Betting on Big Verdicts

Bethesda Firm's Cash Advances Come With High Risks

Anyone got a lawsuit they want to sell?

A Bethesda firm is entering a high-stakes business in which it buys a portion of the rights to civil lawsuits before the victim has collected a dime.

Stone Street Capital's high-risk play can pay off big if it successfully bets on fat court settlements. But it can backfire if it advances money for a lawsuit that gets reversed or never pays. In that case, the plaintiff keeps the advance and Stone Street gets nothing.

Some consumer advocates say the practice, known as advance funding of verdicts, may be sound, but they question the terms of the payments.

Here's how it works: Stone Street advances a plaintiff a third of what he or she expects to get paid by a court ruling. If the money comes through from the court, Stone Street collects its third plus 25 percent interest on the advance. If the case drags on, Stone Street's 25 percent interest on the advance keeps accruing annually, but the interest does not compound.

So a person who is advanced $100,000 must pay Stone Street $125,000 ($100,000 advance plus 25 percent interest) if he receives his lawsuit award within a year. If the award takes two years, the person must pay Stone Street $150,000. If the lawsuit drags on for several years, the interest payment can dramatically reduce the plaintiff's award. On the other hand, Stone Street gets nothing if the plaintiff loses.

"Not even Citibank charges [25 percent] for their credit cards," said Steve Gardner, an attorney who works with the National Association of Consumer Advocates, though he is not opposed to the premise of advances.

The company said the high risks and its cost of capital justify the 25 percent interest rate.

"There is no one on the planet making advances like this at under 25 percent returns," said David Lewis, general counsel and senior vice president of Stone Street. "We purchase interests in ongoing lawsuits, which enables a seller to get money for necessary reasons or to take some of the risk of the case off the table. My cost of funds on this product is very high."

Margot Saunders, counsel with the National Consumer Law Center, said some plaintiffs "are desperate people who really need the money to deal with necessities, so they will take money at almost at any cost. Which is why, traditionally, there has been strict legislation between borrowers and lenders."

Lewis said there is no chance of people being taken.

"In all of our cases, people are represented by competent counsel and/or the clients are sophisticated businessmen," he said.