The Legal System Is a Financial Market

Harvard University is investing money in an outside firm that funds promising lawsuits, then takes a cut of the winnings. This strategy is spectacularly profitable, as well as a sign of a rotted and failing justice system.

Bloomberg reports that Harvard is investing a portion of its enormous endowment in IMF Bentham, a company that “[pursues] strategies from financing cases against corporations to providing cash advances to individual plaintiffs in exchange for a share of settlements.” (In olden days, these activities were called champerty and maintenance, and were illegal because they plainly created distorting incentives regarding the courts. But now this is all legal.) And what kinds of returns can you make on these investments?

“Litigation finance funds have posted internal rates of return of more than 30%, according to the Bloomberg report. IMF Bentham’s strategies have delivered an IRR of about 60% since July 2011, according to a March 2019 investor document.”

A return of 60% over the course of eight years is staggering—better than the best private equity firms and hedge funds. Billionaires would kill for access to that sort of return. And those returns will inevitably attract greater and greater amounts of funding, as everyone tries to get in on the gravy train. What does the incredibly lucrative nature of investing in lawsuits by other people tell us?

• It is impossible to adequately access our justice system without large amounts of money.
• Our litigation system can reasonably compared to a business that requires a lot of capital to enter but then provides fabulous returns on investment. Like, say, a gold mine.
• The money being made by investing in litigation will clearly encourage more litigation.
• The money being made by investing in litigation will discourage the sort of regulation that would prevent such lawsuits from coming about in the first place. For example, rather than lobbying the government to make workplaces safer, it is more rewarding to let someone get hurt on the job and then sue. Apply this principle to the entire universe of effective government regulation.
• The entry of large investors on the plaintiff side of the court system will encourage a financial arms race that will exacerbate the financial barrier to entry for adequate access to justice.
• Harvard has too much money.

Fix the fucking justice system instead of turning it into another venture capital investment.