Capital market volatility, rising interest rates, and international conflict continued to dominate headlines during the second quarter of 2022. The debate regarding disclosure of litigation funding-related documents and communications also continued to rage, with new court orders and rulings coming out of both Delaware and New York.
Two bright spots for liquidity in the litigation finance market took place this quarter with the announcement of a sizable new secondary fund for litigation-related assets and the publication of a new market study by RPC. We also continue to closely monitor the impact of Covid-19 on the legal system. While there has been a seasonal slowdown in cases, their drag on the courts and practitioners remains palpable.
Two Disclosure Developments of Note
On April 18, Chief District Judge Colm F. Connolly of the United States District Court for the District of Delaware issued a standing order requiring litigants to disclose whether their cases are being financed by third parties, provided the case is being heard in his courtroom.
Specifically, each party must disclose: (a) the identity, address, and (if a legal entity) place of formation of the third-party funder; (b) whether the third-party funder’s approval is “necessary for litigation or settlement discussions in the action, and if the answer is in the affirmative, the nature of the terms and conditions relating to that approval”; and (c) a “brief description” of the nature of the financial interest held by the third-party funder.
This standing order is similar to orders issued in other federal jurisdictions, such as New Jersey and California. While the disclosure required to comply with this order has the ability to create a distraction and added costs for plaintiffs, we believe the overall impact will be similar to the impact experienced in jurisdictions that already have similar rules in place — which, at least for now, seems to be minimal.
On the other side of the disclosure aisle, a decision from the Supreme Court of the State of New York, New York County, Appellate Division, First Department, is the most recent decision of a court ruling to find that funding transaction documents are not broadly discoverable or relevant. In Worldview Entertainment Holdings, Inc. v. Woodrow, the court affirmed the denial of a motion to compel production of litigation funding documents, as the defendant failed to explain “how discovery about litigation financing and witness payments would support or undermine any particular claim or defense.”
In contrast to the standing order in Delaware, the Worldview decision is consistent with a broader trend of courts denying discovery of litigation finance transactions. This supports our team’s view that how the action is financed, whether it be debt, cash, or equity, does not impact the underlying merits of a case. Thus, courts should follow the example set in Worldview by not allowing defendants to confound adjudication of a matter with irrelevant disclosure requests.
Secondary Market Surge
We have written at length about the burgeoning secondary market in our asset class. A milestone for the litigation finance secondary market was reached during the quarter when industry veterans Adam Gerchen and Ashley Keller announced a $750 million fund, which targets secondary market investments into matters that were previously backed by other litigation funders. Messrs. Gerchen and Keller are well-known industry participants who sold their litigation finance company Gerchen Keller Capital to Burford Capital six years ago. The fund has reportedly already deployed $225 million into deals. Furthermore, one of its deals was publicly disclosed through a regulatory filing, revealing that their fund purchased a 30% claim from litigation funder Omni Bridgeway in an Australian class action over “combustible cladding.” The fund paid $19.5 million, generating a $16 million profit for Omni Bridgeway.
We believe there are a myriad of deals ripe for secondary transactions and continue to be an active participant in the secondaries market. Secondary funds are commonplace in maturing asset classes such venture capital, private equity, and real estate. We are pleased to see industry veterans like Messrs. Gerchen and Keller back in the market and believe that this added liquidity will benefit our industry as a whole. We would not be surprised to see additional litigation finance secondary funds come to market in the near future.
In addition to this new fund, the second quarter saw more news of capital growth in the litigation finance market. RPC published a study focused specifically on the U.K. litigation finance market. The study’s numbers were congruous with the Westfleet Advisors industry report published last quarter. RPC reported that U.K. litigation funders' assets increased 11% last year to £2.2bn, almost double the £1.3bn reported in 2018 and more than a ten-fold increase over the past decade. RPC's analysis is based on regulatory data submitted by 15 of the U.K.’s largest funders. Comments surrounding the study attributed growth in assets under management to a broader acceptance of funding and, in particular, class action funding.
While the summer has brought with it a slowing of new Covid cases in most jurisdictions, the effects of the pandemic are still being felt throughout the legal system. The backlog of cases caused by pandemic-related delays continue to put pressure on attorneys, while some jurisdictions remain short-staffed. Some attorneys have reported, and we can corroborate this with our own empirical evidence, that critical motion hearings and trial dates continue to be pushed back further than pre-pandemic norms. We are hopeful that as courts add more staff, the pace of litigation will increase and case backlogs become more manageable.
The Latest at LexShares
Last quarter, LexShares was ranked by Chambers and Partners as a leading U.S. litigation funder for a second consecutive year. Chambers’ research highlighted the breadth of our team’s work with law firms and corporate plaintiffs, as well as its technical achievements. The Diamond Mine, our proprietary origination software, was featured in the 2022 Chambers LawTech guide.
In addition, two LexShares team members were named Global 100 Leaders in Litigation Finance in the latest industry rankings published by Lawdragon. Cayse Llorens, LexShares’ Chief Executive Officer, and Allen Yancy, LexShares’ Director of Investments, both earned the honor for a second straight year
Also during the quarter, Mr. Llorens and Matthew Oxman, LexShares’ Vice President of Business Development & Investments, authored a Law360 article titled, “What Litigation Funding Disclosure in Delaware May Look Like.” The piece examines how required disclosure of litigation funding in the courtroom of a Delaware federal judge could affect parties receiving non-recourse capital.
Finally, we are excited to announce the hiring of Selene Diaz as LexShares' Chief of Staff. Ms. Diaz, who will be responsible for special projects and initiatives, brings 15 years of experience working with early stage, small, and midmarket companies — helping them successfully grow through acquisition, financing, and divestiture. Ms. Diaz has a consulting background in the areas of human resources and corporate strategy. She has also managed M&A processes for private equity portfolio companies to facilitate successful outcomes involving control transactions, financing, and succession planning, among other matters.
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This release may contain “forward looking statements” which are not guaranteed. Investment opportunities posted on LexShares are offered by WealthForge Securities, LLC, a registered broker-dealer and member FINRA / SIPC. LexShares and WealthForge are separate entities. Investment opportunities offered by LexShares are “private placements'' of securities that are not publicly traded, are not able to be voluntarily redeemed or sold, and are intended for investors who do not need a liquid investment. Private placements are speculative. Investments in legal claims are speculative, carry a high degree of risk and may result in loss of entire investment.
