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ANALYSIS: Transparency Wanted in Litigation Finance

Nov. 4, 2019, 12:25 PM

The litigation funding industry garnered significant attention in 2019, which won’t dissipate any time soon. Perhaps to the dismay of funders, the headlines often reflected more scrutiny than praise.

From the regulation of disclosure of third-party funding in litigation matters to scrutiny surrounding Burford Capital’s accounting practices to Kirkland & Ellis’s foray into plaintiff-side contingency work, 2019 foretells that we can expect a demand for transparency to grow along with a demand for more capital streams in 2020.

Learn more about the industry and keep tabs on developments with our Litigation Finance In-Focus Page.

Disclosure of Funding

Discussions about mandatory disclosure of third-party financing agreements in court, both through court orders and legislative action, are on the rise.

Examples of courts ordering disclosure in 2019 include federal district court judges in Maryland and Florida presiding over multidistrict litigations ordering plaintiffs lawyers to disclose any potential funding.

On the legislative side of the coin, West Virginia passed a disclosure law, and there is proposed federal legislation that would mandate disclosure of litigation funding in class actions and multidistrict litigation. Legislation was also introduced this year in Utah, Florida, and Texas.

A recent Bloomberg Law Litigation Finance Survey shows that a plurality of attorneys that have obtained or are interested in obtaining litigation funding do not know how frequently funding is ordered to be disclosed. Potential disclosure of funding is a top concern for lawyers who are considering seeking funding in the future. The survey results clearly show confusion in the industry market about whether funding must be disclosed.

Wariness in the Market

The industry has also been weathering scrutiny over its accounting methods. In particular, Burford Capital, one of only two major industry players that are publicly traded, faced a backlash in August after a short seller report questioned its accounting practices and claimed that the firm misled investors about its realized gains, as Bloomberg News reported. Burford saw its stock price plunge by more than half in one day, according to Bloomberg Terminal data, and the company is now facing a shareholder class action lawsuit (although the company is defending its practices and seeking redress for what it claims was market manipulation to drive down its share price). Other litigation finance firms have since sought to differentiate their accounting practices from Burford’s, as reported by Bloomberg Law.

Shortly after Burford’s stock dip, major industry player Vannin Capital (which shelved its own plans for an IPO about a year ago, as the Financial Times reported) was acquired by investment firm Fortress Investment Group.

Bloomberg Law Litigation Finance Survey results indicated that litigation funders believe that a top obstacle to funding is that their potential clients do not understand how funding works. These signals of investor wariness and market confusion foretell that more IPOs in this industry are not expected in 2020.

Room for Growth

Despite current industry scrutiny, Bloomberg Law survey results indicate that interest in obtaining funding outpaces current levels of funding—that is, interest in litigation funding is high and there is room for growth, as evidenced by IMF Bentham’s recently announced merger with Omni Bridgeway. Kirkland & Ellis’s launch of a plaintiff-side contingency fee litigation practice is further evidence of law firms’ interest in new ways to increase capital. Additionally, while GCs and in-house legal departments are looking for ways to cut costs and increase efficiency, they rarely initiate litigation funding requests (perhaps due to the current lack of transparency about this industry), suggesting space for growth in the corporations-as-clients space. And, according to Bloomberg Law Analysis, two of the top 10 legal tech investments in Q3 2019 were with legal finance companies—further evidence of an industry on the rise.

With a potential economic downturn looming and budgets constrained, litigation funding presents an opportunity that law firms—and their clients—may not be able to turn down. Still, the industry can expect continued scrutiny in 2020, in the form of court-ordered disclosures, state disclosure laws, and investor wariness. Shedding more light on this opaque industry will be critical to making litigation funding ubiquitous.

Read about other trends our analysts are following as part of our Bloomberg Law 2020 series.