As Litigation Funders Skirt Sanctions, It’s Time for Disclosure

Unsurprisingly, the US government doesn’t like being in the dark. But they appear to be when it comes to Russian sanctions and litigation financing. That’s in part due to the nature of the litigation financing industry, and lack of laws requiring transparency about who or what is funding the litigation.

It’s high time that litigation financing be held to similar mandatory disclosure standards that courts already require for insurers and publicly traded investors.

Litigation finance is the once-illegal practice of financiers betting big on US litigation. These sometimes-shadowy funds front the money for litigations in exchange for a majority of—and occasionally all—the proceeds. In theory, they’re disinterested.

At times, they will themselves create shell companies, hide their identities, and sue; more often, they will fund others’ cases and do so without transparency. These deals can be for hundreds of millions, and are sometimes worth billions. Yet they claim these private, undisclosed deals worth billions offer them no control. Sure.

While information is undisclosed and thus scarce, investments in US litigation are a multibillion-dollar industry, comprising a growing share of some types of commercial litigation.

Class actions, bankruptcy, and patent cases seem to attract much of it, though insurance, workers’ comp, and even high-profile divorces have been financed.

At least, that’s as far as we know.

Unlike buying a house or trading stocks or even private equity investing, litigation funders generally don’t disclose their terms, their involvement, or who their investors might be to anyone—the government, the courts, even the people they’re suing. Right now, the law doesn’t require it.

The only time they tend to disclose funding is when it benefits them to do so, as in the case with a sympathetic investor, or when there is a later dispute between the funder and investors.

Unsurprisingly, almost a decade ago, those protecting our national security got nervous. Some members of Congress, judges, military officials, and scholars started raising concerns about this new (and rather lucrative) investment.

If no one is aware it’s happening, couldn’t foreign governments, money launderers, or other bad actors take advantage? What about judicial conflicts? Or companies funding suits against strategic competitors or key industries?

And if there were some fraud upon the court, how would it ever be identified? The Judicial Conference, the self-governing body of the US Federal Courts—which reports to the Supreme Court—began considering modest disclosure requirements as far back as 2014.

Funders responded vociferously to these modest calls for transparency, arguing such concerns were overblown, irrelevant, or some kind of sideshow.

They rejoined that funding cases increased access to justice, so the risk was worth it. And they argued that conflicts of interest would be rare—that there were other, better ways for others to interfere in industry, and there were no national security concerns. They wrote dozens of letters to the Judicial Conference arguing against disclosure.

But you can’t know what you don’t know. And that ignorance rightfully unnerved our national security officials, Congress, and courts.

So it should no surprise that just last month, investigative reporters revealed that sanctioned Russian oligarchs have been using litigation funding to evade US sanctions in US courts.

Notably, less than two years ago, some forward-thinking judges began requiring modest disclosures (as others had before them), and soon, it revealed Chinese investors were backing US patent suits against US companies in US courts. And recent government reports showed some of the biggest investors in litigation funds are as-yet-undisclosed sovereign nation wealth funds.

As it turns out, allowing billions of dollars a year to flow through completely undisclosed, much less unregulated, financial products invites investors seeking to avoid scrutiny.

Even aside from recent examples of Russian use of litigation funding to avoid sanctions, lawmakers, judges, and voters think this troubling lack of disclosure is a problem. Bills, proposed regulations, commentary, judicial orders, and reports over the years have sought to add blanket disclosure.

Predictably, funders have opposed transparency by lobbying against it; writing letters, op-eds, and articles; and spending lavishly on events with sitting judges. And they have inaction on their side: Either courts and legislators act, or we do nothing, while the industry continues to thrive in relative darkness.

I vote for the latter—officials must act in the face of well-financed lobbying against disclosure. The Judicial Conference, which represents all federal judges and makes recommendations on rules changes, has since 2017 been considering mandatory disclosure akin to what courts already require for insurers and publicly traded investors.

It would be nothing more than a long-overdue tweak to existing Rules 7.1 and 26 of the Federal Rules of Civil Procedure, something the judiciary itself can implement. But they have been characteristically slow to act, giving the issue due consideration over the past seven years.

Now that we know that Russian billionaires are using this lack of transparency to skirt sanctions, it is time for us to act, whether congressionally, via the Judicial Conference, or even individually, to mandate disclosure.

Funders should self-disclose their investors. Investors should consider pressuring their funders to disclose, lest they get caught in a wave of over-enforcement down the road, and also, because it’s the right thing to do.

This massive industry needs an overhaul to build in transparency. Anything less demonstrably allows other countries to profit off the US judicial system and circumvent sanctions. Let’s shine a light.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Jonathan Stroud is general counsel with Unified Patents.

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