American hedge fund placing bets on European litigation and the future of the EU

23rd Jan 2017

By: Scévole de Cazotte

Despite their publicly stated concerns over the future of the European market, Elliot Management, an American hedge fund, has not shied away from investing in Europe – or at least in their litigation.

In a November letter to its investors, Elliot Management wrote: “the linkage of 28 countries in the European Union (EU) in one economic unit, and 19 of them in one currency union, is unsound…what’s going to happen is that there will be a definite consensus that Europe is not working”.

It was recently announced that Bentham Europe, a litigation management company entirely owned by Elliot Management funds, is investing in a 100 billion euro class action claim against European truck makers for alleged price fixing.

The charge was originally brought by and settled with the EU competition authorities. Now Bentham is funding a class action on behalf of truck buyers all across Europe. The company will pay for the lawsuit in exchange for a share of the eventual payout. With third party litigation financiers reportedly taking anywhere from 10 percent to 45 percent of the final judgment, that could be up to 45 billion euros.

Bentham Europe will also have its pick of European courts. The company has not yet announced in what jurisdiction they will bring the litigation – a tactic known as forum shopping, where litigants choose to bring their case in a court that will give them the most favorable verdict.

Despite Elliot Management’s overall EU pessimism, evidently there is still opportunity for investing in lawsuits in Europe.

But not every case backed by funders is as highly publicized as this European truck maker lawsuit. There is an argument that third party litigation financing (TPLF) lacks transparency. There are no EU member state laws requiring funding agreements to be revealed to the court, and as a result, the judge may not know that up to 45 percent of the award is not going to the plaintiffs at all.

This begs the questions: How many claims in European courts result from a third party looking for a profitable investment? And, are consumer benefiting at all?

While TPLF is being sold as an enabler of justice in the EU, in reality there are many ethical concerns. By allowing third parties to fund lawsuits, the court is no longer a path to remedy, but a path to profit. The financial interests of the financiers are arguably the main driver of the litigation, and can result in a conflict of interest for the attorneys. The legal counsel, who passed off their risk of bringing the suit to the funders, might be compelled to meet the funder’s needs over those of the claimants they are supposed to represent.

Even more concerning, financiers can make their fee contingent upon the duration of the case, motivating attorneys to settle as quickly as possible.

Perhaps Elliot Management is right that some aspects of the European economy are not working so well, such as the lack of transparency and oversight of a financial industry that is growing exponentially. Funding companies are on the rise in places like the UK and Germany, and before long the practice will be booming in every member state. Class actions are also on the upsurge and these mass claims with nameless plaintiffs are ripe for investment.

It would be a precautionary policy to put in place meaningful safeguards that prevent abuses of the justice system. Regulation is needed to protect both the claimants and the defendants from risk investors.