A reporter for U.S. News and World Report this week took a look at the “lightly regulated” business of litigation financing, and came away with some interesting comments about the “perverse”business.
In a January 22, 2018 article headlined “How Wall Street Invests in Justice”, investing reporter John Divine said that “Litigation financing is an incredibly innovative and interesting creation of high finance, but it’s littered with ethical and philosophical quagmires.”
Among his other comments were the following:
- The “obscure field called litigation finance” is now “thriving”.
- “The practice grew quietly but made headlines in 2016 when billionaire Peter Thiel, co-founder of PayPal Holdings . . . , successfully financed Hulk Hogan’s lawsuit against Gawker, a news website, ultimately causing its bankruptcy.”
- Consumers of litigation funding (who are often “poor, uneducated” and “out of work”) may face “unsavory situations” involving settlements that have yet to be paid, where litigation finance companies provide advance payments, which “are given with insane interest rates attached to them” – so much so that the “[r]ates that would often be considered usurious if they were classified as loans”.
- The Consumer Financial Protection Bureau (CFPB) has acted to protect victims of such “overtly predatory” practices “and has taken one of the biggest firms in the industry, RD Legal, to court for using these practices to milk money from both 9/11 first responders and retired NFL players awaiting payouts from settlement funds.”
- RD Legal, J.G. Wentworth, and other companies have challenged the CFPB’s “authority to regulate their businesses” in litigation whose outcome is uncertain.
- Litigation finance has drawbacks that include the following:
- “It further congests courts with additional cases.”
- “Litigation financing can create the incentive to bring frivolous or unnecessary cases, or cases that exploit loopholes.”
- “Far from leveling the playing field, the extremely wealthy can, on a whim, finance lawsuits against their enemies . . . .”
- “It’s insanely expensive. Because it’s a ‘cash advance,’ not a loan, effective interest rates can be over 100 percent.”
- Companies that offer “advances” appear to “tend to take advantage disproportionately of the poor, minorities, the uneducated, and the sick and desperate.”
Overall, Divine said, litigation financing is an “innovative and interesting creation of high finance, but it’s littered with ethical and philosophical quagmires.”
Perhaps it’s best most Americans can’t afford to invest in such tricky instruments. Being part owner of a glorified payday loan operation with its tentacles in the justice system doesn’t exactly inspire pride.
The article is available in full here.