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The Top-Performing Alternative Investments: Litigation Funding


It's risky and controversial: Invest in the legal cost of major lawsuits and if your side wins, you cash out.

In the recent, emotionally resonant finale of a lawsuit by 10,000 ground zero rescuers and cleanup crews against the City of New York, the plaintiffs won a settlement worth $712 million. It was great news for the police, firefighters, paramedics and others forced to take early retirement thanks to respiratory troubles, cancers and other ailments possibly caused by the toxic dust and fumes of those awful days following 9/11. It was good news for their lawyers, who will receive a hefty chunk of the settlement. And it was a nice payout for Counsel Financial, the Buffalo company that invested $35 million in funding the successful litigation, using investors' money.

How It Works: Litigation funding is a growing, controversial trend that first saw the light in the early 1990s and is now attracting the attention of everyone from private investors to hedge funds to bank-backed firms like Citigroup (C)-funded Counsel Financial. Find a case with a potentially large payoff -- a corporation accused of poisoning its workers, for instance -- in which the plaintiffs can't afford the increasingly huge costs of mounting the case, invest money in it via a law firm, and reap a cut of the payout when the case is, hopefully, won or settled.

Who's Investing and Why They're So Good at It: Counsel Financial, the most prominent US player in the field at the moment, employs a team of lawyer appraisers to judge the probability of a win based on all available data about similar lawsuits, regional trends, and historical outcomes. If it looks good, they will invest.

Oxbridge Financial Group is another specialist. But a growing number of hedge funds are also moving into the area, often with the guidance and legal of advice of long-term practitioners of the art, such as litigation-funding pioneers The LawFinance Group.

What They're Making: It's all dependent on the settlement, but returns can be high, as much as 25% of any award. Counsel Financial will make a tidy $11 million in profit off their investment in the ground zero case. Alan Zimmerman of The LawFinance Group made $20,000 from his first $30,000 investment back in 1994. And much of the profit comes from the exceedingly high interest rates charged on the funds -- industry rates are typically in the range of 16 to 18%.

Why They Really Do It: See above. There is an element of social justice involved in providing funding for plaintiffs who can't afford
ever-rising legal costs or defend themselves against the vast corporate bank accounts of their opponents, but nobody here is playing Robin Hood. The increasing concern in the legal world about the growth of litigation funding is based on the very strong possibility that lucrative lawsuits will be initiated purely because of their investment potential.

How To Get Started: Find a hedge fund or private firm that's backed with a good track record in the field and extensive legal experience.

Amateurs Be Warned: Don't go wandering into the middle of a potentially nasty lawsuit without the very best legal advice. And even
the most winning cases go south or are regularly subject to extensive, years-long delays. Are you ready to have your funds tied up that long?
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