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The Legal Strategy That Bankrupted Gawker Comes to Main Street

After Gawker's downfall, start-ups are bringing litigation finance to Main Street. The ramifications for investors and the legal system are huge.
Image: Hulk Hogan
Former professional wrestler Hulk Hogan and his attorney Seema Ghatnekar prepare to take a break just after the jury was handed Hogan's case against Gawker Media for deliberations on Friday, March 18, 2016, in St. Petersburg, Fla.Boyzell Hosey / Pool via AP

In the wake of's downfall, a host of start-ups are rushing to bring litigation finance to Main Street with a business model that could have far-reaching ramifications for both investors and the legal system.

Until the news broke that tech billionaire Peter Thiel was funding former pro wrestler Hulk Hogan’s suit against (now-defunct) gossip blog Gawker for outing him as gay nearly a decade ago, most people were unaware that third parties — traditionally, hedge funds — could bankroll a lawsuit against a person or business

As a result, start-ups in the field of litigation-finance investment have gained prominence, with a simple pitch to investors: Put up as little as $5,000 to fund lawsuits, and make money.

Image: Hulk Hogan
Former professional wrestler Hulk Hogan and his attorney Seema Ghatnekar prepare to take a break just after the jury was handed Hogan's case against Gawker Media for deliberations on Friday, March 18, 2016, in St. Petersburg, Fla.Boyzell Hosey / Pool via AP

An industry is born

Founders of these sites say their business model benefits investors because investing in lawsuits is decoupled from the broader market, meaning that economic downturns wouldn’t hurt their returns, and they argue that the field is still open enough for them to be very selective in the cases they take on.

“Historically, this would have been a nonstarter,” said Stephen Gillers, a professor at New York University School of Law. “There never would’ve been such a thing as litigation funding because the courts took the view and lawmakers took the view that the courts exist for the purpose solely for enabling people whose rights have been violated to get relief of some kind,” he said.

Over the past 15 or 20 years, though, hedge funds and venture capitalists have woken up to the idea that lawsuits can be lucrative, and have poured money into the cases themselves as well as a push for legitimizing their involvement.

It’s a position that makes strange bedfellows, pitting hedge funds and consumer advocates against groups like the U.S. Chamber of Commerce, which strongly objects to the practice.

“Plaintiffs who are in great need are often forced to settle for substantially less than their case is worth because they can’t hold out — and defendants know they can’t hold out,” Gillers said, so they’ll often use whatever legal delaying tactics they can to drag a case out.

“If the defendant knows a funder has put millions or hundreds of thousands of dollars in the case... and that an investment company, a savvy investor, has decided that the case has merit, that may lead to quicker settlement,” he said.

Picking targets

Most litigation-funding investment sites focus on either commercial suits — breach of contract and the like — or personal suits like civil-rights violation and injury cases. They engage in various ways of vetting the most likely prospects out of the hundreds of applicants that contact them.

“Our team’s been investing in legal claims since the late 90s, we have a tried and true underwriting process to vet these claims,” said Jay Greenberg, CEO and co-founder of, a litigation finance company for commercial cases.

There are three main criteria Greenberg said his company weighs when determining whether or not to fund a case. “The first thing we’re looking at is through the legal merits of the case. We’re also looking at the plaintiff’s counsel’s track record,” he said. The final aspect is the defendant’s creditworthiness, since winning a case against an insolvent defendant wouldn’t really be a victory in the sense that investors wouldn’t be able to get a return on their investment.

One firm looks at 3 factors when picking cases:1. Legal merits2. Plaintiff's counsel track record.3. Defendant's creditworthiness.

Some litigation-funding startups are betting that big data will help them find the cases most likely to be decided in their favor. Legalist, a Y Combinator startup, plans to lean on 15 million data points and algorithms to ferret out the cases with the best profit potential.

“All the people involved and the events in the case, all the motions that are filed can be tracked,” said Eva Shang, who was an incoming senior at Harvard University before dropping out to pursue Legalist. “What we’re trying to do is automate the process,” she said. Shang said Legalist also uses data like who the judge is and how many cases they have on their plate at the time.

“We’ve met with hundreds of personal injury and mass tort attorneys to survey the field for underwriting. We built financial models around it,” said Anoush Hakimi, CEO of, which focuses on civil rights, labor, injury and other personal cases. “For each specific type of case, we have various algorithms and formulas,” he said.

“For funders to be profitable, they need to do a good job of vetting,” said University of Iowa College of Law professor Maya Steinitz. This imperative that becomes even more important when funders are soliciting investments from other institutions and individuals to back the cases they choose.

“I think it may be possible to do some data crunching that would have some validity but I think the question of whether a lawsuit is likely to prevail really depends on the subject matter of the case,” she said. “Usually, lawsuits are a very unpredictable matter… The human factor is so great.”

Steinitz said that an over-reliance on big data also could be a handicap because many cases are settled before a case goes to trial, which means case-level data wouldn’t get at potentially illuminating pre-trial outcomes.

“There is always a strategic factor in litigation that can reduce the reliability of statistical analysis because you have to account for multiple possible outcomes depending on what the counter-party does,” Geoffrey Miller, a professor at New York University’s School of Law, pointed out via email. “It’s not easy to do, although I do think that more data can be of some help in increasing the reliability of projections about litigation outcomes,” he said.

Hakimi said that his firm has a perfect track record of investing in winning cases so far.

“It’s primarily a function of a huge inefficiency in the market,” he said. “There’s a huge demand and a short supply of capital… Right now, we’re very picky.”

Founders of these sites say they contribute value because they focus on a segment of the legal arena that the big litigation-investment hedge funds pass over because the individual cases are too small. “Those hedge funds that are out there are investing in cases where they can invest $3 million,” Greenberg said. LexShares, meanwhile, looks at cases with as little as $100,000 at stake.

“LexShares has really opened up this asset class,” Greenberg said. “It lets them access capital in a streamlined fashion.”

With growth comes qualms

Some experts are concerned that quality control could fall in the future as the field becomes more competitive, and could put individual investors at risk.

“There’s a lot of competition for the best cases today,” said Mitch Goldberg, president of ClientFirst Strategy. “This business needs constant funding because both the lawyers and the investors are laying out a lot of cash and potentially waiting a long time for a return.”

Greenberg acknowledged that this is something companies like his will have to deal with as as the market grows. “As the supply of capital increases, competition is going to grow… right now we have an industry that’s so wide-open I don’t see any significant change over the next three to five years,” he said.

Although these most of these sites say that they require individual investors to be accredited but the Securities and Exchange Commission, Goldberg said that doesn’t mean an investor has enough familiarity with the legal system to judge a case — even a pre-vetted one — on its merits.

“For the overwhelming majority of investors, this is way too risky. It’s based on a legal opinion,” Goldberg said. “Just because an individual is an accredited investor does not automatically mean that individual is a sophisticated investor.”