigation finance has always been about attractive risk-adjusted opportunities, yet if the risk remains the same and price compression remains, that reduces the attraction of the asset class. Moderator Steven Molo was surprised there hasn’t been more fallout in this regard.

Aaron Katz of Parabellum pointed out how things are opening up after COVID, and that helps a lot, given that a pipeline of cases awaiting trial quickly burns through ROI. Katz countered the price compression argument, stating that he hasn’t witnessed real price compression and hasn’t found his firm to be competing on raw price. Of course this depends on which segment of the market you are looking at.

The conversation then steered toward ESG, and David Kerstein of Validity noted how there are green shoots of funders getting involved in impact litigation. Yet for most commercial funders, ESG would maintain the same type of analysis as any other case–that said, funders like to have a ‘good story’ for the case, and ESG can bring that to the table. Aaron Katz mentioned Parabellum is very cautious about ESG in particular. “We think people need to be careful about labelling things incorrectly,” said Katz. There are real impact players out there, and litigation funders should be careful about loosely claiming the mantle.

The next question was pretty blunt: Is there a secondary market right now? Aaron Katz thinks not “I pray for it daily.” There is a network of well-resourced institutional players who like to look at claims, but the transactions are laborious (DD challenges, information asymmetry). The secondary participant is not going to be in a direct conversation with the counter-party, and that could cause complications.

One final point: Joe Siprut noted that the evolution of a secondary market is one of the main things that can really unlock a lot of investment for the industry. One of the main barriers to investment is the long lockup period investors are staring at, and if a secondary market were to materialize, that would make fundraising a much easier sell.

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Case Developments Commercial

SEC Sues Father and Son over Fraudulent Mass Tort Funding Scheme

Whilst litigation finance is now a mature and established industry, this does not stop rogue actors from engaging in fraudulent schemes to try and reap personal benefit at the expense of unwitting investors.

Reporting by Bloomberg Law provides details on a lawsuit brought by the Securities and Exchange Commission (SEC) against a father and son in Florida who are accused of using a supposed litigation funding scheme to defraud investors out of $125,000. The lawsuit filed last Friday alleges that Michael Chhabra and Vineet “Vincent” Chhabra set up Tort Fund LLC in April 2019, claiming that the company would provide litigation finance to law firms, when in reality the pair used it as a personal fund for their own legal fees and miscellaneous expenses.

The SEC’s suit, which was filed in the United States District Court for the District of Columbia, claims that Tort Fund LLC’s owners had advertised the fund as a way for investors to support mass tort cases being brought against medical device and household product manufacturers, but did not enter into any funding agreements with law firms to do so. The $125,000 raised was then used to cover legal costs in Michael Chhabra’s own bankruptcy proceedings, paying for the pair’s personal expenses, with around $40,000 spent on maintaining the fraudulent scheme by paying individuals who solicited new investors. 

In its lawsuit, the SEC is asking the court to impose civil penalties and pay out the profits from the scheme, and to prohibit the pair from running any companies that have a class of securities registered in the future. The SEC’s filing can be read here.

Case Developments Commercial

Dutch Supreme Court Denies Sulu Heirs’ Appeal to Enforce Arbitration Award

The long-running dispute between Malaysia and the heirs to the Sultanate of Sulu has been one of the most high-profile cases in recent years, and one that has generated plenty of debate about the role of litigation funders in legal proceedings targeting national governments. A new development in the dispute has seen the Sulu heirs receive yet another unfavourable judgement, with potentially negative implications for their litigation funder, Therium Capital Management.

Articles in Bloomberg Law and Solicitors Journal covers last week’s ruling from the Supreme Court of the Netherlands, which dismissed the Sulu heirs’ appeal to enforce the disputed arbitration award given out by arbitrator Dr. Gonzalo Stampa in Paris. As a result of the Dutch Court’s ruling, the Sulu claimants will now have to cover the legal costs for the appeal and have lost the opportunity to enforce the award by seizing Malyasian assets in that jurisdiction. The finality of this ruling represents a blow to Therium, which invested $20 million in the Sulu heirs’ claim.

Azalina Othman Said, minister in the Malaysian Prime Minister’s Department (Law and Institutional Reform), stated: “Malaysia welcomes this landmark ruling as a momentous victory for the rule of law, representing a further step towards the end of the Sulu case and the preservation of the sanctity of international arbitration as an alternative form of dispute resolution.”

Therium did not respond to Bloomberg Law’s request for comment at the time of publication.

Commercial People Moves

Aperture Investors Hires Luke Darkow to Launch Litigation Finance Strategy 

Aperture Investors, an alternative asset manager and part of the Generali Investments platform, today announced that Luke Darkow has joined the firm to lead its new private credit Litigation Finance strategy. 

Darkow joins Aperture from Victory Park Capital, a global alternative investment manager, where he was a Principal and Portfolio Manager responsible for sourcing, analyzing, executing, and managing investments within the litigation finance asset class. Prior to Victory Park Capital, Darkow held roles at TPG Capital and Morgan Stanley. 

"With Aperture entering its next phase of growth, we see significant potential in specialty lending, particularly in litigation finance, which we believe remains a relatively underbanked asset class. Estimates suggest that the litigation finance market could double annually through 2035," said Peter Kraus, Chief Executive Officer and Founder, Aperture Investors. “Litigation Finance is a niche, relationship-driven sector—and Luke is no tourist. His expertise in both private and public debt investments, his deep network of law firms and legal service providers, and his ability to source opportunities and raise capital will allow us to build out this unique offering at Aperture.”

Litigation Finance involves the provision of third-party capital to help finance law firms or plaintiffs pursuing legal claims in exchange for, or collateralized by, a percentage of proceeds received upon the successful resolution of legal disputes. Aperture’s Litigation Finance strategy will primarily provide structured loans to law firms backed by expected legal fee receivables from procedurally mature, settled, and/or short duration legal cases, targeting uncorrelated returns.

“I’m incredibly pleased to join Aperture and help drive the firm into new opportunities in private credit with this niche, asset-based lending strategy,” commented Darkow. “As Aperture expands its slate of strategies and products, I’m also attracted to the intellectual horsepower and best-in-class infrastructure within the broader firm.” 

About Aperture Investors 

Aperture is an alternative asset management firm offering credit and equity strategies in commingled and bespoke portfolios for institutional investors. Aperture's mission is outperformance, and it is focused on identifying portfolio managers who it believes have a unique edge and can consistently deliver innovative, solutions-oriented investment results throughout market cycles. Since inception, Aperture has steadily grown its breadth of products, and as of August 31st, it manages approximately $4 billion. Its investment strategies are diversified across asset classes and geographies – each managed by a dedicated investment team – with distribution across North America, Europe, Middle East and Asia. 

Aperture Investors was founded in 2018 and is led by industry veteran Peter Kraus and by Generali, one of the largest global insurance and asset management providers. For more about Aperture, visit us at www.apertureinvestors.com.

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