Chevron v Commercial Litigation Investors
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The 18-year environmental lawsuit between Chevron (NYSE: CVX) and Ecuadorean villagers couldn't have endured without the plaintiff being supported by commercial litigation financing. Chevron inherited this mess with its Texaco acquisition. Last February, a court in the Ecuadorean Amazon ruled Chevron had to pony up $9 billion in damages. Both sides are appealing. But the process could screech to a halt now that the world's largest commercial litigation fund, UK Burford Capital, won't increase its 2010 $4 million investment to the $15 million it had committed and had hedged that $4 million in 2011.
Some view this investing in commercial lawsuits as unethical and warn it will increase litigation. Others frame this simply as another alternative investment option. This one differs from most in that it has absolute returns since litigation is not of a cyclical nature. Also they aren't correlated with the economy or what's happening in the stock market. The game gets played on the basis of the merit of the suit, evidence available, what lawyers are involved, weight of expert testimony, public policy, jurisdiction such as federal versus state and which state, and resources of the adversary. Yes, much of this is similar to law firms taking cases on contingency.
Investing in commercial litigation per se isn't new. It had been common practice in the Middle Ages. In England, though, it was outlawed back then. That was primarily because the rich could and would financially back weak suits as a show of power.
What is relatively new is its structuring as professionally managed investments funds, complete with underwriting departments of lawyers and accountants, and often proprietary models for assessing the whole context of a specific lawsuit. This is a disciplined business, based on complex analysis. Only a small fraction of the lawsuits submitted are accepted for funding. What's in it for the business submitting the suit for funding is that it saves the litigation expense which would probably have come from working capital. Mostly plaintiffs are funded. But defendants that have counter claims could also apply for funding. What's in it for investors is returns in the form of capital appreciation and/or income, which can beat those of other investment vehicles.
In the U.S., the SEC has this investment option only available to accredited investors. Since litigation is a slow-moving process, this is best for private equity firms and institututional investors. Also, there's plenty of risk. Some firms wind up shopping their portfolio of lawsuits at fire-sale rates. After all, given the long time frame of litigation, key variables could change. Lawyers could die or perform worse or better than expected. New research can discredit standard expert opinion. Public opinion could shift.
There are about 40 of these funds around the world, with about 20 in the U.S., reports PRIVATE WEALTH. U.S. ones range from Juris Capital to J.D. Capital Advisors.
I have no stock in any companies discussed.