Not Just for Little Guys
As litigation financing becomes more sophisticated, there are increasing opportunities for investments in litigation to spread out the benefits of that investment. In one recent case, a teachers’ pension fund in California used litigation financing to turn a potential financial loss into an opportunity for gain. This case shows that litigation financing can be valuable for more than just the cash-strapped individual litigant.
This story starts with Volkswagen’s falsification of emissions testing results, which precipitated a worldwide scandal. When VW’s deceptive conduct became known in September 2015, it was obvious that VW stood to suffer enormous losses, both in legal claims and lost business. This was very bad news for its investors, including the California State Teachers’ Retirement System (“CalSTRS”), the second-largest pension fund in the United States with about $190 billion in assets. CalSTRS owned more than 300,000 Volkswagen shares. Within days of the announcement of VW’s fraud, the company’s stock price fell by nearly 40 percent, and CalSTRS had lost roughly more than $20 million.
CalSTRS sought to hedge its position in VW stock, and it found a novel way to do so. CalSTRS chief counsel contacted one of the fund’s legal advisors, who was an experienced class action attorney. The advisor suggested that CalSTRS could participate in a class action against VW that was being funded by a litigation finance company. By doing so, CalSTRS could win a recovery that could offset is existing losses, and it could pursue that recovery without putting any of its other assets at risk – because the litigation funding company was footing the bill for legal expenses during the pendency of the case.
The advisor found a case that was about to be filed in Germany, in a court that was close to VW’s headquarters in Wolfsburg, Germany. It was being handled by Quinn Emanuel, a large U.S. law firm, and it was funded by a London-based investment firm that specializes in funding lawsuits and that was looking for shareholders to join the case. In return for a share of any winnings, the litigation funder offered to cover all the costs of the action against VW.
By taking this action, CalSTRS put itself in a position to come out ahead regardless of how the Volkswagen emissions scandal turns out. If Volkswagen suffers devastating losses, it has a chance at a recovery in court. If the company recovers, CalSTRS’ shares will appreciate in value. Without litigation financing, CalSTRS would not be able enjoy this enviable position.
Works Cited:
Kit Chellel, In Pursuit of a 10,000% Return, Bloomberg (Nov. 22, 2016), available at https://www.bloomberg.com/news/features/2016-11-22/big-bets-on-vw-lawsuit-could-yield-10-000-or-nothing
