Prosecutors investigate companies offering plaintiffs advance liquidity
Federal prosecutors are investigating the rapidly growing activities of finance companies providing cash advances to plaintiffs in personal injury and other lawsuits, according to five attorneys briefed on the investigation.
Dozens of companies are offering money to plaintiffs who are in desperate need of the money and don’t want to wait to collect any settlements or damages they might receive in their lawsuits. Critics of the practice say that advances are the equivalent of payday loans because their high annual interest rates – up to 100% – can trap recipients in worsening debt cycles.
Industry recently moved to tap into an anticipated wave of lawsuits alleging sexual harassment in the workplace.
In recent months, federal prosecutors in Manhattan have sent subpoenas to finance companies and other industry players, said the five attorneys, who were not authorized to speak publicly about the investigation. .
They said prosecutors were seeking information about the business relationship between the cash advance companies and trial attorneys who sometimes refer their clients to the companies. They said prosecutors appeared to be investigating whether there were any formal financial agreements between the parties, which could be interpreted as illegal bribes.
Many cash advance companies – some of them founded by personal injury attorneys – rely on other attorneys to send them financially unsuspecting clients waiting to collect legal settlements.
It’s not uncommon for companies to woo lawyers with lavish gift baskets and party invitations. In 2013, a former co-owner of one of these companies pleaded guilty in federal court engage in a bribe system with a brokerage firm that recruited litigants looking for cash advances before they were paid.
Dawn Dearden, spokesperson for the US attorney’s office in Manhattan, declined to comment.
Lawyers declined to name any of the parties who had received subpoenas. They said the investigation appeared to be in its early stages and it was not clear whether charges would ever be laid.
Hedge funds and private equity firms have invested money in the industry, attracted by its large profits. Some of the finance companies allow high net worth investors to participate in the action through online fundraising platforms. The settlement advance industry is an attractive area of investigation for prosecutors, in part because of its rapid growth.
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Businesses have gone beyond simple cash advances. Some now offer financing, at high interest rates, for the surgery of plaintiffs who have been injured in accidents and who are suing for damages.
The industry argues that it provides a crucial service, allowing customers to pay for basic expenses and resist potentially more attractive settlements instead of automatically accepting defendants’ initial offers.
The industry argues that advances are technically not loans – money is only repaid if the plaintiff obtains a settlement or jury award – and therefore is exempt from state usury laws. Companies say high interest rates are needed to cover the certainty that some funds will never be repaid.
The best-known part of the litigation finance industry – providing money to fund complex, long-running commercial litigation – does not appear to be under scrutiny by prosecutors.
Selvyn Seidel, founder and chairman of Fulbrook Capital Management, a company that advises commercial litigation finance companies, said an investigation into certain aspects of the business was overdue. He said some cash advance companies took advantage of unsuspecting consumers.
“The backers of this industry, some are very good and some are very bad,” Mr. Seidel said. “They have a vulnerable audience. They are poor and desperate, and it is a recipe for disaster.
A handful of states have imposed caps on interest rates on cash advances. New York state lawmakers have introduced similar legislation.
Last year, the Consumer Financial Protection Bureau and the New York Attorney General sued RD Legal, a New Jersey firm, claiming it took advantage of former NFL players who expected to receive money as part of the league’s historic concussion settlement. Authorities said RD Legal trapped players “into costly advances on settlement payments.” RD Legal disputes the case.
A representative for RD Legal said the company had not received a subpoena from Manhattan prosecutors.
Representatives and lawyers for several finance companies said they were not aware of the investigation.