Hedge Funds Invest an Estimated $1B in Lawsuits, Earn as Much as 24% in Interest
Investing in lawsuits can be lucrative for the hedge funds and other companies that provide an estimated $1 billion in financing at any given time.
The deals aren’t as good for some clients, the New York Times reports. Many lenders encourage lawyers to bill their clients for the interest costs, and bar associations in most states condone the practice, the story says.
Lawsuit financing can help bring justice to plaintiffs who need high-paid experts and elaborate evidence to help their cases. Ground zero workers, for example, had their suits bankrolled with $35 million in financing. But the lending can also raise ethical issues, the story says.
Typically the lenders charge interest of more than 15 percent a year to finance medical malpractice claims, divorce cases and class actions against corporations. In one case, a hedge-fund backed lender called Ardec Funding charged an interest rate of 24 percent on $45,000 dollars used to bankroll a med-mal case, and it’s collecting $900-a-month interest on the investment, the Times reports.
Sometimes the interest exceeds the recovery. The newspaper cites the case of a woman injured in an accident outside of Philadelphia who won a $169,000 judgment, but owed the lawsuit lenders $221,000. In the ground zero case, though, lawyers were ordered to pay the financing costs.
Another problem involves client confidentiality and the privilege issues raised when detailed information is turned over to lenders. The story gives an example: After a company suing Facebook for patent infringement showed documents to its lender, a Delaware federal judge ruled the information had to be turned over to the defendant.
There are also problems for law firms that lose bankrolled cases. They are still on the hook for the loans. Many firms that borrowed from one lender, Counsel Financial, have filed for bankruptcy, the story says.
The New York Times story is part of a series of articles the Times is calling “Betting on Justice.” Included is an interactive legal history graphic featuring the “Legal Path to Lawsuit Lending.”
Also see:
ABA Journal: “Law, the Investment: Entrepreneurs attract major cash to draw legal services away from law firms”
