Litigation finance and its intersection with law, capital markets

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James Koutoulas, co-founder of JurisTrade, brings a unique view to the intersection of finance, law, and technology. 

A hedge fund manager and securities lawyer, Koutoulas pioneered securitization of legal claims, structuring insured bonds and litigation index funds to make lawsuits investable for institutional capital. As lead counsel for 30,000 victims of the MF Global collapse, Koutoulas recovered $6.7 billion pro bono and solidified his reputation as a David vs. Goliath figure in modern finance. 

Through JurisTrade, the first institutional marketplace for litigation finance, Koutoulas is developing the securitization of legal claims; structuring insured bonds, litigation index funds, and private credit vehicles that make lawsuits investable for institutional capital. 

As managed service organizations (MSOs) attract hedge funds and litigation financiers, Koutoulas addressed how they could reshape law firm economics. 

“Private equity figured out that outsourcing anything that isn’t your core competency is the most efficient way to run a business a long time ago,” Koutoulas said. “Now formerly too proud to outsource knowledge workers of the highest caliber have caught on. We personally applied the MSO model on the hedge fund side of the business with Typhon Capital all the way back in 2008 enabling 16 different pods of portfolio managers to come in house and have their own funds but shared risk management, CFO, compliance, and asset raising and servicing resources.  

“We’ve extended the model into litigation finance with our JurisTrade secondary marketplace affiliate and Cerus Litigation Fund. Lawyers are notoriously bad at running businesses and understanding operational efficiencies so could benefit greatly from the model- if their egos will allow them to relinquish some control.” 

Koutoulas noted that the legal services field is changing rapidly, and that the advent of alternative business structures in Arizona and D.C. allowing non-lawyers to be partners is revolutionizing the space, as is AI. 

“LegalTech has started booming and could be the new FinTech in terms of VC demand,” said Koutoulas. 

Koutoulas spoke of how securitization and insurance backed structures can provide the predictability investors demand amid regulatory uncertainty. 

“These structures are also growing rapidly, and we have been very involved in both,” he said. “There’s an insatiable demand for private credit at the same time cracks are showing in a lot of existing investments. At the same time, litigation finance has incredible yields of 3x to 10x or higher in cases where liability is uncertain, and still in 30%+ IRR range for post settlement mass tort marketing. We have used those yields to Securitize interests on juristrade then purchase capital guarantees. 

“For example, one of our post settlement notes on a large mass arbitration has guaranteed principal, 8% a year guaranteed interest, and a potential additional 10% a year in preferred returns with incredible credit quality. There is nothing I’ve seen in the traditional private credit market that gets close to those risk adjusted returns.” 

Koutoulas addressed the risks of opaque funding arrangements, and what transparency standards are needed to protect claimants and investors. 

“Courts are to a large extent self-regulating in that baseless cases are dismissed and unless there is some kind of blood feud by a funder against a target, funders very rarely will light money on fire on cases that are not economically sound,” he said. “Only once have I seen a funded cases really go off the rails and that’s where the judge enabled a multiyear abuse of process by plaintiffs and ignored multiple violations of federal law by them. 

“The issue there, though, is a bad judge and the funding piece is irrelevant. I think by and large this disclosure issue is a red herring put out there by big insurance companies and Fortune 500 funded lobbyists to distract from the massive edge large tortfeasing defendants have in terms of both balance sheet and insurance coverage to help them crush plaintiffs that don’t have funding.” 

Koutoulas cited his personal experience as a 30-year-old who never took a class in bankruptcy and led the pro bono recovery of 6.7 billion of customers’ funds in the MF global bankruptcy. 

“There, with a staff of my 23 year old sister with an advertising degree learning to be a paralegal on the fly and Commodity broker John Roe working on legal research and DC advocacy, we managed to get a full recovery beating JP Morgan Chase, the trustee from Lehman Brothers, (Bill) Clinton’s FBI director, and of course Jon Corzine, former CEO of GS and governor and senator of NJ and Obamas biggest campaign donation bundlers,” Koutoulas said. 

“There’s not many people capable of pulling off such a feat, especially with only $167,000 in donations for support counsel and years of travel and doing something like that ages you massively so it is not sustainable. So, in similar cases without funding or a pro bono savior, 38,000 people would be out billions of dollars. 

“Put another way, people should be flipping the script and asking how many innocent victims would have their lives destroyed without litigation funding?”