Adventures in Litigation Financing

This New York Times article has introduced me to something I didn’t know existed: litigation financing. Lawsuits are expensive, and investors will fund your legal fees if they think you can win, and then take a cut of the proceeds.

Wall St. Bankrolls Ex-Executive as He Sues Over A.I.G. Bailout

The article in question is about the AIG bailout, and how someone from AIG is suing because they thought the government got too much of the company. (Seriously…)

With the legal bills mounting in the three-year case, Mr. Greenberg sought support from a certain breed of investor — those who have misgivings about the government. […] The investors, who are entitled to a cut of any damages Mr. Greenberg collects from the government, contributed about 15 percent of the tens of millions of dollars in legal costs, according to people with knowledge of the arrangement.

This is apparently an established thing. There are litigation financing conferences, a Wikipedia page, and even payroll loan-ish type outfits (“We provide immediate cash advances for lawsuit funding during pre-settlement”).

The more I think about it, the less I should be surprised. Contingency fee attorneys are essentially the original litigation financiers – they’re “investing” their fee in the hopes of a future return, so why wouldn’t other people do this?

What I find odd is that lawsuits are apparently an investment vehicle. Hedge funds invest in them – in January, a firm raised $260 million for a new fund:

Gerchen Keller invests only in litigation between institutions, including contract disputes and intellectual property feuds. The firm and its rivals steer clear of consumer class-action lawsuits or personal injury cases.

In March, a case was dismissed over the usage of Marvel characters by Disney that had been bankrolled by a hedge fund. Another fund is coming together solely to bankroll a single lawsuit – one which will attempt to force Iran to pay for the 1983 Beirut barracks bombing. They’re going to throw $100 million at it, in the hopes of billions of dollars in returns.

(If you don’t know what a hedge fund is, read this primer. TLDR: they are essentially mutual/investment funds, but (1) they can’t advertise, (2) can only take money from “certified” investors who can presumably afford to lose it, (3) operate without much regulation so they invest in sometimes bizarre things, and (4) take large amounts of money in management fees.)