It has been a while since I have had occasion to write about third-partly litigation financing. However, recent developments at the SEC, in which the agency has pursued enforcement actions alleging that various purported vehicles to finance litigation had defrauded prospective investors, have brought litigation funding back onto my radar screen. Once again, as in the past, various groups are sounding alarm bells about third-party litigation funding, as discussed below.

The specific development that drew my attention back to litigation funding is the enforcement action the SEC filed on September 6, 2024, against a Florida-based father-and-son team, Michael Chhabra and his father Vineet “Vincent” Chhabra, in which the agency alleged that the two men defrauded investors in connection with a litigation funding scheme. The pair allegedly promised investors specified returns and interest income by lending law firms money to finance mass tort litigation. The two men used special purpose vehicles to raise money and advertised the investment on social media. However, the SEC alleged, the vehicle did not provide such funding and did not enter agreements with law firms to do so. The alleged scheme apparently raised $125,000, which the men used for personal expense (including legal fees Michael Chhabra incurred in bankruptcy proceedings). The SEC asked the court to order the Chhabras and their company to disgorge profits and pay civil penalties, as well as to enter an officer bar against them. The SEC’s September 6, 2024, press release about the action against the Chhabras can be found here. The SEC’s complaint can be found here.

The SEC’s action against the Chhabras in fact followed just days after an earlier action in which the SEC targeted another alleged litigation funding scheme. On September 3, 2024, the SEC filed an enforcement action in the Eastern District of California against Maria Dulce Pino Dickerson and Creative Legal Fundings, in which the agency alleged that Dickerson defrauded more than 20 Filipino American investors in a Ponzi scheme that raised $7 million allegedly to fund personal injury litigation. A copy of the SEC’s September 3, 2024, complaint can be found here. Hat Tip to Martina Barash who reported the lawsuit in a September 4, 2024 Bloomberg article, here.

These two recent SEC enforcement actions involving litigation finance funding schemes are certainly concerning, but on the other hand it could also be that two data points are not enough to constitute a trend. Just the same, there are observers that are trying to raise the alarm bell about litigation funding, perhaps none more that the U.S. Chamber of Commerce’s Institute for Legal Reform (ILR).

In a recent report entitled “Grim Realities: Debunking Myths in Third-Party Litigation Funding,” the ILF contends that third-party litigation funding (TPLF) “has become a dominant feature of the civil justice system in the United States and abroad,” all without “any meaningful oversight.” The report notes that the defenders of litigation funding typically claim that it is “benign – and usually salutary – business model that increases litigants’ access to justice.” The ILF reports that “far from serving as an altruistic business endeavor for allegedly injured claimants, TPLF is just a vehicle for maximizing funders’ return on their investments – often to the detriment of the plaintiffs whose claims they are bankrolling.” The ILF’s September 12, 2024 press release about the report, including a link to the report itself, can be found here.

The report contends that the lack of transparency around TPLF means that funders “bleed off recovery intended for litigants,” as their “primary goal” is to “maximize their own profit, often at the expense of the plaintiffs they fund”; exercise immense control over cases, including strategic decision and settlement negotiations, which can undermine the interests of the actual parties involved. The report also contends that funding “can be exploited by foreign adversaries” to “undermine U.S. national security and economic interests by funding litigation against American companies.”

A lengthy part of the ILF’s report is a discussion of a recent dispute involving Burford Capital, one of the largest TPLF firms. Burford had reached an agreement with food company Sysco Corporation to fund antitrust litigation that Sysco filed against pork and beef suppliers. Disputes arose between Burford and Sysco, particularly with respect to Sysco’s ability to enter into settlements regarding the litigation. Eventually Burford instituted proceedings to enjoin Sysco from entering the settlements. Sysco then reached an agreement under which Sysco’s claims against the pork and meat suppliers were assigned to a Burford affiliate, Carina Ventures.

When Burford sought to substitute Carina for Sysco in the antitrust litigation, a magistrate judge rejected the motion to substitute, saying that “condoning Burford’s effort to maximize its return on investment” would cause the harm of “forcing litigation to continue that should have settled.” In June 2024, the district court upheld that magistrate judge’s order, saying that the magistrate judge “was rightly concerned that allowing substitution … could encourage litigation financiers everywhere to use mid-litigation assignments and substitutions to undermine agreements between parties otherwise willing to settle.”  To be sure, as discussed here, in  March 2024 order, the district court in a separate case brought by Sysco against chicken suppliers allowed Burford to substitute Carina for Sysco.

The ILF report asserts that the Sysco dispute “is not anomalous,” and that the allegations of control there “are consistent with numerous other examples of actual TPLF agreements that grant a TPLF entity authority to control or influence aspects of the funded litigation.”

It should be noted that there is relatively little overlap between the two examples of fraudulent fund-raise alleged in the SEC actions cited above, and the allegedly overbearing control that the ILF report contends should raise alarm bells about the litigation funding industry. Nevertheless, there certainly appears to be enough going on to raise concerns about the litigation funding and the problems it can present. The ILF contends that all of these kinds of problems warrant transparency and greater oversight with respect to the funding industry.

I know from past posts about litigation funding that raising questions about the industry raises ire in certain quarters. Litigation funding has its defenders, and the funders themselves are not shy from presenting their own defense. I will say that in the course of my many travels I have seen how the availability of litigation funding allows innovative litigation efforts to go forward; this is particularly true overseas, but also true in the U.S. as well. But while there may be more to be said about litigation funding, it seems likely that advocates, such as, for example, the ILF, will continue to agitate for greater scrutiny of the litigation funding industry. I expect that we will hear more about this topic in the weeks and months ahead.

Special thanks to a loyal reader for sending me a link to the SEC’s complaint in the Chhabra action.