Crowdsourcing Comes to the Booming World of 'Litigation Finance'Paul M. Barrett
For several years, Bloomberg Businessweek has tracked the rise of “litigation finance,” a niche market where hedge funds invest in lawsuits. Today litigation finance moved in a new direction with the launch of LexShares, a crowdsourcing website backed by Atlas Ventures.
Marketed as a populist courtroom ally, LexShares will “provide plaintiffs with equal access to justice and investors with access to a new asset class that is not correlated with broader capital markets,” according to Jay Greenberg, co-founder and chief executive. Note, however, that what sounds like a splendid win-win proposition, sweetened by social-media pixie dust, will not deliver happy news for everyone. Litigation finance inevitably encourages more lawsuits, presumably with deep-pocketed corporations as the targets. And turning litigation into a vehicle for third-party speculation—er, I mean, investment—raises potentially sticky questions about potential conflicts between clients’ interests and those of outside funders looking to maximize returns.
To illustrate that last cautionary point, consider one well-documented episode of litigation finance: the funding of a multibillion-dollar lawsuit against Chevron over oil pollution in Ecuador. The plaintiffs’ lawyer in that case, Steven Donziger, sustained a two-decade legal campaign, in part, by accepting investments totaling close to $30 million from hedge funds and individuals. In 2011, Donziger and his clients—thousands of rain forest residents—won a $19 billion judgment against Chevron in a provincial court in Ecuador. The verdict was upheld on appeal, although the damages amount was halved.
Refusing to pay in Ecuador, where it lacks assets, Chevron countersued Donziger in New York. In March, a federal judge ruled that Donziger’s lawsuit had evolved into an extortion plot featuring bribery, coercion, and fabricated evidence. Donziger denies wrongdoing, is appealing the verdict against him, and, meanwhile, is trying to enforce the multibillion-dollar Ecuadorian judgment in Canada, Argentina, and Brazil.
If Donziger one day forces Chevron to pay full value—something the company vows he’ll never do—he and his funders will all be rewarded richly, with billions left over to clean up the jungle. If, in contrast, Donziger’s financiers push for a return on their investment via an out-of-court settlement, the results could be deeply troubling. If Chevron settled for $100 million, for example, Donziger’s financiers would get paid $69 million off the top—a healthy profit exceeding 100 percent, according to a forensic analysis done at the oil company’s behest by the accounting firm KPMG. Attorneys and other advisers, including Donziger, would share $22 million. Administrative expenses would consume $8 million. That would leave $1.5 million for rain forest reparations.
In a press release, LexShares promises a simple, fair division of any proceeds: “If the plaintiff wins, the investor receives a portion of the proceeds; if the plaintiff loses, the investor forfeits their investment.” The company cited an endorsement from a prominent legal scholar, Richard Painter of the University of Minnesota Law School, who has been an advocate for litigation finance. “The next logical step is using a technology platform like LexShares to broaden access to this asset class and equalize access to the legal system,” Painter is quoted as saying in the press release. From 2005 to 2007, Painter served as an associate counsel to President George W. Bush and as chief White House ethics attorney.
On its website, LexShares describes a variety of investment opportunities for small-scale financiers who would have to be “qualified” before being allowed to put money into pending suits. One involves a “whistle-blower” case against a “Fortune 100 company” accused of defrauding the federal government by submitting falsified contracts. LexShares lists the “offering size” as $100,000, with a minimum investment of $2,500.
Another opportunity involves a “confidential plaintiff” suing a “Fortune 500 company” over “catastrophic damages allegedly sustained from the use of a popular consumer packaged good.” The offering size on the product liability case is $250,000, and it’s already 100 percent funded. In its press release, LexShares refers to a third fully funded case “with a claim value of $40 million.”
Once investors apply to be vetted, they receive more details about the particulars of cases and “are able to track litigation activity related to their investments,” according to LexShares. The CEO, Greenberg, formerly worked for Deutsche Bank’s technology investment banking group. He co-founded LexShares with Max Volsky, described as an attorney and “alternative markets engineer,” who the firm says “has overseen more than 10,000 investments in legal claims since 1999 and is founder of a litigation-finance fund called LexStone Capital.
For better or worse, LexShares joins a burgeoning collection of entrepreneurial financiers seeking to profit from America’s litigation habit.