The Lucrative Mass Torts Scam That Wasn’t

The lawsuit brought by financier Amir Shenaq against mass-torts law firm AkinMears has made the rounds of the tort reform blogs (e.g., SETexas Record, Daniel Fisher at Forbes, and Paul Barrett at Bloomberg), so I figured some plaintiff-side commentary was in order. The details of the lawsuit confirm what I’ve been saying for years: “Mass torts is not an area in which you want to dabble and start throwing around discounts. It’s work, it’s risky, and it can be very, very expensive.”

In essence, a former hedge fund executive filed suit against the law firm claiming that he was hired to raise millions of dollars in funding so that the firm could acquire thousands of transvaginal mesh lawsuits. He alleges that he brought in the funding (through his connections in the finance world), but, once he did, the firm fired him.

Shenaq’s complaint was filed publicly then sealed by the court. As Forbes recounts, the Complaint alleges:

“AkinMears is not run like a traditional plaintiff’s law office, and the Firm’s lawyers do not do the types of things that regular trial lawyers do,” like meet clients, file pleadings and motions, attend depositions “or, heaven forbid, try a lawsuit,” Shenaq claims in his suit. “Despite the fact that AkinMears’ lawyers do not have to dirty their hands with the mundane chores that come with actually practicing law,” the firm charges a 40% contingency fee “which is then divided in some fashion among the participants in its ever-shifting syndicate.”

And, of course, there’s also an allegation about the plaintiff’s lawyers buying themselves an interest in a private jet.

Now, the U.S. Chamber of Commerce has put its spin on the facts. According to Bloomberg:

The U.S. Chamber of Commerce has condemned both claim aggregation and litigation finance as likely to encourage frivolous and abusive lawsuits. “The allegation that a law firm used hedge fund money to buy and sell thousands of personal injury lawsuits shows plaintiffs have become little more than commodities,” says Lisa Rickard, president of the Chamber’s Institute for Legal Reform. “This case appears to be a new example of how litigation financing perverts the justice system and puts the interests of lawyers and financiers ahead of actual plaintiffs.”

It is more than a little hypocritical for the U.S. Chamber of Commerce to claim that trial lawyers are treating injured people like “commodities” when the U.S. Chamber of Commerce’s primary mission is to make the law treat injured people as if they were disposable and unworthy of fair compensation. Every single time a personal injury lawsuit of any sort has gone to the United States Supreme Court, the U.S. Chamber of Commerce has shown up to argue that the injured person should get nothing.

Indeed, if the massive corporations that make up the U.S. Chamber of Commerce wanted to ruin the mass torts bar, they could easily do so: those companies should pledge that, whenever they do something horrible like selling untested implants that rip apart women’s vaginal walls, or selling cars that kill their occupants, or selling drugs that give people heart attacks, they will immediately offer a fair global settlement for everyone affected. If those companies actually followed through with the pledge, there would be little need for mass torts lawyers, and no need for contingent fee agreements that charge between 33% and 40% of the plaintiff’s recovery.

Of course, that’s not going to happen any time soon: there’s too much money to be made by corporations that put short-term profits over safety and then lobbying the courts and the legislatures to take away victims’ rights to compensation. As long as big corporations hurt thousands of people and refuse to live up to their responsibilities, we will need mass torts lawyers to hold them accountable.

As things stand, mass torts work remains risky for lawyers in part because of the callous way that corporations will spend millions of dollars on litigation, no matter how wasteful or unreasonable, if they think it will bring down how much they pay to the people they hurt. Taking the allegations in the AkinMears suit on their face (bear in mind, at the moment they’re just allegations, and no court or jury has ever ruled on them), the suit confirms just how risky mass torts work is even for the biggest players in the field.

First, let’s look at the specifics of Shenaq’s claim. Shenaq isn’t a lawyer, he’s a financier. He claims he earned $1.4 million after working just four-and-a-half months, and he’s suing for an additional $4.2 million. And what did he do to earn that? As Forbes says, “AkinMears owed $40 million to a local litigation-finance firm that was charging it 24% interest,” and “Shenaq says he lowered AkinMears’ rate from 24% to 16%.” For comparison, the current “prime” interest rate — the rate banks use to lend money to their most-favored customers — is just 3.25%. Even corporate debt with a “Baa” rating, which Moody’s defines as “subject to moderate credit risk and as such may possess certain speculative characteristics,” has a rate of just 5.34%.

Thus, AkinMears was paying almost five-times the rate charged to “speculative” businesses, and Shenaq earned over a million dollars, and claims he was owed more, for bringing down to merely three-times the rate charged to “speculative” businesses. Truth is, mass torts law firms aren’t offered loans at the same rates that most small businesses are because banks know that mass torts work is incredibly risky.

Second, let’s look at the transvaginal mesh transaction that AkinMears was supposedly entering into:

At the same time as he was arranging the new loan, Shenaq says he negotiated transactions with Houston lawyer Fletch Trammel and Dallas lawyer Mazin Sbaiti, who he says was affiliated with four firms that called themselves Alpha Law. They ultimately agreed AkinMears would pay $40 million for 13,837 mesh cases. Shenaq estimated AkinMears could reap $130 milllion to $200 million in fees from the 14,000 cases, at $14,000 to $16,000 per case.

Initially, a lawyer can’t really ‘buy’ a lawsuit from another lawyer, and I doubt the AkinMears transaction (assuming the allegations are accurate) put it in those terms anyway. Clients have the right to choose whatever lawyer they want. A lawyer currently representing a client can recommend a client go to another law firm or bring on co-counsel, but a lawyer can’t just wholesale “buy” the representation. It seems to me the only way this transaction would work is if AkinMears was joining on as co-counsel and had set a specific value for the “quantum meruit”* claim that “Alpha Law” would have had on the cases, which would be neither illegal nor unethical, so long as the clients were properly informed and consent was obtained, where necessary.

For all the obsession among the tort reformers about the amount AkinMears “could reap,” no one has bothered to ask: why is Alpha Law selling its quantum meruit claims?

If, as Shenaq alleges, these cases are worth “$130 million to $200 million in fees,” then why on earth would Alpha Law sell its quantum meruit claims for a mere $40 million? Why wouldn’t Alpha Law just keep the cases and enjoy this supposed bonanza?

The answer is obvious: because Alpha Law doesn’t think the cases are worth that much. Despite the conclusion of the Bloomberg article that this is “Lucrative work, if you can swing it,” it seems Alpha Law came to the conclusion that its quantum meruit claims on these cases were worth no more than $2,890 per case, which is why it (allegedly) agreed to sell the claims for that much and get out of the transvaginal mesh litigation entirely.

One final thought. For all the hoopla about clients being treated as “commodities,” ask yourself a simple question: if you had a transvaginal case, would you rather be represented by a lawyer who thought your case was worth $10,000 and wanted to get out of it, or the lawyer who thought your case was worth at least $45,000 and who had obtained a $6 million line of credit for case expenses? Truth is, just like with pre-litigation referrals — another boogeyman of the tort reformers — this sort of transaction shows a healthy legal services market at work, with lawyers recommending to clients that they retain the services of lawyers who value the cases the most.

* A brief explanation of “quantum meruit:” once a client leaves the services of one contingent fee lawyer for another (whether because they accepted a recommendation, or because they simply discharged the prior lawyer), the former lawyer has a claim for the work they already did on the case, also known as “quantum meruit,” a fancy Latin phrase meaning, “the amount earned.”

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