Out-Law Analysis 5 min. read
16 Apr 2021, 9:04 am
Group litigation in the area of civil fraud has largely untapped potential and we expect to see litigation funders seize opportunities for growth over the course of the next couple of years.
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 in 2021
Investment fraud is a huge problem in the UK and it is getting bigger – at least 28% bigger, according to Action Fraud, the UK's national reporting centre for fraud and cyber crime, which looked at incidents of fraud between September 2019 and September 2020. In that time they received over 17,000 reports of investment fraud, amounting to £657.4 million in reported losses.
This statistic captures only reported crimes so is likely only the tip of the iceberg. If history is anything to go by, these statistics will increase further still as the impacts of the pandemic bite and other failed investment schemes come to light. As just one example, the Police Foundation, the UK's policing think tank, recently estimated that pension scams alone had a value of around £4 billion in 2018.
Fraud awareness is increasingly becoming a focus of media coverage and receiving the attention of the general public. In part this is due to high-profile news items such as the widespread fraud on the furlough scheme, which has recently prompted the government to invest £100m in a specialist taskforce. However, it is also because of the increasing prevalence of fraud, with diverse and increasingly sophisticated scams ranging from 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 the statistics are not good. According to an insightful recent article in the Financial Times, only one in 500 economic crimes results in a criminal prosecution. The report said: "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, 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 this has not been without its own set of problems. 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 could be daunting, if not insuperable.
Law firms have become more adept at utilising alternative practices to increase the efficiency and decrease the cost of the mass claims administration process
Our strong prediction is that, in the coming months and years, we will see more and more mass fraud claims in the English civil courts. There are essentially five reasons for this.
First, the financing of group actions is increasingly being facilitated by the ever more robust funding industry. Victims of fraud are understandably wary of 'throwing good money after bad', but third party funding enables them to shift the costs of pursuing a claim to a funder in return for a share of the proceeds.
Secondly, there are good reasons why the courts in England and Wales are a favoured destination for funders and claimants alike, not least that they can often obtain and enforce pre-action worldwide freezing orders and thus shield assets before the fraudsters can ‘judgment-proof' themselves by dissipating them.
Thirdly, a number of different procedures are available to large claimants group when suing in the English courts. 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.
Fourthly, 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, led by their two core products: FinLegal, which standardises and expedites the funding and ATE request process, matching the right law firm with the right funder; and CaseFunnel, a specialised online claimant management platform which simplifies and automates claimant qualification and onboarding processes and the management of all communication with claimants, fundamentally transforming the economics of administering group and volume claims compared with traditional methods.
Legaltech is transforming the economics of volume claims. Applying technology with litigation funding brings benefits not only to victims but to wider society.
Fifthly, law firms have become more adept at utilising alternative practices to increase the efficiency and decrease the cost of the mass claims administration process. These include, for example, the formation of 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 a very large number of members of the group.
Whilst litigators in the competition, data protection and mis-selling areas of group litigation have been quick to adopt these changes, civil fraud has, so far, lagged behind. We expect this to change as macro factors develop. 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 in 2021, turbo-charging claims which might otherwise never have made it to court and enabling justice to be done in the process. Done properly, this could be a real win-win for everyone concerned, apart from the fraudsters.
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, including where necessary a committed funder, a suitable technology provider, a galvanised investor group, a well-informed steering committee, a skilled and determined legal team, and various other specialists – such as asset investigators and forensic accountants.
Overall, though, we view group litigation in civil fraud as a, if not the, main growth opportunity for litigation funders in 2021/22. This area represents a potential great success story for litigation funders by opening up new investment opportunities and, most importantly, providing access to justice to the victims of fraud.
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