The Lawsuit Business Is Good For UK’s Burford Group

13 january 2013

Burford reported its profits surged to $15.9 million last year from $1.9 million in 2010, as the U.K. litigation-finance firm harvested millions of dollars from settlements negotiated by clients who turned to it for cash to maintain lawsuits they otherwise might have been forced to drop. Successful cases included one that settled for a $1.4 million profit a week after Burford invested in the litigation.

Perhaps buoyed by the bullish outlook for lawsuits, Burford shares have climbed more than 20% in recent months.

Burford’s strategy has drawn fire from critics including the U.S. Chamber of Commerce-backed Institute for Legal Reform, which says hedge funds and groups like Burford can prolong lawsuits and even inspire plaintiffs to bring marginal suits they might otherwise have declined to file. Burford executives — a blue-chip group including Chief Executive Christopher Bogart, a former Time Warner general counsel — say they mainly provide a way for businesses to lower the risk of high-stakes litigation by recovering some of their costs while the outcome of a case is most uncertain.

Burford said its wins last year included a “small technology company” that won an arbitration award but was running out of cash while the defendant used delaying tactics to avoid paying. Burford supplied $2 million in “investment capital” to the unnamed plaintiff firm and after 22 months of wrangling the case settled, with Burford earning a $4.4 million profit. In another case, Burford lent $6 million to a law firm that had won at trial but needed working capital while the decision was on appeal. The law firm returned the money plus a $4.5 million profit 11 months later; according to Burford’s time-based loan terms, had the case taken 30 months to come to an end, the company says it would have made three times its investment.

Not all Burford’s cases were winners, highlighting the riskiness of investing in anything as uncertain as the U.S. court system. In one case, two entrepreneurs took to fighting after they sold their business for $100 million. One hired a prominent law firm but was running out of cash when Burford stepped in with $2.4 million to keep the case alive. Burford stood to recover as much as $7 million in profit if the entrepreneur won his case in arbitration, but “the arbitrator did not like” the entrepreneur and ruled against him. Instead of a profit, Burford lost its investment and the borrower went bankrupt.

This year, Burford says it lost $3.2 million after investing in a case that the plaintiff won at trial, only to see an appeals court chuck out the verdict and dismiss the case.

Had we won, we would have generated a profit of close to $10 million, making this a risk worth running; indeed, economically it would make sense to do these kinds of cases on these terms even if we were to lose half of them.

Burford said it has produced net profits so far of $32 million on $35 million in investments. The company, which is publicly traded in London, has raised $300 million and put it in investments including a sort of money-market account financed by a variety of litigation claims that it says generates a 13.5% annual return.

Burford’s most controversial investment may have been the $15 million it agreed to pump into the long-running lawsuit against Chevron over pollution in the Ecuadorean jungle. Under the terms of that agreement, Burford stood to recover the first $50 million or so of any settlement, shoving the ostensible plaintiffs, a group of Ecuadorean villagers, far down the payment ladder. That case, which yielded an $18 billion verdict in Ecuador, probably looked to some like a slam-dunk $500 million settlement but Chevron has fought a fierce legal battle in the U.S. to keep the plaintiffs from collecting a dime. A Burford spokesman said the firm has since sold its investment in that case.