One of the region’s talked-about banks these days doesn’t have tellers or an ATM network. Instead, it exists to help businesses sue other businesses in multimillion lawsuits.
New York-based Burford Group, part of a burgeoning field known as alternative legal financing, is one of several third-party litigation funders gaining traction among the corporate clients of Washington law firms.
Burford raises capital from hedge funds, private equity funds and other institutional backers, then lends that money to people in cases that appear to have a good chance of reaping major rewards, either through a settlement, judgment or jury verdict.
Buford keeps up to 40 percent of those proceeds. The firm already has invested in cases handled by some of Washington’s elite firms including Crowell & Moring, Patton Boggs and the litigation boutique MoloLamken, founded by the former head of Baker Botts’ Supreme Court practice.
Burford’s typical investment is between $2 million and $15 million, and the firm mostly zeroes in on commercial litigation, including contract disputes between businesses. The firm currently has $210 million invested in 33 cases being litigated in U.S. courts, as well as international arbitrations.
The company pegs itself as a financier for the underdog, and its chief investment officer is Jonathan Molot, a Georgetown law professor who once penned scholarly articles about how an “imbalance of resources” hinders justice in the legal system.
Molot, a former litigator for firms in Washington and New York, said he saw a market for third-party funders to even the playing field.
“If you’re a private equity-funded business that’s small but growing, you want to put all your money into growing your business,” Molot said. “Litigation against an adversary can cost millions. We provide the financing so the business can choose the law firm it wants.”
Although litigation funding is still somewhat uncharted in the United States, Burford is not entirely new or unique — other major players include Juridica and Black Robe Capital, based in the U.K. and New York, respectively. Credit Suisse operates a litigation financing unit, and litigants in Europe and Australia have for decades relied on outside funders to invest in litigation. Burford, however, has raised more capital than any other third party funder — $300 million, $90 million of which it is looking to commit to future investments by mid-2012.
Burford typically keeps its investments confidential, but it scored a very public win last year, collecting $18 million from a settlement resolving a breach of contract suit between two Arizona real estate developers. Burford had bet on the winning party, Gray Development Group, and the gamble paid off with a 200 percent return on a $6 million investment.
Not all investments hit pay dirt. Last November, Burford floated $4 million to fund a massive tort lawsuit brought by Ecuadorian nationals against Chevron alleging that years of oil drilling caused cancer and other health ailments, but then withdrew a month later and sold the investment to another third-party funder, according to Burford’s most recent financial report released to investors today.
Having an outside funder can be a game-changer, shifting some risk from a litigant onto the investor. In some ways, it’s similar to what contingency-fee lawyers do, except now the funding is coming from a third party instead of the law firm itself, said Jeffrey Lamken, founding partner of the Washington litigation boutique MoloLamken, which is representing a financial services firm whose fraud suit against a major bank is being financed by Burford.
“Having someone else provide financing ... We can focus on being lawyers instead of being financers,” he said.
Not everyone is sold on the concept. Skadden litigator John Beisner said introducing a third party raises questions about ethics and disclosure.
“Do you disclose that to a jury?” he said. “Doesn’t a jury have a right to know most of the money they’re awarding to an individual or small business is going to a large institutional investment fund?”