In last week's Advisen webinar on 2012 D&O claims
trends, one of the audience questions related to the growth and relevance of
litigation funding in the U.S. In responding to the question I noted,
among other things, the rise of litigation funding outside the U.S.,
particularly in Australia and Canada - a point I underscored in a
blog post late last week noting the growing importance of litigation
funding in Canadian class action litigation.
Consistent with this litigation funding theme, on
February 1, 2013 the Am Law Litigation Daily ran an interesting
interview of Christopher
Bogart, the CEO of Burford Group LLC, one of several firms in the vanguard
of the growth of litigation funding in the U.S. Burford Group is the
investment advisor for Burford Capital,
which according to its website is "the world's largest provider of investment
capital and risk solutions for litigation." (The formal relationship of the
various Burford entities is described here.) Burford's
shares are listed on the London AIM exchange. Bogart helped co-found Burford in
2009, after serving as an attorney for the Cravath, Swaine & Moore law firm
and as general counsel of Time Warner.
The Am Law Litigation Daily article asks the rhetorical
question whether the "litigation funding moment" may have arrived, based on
Burford's reported results for 2012. Among other things, the article notes that
Burford took in $47 million in recoveries from 12 investments (which may
consist of either a single case or a portfolio of cases for a single client).
The article also notes that overall Burford has provided $373 million in
financing for over 46 investments. According to a January 24, 2013 Financial
News article (here),
Burford reported a return on investment for the completed cases of 61%, with
further recoveries pending. The Financial News article suggests that
this may be the period where litigation funding "comes of age."
In another sign of the firm's apparent progress, in a
January 21, 2013 press release (here),
Burford announced the addition to its U.S. operations of several new hires,
including the addition of Georgetown University Law Professor Jonathan
Molot as Chief Investment Officer.
Burford is only one of several litigation funding firms
now operating in the U.S. and elsewhere. Juridica Investments is another
investment fund that is publicly traded in the U.K. and that has U.S.
operations engaged in U.S. litigation funding. IMF Australia Ltd, another litigation funder
that is listed in Australia, is the corporate parent of Bentham Capital LLC, which is also in
the business of funding U.S. litigation.
The success of companies like Burford has attracted
additional competition. For example, in January 2012, Parabellum Capital spin-out
from Credit Suisse for purposes on litigation funding investments in the
U.S. And, as discussed in a prior post (here)
in April 2012, former Simpson Thacher partner Michael Chepiga and former
Bernstein Litowitz Partner Sean Coffey announced the formation of Black Robe Capital Partners, as yet
another firm formed for purposed of litigation funding investment.
In short, there are now a number of firms active in
litigation funding in the U.S. Most of these firms have only just been formed
within the last few years, but signs are that these firms could take on an
increasingly important role in the U.S. litigation scene. Indeed, in Canada and
Australia, where the litigation funding track record is longer, litigation
funding has become a significant part of the litigation landscape, particularly
with respect to class action litigation. For example, in its 2010 study of
securities class action litigation in Australia (refer here),
NERA Economic Consulting identified the emergence of litigation funding as the
most significant development behind the increase in securities class action
litigation that country. Similarly, in its recent study of Canadian class
action lawsuit developments (discussed here),
the Osler Hoskin & Harcourt firm documented how litigation funding
arrangements increasingly are accepted by the courts, a development that the
firm worries could spark further class litigation there.
These developments outside the U.S raise the question of
what the growth (and success) of litigation funding may mean for litigation in
the U.S. The more positive spin may be that the availability of litigation
funding levels the playing field for smaller litigants taking on much larger
adversaries. At the same time, however, litigation funding raises a host of
questions. First and foremost are the concerns about the possible conflicts
between the litigation investors and the actual litigants. The funders'
investment objectives may diverge from the actual litigant's litigation
objectives - differences that could lead to diverging views about litigation
tactics and even case resolution approaches and objectives.
Similarly, there is the question whether litigation
funding is appropriate in the class action context. While the litigation
funding unquestionably may help facilitate a recovery for the class, the amount
to be paid to the litigation funder, in the form of commission or other
payment, will reduce the amount of the recovery for the class. The absent class
members cannot all be consulted in advance about such arrangements, which may
or may not look fair after the fact.
A more fundamental question has to do with the possible
effect of growing amounts of litigation funding on the litigation system. Will
the availability of litigation funding encourage an increase in litigation?
Will it encourage adversaries -- who might otherwise be able to reach a
business resolution of their dispute - to litigate rather than negotiate? And
then there are the concerns about a field in which there apparently are huge
sums to be made but no apparent barriers to entry -- will the outsize profits
that are now being reported attract less scrupulous competitors who attempt to
extract outsized returns at the expense of litigants?
There are, in short, a host of unanswered questions about
the growing presence of litigation funding on the U.S. litigation scene. There
is no doubt in light of the outsized returns that the early entrants to the
field are reporting that there will be increasing activity in the litigation
funding arena and that litigation funding could become an increasingly
important part of commercial litigation in the U.S. I fully expect that we will
be hearing a lot more on this topic in the months ahead. But the point is
-litigation funding is here, now. We had better recognize that, get used to it,
and try to understand what it means.
One final note. The last time I ran a blog post about
litigation funding, I immediately got a host of phone calls from would-be
litigants looking for funding. Friends, I am just a blogger. I am not involved
in litigation funding nor am I in the business of referring others to
litigation funders. If you are a prospective litigant looking for litigation
funding, please do not call or email me. I have linked above to the websites
for the firms that are involved in litigation funding. Please contact them, not
me. Thank you.
In the Current Environment, D&O Insurance
Remains Critically Important: As numerous observers have
noted (refer, for example, here),
litigation related to mergers and acquisitions activity declined in 2012
relative to 2011, at least in part due to the decline in the number of M&A
deals. The question remains what this development means for litigation activity
in 2013. A January 25, 2011 CFO.com article entitled "If Mergers Pick
Up, Can Lawsuits Be Far Behind?" (here),
notes a number of factors suggesting that M&A activity could improve in
2013, which could lead to a resurgence of M&A claims - a development that
could make the D&O insurance for the companies involved increasingly
The CFO.com article states the M&A related
lawsuits "have been in decline because of waning M&A activity." However,
other observers have been reluctant to ascribe the decline in M&A
litigation just to the reduced M&A activity alone. For example, and as
in its recent study of 2012 D&O claims, Advisen noted the number of new
merger objection suits declined 24 percent in 2012 compared to the all-time
high levels in 2011. The report attributed the decline in merger objection suit
filings in part to the decreased M&A activity. However, the report also
noted, the ten percent decline in M&A activity "does not fully explain the
large decrease in suits."
Whatever may be the reasons for the relative decline in
M&A-related litigation in 2012, circumstances suggest that companies may be
poised for a rebound of M&A activity in 2013. The CFO.com article
notes that corporate cash levels, currently over $1.1 trillion for the S&P
500, may support strong M&A activity this year. Should M&A activity
levels rebound in 2013, the likelihood is that the companies involved in the
deals will also become involved in litigation related to the transaction.
The likelihood of litigation in turn underscores the
importance of the D&O insurance available for the companies involved. The CFO.com
article emphasizes that because of the likelihood of claims it is more
important than ever for all companies - both publicly traded and privately held
- to take steps and make inquiries "to make sure they're adequately covered."
As one commentator quoted in the article notes, company officials should
examine their coverage regularly, because "what's available in the market
changes, the forms change and the exclusions change."
Readers who review the CFO.com article will note
that the article cites results from the most recent Towers Watson D&O
Liability Insurance Survey report. Readers interesting in reviewing the survey
report itself should refer here.
The Week Ahead at the PLUS D&O Symposium:
week I will be attending the PLUS D&O
Symposium at the Marriott Marquis hotel in New York. On Tuesday, February
6, 2013, I will be moderating a panel at the Symposium entitled "Financial
Institutions Underwriting: Is it Safe to Come Out Now? Part 2" which is a
follow-up to a panel on the same topic that I moderated at last year's
Symposium. Joining me on the panel will be Laurie Banez, Senior Vice President,
Chief Underwriting Officer, Argo Pro; Jack Flug, Managing Director, Marsh;
Paul Ferrillo, Litigation Counsel , Weil Gotshal & Manges LLP; and Sandy
Crystal, Executive Vice President, Crystal & Company. I hope everyone will
plan on attending our panel, which should be great.
I will be around the Symposium venue throughout the
conference, and I look forward to seeing everyone there. I hope that if you see
me at the Symposium that you will take a moment to say hello, particularly
if we have never met before. I look forward to seeing everyone there.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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