Thursday, November 18, 2010

Gambling on the Misery of Others

It was called champerty and it used to be a crime.   Now Wall Street is all over it, investing in other peoples' lawsuits.  The Center for Public Integrity warns that investors have begun flocking to lawsuits, even divorce and medical malpractice cases, in search of easy pickings:

Large banks, hedge funds and private investors hungry for new and lucrative opportunities are bankrolling other people’s lawsuits, pumping hundreds of millions of dollars into medical malpractice claims, divorce battles and class actions against corporations — all in the hope of sharing in the potential winnings.

...Most investments are in the smaller cases that fill court dockets. Ardec Funding, a New York lender backed by a hedge fund, lent $45,000 in June to a Manhattan lawyer hired by the parents of a baby brain-damaged at birth. The lawyer hired two doctors, a physical therapist and an economist to testify at a July trial. The jury awarded the baby $510,000. Ardec is collecting interest at an annual rate of 24 percent, or $900 a month, until the award is paid.

Champerty was widely decriminalized during the 20th century but it can still fetch you up to seven years inside in Hong Kong.  In the U.S., however, it seems anything goes.... but not without problems.

the review shows that borrowed money also is fueling abuses, including cases initiated and controlled by investors. A Florida judge in December ordered an investment banker who orchestrated a shareholder lawsuit against Fresh Del Monte Produce to repay the company’s legal expenses, ruling that the case should not have reached trial.
Such financing also drains money from plaintiffs. Interest rates on lawsuit loans generally exceed 15 percent a year, and most states allow lawyers that borrow to bill clients for the interest payments. The cost can exceed the benefits of winning. A woman injured in a 1995 car accident outside Philadelphia borrowed money for a suit, as did her lawyer. By the time she won $169,125 in 2003, the lenders were owed $221,000.

Lawyers are not required to tell clients that they have borrowed money, so the client may be unaware that there is financial pressure to resolve cases quickly. Lenders also seek detailed information about cases, which can jeopardize client confidentiality. A federal judge in Delaware ruled in June that a company suing Facebook for patent infringement had to show Facebook documents that its lawyer had shared with a lender.

When large banks and hedge funds eye lawsuits as a lucrative investment opportunity, it's their money that can do the talking, not the litigant.

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