Advertisement
 
YOU ARE HERE: LAT HomeCollectionsSuits

An Option for All to Profit From Lawyers

INNOVATION / MICHAEL SCHRAGE

August 15, 1991|MICHAEL SCHRAGE

For the lawyers and investment bankers who made the Greed Decade possible, the '90s must feel like a bitter diet of humiliations. Unemployment cruelly stalks the corner offices. BMWs have been repossessed. Once-proud firms now scrap like rabid hyenas for any shred of stray business that might be tossed their way.

So America's brightest young lawyers, traders and financiers are being forced to abandon their cherished Master of the Universe dreams. No deals for them . Why, there aren't even enough decent bankruptcies to go around. What a tragic waste of superbly trained human capital!

If people really cared about America's global competitiveness in legal and financial services, they wouldn't let this happen. No sirree, they'd welcome an opportunity to put those agile minds to work to create a marketplace where America would have unquestioned pre-eminence. They'd quickly grasp the synergistic potential of a market that fused law and finance. Just as we now have vibrant global markets in pork bellies, soybeans and corporate equities, we should establish a marketplace in lawsuits.

America's lawyers would attract new clients and have a rich vein of new capital to mine. The investment bankers could make new fortunes underwriting lawsuits as well as selling options and futures on them. These sagging service sectors would be instantly revitalized without a single penny of government subsidy. That's more than Detroit, Silicon Valley or the Farm Belt can claim.

It's all very simple. Let's say that someone has a good malpractice claim against a doctor. Typically, a law firm would take that case on a contingency basis--that is, the firm would take the risk of representing the client in exchange for roughly a third of any award or settlement. If the case is lost, the lawyers get nothing.

In the market scenario, however, the law firm and its client could choose to treat the lawsuit just like a stock offering and invite investors to help defray the costs in exchange for a piece of the action. Let's call these stocks SUITS--for Securitized Units of Investment in Trial Situations. The firm would register its SUITS with the Securities and Exchange Commission and issue a prospectus offering the key details of the case. For example, for successfully argued malpractice cases of this type, the law firm typically receives jury awards of $3.5 million. Based on such information, the case would be "taken public" and people could buy and trade their SUITS depending upon how the case progressed. \o7 The ruling against the plaintiff's expert witness dropped the SUIT 50 cents to $2.75.\f7

Of course, $3.5 million is small potatoes. There's bound to be a more lucrative market in corporate lawsuits, where the General Electrics, Fujitsus and Exxons of the world are battling over tens or hundreds of millions of dollars. The potential awards are so large that you might even have institutional investors such as the pension funds buying in. With triple damages in some instances, we could make a killing. Just as the stock market has analysts, this litigation could spawn legal analysts to advise institutional investors when it's best to buy, sell or hold their SUITS.

You could have public offering or private placement SUITS. The Chicago exchanges might be delighted to set up a market in SUITS options and futures. Sell options on IBM stock; now sell options on IBM litigation. The cleverer investment banks might collaborate with attorneys to create, say, the Salomon Bros./Sullivan & Cromwell or the Morgan Stanley/Cravath, Swaine Litigation Index Funds--just as there's the S&P 500 and the Dow Jones industrial averages for stocks. You could create special baskets of litigation for investors who want to focus on antitrust cases or intellectual property lawsuits or employee discrimination suits.

Yes, there are ethical concerns and rules against "barratry"--the fomenting of frivolous suits--but lawyers and investment bankers have been known to overcome ethical qualms. Here's a vehicle that lets litigants raise capital and manage legal costs more efficiently. There is no inherent technical reason that SUITS couldn't be offered and traded just like any other properly registered financial instrument.

"There has been private investment in a few cases," points out Joseph W. Bartlett, a partner at Mayer, Brown & Platt and author of a leading securities text. "It's very uncommon because cases tend to be hard to value."

On the other hand, he notes, "some of the investors putting money into biotech companies these days are investing in lawsuits because pending litigation is the biggest asset some of these firms have."

Indeed, says Bartlett, "Patent lawsuits are where the real dollars are now."

Who knows? Maybe the real growth market will be selling shares in shareholder suits. Or selling shares in litigation surrounding failed shareholder suits. It doesn't matter; the possibilities and permutations are endless. That's why creating a marketplace in lawsuits would be bound to invigorate both the legal and investment banking professions.

Indeed, as business and litigation increasingly go global, the NYSE--the New York SUITS Exchange--would be the world capital of this exciting new merger of legal and financial expertise. Asia and Europe would rediscover the fearsome prowess of America's high-value-added service sector.

Sure, some will scoff and claim that these new financial instruments will undermine U.S. competitiveness. They'll say that SUITS get in the way of managing to create real value in the marketplace. They'll complain that it's all just "paper entrepreneurialism"--but isn't that what they said about the junk bond?

Advertisement
Los Angeles Times Articles
|
|
|