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Litigation Funds Face New Player Disruption Risk in 2021 (1)

Dec. 17, 2020, 9:56 AMUpdated: Dec. 17, 2020, 5:30 PM

Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. This week, we close the year out with a preview of the litigation funding market in 2021. Sign up to receive this column in your inbox on Thursday mornings. Programming Note: Big Law Business will return Jan. 7.

Litigation funders had a busy 2020 marked by record-setting amounts of capital entering the industry, success in pushing back on regulation attempts, and a giant payout that bolstered some balance sheets.

The year kicked off with Chicago-based GLS Capital raising nearly $350 million. Parabellum Capital, Validity Finance, LexShares, and other funders then helped the industry raise more than $1 billion in 2020.

For a year marked by a global pandemic and a recession in the U.S., the litigation funding industry proved fairly resilient.

Newly flush from their investments, those financiers will be busy putting cash to work in 2021. But they will likely compete with new participants that may “disrupt” the traditionally lawyer-led industry, said Charles Agee, leader of litigation finance brokerage Westfleet Advisors.

“A new type of player may be coming into the space that is more heavily weighted toward financial acumen,” Agee said. “If that actually happens and becomes a real thing, it will be disruptive to the market.”

Hedge funds and large asset managers are increasingly looking to invest in portfolios of cases with law firms, said Agee, whose business linking law firms and plaintiffs to financial parties could stand to benefit from a bigger pool of investors. Comfortable with their ability to structure investments to avoid big losses, those investors are willing to accept far lower returns than litigation funders, he said.

Ralph Sutton, CEO of Validity Finance, said hedge funds so far are less interested in the types of cases firms like his invest in, which range in size from $3 million to $20 million. Those cases still carry the type of win-or-lose risk that justify investment returns ranging from two to four times the amount invested, he said.

“As the funds recognize the asset class, their target returns being so much lower, they will provide large amounts of capital in those larger funding requests at lower returns,” Sutton said. “I don’t think it is going to impact where most commercial litigation funders operate for the moment.”

It’s not just hedge funds looking to shake up litigation finance.

Kyle Roche, a co-founder of litigation boutique Roche Cyrulnik Freedman, is gearing up to start one of the earliest crypto-assets tied to a lawsuit. A company called LawCoin launched a tokenized litigation finance investment in 2019.

Roche says the development will increase transparency for investors and boost access to the justice system for those who can’t afford legal services.

Roche is partnering with Ava Labs and Republic Advisory Services to launch an “initial lawsuit offering.” The aim is to raise $5 million to fund a lawsuit filed by hemp company Apothio LLC. The company alleges officers in California’s Kern County Sherriff’s Office destroyed 500 acres of the company’s hemp farm, ruining product worth at least $1 billion.

Many so-called “initial coin offerings,” which raised money to launch new cryptocurrencies, ended with claims of fraud. Roche and his law firm are well-known for representing plaintiffs pursuing cases against those ICO operators.

Roche said tying the value of the new currency to an underlying asset—the value of the litigation—will provide investors with liquidity throughout the lifecycle of a case. Few litigation investments develop a secondary market that allows initial investors to exit their positions before a case concludes.

“We are focused on getting the first one launched, and the plan for 2021 is to open it up so both law firms and individuals can use the platform to raise the resources necessary to pursue litigation in an open and transparent manner,” Roche said.

Regardless of who is investing in litigation, one other question will be answered in 2021: What effect the coronavirus pandemic and any ensuing economic downturn will have on the number of lawsuits filed.

Early in the pandemic, litigation funding firms said they experienced a flood of lawsuits related to the pandemic. But many insurance-related claims have struggled to find footing.

“We should know in 2021, perhaps later in the year, whether litigation activity has increased in any significant manner,” David Spiegel, co-founder of GLS Capital, said. “I think that is the big question: Do Covid-related adverse economic circumstances lead to more litigation finance opportunities? The jury is still out, in my opinion.”

Worth Your Time

On Black Lawyers: Bloomberg Law last week launched a podcast featuring interviews with Black lawyers about the role race plays in advancing through the legal profession. Episode Two features interviews with Black lawyers detailing their experiences in Big Law.

On Lateral Moves: It was a busy week for lateral hires. Perkins Coie picked up a 17-lawyer group of white-collar litigators from Richards Kibbe & Orbe. Goodwin Procter hired Kirkland M&A partner Joshua Zachariah. Cooley hired Tiana Demas from Facebook Inc., where she led a team investigating cyberattacks.

On Jones Day: Six female attorneys suing Jones Day told a federal judge this week their review of compensation data produced by Jones Day revealed insufficient proof to pursue a collective action under the Equal Pay Act. They will pursue their individual pay and discrimination claims, Bloomberg Law’s Patrick Dorrian reports.

On Bar Exams: The New York bar exam passage rate shot to 84% for online test-takers in October, up from 65% from July, when the test was taken in-person, Bloomberg Law’s Sam Skolnik reports. New York joins other states that have seen pass rates skyrocket in their first-ever online-only exam.

That’s it until the New Year! Thanks for reading and please send me your thoughts, critiques, and tips.

(Adds information related to LawCoin litigation finance cryptocurrency investment.)

To contact the reporter on this story: Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editors responsible for this story: Chris Opfer at copfer@bloomberglaw.com;
John Hughes in Washington at jhughes@bloombergindustry.com

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