In many ways, deciding to fund is like placing a bet on a horse.After learning everything possible about the horse and its jockey, a decision is made whether to bet on the horse, and after the bet is made, the bettor sits on the sidelines and watches the race. The bettor neither coaches from the sidelines nor gets involved in decisions about how to ride the horse or manage the course or jockey. Similarly, after deciding to provide funding, a funder in this model does not get involved in choice of counsel, settlement, litigation strategy, or negotiations.
Michele DeStefano, Claim Funders and Commercial Claim Holders: A Common Interest or a Common Problem?, 63 DePaul L. Rev. 305 (2014)
Those who write and speak about litigation finance often invoke the metaphor of the horse track when thinking about the practical dynamics involving litigation finance. The quote above is just one of several invocations. I last heard it used back in November 2015 by Selvyn Seidel of Fulbrook Capital Management, who was moderating a litigation funding conference sponsored by NYU Law. Here is my humble attempt to apply the metaphor to the field of whistleblower finance, specifically with respect to federal false claims act qui tam false suits.
When you sue on behalf of the federal government (as plaintiff, a/k/a the “relator”) to recover money that you believe was taken from it as a result of fraud, you are making a bet that, down the line, someone will convince a judge or a jury that there was a fraud committed by a third party dealing with the government (the defendant, the party you are suing), that this third party is liable to the federal government, and that the government was damaged to a degree that you expect or anticipate. You may be betting, in particular, that the case will be strong enough for the federal government to intervene (i.e., take the case over) and that the defendant will realize that the case is strong enough, and the federal government a formidable enough opponent, that its self-interested best course is to settle with little or no litigation and in the range of an amount that you calculated when you placed your bet. You are also calculating that your bet will pay out within a certain time frame, i.e., that the case will be won or settled within a specified time period. And finally, you are betting that, by the end of the case, the defendant is still solvent and capable of paying the settlement or judgment.
Who are the people gambling in these False Claims Act/qui tam horse races?
The plaintiff/relator/whistleblower
The person actually suing on behalf of the government. Certainly, by the time the case is unsealed and becomes public record, if not before, the whistleblower has crossed a professional Rubicon. She has made a choice that carries potentially career and life altering consequences, risking permanent ostracism and perhaps de facto debarment in her chosen profession. From an economic (as opposed to moral) perspective, the whistleblower has to calculate whether the expected value of her choice is worth the risk and consequences: What is the likelihood of success and what is the likely net recovery to the whistleblower and in what time frame, as compared to the discounted value of a stream of cash payments from future earnings in her chosen field?
The plaintiff/relator’s attorney
The lawyer who takes the whistleblower’s case typically does so on a contingency basis, meaning that the attorney collects his or her fees only if the case results in a recovery. The lawyer also typically lays out the costs and expenses of bringing a suit (such as travel expenses, private investigator fees, expert witness fees, etc.) on behalf of the plaintiff and will only recover these out-of-pocket expenses if there is a recovery at the end of the day significant enough to cover all of the expenses. The lawyer may be the one who is considering taking on the case, in which case the lawyer is betting on the underlying merits (or innate strength of the case on the facts likely to be developed and demonstrated through the litigation process), as well as that lawyer’s talents as a litigator in developing these facts and navigating the case through procedural and other legal obstacles raised by the other side’s lawyer. [** The prospective plaintiff’s lawyer is also gambling on, and making calculated risk decisions, with regard to the other side’s lawyer and the judge in the case, making the bets taken a more complicated affair perhaps than a day at the racetrack. More on this below. ]
The lawyer may also be someone who is asked to come into the case by an originating attorney (i.e., the lawyer who identifies the case and is first retained by the relator), often for the purpose of dedicating resources to the case, either in terms of attorney manhours or funds for litigation expenses or both. This lawyer too is gambling both on the strength of the case and the skill and acumen of the originating attorney.
The Litigation Financier
Sometimes a third party who is a stranger to the lawsuit is brought in to provide financing either for the whistleblower or the plaintiff’s attorney or both. Typically a hedge fund or finance company, this player almost always emerges only after the case has been filed. Funds may be sought by the whistleblower in order to pay for living expenses or to start a new venture or simply to monetize a contingent asset (the expected recovery on the suit). Funds may also be sought by the whistleblower or his attorney to help underwrite the costs of the case, often when the expenses increase beyond what is originally anticipated, such as when the Department of Justice declines to intervene in the case, and the whistleblower and his counsel face the decision of prosecuting the suit on their own. The litigation financier typically provides funds on a non-recourse basis: Like a contingency fee, the return of the investment principal and any return on that principal comes only out of a litigation recovery, and the financier does not have recourse against the other assets of either the relator or his counsel to recoup the financier’s investment. The return on the investment may be calculated based on an interest rate that increases when certain time intervals are reached (e.g. 1.5x on principal in first year; 2.0x on principal in years 2 through 3 and so forth). The return may also be calculated as a percentage of the recovery or it may be a hybrid of both.
The litigation financier makes the same bets and takes the same types of calculated risks as the attorney who is asked to join a case. The financier needs to calculate the strength of the case itself and the strengths of the attorneys handling the case (and in more sophisticated analysis, the strengths of opposing counsel and the assigned judge), plus the likely time frame for a recovery and probability of solvency of the defendant within that time frame.
Like many who go to the racetrack, all these gamblers may make their calculations and place their bets based on their unique vantage points, drawn from anecdotal experience, from word-of mouth reputations and other heuristics. Like the racetrack gamblers, they may also try to gauge their calculations on developed statistical profiles about the players and the cases. In the horse racing industry, there will be those who are willing to pay for these profiles. And the racetrack with be populated by dedicated and focused real or want-to-be professional gamblers, clutching their racing forms and tip sheets, as well as everyday folks out to the track for a lark and the hope and thrill of a potential windfall. (We see this very same phenomena in the racetrack’s cousins, the financial marketplaces.)
Alas, the ‘horse-and-jockey’ racetrack metaphor is too simple and breaks down when it comes to assessing the litigation finance landscape. Here, we have additional players, judges and opposing counsel, each with their unique strengths and weakness, biases and predispositions, and with significant roles to play that will impact the outcome. These players and their characteristics must also be assessed and brought into the risk calculus mix. The better sporting metaphor, in my mind, may very well be Baseball, where the Umpire (with his unique, idiosyncratic and changing notion of a batter’s strike zone), and a Pitcher and Batter working at cross purposes, each will influence the game’s outcome. The Baseball folks are well ahead of the things when it comes to putting numbers on the varied factors that influence the fate of an everyday baseball game and indeed an overall baseball season. Like their professional cousins at the racetrack and in the financial markets on Wall Street and elsewhere, they pull data and try to quantify everything, running computer-driven statistical simulations to get to their predictions. Years ago, the phenomena and discipline was called Sabermetrics; recently, with the Michael Lewis book and movie, it’s simply called “Moneyball.”
The term has caught on in the Legal Finance World, and many large litigation funders profess to use some form of Big Data and data analytics to help inform their funding decisions, typically when it comes to large scale commercial and intellectual property cases. But what about the rest of us and, in particular, those individuals who are contemplating becoming whistleblowers and those attorneys and litigation brokers and funders who are contemplating taking on a whistleblower case? What are we bringing to the litigation racetrack when we place our bets? Will we be armed with our statistically-derived racing forms and tip sheets? Or will we present ourselves more in the manner of the casual horse race fan, with a good gut feeling (or not) about a whistleblower matter?
More thoughts on this in the weeks and months to come. … But I am ultimately thinking of a particular species of Trees … Decision Trees.
