Are you funding Ecuador’s corrupt litigation against Chevron?

posted at 4:10 pm on June 29, 2011 by Ed Morrissey

I admit I’ve never heard of “litigation finance” before now.   American law largely prevents it, although that may change as trial lawyers discover the new and exciting cases they can pursue with OPM (Other People’s Money), even without having the case itself be fraudulent.  As Fortune senior editor Roger Parloff reports today, a great many British families might have their life savings invested in a class-action lawsuit that an American judge has ruled shows sufficient evidence of fabrications, collusion, and fraud:

Now, who are all these people we say have been investing in this malodorous case without even realizing it? Well, some are American or British high rollers who put their money into aggressive hedge funds like Reservoir Capital of New York or Eton Park of London; others, however, seem to be mainly British mums and dads who hold mutual funds managed by trusted names like Fidelity International, Invesco Perpetual, Baillie Gifford, or Scottish Widows. These six institutions together own about 80% of a publicly listed investment firm called Burford Capital, based on the British island of Guernsey. Burford, in turn, invested $4 million in the Ecuadorians’ case against Chevron last November in exchange for a 1.5% stake in any recovery, with the stated goal of increasing its outlay to $15 million, entitling it to a 5.5% share.

At the time Burford invested, four U.S. courts had already issued rulings that found evidence of fraud by the plaintiffs’ lawyers. In fact, three months before Burford invested, a law firm for the plaintiffs advised the fund that the Ecuadorian judgment would be hard to enforce in the U.S. because of the “jaundiced eye” with which U.S. courts were viewing the case. Those lawyers were nevertheless optimistic that if the plaintiffs threatened to disrupt Chevron’s operations by peppering it with enforcement actions around the globe — trying to, say, seize Chevron’s tankers in the Philippines or Singapore and its wells and pipelines in Chad or Kazakhstan — they could still pressure it into settling.

Though the identity of investments is usually kept confidential by Burford and companies like it, Burford’s involvement in the Lago Agrio case has been dribbling into public view since December, thanks to a series of wildly improbable events, which we’ll get to later. For anyone curious about the young, controversial, and highly opaque field of litigation finance, this fortuitous development provides a rare opportunity to see how it works in practice.

Thanks to a complicated funding structure, Burford and other investors become the primary beneficiaries of any settlement reached.  In fact, if the settlement comes in low enough, the investors may be the only people who get paid.  They have a claim on the first $55 million at a mathematical floor of $69.5 million, and the rest would go to other investors, thanks to a “distribution waterfall” that puts the Ecuadorian peasants on whose benefit the suit was filed at the back of the bus — after the investors and lawyers.

If this sounds sleazy, well, yes it is.  In fact, the notion of litigation finance was so offensive at one time that American law barred it as “champerty,” according to Parloff.  But the times, they are a-changing, and the lawyers are leading the way:

Basically, financing someone else’s lawsuit was considered immoral because “intermeddling” in the disputes of others fomented discord for pecuniary gain.

Though these practices may still carry a stigma with older lawyers, about half the 50 states have either repealed the laws or shredded them with exceptions. Meanwhile, England and Australia have embraced litigation financing even more enthusiastically than America has. The majority view in the U.S. today seems to be that bans on third-party funding are Puritanical archaisms. …

So there has arisen in recent years an array of litigation-finance businesses that serve a variety of niche markets. At least six companies, according to a 2010 Rand Institute for Civil Justice study, now specialize in making investments in “commercial disputes,” which Rand analyst Steven Garber defines as “business-against-business” cases. In addition to Burford, they are Juridica Capital (another Guernsey-based publicly traded hedge fund), Calunius Capital, Juris Capital, ARCA Capital, and IMF (an Australian-based publicly traded fund). Some diversified financial institutions, like Credit Suisse (CS), Allianz , and Deutsche Bank (DB), also have units that specialize in litigation financing.

Most of the time, these financial arrangements remain confidential, which is one reason why this practice hasn’t yet permeated the public consciousness.  Thanks to the ineptitude and self-promotion of the plaintiffs’ attorney in this case, though, the lid finally came off:

Burford’s agreement with the Lago Agrio plaintiffs was subject to confidentiality restrictions at least as severe, which were supposed to last for seven years after the contract’s termination. But thanks to lead U.S. plaintiffs’ lawyer Steven Donziger, it’s now come to light. When Donziger invited that moviemaker into his strategy and bull sessions in 2006, he inadvertently waived the attorney-client privilege to everything that took place there and more. After viewing hair-raising outtakes from the documentary (subpoenaed by Chevron) along with other evidence, three U.S. judges found that privileges protecting other documents had also been waived under an exception that applies when lawyers might be involved in a fraud or crime. Finally, Judge Kaplan ruled that Donziger had waived privileges to still other information through gamesmanship in responding to Chevron’s subpoenas.

For students of litigation finance, Donziger’s Keystone Kounsel act has been a godsend. It has lifted the veil on practices that are usually pondered only as sterile abstractions. Burford is, moreover, “the largest and most experienced international dispute funder in the world,” as its promotional materials state, so we’re not looking here at some aberrational outlier in the field. Since launching in 2009, Burford has raised $300 million in two public offerings on the London Stock Exchange’s AIM market for emerging companies. Burford’s investment advisory group boasts an all-star management team: Its CEO, Chris Bogart, is a former general counsel of Time Warner (TWX) (Fortune’s publisher’s parent); its nonexecutive chairman, Selvyn Seidel, founded the New York office of Latham & Watkins, a top-drawer U.S. law firm; and its “special ethics counsel” is Geoffrey Hazard Jr., a Sterling professor of law emeritus at Yale Law School and “perhaps the primary figure in legal ethics in the country today,” according to Burford’s website. For those reasons, we can be assured that Burford’s conduct probably represents the very best practices the young industry has to offer.

Be sure to read the long and complicated story in its entirety, and consider this point as you do.  Should we allow investors to incentivize nuisance claims and shakedown class-action suits and further damage our economic strength just to transfer money from corporations to other investors using the poor as a strawman?  Or should we give the Puritans some long overdue credit and start cracking down on “champerty” again?

Update: I credited the story to Forbes, but it should have been Fortune.


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Comments

Champerty breeds barratry.

Akzed on June 29, 2011 at 4:14 PM

With the Puritans on this one.

AshleyTKing on June 29, 2011 at 4:20 PM

Stocks on the town green. For 24 hours.

BobMbx on June 29, 2011 at 4:21 PM

Rumor has it…

… Obowma is a lawyer.

Seven Percent Solution on June 29, 2011 at 4:30 PM

With the Puritans on this one as well….now if we could just get rid of the Puritan-era law that bans alcohol sales on Sunday. That really sucks.

search4truth on June 29, 2011 at 4:32 PM

In fact, if the settlement comes in low enough, the investors may be the only people who get paid. They have a claim on the first $55 million at a mathematical floor of $69.5 million, and the rest would go to other investors, thanks to a “distribution waterfall” that puts the Ecuadorian peasants on whose benefit the suit was filed at the back of the bus — after the investors and lawyers.

I’m pretty sure the courts will rule that the UAW pension fund gets first dibs on any money awarded.

Vashta.Nerada on June 29, 2011 at 4:32 PM

Effin lawyers…

catmman on June 29, 2011 at 4:36 PM

Can’t stand Chevron. They lost me forever as a customer about 10 years ago. As for this case, well, they’re adults and know how the game is played.

Christien on June 29, 2011 at 4:41 PM

This is why the founders were so invested in the rule of law. What we have here is capriciousness masquerading as law. But the sad thing is that liberals in this country are increasingly more interested in forcing absurd, anti-lawful foreign actions like this on our country.

Warner Todd Huston on June 29, 2011 at 4:50 PM

Though these practices may still carry a stigma with older lawyers, about half the 50 states have either repealed the laws or shredded them with exceptions. Meanwhile, England and Australia have embraced litigation financing even more enthusiastically than America has.

Lawyers meddling with the laws so that lawyers can make more money. Kind of like congress voting itself pay raises.

ZenDraken on June 29, 2011 at 4:57 PM

I read about this case a few months ago, and the only logical conclusion I could draw is that the primary attorney involved should be disbarred and then drowned in a septic tank.

Jaibones on June 29, 2011 at 5:18 PM

As with most things considered to be “Puritanical archaisms” by social progressives, there were and still are good reasons for them, and ignoring them will cost us dearly.

Socratease on June 29, 2011 at 5:21 PM

archaisms

Anachronisms, damn it!!! Are there no literate people left amongst us?!?!?!?!

abobo on June 29, 2011 at 5:25 PM

If you have ever been the little guy in a suit against a big guy, you might think differently.

Everything in extreme can be abused, but if we hadn’t “sold” a share of a settlement, we could not have afforded to continue the suit.

barnone on June 29, 2011 at 5:32 PM

Wow, a reasonable person would just assume this is wrong, and illegal, but I guess the secular backlash to everything Puritan that once influenced America knows NO bounds.

This is Crony Capitalism at its worst and should be turned into an national issue for the next election.

Trial lawyers are the ultimate scum and financing and betting on their cases? GIVE ME A BREAK, how is that legal anywhere?

Daemonocracy on June 29, 2011 at 5:49 PM

Tort reform and loser pays legislation, NOW.

Daemonocracy on June 29, 2011 at 6:06 PM

I’m pretty sure the courts will rule that the UAW pension fund gets first dibs on any money awarded.

Vashta.Nerada on June 29, 2011 at 4:32 PM

What does the UAW have to do with the Chevron case? Oh wait, -I guess that doesn’t matter does it?

slickwillie2001 on June 29, 2011 at 6:35 PM

“Liberals” and “crony capitalism”. Read the whole thing and I didn’t see any Libtard fingerprints on it. As for “crony capitalism” that’s been going on for at least 100 years.

Conservatives always thought it was great when companies went under or got bought out (competition, survival of the fittest, winners and losers). But it doesn’t really serve the consumer when you find that there are fewer places to shop, fewer car companies to buy from, fewer airlines to fly, fewer banks…in a word, fewer choices and less of a likelihood that prices are held in check to due healthy competition.

At some point you realize, “Huh, all these guys charge pretty much the same thing…and it sucks.”

Oh, but I forgot about all of the foreign crap made by foreign employees…that’s different-I guess. If only (other)Americans were willing to work for Third World wages, we wouldn’t be in this economic mess now, would we?

Conservatives go on and on about how great small businesses are (they certainly are vital to our economy), but how about how they’re routinely gouged for debit and credit card swipe fees? See, if you complain about that, then you have to complain about banks-and that makes you a Commie.

So, we can just keep complaining about certain ills and ignore others, depending upon how they dovetail into our ideologies.

Dr. ZhivBlago on June 29, 2011 at 6:54 PM

“The first thing we do, let’s kill all the lawyers.”

Henry The Sixth, Part 2 Act 4, scene 2, 71–78

iurockhead on June 29, 2011 at 6:58 PM

It would be nice if in addition to the Chevron case failing, some of those shake down lawyers at Burford could find their was to jail.

burt on June 29, 2011 at 7:10 PM

Though these practices may still carry a stigma with older lawyers, about half the 50 states have either repealed the laws or shredded them with exceptions.

Yeah, lawyers got ethics!

GarandFan on June 29, 2011 at 7:44 PM

Check this site out.

http://www.foundationforfairciviljustice.org/

For a good laugh look at their awards for wacky warning labels.

Purportedly Europe does not come close to the litigiousness of the US when it comes to some of the crazy lawsuits we see. Many Euros wonder why we put up with it.

CW on June 29, 2011 at 8:49 PM

abobo on June 29, 2011 at 5:25 PM

An anachronism refers to a concept or idea which is misplaced from its common time-relevance, or at least apparently out of the larger sequence commonly known. The lifestyle of the Amish is viewed by most non-Amish as anachronistic. The key is that time, or chronology, is at the root of an anachronism.

An archaism (a perfectly normal, real, and in English law parlance, commonly used term) is an idea, idiom, or mode of expression which is considered old-fashioned or out of common use.

Clearly there is much room for overlap in usage between the two, rendering your outrage, outrageous.

Freelancer on June 29, 2011 at 10:03 PM

…and its “special ethics counsel” is Geoffrey Hazard Jr., a Sterling professor of law emeritus at Yale Law School and “perhaps the primary figure in legal ethics in the country today,” according to Burford’s website.

What is it about the Ivy League, and Yale especially that produces graduates schooled in corruption more than anything else?

doufree on June 30, 2011 at 8:45 AM