Hedge Fund Sues GOP-Hated Regulator for Exceeding Its Authority

  • CFPB is probing firm over trade tied to 1983 terrorist attack
  • U.S. agency faces uncertain future in Trump administration

A financial regulator long vilified by Republican lawmakers is facing new allegations that it’s exceeding its authority, this time by a hedge fund under investigation in part for legal settlements tied to a 1983 terrorist attack.

RD Legal Funding sued the Consumer Financial Protection Bureau in federal court Tuesday, arguing that the regulator sought to justify a probe into the firm by mischaracterizing its business as issuing loans. RD Legal occupies a niche in the hedge fund industry, offering law firms and plaintiffs money in return for future payouts tied to legal disputes. One of its biggest wagers has been investing in claims against the Iranian government over attacks on a U.S. Marine barracks in Beirut more than three decades ago. The bet has drawn scrutiny from the CFPB, RD Legal’s lawsuit shows.

“The lawsuit is calling out the CFPB for a massive overreach of their jurisdiction and a failure to have a reasonable discussions as to the merits of their legal position,” David Willingham, an attorney for RD Legal, said in an interview.

The RD Legal suit is the latest challenge to the CFPB, a regulator created under the 2010 Dodd-Frank Act that faces an uncertain future under president-elect Donald Trump. Republicans and the financial industry have been vocal critics of the agency, arguing it lacks accountability, pursues investigations that are outside its jurisdiction and that its structure gives too much power to the agency’s director.

October Ruling

CFPB opponents were emboldened by a federal appeals court ruling in October that deemed that agency’s structure unconstitutional. RD Legal referenced the decision, which the CFPB has appealed, and the agency’s single directer structure in its filing Tuesday.

A CFPB spokesman declined to comment.

RD Legal finances law firms’ day-to-day operations and in turn receives a claim from legal judgments, a service that the regulator is wrongly defining as a “consumer financial product or service,” the suit filed in New York’s Southern District says. The CFPB is also asking for documents related to RD Legal’s investments in a victim’s compensation fund stemming from the September 2001 terrorist attacks, as well as a settlement over concussions suffered by players in the National Football League, the lawsuit shows.

The Securities and Exchange Commission brought an enforcement case against RD Legal in July, arguing the firm wrongly marketed its funds as investing in settled lawsuits. In fact, most of investors’ money was allegedly used to pursue bets tied to unsettled suits, and other cases for which “collection was still subject to significant litigation risk,” the SEC said.

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