The Securities Law Disclosure Conundrum for Publicly Traded Litigation Finance Companies

Abstract

The article examines a peculiar legal dilemma—implicating securities law, legal ethics, and evidence law—that arises when litigation finance companies (LFCs) become public companies. LFCs provide funding to litigants and law firms for prosecuting lawsuits in exchange for a share of the lawsuit recoveries. In recent years, LFCs have significantly altered the landscape of the civil justice system in common law jurisdictions. But their assets, which are really just rights to proceeds from lawsuits, are notoriously opaque—who really can predict what a jury will do when it comes to liability and damages? When LFCs go public, this opacity frustrates public investors’ legitimate expectations to be able to understand the company’s accounts and operations. The problem is exacerbated by the applicable accounting rules, which outsource the task of valuing the assets to the LFCs themselves, vesting them with significant discretion to in effect build their own financial statements. The resulting lack of clarity about basic valuation matters undermines the two main objectives of securities law: investor protection and market integrity.

From a securities law perspective, the normal solution to an opacity problem is more and better disclosure. However, concerns over the possible waiver of evidentiary protections flowing from the attorney-client privilege and the work-product doctrine complicate matters for LFCs. To avoid the possibility of waiver of privileged, confidential information (which would in most cases undermine the cases underlying their assets), LFCs are circumspect when it comes to disclosing any details of the valuation models for their assets, much less relevant details about specific cases. The shadow of privilege waiver thus chills the entirety of LFC disclosure practice, foreclosing it as an effective corrective to the intrinsic opacity of LFC accounts.

After detailing the sources and extent of this opacity problem, the Article explores two case studies. The first, involving the 2015 failure of Juridica Investments, illustrates how opaque LFC accounts can undermine the investor protection objective of securities law. The second, involving the 2019 “short attack” by hedge fund Muddy Waters on litigation funder Burford Capital, shows how the opacity problem can undermine the market integrity objective as well. The Article concludes by laying out a framework for reform.

Keywords: litigation finance, litigation funding, third-party litigation funding, securities law, public companies, privilege waiver, fair-value accounting, work product, burford capital, juridica investments