The Rise of Alternative Investment Models in International Business Fraud Cases and Important Considerations for Such Arrangements

George BenaurBusinessLeave a Comment

In recent years, I have witnessed the rise of new business models for pursuing litigations and arbitrations in business fraud cases. Unlike the traditional hourly rate model, where large law firms typically take a large initial retainer to bill against at an hourly rate, the new arrangements typically involve teams of lawyers and advisors willing to take on matters on a pure contingency basis. In other words, they take the cases based on an agreement that they will only be paid a certain percentage if the client recovers funds from the defendant.

There are many companies now that provide litigation funding and thus engage in trading claims, similar to the investment banking model. Certain companies buy the claimants’ rights to a judgment, such as an arbitration judgment, for example, and they take the risk that they will recover a greater amount on that judgment once they prosecute the claim themselves. Many lawyers also take cases on a contingency basis, risking that they will only get paid if the matter is successfully concluded in a settlement or at trial. Many litigation funders out there seek to take the “lion’s share” of the claim, especially in situations where the client may not have sufficient leverage to negotiate a better deal. You have to be careful with such arrangements, which are growing in the industry.

Experience shows that contingency fee arrangements are not always successful. There are examples where the case was successfully won and a result achieved, and even funds recovered by the client, but then the client changes their mind and refuses to pay the success fee. There are also examples where advisors miscalculate potential consequences and then find themselves entrenched in a litigation with significant counterclaims against them, where the law firm is then forced to spend time and/or money defending the claims, without making any money in the process. Another scenario is where the result is achieved, and a settlement is on the table for the client, but the client still wants to obtain more, thus taking advantage of the lawyer or advisor to keep working or face not receiving any return. Suffice it to say, one has to be careful when accepting cases purely on a success fee or contingency basis.

The following are certain considerations that I have found to be invaluable in my experience in dealing with such matters.

  1. Have a Strong and Clear Engagement Agreement: Having a strong engagement agreement is important for all legal representation. When it comes to success fees, this fact is especially true, because there are circumstances where clients do change their minds about the deals that they reached. If there is a clear engagement agreement, then the chances of being able to enforce it are significantly higher. The engagement agreement should also provide that at the very least the client should be contributing, if not covering in full, the costs of the litigation (such as travel costs, deposition transcripts, court filing fees, etc).

 

  1. Conduct Extensive Litigation Risk Analysis: Litigation risk analysis is more than just having a conversation with the client and then immediately signing up an engagement agreement. It must involve a deep dive into the facts of the matter, including witness interviews and document review, before engaging in a long protracted litigation. This analysis is required in all matters, not only contingency fee arrangements. The analysis must involve such issues as whether there are viable legal claims, potential damages analysis, the prospect of actually being able to collect on any judgment, the impact of potential adverse publicity, the risk of counterclaims, and other risks associated with litigation. It is only after such an assessment is fully conducted that one can give a realistic value to a case.

 

  1. Organize a Reliable Team that is Ready for Fight and is Aligned on Strategy: In cross-border litigation, ensuring that the cases will have sufficient expert support necessary to succeed in different jurisdictions is not always an easy task. People often have different perspectives and different expectations. These matters should be cleared before the litigation is commenced. For this reason, it is important to fully think through the tactics and actions that may need to be pursued in different countries and/or states before engaging in a case.

 

  1. Think Through Potential Defenses and Counterclaims. Clearly, one does not want to start a $1M case in most cases to face a $10M counterclaim, at least without some good reason. Other potential defenses also need to be considered. An example of this is the feared bankruptcy filing. As is often the case, a defendant may prolong defending a litigation and then turn to a chapter 11 bankruptcy filing to avoid having to pay the judgment at the last minute. One has to be ready for that alternative strategy. The same is true with the constant “rebranding” of companies that occurs in international business fraud cases where defendants are hiding their assets in corporate shells. Necessary expertise is needed to be able to pierce through such veils that may be set up internationally.

 

  1. Educate the Client on These Issues. Even the most sophisticated business people familiar with the litigation process do not always understand “legalese” and do not know the intricacies of litigation. It is important to keep clients informed about the strategic choices made during the litigation process, the costs involved, and options that may arise during the process so that they can make a fully informed choice about them.

New business models, investment bankers, and claims traders have definitely entered the litigation market in the past years. They are all going after the big money awards being entered in international arbitration panels and the courts worldwide, and seeking to enforce those awards to collect big rewards from defendants worldwide. In this crazed market, however, it is important to keep a level-headed mind about the fact that many seemingly high reward cases are nothing but a sham, or an unrealistic prospect that it is way too expensive to make into a real result. For this reason, a return to basics at the inception of the case is essential. And this applies to the original engagement agreement, case analysis and risk mitigation, and client communication.

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