The dubious business of investing in mass torts

April 18, 2016

Have you heard the latest in get-rich-quick investment ideas? All you have to do is find thousands of people injured by a drug or medical device, sign them up as clients, find lawyers to file and settle their cases and collect a share of the legal fees. It’s easy! You can’t lose!

Or so you might think from the plethora of litigation financiers touting mass tort litigation as a new asset class. In theory, as the manager of a $260 million hedge fund explained at a 2015 conference on alternative investments, sophisticated investors that put money into a docket of mass torts cases after the defendant’s liability has already been established can earn as much as 25 percent interest on its capital. No wonder an unnamed Texas investor supposedly funneled nearly $8 million to plaintiffs’ lawyer Mikal Watts in 2010 to help him build an inventory of seafood workers to sue BP after the Deepwater Horizon oil spill.

Elite personal-injury lawyers tell stories about having been pursued by litigation financiers offering tens or even hundreds of millions of dollars to buy a piece of their mass torts dockets. The litigation funder Gerchen Keller raised more than $400 million last winter for a new fund dedicated to investments in late-stage cases. A few months later, Gerchen supposedly put up about $45 million to fund the acquisition of tens of thousands of pelvic mesh claims by the Houston plaintiffs’ firm AkinMears, according to a lawsuit by AkinMears’ former business development officer. (Neither Gerchen Keller nor AkinMears has confirmed the fund’s involvement, and AkinMears has disputed the price tag alleged in its former executive’s suit, which has settled on confidential terms.)

Now comes news that investing in mass torts litigation is not the exclusive domain of sophisticated hedge funds. According to a fraud complaint filed Friday by the Securities and Exchange Commission, an outfit called Prometheus Law allegedly took in about $11.7 million from more than 250 small investors, many of them retirees, promising to double, triple or even quadruple the money they put into Prometheus’ “legal marketing” program for mass torts.

Prometheus consisted of a Michigan-licensed tax lawyer, a Washington State-based legal marketer and several dozen sales agents trying to entice investors. (Among the tactics: ads in USA Today.) The outfit’s pitch, according to the SEC, was that it would use investors’ money to locate and screen personal injury plaintiffs in cases in which defendants had already set up settlement funds.

Prometheus allegedly told investors it would partner with plaintiffs’ firms to bring claims on behalf of the clients it found through its legal marketing. When cases settled, Prometheus would receive one-third of the legal fees – 11 percent of the total settlement. According to the SEC’s complaint, filed in federal court in Los Angeles, Prometheus sold “prepaid forward contracts” that guaranteed spectacular returns, 100 or 125 percent in 24 months, or even more for a longer-term investment.

The payouts depended, of course, on Prometheus generating mass torts claims. In rough numbers, to double the $11.7 million the SEC alleges Prometheus took in from investors, the firm needed to sign up personal injury clients whose cases would be worth at least $212 million. According to the SEC, in its year or so of operation, Prometheus did become counsel to 2,300 personal injury clients, of whom 700 filed claims. (The majority were against the maker of one particular drug, though the SEC does not name the product; Prometheus marketing materials mention Bayer’s Yaz and Yasmin birth control pills and the GlaxoSmithKline antidepressant Paxil.)

But the SEC alleges that Prometheus’ business plan had fallen apart by the middle of 2014. Instead of using investor funds to generate additional clients, the SEC complaint said, Prometheus principals James Catipay and David Aldrich “spent millions of dollars on personal items, including a million-dollar loft in downtown Los Angeles and paying Aldrich’s personal income taxes.” Catipay, the lawyer of the two, blamed Aldrich for the supposed misappropriation in a 2015 suit in Los Angeles Superior Court, but the SEC said Catipay continued to hustle investors after he and Aldrich split in 2014.

Moreover, the settlement prospects weren’t very good for the cases Prometheus did manage to generate, according to the SEC. A medical claims underwriting lawyer supposedly told Catipay and Aldrich in late 2014 that the cases comprising nearly 90 percent of Prometheus’ portfolio were “junk” that no one else was “still trying to generate.” When the first round of contracts came due, Prometheus didn’t have revenue from settlements to pay out. Instead, according to the SEC, Catipay and Aldrich used new investor money to pay old investors – a “Ponzi-like” scheme both admitted under oath, the SEC said.

And then there is the not-so-small matter of Aldrich, the non-lawyer Prometheus principal, sharing in legal fees kicked off by the cases he generated. Fee-splitting with non-lawyers in prohibited everywhere except in Washington, D.C. (where some hybrid mass torts law-and-marketing firms have set up shop to take advantage of that very loophole). Before Aldrich met Catipay in 2013, the SEC’s complaint claimed, he’d been turned down by about 100 plaintiffs’ lawyers concerned about ethical prohibitions on sharing fees with a non-lawyer.

Aldrich and Catipay were allegedly advised that the fee-splitting arrangement was a violation of ethical rules in April 2014 – the same time they received legal advice that the contracts they were selling were securities, despite their protestations to the contrary. California opened an investigation into Prometheus’ alleged sale of unregistered securities in June 2014, yet, according to the SEC, Aldrich and Catipay continued to sell the contracts.

I left a message on Prometheus’ answering machine, which is also the phone number Catipay lists on his Michigan bar registration. I could not find a phone number for Aldrich, but sent an email to an address he is said to use. I did not hear back from either man.

The SEC’s allegations are just that, of course, and the actions of defendants who supposedly oversold the prospects of an investment to unsophisticated customers should not discredit the entire asset class.

But if nothing else, the SEC complaint disproves the truly silly theory that it’s easy to make quick money by investing in mass tort litigation. According to the SEC, Prometheus took in less than $10,000 in revenue from legal fees in settled cases. If you do the math, that means the total value of settled claims in cases generated by Prometheus was about $91,000. To break even with investors, Prometheus needed its cases to generate $106 million. To delivers the returns it promised, as I mentioned, the fund needed settlements to top $212 million.

Nor is Prometheus the only outfit to fall into potholes in the mass torts investment game. AkinMears, the Texas plaintiffs’ firm that allegedly spent $45 million to acquire a huge docket of mesh cases last summer, subsequently told me and my reporting partner Jessica Dye that it was unaware some of those cases had originated at offshore call centers. The firm also told us that an unexpected significant percentage of clients opted not to proceed or not to use AkinMears as counsel when their cases were transferred.

That is not to say AkinMears (and Gerchen Keller, if it is true that the litigation funder financed the deal) won’t make money from the mesh cases – the firm didn’t directly address that question when we asked – but the process has not been simple. And really, it shouldn’t be. At the heart of every mass torts claim is an allegedly injured person, someone whose life supposedly changed because of a defective product. Proponents of outside investment in mass torts litigation argue that more money means more legitimately injured people will be able to bring claims. Defendants argue that pressure from outside investors will drive up the number of meritless suits. I’m not sure we know yet who is right on that point. But I am sure that personal injury cases, even in mass torts featuring tens of thousands of suits, are not a commodity.

It disserves the idea of justice to treat them as if they were.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/