Money Stuff: There’s a Stock Exchange for Lawsuits

Two things that Americans, and Money Stuff, love are financial capitalism and litigation. An important mechanism of American life is that, if someone does something bad to you, that automatically creates an asset: If I punch you in the face, or post mean things about you on the internet, or poison your town’s drinking water, you become the owner of a financial asset, and I incur an offsetting liability. Because you can sue me, you probably will, and your lawsuit might result in you getting money from me. [1]

How much is the asset worth? There are two approaches to answering that question:

1. We love litigation, and the obvious answer to the question is “sue me and find out.” You file a lawsuit, we go to court, we have a trial, you win, the judge awards you damages, I appeal, I lose, the judgment is finalized, you collect the damages, and the amount you collect is, say, $100. (Or we settle somewhere along the way.) Your litigation asset has matured into $100 in cash. It is reasonable to assume that, at the beginning — when I punched you or whatever — the asset was worth some lesser amount, call it $50, that is, $100 discounted by the time and expense and risk that you would incur in suing me and going to trial and collecting damages. If, the morning after I punch you, you go to a lawyer and say “how much is this black eye worth,” she will probably say something like “you have a strong case and I expect we’ll probably recover $100,” and you could ask her some questions about risk and timing and expense and rationally discount her answer back to $50. [2]
2. We love financial capitalism, and the other obvious answer to the question is “an asset is worth what someone will pay you for it.” If I punch you in the face, you should go out and find an investor who will buy your claim from you: The investor will give you $50 in cash now, and will pay for a lawyer to sue me, and eventually after trials and appeals and collections and everything, you will be awarded $100, which you will turn over to the investor who owns your claim. 

Traditionally the first approach was the only approach — selling lawsuits was historically frowned upon — but we really do love financial capitalism and that situation couldn’t last. Now “litigation finance” is a big business, and a big asset class; plaintiffs and law firms get money upfront from investors in exchange for a share of their possible eventual winnings. One way to analyze this is that it is expensive but socially valuable for class-action lawyers to bring mass tort cases (I poisoned your town’s drinking water, I invented OxyContin, etc.), and selling off a portion of the prospective recovery is a way for them to finance their cases, remedy injustice and deter wrongdoing. Another way to analyze it is, look, I got punched in the face, I have an asset, markets ought to be complete, why shouldn’t I be able to sell my asset?

(A third way to analyze it is in terms of “uncorrelated returns,” which are also widely beloved. Your chances of winning a lawsuit and recovering a lot of money from me do not seem like they would be highly correlated to the stock market, so an investor will be excited to pay for your claim to get an asset that will not necessarily go down if the market crashes.)

I’m a little bit kidding about being punched in the face, which is too small-stakes for litigation finance, but in mass torts and business disputes litigation finance is a growing asset class. And markets tend toward completeness and tokenization and all-to-all electronic trading, so obviously in the fullness of time you should expect lawsuit claims to trade on an electronic exchange so you can buy and sell them in your Robinhood app or whatever. 

Here’s a press release:

The JurisTrade Platform soft-launched last week with over $70 million in litigation funding opportunities in single cases, funding mass tort dockets and law firm refinancing. ...

The JurisTrade Litigation Asset Marketplace ("JurisTrade') provides a transparent electronic platform which facilitates both primary funding opportunities in litigation finance, as well secondary sales of such interests.

The potential market for litigation finance ranges in the several $100s billions, of which only $30 billion is currently funded. JurisTrade is designed to unlock this large unmet demand through its liquid and transparent marketplace.

The litigation finance ecosystem has been clamoring for years for this type of market solution. Similarly to many other major asset classes, JurisTrade was built on a foundation of industry standardization, transparency, and process streamlining, which eliminates uncertainty and, thus, attracts liquidity for litigation finance, a bona fide uncorrelated asset class.

Clients of JurisTrade include institutions, law firms, litigation finance funds, and family offices.

JurisTrade's Phase I rollout includes nine diverse investment opportunities including a high-profile single case, a judgment monetization case, a law firm debt refinancing case, and several mass action-related cases. An OTC service desk is being offered to assist our clients in negotiating terms and structuring all manners of trades and vehicles, among other things. Other market features, technology, and analytics will be offered soon.

It is fun to imagine what a truly complete and liquid market in litigation claims would look like. [3] Like, as soon as I punched you in the face, you could take a picture of your black eye, upload it to your brokerage app, and sell your claim in minutes. Or more broadly what if there were public real-time market prices for every lawsuit? (Or at least, for some mass tort lawsuits and high-profile commercial disputes?) Why bother with the trial? [4]  “I see our lawsuit is trading at a market capitalization of $15 million, want to settle for that right now?”

Readers keep asking me about this, and I don’t know the answer, so I suppose it must be a good question: Why did Endeavor Group Holdings Inc.’s stock trade above $27.50 all last week? Why did it close on Friday at $29.22? Last April, Endeavor announced that it would be taken private by Silver Lake (its majority shareholder) for $27.50 per share in cash. Three weeks ago, it announced that the deal would close on March 24, today, as agreed. Today it announced that, in fact, the deal closed. If you bought stock for $29.22 on Friday, you got $27.50 today, exactly as Endeavor told you you would. Why’d you pay $29.22?

We talked a couple of weeks ago about the controversy around this deal: Endeavor’s biggest asset is a controlling stake in another public company called TKO Group Holdings Inc., and TKO’s stock has traded up since the Endeavor deal was announced, so the implied value of Endeavor now seems to be a lot more than the $27.50 per share that Silver Lake is paying. You might rationally, as late as Friday, have thought “this company is worth much more than $27.50 per share, so I will pay more than that for it.” The only problem with that reasoning was that Endeavor had a binding agreement to be cashed out at $27.50 per share today, so your thoughts about its intrinsic value were not particularly relevant.

Unless? Here are some ways that paying $29.22 could have worked out [5] :

1. What we actually discussed a couple of weeks ago was that many Endeavor shareholders have plans to seek appraisal, where they go to a Delaware court and ask it to give them the fair value of the company, rather than the deal price. Appraisal these days often doesn’t work — a court says “ehh the deal price was fair” or even “actually the deal price was generous and you get less” — but here there’s a strong case that the value of the TKO stake is worth more than the deal price, so the appraisal arbitrageurs are hopeful. But this is not a reason to pay $29.22 on Friday, because appraisal has technical requirements and a big one is that you had to have held your stock continuously since, in this case, Feb. 4, to get appraisal. (Endeavor also warned shareholders about that weeks ago.) If the disgruntled shareholders win their appraisal case, they get more money, but shareholders who didn’t demand appraisal in time don’t. So even if Silver Lake ultimately has to pay $35, if you bought stock at $29.22 on Friday, you won’t get it. So this is not a very good reason to pay up on Friday.
2. There was always some possibility of compromise: Silver Lake could have offered to pay more money, in exchange for the disgruntled shareholders dropping their appraisal demands. The natural way to do this would be to increase the deal price and pay the extra money to everybody, including people who bought their shares at the last minute. Silver Lake was pretty adamant that it wouldn’t do this, and it didn’t, but perhaps if you bought stock on Friday you were betting that it would.
3. There are other sorts of lawsuits: You could bring a shareholder class action against Silver Lake and Endeavor for breaching their fiduciary duties to shareholders, and maybe a court would agree with you and force Silver Lake to pay more. This sort of lawsuit can lead to repricing the deal for everyone, including latecomers. [6]  Maybe you bought stock on Friday to bet on this sort of case.

I don’t know. My assumption was that No. 2 was the main explanation — people were hoping for a deal repricing before it closed — but that did not work out. 

We have talked a few times about 23andMe Holding Co. founder Anne Wojcicki’s efforts to take the company private. Basically she controls about half of the voting stock of the company, she has made a couple of non-binding offers to buy out the rest of the company for cash, and 23andMe’s board has said no. Actually, the first time, the whole board said “we quit” rather than trying to negotiate her up; she replaced them with a second board, which has also so far said no to her. To be fair to the board, the prices she was offering — most recently 41 cents per share — were not very inspiring; they were far below the company’s peak valuation, and they kept getting lower. To be fair to Wojcicki, yesterday the company filed for bankruptcy. Whoops! From its press release:

“After a thorough evaluation of strategic alternatives, we have determined that a court-supervised sale process is the best path forward to maximize the value of the business,” said Mark Jensen, Chair and member of the Special Committee of the Board of Directors. “We expect the court-supervised process will advance our efforts to address the operational and financial challenges we face, including further cost reductions and the resolution of legal and leasehold liabilities. We believe in the value of our people and our assets and hope that this process allows our mission of helping people access, understand and benefit from the human genome to live on for the benefit of customers and patients.” 

Wojcicki resigned as chief executive officer, and “said in a late Sunday post on X that she still aims to buy the company’s assets.” I assume that her next bid will come out to $0.00 per share, but that is not investment advice and the stock was trading at about $0.89 at noon today so who knows.

Meanwhile here is a press release from the attorney general of California urging customers to delete their genetic data from 23andMe, which is understandable — a bankrupt company that is selling itself for scrap to the highest bidder might not be the best repository of sensitive medical data — but which doesn’t seem all that helpful to the bankruptcy process. What assets are the bidders buying?

Far be it from me to give you illegal advice, but here is schematically how one might do insider trading. You need two people. One is an insider, who has somewhat regular access to nonpublic information about, say, mergers. (Perhaps the insider is an investment banker or lawyer.) The other is a trader, who buys stocks based on the insider’s information. The stocks go up, the trader profits, and she shares the profits with the insider.

The devil is in the details; here are the problems you need to solve:

1. The insider and the trader need to trust each other completely, since either one could ruin the other.
2. The insider and the trader can’t, though, have obvious deep ties to each other, because US authorities are actually good at piecing those ties together. Like you might trust your college roommate completely, but you cannot use your college roommate as an insider trading partner, because prosecutors will immediately put those facts together: They’ll see you trading in stocks X, Y and Z; they’ll see that your roommate’s firm worked on those deals; they’ll look at Facebook or the alumni directory or whatever and figure out that you were roommates. You need someone whom you trust completely, but whom no one knows you know. (Or, at least, there is no electronic evidence that you know them.)
3. You need to communicate in a way that leaves no electronic trace. “Insider called Trader minutes after the board meeting, the call lasted 2 minutes, and Trader made trades minutes later” is the sort of thing that prosecutors love to put in insider trading indictments. Don’t give them that!
4. You need to share the profits in a way that leaves no trace. (Classically, the trader hands the insider a bag of cash in a parking lot — without texting about where to meet.)

Those are the main things. [7] There is some tradecraft to be done. Perhaps people are doing it, and we never find out because they are really good, but most of the time we do find out because their tradecraft is shoddy. Still. Two of my favorite insider traders were some guys — an insider and a trader — who apparently never met each other, but who passed information through a middleman whom both of them knew independently. The insider met the middleman at a coffee shop to pass the information in person, and the middleman then met the trader “near the clock and information booth in Grand Central Terminal,” where he would pass on the information “by showing him a post-it note or napkin with the relevant ticker symbol.” And then the middleman “chewed up and sometimes even ate the note or napkin.” Somehow they got caught anyway, but, man, I love them.

Everyone else falls short. Here, for instance, is a Bloomberg News story about an alleged insider trading ring that met in person at a Paris restaurant, but (1) always the same restaurant and (2) they kept taking selfies there? What? Why?

In November 2016, day trader Eamma Safi asked his Facebook contact Zhi Ge to travel from Italy to meet him and an owner of the restaurant, Samy Khouadja. “Friday you will be welcomed to our world of business,” Safi told Ge in a message sent just ahead of their lunch, according to a US indictment made publicly available this month.

To mark the occasion, Safi — also known as “Yummy” — took a photo of the trio at Hexagone, a now shuttered classic French restaurant with a modern twist that was a short walk from the Place du Trocadéro and its views of the Eiffel Tower. In the picture Ge grins broadly with his companions. Behind him candlelit tables give way to vast mirrors and ornate feather frescoes. …

After the Paris lunch, Ge apparently got straight to work. Messages were exchanged with increased frequency and started to use language including “shoes” and “running,” which the US says was code for using disposable burner phones to communicate about insider trading.

Yeah no bad tradecraft all around.

I suppose that if you live in the US you have an obligation to report your Swiss bank accounts to the Internal Revenue Service, but one could imagine an exception for the Swiss executives of Swiss banks. Like, yeah, obviously this guy had a Swiss bank account?

Former UBS North America CEO Markus Rohrbasser agreed on Friday to pay more than $4.9 million to the IRS for failure to report his interest in foreign bank accounts over an 11-year span.

But, no, no exceptions.

Last week I mentioned the fact that, when I was an investment banker, my desk used to occasionally go in together to buy Mega Millions tickets, but I never had high hopes, because “is karmically impossible for a group of Goldman derivatives bankers to win the Mega Millions.” More than one reader emailed to remind me of the group of asset managers in Greenwich who won the $254 million Powerball jackpot in 2011. There is also the foreign exchange trader who won a “$1 million a year for life” scratch-off game in 2008 and told the New York Post “Is it going to materially change my life? No.” Two years later his sister also won $1 million in the lottery.

Meanwhile, the guys who bought every Lotto Texas ticket and won a big jackpot have ruined it for everyone else:

Last month, one Texas lottery winner got lucky, scoring an $83.5 million Lotto Texas jackpot. Maybe a little too lucky, in Lt. Gov. Dan Patrick’s opinion.

The winner purchased her ticket Feb. 17 through Jackpocket, a third-party lottery “courier” service that sells tickets to customers through an app online and processes them at a brick-and-mortar storefront called Winner’s Corner. …

“We’re not suggesting anything illegal, but this is not the way the lottery was designed to operate,” Patrick said in a video update to X. “It was designed to operate by someone coming into a store, giving someone cash, and getting a ticket back.” 

The lottery winner says she played by the rules.

“I literally spent $20. I didn't spend $26 million to run every single possible combination of numbers," she told the Austin-American Statesman. "If (the Lottery Commission) didn't do an investigation into the (April 2023 jackpot winner), that's on you. That's not my fault.”

Yes but somebody did spend $26 million to run every single possible combination, which puts the courier services in kind of a bad light.

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