Home > Uncategorized > Litigation finance: a terrible idea

Litigation finance: a terrible idea

September 1, 2015

I watch my share of bad commercials on TV. I don’t have cable but I have an antenna so I can receive some free TV stations, including one that is clearly meant for senior citizens called CoziTV. Cozi regularly has marathons of Murder She Wrote, Magnum P.I., Hart to Hart, and Fantasy Island, all shows that I somehow can’t stop watching, partly I think because I get so much confirmation from them about how awful my childhood was.

Anyhoo, back to the commercials. I couldn’t help notice a proliferation of ads for help with a medical condition called “transvaginal mesh injury.” Basically the ads were asking whether the viewer had such a problem, and whether they’d like to perhaps talk to a lawyer at this free phone number. Pretty much every other ad was about this condition, so it seemed like a pretty big deal, at least for the intended audience of old ladies.

Well, I didn’t pay much attention to it, until I came across this fascinating Reuters special report on corrupt medical lending practices entitled New breed of investor profits by financing surgeries for desperate women patients and written by Alison Frankel and Jessica Dye.

The article outlines the following scheme: financiers find women who need this surgery, based on a defective medical part, but don’t have the money for it and whose insurance companies won’t immediately cover it. They offer them the financing now in return for part of the eventual settlement with the company that was responsible for the faulty mesh. But then they make a deal with a surgeon to overcharge for the surgery, and they inflate the costs as well, and at the end of the whole thing they take a large part of the settlement which the woman was entitled to, and sometimes the woman even ends up owing them money.

It’s horrible, but it’s really just one example of a large industry of what is known as litigation finance, which just means the world where people with lots of money decide to bet on outcomes of court cases.

A recent Bloomberg article discussed the growing industry of litigation finance, and describes how congresspeople are starting to pay attention to all the hedge funds getting in on the act.

Of course, the financiers defend this practice by pointing out that, with money from people like them, a given side in a legal proceeding has more resources to make their case. They would also point out that they only put money behind cases that have at least some chance of winning.

However, there are two big problems with it as a concept. First, it means that there will be more money available to lawsuits in general. We’ve already seen what happened with college tuition when something that’s already too expensive gets access to loans: it gets even more expensive. It’s an arms race. According to Bloomberg, the typical client for these litigation finance firms are big companies which use corporate law firms.

Second, the justice system is already super unfair, and it’s not like hedge funds are running into this game to improve the system. Rather, they are there to exploit the system. That’s what hedge funds do. So if they have detected a bias in the system, they are going to treat it like an arbitrage situation and throw money at it for all they’re worth. The side effects of that will have nothing to do with justice.

The real reforms we need to see with the justice system is a way for money to be less of a factor, not more.

Categories: Uncategorized
  1. September 1, 2015 at 9:10 am

    this is awful; thanks for ruining my Tuesday; perhaps my whole week! 😦 …not to mention reinforcing my paranoia about an economic world driven to exploit individuals and “the system.”


  2. Sb
    September 1, 2015 at 9:25 am

    The super rich are far too rich for anybody’s good. They need to be taxed more so there’s no sunlight for this kind of weeded garden. They clearly aren’t doing anything useful or productive with the marginal dollar they put towards this endeavor.

    The implication is that the insurance industry and medical device companies are being played here, right? If so they will just pass on the costs to the consumers.


  3. tdhawkes
    September 1, 2015 at 9:25 am

    Your solution is money needs to be less of a factor. I agree. But, look our society. We are all besotted with money. And there are reasons. We obtain everything needed for our lives with money. We just don’t know where to draw the line with money. It has us by the nads, the throat, the aspirations, the dreams, the reality of our lives. How do we minimize the effect of money on our choices when it is really and truly the pivotal choice if we want to eat, to be accepted, to live?


  4. September 1, 2015 at 10:03 am

    This is an interesting extension of the no-win no-fee system that lawyers have developed. If the medical people were obliged to deal quickly, effectively and costfree with any medical cock-up then at least this type of activity would go away. (wishful thinking here).


  5. September 1, 2015 at 12:06 pm

    just one example of a large industry of what is known as litigation finance, which just means the world where people with lots of money decide to bet on outcomes of court cases

    Just one example indeed. Another low-rent advertising staple of the B-list channels-between-the-channels is “Oasis Legal Funding.” Their “value proposition” adds up pretty directly to “bet on outcomes of court cases.” I can only imagine what the internal rate of return on such transactions might be. For the other side of the process, there’s J.G. Wentworth, who will buy “structured settlements” for one lump sum price, which I’d also assume is a fire sale price, since their smarmy ads depict people between rocks and hard places.


    • smythejames78
      September 2, 2015 at 2:32 pm

      JG Wentworth owns Oasis.


      • smythejames78
        September 2, 2015 at 2:40 pm

        In fact, their business model pretty relies on securitizations. Before they were largely brought to market by a PE firm, they (JGW) specialized only in structured settlements, having kept pre-settlement financing low for some time. They, essentially, free up ‘cash now’ tied to purchased settlement obligations by bundling large quantities (normalized volume somewhere to the tune of 200-250mm) of said owned claims & reselling them to the capital market via a securitization. Since their inception (sometime in the 80s), they’ve come to be the market in this area of financing, and now starved for “growth”, they’ve expanded heavily with several litigation-financing acquisitions into this area of pre-settlement funding. That’s about the best I can do to sum it up.


        • September 3, 2015 at 11:54 am

          I could swear I’ve seen this movie before. Lemme guess, are these “securities” “AAA” rated?

          What’s next, derivatives derived from bundles of merchandise in pawn shops? Will alternative lending ever scrape the actual bottom of the barrel?


        • smythejames78
          September 3, 2015 at 1:29 pm

          So, via the EDGAR db (there’s an API), from a quick perusal of their most recent 10q, their ratings have ranged from (what I can find) Aaa to Baa2. Of course, the various tranches have their own separate ratings, for the various classes of ‘investor’.

          Also, on p21 of the same mrq filing, you’ll find a table showing their pre-litigation financings. They’ve obviously, about 2x over, expanded quite a bit into this lending territory.


  6. September 1, 2015 at 5:02 pm

    If you start a story Doctors: A Terrible Idea by telling us about some unlicensed liposuction idiot who ends up killing people, we would be inclined to conclude that Doctors are terrible. The Litigation Finance people that I know are nothing like the sleazeball surgery schemer you present. In fact, since they put up capital, they look for cases where it might be too expensive to litigate without financing, and where the odds of winning the case are high because the other side is negligent (imagine Bhopal). Can a single lawyer or even a law firm take on Exxon or PG&E? Probably not. But with financing, yes. To me that sounds like a win-win. The lawyers prevail. The claimants receive what they are due. The financiers who made this possible get a piece of the pie.

    Remember the movie Erin Brockovitch where Ed Masry brings in a bigger law firm in order to finance the case against PG&E? Now lawyers can bring in litigation financiers, instead.


    • September 3, 2015 at 12:04 pm

      It may be a legit value proposition, but I can’t think of it as entirely non-sleazy as the content of the ads invites people to become plaintiffs. If the value proposition also involves their becoming patients, that would at least fall under most people’s definition of a bait and switch. Also, between (1) lawyers, (2) doctors, (3) plaintiffs, (4) medical suppliers and (5) investors, there’s ten (C(5,2)) plausible kickback vectors right there. Enough to make me at least wonder what supervisions are in place.


      • September 3, 2015 at 12:35 pm

        The Litigation Financiers I was talking about do not recruit via such ads enticing people to become patients, Sleazebags exist in every profession,


  7. Gordon
    September 1, 2015 at 6:26 pm

    You’re really describing two separate issues: the first is that a financial company is offering financing for a procedure related to a lawsuit which the patient couldn’t otherwise afford. If that’s done ethically, there shouldn’t be a problem: in fact, the more companies that are competing (ethically) for that kind of business, the better, because the competition should be manifested in a higher payout for the patient if the market is efficient (and ethical).

    The second issue really is problematic: making side deals with surgeons and inflating costs sounds like fraud – why isn’t that being prosecuted under existing laws?


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