Litigation Finance Transparency Push Instead Lets Opacity Shine

Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. This week, litigation funders debate whether a new report on their industry is transparent enough.

Litigation finance has been a buzzy topic in the legal industry for at least five years. During all that time, there has never been a real answer to a somewhat straightforward question: Just how much money are Big Law firms taking from litigation funders?

There’s still not a verified number, but this week the industry got its best educated guess.

A survey of more than 40 U.S. litigation finance companies found that about 30% of the capital they put to work from July 2018 through July 2019 went to the nation’s top 200 firms by revenue. The survey, conducted by litigation finance brokerage firm Westfleet Advisors, says about $2.33 billion of capital was committed during that time span. So, AmLaw 200 firms received just shy of $700 million in commitments.

Industry sources were split on whether that number seemed high or low. And not all agreed that the Westfleet Advisors’ survey was done in good faith.

In short, an effort to increase transparency in the industry instead feels as if it has only reinforced the narrative that numbers in the litigation finance world are…rather squishy.

Westfleet Advisors founder Charles Agee said he hired an accounting firm to collect data from the litigation finance firms. That included how much capital they managed; how much of it they deployed over a 12-month span; and what types of law firms used the capital. The deal flow data was anonymized before Westfleet analyzed it.

Most of the 41 companies asked to participate responded to the request, he said. They were interested in a more transparent market.

“They didn’t know the size of their own industry either, so they were all very curious to find out what the contours of the space really were,” Agee said.

But not everybody was happy with the results.

A spokeswoman for Burford Capital, the industry’s largest player, questioned the credibility of the data and disagreed with its characterizations of the industry. Those included that excess capital in the industry made it a “buyer’s market” for claim holders.

“While we appreciate any effort to bring more transparency to the industry, Westfleet’s status as a broker makes it obviously self-interested in how it presents data like this and it is notable that some of the industry’s largest players—including us—declined to participate,” Burford’s chief marketing officer Liz Bigham said in a statement.

Bigham declined to provide new data around Burford’s work with the AmLaw 200. In the past, Burford has said it has “worked with” 90 of the AmLaw 100 firms on “potential investments.” That number doesn’t mean Burford has deployed capital in deals with 90 firms.

Commenting directly on the 30% figure, Bigham said, “It’s a limited picture [of the industry], and it’s just not consistent with our experience.”

Burford shares on Wednesday fell as much as 6.5% after an analyst said the company’s returns were too concentrated on a small number of investments. Burford’s shares remain depressed since a short seller in August questioned the firm’s accounting practices. Burford has defended itself against those claims.

Other sources said it seemed accurate that 30% of the litigation finance industry’s capital would be allocated to Big Law. Only 15% of law firm lawyers said they had used third-party financing in a survey conducted this year by litigation finance firm Validity Finance and ALM.

Ralph Sutton, founder & CEO of Validity, didn’t push back against the 30% figure.

“Most of AmLaw does defense work,” he said. “They don’t have portfolios yet because they haven’t taken up the ability yet to share risk with funders in big numbers. So you have smaller firms who are spinoffs from bigger firms who are perhaps weaponized to do this kind of work.”

Agee said the “relative lack of utilization” among Big Law firms is due to the difference between those lawyers’ awareness of litigation funding and their education on how to use it.

“Within Big Law I think you have a lot of the former and not a lot of the latter,” Agee said.

A little over a year ago, I wrote a story about the litigation finance industry that began with this question: “There is more money than ever in the hands of litigation financiers, but can they convince law firms to use it?”

Despite some new data, that still feels like an open question.

Worth Your Time

Big Law on Politics: I wrote this week that lawyers and law firm employees have given more than $17 million to presidential candidates so far this election cycle, and 95% of it has gone to Democrats. They’ve been particularly generous to Joe Biden and Kamala Harris.

Big Law on Climate: My colleague Meghan Tribe reports that the former leader of Baker McKenzie’s global climate change practice is starting an investment and advisory firm aimed at helping markets adapt to a “net zero emissions” world.

On Lawyer Regulation: Bloomberg Law’s Sam Skolnik writes that California has delayed a recommendation on whether the state bar should adopt changes that would broaden the range of those who can provide legal services. The proposed changes could open the door to U.S. legal practice by tech companies and the Big Four.

That’s it for this week. We’ll be bringing you the Big Law Business column on Wednesday next week, since next Thursday is Thanksgiving. In the meantime, please send me your thoughts, critiques, and tips.