“We Fund David Against Goliath”: The Ethics of Investing in Litigation Funding

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The pursuit of justice is a noble cause, but can the same be said of the investment in it? As litigation finance gains more and more attention, parts of the legal industry have expressed concerns about the mix of morals and money.

Among the concerns is the possibility that the establishment of closer links between lawyers and investors could lead funders to exercise some power over litigation, which could put lawyers in a situation where they could be forced to fail to meet their professional obligations.

Citywire Selector asked investors in the space how they perceive these concerns and what can be done to mitigate the risk.

Applicants vs cash

One of the reasons litigation funding has been viewed as unethical is the attorney’s potential conflict of interest between their duties to the client and to the funder, said Martin Schulz, Chief of the international equity growth team at Federated Hermes, which has invested in litigation finance firm Burford for nearly a decade. He believes that there are ethical risks present in trading.

“We have celebrities who can then fund failed things and businesses and that’s not always the right thing to do. It can certainly be used for bad purposes, ”said Schulz. He concluded that investors must strike a balance between ethical considerations and the pursuit of justice.

Syz Capital invests directly in litigation cases, but despite its expertise in the field, its co-manager Olivier Maurice was reluctant to comment on the ethical risks of the business.

“Donors do not control the cases, only the plaintiffs are supported by their lawyers,” Maurice said in response to concerns over the conflict of interest.

However, Mauritius said investors can mitigate ethical risks through thorough due diligence of the legal merits of cases and the intentions of different stakeholders, and avoiding frivolous cases with a weak legal basis where the claimant aims for a speedy resolution. He mentioned personal injury cases against businesses as an example.

In addition, Mauritius stressed the need to choose tailor-made investment structures and reliable companies with strong ethical considerations, as well as to avoid all cases where the company might have a conflict of interest.

“For example, we are part of the Syz group and we would not litigate against companies in this group. Some of our investors control operating companies, and we would not participate in business involving such companies, ”said Maurice.

In addition to this, Mauritius mentioned that tighter regulations and tighter standards for litigation funding could strengthen ethical barriers, ward off harmful actors and support the professionalization of the industry.

Currently, the UK Department of Justice has commissioned the Association of Litigation Funders to self-regulate the industry. Its code of conduct, written to mitigate the ethical risks present in the business, obliges member companies to respect their financial obligations in all disputes they have agreed to finance, for at least 36 months. They can only opt out of funding under specific circumstances. In addition to this, members are prevented from taking control of litigation or settlement negotiations and from pressuring lawyers to default on their professional obligations.

The Woodsford litigation firm was a founding member of the association and its CEO, Steven Friel, has said that there are theoretical conflicts of interest in litigation funding, but sane lawyers and funders are doing great efforts to eliminate these conflicts.

“I have been a litigator for over 20 years and have run one of the world’s leading litigation finance firms for the past 6 years. During that time, I have never experienced any problematic conflicts of interest related to litigation funding.

“The only parties that seem to be complaining about litigation funding are the powerful lobby of defendants, including large multinationals who do not like to be held accountable for their wrongdoing,” Friel commented in a written response.

An ESG alternative?

Contrary to critics, Marice argued that there is a rarely discussed ESG element in litigation funding because it provides access to justice.

“It could be companies suing their insurer for not providing Covid compensation or Covid damages. It could be a small tech company suing a tech giant for patent infringement and claiming unpaid royalties, ”Maurice said, describing some of the cases his company is funding.

“We always fund the plaintiff against the defendants, not the other way around. We are funding David against Goliath, ”he continued.

Syz Capital focuses on corporate claims, but Maurice argues that litigation finance provides an opportunity for ESG litigation specialists such as PGMBM to partner with lawyers and help disadvantaged groups sue companies for damages. environmental or social.

An example of this, Mauritius added, would be the £ 5 billion (€ 5.89 billion) lawsuit filed by 200,000 Brazilians against mining companies BHP and Vale over the failure of the Fundão dam in 2015, which released millions of tonnes of toxic sludge over 500 km and resulted in the worst environmental disaster in Brazilian history.

“I think there are ethical issues, but at the end of the day what we all want is justice. If a team can’t afford to continue their legal defense, you at least want to make it a more level playing field, ”Schulz added.



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