Litigation funding is a relatively young business, although in the past 10 years it grew out of the infant phase and gained some mainstream reputation with the investing public. Legal claims, professionally managed, are now an asset class for hedge funds. Following several successful placements by litigation funders (a recent £200M fundraising by Therium Capital Management being the most notable), investment already poured into funds of this type is now probably in single billions.
A brief review of active litigation funds reveals that almost all of them limit their geographical scope to democratic countries with well-developed law systems (US, EU, Australia). A major reason for litigation funders not to reach out beyond Rule of Law respecting states is that elsewhere their legal financing may prove insufficient to prevail in court. Corruption and political interference, if used by the opponent, would neutralize even the strongest litigation position.
Another reason for litigation funds not to venture far from home is enforcement uncertainty. Collection on a judgement could be a challenge even in Britain and America. In countries with less robust judiciaries collection chances would largely depend on extra-judicial capabilities of the successful litigant, and this is something no US or UK litigation fund would wish to get involved in.
A notable attempt to raise a fund to invest at least part of its capital into emerging economies (many of which have a dismal Rule of Law adherence record) was made by Commercial Intelligence Funds Group in 2011. The fund manager sought to raise $100M for a fund (Global Distressed Alpha Fund III – GDAF III) to finance lawsuits in Africa, Latin America and Asia but no reports followed to reveal whether it reached the set benchmark. A Google search hit on the 2014 Bermuda Supreme court records provided a hint: a petition was filed for the liquidation of Africa Alpha Capital I Limited by GDAF III LP.
So, does lawsuit funding have a place in countries disrespectful to the Rule of Law? It seemed no, until when recently covering one particularly nasty corporate conflict in Ukraine, I came across a litigation fund which feels very comfortable operating in the muddy waters of post-USSR and other emerging justice systems.
Name is Black Eagle Litigation Fund. Its declared geographical scope includes the former Soviet Union, and from all my research it seems that this is where its main activity takes place.
Black Eagle is a Swiss-managed Cayman Islands-registered vehicle, backed by US, European and, it appears, some ex-USSR investors. To be more precise, it is not a single fund but a network of entities, each with a unique mix of investors.
The reported case history of the fund (its core operation has been around for more than 16 years) reveals that it is anything but a classic litigation fund. Forbes magazine once described it as an ‘anti-raider’ citing the fund’s practice of buying recovery claims from victims of Russian corporate raidering and title theft in early 2000s, then attacking the raiders’ offshore holdings and forcing them to settle or face a global asset freeze.
More recently Black Eagle speculated in distressed bank debt in Cyprus after the collapse of its banking system in 2013. Neither the scale, nor the outcome of this activity was reported. One can only assume that the fund’s business there involved dealing with a lot of disgruntled Russians and Ukrainians who lost their offshore money and wanted at least some cash out, following the freeze.
In post-Maidan Ukraine Black Eagle bought hugely discounted debt of failed Ukrainian banks, then attacked their owners, legally bypassing the bankruptcies to reach the owners’ personal assets for a full payback. That cost the fund some bad publicity in Ukrainian media (‘vulture’ was one of the mildest epithets used). Bloggers apparently engaged to badmouth the fund went as far as speculating on its relation to a ‘Black Eagle Trust Fund’, a conspiracy theory-fuelled urban legend about how the CIA allegedly plundered the Japanese WW2 gold and then invested it into black ops around the world.
Another well-reported case Black Eagle Litigation Fund got into was a shareholder brawl in Togliattiazot, the world’s largest producer of ammonia, based in Russia and worth billions of dollars. The fund itself bought a share and signed up several other investors for a mandate to trace and recover over 900,000,000$ allegedly embezzled from Togliattiazot. Online global asset search and cease & desist notices issued in the name of the fund reveal that it sticks to its old tactics of attacking the offshore holding system of the target asset.
It is not surprising that on its (otherwise quite uninformative) website the fund describes itself not only as a litigation financing, but also as a distressed asset fund. It probably makes more sense to treat any legal dispute in ex-USSR courts as an ‘asset’ rather than simply a legal dispute, because there is so much more you can do in a muddy-water legal system with a business claim besides just litigating.
When you research the exploits of Black Eagle and the like, their business model for making money on legal disputes in the former Soviet Union becomes apparent.
They do not finance just litigation, they fund a no-holds-barred global offensive on the opponent, using litigation as one tool but otherwise mounting a regulatory and sometimes even a PR attack. Shareholder conflicts and business wars in ex-USSR do get ugly.
Black Eagle managers understand very well that the ‘Achilles’ heel’ of any ex-USSR business is offshore. Operational businesses of the fund’s opponents may be in Ukraine, Russia or Kazakhstan, but when it comes to preserving wealth and sorting out business shares with partners, ex-USSR businessmen resort to the protection of developed legal and financial systems overseas. And that is where ‘vultures’ like Black Eagle strike, for it hurts the most.
In the Ukrainian matter I mentioned (which I still continue researching) it appears that lawyers linked to the fund somehow convinced the nominee shareholders and directors of their opponent’s offshore company to switch sides, then ‘self-destructed’ the lawsuit which annoyed the fund’s client. Hardly a civilized litigation funding business model.
It remains to be seen whether other litigation funders would follow suit and invest their shareholders’ capital into legal disputes in high-risk countries. But if they do, they should never forget that it was the Rule of Law in their home countries which brought them into existence in the first place. Unless a ‘vulture’ reputation is all that they desire.