Could investor fraud actions be the next great success story of litigation funding?
Action Fraud has reported that, between September 2019 and September 2020, they received over 17,000 reports of investment fraud, amounting to £657.4m in reported losses (a 28% increase from the same period the previous year).
Of course not all frauds during this period will have been discovered and reported to Action Fraud, so the true figure is likely to be much larger. Indeed the Police Foundation, the UK's policing think tank, has recently estimated that pension scams alone had a value of around £4 billion in 2018.
In part this upsurge in fraud is due to the internet and the ease with which scammers can obtain data and target their victims (both individuals and businesses). Statistics will no doubt increase still further in the aftermath of the pandemic: history has repeatedly shown that fraud statistics tend to rise during economic downturns, as more and more frauds come out in the wash due to failed investment schemes and the investigations and insolvency processes that follow.
Fraud is also increasingly becoming a focus of media coverage and the attention of the general public. In part this is due to high-profile news items, such as the widespread fraud on the government's furlough scheme. However it is also because, sadly, fraud is increasingly becoming part and parcel of our daily lives. No doubt many readers will at some point have felt perturbed by the bombardment of their inboxes and mobile devices with a diverse range of scams: phishing, boiler rooms, cloned firm frauds, Ponzi schemes, pyramid schemes, invoice hijacking, sales of non-existent or counterfeit products, and identity theft, to name but a few. For many defrauded investors, their first instinct will be to contact the police, but an insightful recent article in the Financial Times references data that only one in 500 economic crimes results in a criminal prosecution. The author concludes:
“Increasingly, online investment fraud looks like a new breed of crime that has somehow turned punishment into a remote occupational hazard. Its growth will continue until the balance of risk and reward is reset.”
Apart from the police, the other third parties upon whom victims have traditionally relied are insolvency practitioners and the regulatory authorities. Each of these routes has its limitations though, as further explained here, and in many cases the investors' best option may be to take advantage of economies of scale by forming a group, aggregating the value of their claims and pursuing them in the civil courts.
Historically it has been extremely difficult for defrauded investors to do this. The reasons are complex, but perhaps the most fundamental is that the logistical challenges of organising a group, agreeing a litigation strategy and financing a group action used to be insuperable, or at least sufficiently daunting to deter most investors.
We expect that this will change in the coming months or years and that we will see more and more mass fraud claims in the English civil courts. There are essentially four reasons for this.
First, the financing of group actions is increasingly being facilitated by the ever-growing litigation funding industry. It will often be the case that victims of fraud will want to pursue claims against the fraudsters, but will understandably be unwilling to 'throw good money after bad'; third party funding allows them to have it both ways.
Of course, a concern for any commercial litigation funder will be that fraudsters have a propensity to 'judgment-proof' themselves by dissipating their assets. However, there are good reasons why English Courts are a favoured forum for victims of fraud, not least the fact that they can often obtain and enforce pre-action worldwide freezing orders and thus shield assets before the fraudsters are even aware they are about to be sued. For further details, see here.
Secondly, a number of different procedures are available to large claimants group when suing in the English Courts, as further explained here. Whilst there is scope for further development in this area – for example via legislation introducing further 'opt-out' procedures, as has happened in some other countries such as the US, Canada, Australia and the Netherlands – claimant groups in England nevertheless have a flexible menu of procedural options to choose from, depending on the specific needs of the case.
Thirdly, many of the logistical challenges associated with group actions can be overcome with technology. In short, the use of specialised technology allows claimant groups to be formed and actions to be pursued to settlement or trial much more quickly, efficiently and cheaply than the conventional processes used by most law firms.
Disputed.io are at the forefront in this area. They have developed FinLegal, a product which standardises the funding request process and which helps to match the right law firm with the right funder. They also offer CaseFunnel, a specialised online platform with numerous features including automated onboarding processes, case management tools and workflow allocation programmes, all of which enable law firms to administer group actions much more efficiently (and therefore cheaply) than traditional methods.
Fourthly, the law firms who specialise in this area have become more accustomed to using the sort of technology provided by Disputed.io. They have also developed other tried and tested methods of increasing the efficiency and decreasing the cost of the mass claims administration process. These include for example the formation steering committees with authority to act on behalf of all investors, instead of taking instructions on every issue from each client individually (which is unworkable in cases involving very large claimant populations).
However, whilst group litigation has become reasonably well-established in other areas (e.g. competition, data protection and financial misselling), it is still a relatively uncommon occurrence in the civil fraud world. We expect this to change. Whilst it will always be difficult to fund low-value claims, mass fraud actions are not uncommonly worth tens or even hundreds of millions of pounds. We view it as inevitable that litigation funders will seize on this investment opportunity.
Equally, we predict that defrauded investors who are pessimistic about the chances of a criminal prosecution or regulatory investigation, or who are concerned that they will receive pennies in the pound out of any insolvency process, will increasingly turn to civil claims as a means of taking the recovery of their losses into their own hands.
As always, each case will turn on its facts. For any civil asset recovery strategy to succeed, a meritorious claim supported by credible evidence and a sound enforcement strategy will inevitably be required. Success will also require a real team effort, i.e. a committed funder, a galvanised investor group, a well-informed steering committee, a skilled and determined legal team, and an innovative technology provider. Often it will also require assistance from other specialists, such as asset investigators or forensic accountants.
With the right case and the right team, though, we see no reason why mass investment fraud claims could not become commonplace in the English civil courts. Indeed, this may increasingly be viewed as investors' only realistic chance of obtaining justice, unless there are substantial overhauls to the ambit and resourcing of the policing and regulatory investigation of fraud.
Commercial litigation funders will play a critical role in making this change happening, and we are optimistic that they will do so. Indeed we think this may well be the next great success for the litigation funding industry.
Link to the Pinsent Masons article here.
