Litigation finance firm Lake Whillans is in expansion mode.
Fresh off announcing the hire of Wachtell, Lipton Rosen & Katz associate Garrett Ordower, the firm’s founder Lee Drucker said he plans to add another lawyer from a “Wachtell esque” law firm in the next three months and has closed a $50 million investment from the University of Michigan, to create a fund of about $150 million.
Now he’s in the process of another investment round that should close by summer, he said.
“We produce strong returns that are largely uncorrelated to the broader economy,” said Drucker of why university endowments and pension funds invest in the firm’s business of betting on lawsuits.
Lake Whillans, founded in early 2013, focuses on financing litigation involving breach of contract, breach of fiduciary duty and trade secrets claims and steers clear from more complex disputes, such as intellectual property, antitrust and whistleblower suits.
This is so that the firm’s four full-time staff and two strategic advisors can easily assess the merits of a case.
“I think that patent is a highly specialized area of law and qui tam whistlebower cases are just a total black box; it’s hard to have a handle on what’s going on,” said Drucker. “We like to ground our understanding in something that makes sense, where there’s a bedrock of good guy versus bad guy. We want to be the white knight and the group that’s helping the underdog.”
In joining Lake Whillans, Ordower will help the fund’s staff underwrite such cases. His start date is May 1.
According to his LinkedIn bio, Ordower was an associate at Wachtell since 2012. He clerked in the United States Court of Appeals for the Second Circuit in 2011 and before that, in the U.S. District Court for the Northern District of Illinois. He studied journalism in college and got a job as a staff writer at the Daily Herald in 2003, before deciding to go to law school at the University of Chicago in 2007.
On Thursday, Big Law Business used the occasion to catch up with Drucker about his business, as well as his views of how the market for litigation finance is evolving. The following interview has been edited for brevity and clarity.
Big Law Business: So you announced a new hire today. How did this come about?
Drucker: We are pretty busy so we needed some more folks. And Garrett is someone I’ve known for a very long time, since probably 18. We went to college together. He is a friend of mine and obviously has been very successful and we talk a lot about business. And over the years I think it became apparent that he had an interest in what I was doing and I would always love to work with him. He’s one of the most talented people I know. As we are getting more busy, we needed somebody and it was getting to the point in his career where he was able to make the jump, and it happened.
Big Law Business: You’ve been doing this for how long now?
Drucker: In early 2013 we launched Lake Whillans. I had worked in litigation finance previously and my first blush with it was in 2008, actually. When I worked for, during a JD/ MBA at NYU, and was hired by a partner at Latham & Watkins. He had reached a mandatory retirement age and had a great rolodex and wanted to start a business and took me on and wanted me to write a business plan. And one of the business plans I wrote was around litigation finance. And that partner went on to be the founder of Burford about a year and a half after I worked with him.
What I saw then and that I continue to see today is an inefficient market. It’s inefficient almost by design. You have, on the one hand, businesses and claim holders who have a line item that appears on their budget out of the clear blue sky, in the form of litigation fees and expenses, which can be substantial. But you often have companies whose underlying business has been damaged by the counter party, so their ability to pay that line item has been impaired, not to mention, the incentives not to spend money on legal expenses. So you have a real need for capital. And then on the other hand, you have an inability of capital to flow to these claim holders and businesses and the people who understand the business best — lawyers — are really limited in their ability to put capital into the system. First and foremost, they are prohibited under the legal rules of providing capital to a claim holder. To the extent a party needs support, the lawyers can’t provide that capital. To the extent they are allowed to provide resources in contingency fees and pay for expenses, they are really limited in a way that no other business is limited. Lawyers can’t split fees with non-lawyers, and what that means is that they can’t sell equity. The only way to finance and invest in a legal claim is taking money out of their own salary or raising debt, which is quite draconian. What I saw and what I see is a need for capital and I see litigation finance is a solution to that problem.
Big Law Business: So how do you provide capital?
Drucker: Most typically, what we are doing is providing capital to the claim holder in return for a portion of the proceeds. If a company needs $5 million to litigate against bad guys and $2 million to support their business, we’ll give them $5 million for X percent of the results of the legal claims.
Big Law Business: How do you determine which cases to invest in?
Drucker: We have a lot of top legal practitioners. We are only investing in cases where there is robust documentary evidence that demonstrates a good guy over a bad guy. We are looking at cases where there are lots of contemporaneous documents, emails, contracts, court transcripts, board minutes and we are reading all of that. In a case that’s further along, we’ll read depositions, court transcripts and expert testimony, so we’ll have a firm handle on one, what happened, and two, the application of the law to the facts.
Big Law Business: So that must take up most of your time.
Drucker: Yep, that’s definitely most of what we do.
Big Law Business: Where are you seeing your business come from? Is it from law firms or plaintiffs directly?
Drucker: It’s both. Sometimes together. Sometimes the claim holder will go to the law firm and say, ‘I really want you to represent me,’ and the law firm says, ‘Here’s my charge,’ and the client says, ‘That’s too much.’ And the firm will say, ‘Go talk to litigation funders’ and these are the firms we know. Sometimes it’s the law firm reaching out to us directly and sometimes it’s the claim holder calling us before a lawyer. They say, ‘I know this will be expensive and I don’t know which law firm is best.’ It runs the gamut of situations.
The type of people who are reaching out to us are generally going to be your AmLaw 200 firms, your high end litigation boutiques or claim holders that are in substantial businesses. A lot of the companies we fund are venture backed companies or private equity backed companies; some smaller companies, but often small-ish to medium-sized businesses are our bread and butter. We have been reached out to by some Fortune 100 companies, but the majority is five- to 50-people companies.
Big Law Business: And where is all your money coming from?
Drucker: University endowments, pension funds. We are structured as a hedge fund, so the normal categories. You are catching us in the middle of a round right now. It should close by the end of the summer. We just closed the first investment in a new fund. It will be a $50 million check from the University of Michigan and this fund will be about $150 million.
Big Law Business: What is the fund-to-investor relationship?
Drucker: They give us money and we get paid a management fee every quarter and then we invest their money and we get returns. All of those returns go to Michigan and we keep 20 percent of the profits.
Big Law Business: What value do they see in this?
Drucker: It’s a solid investment for them. We produce strong returns that are largely uncorrelated to the broader economy. So if they are a university endowment, their job is to get returns for their university and they see this as a lucrative investment opportunity.
Big Law Business: How do you view your position in the litigation finance market? You also have some competitors.
Drucker: I think there is a lot of overlap between [Lake Whillans, Burford and Bentham IMF]. Realistically, that is who I view as our peer group. We are a little different in two ways. One is, I think we are more focused. We do not do what probably makes up the bulk of their portfolio. We don’t invest in patent disputes. They both invest in patent disputes. We don’t do qui tam or whistleblower cases. And we don’t do mass torts. We have never done an antitrust case. We focus on breach of contract, trade secret misappropriation and breach of fiduciary duty claims, that are grounded in kindergarten morality. ‘You promised to do something and you didn’t do it.’ ‘You acknowledged something is mine and you took it.’ Pretty simple stuff. And that is really our focus.
We also have a smaller and more nimble team. When you call us, your first call is to the ultimate decision maker on whether it’s a go or no go.
Big Law Business: Why do you have the focus that you do?
Drucker: I think that patent is a highly specialized area of law. Antitrust is highly specialized and qui tam whistleblower cases are just a total black box. It’s hard to have a handle on what’s going on. I just don’t think we want to be involved in that kind of stuff. They aren’t easy to understand. We like to ground our understanding in something that makes sense, where there’s a bedrock of good guy versus bad guy. We want to be the white knight and the group that’s helping the underdog.
Big Law Business: Other litigation finance firms have struggled and failed entirely. What lessons would you take from those firms and how do you ensure the success of your business?
Drucker: The more investments you make, the more potential money you can make. But I think people get swept up in that a little bit. And there is a concern of how much money they are investing. For us, it’s about focusing on dollars coming back and not dollars going out. We are willing to leave money on the table and not go into areas we aren’t comfortable in. Other folks are trying to do anything. We try to be conservative, so I think that’s number one. And number two is, we try to be good partners. We are in this business for the long run and we aren’t trying to get rich quick. I think we are taking the long view on everything and sometimes that means not doing something that maximizes dollars today, but continues to build a reputation of being a good partner. I can’t say specifics about what happened with other folks, but that’s our view.
Big Law Business: It wasn’t too long ago that the litigation finance industry came under a microscope when news surfaced that Peter Thiel bankrolled Hulk Hogan’s lawsuit against Gawker. Did that effect your business?
Drucker: It actually was really beneficial to us because it raised the profile of litigation finance. Most people still have never heard of it. For my life, I’ve been doing this for almost 10 years, and so to me, it’s like, this is the biggest industry in the world. I recognize, though, that probably 95 percent of Americans have never heard of this industry in their life. There was a lot of negative press around it, but ultimately it made people curious about what it was. The naysayers can be naysayers, but for every one, we’ll have a convert.
Big Law Business: What did you make of the criticisms?
Drucker: A lot of the outcry was that this will lead to the rich controlling the legal system. But it’s like, news flash: The rich does control the legal system! This provides a little leveling of the playing field. If you bar it, only the rich will access the court systems. There is a right way to do it and a wrong way to do it and we are really proud of the investments we have made, so hopefully the people take the time to drill down and see the nuance and what our practice is about.
Big Law Business: It seemed like Thiel was an outlier.
Drucker: What he did wasn’t a business. What he did I don’t even know if he got a return on it. He wasn’t a litigation funder. He was a guy with a grudge. To call it an outlier almost implies that it’s the same thing, but it’s not the same thing. It’s like comparing a private equity company to a guy who hates somebody else who is running a restaurant, and then opens one next to him just to put him out of business. Is that private equity? No. That’s a guy with a grudge. He wanted to bankrupt a company. I have no desire to bankrupt a company. A lot of the companies [that are defendants in Lake Whillans-backed litigation] have good employees. And they happen to screw someone over and they should compensate them. And that’s all we want, is to have business relationships to work out the way they are supposed to work out and not let deceitful and more powerful groups take advantage of whoever they want. It’s a totally different animal.
Big Law Business: What are the boundaries you have to respect as litigation unfolds? What’s to prevent you from looking over the shoulders of the lawyers handling the case and chirping about how you think it should be litigated?
Drucker: For the vast majority of our cases, and by that I mean every investment we made except one, the claim holder has full discretion for strategy of the settlement. It’s on our website and it’s part of our ethics. We aren’t going to use draconian terms where if you don’t do what we say, something bad will happen to you. It’s that we are going to build something and embark on a journey and for us, we want to make sure the claim holders are good. But once we determine they are, they are running the show and we’ll structure the agreement so they can make whatever decision they want.
The one time we did it, it was a claim holder who has a software business. They were developing new products and seeing venture capital. We said the case is really good, it’s pretty big. We need $2 million for litigation fees and expenses, but you also are looking for $2 million to build new software. We said, ‘What if we gave you $4 million, monetizing the larger piece of the case — two to this, two to that — and now that we have monetized so much, you have effectively exited. We will need settlement control if you want us to do that. That was a big [leap of] faith for them. That is a jurisdiction by jurisdiction determination. Some you can’t do that, and others you can. It only makes sense when you are monetizing a large portion of the claims that the claim holders have effectively exited. That is a rare case for us.
Big Law Business: Which case was that?
Drucker: It’s not public unfortunately.
Big Law Business: There are some critics who say litigation finance relationships should be disclosed in the course of litigation. What’s your take on that?
Drucker: Our view is that I would love nothing better than to [disclose]… it would help our business and it would help people’s perspective of litigation finance. The only thing we don’t want to happen is to hurt the underlying claim by us being revealed. The claim holder shouldn’t suffer because they need to have financing. So have whatever disclosure you want, but also limit the side shows that go into how we fund the case. All that should be off limits.
Big Law Business: So you’re afraid it would give the opposing party an additional thing to litigate.
Drucker: Right. And drive up costs. The courts have enough going on that they don’t need to get into this side show. You know the litigation funder has a case and that is all you need to know. You don’t need to know how we do our jobs. That seems irrelevant to the facts of the case. As long as that’s off limits, let’s disclose away and focus on who is right and who is wrong.