March 15, 2011 6:46 PM
New Suit Against Juridica Exposes Cracks in Litigation Funding Model
Posted by Nate Raymond
From The Am Law Litigation Daily
Juridica Investments Limited, one of two publicly traded, commercial litigation funding companies operating in the United States, doesn't like to disclose specifics about the cases it's investing in. But details of a failed Juridica investment in an arbitration against Romania recently became public after the claimant in that action, S&T Oil Equipment and Machinery Ltd., filed a Houston federal district court racketeering complaint against Juridica. The S&T suit offers a rare glimpse of the tension that can emerge between a litigation finance-backed client and the litigation financer--particularly in terms of what information the funder is permitted to see without compromising attorney client privilege or the independence of the lawyers handling the case.
In 2007, represented by King & Spalding, S&T brought an International Centre for Settlement of Investment Disputes arbitration against Romania, seeking €140 million for Romania's termination of the privatization of a large, state-owned chemical manufacturing plant. King & Spalding had originally taken the case on contingency, but, according to S&T, threatened after a year to resign unless S&T found another funding source. (A spokesman for King & Spalding declined to comment.) In 2008 Juridica kept the case alive with a $3 million investment.
But problems emerged in 2009. In early August, King & Spalding asked the ICSID arbitration tribunal to postpone a hearing to allow S&T to address new evidence and allegations by Romania, according to a decision in those proceedings. Later that month, King & Spalding asked the tribunal to postpone the arbitration again because S&T could not cover the $150,000 it was required to advance for the ICSID case to proceed.
At around this time, King & Spalding informed S&T that it wanted to withdraw from the representation. The firm claimed that S&T had not produced "an alleged critical piece of evidence," according to the complaint against Juridica. S&T calls the claims by King & Spalding "false, untrue, inflammatory, and highly defamatory."
King & Spalding also notified Juridica of its falling-out with S&T. Juridica then attempted to set up a meeting with S&T, King & Spalding, and S&T owner Valerian Simirica, according to an exhibit in S&T's suit against Juridica. King & Spalding initially advised Juridica it would need Simirica to waive the attorney-client privilege, but Simirica was in Romania at the time. So Juridica's operations manager asked him via e-mail to give King & Spalding permission "to speak openly with us."
Simirica finally responded to Juridica on September 21, saying he'd been advised not to waive the privilege because such a waiver "can damage even more the situation." He also said he still believed S&T could win the case, albeit with new lawyers.
But a few days later, King & Spalding apparently decided it did not need Simirica’s permission to waive the privilege. In a letter described in an e-mail from Juridica principal Timothy Scrantom but not filed in court, Reginald Smith of King & Spalding advised that "the disclosures we are seeking are within the common interest exception to the doctrines relating to waivers of attorney-client privilege."
In November 2009, Juridica's Scrantom sent Simirica of S&T a rescission letter, refusing further funding of the arbitration following an inquiry by independent counsel. Juridica asserted that Simirica made "material misrepresentations" about the prospect of success in the arbitration and the facts underlying the case. The funder alleged that S&T failed to disclose information to Juridica and King & Spalding, and demanded "immediate reimbursement of all sums" paid to King & Spalding.
The ICSID arbitration panel eventually dismissed S&T's case against Romania after the company failed to put up the money to pay for the arbitration. Several months after that, Juridica filed an action against S&T at the London Court of Arbitration to retrieve its investment in the S&T case. Out of at least 23 cases in which Juridica has to date invested or committed $127 million, the S&T arbitration has been the sole one requiring a write-down, according to Juridica's regulatory filings. (S&T's case is not disclosed to Juridica investors by name, but its identity is clear if you're familiar with the dispute.)
S&T responded to Juridica's arbitration filing with a Houston federal court suit that clearly aims to punish the litigation funder. S&T's counsel, J. Mark Brewer of Brewer & Pritchard, asserts that "everything about the transaction with Juridica is improper and...their business model is unethical."
The litigation isn't going very well for S&T; last week, Houston federal district court judge Nancy Atlas denied S&T’s request for a temporary restraining order to enjoin Juridica's London arbitration against S&T, saying S&T and its owner "have not demonstrated a substantial likelihood of success on the merits of their claims." Juridica's lawyers at Barnes & Thornburg and Thompson & Knight have moved to dismiss the suit, which Juridica in a statement calls "wholly without merit."
Nevertheless, despite Juridica's efforts to keep many of the documents in the case under seal because they purportedly reveal trade secrets, S&T has managed to expose key details of its relationship with Juridica and King & Spalding. And that may be the most important legacy of the S&T spat with its erstwhile investor. Maya Steinitz, an associate-in-law at Columbia Law School who has written about the litigation finance industry, said S&T's "allegations implicate the potential conflicts of interest that arise once lawyers have a relationship--indeed may be accountable to--an investment firm as well as to their clients."
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