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Why Litigation Finance is Suited to Public Markets

The following was contributed by Nick Rowles-Davies, Executive Vice Chairman of Litigation Capital Management (LCM).

The recent and well documented attacks by activist short-seller Muddy Waters on Burford Capital have brought litigation finance into the limelight. Whilst largely focussed on Burford’s accounting methods and corporate governance, the hedge fund’s accusations have raised concerns around the practices and legitimacy of the industry more broadly.

One key question raised is around whether funders should even be listed on a public market. More pointedly, why can companies with questionable governance practices, an unpredictable revenue forecast, and operating in an industry with limited access to a secondary market against which claims can be evaluated, be listed?

A lot of this is down to varying levels of understanding around Burford’s accounting practices, and indeed those of the wider industry. It is important to recognise that while there are many companies operating in the growing litigation finance space, they do not all do the same thing, or account the same way and shouldn’t all be tarred with the same brush.

Fair value accounting – adopted by Burford and others under IFRS 9, is not an evil. But the application of it does matter. There are differing ways of adopting fair value accounting and how it is used is ultimately a management team decision. The accounting treatment for litigation projects varies across the industry and some approaches are more reliant on subjective judgement by management teams than others.

For a clear representation, fair value numbers should always be given alongside historical cash accounting figures, so investors and counterparties are able to see the underlying performance of the business. It is vital that funders are fully transparent and have numbers that can be easily verified and valued externally.

In practice, this entails the development of a fair value accounting method that can be scrutinised and tested by external parties. This probably results in lower valuations than management may have reached alone. But ultimately, as we’ve seen over the past fortnight, it is prudent to be cautious and conservative. The importance of disclosure to shareholders and clients cannot be underestimated.

Subject to the right application of fair value accounting, there are several significant advantages to being listed – relating to transparency, regulation and access to capital – that make it a highly appropriate model for funders.

Being listed on any stock exchange ensures a level of regulation and transparency that the private markets do not. We say this with some authority having been listed on both a main market (the Australian Securities Exchange) and the Alternative Investment Market (“AIM”). Our experience has been that there is little difference in standards and accountability between the two. As a constituent of a public market, there is pressure to ensure that standards of corporate governance are upheld. Natural checks exist to hold companies to account in the form of selling investors, analysts publishing negative research, and, at the most extreme level, activists or short sellers publicly targeting companies.

What’s difficult is that there is no formal regulation of the litigation finance sector, although its introduction in multiple jurisdictions is inevitable in time. It is hard to predict what form it will take, but I have no doubt that respectable funders will welcome it when it arrives, and we should do.

In the meantime, our listed status provides a platform through which we can continue to meet regulatory standards. This is particularly important for firms like LCM looking to fund corporate portfolio transactions. Naturally, sophisticated corporates have stringent KYC protocols, and being listed demonstrates a level of oversight and transparency around where your capital is coming from, often in stark contrast to some.

Furthermore, litigation finance is capital-intensive by its very nature and being listed provides funders with access to public sources of capital in the equity and bond markets. Equity raises provide funders with permanent capital to invest from the balance sheet, thereby avoiding any potential liquidity mismatches that might occur with some alternative fund structures. It also means investors of all types (from institutions to individuals) can gain access to the asset class’s attractive, uncorrelated returns.

There will be a failure in this industry soon. This will be in large part due to the use of contingent revenues to hide loss positions, as well as funders being over reliant on one part of the market, such as single case investments. This is clearly not a sustainable business model and further illustrates the need for the considered use of fair value accounting.

Recent events have been no help to the ongoing education process around the benefits of legal finance generally. It is a rude awakening that the practices of one business in our industry have raised so many questions around the governance and reporting of its peers. It will take time for the jitters to settle. In the meantime, the regulatory oversight that being a listed company provides should be seen as a positive.

Nick Rowles-Davies is Executive Vice Chairman of Litigation Capital Management (LCM) and leads the company’s EMEA operations.

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Community Spotlight: Scott Davis, Partner, Klarquist

By John Freund |

Scott focuses on intellectual property litigation, representing clients in courts throughout the U.S. He has had great success both obtaining relief for intellectual property owners and defending suits in a wide range of technical fields in cases involving patent, trade secret, unfair competition, employment agreement, copyright, DMCA, trademark, trade dress, product configuration, and false advertising claims.

Scott has litigated cases involving chemical, mechanical, medical device, internet, software, encryption, computer, clean energy, automotive, apparel, food, agricultural, and pharmaceutical technologies. Representing some of the largest companies in the world as well as smaller businesses and start-ups, he has succeeded for clients such as Adobe, British Airways, Columbia River Knife & Tool, Capsugel, Costco, Danner, DexCom, Intuit, Microsoft, Nightforce, Phibro Animal Health Corporation, SAP, SunModo, and Yelp.

Describing his past success and approach with the Klarquist litigation team, IAM Patent 1000 recently lauded Scott’s ability to assess the best strategies and his talent for understanding and simplifying complex technology, and noted that Scott will “always put your objectives first and act like a part of your team.”

Company Name and Description: Klarquist is a full-service intellectual property (IP) law firm with services including IP counseling, patents, trademarks, copyrights, litigation, and post-grant USPTO proceedings. Because we focus our practice exclusively on intellectual property, our prosecution professionals leverage a thorough understanding of our clients’ cutting-edge technology to an extent not seen in general practice firms. Our technical expertise covers biotechnology, physics and optics, chemistry, electrical and mechanical engineering, software and computer science, plants, and semiconductors.

Klarquist is one of the oldest and largest intellectual property law firms in the Pacific Northwest. For more than 80 years, the firm has provided intellectual property legal services to innovators of all stripes and sizes. The firm has over 60 attorneys and patent agents, more than 90% of whom hold technical degrees and many with doctorates in their respective fields. Klarquist professionals are adept at handling all phases of intellectual property matters, from procurement to transfer to litigation of disputes and post-grant review proceedings. Our roster of clients includes some of the most innovative companies and institutions in the world, from Amazon and Microsoft to the U.S. Government, which chooses Klarquist to procure its patents more than any other firm in the nation. As a full-service intellectual property boutique, Klarquist is uniquely equipped to handle any matter, for any innovator, in virtually every area of modern technology.

Website: www.klarquist.com

Year Founded: 1941

Headquarters: Portland, Oregon

Areas of Interest: Dispute resolution, litigation, and patent post grant proceedings.

Member Quote: "Litigation funding provides a key to unlock access to civil justice."

$170 Million Settlement Approved in Allianz Class Action

By Harry Moran |

A complex Australian class action that emerged through the consolidation of two separate group proceedings has reached a successful conclusion, with the court approving a large settlement and thereby marking a significant win for the litigation funder who backed the case. 

A post on LinkedIn from Balance Legal Capital highlighted the approval of the settlement in the Allianz class action, with the Supreme Court of Victoria approving the A$170 million sum to bring the group proceedings to a close. The class action, which Balance Legal Capital funded, was brought on behalf of over 200,000 Australian customers who purchased a vehicle and were then sold Allianz or Allianz Life “add-on” insurance products by the dealership, alleging that the insurers engaged in misleading or deceptive conduct.

Johnson Winter Slattery (JWS) and Maurice Blackburn Lawyers jointly represented the plaintiffs in the class action. In 2021, the Court had ordered the consolidation of this group proceeding with a similar class action against Allianz, resulting in two representative plaintiffs: Ms Tracy-Ann Fuller and Mr Wilkinson.

The judgment approving the proposed settlement was made today, with the court approving a $30,000 payment to the two plaintiffs. The court also maintained the Group Costs Order (GCO) of 25% of the settlement, with a $42.5 million payment set to be divided between JWS and Maurice Blackburn, with a further sum of up to $4.72 million allocated to Maurice Blackburn for the administering of the settlement distribution scheme. 

On the costs incurred by the law firms, Justice Matthews wrote that they were, “satisfied that the costs are reasonable and proportionate to the issues in dispute and the overall amount in dispute.” The judge went on to highlight that the class action “was a very large and complex proceeding and it is unsurprising that the costs are substantial.”

The full judgment and settlement approval orders can be read here. More information about the case can be found on the Allianz Class Action website.

Judge Halves Funder’s Legal Costs in Mastercard Case

By Harry Moran |

The dispute between Walter Merricks and Innsworth Capital in the Mastercard claim has been one of the most visible examples of a rift between a class representative and litigation funder. 

An article in The Law Society Gazette provides an update on the ongoing fallout from the settlement in the Mastercard litigation, as the acting president of the Competition Appeal Tribunal (CAT) has described the funder’s legal costs of over £52,000 as “wholly disproportionate and unreasonable”. These comments came in a ruling on costs that Mr Justice Roth had ordered the class representative to pay, relating to the funder’s legal costs for responding to Mr Merricks’ application for a court order (‘Documents Application) that would have prevented the funder from using confidential documents in its intervention.

In his assessment of Innsworth’s submissions on costs, the judge accepted that the funder’s need to oppose the Documents Application was “critical to its ability to participate effectively in opposing the CSAO Application” and went on to say that he had “no criticism of the time spent by the solicitors.” However, Justice Roth did highlight the decision to instruct “both leading and junior counsel to advise on the response” and the fact that in this matter, “Akin Gump is charging at well over double, and in the case of the Grade B solicitor almost three times, the London 1 Guideline Rates.”

The ruling goes on to note that whilst Innsworth “may choose to agree with its solicitors to pay a much higher rate of fees”, it does not automatically follow “that costs incurred at those rates are recoverable from the other side”. Determining the final costs, Justice Roth settled on a reduction of the solicitors’ fees down from £26,355.50 to £12,000, and similarly reduced the counsel fees to £10,000, which he still described as “generous”. As a result, the final sum for Innsworth’s costs was set at £22,000.

The full ruling from Mr Justice Roth can be read here.