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Credit Suisse Group AG
Time Warner Inc
Invesco Perpetual UK Smaller Companies Investment Trust PLC
The white-wigged sages of British jurisprudence outlawed investing in someone else’s lawsuit for fear that feudal lords would manipulate their subjects’ litigation for profit or mere sport. The 18th century British jurist William Blackstone condemned such investment, known as champerty, for “pervert[ing] the process of law into an engine of oppression.”
Restrictions on champerty faded as the law evolved. In the U.S., the Supreme Court held in the 1960s that civil rights organizations have a constitutional right to invest in other people’s lawsuits that further the advocacy groups’ aims. More recently, many states have loosened rules to allow consumer-finance firms to lend money for legal cases. The companies that have done litigation finance to date have mostly made loans to plaintiffs’ lawyers pursuing slip-and-fall and auto-accident suits, often charging interest rates of 20 percent or higher.
Now litigation finance is moving up the corporate food chain. Larger and more sophisticated investment outfits, such as Burford Group and Juridica Capital Management in the U.K. specialize in making bets on bigger-dollar cases. Parabellum Capital recently opened its doors in New York after being spun off from the legal finance group at investment bank Credit Suisse (CS). “We’re looking at a company’s lawsuit against another company as an asset on the corporate balance sheet that can be monetized in the short run, while we take an interest in, and some of the risk in, the long-run outcome,” says Christopher Bogart, chief executive officer of Burford and a former executive vice-president and general counsel of Time Warner (TWX).
Working out of Manhattan offices so new the art is still indicated only by blue tape on bare walls, Bogart runs a $300 million fund that made new commitments to legal cases totaling $35 million in just the last three months of 2011. “Another way of understanding what we do is that we provide corporate finance for assets that traditionally weren’t subject to finance,” he says. “We’re making the litigation marketplace more efficient.” His investors include Invesco UK (IPU), Reservoir Capital Group, and Scottish Widows Investment Partnership.
No data exist on how much is invested in ligitation finance. Burford’s analysis of figures gathered by American Lawyer magazine shows that the 200 largest U.S. law firms bill about $33 billion annually related to litigation, Bogart says. That excludes the cost of verdicts and settlements as well as the billings of tens of thousands of smaller law firms.
Litigation finance, which fertilizes lawsuits that otherwise might settle quickly or die altogether, “is poised for growth worldwide,” Cassandra Burke Robertson, associate professor of law at Case Western Reserve, wrote in an article published in November 2011.
While Bogart doesn’t like discussing Burford’s investments for the record, he points to one widely publicized case that concluded in 2010. The firm invested $6 million in a breach-of-contract lawsuit between two Arizona real estate developers. The winner, Gray Development, paid more than $18 million to Burford—a 200 percent return. Gray would not have been able to afford its highly regarded New York law firm, Simpson Thacher & Bartlett, without an infusion of outside capital, Bogart says. A spokesman for Gray did not return a phone message seeking comment.
In another case, Burford provided $4 million in financing in November 2010 that helped keep alive a lawsuit filed against Chevron (CVX) on behalf of residents of the rain forest in eastern Ecuador who allege large-scale contamination from a predecessor company’s oil drilling. The investment allowed the plaintiffs’ team to augment its legal firepower by hiring Washington-based law firm Patton Boggs, which normally represents large corporations. Burford quickly sold off its stake in the case, eliminating its downside risk while retaining an interest in any winnings. In February 2011, a provincial Ecuadorian court imposed an $18.2 billion judgment on Chevron; an appellate court has upheld that verdict. The oil company has said it will continue to contest the judgment.
The bottom line: Burford Group has raised $300 million to invest in litigation. It put $35 million to work in the last three months of 2011.