Litigation funder facing SEC fraud claims made bad bets on mass torts

July 15, 2016

The Securities and Exchange Commission on Thursday accused the litigation financier RD Legal Capital and its founder, New Jersey lawyer Roni Dersovitz, of deceiving investors in the $170 million fund about where their money was being deployed. By 2015, as The Wall Street Journal was the first to report, Dersovitz’s interrelated funds were heavily concentrated in an anti-terror case accusing Iran of responsibility for the 1983 bombing of Marine barracks in Beirut. But even though more than $100 million of RD Legal’s capital was tied up in the litigation against Iran, according to the SEC order instituting an administrative proceeding against the funds, RD principals allegedly told investors repeatedly that their exposure to the case was limited and that the funds’ primary strategy was buying legal fee receivables in cases that had already been settled.

Promising an annual return of 13.5 percent, RD Legal, according to the SEC, touted the legal fee receivables as a very low risk investment, since it was purportedly buying law firms’ contingency fee claims in cases the firms had already settled. Those were deceptive representations, according to the SEC, because the lion’s share of RD’s capital was actually invested in the much riskier Iran litigation.

Ironically, RD Legal’s bet on the Iran case may turn out to be prescient. The funder, according to the SEC order, sank nearly $10 million into contingency fee receivables for two of the law firms attempting to enforce default judgments against Iran and RD subsequently invested tens of millions of dollars buying judgments from families of Marines killed in the 1983 attack, who were plaintiffs in the case. This spring, the U.S. Supreme Court upheld the constitutionality of a law that effectively allows plaintiffs holding judgments against Iran to seize nearly $2 billion in frozen assets. Depending on how those assets are divided among plaintiffs, it would seem that RD Legal has a shot at making money from its stake in the case.

But it has already lost money in its investment in mass tort litigation over the osteoporosis drugs Fosamax, Actonel and Aredia and the arthritis drugs Bextra and Celebrex, according to the SEC order and lawsuits RD Legal brought against firms whose fee receivables it purchased. RD Legal’s forays into mass torts are yet another example of why these cases are simply not paving stones on the road to Easy Street.

In the Fosamax case, as RD Legal alleged in a 2014 complaint in federal district court in New Jersey, the firm advanced millions of dollars to two California plaintiffs’ firms in anticipation of the fees the firms would earn in three multidistrict litigations against supposedly defective osteoporosis drugs. But according to the SEC, the litigation was far from settled at the time RD Legal bought the legal fee receivables, despite the funds’ representations to its investors. The drug cases didn’t settle until 2014, and even then, the hedge fund had to sue to recover what it said it was due.

The case docket doesn’t reflect the outcome of RD Legal’s suit against the osteoporosis plaintiffs’ firms, but according to the SEC, after two years of litigation, the hedge fund ended up settling for “several millions of dollars less than the amount they had advanced  starting eight years earlier.” So much for that low-risk venture.

In the Celebrex/Bextra litigation, which the SEC order does not address, RD Legal invested about $485,000 to purchase what it believed to be nearly $900,000 in receivables from an Alabama plaintiffs’ lawyer with cases in the MDL. RD Legal was also the middleman in a separate transaction in which it bought $1.7 million in receivables from the Alabama lawyer for about $980,000 and resold its interest to another hedge fund. The Alabama lawyer, who has since been disbarred, turned out to be due less than $70,000 in legal fees in Celebrex/Bextra litigation. RD Legal and the other hedge fund sued him and obtained default judgments.

RD Legal’s website solicits inquiries from plaintiffs and law firms involved in a plethora of mass torts, including litigation over fracking, Chinese drywall and pelvic mesh, in which not every claim is subject to a settlement. The SEC order said the hedge fund advanced $7 billion to accounting and claims aggregating firms that, for a fee, helped claimants in the BP Deepwater Horizon oil spill disaster. The SEC faulted RD Legal for assuring its investors that the BP and other advances were a slam dunk when the fee receivables the fund purchased were still up in the air.

The SEC’s order against RD Legal shows that mass tort and personal injury litigation is still considered a promising asset class for investors. At some point in the last couple of years – the order does not specify when – the funds sold $50 million of legal fee receivables to an unnamed third party. The SEC faulted the funds for the terms of the investment, which allowed the third-party investor to move ahead of other fund investors when receivables finally paid off. The agency also claimed that the $50 million cash infusion allowed RD Legal’s founder to pull money out of the funds, even though he told other investors the funds were experiencing a liquidity crunch.

There’s a telling phrase in the order’s discussion of the mysterious $50 million, third-party investment. RD Legal was in a bind, the SEC alleged, because “respondents had invested the funds’ assets in cases that, in part because of their nature as ongoing litigation, were taking years to collect.” That’s a phrase that ought to serve as a warning to every investor thinking of sinking money into big-ticket litigation. No matter what anyone tells you, investing in litigation is not risk-free. Returns are not guaranteed. It takes a long time and can take unpredictable turns even in late stages.

We don’t often get a glimpse at the inner workings of hedge funds that specialize in litigation finance, an extremely opaque specialty. Even the SEC order against RD Legal doesn’t reveal whether investors received the 13.5 percent annual return they were supposedly promised. But at the very least, RD Legal’s story is cautionary. In litigation funding, investor beware.

I left a phone message for RD founder Dersovitz but didn’t hear back. An attorney for Dersovitz told the Journal that the SEC’s action was misguided. “We have always been completely transparent with our investors,” he said.

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