With investors starved for yield and unnerved by volatility, Mighty
Group Inc. offers a tantalizing proposition: earn 25% to 30% interest on
an asset that has zero correlation with anything else in your
portfolio.
The catch? Mighty lends money to plaintiffs in personal injury lawsuits. You collect only if they do. Plus, the head of this online electronic investment platform recommends that only personal-injury lawyers, or investors who have such lawyers helping them evaluate cases, plunk down their money at this early stage.
“We are not a platform for gambling on cases,” warns Mighty’s CEO and cofounder, Joshua Schwadron, 34, an Emory University law school grad who runs the 21-employee firm out of industrial-chic offices on the edges of New York City’s financial district. “In order to properly understand these investments, you have to have legal expertise. We don’t want people throwing darts.”
Not yet, anyway. Schwadron’s ambition is to generate enough data about the risk and returns of lending small amounts of money to plaintiffs in personal injury suits to turn litigation finance into a respectable alternative investment–one predictable and large enough to draw affluent investors who don’t chase ambulances for a living. Right now such loans are made mostly by small local outfits operating in the shadows.
Schwadron’s dream isn’t so far-fetched. The potential market is sizable; in 2014 insurance companies paid out more than $140 billion for lawsuits, including $72 billion for car accidents alone, according to financial industry analyst SNL Financial, a unit of McGraw Hill Financial based in Charlottesville, Va. And there’s precedent in peer-to-peer lending sites like Lending Club and Prosper, which make small unsecured personal loans and were also once considered iffy. Now those sites are dominated by institutional investors; individuals seeking yield can invest in packages of peer-to-peer loans, and new venture-capital-backed lenders like Earnest are using novel data sources and algorithms to lend online.
Schwadron, who fashions himself a crusader as well as an entrepreneur, invokes legal academics like Anthony Sebok
of Yeshiva University’s Cardozo law school, who contends insurance
companies have too much bargaining power. Lending money to individual
plaintiffs, the argument goes, allows them to hold out for fatter
settlements.
Plaintiffs “need to pay rent, they need to buy food,” says Mighty board member Roger Ehrenberg of IA Ventures, one of ten investors (including Tribeca Venture Partners) that last September pumped $5.25 million into Mighty. “They’ve got a money-good claim against an insurance company, and oftentimes those claims take a long time to settle.”
But is lending to plaintiffs at high rates really doing them a service? Schwadron answers that Mighty does its best for plaintiffs by running an electronic Dutch auction, where the bidder who is willing to accept the lowest rate wins the deal, which Mighty refers to as an investment, not a loan.
True, with transactions running more than 100 a month since Mighty’s official launch in September, rates are mostly above 30%. But that will come down, Schwadron predicts: “I believe in a future where financing for this sort of asset will be so easy and so ubiquitous and so inexpensive the market will not just be for [plaintiffs] who are desperate.”
Wait a minute. Is investing in legal claims even kosher? Ethics rules in the U.S. prohibit lawyers from sharing fees with non-attorney investors, and in many states plaintiffs are barred from selling their claims outright. But where there’s a yield there’s a way. Most legal financing deals are structured as loans, not sales, with complex waterfall structures in which investors get different returns depending on how quickly a case settles and for how much. Mighty is unusual in that its financing carries a single interest rate determined by the auction process.
Still, there’s some murkiness here. For example, the Colorado Supreme Court ruled last November that lawsuit loans must comply with the state’s consumer lending laws, potentially limiting returns.
Then there’s the whole business of collecting; a plaintiff could win but stiff his lenders. In one Pennsylvania case, Oasis Legal Finance, a Chicago lender, extended $60,000 to an injured worker only to find out he’d borrowed $67,500 from five other companies against the same case, with all six loans ballooning to more than $400,000 with interest, barely payable after subtracting fees from his $600,000 settlement. The lenders challenged his bankruptcy in 2007 and settled on undisclosed terms. Mighty attempts to head off such problems by requiring all borrowers to be represented by a lawyer and to disclose any other financing they’ve taken.
While Mighty isn’t the only new entrant aiming to turn litigation into an asset class, other players are concentrating on commercial litigation. New York-based LexShares, launched in late 2014, allows SEC-accredited investors (those with net investable assets of $1 million or more, or $200,000 a year in annual income) to invest as little as $2,500 in individual commercial lawsuits by clicking on cases. (All the suits, it says, have been screened by legal experts.)
Los Angeles-based Vinson Litigation Finance, launched in 2012, uses the predictive software of Donald Vinson, a pioneer in the technique of jury research, to handicap commercial cases for investment. It is open to accredited investors ready to plunk down at least $500,000.
Chicago’s Gerchen Keller Capital, which claims to be the largest player in litigation finance, was launched in 2013 and already manages $1.4 billion for institutions, hedge funds and the family offices of the rich. New York’s Parabellum Capital, formed in 2006 by two veterans of a disbanded Credit Suisse litigation investing team, manages more than $100 million for institutions and wealthy families.
One of the easiest ways for the average investor to play now is by buying the stock of Burford Capital, which trades on the London Stock Exchange’s AIM. Christopher Bogart, the 50-year-old founder of Burford, is a former general counsel for Time Warner and former CEO of its cable ventures unit. After leaving Time Warner in 2003, he began managing venture capital money (for the billionaire Lauder family, among others) and decided to raise a few million to dabble in legal financing, too.
The catch? Mighty lends money to plaintiffs in personal injury lawsuits. You collect only if they do. Plus, the head of this online electronic investment platform recommends that only personal-injury lawyers, or investors who have such lawyers helping them evaluate cases, plunk down their money at this early stage.
“We are not a platform for gambling on cases,” warns Mighty’s CEO and cofounder, Joshua Schwadron, 34, an Emory University law school grad who runs the 21-employee firm out of industrial-chic offices on the edges of New York City’s financial district. “In order to properly understand these investments, you have to have legal expertise. We don’t want people throwing darts.”
Not yet, anyway. Schwadron’s ambition is to generate enough data about the risk and returns of lending small amounts of money to plaintiffs in personal injury suits to turn litigation finance into a respectable alternative investment–one predictable and large enough to draw affluent investors who don’t chase ambulances for a living. Right now such loans are made mostly by small local outfits operating in the shadows.
Schwadron’s dream isn’t so far-fetched. The potential market is sizable; in 2014 insurance companies paid out more than $140 billion for lawsuits, including $72 billion for car accidents alone, according to financial industry analyst SNL Financial, a unit of McGraw Hill Financial based in Charlottesville, Va. And there’s precedent in peer-to-peer lending sites like Lending Club and Prosper, which make small unsecured personal loans and were also once considered iffy. Now those sites are dominated by institutional investors; individuals seeking yield can invest in packages of peer-to-peer loans, and new venture-capital-backed lenders like Earnest are using novel data sources and algorithms to lend online.
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Plaintiffs “need to pay rent, they need to buy food,” says Mighty board member Roger Ehrenberg of IA Ventures, one of ten investors (including Tribeca Venture Partners) that last September pumped $5.25 million into Mighty. “They’ve got a money-good claim against an insurance company, and oftentimes those claims take a long time to settle.”
But is lending to plaintiffs at high rates really doing them a service? Schwadron answers that Mighty does its best for plaintiffs by running an electronic Dutch auction, where the bidder who is willing to accept the lowest rate wins the deal, which Mighty refers to as an investment, not a loan.
True, with transactions running more than 100 a month since Mighty’s official launch in September, rates are mostly above 30%. But that will come down, Schwadron predicts: “I believe in a future where financing for this sort of asset will be so easy and so ubiquitous and so inexpensive the market will not just be for [plaintiffs] who are desperate.”
Wait a minute. Is investing in legal claims even kosher? Ethics rules in the U.S. prohibit lawyers from sharing fees with non-attorney investors, and in many states plaintiffs are barred from selling their claims outright. But where there’s a yield there’s a way. Most legal financing deals are structured as loans, not sales, with complex waterfall structures in which investors get different returns depending on how quickly a case settles and for how much. Mighty is unusual in that its financing carries a single interest rate determined by the auction process.
Still, there’s some murkiness here. For example, the Colorado Supreme Court ruled last November that lawsuit loans must comply with the state’s consumer lending laws, potentially limiting returns.
Then there’s the whole business of collecting; a plaintiff could win but stiff his lenders. In one Pennsylvania case, Oasis Legal Finance, a Chicago lender, extended $60,000 to an injured worker only to find out he’d borrowed $67,500 from five other companies against the same case, with all six loans ballooning to more than $400,000 with interest, barely payable after subtracting fees from his $600,000 settlement. The lenders challenged his bankruptcy in 2007 and settled on undisclosed terms. Mighty attempts to head off such problems by requiring all borrowers to be represented by a lawyer and to disclose any other financing they’ve taken.
While Mighty isn’t the only new entrant aiming to turn litigation into an asset class, other players are concentrating on commercial litigation. New York-based LexShares, launched in late 2014, allows SEC-accredited investors (those with net investable assets of $1 million or more, or $200,000 a year in annual income) to invest as little as $2,500 in individual commercial lawsuits by clicking on cases. (All the suits, it says, have been screened by legal experts.)
Los Angeles-based Vinson Litigation Finance, launched in 2012, uses the predictive software of Donald Vinson, a pioneer in the technique of jury research, to handicap commercial cases for investment. It is open to accredited investors ready to plunk down at least $500,000.
Chicago’s Gerchen Keller Capital, which claims to be the largest player in litigation finance, was launched in 2013 and already manages $1.4 billion for institutions, hedge funds and the family offices of the rich. New York’s Parabellum Capital, formed in 2006 by two veterans of a disbanded Credit Suisse litigation investing team, manages more than $100 million for institutions and wealthy families.
One of the easiest ways for the average investor to play now is by buying the stock of Burford Capital, which trades on the London Stock Exchange’s AIM. Christopher Bogart, the 50-year-old founder of Burford, is a former general counsel for Time Warner and former CEO of its cable ventures unit. After leaving Time Warner in 2003, he began managing venture capital money (for the billionaire Lauder family, among others) and decided to raise a few million to dabble in legal financing, too.
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