Investors financing litigation to net big profits

Critics argue third-party funds in mass torts often turn lawyers’ clients into commodities

In the West Virginia courtroom of U.S. District Judge Joseph Goodwin, lawsuits that have been lingering for several years in America’s largest-ever medical mass tort may be heading toward a comprehensive settlement. The judge said earlier this year the two sides should work out a deal on the cases that have not yet been settled, and what federal judges want, they usually get.

The lawsuits, which at one point numbered far more than Charleston’s population of 50,000, arose from the use of a product called transvaginal mesh. The implanted mesh was manufactured by several companies to help women with a variety of pelvic problems, but because of the potential for postsurgical complications, it was the subject of a 2008 alert by the Food and Drug Administration.

The companies insisted the product was safe. But blood was in the water, and soon plaintiff lawyers around the country, including most of the heavy hitters and big names, had rounded up plenty of clients — some 70,000

by one estimate. Massive advertising campaigns made sure of that.

Curiously, the firm that advertised the most was one few other lawyers had heard of. Houston’s AkinMears, a tiny operation with only seven lawyers listed on its website, reportedly spent around $25 million in a sweeping TV blitz, cutting across channels from gardening to golf to get viewers to call a toll-free number.

Yet, with no star attorneys in its stable, AkinMears took no part in the crucial “bellwether” trials that were intended to establish the value of the cases.

In truth, it spends little time in the courtroom. Its main partner, Truett Akin IV, is still better known as a former University of Houston football player than a lawyer, though in fairness he has finally earned some headlines. Just not the kind he wanted.

“I find the whole thing incredibly distasteful and borderline reprehensible. I am a capitalist, and I believe firmly in the capitalist system. I believe in the civil justice system. But there are more appropriate business models and models that are inappropriate. I find this one ghastly.” Mark Lanier, Houston trial lawyer

‘Bushels of wheat’

A breach-of-contract lawsuit filed by a former AkinMears employee at the end of September raced through the legal grapevine like a greyhound. In colorful language obviously intended for a broad audience, the suit by a banker-turned-lawyer named Amir Shenaq opened a rare window into a shadowy world where clients exist only as case numbers, and large chunks of them are bought and sold with outside money and without their knowledge — in the words of one critic, like “bushels of wheat.”

Shenaq had been hoping to strike it rich as the mesh litigation headed toward conclusion. His job had been to arrange financing that would allowed AkinMears to quietly acquire thousands of cases at a discount, right before Judge Goodwin pushed through the final remaining settlements.

The money, according to the suit, came from a private investment firm that bankrolls lawsuits in exchange for a portion of the returns. Shenaq claimed that he was fired because the firm did not want to pay him $4 million it owed him.

The suit was settled last week with the terms undisclosed. The attorney for Shenaq did not respond to requests for comment. AkinMears declined to comment on the suit or the settlement.

If publicity was Shenaq’s initial aim, he succeeded. There both in the flamboyant text and between the lines of an otherwise routine complaint of a fired employee was raised the specter of a different type of law firm that does not have to do very much to get a piece of the action.

“AkinMears is not run like a traditional plaintiff ’s law office, and the firm’s lawyers do not do the types of things that regular trial lawyers do,” the lawsuit states. “AkinMears is nothing more than a glorified claims processing center, where the numbers are huge, the clients commodities, and the paydays, when they come, stratospheric.”

Corrupted interests

Making it all possible, in this case, was one of the private equity firms that have sprung up in recent years to invest in litigation, which they see as promising higher returns than other investments. It had taken only weeks for Shenaq to interest one such firm, Gerchen Keller Capital, and line up about $100 million, to be couched as loans.

For experienced lawyers on both sides of the divide and pretty much anyone who keeps up with the high-stakes world of bigtime civil litigation, it was not hard to imagine a future of many such firms, all of them quietly using other people’s money — and lots of it, rather easily obtained — to build a juggernaut of lawsuits that in theory could threaten the foundation of the American civil justice system.

The defense bar, which represents corporations that are often targeted in so-called mass torts, found the glimpse into the Houston firm’s inner workings predictably chilling. Lisa Rickard, president of the U.S. Chamber of Commerce’s Institute for Legal Reform, said the revelations about AkinMears shows how “litigation financing perverts the justice system and puts the interests of lawyers and financiers ahead of actual plaintiffs.”

Growing alarm

The American Association for Justice, the trial lawyers’ group, defended access to third-party funding as a necessity when consumers face corporations with unlimited resources

“The world of litigation funding is complicated,” the advocacy group said in a statement. “But, when done ethically, (it) can help balance the playing field for those who have been harmed and ensure that wrongdoers can be held accountable,”

The AAJ did not define what constitutes ethical financing or address the AkinMears legal practice directly. But some veteran plaintiff lawyers are displeased by the notion of law firms as tools of investment bankers.

“I find the whole thing incredibly distasteful and borderline reprehensible,” said Mark Lanier, a nationally known trial lawyer from Houston. “I am a capitalist, and I believe in the capitalist system. I believe in the civil justice system. But there are appropriate business models and models that are inappropriate. I find this one ghastly.”

Shenaq’s lawsuit claims AkinMears was not satisfied with the results, despite all the money it spent on advertising. Leads from a call center were too iffy.

“Akin ... wanted to aggressively grow his business, including a significant change of course,” the lawsuit states. “Rather than buying non-stop advertisements and acquiring clients in a random, unpredictable manner, he wanted to start making direct investments in ongoing mass tort litigation. Akin mentioned a goal of closing on $100 million worth of cases in 2015 alone.”

Long established in other countries, third-party funders like Gerchen Keller provide backing for lawyers involved in expensive lawsuits. Typically these litigation finance operations are private equity funds that may couch their help as loans but are in essence investing in the outcome of the lawsuits. The one constant is that the “loans” are non-recourse, meaning they do not have to be repaid if the lawsuit is unsuccessful.

The rise of litigation finance firms in the U.S. has taken place in the last decade. And as their numbers have increased and the scope of the litigation they invest in broadened, both lawmakers and business interest groups have expressed alarm. Shenaq’s lawsuit provided one more bit of ammunition.

Mass profits

So far, the bulk of thirdparty assisted litigation has been in one-off lawsuits, often in complex business matters such as patent disputes. Gerchen Keller, with around $800 million in its litigation portfolio, has publicly said it will shy away from classactions and personal-injury cases. Its apparent willingness to invest heavily in AkinMears, however, is part of a more recent strategy of finding “latestage” litigation where the promise of a good return is quick. The subject matter mostly is irrelevant.

Gerchen Keller declined to comment on Shenaq’s lawsuit or its business practices, citing client confidentiality.

According to Shenaq’s calculations, the 14,000 transvaginal mesh cases AkinMears was intending to buy from a Washington, D.C., firm would net attorney’s fees of $14,000 to $16,000 per case, according to the lawsuit. The cost of each case, however, was less than $3,600. Even if some of the cases fizzled out on further inspection, the profits would be immense.

“Akin was now on the cusp of acquiring this massive docket without a nickel coming out of his own pocket,” the suit says, adding that the total net value to the firm could be an estimated $100 million. All of that without having to try a single case.

“This is not the way a civil justice system is supposed to work,” said Bryan Quigley, ILR spokesman. “The outside money will ... introduce other players that have no stake in it. It will expand litigation and flood courts with useless lawsuits. There is a bias toward settlement in mass tort cases, once the tort has been established.”

Buying a case

For the plaintiff bar, the coming of litigation finance is a mixed blessing. It may help small firms or firms that have little track record because one of the biggest obstacles to getting into mass tort litigation is removed: money. But less receptive are the established firms, for so long public enemy number one to business groups.

As they see it, the top plaintiff lawyers will still have to do the hard work and risk their own money to begin litigation that may or may not evolve into a big mass tort. Meanwhile, the big-lot commodity lawyers merely sit on the sidelines and watch, they say.

“There is a difference between using outside money to put into a case and using it to buy a case,” Lanier said.