Litigation Finance: The Next Hot Trend?

Litigation Finance: The Next Hot Trend?

If you’re a former Supreme Court clerk, the legal world is your oyster. In the words of one observer, “Supreme Court clerkships have become the Willy Wonka golden tickets of the legal profession. So many top-shelf opportunities within the law, such as tenure-track professorships and jobs in the SG’s office, [are] reserved for members of the Elect.”

If you work at a hedge fund, maybe after a stint at Goldman Sachs or a similarly elite investment bank, you’re the Wall Street version of a SCOTUS clerk — at the top of the field, but with way more money. There aren’t many Lawyerly Lairs out there that cost $60 million (the cost of hedge fund magnate Steve Cohen’s new Hamptons house).

What could lure four high-powered lawyers and hedge-fund types, including two former clerks to the all-powerful Justice Anthony Kennedy, to leave their current perches? How about the chance to earn the kind of money that would make a Supreme Court clerkship bonus look like a diner waitress’s tip?


A quartet of elite lawyers — a group that includes two former Kennedy clerks, two hedge fund alumni, a former general counsel to a major corporation, a former Gibson Dunn partner, and an ex-Goldman Sachs banker — have formed an enterprise to enter the growing field of litigation finance. Here’s a report from this morning by William Alden of DealBook:

Litigation finance, an obscure corner of Wall Street, is gaining more interest. A new firm, Gerchen Keller Capital, has raised $100 million to invest in high-stakes litigation between companies, becoming the latest investment shop to dive into the relatively new sector….

The prospect of double-digit returns has lured some prominent lawyers to set up litigation finance firms in recent years, bankrolling plaintiffs in exchange for a slice of the potential winnings. Some can invest in defendants as well, by advancing legal fees and then collecting a return if the case is successful. Such deals are not loans; if cases are not successful, the investors lose their capital.

Two of the large firms in the field, Burford, started in 2009, and Juridica Capital Management, started in 2007, have listed their funds in London. Two others run by former lawyers, BlackRobe Capital and Fulbrook Capital Management, began in 2011. In 2012, the litigation finance team at Credit Suisse left to form Parabellum Capital.

But the Gerchen Keller model differs from what’s currently out there: they’re going to focus on funding litigation brought by major companies against other major companies, as opposed to consumer or class-action cases brought against businesses. So it’s litigation finance with a twist, aimed at servicing large commercial enterprises as opposed to the little people. This may reduce some of the concerns expressed about litigation finance by groups like the U.S. Chamber of Commerce, which view traditional litigation finance as anti-business.

And Gerchen Keller will also provide financing to defendants as well as plaintiffs, as the founders explained to Alison Frankel of Thomson Reuters:

Here’s how [chief investment officer Ashley] Keller explained the model: Let’s say a major corporation wants to hire a top defense firm to handle a big case. The corporation offers an alternative fee deal under which the firm reduces its hourly rates but is awarded bonuses for good results. Some firms are reluctant to agree to such arrangements because they’re worried about cash flow to cover fixed overhead costs. So Gerchen Keller steps up and assumes some (but not all) of the law firm’s risk. The upside for the financier and its investors is in the bonuses the defendant has agreed to pay for good results; the upside for the defendant is being able to use the law firm of its choice under terms that reward efficiency. For what it’s worth, Keller has seen the model in action at Bartlit Beck, which pioneered the concept of incentive fees on the defense side. “This is a value-added service for law firms,” he said.

Who are the four men behind Gerchen Keller Capital? Readers, prepare yourself for résumé porn of the highest quality. From Leigh Jones of the National Law Journal:

  • Adam Gerchen, the company’s chief executive officer, was portfolio manager at hedge fund Alyeska Investment Group L.P. and an investment banker at Goldman, Sachs & Co. He earned his law degree at Harvard Law School.
  • Ashley Keller is chief investment officer who was an analyst at Alyeska and a partner at Bartlit Beck Herman Palenchar & Scott. He clerked for U.S. Supreme Court Anthony Kennedy and graduated from University of Chicago Law School.
  • Serving as chief underwriting officer is Travis Lenkner, former senior counsel at The Boeing Co. and former attorney at Gibson, Dunn & Crutcher. Lenkner, who graduated from University of Kansas School of Law, also clerked for Kennedy.
  • Terry Carlson, chairman of the investment committee, was general counsel at Synthes Inc. and was a partner at Gibson Dunn, where he established the firm’s Hong Kong office. He graduated from University of Michigan Law School.

Loyal readers of Above the Law may recall Travis Lenkner from the pages of Legal Eagle Wedding Watch. He married a fellow SCOTUS clerk, Erin Delaney, who was walked down the aisle by her former boss, Justice David Souter. Judge Guido Calabresi officiated, and Judge Brett Kavanaugh attended.

I spoke last week by phone with Messrs. Gerchen, Keller, and Lenker, to discuss Gerchen Keller Capital. Here are some (condensed and lightly edited) excerpts from our discussion.

ATL: You’re looking to work with large companies. Why wouldn’t these companies fund their own litigation?Ashley Keller: You’re certainly right that a lot of these clients have balance sheet capacity and could fund out of pocket. Notwithstanding their balance sheet capacities, there might be institutional constraints. If a company has a $5 billion claim, it will pursue it. But what if it has a $50 million or $100 million claim?

If you’re a general counsel, a lot of C-suite executives are viewing your office as a cost center. It’s not that easy to walk to the CFO’s office and ask for $5 million or $10 million to finance offensive litigation. That will immediately hit the P&L of the company and affect earnings per share, but the outcome is uncertain and contingent. We think a fair number of meritorious claims are being left on the table notwithstanding balance sheet capacity.

ATL: For your fund to succeed, you’ll have to pick the right cases. How do you assess the merits of a case?

Ashley Keller: You look at a case the way a contingency law firm would look at a case when doing due diligence at the threshold. You have a return threshold that is about your cost of capital. Then you draw out a decision tree to figure out what arguments you’ll face from the other side, figure out what the case might be worth, discount back to present value, and see if the amount hits your return threshold.

Depending on the point of time in the litigation, we’ll have more or less information available to us. For example, we’ll have more information if we come into a case after the close of discovery than if we come into a case pre-complaint. There’s no single pricing mechanism; it’s not formulaic.

ATL: How did the idea of going into litigation finance come to you? How did you all come together?

Ashley Keller: The idea first came up years ago, when Travis and I were clerking together at the Court in 2008. It came up again when Adam and I were working together at a hedge fund here in Chicago called Alyeska. Adam was in the risk arbitrage space, very accustomed to pricing binary events, which is not that different from pricing litigation outcomes. Adam and I started talking about this late last year while sitting together at Alyeska.

We thought that financing litigation could be appealing to investors. It offers attractive returns and exposure to an asset class that is uncorrelated with other asset classes. What the S&P 500 does has nothing to do with whether the Federal Circuit invalidates a software patent or Judge Robinson grants summary judgment.

So we put together marketing materials, went on the fundraising circuit, and got capital committed. We knew we’d need another top-flight person and brought Travis board.

ATL: Who are your investors? Are you still accepting investment?

Adam Gerchen: We’re structured like a private equity fund. We had a hard close of April 1, with capital committed for four years. We’re a limited partnership with about a dozen LPs, generally high-net-worth individuals with more of an institutional mindset.

ATL: How do you feel about leaving behind the practice of law? You have the kinds of résumés that could lead to high government posts or federal judgeships someday. Does moving away from practice concern you?

Ashley Keller: There is no Senate that would confirm me to anything in the conceivable future.

Travis Lenkner: I came from being in-house at Boeing, but Adam and Ashley had already left practice by going to Alyeska. I think what’s fun for me and for all of us is expanding into the finance space while also keeping a foot still planted on the legal side — working with law firms and companies, monitoring litigation, and being a strategic partner. We have a perspective that we can bring to bear to matters. All that is still there. Doing this just gives us the chance to work with even more lawyers and companies than we could have through practicing.

ATL: Thanks for taking the time to chat. Congrats and good luck on your exciting new venture!