Capital Flows Into Litigation Funds With Social Justice Impact

Investors who seek returns by funding lawsuits are adding a new twist—they are seeking social change too.

James Burnham, a former Jones Day attorney who served in President Donald Trump’s Justice Department, in July launched Vallecito Capital, a $50 million fund that will back cases supporting the conservative policy mission. TRGP Capital, a Connecticut-based litigation financier, in January announced the launch of Flashlight Capital, a separate vehicle whose goal is to “catch the confluence” between litigation finance and ESG investing, said managing director Will Zerhouni.

And Aristata Capital, a firm launched last year and partially backed by Democratic donor George Soros, has made nine investments from a $67 million fund to hold corporations accountable for environmental and human rights abuses.

“Conservative, liberal, whatever it might be, you’re seeing more capital moving into this space,” said Rob Ryan, chief executive officer at Aristata. “You’re seeing a recognition from investors that this is a incredible opportunity to generate impact and some significant returns.”

The money is flowing into the $13.5 billion litigation funding industry, in which investors financially back lawsuits with the hope of generating a typically hefty return—if the cases go their way. While investing in capital markets to achieve policy or socially conscious goals gained influential champions years ago, the trend of litigation funders seeking social change and profits through the court system developed just in the past nine months.

“This is why we became lawyers; it wasn’t because this was the fastest way to money, but this was the fastest way to justice,” said Flashlight Capital’s Zerhouni, a former trial lawyer. “You mix that with people who want to do good using their capital and it’s a natural fit.”

Vallecito’s Burnham has said the impetus for starting his fund stems from a feeling among conservatives that some of the socially conscious policies implemented by companies may break the law.

Conservatives have joined liberals in tapping the nonprofit legal sector as an influential vehicle. Donor money has been flowing to groups such as Edward Blum’s Students for Fair Admissions, which successfully challenged affirmative action in higher education at the Supreme Court. But unlike those organizations, Burnham’s fund is for profit and seeks a return on its investment.

Burnham put it this way in a Federalist Society webinar in November: “The idea with Vallecito Capital was OK, if companies are doing bad and unlawful things, shouldn’t we find a way for investors—people who care about these issues—to fund cases for a return that also seeks to penalize unambiguously bad behavior.”

Burnham, whose firm is based in Alexandria, Virginia, declined to comment. It is unclear who the fund’s main backers are, or which lawsuits Vallecito has funded, because litigation funders except in rare instances are not required to make such disclosures.

Flashlight

Flashlight Capital is fundraising for a $250 million fund with an unnamed UK-based private equity firm as its lead investor. Unlike its counterpart TRGP, Flashlight will take a smaller percentage of an award and take on riskier, less lucrative cases. Flashlight’s cut will come out of the attorney fee part of the outcome.

The fund has already supported cases targeting environmental damage and alleged social media harms, among others, the leaders said. Wading into highly politicized cases—such as ones involving former President Donald Trump or voting rights issues—is not off limits, but it is unlikely. Flashlight’s criteria involves funding cases for the underserved who are in need of capital, said Michael Rozen, a TRGP founder and managing partner.

“We’re not looking to make political statements by the things that we do,” Rozen said. “We’re looking to act as responsible stewards for our own capital.”

The size of the social-cause funds is typical of new entrants into commercial litigation finance, with Flashlight’s fund being on the upper end, said Charles Agee, chief executive of consulting firm Westfleet Advisors. “There’s also a real demand for it on the capital provider side,” he said.

‘Profit Motive’

The business model of litigation finance gives rise to questions about whether funders will get behind the types of ambitious cases where a judgment is far from certain, said Richard Wiles, president of the Center for Climate Integrity.

“I would imagine hedge funds are going to bring a profit motive and will have a narrower set of cases that they’ll want to get involved in,” Wiles said. “That’s not necessarily a bad thing,” considering the resource disadvantage plaintiffs often have.

Big corporations have the funds to fight tooth and nail on every aspect of a case, Wiles noted, citing ongoing litigation involving entities such as Exxon Mobil Corp. over its alleged role in climate change.

For litigation funders, “the question is which of these cases will yield money,” said Michael Gerrard, a Columbia Law School professor. “It’s not uncommon for cases involving oil spills. But so far there hasn’t been a single court decision anywhere in the world awarding money damages against fossil fuel companies because of climate change.”

Hassan Murphy, a TRGP co-founder who once led a Baltimore law firm, said Flashlight will be willing to “take bets that may look riskier to others.” But leaders of TRGP and other funders acknowledge that to have any effect, they need to get behind cases that win.

“For the strategy to work, we need to be able to orient private capital to solve these major public problems,” said Ryan, the Aristata CEO. “That means we must be successful from an investment standpoint, from a return standpoint.”

Republican Ire

The funds represent another form of investing with environmental, social or governance goals. The ESG model became attractive to money managers in recent years, with powerful firms such as BlackRock championing an investing strategy with environmental and social impact in mind.

But just as ESG became the subject of attacks, litigation finance has been a polarizing industry since it emerged. While Burnham’s fund shows conservatives are getting behind the business, the role of investors in lawsuits has mostly drawn criticism from Republicans.

Rep. James Comer (R-Ky), chair of the House Committee on Oversight and Accountability, held a four-hour hearing in September on the industry, where he claimed left-wing activists were aiming to hijack the US legal system by funding suits they support.

“These lawsuits are a detrimental form of political activism,” Comer said in a statement for this article, adding that progressive-funded lawsuits are “aiming to implement a radical agenda.”

Litigation funders’ lack of disclosure requirements make it hard to discern which lawsuits they’re getting behind. The US hedge fund Gramercy Funds Management LLC in October, however, announced that it had struck a $550 million deal with a UK law firm pursuing environmental cases linked to carmakers’ pollution and a Brazilian dam disaster.

The investment, which came in the form of a secured loan, “materially aligns with our ESG and impact investing objectives,” Gramercy said in an October statement.