The Third Party Funding Series (Part II): In conversation with Selvyn Seidel, Fulbrook Capital Management

Selvyn Seidel, Fulbrook Capital Management

Dispute financing (also known as third party funding, or litigation financing), an area of practice which is relatively unheard of in India is a multi-million dollar industry which is young, but growing by the day in countries such as USA, Australia and England.

And Selvyn Seidel is one of the forerunners in this industry, being one the first few to have set up a company for dispute financing. Not just one, but two, first Burford Capital, and then Fulbrook Capital Management.

In this interview with Bar & Bench’s Varun Marwah, Selvyn discusses the intricacies and nuances associated with dispute financing, his sentiment on the scope of growth of this business in India, and the possible impact of Trump’s election.

(Edited excerpts)

Varun Marwah: Tell us a little bit about your background. At what point in your career did you take up dispute funding?

Selvyn Seidel: I came to dispute financing after about 40+ years of litigation experience, most of which was spent with Latham & Watkins LLP, where I was involved in complex commercial, and often international, litigations. I chaired and founded the international litigation and arbitration practice there as well.

I have also been involved in a lot of teaching I taught for ten years as an Adjunct Professor of Law on international litigation and arbitration at New York University’s School of Law. I have lectured and continue to lecture at various law schools including Harvard, Columbia, and Oxford.

In 2008, I learnt about dispute financing, through a program that was being offered in London. Later, I joined forces with former general counsel of Time Warner, Chris Bogart, and we ran a company I had founded that focused on dispute financing. We soon realized that the best thing to do was become a public company if we wanted to best succeed.

In October 2009, we co-founded Burford Capital, a public company listed on the AIM of the London Stock Exchange. We initially raised a $135 million from 20-odd investors.

Although the market was still quite young, and even though we had just one smaller case in our portfolio, we were able to quickly, over the first year, deploy about $100 million. Then we decided to raise more in investment capital- about $175 million – and we thus became a company with about $300 million. Today Burford is among the leaders in the world.

Varun Marwah: You are also the founder of Fulbrook Capital. How is it different from Burford?

Selvyn Seidel: I formed Fulbrook Capital to advise claimants and investors in the industry. This space was virtually unoccupied and was important to fill — the industry is not well known because it is young, complex, and changing quickly. We officially began operations in 2013.

It differs from Burford, and other financiers, who represent themselves and invest their capital in commercial claims. Fulbrook represents investors, or bring to them claims from claimants we represent which we have vetted and we think meritorious. We have been compared by some to investment bankers or investment advisors. The comparison is helpful to understand Fulbrook, although the comparison is inapt in various respects.

Varun Marwah: You have referred to different kind of funders viz, Conventional, Situational and Lender.

Selvyn Seidel: Simply put, “a conventional funder” is one whose investors have devoted certain capital and all their time to investing in commercial claims. Burford and Harbour Litigation Funding are two examples.

A “situational investor”, as I call them and I am sure there are better words to describe this investor class, is a party who invests only part of their total capital into commercial claims, depending on the situation. Hedge funds, private equity entities, family offices, pensions, high net worth individuals, illustrate this category. A situational investor does not typically have the capacity to conduct the review that Fullbrook can, hence they depend on us more than a funder does. Also, most of them don’t have the capacity to attract good claims.

As to “lending”, some funders are also becoming more akin to “creditors”. They’re putting out a newer product which can be describe as “credit investing”. They will review cases with a similar criteria that a lender might use, and if that claim qualifies, they advance the money with a return more like a junk bond or a hard money loan, charging an IRR of 18-22%, or a lower multiple or other formula than might be used by a typical investor.

Varun Marwah: How do you decide on which cases to ‘invest’ in?

Selvyn Seidel: A very complicated question, that cannot be responded to adequately with a short answer, since each case requires its own process. In general, we have certain strict economic, substantive and jurisdictional criteria that must be met. As to qualifying claims, we examine them closely, one by one, with the assistance of outside experts as needed. We are starting to use algorithms, and technology, in the process. At the same time, we have certain specialists in negotiating and drafting various needed documents.

We view the investment process as a portfolio exercise. So, if we arrange for investment in one case, that will influence our decision on the next case that we choose, looking for suitable diversity. Indeed, a phenomena is starting where investors, if able, are happy to invest in portfolios of cases, with the investment commitment equalling $50 million or more.

In short, this process is at the heart of dispute financing; it is complex, and is fascinating.

Varun Marwah: There are talks about these claims being traded as derivatives?

Selvyn Seidel: Well there has been a lot of talk with respect to using commercial claims, the way some other assets are used, such as securities. And in some cases it is being used in a derivative way. However, there are certain restrictions against trading in claims, in most jurisdictions. They restrict creating derivatives from commercial claims

I think these restrictions will loosen in the foreseeable future. One area, in particular, where it is happening more quickly is in the patent area, where claims are being traded.

I expect it will become a public market down the road for trading in commercial claims. Derivatives will similarly grow in usability and in use.

Varun Marwah: The way I see it, there are no rigid rules with respect to advancement of money as to how this capital is to be treated.

Selvyn Seidel: While I understand your perception and think most people would agree, I see it a bit differently. There are actually a number of rules that apply to this industry. There are specific rules issued by many courts, in the U.S. and globally.

Beyond this, there are countless general rules that apply to the industry, such as common law and statutory rules, such as the laws of negligence, breach of contract, and fraud, and the laws of the SEC. There are also guidelines, or rules, issued by various bar associations and other bodies. Finally, there are specific rules being enacted all the time, or being investigated, such as in the U.S., the U.K., Hong Kong, and Singapore.

Varun Marwah: What is your take on the Indian market? Any plans on setting shop here?

Selvyn Seidel: I would like to do that- is it a short term goal? No, but is it a long term goal? Yes.

One of our specialties is international arbitration. I think the Indian market is a wonderful long-term opportunity for financing international arbitrations, if treated right. The international arbitration space is a huge opportunity, because it’s growing by leaps and bounds.

India has just formed the MCIA, and that is a wonderful organization designed to improve and enhance international arbitration. As it does that, it will at the same time be competing with other arbitration jurisdictions. This is important; not only does the Center attract revenue for India from its own operations but it also brings investment into the country when those investors know, if a dispute arises, they can get a reasonable resolution. But India has a lot of ground to make up. In catching up, it will turn to financing for help.

Varun Marwah: What are your thoughts on Indian companies entering litigation funding?

Selvyn Seidel: I think what’s going to happen is that as the life of dispute financing increases, Indian companies will be drawn into the industry, particularly as it relates to Indian companies. Litigation related to Indian companies should increase at three levels:

1) Litigation outside of India by Indian companies;

2) International arbitration, and later, litigation within India.

3) Other dispute financiers, from outside India, will become active here. Some, like Harbour Litigation Funding, have already sent people to India making plans for the future. Their presence will induce Indian companies to enter the industry.

Varun Marwah: What are the hurdles?

Selvyn Seidel: First, international arbitration will take some time to prosper here.

Second, the court system in India has earned a bad a reputation of being notoriously slow, which is a primary reason why financiers shy away from it. While that is improving, it will predictably take a long time.

Third, foreign law firms are not allowed here. They are highly attractive vehicles for financing. Word is that foreign firms will be allowed in, but that rumour has been around for quite a while.

Fourth, India has a lack of enough clarity on the champerty and maintenance side. People fear, whether justified or not and some decisions indicate there is a lack of justification, that these doctrines could be applied to void or otherwise hurt financing. Champerty and maintenance are less of a problem in international arbitration, because international arbitration doesn’t have the public policy restrictions that courts have. But here, of course, I defer to lawyers in India to analyze champerty, maintenance, and barratry.

Fifth, while I am convinced dispute financing is a decidedly healthy and beneficial industry when operating properly, it needs to improve. Indeed, it is being criticized by many. The U.S Chamber of Commerce has constantly criticized the industry, and challenged it since it has the ability to increase sham law suits, increase costs, overload courts, and take advantage of helpless claimants. Some of these claims, however, are absolutely bogus, some have a certain degree of validity and the industry should be taking note of it.

Varun Marwah: Why is there increasing cooperation between dispute financiers and contingency law firms in the U.S?

Selvyn Seidel: Although you would think at first blush that they are competitors (and in some cases they are), there is an incentive for contingency law firms to share the risk and the reward with financiers, and thus cooperate at least as much as they compete.

In the past, there were a lot of law firms which were not working on contingency basis before, but they are happy to work on contingency basis since they can now share some of the risk with the financier and some of the reward. In this sense, they are colleagues more than competitors. In my view, it is this type of firm — one that in the past worked on a time and charges basis, but is now willing on some cases to work on a partial contingency basis— that you see the most working with financiers.

Having said that, in some cases the typical contingency law firms are not necessarily looking at dispute financiers because if they see a good claim, they want to have it to themselves and not split the fee with the funder.

Varun Marwah: Where does that fit in the Indian context?

Selvyn Seidel: India generally frowns on contingency law firms, as I understand it. Actually, that can be compared to the U.K, where until recently contingency lawyering wasn’t allowed. I would, in fact, predict that India will take this route as well. I believe that contingency law firms, if done in the right way (and there are a lot of wrong ways), will help.

In fact if you want to take this to the extreme, I predict that ultimately what will happen here is what’s being done in other countries- law firms are becoming competitors because they are using their own capital to fund litigation rather than going to dispute financiers, or using capital from dispute financiers in large amounts to finance a portfolio of cases, or a large case, needing $50 million or more. The U.K has allowed a non lawyer to invest in a law firm, and become a partner in the law firm. This money and expertise can be used by the firm in litigations or arbitrations.

In fact, Burford just set up it’s own law firm. Juridica did the same many years ago.

These developments will impact India, especially when foreign law firms are allowed in.

Varun Marwah: While in the U.S, dispute financiers typically work along side contingency law firms, that cannot be the case in India. What are your two cents on the reaction of Indian law firms?

Selvyn Seidel: I’m confident that the Indian law firms will, for the most part welcome dispute financing.

But, how will they react to it once foreign law firms come in, is not altogether clear. I still think they will welcome it, as it will be a way for them to compete with foreign law firms. Indian law firms have lawyers whom I have a lot of respect for- they are capable, industrious and the ones I have dealt with are representative of the profession.

Varun Marwah: What is needed to make it a reality in India?

Selvyn Seidel: You should have a terrific drawing card in the MCIA. That would be an attraction and if people put a concentrated effort into developing, it will grow quickly and make a lot of difference. I see it happening in Hong Kong, see it gaining momentum in Singapore which is a jurisdiction which has been historically opposed financing on champerty grounds.

You need means and incentive to make people aware of it. Its story then tells itself, and enhances its understanding and use. Indian media have the interest, judging from a couple of articles previously run, and the in-depth coverage your publication is giving it.

I see it happening elsewhere. It should happen here, particularly in international arbitration.

Varun Marwah: Finally,  while I know it is early days and speculation is everywhere, what do you think think about the impact of the approaching Presidency of Mr. Trump?

Selvyn Seidel: While it seems inevitable there will be an impact, possibly a very serious one. At this early stage there are too many variables – who his appointees will be, what he will decide himself, and so on.  It does seem, however, that in the short term, a year or two, not a lot will occur generally, or as to India.   Longer term I think that dispute financing is likely to gain some support given factors such as Mr. Trump’s use of the courts to make claims himself.  There are of course also negative factors, such as Mr. Trump’s siding with big business, a community generally opposed to dispute financing. But I think the positive outweigh the negative.

As to India, it might be affected by what goes on generally, and  the relationship between the U.S. and India is also not predictable at this point.  But I am optimistic given what India represents.  Moreover, while dispute funding in the U.S. is important to India, there are other countries, like the U.K., which have dispute financiers interested in India.

Basically, it is dangerous to make predictions now, except that there should be time enough to better read the situation and plan for changes, as time goes by. We can also say with confidence, I think, that the industry has come too far, and made too much progress, to have it experience a significant set back, in general or as to India.

(You may read the first part on third party funding here)