SAN FRANCISCO (Legal Newsline) - A San Francisco-based litigation funding company is a type of business that operates in the shadows, according to a legal expert, and now that the Securities Exchange Commission is going after Prometheus
Law on charges of defrauding investors, other third-party litigation funders may find themselves subject to greater oversight.
funding is a shadow industry," professor Maya Steinitz of the
University of Iowa, College of Law, told the Northern California Record. “So there's no data on how widespread
any practice is, and (it) speaks of the need to have some kind of regulatory
oversight over litigation finance.”
In charges filed April 16 in the Central District of California, Prometheus executives James
Catipay and David Aldrich are alleged to have violated six SEC rules in
raising nearly $12 million from about 250 investors since 2013. The firm allegedly engaged in an illegal
scheme to profit from prospective plaintiffs’ personal injury lawsuits over
medical equipment and prescription drugs.
Steinitz said that as the functions of third party litigation businesses become more visible, “there
will probably be more outlier cases of abuse that need to be addressed by the
SEC and others."
"I have long argued that we should focus on litigation finance
as a form of finance and regulate it as a pocket of the finance industry rather
than to focus exclusively on stretching the regulation of attorneys to address
potential abuses,” she said.
Steinitz participated in a 2013 panel on litigation financing at Stanford University and has published two articles on the subject, “A Model Litigation Finance Contract," and "Whose Claim is This Anyway?"
A statement from Michele W. Layne, director of the SEC’s Los
Angeles regional office, says the company "defrauded investors, many of them
retirees, by repeatedly downplaying the risks associated with their investments
and the fact that their entire business model was unrealistic to afford the
exorbitant returns promised."
Catipay, a tax attorney, and Aldrich, company president and marketing officer, allegedly promised returns of 100
percent to 300 percent to investors, based on the future proceeds of settlements
from plaintiffs’ class-action personal injury lawsuits. Investments of a penny
that reaped returns $1 to $3 never arrived, authorities say.
Prometheus Law’s initial investors received income from more recent investors.
Prometheus owes investors $31.5 million, according to the SEC. It seeks preliminary and permanent injunctions, an appointed receiver
over the firm and a freeze of assets.
Kim Stone, president of the California Civil Justice Association, said that third-party
litigation financing with respect to mass tort actions raises serious concerns.
“If the class action lawsuit is funded
by an outside party and is pushed by a lawyer, then what role if any does the
supposed client play?” she said.
And, how widespread is such wrongdoing as the SEC alleges in charges against Prometheus
Ratner, associate professor at University of California Hastings College of Law in San Francisco,
warned investors of potential downsides of investing in litigation funding.
“As with any type of investment,” he
said, “there will be persons who misuse capital that they raise or engage in
other kinds of fraud, and they will be subject to SEC actions, private
litigation, and the like."
“I don't have any reason to believe that fraud is any more common in
third-party funding than it is in any other
investment domain,” Ratner said.
But, he said, what is arguably different with third party litigation funding is that the field is poorly understood by some investors.
It also has "received
substantial media coverage for being lucrative, two things that make it ripe
for fraud. Litigation funding is an
evolving field," Ratner said.
He added that there are established players that dominate the field - such as New York-based Burford Capital - which he said will likely not experience "any impact at all from the SEC's
investigation of Prometheus.”
to its website, Burford “is the world's largest provider of finance for
litigation and arbitration–our capital can be used for case or portfolio
funding, operating expenses, and more."
Litigation Finance Survey shows that litigation finance continues to grow and
evolve, with 28 percent of private practice lawyers (who) say their firms have
used litigation finance directly—a four-fold increase since 2013."
Chicago-based litigation funder Gerchen Keller Capital also claims to be the
world's largest provider of such legal financing, with more than $1.4 billion in
assets. In 2013, Gerchen Keller says it had more than
$100 million in capital.
Judith A. Butler, an SEC spokesperson, declined a request
from the Northern California Record
for a comment on how widespread the alleged wrongdoing by Prometheus Law is,
and if more third-party litigation SEC suits are ahead.