Litigation funding by private corporations other than law firms or individuals who are not lawyers is generally prohibited here in the US, but the concept is catching on overseas, especially in jurisdictions that have a “loser pays” rule for allocating fees and costs. This recent entry from The D&O Diary summarizes an article predicting that the ability to assign of securities claims in the UK to private equity firms and hedge funds will lead to an increase in securities filings in that country, by relieving some of the risks of the loser pays rule.
Today, Stuart Wilson of the Australian Shareholder’s Association published this op-ed in The Australian discussing private funding of shareholder class actions Down Under. The article discusses the role of a listed litigation funding company, IMF Australia, which recently funded a successful class action and earned a healthy fee for its services. Mr. Wilson discusses the impact of new companies and law firms moving into the “fledgling industry” of litigation funding and the possibility that they will drive the price of litigation funding down. For the moment, though, he says that IMF’s “stranglehold” on shareholder class actions allows it to keep its fees high. Even so, he defends third party litigation funding as a mechanism for providing access to justice for millions of shareholders who would otherwise not have any practical means of bringing their claims.
Addressing the possibility that third party litigation funding will open the door to the “frivolous shareholder actions” that he seems to concede are common in the US, Mr. Wilson says no, pointing to two factors. First, he points out that losing plaintiffs, and in turn, the funder, can be assessed litigation costs. Second, he argues that faced with the prospect of having to pay costs in losing cases, IMF takes a conservative approach in deciding which cases to pursue and that “only the strongest cases are considered.”
I guess time will tell whether this same conservative approach will prevail as the new players move into the securities class action litigation funding market and the competition increases. The bigger question is, what happens if the officers or directors of a company that funds securities litigation make a false or misleading statements to their own shareholders about that litigation?