Investors Should Be Wary Of Mass Tort Litigation Schemes

In recent years, personal injury lawyers have reported being pursued by litigation financiers offering tens or even hundreds of millions of dollars to buy a piece of their mass torts dockets. This is because investing in mass tort litigation is the latest get-rich-quick investment idea. With this investment scheme, investors put money into a docket of mass torts cases after the defendant’s liability has already been established. It is said that the investors can earn as much as 25 percent interest on its capital.

The reality of investing in mass tort litigation is not so simple. In most cases, the mass tort would have to generate massive amounts of money for the investors to get the returns they were promised and there is no guarantee that this will happen. Several firms focused on mass tort litigation have found themselves in trouble when the cases they invested in did not generate the returns promised.

One notable case that reflects this problem is a case that was recently filed by the Securities and Exchange Commission in federal court in Los Angeles against an outfit called Prometheus Law. Prometheus consisted of a Michigan-licensed tax lawyer, a Washington State-based legal marketer and several dozen sales agents who took in about $11.7 million from more than 250 small investors to invest in mass tort litigation. Some of the investors reported that they were promised that Prometheus would double, triple or even quadruple the money they invested.

According to investors, the plan was for Prometheus to partner with plaintiffs’ firms to bring claims on behalf of the clients it found through its legal marketing. In return for finding the clients, Prometheus would receive one-third of the legal fees, typically a little more than 10 percent of the total settlement. Investors were guaranteed spectacular returns, 100 or 125 percent in 24 months, or even more for a longer-term investment, according to the SEC’s complaint.

To satisfy its contracts, Prometheus would need to be generating mass tort claims worth at least $212 million. According to the fraud filing, the SEC claimed that Prometheus did become counsel to 2,300 personal injury clients, of whom 700 filed claims. The total value of settled claims in cases generated by Prometheus was about $91,000, meaning that Prometheus took in less than $10,000 in revenue. Prometheus needed its cases to generate $106 million just to break even with investors.

When the first round of contracts came due, Prometheus didn’t have revenue from settlements to pay out. Instead, the company’s principals James Catipay and David Aldrich admitted under oath that they used new investor money to pay old investors, effectively turning their company into a Ponzi scheme. California opened an investigation into Prometheus’ alleged sale of unregistered securities in June 2014. Even still, Aldrich and Catipay continued to sell the contracts. According to the SEC’s complaint, they spent only about a third of the investors’ money on looking for tort plaintiffs and spent most of the money on themselves. The SEC is seeking the freezing of assets, the disgorgement of ill-gotten gains and civil penalties.

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