Hedge funds have been speculating on lawsuits, a new form of financial engineering that some business interests say encourages wasteful courtroom warfare. Now two top Republican senators—Chuck Grassley of Iowa and John Cornyn of Texas—have a few questions of their own. The lawmakers announced a move to start “examining the impact of third-party litigation financing is having on civil litigation.” Their starting point is not one of enthusiasm.

“Litigation speculation is expanding at an alarming rate,” Grassley, chairman of the Senate Judiciary Committee, said in a joint statement released Thursday. “And yet, because the existence and terms of these agreements lack transparency, the impact they are having on our civil justice system is not fully known.”

Grassley and Cornyn, the Senate majority whip, sent letters to three of the largest commercial litigation finance firms—Burford Capital, Bentham IMF, and Juridica Investments—requesting details on the cases they finance, the terms of their investments, and their returns. Burford in particular has helped move lawsuit finance into the corporate mainstream. While its most notorious, and least successful, investment supported a class-action lawsuit against Chevron in Ecuador, Burford mainly finances suits initiated by major companies and handled by big corporate law firms such as Simpson Thacher & Bartlett, King & Spalding, and Latham & Watkins.

Burford and its competitors invest in lawsuits in exchange for a share of any recovery. The U.S. Chamber of Commerce, for one, has derided this activity as “a sophisticated scheme for gambling on litigation” that allegedly fuels abusive suits and creates conflicts of interest. Litigation finance firms counter that they enable legitimate claims that otherwise would sit dormant on the books of their corporate clients.

With new attention from the Senate, and the prospect of public hearings, which sometimes follow from committee inquiries, we may learn more about the pros and cons of spreading investments in litigation.

Topics Lawsuits Mergers & Acquisitions