Numbers never lie — or do they?

February 2015

For most companies, complex litigation is a costly liability.

For litigation funders, it’s a valuable asset.

And, judging by the financial results of the largest players in the litigation-funding game, that asset is quickly appreciating.

Burford Capital reported an 89 percent increase in profits, $18 million, from a year ago during a 12-month period ending in June. And the company put five times more money, $62 million, toward new investments in 2014 — a sign of future growth.

Six-year-old Juridica Investments Limited had generated more than $241 million in gross proceeds from litigation, $178 million of which is net profit, as of June 30.

Bentham Capital LLC — the U.S. operation of the company that originated large-scale corporate lawsuit investing in Australia more than a decade ago — finished its third year with gross returns of $31 million and profit of $17 million. Its parent company has an annual rate of return over the last 14 years of nearly 65 percent.

“Which is pretty great,” said Ralph Sutton, the chief investment officer of Bentham Capital.

Pretty great, indeed. Annual returns like those might stabilize Illinois’ public pension funds.

Such high returns are at least in part a result of the business’ inherent risk.

Litigation funders provide loans to corporate plaintiffs or law firms in return for a share of the award. If there is no award, the funder receives no payment.

The cases are usually business-to-business contract disputes, arbitrations, patent lawsuits and antitrust matters typically handled by AmLaw 100 firms. For law firms, it has proven to be a solution to client demands for alternative fees.

Despite its fat returns and the nearly ubiquitous belief that litigation funding is poised for growth, the nascent industry faces a number of risks.

Perhaps chief among them is a lobbying effort by the U.S. Chamber of Commerce to enact a regulatory regime for the practice. That would include requiring funders post a bond worth 25 percent of a lawsuit’s damage claims, forcing litigation funders to pay the other side’s attorney fees if they lose and giving the Federal Trade Commission rule-making power.

“They’re not trying to regulate it. They’re trying to cripple the industry,” said Brad Wendell, a professor at Cornell Law School who has studied the ethics of litigation financing and consults for companies in the field.

But litigation funders face another serious challenge that, unlike the Chamber of Commerce’s actions, is something the industry itself can control — a perceived lack of transparency.

The results of the three companies that report their financials is about the extent of publicly available information on the inner workings of litigation funding.

Other details can be gleaned from litigation, but the trend appears to be less information: Private funds are an increasingly common model for litigation funding in the United States. And they report very little about the cases they invest in, their returns or the terms of their investment agreements with plaintiffs or law firms.

Even within the tight-knit world of litigation financing, there are differing views on whether secrecy is helpful, harmful or a natural byproduct of litigation.

Some disregard the debate, saying the deals are transparent enough for those that matter — investors and plaintiffs.

But others, particularly Bentham’s Sutton, believe a more open business model will help prove its benefits and lead to wider acceptance of the practice, especially considering the natural skepticism of their most importance audience — lawyers.

Private growth

While litigation funders are very optimistic about their profession’s future in the U.S., it is difficult to gauge the current size of the domestic market.

The New York City Bar Association as of 2011 estimated the outstanding aggregate amount of litigation finance at more than $1 billion. While that accounting likely included the publicly traded litigation funders — which had mostly existed in or before 2011 — it fails to consider at least two subsequent fundraising efforts that took place in Chicago, both of which were private, as well as the growth by the public companies.

Gerchen Keller Capital, a local private fund, has raised more than $300 million since its 2013 opening. And Longford Capital, another private fund started in Chicago by a pair of lawyers formerly with Neal Gerber & Eisenberg, had raised more than $55 million as of July.


“Transparency is the best way to help people understand what we do. And when they understand it, they’ll accept it and want to do it.”

—Ralph Sutton, Bentham IMF

While Bentham’s Sutton said he knows the founders of both those funds and believes they are responsible members of the industry, he is blunt about whether he believes an increase in private funds who do not report their financial results is healthy for the long-term prospects of the practice.

“No,” he said.

“It does not inure to the benefit of the long-term health and sustainability of our industry because, in my view, transparency is the best way to help people understand what we do. And when they understand it, they’ll accept it and want to do it. And when you’re private about all these numbers, you’re not helping people to understand why it’s a fair situation. And why you’re helping small- and medium-sized companies to fight big fights. In other words, why you’re leveling the playing field.”

Christopher Bogart, CEO of Burford, agreed that financial results provide an important insight into how the business works. But he was less convinced that the secrecy inherent in the private-fund model — which he sees as a difference in form, not function — could pose a difficulty for the industry.

“I think it certainly helps litigation finance that there are transparent vehicles out there,” Bogart said. “But I’m pretty relaxed about the whole thing, candidly. There’s not one single right way to raise capital.”

For Sutton, transparency largely boils down to a number: 65 percent. That’s the cut of $1.47 billion in returns that has gone to claim owners and their lawyers in IMF Bentham’s 14-year history. He said IMF Bentham, the Australian parent company, has taken the remaining 35 percent on those returns. He pointed out that the U.S. operation has so far achieved a similar split between the claim owner, lawyers and funders.

“Our rule is: If we can’t imagine the client getting 50 percent or better, then we won’t do that deal,” Sutton said.

That stance, which others in the profession said they abide by, is also an argument against two of the Chamber of Commerce’s knocks on litigation finance: that an influx of third-party money perverts a plaintiff’s objectives in a case and that it prolongs litigation as they seek higher settlements.

To document this criticism, the U.S. Chamber Institute for Legal Reform points to a case involving a network-security company called Deep Nines. The company received an $8 million investment from a litigation funder and eventually agreed to a settlement of $25 million. After paying off the investor, as well as paying its attorneys and court costs, the ILR said Deep Nines kept $800,000. The litigation funder received $10.1 million.

But for every story like that, there are many more that end in success for the client — hence the healthy financial results.

Greg Duman, CEO of Prism Technologies, said Bentham has “no control” over the outcome of the lawsuits his company filed against a slew of major wireless carriers and in which Bentham invested.

Duman’s Omaha, Neb.-based patent licensing firm received funding from Bentham to carry out what he called its largest-ever lawsuits, both in terms of cost to litigate and damages pursued. He declined to say how much money Bentham invested but said “several of our cases potentially have damages ranging from $30 million to several hundred million.” Like virtually every litigation-funding deal, the contract is confidential.

One of Duman’s lawsuits — a patent infringement claim against AT&T Corp. — already settled for an undisclosed amount. Prism has ongoing litigation in Nebraska federal court against U.S. Cellular Corp., T-Mobile USA Inc., Sprint Spectrum LP and Cellco Partnership (a legal name for Verizon Wireless).

“Under our contract with Bentham, we’re obligated to notify them when we’ve reached a settlement, which we did, and we’re not really able to disclose much about the settlement to Bentham either, other than the fact that it occurred, and the amount under confidentiality was provided to them,” Duman said.

Unlike many litigation funders — especially the private fund variety — Bentham has routinely advertised its successes.

In one case that it believes shows how litigation funding helps “level the playing field” for small businesses litigating against large companies, Bentham funded an Indiana contractor who was awarded a $14.5 million verdict in a defamation suit against State Farm Insurance. Interest after appeals rose the verdict to $17 million. Bentham received $5.1 million, 30 percent, according to a regulatory filing by its parent corporation. Its profit was $2.2 million.

“What we might succeed in doing by being transparent is educating lawmakers and other stakeholders in the system,” Sutton said. “They will understand what we do and, therefore, understand that this lobby group represents a tiny, tiny fraction of American business and is just really seeking to protect itself and nobody else.

“The (Chamber of Commerce) is not trying to address the legal system and its problems. They’re not trying to help small- and medium-sized businesses with their issues. That’s the way it will hopefully unfold.”

Other concerns

Even as the industry grows, some believe it remains “opaque.” That’s what Maya Steinitz, an associate professor at the University of Iowa College of Law, called it last year in her paper, “A Model Litigation Finance Contract.” Steinitz focused her research on the lack of contract terms that are publicly available between litigation funders and the plaintiffs they invest in. She said that level of privacy raises the costs of financing for plaintiffs.

“Contract secrecy has prevented reputation markets from emerging and has reduced claimants’ bargaining power,” Steinitz wrote.

“The lack of publicly available sample contracts both raises the transaction costs of entering into funding arrangements — as each plaintiff negotiates from scratch and in the dark — and, consequently, creates a barrier for claimants to actually access litigation funding. It also raises the cost for new market entrants who may compete with existing litigation funding firms and who may, through their competition, lower the costs of financing for the plaintiff.”


“It certainly helps litigation finance that there are transparent vehicles out there. But I’m pretty relaxed about the whole thing, candidly.”

—Christopher Bogart,
Burford Capital

Steinitz’s paper lays out a sample funding agreement that she said helps litigation funding meet its objective: promoting access to justice without corrupting the civil justice process.

To David Desser, a longtime litigation funder and principal at Juris Capital, the bigger risk for litigation funders is not whether they report their financial results, which he does not do. Instead, the risk lies in the pressure that comes with large capital reserves that some firms (not his) have amassed.

Desser left Katten Munchin Rosenman a decade ago to become general counsel of a consumer lawsuit lending business, which provided smaller loans for claims such as personal injury. He eventually helped start Juris Capital — now a three-lawyer shop dedicated to financing corporate lawsuits — with his own money.

Unlike funds that raise a pool of money and then seek to invest it, Desser’s team and a group of dedicated investors write their own checks for each investment. He does not have capital dedicated to the firm until he seeks it out on a per-deal basis.

He said, however, that he has never been turned down on a deal he asked his investors to join him in. Desser said he also doesn’t collect fees on the money he raises, which he said many of the private litigation funders do.

“The managers of Juris Capital invest personally in every deal, so we believe in each investment. We cannot make money by investing in bad deals,” Desser said.

He said this arrangement prevents his firm from feeling pressured to invest in cases. The thinking goes like this: A fund with, say, $200 million to invest will seek to invest that $200 million regardless of whether or not it finds $200 million of acceptable deals. It may try to add a little bit more money into each investment. That would mean the funder gets a larger portion of the award and, in turn, that increases the risk that the funder will have more control over a plaintiff’s actions.

Sutton’s 65 percent metric — the cut plaintiffs historically get of Bentham’s awards — is his defense against this criticism. Still, Desser said his firm operates with an even smaller return in mind. He said he prefers plaintiffs receive more than 70 percent of any award.

“I think raising first and spending second, especially when you’re north of $100 million, is going to be tough,” Desser said. “If we (invest) $25 million in a year, that’s great. If the next year we only do $18 or $16 or $14 (million), that’s fine too. It’d be better to do $25 million than $14 million. But we can afford to do both.”

Here is another area where transparency appears to come in handy. Litigation funders do not appear to be throwing money haphazardly into bad cases — or, at least, they are passing up a lot of cases. Bentham, for instance, said it made 10 total investments last year, while it reviewed more than 150.

Local example

Meanwhile, some of these concerns are apparent in an ongoing case in Chicago’s federal court involving litigation funder Juridica and Downers Grove resident Valerian Simirica.

In the mid-2000s, Simirica attained a portion of a Romanian commodity business called S&T Oil Equipment & Machinery Ltd., which the Romanian government later nationalized. Hearing about what may have been an illegal taking, a lawyer in France who worked for King & Spalding, one of the largest firms in the world, reached out to Simirica, according to court documents.

“I think raising (money) first and spending second, especially when you’re north of $100 million, is going to be tough.”

—David Desser, Juris Capital

Photo by Carol Palmer of PalmerBohan

Simirica hired King & Spalding on a contingency fee to pursue an international arbitration hearing seeking 140 million euros ($114.8 million) in damages. After King & Spalding said Simirica failed to unveil some crucial facts about the case, the firm allegedly said it would pull its representation unless Simirica would pay up to $2.25 million in fees plus $1.25 million in costs.

In court filings, Simirica alleges that, without his knowledge and through a third party, Juridica began speaking with King & Spalding about investing in the case, and eventually, the company did just that, putting up $3 million.

In a lawsuit, Simirica alleged the contract — which remains largely confidential — charged “an unconscionably excessive fee” and allowed King & Spalding to “charge an unconscionable fee” if Simirica “wished to settle on terms that were not to King & Spalding’s liking.”

“It’s so egregious that no reasonable person could look at it and not say, ‘How in the world could you have been represented by counsel and sign something like this?’” said J. Mark Brewer, a Texas lawyer who has represented Simirica in a flurry of litigation spanning Texas, London, New York and Chicago.

The international tribunal eventually dismissed S&T’s claim against Romania, and shortly after that, Juridica sought to retrieve its investment from Simirica in the London Court of Arbitration, the venue designated by the funding agreement. The London court ruled in Simirica’s favor, granting him about $400,000 in fees, which Juridica paid.

In November, Juridica sued Simirica for $800,000 in DuPage County Circuit Court. The firm said Simirica had recouped that amount in a separate lawsuit against Romania that Juridica claimed rights to.

Brewer said he was shocked by the lawsuit because Juridica had previously resisted litigating in U.S. courts. And he also argues the London arbitration panel already ruled Juridica did not have a claim to the $800,000.

“We just want it to go away. We want to leave it alone,” Brewer said. “I don’t know what they’re trying to accomplish, other than to avoid the day of reckoning with their shareholders when they have to admit, ‘We lost and we’re never going to get any money out of this case.’”

Juridica’s semiannual report from June, which gives updates on the firm’s cases, describes a similar case that it says is no longer being funded and that it calls “Case 0608-S.”

It says Juridica “remains entitled under its investment agreement to recover from the client any sums received by the client in connection with ancillary claims made by the client against other parties.”

It then says Juridica has demanded payment of approximately $800,000, which the client was already awarded in a related case, and “is evaluating its options at this time.”

Through a spokeswoman, Juridica declined comment.

For all the talk about the benefits of transparency, it’s still litigation. And few companies like to talk about pending cases.