Securitizing Litigation Claims for Fun and Profit

Call me old fashioned, but I am uncomfortable with the growing industry involving third-party financing of commercial claims in litigation. In the not-too-distant future, it may well be that commercial litigations will be “bundled” and traded as securities on financial exchanges, not unlike the exchanges that trade fx.

However, lawyers are not agricultural growers, but professionals who have been trained to serve as both officers of the courts in which they are admitted and skilled advisors to the clients by whom they are retained. In the absence of regulatory safeguards and rigorous judicial oversight, traditional litigation practice is at risk of being turned on its head.

As a counterweight to my negative views on the subject,Aaron Katz, a principal at Parabellum Capital, LLC, and Steven Schoenfeld, a partner at Robinson & Cole, LLP, have written an excellent article titled, “Third-party Litigation Financing: Commercial claims as an Asset Class,” which appears in Practical Law The Journal, July/August 2013. Katz and Schoenfeld offer a compelling argument on behalf of an industry that is estimated to exceed $1,000,000,000 in the United Kingdom and United States combined.

Third-party litigation financing is a mechanism by which a party not affiliated with a certain lawsuit pays for another party’s (usually a plaintiff’s) legal fees to pursue the lawsuit, in exchange for a portion of the proceeds recovered by settlement or judgment. As the authors discuss, third-party litigation financing arrangements are complex transactions that need to be negotiated and structured carefully to address the unique needs of the specific investment.

Katz and Schoenfeld are sensitive to the legal issues inherent in third-party litigation financing, including champerty and maintenance; the duty of confidentiality and the related attorney-client privilege; and litigation counsel’s duties of loyalty and independence.

Litigation counsel owes a duty of loyalty to a client. This duty requires litigation counsel to act in the client’s best interests and give the client independent legal advice without interference from third parties, even if a third party pays the attorney. The authors point out that a third-party funder who controls the litigation may run afoul of litigation counsel’s ethical duties of loyalty and independence in addition to champerty laws. Therefore, it is not advisable for third party funders to not hire or terminate litigation counsel; direct litigation strategy; or make settlement decisions.

Of course, these ethical precautions may be difficult to observe in the heat of battle with millions of dollars of potential fees at stake. The housing crash and the severe recession that followed was, in part, due to the excesses of Wall Street and the development of unusual, difficult-to-comprehend financial products, so instead people is deciding to invest in other sort of products and services like stock or cryptocurrency, moving average crossover pattern strategies which really help to do the right investments. In addition to this, many developers are planning to get substrate to build their own blockchain application. Does any attorney really look forward to the day when your commercial litigation, rated Triple-A by a third-party litigation financing company, has been bundled into other purportedly Triple-A litigations and sold to investors?

One previously Triple-A rated commercial litigation was recently downgraded and assigned a “junk” rating. CNNMoney reported on January 10, 2013 that Burford Capital, a $300 million publicly-traded fund that invests in lawsuits, accused representatives of the Ecuadorians, who are suing Chevron in Lago Agrio, Ecuador, of having defrauded the firm into investing in their case two years ago. It was reported that, on October 31, 2010, Burford gave the plaintiffs $4,000,000 in financing as the first tranche in what was planned to become a $15,000,000 investment. In exchange, it received a 1.5% stake of any recovery, which was to rise to a 5.5% stake upon full funding. Burford accused plaintiffs’ counsel of being “willing to do and say anything to attract new funding.”

Remarkably, Burford was able to recover its full investment by selling a $4,000,000 “participation” to another investor, while retaining an upside interest in the case. The new investor reportedly also owns a minority stake in the Brooklyn Bridge.

Keeping Your Adversary’s Environmental Expert Honest

Law 360 reported on April 12, 2013 that Steven Donziger, counsel for the indigenous Ecuadorians known as the Lago Agrio plaintiffs, “meddled” in the preparation of a key environmental report used against Chevron as part of an effort to secure, by hook or by crook, the $19.2 billion judgment.

The environmental consultants at Stratus Consulting Inc. (“Stratus”) who prepared the report, Law 360 reported, found no credible scientific evidence linking Chevron’s operations in Ecuador to groundwater contamination, adverse health effects or an increase in the incidence of cancer. In fact, Stratus claims it was pressured by Donziger into making false public statements and concealing its role in drafting a purportedly “independent damages assessment.” The lead Stratus consultant stated, “I based my opinions and conclusions on a series of assumptions and data provided to me by Donziger and the [Ecuadorian plaintiffs’] representatives that I do not know to be true.”

In a press release, dated April 11, 2013, Stratus announced that Chevron had dismissed with prejudice the fraud and racketeering claims asserted against Stratus in the SDNY. According to the press release, Stratus’ environmental consulting work for Donziger was used in a report submitted to the Ecuadorian court by the supposedly “independent” court expert, Richard Cabrera, as part of a process that Stratus learned was “fatally tainted” by Donziger and the plaintiffs’ representatives “behind the scenes activities.”

 Most toxic tort cases do not have stakes anywhere near as high as Chevron’s Ecuador case. There is the danger in any high stakes litigation that an environmental consultant is pressured into offering baseless conclusions under pressure from plaintiffs’ counsel or, alternatively, that the consultant’s data is used improperly.

 There are steps that the diligent defense lawyer can take to reduce the likelihood of falling victim to expert witness fraud or abuse.

1. Obtain all the data. Well before the deposition of the plaintiffs’ expert, every piece of scientific data available should be obtained and reviewed. It may not be enough to rely upon reports submitted by the consultant to plaintiffs’ counsel or a regulatory agency. Often, the reports do not contain all the available information.

Where site investigation work is involved, it is good practice to obtain the consultant’s field notes so that defense counsel can investigate what on-site activities were performed on each day and by whom. If an issue in the case involves groundwater contamination, defense counsel should obtain the location, depth and construction details of each monitoring well, if detailed boring logs are not part of the report. The boring logs can provide important information concerning the observations of the staffers involved in the drilling, such as odors detected during drilling and soil composition.

2. Does the data permit the consultant to draw the conclusions made in his report? If there is a claim that groundwater contamination caused off-site impacts, for example, what assumptions were made in reaching this conclusion. Were on-site or off-site perimeter wells drilled? What does the data suggest about the presence of a groundwater plume? Was sufficient groundwater data obtained to permit reliable mapping of a plume? What assumptions does the consultant make concerning the size of the plume or the speed at which it is moving? Are these assumptions based on scientific evidence or guesswork?

Defense counsel should always be on the lookout for data that does not support the consultant’s conclusions. Does the consultant draw selectively upon certain pieces of data to support his thesis but ignore other data?

Often, an environmental consultant and a toxicologist are both retained to advance plaintiffs’ theory of the case.  Does the plaintiffs’ toxicology expert misapply the information generated by the environmental consultant? If the toxicologist alleges that plaintiffs were injured due to an inhalatory exposure, for example, evidence of elevated groundwater levels is not relevant in the absence of evidence that contaminants in groundwater reached the ambient air where they could be inhaled.

Similarly, evidence of groundwater contamination in a monitoring well may not be indicative of the quality of the water at plaintiffs’ tap. There may be data gaps that plaintiffs’ toxicologist will attempt to fill with mere speculation. Defense counsel must be prepared to exploit those gaps and reveal the fallacies in the expert’s presentation.   


Forum Non Conveniens: Be Careful What You Ask For

In defending a United States defendant in an action involving a foreign accident and foreign claimants, it is almost a knee jerk reaction to file a motion to dismiss on forum non conveniens grounds. In a thought provoking article, “Be Careful What You Ask For – the Forum Non Conveniens Dilemma,” Cozen O’Connor lawyersRichard Dunn and Raquel Fernandez bring this practice into question. Mr. Dunn and Ms. Fernandez urge a different standard for analyzing whether to file the motion. The question that should be asked is whether it is beneficial for the U.S. defendant company to be subject to the laws and procedures in the foreign jurisdiction.

Thus, it is critical to understand the foreign jurisdiction’s law before your client is stuck there in litigation. A few of the considerations to think about include:

(1) Can your client get out of the case on summary judgment? Many foreign jurisdictions do not provide for summary judgment. Therefore, all matters before a court must be tried to conclusion, which may potentially lengthen and increase the cost of proceedings;

(2) How much time will your client have to prepare its case? Some foreign jurisdictions allow a short time for defendant to mount its defense, which may be an important consideration in a complex product liability case where it is necessary to hire and prepare appropriate experts. Moreover, the documentary evidence that supports your client’s case has to be translated into the foreign jurisdiction’s official language; 

(3) Will discovery be allowed? In some foreign jurisdictions, there is nothing akin to the discovery procedures that benefit parties in the United States;

(4) Will expert testimony be allowed? Often, the foreign court will place great emphasis on the government accident investigation report rather than on the expert evidence. In some jurisdictions, your client’s liability may be determined by the government authorities charged with investigating the accident, although they may not be competent;

(5) What is the role of the judge? Is the court the sole trier of fact?;

(6) Are there multiple claimants? You should determine whether all of the claimants involved in the incident can be consolidated before the same tribunal. If each claimant is able to file suit in his or her own locale, the client may need to defend numerous actions before numerous judges in different locations; and

(7) What are the attitudes towards the United States and American businesses in the foreign jurisdiction?

Anti-American bias and corruption figured prominently in Chevron’s environmental litigation in Ecuador. In the early 1990’s, Ecuadorian claimants filed suit in the United States alleging that Texaco’s operations polluted the rain forests and rivers in Ecuador, resulting in environmental and personal injury damages. The lawsuit was dismissed in 2002 on forum non conveniens grounds and the case was refiled in Ecuador the following year. In February 2011, an Ecuadorian court entered an $18,000,000,000 judgment against Chevron (which had earlier acquired Texaco).

Scott A. Edelman, a partner at Gibson Dunn in Los Angeles, made a compelling presentation at a recent IADC meeting concerning serious irregularities and a lack of impartiality in the conduct of that case. Chevron alleges that the plaintiffs’ lawyers are guilty of fraud and misconduct and have filed a civil lawsuit under RICO in New York federal court against the trial lawyers and consultants involved. Chevron’s suit alleges that these attorneys and consultants used the Ecuador lawsuit to threaten Chevron, mislead U.S. government officials, and harass and intimidate Chevron employees, to extort a financial settlement from the Company. Chevron further alleges that plaintiffs built their case through fabricated evidence and a campaign to incite public outrage.

It is likely that the pervasive fraud that permeated the Ecuador litigation would not have occurred in a U.S. federal court. As a result of Chevron’s experience, a U.S. defendant would have to think twice about filing a forum non conveniens motion if there was any likelihood that the case would end up in Ecuador or somewhere similar.