‘Wild West’ of Lawsuit Funders Supports Divorcees to Soldiers

Photographer: Michael Crabtree/Bloomberg

A man enters the High Court in London. It used to be illegal to invest in someone else’s lawsuit in the U.K. under a medieval offense called champerty, intended to stop meddling in litigation. U.K. court rulings between 2005 and 2009 removed most limitations and funders entered the mainstream. Close

A man enters the High Court in London. It used to be illegal to invest in someone... Read More

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Photographer: Michael Crabtree/Bloomberg

A man enters the High Court in London. It used to be illegal to invest in someone else’s lawsuit in the U.K. under a medieval offense called champerty, intended to stop meddling in litigation. U.K. court rulings between 2005 and 2009 removed most limitations and funders entered the mainstream.

Jane Ong thought she had a good case to sue her accountants in Singapore over asset valuations during a two-decade divorce fight. Short of money, she persuaded a litigation funder -- an investor that pays for a lawsuit in return for a share of the proceeds -- to help.

Buttonwood Legal Capital Ltd. funded Ong’s claim in the country for about two years before pulling out in 2012, she says, leaving her with legal bills she couldn’t pay.

“They left me again owing money,” the 52-year-old London resident said. “This was meant to be good for me.”

Litigation funding is a fast-growing industry that backs some of the U.K.’s biggest lawsuits. Funders have invested in an ex-soldier’s $1.6 billion claim against Gulf Keystone Petroleum Ltd. (GKP), and a class action by thousands of Royal Bank of Scotland Group Plc (RBS) shareholders over the lender’s 2008 rights issue.

Supporters say the industry improves access to justice by allowing people who couldn’t normally afford it to sue wealthier opponents. If a case is successful, both investors and litigants win, sharing any compensation. When things go wrong and disputes break out, the situation isn’t so clear.

“The litigation funding market still has a long way to go in its development,” said Michelle Duncan, a London lawyer with Paul Hastings LLP. “At the moment it’s still pretty unsophisticated and is also unregulated -- it’s a bit like the Wild West.” She said the firm’s London office hasn’t worked on cases funded by outside parties.

‘Walked Out’

Ong’s case, which was filed in Singapore, highlights the shifting relationships between funders and their clients around the world. While her lawsuit is complicated, she says Buttonwood bears part of the blame for its failure. The company says its contract with Ong allowed it to stop giving her money.

Delays in getting cash from Buttonwood meant she couldn’t pay her lawyers and had to represent herself at a 2011 trial, she said. Unable to cope, Ong quit in the middle of a hearing. “I walked out of court,” she said.

Buttonwood initially funded her appeal, then decided she wasn’t likely to win and terminated their agreement, according to Ong, who said she never fully understood her contract with the company.

Buttonwood said in an e-mailed statement it met its obligations to Ong and there were no delays in providing her money.

50 Percent Chance

“The decision to terminate funding of a case is not one the funder takes lightly,” Buttonwood said. It ended Ong’s funding only when lawyers advised the company she had less than a 50 percent chance of winning, the Hong Kong-based firm said.

Engelin Teh, one of Ong’s lawyers in Singapore, declined to comment and another, Woo Tchi Chu, didn’t respond to e-mails and phone calls.

While lawyers have a duty to act in their clients’ best interests, litigation funds have to answer to investors. It’s not clear what should happen when those two imperatives clash, or who should resolve disputes. Funding arrangements aren’t covered by legal or financial regulators in the U.K.

The question of what’s reasonable behavior isn’t black and white, said Richard Moorhead, a professor of law and ethics at University College London.

“Commercial reality will also mean that, on occasion, litigants’ rights are inappropriately compromised and the independence of lawyers involved in those cases will similarly be compromised,” he said

U.K. Lawsuit

One of the first U.K. lawsuits to deal with the issue was filed in London in January and may go to trial as soon as this week. The case, which also involves Buttonwood, has been sealed by a judge and court documents aren’t available.

The dispute concerns about 1.3 million pounds ($2 million) Buttonwood provided for a property lawsuit planned by Alternative Real Estate Fund Ltd., according to two people familiar with the case who asked not to be identified because they weren’t authorized to discuss the case.

The money is being held at a U.K. law firm until the court rules on the dispute. Buttonwood is seeking to end the agreement and take back its cash, while the real-estate fund says the case still has good prospects, the people said.

Buttonwood said it couldn’t comment because of the restrictions put in place by the judge.

It used to be illegal to invest in someone else’s lawsuit in the U.K. under a medieval offense called champerty, intended to stop meddling in litigation. U.K. court rulings between 2005 and 2009 removed most limitations and funders entered the mainstream.

Hedge Funds

Now the market includes specialist companies, hedge funds and private investors, offering secured loans, lump sums and, in some cases, unlimited funding.

Rupert Jackson, a judge appointed by the U.K. courts to come up with reforms to lower legal costs, has praised litigation funders for promoting access to justice and filtering out unwarranted claims. The industry provides “for some parties, the only means of funding litigation,” he wrote in a 2009 report.

The Association of Litigation Funders, a London-based lobbying group for the industry, has seen its membership grow to nine since it was founded in November 2011. Three of its members -- Harbour Litigation Funding Ltd., Vannin Capital PCC Ltd. and Burford Capital Ltd. (BUR) -- have raised a combined $700 million from investors chasing returns that aren’t affected by market gains and falls.

ALF has written a code of conduct for members and set up a complaints process. Under ALF rules, members can only withdraw funding in limited circumstances, for example if the chances of winning a case drop significantly or if the costs soar.

Complaints Procedure

In addition to its lawsuit, Alternative Real Estate Fund made use of the association’s complaints procedure to lodge a formal objection about Buttonwood on the grounds that it was affiliated with Argentum Capital Ltd., an ALF member. Buttonwood lists Argentum Investment Management as its investment manager on its website.

That complaint was dismissed, Alternative Real Estate Fund said in a statement, because Buttonwood wasn’t a fee-paying member and the association had no power to censure it.

“We consider that the ALF’s procedure for processing complaints is unduly opaque and that the crucial decision about jurisdiction in the complaint is open to question,” the fund said.

Argentum Investment Management helps manage the money Buttonwood raised from investors, and didn’t actually invest or enter into the funding contracts, according to Buttonwood’s e- mailed statement.

‘Wholly Dismissed’

Since Argentum Capital Ltd. and its affiliates weren’t parties to any funding agreement in the real-estate fund case or for Jane Ong’s lawsuit, it couldn’t answer questions about them, Argentum director Duane McGaw said in an e-mail. The complaint to the ALF “has been wholly dismissed,” he said.

Ong said she wasn’t clear about Buttonwood’s relationship with Argentum. “To this day, I still don’t know who it was I was dealing with,” she said.

Leslie Perrin, ALF’s chairman and head of London-based funder Calunius Capital LLP, said the group demands members get an independent opinion from a lawyer about whether the termination of funding is reasonable.

“There are bound to be commercial clashes between funds and potential counterparties,” he said in an interview from his office near Piccadilly Circus, without commenting on specific cases. “Those can be quite difficult.”

ALF can expel members and publicly censure them if complaints are upheld.

Proper Grounds

Jackson’s reforms, which include allowing British lawyers to offer the no-win-no-fee deals popular in the U.S., came into effect on April 1. While they don’t hinder the use of litigation funding, Jackson has expressed concerns about investors pulling out of active lawsuits.

“The funder should be obliged to continue to provide whatever funding it originally contracted to provide, unless there are proper grounds to withdraw,” he wrote in his 2009 report. While backing the ALF code, he said there might need to be statutory regulation if the industry continues to grow.

Perrin said he was eager for the voluntary code to be given a chance to work, although “we recognize we are always under review.”

In Australia, one of the world’s most active litigation funding markets, the government has drafted rules requiring firms to manage conflicts of interest. There are also calls for legislation in the U.S., where one in 10 litigators at the 200 largest law firms has used a litigation funder, according to a survey by Briefcase Analytics last year.

‘Too Acute’

Bob Weber, general counsel at Armonk, New York-based International Business Machines Corp. (IBM), says the presence of outside investors interferes with the attorney-client relationship and causes conflicts of interest.

“Litigation funders should surely be regulated because of the extraordinary potential for abuse,” he said in an e-mail. The risks “are simply too acute to be left to industry self- regulation.”

Still, investors allow some people the opportunity to pursue cases they otherwise wouldn’t have been able to get to court.

Rex Wempen, the former soldier suing Gulf Keystone, has had to come up with 17.5 million pounds to deposit with the court in order to continue his claim, the company said in regulatory filings.

BlackRobe Capital

His costs are being covered by New York-based specialist litigation investor BlackRobe Capital Partners LLC, hedge fund Platinum Partners and others, his lawyer Alex Panayides said in an e-mail. BlackRobe’s founders include Sean Coffey, a former plaintiff’s lawyer with Bernstein, Litowitz, Berger & Grossmann LLP, who secured more than $7 billion in settlements for investors of bankrupt Worldcom Inc.

If Wempen wins the case, which is awaiting judgment, his backers will get back their initial investment and more.

“Litigation funding levels the playing field,” said Dan Morrison, a lawyer at London-based Grosvenor Law LLP who has used them in the past. “It’s often the case that a deep- pocketed defendant, such as a bank, will use litigation procedures to oppress or stifle a claimant.”

Jane Ong still hasn’t divorced her husband. She said it hasn’t been determined who should pay the costs left over from her failed Singapore lawsuit. Her advice for other people considering using a litigation funder is to be wary. “They are not in this for the justice of the case.”

The High Court case is: Harcus Sinclair v. Buttonwood Legal Capital Ltd. & Ors, High Court of Justice, Chancery Division, HC13E00211

To contact the reporter on this story: Kit Chellel in London at cchellel@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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