With the economy in the tank and apparently a ton of money “on the sidelines,” as the Wall Steet analysts like to say, the venture capitalist industry has found a new place for some of that sideline money.
You may recall venture capitalists, as in Michael Milken, junk bonds and unfettered mergers and acquisitions fame. It’s where the high rollers choose to roll or at least have in the past. Apparently it was pretty much a sure thing as far as investors were concerned and many people made a boatload of money scraping together financing enabling entrepreneurs to merge and acquire. Well, recently there have been fewer and fewer places to roll and fewer things to merge with and acquire. Not to mention that the Chinese now control most of the money and are investing it enthusiastically in American car brands… as in Hummer and reportedly Jeep. This has left many of the venture capitalists with all that capital and no place to venture with it.
Not to fear in the high roller world of money on the sidelines!
According to a news spot on CNBC recently, the venture capitalists are now financing litigation. Yes, you read correctly. Big money is now financing lawsuits betting on the courts and juries to make outrageous awards from which the investors skim a take straight off the top. CNBC stopped short of saying the big money is financing frivolous litigation but just barely short of making that accusation. One of the wonderful things about America is that anybody can sue anybody over almost anything and over time they usually do. And with the increasingly egregious awards being doled out by judges and courts it was only a matter of time that the sidelined money, as in venture capitalists, got in the game.
What the venture vultures are finding intriguing are multi billion dollar awards going to states in tobacco settlements and class actions against pharmaceutical companies, asbestos manufacturers and other social wrongdoers with extremely deep pockets. And after having financed many of the mergers and acquisitions that have created these corporate behemoths, now the venture vultures are turning on the very behemoths they created by financing litigation against them. Isn’t that a clever means of playing both the over and under?
Legal firms have previously been the primary financiers of litigation by taking on contingency cases whereby they foot the bill until they win a settlement and then siphon off their fees from the award before the aggrieved ever gets a penny. In that they assumed the risk and most of expense to bring the litigation and nurture it through the legal system, often times for many years, they can certainly make the case that fees, usually a percentage of the award, are their justified return on investment.
What this new phenomenon of vulture capitalism assures is that now there is an entirely new and expanded pool of money to finance litigation that in the past was too risky and potentially too prolonged for even very wealthy law firms to take on. This is a gold mine for trial lawyers, marginally aggrieved groups and almost anybody else that can make the case that there is a reasonable chance of a financial windfall if only they can hold on long enough to get the payday. What it also means is that those who are truly wronged such as tobacco users, asbestos and other unsafe product victims will get even smaller percentages of awards as the financing arm and the legal arm will both get their cut before the victim. Essentially victims increasingly become the pawn.
Hospital corporations, nursing home conglomerates, pharmaceuticals companies, of course tobacco companies and other sources of potential wrongs should be shaking in their shoes one would think. Or maybe not. They will simply be passing along the costs of the increasing likelihood that they will be spending more time in court and paying ever increasinging awards from not only warranted litigation but a new field of marginal litigations with a new sugar daddy footing the bill. And you thought health care costs were going be contained. The vulture capitalists have made sure that there is little chance of that.
I have to think the founding fathers had a more benevolent vision of the judicial process than to become a revenue stream for investment bankers which is what this new strategy illustrates. So you see, there really is no such thing as money on the sidelines. It just changes the games it plays.
John Kliebenstein is circulation and operations manager of the Brownwood Bulletin. His column appears on Wednesdays. E-mail him at email@example.com.