Litigation funder accused of lying to investors fires back at SEC

August 22, 2016

(Reuters) – Roni Dersovitz is a onetime personal injury lawyer who transformed himself into a financier deploying $170 million in capital to litigation funding. Last month, after a year-long investigation, the Securities and Exchange Commission brought an administrative proceeding against Dersovitz, accusing the New Jersey fund manager of deceiving investors about his outsized bet on a default judgment against Iran. On Monday, Dersovitz and his lawyers at Hughes Hubbard & Reed struck back at the agency with a complaint in federal court in Newark. Dersovitz’s suit asks for an injunction against the SEC’s case, arguing (among other things) that new rules the agency adopted last month exacerbate the due process deficiencies of administrative proceedings.

The amended rules, which the SEC enacted in response to reports that proceedings before agency-appointed judges are unfairly weighted against defendants, “reinforce and codify the practice of trial by hearsay,” Dersovitz’s complaint said, because the new rules allow for the introduction of sworn witness statements obtained during the SEC’s investigation. Defendants’ lawyers are not present during the SEC’s questioning of these witnesses, so their statements are not subject to cross-examination, said the Dersovitz suit. Dersovitz also contends the new SEC rules unfairly require defendants in administrative proceedings to assert affirmative defenses within 20 days of being served with notice or else risk waiver of those defenses. Dersovitz said he would not be subject to those and many other strictures had the SEC sued him in federal district court rather than in an administrative proceeding.

The Dersovitz complaint asserts that the rule changes further skew proceedings that are already unconstitutional under the Due Process and Appointments Clauses. Dersovitz is the latest in a long line of defendants (technically, respondents) in SEC administrative proceeding to challenge their constitutionality. So far, no federal appellate court has sided with defendants. Earlier this month, the District of Columbia U.S. Circuit Court of Appeals set precedent when it affirmed the SEC commissioners’ conclusion that its in-house judges are not subject to the constitution’s Appointments Clause because their decisions are not final without the commissioners’ approval.

The SEC, as you may recall, alleged that Dersovitz and RD Legal falsely promised investors that their money was dedicated to buying up legal fee receivables in cases that had already been settled, a bet nearly sure to pay off. According to the SEC, Dersovitz failed to disclose that a huge percentage of the funds’ capital – more than $100 million – was actually invested in a default judgment against Iran in a case brought by relatives of U.S. Marines killed in a 1983 attack on barracks in Beirut. The risk profile on the Iran judgment, the SEC said, was very different than the profile on the legal receivables Dersovitz allegedly described to investors.

Dersovitz and his Hughes Hubbard lawyers responded to the substance of the SEC’s allegations in an Aug. 5 filing in the administrative proceeding. According to the filing, Dersovitz told investors in his domestic and offshore funds what they were signing on for. The SEC, the filing said, ignored language in RD Legal’s offering documents and marketing materials that specifically disclosed the fund would invest in non-appealable judgments, such as the default judgment against Iran, as well as settled cases. The funds, Dersovitz claimed, fully disclosed his investment strategy – including warnings that he might capitalize on what he regarded as unique opportunities – in offering statements, financial statements audited by an outside firm and on an investor-accessible website that reported all of the funds’ positions and historical returns.

And according to Dersovitz and his lawyers, his investors got just about everything he promised them. The funds said they would deliver 13.5 percent returns before Dersovitz received any profits from his investments. Dersovitz’s filing said that since the funds’ start in 2007, all investors in the domestic fund have realized that 13.5 percent return. The offshore fund, he said, hit that target in every year except 2015, when it returned 11.4 percent to investors.

In particular, the Iran judgment bet has turned out to be a moneymaker, according to Dersovitz. After a U.S. Supreme Court decision last spring that upheld the constitutionality of a law directing nearly $2 billion in contested Iranian bank assets to anti-terrorism judgment holders, Dersovitz’s funds have begun to collect returns on that investment, the Aug. 5 filing said, proving that his bet was “as strong and secure as any in the funds’ portfolio.” In fact, Dersovitz contended that he always told investors his investment in the Iran case was the “best trade in the book.”

In a separate filing in the administrative proceeding, Dersovitz has moved for the SEC to be required to disclose the identity of supposedly defrauded investors cited in the agency’s original notice against him. Since the SEC’s allegations are based on phone calls and oral marketing presentations rather than formal offering materials, Dersovitz said he cannot refute the agency’s claims without knowing specific details – especially because, according to his answer to the SEC, some investors have told him they felt pressured to give incriminating statements to the SEC.

“Respondents deserve the opportunity to be able to respond to the substance of the allegations against them, and the Commission Rules of Practice – and fundamental concepts of due process and fairness – require the (SEC) to provide sufficient detail,” Dersovitz’s filing said.

The odds are overwhelmingly against the fund manager winning against the SEC in federal court or in the administrative proceeding. But at the very least, it’s going to be fascinating to learn more about the business of litigation funding as his case moves forward.

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