Investor Funding Lawsuit Against Carlyle Group
The Wall Street Journal recently published an article titled “Burned Carlyle Investor Backs Suit Against Private-Equity Firm.”
The plaintiff is Louis J.K.J. Reijtenbagh, a Dutch investor who lost $60 million investing a fund titled Carlyle Capital Corporation, Ltd. Carlyle Capital Corporation invested residential mortgage backed securities (MBS) tied to home mortgages in the United States. In 2008 when the housing market collapsed, Carlyle Group was forced to liquidate the fund.
In addition to Reijtenbagh and his affiliated companies suing Carlyle, there is also an entity representing the interests of other shareholders called Defendant Stichting Recovery CCC (“SRCCC”). A “stichting” is a corporate entity formed to pursue what would be considered a class action suit in the US. The formation of this entity speaks to the fear class action lawyers and firms have for litigation finance.
Usually a class action lawsuit is initiated by a class action law firm seeking to enrich themselves. Class action law firms fear litigation finance because plaintiffs can decide to fund a lawsuit and pay a firm by the hour or a fixed fee rather than a contingency fee. If litigation funding were to become more popular, then class action law firms could see less cases and lower fees. However, in this case the entity was dissolved.
According to The Wall Street Journal, Reijtenbagh is paying others to sue the private equity firm. While Reijtenbagh is funding the case, he is one of the plaintiffs. Typical commercial litigation finance involves a third party funder who takes on the risk of the case’s outcome in exchange for a portion of the settlement. Contrast that with Peter Thiel’s funding of Hulk Hogan’s lawsuit against Gawker. While Thiel was technically a third party, you could argue that he did have a vested interest in the case other than a monetary award. His goal may have been to take down the media outlet Gawker, which outed him as gay in 2007.
Apparently Reijtenbagh has funded several lawsuits already, so perhaps this isn’t his first investment that has gone awry. Over the years litigation finance has become its own asset class with sometimes lucrative returns. Critics have been quick to accuse litigation finance for promoting frivolous lawsuits. Third party funders want to make money and frivolous lawsuits don’t make money. We doubt third party funders would put money on a case for revenge, but a billionaire might.