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“Edge” for Litigation Finance Managers

July 22, 2020

“Edge” for Litigation Finance Managers

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
  • As the litigation finance industry matures, there will be more competition, more fragmentation and more specialization
  • Competitive advantages will be necessary for managers to differentiate themselves in the marketplace and produce strong risk-adjusted returns
  • Managers should institutionalize their “edge” to create equity value for themselves, and separate the value of their organizations from the principals running it
INVESTOR INSIGHTS
  • Investors should be looking for managers that have some advantage, or “edge” vis-à-vis their competition; an informational advantage is one approach
  • Funders should be open-minded about their diligence process, and experiment with non-conventional approaches to add value to the case
  • Informational advantages may be particularly beneficial in collections and enforcements
In the capital markets industry, there is a concept referred to as “edge”, which can be defined as any legal form of information, insight or proprietary process or knowledge which an investor possesses that allows him or her to outperform peers and generate alpha.  Investors look for managers with “edge” as a point of differentiation, and as a means to lower risk and enhance returns in a given investment strategy. In thinking about how a litigation funder can develop ‘edge’, one option is to acquire an informational advantage that enables the funder to invest where others do not dare to tread, or avoid investing where the path is well worn.  One way to obtain an informational advantage is to look where others are not looking.  Today, we have at our disposal the world’s largest accessible database free for anyone to access – the worldwide web.  We also have the so-called “dark web”, where fewer dare to participate, but which may possess insights nonetheless. In order to get a better perspective on the nuggets of gold that lie within the web, I decided to reach out to Cameron Colquhoun of NEONCentury, a UK-based intelligence firm, to better understand how the litigation finance community may be able to generate edge. The Web…. In some ways, little has changed about our use of the internet in 30 years: we all still use screens, keyboards and mice to open windows and browser pages. What has changed, without exception, is the size of the world behind our screens – which is far bigger than our brains and imaginations can appreciate. As of 2016, Google revealed it knew of 130 trillion web pages, and the real number today is likely to exceed 200 or 300 trillion. To put it another way; as the Head of Security at Twitter pointed out back in 2011, one-in-a-million events happen on the internet every second, and one in a billion events happen almost as frequently. It is a mathematical near-certainty that within all of this data, game-changing intelligence is sitting there, waiting to be found – vital to the success of any litigation. The truth is, very few law firms or investors understand this reality, and therefore rarely ever engage or commission the type of intensive, detailed online investigations that are required to push the confidence intervals of success up by 1, 2, 5, 10 or even 20%. In the biggest cases, this can mean tens if not hundreds of millions of dollars of difference in settlement. …and the Dark Web The dark and unindexed web is another part of the web that is as yet untouched by both law firms and litigation finance. In particular, leaked data and data ‘dump’ sites hold huge amounts of pivotal intelligence. The most prominent case of leaked data to date is of course the Panama Papers, where millions of files belonging to a single Panamanian law firm were leaked online and led to over $1.2bn in recoveries (the real figure is likely to be far higher, as most countries do not make settlement data public). Dozens of prominent individuals had their assets exposed, and with millions of documents available to research – many more hidden assets and frauds are likely to be revealed amongst the 11.5 million files. Every time a new major leak is released online, (more recently BlueLeaks and 29Leaks), law firms or litigation financiers should be feverishly combing through its contents looking for angles. Case Study At NEONCentury, we are often tasked with conducting investigations prior to a potential litigation. In one case, a hedge fund asked for our help as they believed a group of CEOs were meeting in secret, and were considering a litigation. This global company, they suspected, was going to be sold for several billion below market value in some kind of backroom boys club deal. Using our data capabilities, we tracked the private jets owned by those who attended these meetings, but the planes were delisted from public view (this is known as a BARR / LADD request and often used by CEOs and Ultra High Net Worth investors for anonymity). BARR-listed jets do not appear on sites like FlightRadar and FlightAware. However, these aircraft, by law, must emit radio signals (ADS-B) data, and using the right online databases and sources, the aircraft can be tracked and historical manifests can be discovered. We were able to conclusively prove that the private jets belonging to three members of the secret meetings were all on the same runways at multiple times and locations, giving our client a route to a potentially multi-billion dollar litigation. It is difficult to imagine a single law firm on the planet that would have these capabilities in-house, or even understand the ‘art of the possible’ when it comes to open data. Today, litigation financiers allow law firms to manage the research and investigation sides of a case, hoping that either the law firms’ in-house research teams or external corporate intel firms might yield further intelligence to tip the outcome in their favour. Law firms are not known for their technological prowess or understanding of the internet, generally, and therefore the litigation finance world may be missing real value in allowing law firms to manage the technical and cyber side of a case on their behalf. …the “Edge” If investors can accept that game-changing intelligence for any litigation is out there in the public domain, they may be better-prepared to commission this research directly with corporate investigations firms *before* any litigation is even considered. Investors would then be forearmed with a much stronger hand when they engage both law firms and claimants. This approach would greatly improve the ROI of litigation finance, and is analogous with the world of hedge funds and short-sellers. Many of these firms spend months or years investigating a company, searching for hidden value or opportunity. In the case of Wirecard, hedge funds discovered evidence of fraud just by conducting deep online investigations of Wirecard’s clients. Some walked away with billions in returns on this research. There is no reason why the same approach cannot be applied to the world of litigation finance: forward-thinking investors, who understand the power of corporate intelligence and the scale of the internet, can partner with world class investigators, and take these results to the right law firms to alter the course of multimillion and multibillion-dollar litigations. Investor Insights As the litigation finance industry matures, there will be a significant increase in managers who are attracted by the returns inherent in the industry, and the intellectual challenge of applying their litigation craft in another application.  The industry will scale, fragment and specialize.  This will make it more difficult for fund managers to differentiate their approach and value.  Forward-thinking managers should be looking at ways to create “edge” for themselves to attract institutional capital and generate superior risk-adjusted returns.  An informational advantage is one such way to create “edge”. As always, I am open to criticism and other points of view, so feel free to contact me to exchange ideas.  Edward Truant is the founder of Slingshot Capital Inc., an investor in the litigation finance industry (consumer and commercial) and a former partner in a private equity.  Ed is currently designing a new fund focused on institutional investors who are seeking to make allocations to the commercial litigation finance asset class.  Cameron Colquhoun is the founder of Neon Century, a former UK intelligence officer and winner of the Fulbright Award for Cyber Security. Neon Century is an elite corporate intelligence firm based in London, providing clients in the hedge fund, equity and litigation sectors with decisive advantage.

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Commercial

Defense Firms Move Into Contingency Work as Funders Supply Capital and Case Validation

Traditionally defense-oriented large law firms are increasingly taking on plaintiff-side engagements for their corporate clients, with litigation funders providing both the capital and an independent assessment of which claims merit pursuit.

As reported by Original Jurisdiction, the shift was the subject of a Burford Capital panel discussion examining how the historical division between plaintiff-side and defense-side practice has continued to erode. Corporate clients, panelists observed, have come to treat affirmative litigation as a balance sheet item rather than a cost center.

The reframing is straightforward: as one panelist put it, "if you have a meritorious legal claim, that is an asset" — one that can generate value for shareholders instead of sitting unused. Recognizing claims that way, however, requires firms built around hourly billing to absorb risk they have not historically carried.

That is where funders enter. By financing plaintiff-side matters, funders allow firms to pursue contingency work without exposing their own economics to a single outcome. Panelists also described the diligence funders perform as valuable in its own right, characterizing a funding commitment as "a vote of approval" on the strength of a claim.

The transition demands a change in orientation as much as in economics. Lawyers accustomed to defending must, in the words of one participant, "stop playing defense" and play offense, while managing budgets against work that generates no continuous hourly revenue. Larger corporate clients, meanwhile, are weighing potential recovery against the commercial relationships a claim may disturb, and selecting counsel accordingly.

Commercial

Drafting Determines Whether Funding Costs Are Recoverable in Singapore Arbitration, Practitioners Warn

Whether a successful party can recover its third-party funding costs in a Singapore-seated arbitration remains unsettled and turns substantially on how the funding agreement itself is structured, according to new practitioner guidance.

As reported by Pinsent Masons, recoverability is determined by tribunals on a case-by-case basis, with no settled rule compelling or barring an award of funding costs. The threshold for challenging a tribunal's costs determination in court is correspondingly high, reflecting Singapore's minimal-intervention approach to arbitral awards.

The analysis points to the Singapore International Commercial Court's decision in *DTH v DTF*, in which the court declined to disturb a tribunal's refusal to award funding costs alongside legal costs on an award of approximately $14.73 million. The SICC observed that it was "difficult to see how such a determination could be said to shock the conscience," signaling how little room parties have to relitigate costs allocation after the fact.

Drafting is where the guidance places the emphasis. Funding agreements must satisfy the requirements of section 5B of Singapore's Civil Law Act, and arrangements framed as commercial investments in the outcome rather than as funding for the costs of proceedings risk falling foul of the maintenance and champerty rules that section 5B carves out.

The practical implication for funders and funded parties is that the recoverability question is largely settled at the point of contracting, not at the costs stage. The guidance also notes the divergence between Singapore-seated arbitration and SICC proceedings, where recovery of funding costs remains prohibited outright.

Commercial

New Jersey Appellate Division Upholds Legal-Bay Medical Funding Agreement Against Statutory Challenge

New Jersey's Appellate Division has affirmed the enforceability of a Legal-Bay LLC funding agreement in *Viglianti v. Blue*, rejecting a plaintiff's argument that state insurance and lien statutes invalidated his obligation to repay the funder after his personal injury case settled.

According to PR Newswire, the underlying dispute arose after the plaintiff exhausted his automobile Personal Injury Protection benefits following a motor vehicle accident but still required spinal fusion surgery. Legal-Bay advanced $90,000 directly to his medical providers, allowing the procedure to proceed while his claim against the defendant remained pending.

After the case settled, the plaintiff challenged Legal-Bay's right to repayment, contending that New Jersey statutes governing PIP reimbursement and physician liens operated to void the funding agreement. Both the trial court and the Appellate Division disagreed. The appellate panel found that the cited statutes did not "invalidate or limit the agreement," characterizing it instead as a private contract voluntarily entered into by the plaintiff after consultation with counsel.

The decision is notable for the distinction it draws between statutory schemes regulating insurers and medical providers on one hand, and privately negotiated funding arrangements on the other. Rather than reading the PIP framework as occupying the field, the court treated the funding agreement as a separate contractual undertaking that the plaintiff was free to make.

For the consumer legal funding sector, the ruling supplies appellate-level support for medical funding structures in a state where the treatment of such arrangements has drawn recurring scrutiny. It also underscores the role documented consent and independent legal advice play when funders defend agreements against later statutory attack.