The Investors Profiting from the Victims’ Payouts

This is the second article based on conversations I had more than a year ago with a former employee in the litigation finance industry. John contacted me after reading several of my SlimeGate articles on the corrupt financing tools feeding the Predatort beast. He wanted to share more details on what was going on behind the scenes and what needs to change as the greed, lack of ethics and unmonitored practices were destroying the tort law profession. The first article examined how a litigation finance employee lends to law firms. This second article will shine a light on the investors funding the litigation industry and how they shape the tort law practice, which lawsuits get pursued and how much of the settlements are diverted from the victims to the investors, funds and companies. This whistleblower exposé is important in pulling back the veil of what goes on in the unreported financial institutions feeding funds in, and profiting handsomely from a dark, unregulated and integrity-challenged litigation industry. Names and dates have been changed to protect the whistleblower.

In my three decades in issue management, I have kept to the dictum: Follow the money! Our environmental-health narrative is being defined today by the litigation industry. But the real money we need to follow here is laid out by the litigation finance companies and the investors behind these dark banks. Testimony from this whistleblower helped lay out more breadcrumbs to follow.

In Part 1, John took us through the evolution of his litigation finance company, Renders, from financing individual cases to MDL and class action funding, the lending agreements and the ethical issues behind litigation finance lending practices. John showed the absurdity of giving unlimited funding to greedy lawyers at loan-shark interest rates. He revealed how more than half of any court payouts went to the litigation finance companies (rather than the plaintiffs). But these litigation finance firms are not banks in any traditional sense. They are more intermediaries, like investment houses, raising cash from third parties to bundle up into projects or funds to lend to law firms. These external investors are referred to as “undisclosed third-party litigation funding (TPLF)“. They are also not like banks in that there is no transparency in the process – leaving questions of who the investors are, how much the rates of interest and rates of return to investors are, what commission percentages are withheld by the litigation finance firms and who they are actually funding all completely in the dark.

John, a young investment analyst at a large litigation finance firm with little interest in auditing or monitoring the lending process, spent about half of his time working with outside investors to raise the hundreds of millions of dollars he would then lend to the law firms. He told me, in a rather deadpan tone: “If you weren’t investing at least $10 million in the firm, you were not worth my time.” John interfaced with private investors, institutions, endowments, pension plans often via some external investment vehicles. Transparency was not an issue or a concern, it seemed, for any of the parties.

Renders benefited from the changes in the Accredited Investor Law (codified under Dodd-Frank in 2010) that lowered standards and reduced need for regulatory disclosure filings with the SEC for certain very rich investors. The litigation finance industry basically takes income from large investors and lends directly to the law firms (something known as direct lending) – no scrutiny, no transparency.

John preferred fundraising for commingled funds (that pooled investments) but it was more common for investor money to be earmarked for a specific caseload, ie, investors would be paying into a special case fund. A lawyer with a large number of specific lawsuits, for example, could get an investor to go to Renders to invest in a certain case fund, and then the law firm can draw from that fund. As there is no transparency demand, and no scrutiny of the law firm, the investor could clearly have a special interest go unnoticed. A company could invest in lawsuits against a competitor. A foundation, working via NGOs, could finance lawsuits as part of its larger reputation-destruction campaign.

This is basically direct lending from the investor/special interest to the law firm with the litigation finance firm taking a nice cut. John said he would never tell the borrower (the law firm) who the investors were (although they most often knew), but others in the office did it all of the time.

Investors often did pressure John to invest more in a certain portfolio. Sometimes top-end funding limits had to be set for certain classes of cases. Positively, investors would also make him aware of new up-coming MDLs (what could be called “Daubert investing”). Negatively, investors were also spying on the fund managers to ensure their investments were safe. Ironically, this was the only real control or scrutiny that existed in the entire process.

John’s time was split 50/50 between raising investor income and law firm lending. A large number of private investors were looking for the next big thing and they often shared confidential leads and information. John would inform them of upcoming lawsuits and potential opportunities. All of this was done in the shadows as there was no transparency and no scrutiny.

A Ponzi Scheme

John’s largest investor was a bank that pumped almost a billion dollars into Renders (putting large amounts of capital at risk). But there were also a lot of fund managers seeking high returns for their clients at smaller scales. An institutional investor, for example, could come to Renders pooling funds from 1000 clients. The investor would earn 1% a month in consistent returns while Renders profited from the 2 and 20 rule: 2% of the investment went straight to the office, and 20% came off of the net income from the lawsuits. This added significantly to Renders’ revenue stream. To put this in perspective, 2% of one billion dollars under management was a $20 million commission going to the firm’s partners.

Renders never kept a loan-loss reserve and a third-party auditor simply rubber stamped the accounts. It should come as no surprise that some ex-Enron people are involved in the top management at Renders. They would often tweak the accounting, like holding back distributions to the next quarter (ie, kicking the can down the road with new loans getting paid down with new investments). As long as the funds kept growing by 15% a year, there was no problem. They would simply hide the bad loans from the auditor’s rubber stamp.

When they would close a fund (and return funds to the investors), done only once a quarter, they would often try to delay the distribution until the next quarter to collect more management fees. They would give some excuse to the investors for the delay.

Their target rate of return on investment in lawsuits was 18 to 24% but it was getting hard to find good quality caseloads. “If you are given $150 million to invest, there are only so many opportunities.” Many fund managers were pitched the asbestos portfolios as the safest investment as the payouts were locked in bankruptcy trusts. John disagreed. “It is not so safe if the trusts go bankrupt.”

Rapid Evolutions

The industry is evolving so rapidly and the litigation finance industry is scrambling to adapt to the new markets and opportunities. The aggregators or horse traders that advertise on US late-night TV and the Internet is a recently emerging market. These firms also process the thousands of potential plaintiffs to sell to law firms. (See the SlimeGate article on the Predatort Victim Exchange.) John would deal with an office of seven or eight people handling 50,000 plaintiffs in potential high profile lawsuits they would then trade on an open market. There are no rulebooks or checks in place governing how to monitor how these people operate or if there are any red flags to be aware of.

John was 26 at the time, pioneering a new market managing 100s of millions of dollars without scrutiny or checks that were ever audited. Every day, he recalls, there was a fire drill, ie, some crisis that needed to be resolved in an environment where the rules kept changing. The pressure and stress on him was enormous.

John lost his job when he raised several ethical issues with his direct management on the nature of several loans. It seems he no longer fit within the culture of the organisation. This implies that the litigation finance industry, at least at Renders, had no place for moral standards.

The Risk-Monger’s Observations

John’s exposé brought together many points I had expected – that in a world of unregulated greed and corruption, Big Money would find its way to turn a bigger profit. My argument that the litigation finance industry has built a Ponzi scheme was reinforced.  I suppose I was not prepared to see the type of numbers and corruption that a young analyst, in his early twenties, was tossing around at the top of the value chain, while the plaintiffs, the victims, were a mere afterthought. Some further observations:

• Because there is no transparency in the litigation finance system, there is nothing stopping interest groups from funding lawsuits against their competitors or companies with alternative products that may threaten their markets. Foundations running activist groups via fiscal sponsors could also use the litigation process for campaign purposes. For example, seven large foundations are funding Sher Edling (via a fiscal sponsor, New Venture Fund) to file climate nuisance lawsuits against the fossil fuel companies for damages due to climate change. This lawfare strategy is not intended to win cases but to continuously attack the reputation of these industries.
  
• We know so little of what is happening behind the curtains. I was often curious why law firms would persist in trying cases after the bellwether cases were not just defeated, but their arguments and scientific experts were humiliated in the judges’ summations (take, for example, the recent defeats of MDL bellwethers against Kenvue on Tylenol or against Syngenta on paraquat). Was there too much money invested for the law firms to just cut their losses and try cases they had better chances of winning? Who was pulling the strings?
  
• The investment conditions John revealed (investors getting 1% monthly while the firm follows the 2 and 20 rule) is stunningly simple. None of this is related to the likelihood of a case fund actually producing winning lawsuits. The entire litigation finance process is detached from the justice process, the outcomes or the point of funding law firms to carry out credible cases for credible plaintiffs. There is no financial risk for the investors or the litigation finance companies – they both get paid first. How many more corruption red flags do we need to see here?
  
• The tricks John used to delay distributions or the closing of funds was not something a young analyst could have figured out on his own. These tactics are obviously company policies he was trained to do, and it seemed endemic in the industry. The rolling over of investments to pay back the previous ones are classic Ponzi scheme tactics and John admitted it. But in a world of zero transparency, these are Ponzi schemes that never get found out. There is no regulatory authority to police such events. Whenever a large law firm or a litigation finance company gets into trouble (ie, if the floor falls out), the lawyers would just reconstitute themselves as another entity and carry on. Unless actors sue each other for unpaid fees or obvious ethics violations, no one is the wiser and the entire house of cards continues for another day. The silence goes right down to the office cleaning staff. When your employment contract is a glorified NDA and your management are a band of corrupted lawyers, staying silent is the best and, perhaps, only option.
  
• I find it interesting how activist NGOs and environmental-health zealots so readily get into bed with the tort lawyers, work on campaigns together and promote them as heroes standing up to defend the victims from some evil industry. While these post-capitalist idealists campaign against the excesses of capitalism, what John’s whistleblower exposé reveals to me is that the greed, deceit and corruption in the litigation finance and the US tort industries are the worst form of naked, unbridled capitalism. It screams for scrutiny, transparency and regulation, but these activists serve as the litigation industry useful idiots and, sorry to say, are also mostly on the take. I have shown how litigation finance money has made its way, in the shadows of foundation dark donor-advised funds, into anti-glyphosate movie productions, NGO campaigns, paid-off journalists, WHO cancer agencies and scientific research institutions.
  
• The fact that this is a fast-changing industry with no rule-books screams for regulation. Since the interviews with John, and since his departure, several further evolutions have affected the industry.
  – Dark crypto money can easily match up with dark litigation funding so volumes are expanding.
  – We also saw how Emirati investments were pouring into the US litigation finance industry. Given the lack of transparency, we have no idea how many foreign interest groups are using this investment vehicle to influence US policies (and profit from it).
  – Lawyers are starting to turn to crowdfunding platforms for bypass the loan-shark conditions of litigation finance, allowing interest groups to influence the judicial process even more discreetly.
  – And as AI is affecting the entire legal industry, it is clear that the litigation finance sector will be able to remove even more support from analysts like John.

So what can we do?

Recommendations

I find it amusing seeing a grifter like RFK Jr try to explain what is wrong with the US health system. Junior is a tort lawyer involved with some of the larger law firms in the industry and knows the system well so he would never point to the obvious: to improve the US health system, the tort system needs reform. This, in itself, would bring healthcare costs down as these large settlements get passed through to the companies, doctors, insurers, researchers and are eventually paid by the consumers. The growth of litigation finance conglomerates over the last decade has juiced the game even more. The first step now for any rational tort reform has to start with restructuring or removing the litigation finance system. From my research and reflections on John’s revelations, here are some basic recommendations:

• Transparency is key to reform the system.
  – Not only do the loans to law firms need to be made public, but also the conditions and rates of these loans.
  – The plaintiffs need to know how much of their settlement is going to third-party financiers (many are tormented by the lawsuits only to find out later they are then harmed a second time by these greedy bottom-feeders).
  – The courts need to be informed who is investing in the lawsuits and if this amounts to a conflict of interest.
  
• Stop the special case funds that allow investors to influence the judicial process. If investors want a piece of the action, they could invest in a general comingled fund or buy shares or bonds in the litigation finance companies. Lawfare should not be a corporate strategy to use against your competition.
  
• There needs to be caps on how much law firms can borrow and on how much organisations or individuals can invest. There also need to be caps on the rates litigation finance companies can levy on law firms. If the risk is too high or the law firm is too corrupt, don’t lend to them.
  
• There must be scrutiny on how the money is spent (ie, not on law firm private jets). Litigation finance firms must be obliged to audit their loans and file these audits like any other lender.
  
• The Accredited Investor Law should not apply to non-transparent financial instruments like the litigation finance industry. Gouging desperate law firms and their plaintiffs at loan-shark rates does not qualify as a sophisticated investment vehicle.
  
• There needs to be some serious investigation into the practices and conditions of the litigation finance industry. The media needs to shine a light on the damage that the greed, theft and corruption of these actors are causing (instead of the media just amplifying their twisted narrative that they are all fighting for some social justice). Americans should not have to rely on the odd blog punched out by some retired professor in Brussels (and a few others) when he has time and when he noticed something moving in the shadows.

These recommendations only pertain to the litigation financing part of the need for tort reform in the US. There are serious things that need to change in the system. Quite simply, injecting large amounts of money in the dark with no scrutiny can only attract greed, theft and ethical flexibility. Such a system can only attract the worst types of people and I am happy John not only got out, but also grateful that he was brave enough to contact me to share his story.

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I would like to close this exposé with a personal message to other young investment analysts like John still working in the litigation finance industry. I know the money is good but you were likely hired because you had a certain risk tolerance that would make any success in any business easy for you.

• If you have this voice in your head saying that what you are doing is probably not ethically or legally correct…
• If you are tired of making other (rather unpleasant) people very rich while you bend all the rules…
• If you are starting to wonder whatever happened to the victims in this equation, the plaintiffs…

… then you can always leave your company and follow a path you are more comfortable with. You will certainly succeed in life and maybe use your skills for good. And you can always send me a message to set up a call to share some of your stories and help play a part in reforming a corrupt institution.

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Since 2018, SlimeGate has been one of the few documents, a living research text, trying to expose the corruption and lies behind the litigation industry. If you enjoyed this read (free with no ads) or the entire SlimeGate exposé, why not support The Risk-Monger via Patreon? Become a Gold-Monger patron from 5 € / $ per month and get David’s newsletter.