Senators Grassley, Cornyn Seeking Details on Litigation Finance

Aug 28 2015 | 6:38pm ET

Two Republican senators asking questions of three firms as they begin taking a serious look at the litigation finance industry, a new investment arena of increasing interest to hedge funds. 

Senators Chuck Grassley of Iowa and John Cornyn of Texas have sent letters to Burford Capital, Bentham IMF, and Juridica Investments asking about their involvement in the industry, which essentially involves financial support of court actions in return for a share in any payouts that result. Questions asked ranged from general practices and case details to investment terms and ROIs details.

The effort is part of an examination into the impact of third-party litigation financing on civil litigation, according to a joint statement. Critics of the practice say that such lenders are not direct parties in the lawsuits they finance, yet have a financial incentive in their outcomes. This leads to spurious lawsuits, conflicts of interest, and higher settlement payoffs to satisfy third-party lenders, they contend.

“Litigation speculation is expanding at an alarming rate.  And yet, because the existence and terms of these agreements lack transparency, the impact they are having on our civil justice system is not fully known. It’s vitally important to our civil justice system that litigation decisions aren’t unduly influenced by third parties,” Grassley said in the statement.

“Third party litigation financing pumps millions of dollars into our justice system, and the current lack of oversight makes it difficult to track this money’s influence on the actions of litigants and the outcomes of litigation. These letters will give us insight into where this money is going and will help us craft effective protection to keep the civil justice system honorable and fair,” added Cornyn.

Supporters of the practice, on the other hand, say that their money enables the filing of legitimate claims from aggrieved parties that would otherwise not go forward for lack of funding. 

And it’s becoming big business. In 2014, U.K.-based Burford, which boasts a $500 million war chest for such activity, reported operating profits of $61 million on $82 million in revenue. All told, the firm has made 32 investments generating $209 million in gross recoveries and $78 million net of its invested capital, Burford CEO Christopher Bogart told Bloomberg in March.

At the moment, the two senators are in the information-gathering stage. But based on the joint statement, they're not coming from a position of raging support for the new area. Whether their line of questioning ultimately results in new efforts to regulate or place prohibitions on litigation finance, though, remains to be seen.

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