Financial groups are helping victims defend themselves in court, taking handsome commissions in the process. Brussels will take a position on the subject next week.
Returns on investment of more than 300%: this is one of the most profitable sectors of international finance that Europe could tackle on September 3. The European Commission, alerted by a report by MEP Axel Voss published in mid-2022, will close an audit on Tuesday on litigation funds, one of the most profitable and controversial investments.
Their operation is simple and takes place in court: funds are provided to financially support plaintiffs during a trial, particularly against large companies. By allowing them to hire lawyers and build a quality defense for several years, they then award themselves fees that can vary between 20 and 50% of the money recovered by the victims, in the event of victory.
There is no shortage of examples of such procedures: one of the main French players in the sector, Deminor, for example, supported 2,500 plaintiffs during the Madoff affair; the American Gramercy has just paid 550 million dollars to support 700,000 plaintiffs fighting against the mining companies BHP and Vale; TikTok, targeted by collective complaints over data breaches, has seen financiers flock to bring the procedure to a conclusion since 2020.
Bankruptcy possible, income debate
The litigation fund industry is not extremely developed. The main French player in the sector, IVO Capital Partners, reports only 47 transactions completed in 10 years, for 115 million euros deployed at the end of 2023. On a global scale, this would be around 40 to 80 billion euros that would be directed to victims.
Australia, the Netherlands, and the United States are the largest providers; but in Europe, Paris has many skills in international judicial arbitration and could see these funds develop. Which, like any unregulated financial investment, carry significant risks: the American player LexShares gave up one of its funds and dismissed staff after the pandemic led to delays in legal decisions.
Litigation funds do not win all cases, far from it, and can suffer high losses. Their profitability is also debated: to our colleagues at Les Echos, IVO director Charles Demoulin testifies that 20% of cases are lost, and that the firm aims for a profitability of 12% per year, once insurance is included.
Figures that contrast with the report submitted by Axel Voss, which cites a profitability of up to 300% to 3000% – spread over the duration of the procedure. IVO estimates that without insurance, its net return is 20 to 25%.
Burford Capital, one of the world’s leading funds, denies Voss’s accusations, publishing its figures: it speaks of a net return on investment of 11% per year. But it does point out that of the 173 cases in which it has intervened between 2009 and 2022, it has generated a return of more than 200% on 22 occasions – with an average return of 69%.
States concerned about interference, trial bosses
Europe could decide to regulate the sector more effectively by imposing a maximum rate on commissions taken from complainants. The European Parliament had already validated a large part of the measures proposed by Axel Voss.
The ethical argument – charging a victim a fee to enable them to defend themselves, generating profits from their victory – is at the heart of the European position. Germany has already capped commissions at 10%, and the UK has banned percentage-based remuneration – a rule that is quickly circumvented.
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The American authorities, for their part, express their concern about possible Russian interference in the field: the Kremlin could take advantage of the opacity of the current rules to interfere in trials and destabilize large firms. The industry responds that, conversely, it is mainly to defend the interests of these large multinationals that the American Chamber of Commerce, in particular, is pushing for more supervision.
The debate promises to be thorny on September 3, therefore – but it should not call into question the litigation funds, the prospects of which are particularly bright thanks to the increase in trials in the environmental field.
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