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Hedge Funds Showing Increased Interest in Litigation Claims

January 15, 2019

Hedge Funds Showing Increased Interest in Litigation Claims

It’s no secret that over the last several years, Wall Street has been pouring money into the litigation space – whether indirectly by capitalizing litigation funders, or directly via their own investments into the space. However the recent revelation of Baupost Group’s $1 billion purchase of legal claims against utility company PG&E illustrates both the scope and scale of the hedge fund world’s interest in the legal sector. As reported in Yahoo News, billionaire Seth Karman’s Baupost Group has long been one of the titans of the hedge fund world. Now Baupost is spreading its wings, having purchased $1 billion of legal claims against utility giant PG&E. Interestingly, Baupost appears to have purchased the claims as a hedge on its investment in PG&E stock. Klarman’s fund invested in PG&E, which subsequently plummeted over 80% after the California wildfires left the utility company $30 billion in debt and facing imminent bankruptcy. However, in a process known as subrogation, Baupost also purchased legal claims against PG&E, held by the utility company’s insurer. The hedge fund reportedly paid 35 cents on the dollar for those claims, and now maintains the right to sue PG&E, the very same company it invested in. Insurance claims are repayable in a bankruptcy proceeding, however Baupost may be in for a bumpy ride to recoupment, given their status as a general unsecured creditor. That classification essentially places them last in line. This is not the first subrogation claim Baupost has pursued, and it is currently engaged with another similar claim. Sometimes the hedge fund purchases a partial subrogation, and partners with an insurer in the litigation of an entity. All of this shows how far Wall Street is willing to go when it comes to capitalizing legal claims.

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Commercial

LITFINCON Europe Sets Amsterdam Agenda With Burford, Therium, WTW and Susman Godfrey on the Bill

Siltstone Capital has released the full programme for the first European edition of LITFINCON, which opens in Amsterdam on 7 October with eleven panels and a speaker roster drawn from funders, brokers, insurers and the plaintiff bar.

As reported by PR Newswire, the two-day conference runs 7 and 8 October at the Rosewood Amsterdam, the former Palace of Justice on the Herengracht, with VIP programming including a dinner and canal cruise the evening before. This is the seventh LITFINCON edition and the first held in Europe, following events in Houston, Beverly Hills and Singapore that have drawn more than a thousand attendees between them.

The theme is "The Claim Is the Asset: IP, Arbitration, Class Actions & the Investors Who Know It." Confirmed speakers include Philipp Leibfried, Managing Director and Head of Europe at Burford Capital; Neil Purslow, Co-Founder and Managing Partner of Therium Capital Advisors; Max Tribble of Susman Godfrey; Dan Kesack of WTW; Nick Moore of CAC Specialty; Jamie Molloy of Ignite Specialty Risk; Tets Ishikawa of LionFish Capital; and Till Schreiber of Cartel Damage Claims.

Panels cover pricing in European collective actions, enforcement of arbitration awards, Unified Patent Court strategy, artificial intelligence in litigation finance, insurance structures for legal assets, and the divergent regulatory positions taking shape in the UK, EU and United States. The programme closes with a 75-minute unscripted session billed as "Candid Conversations."

Jim Batson, Chief Investment Officer of Legal Finance at Siltstone Capital, said: "Every deal in this industry starts with a conversation between people who trust each other."

Commercial

Padronus Funds Three German Collective Actions Over Streaming Price Rises, Capping Its Fee at 9.9%

Austrian funder Padronus is financing three new German collective redress actions against Netflix, Apple TV and WOW, structuring its return just below the statutory ceiling that governs funder participation in the country's collective redress regime.

As reported by Digital Fernsehen, the Verbraucherschutzverein filed the three Abhilfeklagen on 15 September, two before the Kammergericht Berlin and one before the Bayerisches Oberstes Landesgericht. The claims allege that the providers raised subscription prices unilaterally on the basis of clauses that do not meet German standards for consumer contracts. Cited increases include WOW from €35.99 to €44.99, Apple TV+ from €4.99 to €9.99, and Netflix from €11.99 to €19.99.

The funding terms are the notable feature for the market. Padronus, operating through Vienna-based Prozessfinanzallianz GmbH, carries the entire cost risk and takes 9.9% of any proceeds, deliberately set beneath the 10% cap imposed on funder remuneration by the German legislation implementing the EU Representative Actions Directive. Where a participant holds legal expenses insurance that responds, Padronus waives its share altogether. Consumers pay nothing regardless of outcome.

Expected individual refunds run from roughly €200 to €700 per provider, and Padronus chief executive Richard Eibl has said a subscriber to all four services could recover close to €800. At the participation levels the funder is targeting, aggregate exposure would reach nine figures.

The German courts have not settled the question. The Kammergericht Berlin held comparable Netflix and Spotify clauses invalid in 2023, and the Bundesgerichtshof declined to disturb that outcome. But the Bayerisches Oberstes Landesgericht dismissed a parallel claim over Prime Video in July, and an appeal is pending.

Commercial

CAT Approves £260M Google Settlement, the Largest Class Payout in the Regime’s History

The Competition Appeal Tribunal has approved the £260 million settlement of the opt-out collective action brought against Google on behalf of thousands of UK app developers, clearing the way for the largest distribution to class members the Tribunal has sanctioned since the UK's collective proceedings regime began in 2015.

Of the total, £160 million is earmarked for eligible developers, including sole traders and small businesses that sold apps or digital content through the Play Store from August 2018 onwards. The remaining £100 million covers the funding, insurance and legal costs of running the case. Individual payouts will be calculated on each developer's qualifying Play Store sales during the relevant period, and eligible businesses are being directed to the claim website to register ahead of the claims process opening.

As reported by City AM, the claim alleged that Google abused a dominant position by imposing unfair and excessive commissions on developers distributing through the Play Store. Google settled without any admission of liability or wrongdoing, saying it was pleased to reach agreement subject to court approval.

For the funding market, the approval resolves the question hanging over the case since August. Bench Walk Advisors financed the proceedings, and the professional parties agreed to forgo £34 million of their contractual entitlement, bringing their combined return down to the £100 million the Tribunal has now approved. The Tribunal's willingness to sanction a settlement of this size, with costs and funder returns disclosed and reduced in advance, gives funders a concrete benchmark for what the CAT will treat as just and reasonable.

Neil Purslow, Chairman of the Executive Committee of ILFA, said: “This landmark settlement vindicates the opt-out collective actions regime at an important moment for its future. Thanks to the regime and the litigation funders who underpin it, thousands of small businesses with no realistic alternative to take on a corporate wrongdoer will now be awarded compensation they could never have won on their own.”

“As the Government considers the future of the regime, this case is proof the system can deliver. This is a young regime that should be nurtured and expanded, not constrained, so more consumers and small businesses can hold powerful defendants to account.”