Hedge funds and private-equity firms are deepening their involvement in big-ticket personal-injury lawsuits against drug companies and medical device manufacturers.
Investment firms are lending money to law firms that bring so-called mass torts and providing cash advances to plaintiffs involved in such litigation. The activity is increasing just as prosecutors and lawmakers intensify their scrutiny of the industry.
Earlier this year, EJF Capital, a $6 billion hedge fund, began raising money for its third investment vehicle that will lend money to lawyers bringing mass-tort cases, according to a February email to prospective investors. The new fund aims to raise $300 million on top of the nearly $450 million the Arlington, Va., hedge fund has already lent to personal injury law firms.
EJF was an early mover in the business of financing mass tort litigation. Such loans can carry annual interest rates as high as 18 percent.
The field is getting crowded. Wall Street firms and other investors have become go-to financiers for many of these cases, which feature large numbers of plaintiffs who have suffered similar injuries from a consumer product.
Adam J. Levitt, an attorney in Chicago who has brought mass-tort cases, said there was an “ever-increasing influx of hedge funds into the litigation-funding space.” One cause, he said, is their eagerness for investments that won’t perform in lock step with stock markets or the overall economy.
Hedge funds such as Fortress Investment Group, Pravati Capital and Virage Capital Management have lent money to mass-tort law firms in recent years, according to lawyers and lending executives.
Marketing documents for EJF’s new fund said the firm saw an opportunity to take advantage of the “current banking regulatory environment,” which has led some banks to pull back from lending to mass-tort firms.
Meanwhile, a slew of newer firms — including hedge funds and those affiliated with hedge funds — that specialize in lending to mass-tort lawyers are cropping up.
Deer Finance, a small Manhattan firm with a board member who works for the hedge fund Fir Tree Partners, began focusing on such loans last year. An Arizona investment firm, Stillwell Madison, signed a financing agreement in 2016 with Girardi Keese, the Los Angeles mass-tort firm involved in the case that the movie “Erin Brockovich” made famous.
Some hedge funds are considering providing law firms with loans to buy large mass-tort cases from rival firms in order to bulk up their caseloads, according to a person involved in negotiating one such deal.
Tom Girardi of Girardi Keese, one of the nation’s most successful mass-tort lawyers, said funding from alternative lenders was necessary to battle companies with unlimited budgets. “If you are going to fight them, you better have the money to properly present these cases,” he said.
The litigation-finance business has been around for a long time, but until recently it was mostly focused on the financing of complex, long-term commercial litigation. The emphasis on bankrolling consumer suits is newer and potentially even more profitable for lenders.
Analysts estimate that litigation finance is at least a $10 billion industry, and they expect it to keep growing.
Daniel Ballen, a portfolio manager with Pimco, the giant bond fund, described the industry as being in its “third inning” at a recent litigation-finance conference.
As the industry booms, state and federal authorities are beginning to look into a specialized corner that provides high-interest cash advances to litigants waiting for settlements or jury awards.
Federal prosecutors in Brooklyn recently opened an investigation into a network of lawyers, finance firms and others that may have lured women into getting unnecessary surgery to remove pelvic mesh implants, according to people familiar with the matter. Removing the implants improved the chances that the women would win large legal settlements from medical device manufacturers.
In a report in The New York Times in April, women said that they had been prodded to get the vaginal mesh implants removed and that a cash advance firm had provided them with financing to do so.
The people familiar with the nascent investigation, who were not authorized to speak publicly about it, said prosecutors had recently asked some lawyers involved in the litigation to hand over transcripts of depositions in which plaintiffs discussed how their mesh-removal surgery was paid for.
A spokesman for Richard P. Donoghue, the United States attorney for Brooklyn, declined to comment.
In New York, state lawmakers are trying to crack down on finance firms that offer cash advances to litigants, introducing legislation that would cap the interest rates. Critics say that the fine print of these deals is often incomprehensible and that the loans can leave plaintiffs with only a small fraction of the settlement money they thought they would receive.
“We have turned our civil justice system into a profit center, and now the Wall Street sharks are circling,” said Tom Stebbins, executive director of the Lawsuit Reform Alliance of New York, which represents a number of industries. “They see litigation as a low-risk investment. They see this as a sure thing with so many cases settling.”
The firms say they are serving a valuable role and helping litigants in need of short-term cash while their lawsuits spend years making their way through the legal system.
Settlement advances help individuals “meet pressing financial needs and have the financial wherewithal to pursue cases against often-powerful interests,” said Jim Terlizzi, chief executive of DRB Capital, a company that offers such advances and that is owned by Blackstone Group, the private-equity firm.
The broader business of lending to mass-tort firms is also facing growing pressure.
Last month, three Republican senators introduced a measure that would require attorneys in class actions and mass torts to disclose if a third party is financing their case.
A federal judge in Cleveland overseeing hundreds of mass-tort cases against opioid makers last month ordered plaintiffs’ law firms to disclose any financing they were getting from third parties.
Plaintiffs’ lawyers and investment firms argue that the money the firms provide makes it possible to pursue costly litigation against large companies. But some hedge funds impose higher interest rates if a case drags on too long.
Elizabeth Burch, a professor at the University of Georgia School of Law, said she found that problematic because it “encourages quick settlements that, at least in the mass-tort context, are unlikely to be in plaintiffs’ best interests.”
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