Litigation-Finance Firm Survives Chevron Debacle, Learns Lessons, and ThrivesPaul M. Barrett
Burford Capital, a litigation-finance firm, was just getting aloft in 2010 when it invested $4 million in a controversial pollution lawsuit against Chevron in Ecuador. The transaction went sour very quickly.
Burford’s chief executive officer, Christopher Bogart, a former executive vice president and general counsel of Time Warner, says his firm has benefited from having extricated itself swiftly from the pollution suit and has seen its profits expand. Burford’s fortunes matter because it’s the largest competitor in a nascent litigation-finance industry that provides capital to law firms and corporate litigants in exchange for a share of eventual recoveries.
In the Ecuador case, Chevron turned the tables on the main American plaintiffs’ lawyer, Steven Donziger. In March, it persuaded a U.S. federal judge in New York that the long-running pollution suit had evolved into a massive extortion scheme involving coercion, bribery, and corrupt Ecuadorian judges. Donziger is appealing that ruling, which could make it difficult for him ever to collect on a $9.5 billion judgment he won on behalf of thousands of poor Ecuadorian residents of the rain forest.
Claiming it had been deceived about rampant fraud in the Ecuadorian courts, Burford says it managed to offload its $4 million stake to an unnamed investor—someone who obviously has a very high tolerance for risk. Even if it could emerge financially whole, the litigation-finance firm appeared to have suffered a black eye to its reputation.
All this unfolded amid skepticism about the small-but-growing litigation finance industry. Critics such as the U.S. Chamber of Commerce claim that third-party investments in lawsuits encourage frivolous courtroom hostilities.
I sat down with Bogart to discuss the fallout from the Ecuadorian experience. First, he stressed that Burford, a publicly traded firm based in the U.K., did not finance Donziger directly. Instead, it financed the activities of Patton Boggs, a Washington-based corporate law firm that allied itself with Donziger to help him enforce any judgment won in Ecuador. In the wake of the U.S. court decision finding that the entire Ecuadorian suit had been permeated by fraud, Patton Boggs has apologized for its role and paid an unusual $15 million settlement to Chevron. A weakened Patton Boggs agreed to merge with a larger law firm and form what is now known as Squire Patton Boggs.
Still, the distinction of whom Burford backed in the Ecuador case matters to Bogart. “Our business is financing major U.S. law firms, and we rely on those firms not only for the quality of their lawyering but also for their own factual, legal, and ethical analyses of the matters they recommend to us,” he says. Patton Boggs didn’t live up to its professional standards, Bogart adds—an assertion that seems amply supported by the law firm’s expression of regret for having linked itself to Donziger. ”The principal lesson learned,” Bogart says, “is that even terrific lawyers at great law firms can lose their objectivity and professional detachment when caught up in matters about which they feel passionately.”
Burford has bounced back. It reported $40 million in profits after taxes in 2013, a 28 percent increase. It presently has 35 investments outstanding, with total commitments of $264 million. “We would not have entered into the Ecuador case had we known at the outset what we came to know later,” Bogart says. “However, now that all the facts are out, we believe the general sense of us is that we acted properly once troubling information came to our attention. … At the same time, our involvement in the matter and its public notoriety certainly increased the visibility of litigation finance and led lawyers to understand that Burford existed and was available to them as a financial resource in large, expensive, and complex cases.”
Burford continues to evolve, Bogart says. Initially, it engaged in what he calls “basic litigation finance”: “the payment of some of the fees and expenses of a case in exchange for a contingent portion of any recovery.” Burford is moving, he says, toward “more of a pure corporate finance business, with our capital being used for a variety of business purposes, not just litigation expenses, and with litigation claims being recognized as the corporate assets they truly are.”
He points to an investment with Rurelec, a British developer and operator of power plants. Rurelec was pursuing an arbitration claim against the government of Bolivia for the expropriation of one such power plant. Burford “monetized” Rurelec’s claim by providing the company with $15 million in financing. On June 2, Rurelec announced it had received some $32 million from the arbitration case. The following day, Burford said it had received repayment of its $15 million, plus an $11 million net profit.
“We were able to use a pending arbitration claim to obtain innovative corporate financing from Burford that lowered our cost of capital and helped our business expand,” Rurelec Chairman Colin Emson said in a prepared statement.
The Rurelec deal—in contrast to the ill-fated Ecuadorian engagement—vindicates the litigation finance model, according to Bogart. “The ‘frivolous litigation’ argument defies any economic logic whatsoever,” he says. “Frivolous litigation by definition is not valuable litigation, and paying to finance it will simply result in the investor losing money. We are at the other end of the spectrum: We only finance litigation that is good enough to have room not only for the client’s recovery and the lawyer’s profit but a further layer of return for our capital.”
If Bogart and his colleagues can avoid missteps such as the Ecuador case and continue to show returns of the sort derived from the Bolivian one, Burford may yet overcome the criticism that the last thing the civil justice system needs is additional incentives to pursue litigation.