‘The dark side’ of litigation funding…

Virage Capital Management has some in the staid litigation finance industry worried that the barbarians are at the gates.

A Houston hedge fund has dug deep pockets staking lawyers to up-front money for lawsuits, but the firm’s sharp elbows has left a lot of bruises.

Virage Capital Management has quietly amassed more than $600 million in assets under management in less than decade in business in the still emerging field of litigation finance, SEC records show.

The firm’s high-risk, high-reward approach to its business—and its aggressive pursuit of debtors—has brought it unwelcome attention. Over the past year, Virage has become entangled in a series of public lawsuits: one set involving some $59 million in loans to the California law firm Pierce, Bainbridge, the other involving some $17 million in loans to Florida plaintiff’s lawyer Tim Howard.

Late last month, a Florida judge urged the state bar association to pull Howard’s license. His partner, Don Reinhard, settled fraud allegations with the SEC on April 8.

‘God forbid’

Virage General Counsel Burke McDavid declined comment for this story. In its long history of litigation, Virage doesn’t appear to have lost a case on the merits yet. That it’s even resorting to court, though, is something new to the old guard in the litigation funding industry.

“For something like 15 years I’ve never been sued or sued a client,” says Ralph Sutton, co- founder of New York-based Validity Finance, a litigation funder. “When you’re involved in litigation finance you try as hard as you can not to bring an arbitration or, God forbid, a lawsuit because that’s just really bad for business.”

Laina Hammond, Sutton’s Houston-based partner, says the litigation funding industry was started by lawyers, who are generally conservative in their approach to business. The arrival of hedge funds, who are much more open to risk, feels like a shift in the business culture, Hammond says.

“There are companies that are more comfortable doing deals that are closer to borderline ethics,” she tells me. “We’re always trying to make sure that on front end that we’re not going into to business with clients who we might have to sue at the back end.”

Two firms, many headaches

Pierce, Bainbridge was founded in 2017 and once represented such Trump Administration luminaries as former New York mayor Rudy Giuliani and former campaign aides Carter Page and George Papadopoulos. The firm had a spectacular rise and even more spectacular collapse, amid allegations of fraud, drug and sexual abuse.

Tim Howard represented dozens of former NFL players in their claims against the league’s $1 billion brain injury fund. In early October, Howard agreed to pay $386,000 and accept a lifetime ban from the financial services industry to settle SEC claims that he had bilked his clients out of their life savings in a pair of hedge funds he owned. The FBI has opened a probe of his businesses, a probe that may have contributed to the suicide of one of his longest aides.

Reinhard, Howard’s partner in the NFL case, was already doing his second stretch in prison when the SEC investigation began. In the late aughts, he was convicted of securities fraud. This time, he’s away for child abuse. He forced his girlfriend’s toddler to eat his own shit as a form of potty training.

‘The dark side’

“This is the dark side of litigation funding,” says J.B. Harris, a Florida personal injury lawyer locked in lawsuits with Virage over Howard’s cases. “They are unregulated, they charge usurious interest rates. If I were an investor, I would be outraged at the risks that they’ve taken.”

Founded in 2013 and led by former Enron public relations executive Edward Ondarza, Virage is already one of the largest litigation funders in the U.S. Rivals include Burford Capital Investment Management ($2.9 billion in assets under management), Longford Capital ($497.6 million in assets under management), and Omni Bridgeway ($396 million in assets), SEC records show.

Most of Virage’s rivals focus on one of three types of litigation financing: direct loans to clients (with the expectation that the lender will be paid back once an award comes in), portfolio loans to law firms (where risk is spread out among a series of cases so that one big award covers loses in several others), or direct (traditional loans to law firms along the lines of a venture capital infusion). It can be ethically dicey to deal with law firms because most state bar associations forbid lawyers from signing fee sharing agreements with non-lawyers.

Virage seems to work on a mash-up of all three approaches: when Pierce, Bainbridge broke up, for instance, Virage sent collection letters to the firm’s former partners—including, in one case, a partner who billed by the hour. Told that any lien on hourly rates would violate ethics rules, Virage backed off, records obtained by myers101.com show.

Virage’s approach certainly seems to have paid off. By 2015, it had already amassed $260 million in assets under management and was routinely returning 18 percent to 24 percent on its loans, Ondarza said at business roundtable in Houston that year. “I just think it’s a very exciting time,” he said.

‘Break the rules’

Virage started as an offshoot of another Houston company, LitCap. LitCap was created by trial lawyer Hugh Plummer and financier Britton Holland. It was a web site designed to link small- to mid-sized law firms up with funders. Plummer, Holland and Ondarza formed Virage as one of those funders, court and other public records show.

In the years since Enron’s collapse, Ondarza had tried his hand at a few smallish hedge and venture capital funds from his offices on Post Oak Boulevard. He brought in veteran trial lawyer Marty Shellist to help him evaluate cases. Shellist was followed by former J.P. Morgan hedge fund manager Bryan Patterson (who helped Virage obtain $40 million in startup capital from Morgan), now Virage’s COO. Former Kaufman, Rosin investment manager Harrison Blase joined Virage as CFO in 2014, and McDavid, who had been a partner with Akin, Gump in Moscow and in Texas, joined as general counsel and chief compliance officer in 2019.

The emerging company was apparently too ambitious for its old partners. In 2017, Plummer and Holland sued Virage and its executives. They claimed the Virage partners had steered the company away from the “mutually beneficial and ethically sound partnership” that had launched it.

“Instead, the Virage Entities and the Individual Defendants wanted to call the shots, break the rules, and force changes that would work to their exclusive benefit—often at the sacrifice of the ethical standards upon which LitCap and the Virage Entities had been founded,” the lawsuit claimed.

Plummer and Holland said that when they challenged Virage about its conduct, Shellist shrugged and said he and his fellows were merely following “the Golden Rule: He who has the gold makes the rules.”

On a motion from Virage, that suit was referred to arbitration and later settled, its terms kept secret, court records show.

Due diligence

It wasn’t the last time Virage would face questions about its methods. Consider its battle with Harris, the Florida plaintiff’s lawyer, currently pending in civil courts in Houston and Florida.

Howard and Reinhard signed up dozens of former football players, promising them (and Virage) big payouts from the NFL’s brain injury settlement fund. Instead, the SEC says, Howard and Reinhard swindled the stricken players out of millions, blowing the money on a hedge fund of their own, private real estate deals, an online university, and a new car.

Harris had initially teamed up with Howard on the NFL cases, but he says he left when he saw how fast Howard was spending Virage’s money and how little attention it seemed he was paying to his clients. Harris also claims that Howard used some of Harris’ cases against Big Tobacco to use as collateral for one of Howard’s Virage loans.

Given Howard’s disciplinary history—Florida Bar Association records show at least three separate ethical violations in 2003, 2005 and 2007—Harris says he wonders whether “Virage’s due diligence department was asleep at the switch.”

Pierce, Bainbridge

Virage’s biggest challenge may be its ongoing conflict with the law firm of Pierce, Bainbridge. Its loan package, said to be about $59 million, appears to be the largest financing Virage has ever put funneled.

Pierce, Bainbridge founder John Pierce, a self-styled right-wing maverick, brought in a series of high-profile clients. He also claimed to have a portfolio of lucrative cases, from airline crashes to defamation suits filed by former presidential candidate Tulsi Gabbard against Google and former Secretary of State Hillary Clinton.

“Pierce, Bainbridge is an interesting case because they were a brand-new firm,” Validity’s Sutton says. “A firm that collects a lot of people and aggregates them and who make litigation finance as their business model is certainly innovative, but they present a new risk profile.”

In 2019, just as the last of Virage’s millions were flowing in, though, a former partner at Pierce, Bainbridge filed an explosive lawsuit. It claimed that Pierce, Bainbridge had inflated the value of its cases.

Within months, nearly every attorney—including most of its name partners—had bailed on Pierce, Bainbridge.

“We probably got into some deals way too fast and took way too much money to fuel our unprecedented and exponential growth,” John Pierce told me in an email statement. “One lesson learned is how crucial it is to ensure the funder knows what they are doing from an underwriting standpoint and that they are operating in good faith.”

Bill Myers
Bill Myers
Bill Myers is a journalist, teacher, researcher, and investigator. Raised in a small town in Illinois, he has spent most of his life in newsrooms in Chicago, Cambodia and Washington, DC.

Content Copyright © Bill Myers

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