Investing in litigation: beat the street by buying a share in someone's grievance against a big company

Investing in litigation is a gimmick from my next novel, Makers, coming next fall from Tor and HarperCollins UK -- the idea is that you can get rich by bankrolling people who have grievances against giant corporations in exchange for a piece of the award or settlement (this is something that plaintiff-side lawyers effectively do when they do work on contingency). I based it on a crusading lawyer I know who raised money from a philanthropist this way, but as far as I knew, that was the only case of it at the time.

No more: investing in litigation is now a sound business strategy, says the NYT:

Mr. Fields is chief executive of Juridica Capital Management. which runs a fund that invests in one side of a lawsuit in exchange for a share of any winnings.

"It's always a good time to invest in litigation," Mr. Fields said, though he added that the weak economy helped. "When the recession started to bite, the phones started ringing off the hook. Last year, we looked at 122 cases and we made 17 investments." A small but growing number of investors are exploring this idea, helping companies avoid some of the risks and costs of litigation in exchange for part of any money paid out when the case is settled or resolved by a court. After all, it can be costly to hire lawyers, who may charge close to $1,000 an hour at the most elite firms.

Credit Suisse has a unit devoted to this kind of investing. Juris Capital, a Chicago firm backed by two hedge funds, also does it. Several other hedge funds do, too.

Investing in Lawsuits, for a Share of the Awards (via /.)

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  1. How delightfully devious! This is like the X-Treem version of shorting.

    I can imagine a company investing heavily in frivolous lawsuits against its competitors. This is a much more amusing system than bookies laying odds on lawsuits.

  2. This is called champerty and it used to be prohibited as being against good public policy. It was feared that people would finance unmeritorious claims in order to take their chance at winning a verdict. I have a lot of sympathy with that view.

  3. My favorite Australian book about lawyers is called “Hell has Harbour Views” by Richard Beasley – later made into a television film by director Peter Duncan. Its very clever in exploring typologies of lawyers, and various types of legal games. It captures beautifully the Dantesque nature of some of the Big Sydney law firms. Beasley has also written another called “Ambulance Chaser”.

    Matthew Rimmer

  4. When I read the headline, I was first reminded of SCO… not a sound business scheme.

    Apart from that, many insurance companies already do so – it is nothing new apart from investors, banks and fonds jumping on the bandwagon.

    Greetings, LX

  5. This should still be criminal.

    Litigiousness and fear of it have become so bad now that even cashiers and waitresses answer questions as if they’re in a deposition (“I cannot say for certain if the soup contains meat. I only take the orders and deliver the food.” as opposed to a simple “I don’t know, let me ask the cook.”).

    The fact is that allowing lawyers to speculate (a.k.a. working on contingency) is causing this type of thinking, and media coverage of their (few and far-between but nonetheless titillating) successes has left most everyone in America thinking things like “Go ahead, tailgate me! I can use the cash!”

    Americans now (yes I’m one), as a rule, think about being sued and/or who they can sue as a knee-jerk reaction to every little indignity life inflicts, like any inconvenience is a potential winning lottery ticket.

  6. This reminds me of something in a short by Roger Zelezny. Wish I could remember which one.

  7. Champerty is/was such an obvious evil in legal systems that IMO the “Judge-made” common-law in England, Canada, Australia and even the USA may well still prohibit it: this Law has simply, perhaps, been forgotten in the Anglo-American contest-based “share the spoils” system of funding litigation (specifically, lawyers’ “contingency fees”, which can look like champerty/are champertous from the get-go).
    Or can we now sell our dormant claims against others to those who would enforce such solely to vex their enemy, against whom we would not otherwise act?
    And why would any Court countenance such an obvious and socially obnoxious abuse of its processes, other than through incompetent ignorance?

  8. How delightful! Another way in which my loyal minions (tort lawyers) can add additional layers of slime to themselves and their environs.

    -Satan

  9. Wouldn’t there be a conflict of interest if say a person hired a lawyer to sue a company, but the company was actually the person paying the lawyer. Also, let’s say the company does a lot of business with the lawyer outside of any specific case, wouldn’t they lawyer have it in his best interest to take better care of the company than the person?

    Yeah, I’m sick of the little guy getting screwed just as much as the next person, but I don’t think this is a good solution.

  10. In addition to being problematic because it might encourage the bringing of unmeritorious or speculative claims, this strategy can also lead to bankrupt litigants if the financing is backed by the plaintiffs, like what happened to the city of Lodi, California.

  11. My new money-making scheme is as follows:

    1. Invest in litigation against a wealthy defendant.
    2. Bribe the judge to throw the case my way by offering him/her a share of the proceeds.
    3. ???
    4. Profit

    To those who point out that this would be illegal, my answer is “Why do you hate capitalism and the free market?”

  12. There was a guy I knew who sued a major horticultural society because they wouldn’t make him a judge or something, and how they didn’t have any mention of not excluding gays or discriminating or something in their bylaws.

    He had limited funds, and I recall getting a xeroxed letter asking for money, with a note about how- if he won- there would be a “Thank You” bonus in return. That would have been 1998 or 1999. I still have the letter.

  13. To those who long for a return to the days of champtery laws, have you considered that contingent fee litigation is basically the only way people of limited means can acquire representation? I guess when you get injured, or fired, or have a problem with your benefits and need to litigate your claims you’ll happily fork over the 450-650 per hour you would pay for a junior partner with litigation experience in a major metropolitan area.

    Besides, the article is not about the well-established practice of contingent fee litigation on behalf of individual plaintiffs with small claims, it’s about a newish phenomenon in the financing of major commercial litigation.

  14. As a stockholder, several times a year I will get notice of a class action suit of which I am a part. I’m never a large shareholder. I might have had 100 shares of the company in question. When the suit is settled the court will award the law firm anywhere from $15 million to $30 million and sometimes more. I will eventually get a check for less than $5. Once I recall the law firm got their chunk and us chumps got the right to buy something at a discount. And not a very big discount at that. This is a business and it is extortion plain and simple.

  15. If the investments were based on justice, then I might feel good about it, the way that the author of the post clearly does (note the Happy Mutants tag).

    But investments are based on the probability of making more money, which, according to the very rules of capitalism, is completely indifferent to justice.

    In fiction, you can create a world where such investments focus on bridging the gap between the current state and a more just future. In reality, champerty has enormous room for abuse.

  16. The first time I ran for office in Indiana, one of my campaign signs was confiscated because it didn’t have a “paid for by _” disclaimer. I sued, got the statute tossed out, collected $2,000, paid the donors to my campaign a 100% dividend. A buncha people had put up $1, they got $2 back.
    But then the legislature repasseed its unconstitutional “paid for by _ ” rule,and I haven’t been able to get the new statute tossed yet.
    Which reminds me, the day before yesterday a city council person in Clarksburg West Virginia was arrested for an anonymous flier – but anonymous fliers are completely legal under McIntyre v Ohio.
    http://ballots.blogspot.com/2009/06/clarksburg-west-virgina-city-councilman.html

  17. This sounds horrendous. Even if some relatively ethical fund that had strict guidelines about not doing really evil things, the profit motive would inform the legal representation unfairly. For example, given the option to seek an injunction against a pesticide manufacturer to quit making carcinogens or to pursue monetary damages for consumers and farmworkers, the money would come first. In fact, this creates a situation where the smart money would be to hold off until enough people get cancer so as to up the potential reward.

    A slightly more ethical way to do this would be for these high rollers to toss the money toward the ACLU, EFF, etc and then invest in one of those lump sum settlement “it’s my money and I want it NOW” companies.

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