Crazy Thinking

Money is not an issue.  Even with rising costs, you can still afford to pay to prosecute a case.  Splitting costs with a litigation finance firm would take a cut out of the likely settlement or verdict.  Nonetheless, why would a large corporation consider having a litigation finance firm fund their litigation?

Because, according to the rules of accounting, corporations who have to finance their own court cases, have to claim their legal expenditures.  If a corporation uses a litigation-financers, they do not have to claim this!

Here’s the backstory: Stock analysts care only about the operating costs of a public company.  Thus, if you spend a ton of money, but the loss is a one-time event, unlikely to recur, then analysts don’t care about it.  Analysts exclude that one-time loss; analysts assess the company only on the basis of current results.

For now, imagine, a lawsuit will cost a company $20 million to pursue and will likely yield a $100 million settlement.  Common sense indicates that the lawsuit will net a profit of $80 million.  However, assume that for every $2 million that is spent, the company’s shares will drop two pennies.  Thus, if the company pays to follow this lawsuit, $20 million will be spent and will lower operating results by 10 cents a share. This could lead to horrific consequences.

However, now consider than instead of paying $20 million to pursue the litigation of a case, a litigation financer is used that will net a 40% share.  Now, the company has spent zero dollars to fund the case.  Thus, their share will not drop any!  While this makes no economic sense, this is how our market works.

For this exact reason, it is important to consider using a litigation financer if you are pursuing legal action.  A company may hurt themselves without even realizing it!

Keywords: litigation finance, company, share, market

Work Cited:  Mark Herrmann, The Crazy Reason Even Rich Corporations Consider Litigation Finance, Above the Law (April 17, 2017)