Posted on December 12th, 2016
The Wall Street Journal
by Sara Randazzo
August 4, 2016
Bret Crafton says he doesn’t have to worry about how Britain’s vote to leave the European Union will affect his personal investments.
That’s because Mr. Crafton, an economic consultant in Boston, has sunk $75,000 into other people’s lawsuits through a website run by LexShares Inc., which offers up slices of commercial lawsuits to ordinary investors.
“Whereas every other asset is affected by [Brexit], my lawsuits are not,” he said.
Once reserved for hedge funds and other deep-pocketed investors, litigation funding is moving into the mainstream through startups like LexShares in Boston and Los Angeles-based Trial Funder Inc., a website that raises funding for personal-injury and civil-rights cases.
With promises of double-digit returns, the platforms have attracted thousands of investors looking for profits that aren’t influenced by the broader investment market. For both websites, users must meet Securities and Exchange Commission standards for “accredited investors,” which require individuals to have made more than $200,000 annually for the past two years or have $1 million in assets outside of their primary residence.
For Mr. Crafton, one investment already has paid out, at a rate of return around 60% after fees. “Nothing pays back that well,” he said.
The investments are far from foolproof. Lawsuits can drag on for years, tying up investor dollars, and litigation funders lose everything if a suit isn’t successful.
“It’s an opening for the smaller investor,” though a potentially risky one, said Selvyn Seidel, a litigation-finance investment adviser.
Cade Joiner, an Atlanta business owner who invested $1,000 through Trial Funder in May, said he knows losing is a possibility but hopes to see a 30% to 40% return. “It’s an untapped area; that’s what was so exciting to me,” he said.
LexShares’ 30-year-old co-founder, Jay Greenberg, a former investment banker, said the company targets commercial cases that need $100,000 to $1 million in funding. That’s too little for most traditional litigation-finance companies to consider. Mr. Greenberg’s team evaluates each case, and reports turning down 95% that come their way.
So far, LexShares has raised around $5.5 million for 15 cases, including a legal malpractice lawsuit brought by an athletic association, a breach-of-contract suit against an investor group over a soured real-estate project and several suits against Fortune 500 companies over allegedly harmful products.
Three of LexShares’ cases have settled, all favorably, Mr. Greenberg said. In one case, investors got a 93% annualized return from a $28.5 million settlement of a whistleblower lawsuit against medical-waste disposal company Stericycle, which was accused of defrauding government customers by withholding accurate pricing information.
Stericycle didn’t respond to requests for comment.
Trial Funder funds even smaller cases, providing as little as $2,000 either to lawyers or directly to plaintiffs for personal expenses.
After funding eight cases through its site, the company raised a $100,000 fund earmarked for personal-injury cases—with a projected internal rate of return of 60%. It is also readying a $5 million fund for personal-injury and mass-torts cases, such as those against allegedly harmful drugs or medical devices.
On a recent afternoon in downtown Los Angeles, Trial Funder co-founder Anoush Hakimi fielded a call from a plaintiff looking for funding after getting hit by a car while driving with his wife and daughter.
“It doesn’t look like a great case,” he said when he hung up, as a Boston terrier named Biggie Smalls scrambled around the floor of the company’s sparsely decorated office. The man’s only injuries were being “sore all over,” Mr. Hakimi said, and he was hit by a 1999 Chevrolet van, which likely has a low insurance cap.
Such is the process—part science, part art—of deciding which lawsuits to offer up to investors.
Mr. Hakimi and his co-founder, lawyer Peter Shahriari, rate potential investments on the plaintiffs’ credibility, strength of evidence, seriousness of medical problems and other factors. “It’s a bonus if they went [to the hospital] in an ambulance,” Mr. Hakimi says. “It seems lowbrow, but it’s a basic way to determine liability.”
Attorney Sarah Garvey helped her client, Joseph Rosales, raise $20,000 on Trial Funder to defray costs in a lawsuit against Chico, Calif., over allegedly excessive use of force by a police officer, which was recorded by onlookers. “Civil-rights lawsuits are very expensive,” Ms. Garvey said, and having outside funding helps. Investors doubled their money when the case settled in January for $165,000.
Plaintiffs who take money personally from the site must pay back the principal amount plus fees of 3.5% compounded monthly if their case is successful. If the money goes directly to a law firm to fund case expenses, Trial Funder investors get between 10% to 25% of any recovery, after the initial investment has been repaid.
Mr. Hakimi, an Iranian immigrant who worked as a real-estate finance lawyer before starting Trial Funder, concedes the company’s rates are high but says they should drop as competitors enter the market.
So far, competitors aren’t rushing in.
One company, Mighty, tried to create an online marketplace to pair personal-injury claimants with funders, but co-founder Joshua Schwadron said the concept failed because it took too long for funders to bid on the cases. Mighty now sells software to litigation financiers.
Funding litigation online, Mr. Schwadron said, always faces the problem of making plaintiffs wait while the funds are raised, and “speed is very important to plaintiffs looking for financing.”