Betting on Big Verdicts
Bethesda Firm's Cash Advances Come With High Risks

By Thomas Heath
Washington Post Staff Writer
Monday, June 2, 2008

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.

In one class-action suit by Exxon service stations, Stone Street advanced $10 million to 60 dealers. Stone Street got its money back, plus 25 percent.

The company has trained several staffers to pore over databases and other sources of information, such as legal newsletters, looking for specific pending court cases, and it is about to launch a direct-mail campaign to civil attorneys. The company makes advances not at the beginning of a lawsuit but further along in the case, when its professionals can apprise the risk and make large advances.

"We engage in cases where there is a high probability of some sort of payment," Lewis said.

Stone Street also makes sure the defendant has the resources to pay the judgment. A defendant such as an insurance company or a corporation is more likely to pay than an individual who does not have significant resources.

Stone Street was founded in 1989 by Lee Jundanian, a Bethesda businessman. He sold the company last year to a Long Island financial firm called New World. Stone Street has 115 employees on the fifth floor of a Wisconsin Avenue office building. Lewis said it is profitable but declined to provide numbers.

The firm had been steaming along profitably for two decades, in a niche business buying years of annual payments from lottery winners and plaintiffs in return for up-front cash.

Experts estimate that Stone Street does more than 1,000 transactions a year, including the lottery, plaintiffs settlements and now the purchase of lawsuits, which it calls "large verdict funding." Most of the business comes from people who respond to its advertisements, which appear on television and the Internet and through direct mail.

Until now, however, the biggest growth area had been built on the purchase of payments from people who have settled lawsuits, commonly known as "structured settlements." Stone Street is a small player in structured settlements, compared with J.G. Wentworth and Peachtree, which have been the market leaders.

J.G. Wentworth said it is also in the field of paying advances to plaintiffs, but that is a small part of its business.

"We provide advances to plaintiffs in a limited number of cases, adhering to strict underwriting policies," said Wentworth spokesman Ken Murray. "We believe it's good for consumers [plaintiffs in this case] to have more financial services options, which this business can provide."

Stone Street hopes to make the advances on court settlements a big growth area of its business and become a leader in the field.

The structured-settlement industry has drawn some fire. Patrick Hindert, who has co-authored a legal textbook on the settlements, said the industry has been criticized for discounting too much of the value of the client's income stream when making lump-sum payments.

"The industry they are in is very controversial and was once referred to as 'the gray market' because it had to be done almost surreptitiously," Hindert said. "There's still people that have very strong, negative opinions about the business because, one, of the aggressive advertising; and two, because of the perceived high discount rates," which can reduce the amount the seller would receive over the life of the payments.

Hindert said Stone Street and other companies in the structured settlement business meet a need in the marketplace by providing immediate cash to people who can't wait for a state lottery to dribble out years of annual payments or for an insurance company to cover the cost of a malpractice award over 10 or 20 years.

Customers are as varied as a handicapped accident victim who needed a new house and a lottery winner who needed cash for a college education. Most lotteries pay their winners upfront, but there are still a few lotteries in which the winners must take the cash over time, which creates opportunities for Stone Street and others.

Customers' needs drive the advanced verdict funding business as well. Gene Stearns, the Miami attorney who represented the 11,000 Exxon service station dealers in the class-action suit, said some of his clients went to Stone Street because they were desperate for money.

"The interest rate, while not the Fed funds rate, was not so outrageous that you could find it unreasonable," Stearns said. "The dealers that did business with them got less money up front than they would have gotten later, but they eliminated the risk of loss."

Gary Turner of Chelsea, Ala., sold part of his annuity from his father's estate to Stone Street in return for a $400,000 payment that enabled the 25-year-old banker to buy a house and pay his debts. Turner still collects about $2,000 a month from his father's estate, which is far less than the $9,594 he would have collected had he not sold part of the annuity. His monthly payment will increase over the rest of his life.

"It helped me get married and start my life and buy a home that I have 80 percent equity in," Turner said. "Now I am just saving my money. I am not in debt at all."