Investors are often excessively fearful of litigation. Investors are often afraid to touch companies facing high profile and/or complex litigation — because the surrounding publicity and seemingly opaque nature of that litigation leads to a view that the litigation liability itself is unquantifiable. Media reporting often increases the fear factor, making investment in a company’s capital structure seem unanalyzable and thus much too risky. We disagree.
Market punishment of a company often stems from robotic extrapolation of a single damages number. A company’s market cap can plunge solely and directly from a newly filed, highly publicized complaint or a large negative jury verdict. That decline often far exceeds the damages alleged or awarded by a single jury because of the immediate, sometimes robotic extrapolation of that single dollar number to all other claims versus the company. This often presents a unique opportunity to invest in the beaten-down company and benefit from the sharp dislocation between the market’s snap misperception of the litigation and over-punishment of the company and the more benign, much less costly resolution of that litigation later in time. We can lead the investor away from the market noise towards the litigation finish line.
We can help investors recognize and understand the twists, reversals, and delays involved in litigation. Investment opportunities stem from what corporate GCs and their outside litigators know — that lawsuits take many years to get to trial, complaints can get dismissed or have their claims and/or damages radically trimmed long before trial, and lawsuits typically settle before trial for a portion (sometimes a tiny fraction) of the original damages claimed. Massive, high-profile judge or jury verdicts can get reversed or significantly reduced by the trial judge or appellate courts and the appeals themselves can cause many years of delay. We project the timing and potential potholes/positive outcomes in the litigation.
A single large high-profile tort claim jury verdict can shake the market but rarely correlate to the price paid for the ultimate mass settlement of all tort claims. In mass tort litigation a single large jury verdict in a single trial does not typically relate at all to the much lower “per claim” and total cost that company will ultimately negotiate and pay to settle all the mass claims. Claims of various plaintiffs vary in terms of evidentiary strength, severity of illness, damages, and a host of other factors and thus have different valuations. Plaintiffs’ attorneys and most companies don’t want to litigate multiple claims for a decade. They generally want to resolve the claims when the stage is set to negotiate a reasonable mass deal, and the market rewards companies for the certainty accompanying that settlement. Isolated jury verdicts do not set the price for claimants in that mass settlement. We can point to precedent settlements reflecting this large disparity.
Shotgun corporate punishment also presents opportunity. When a massive accident occurs and the facts are not yet known (as with the 2010 BP/Deepwater Horizon oil spill) the market often uses an initial shotgun approach to potential liability — punishing every company that might be held responsible regardless of its true role (perhaps benign or limited) and whether it will be indemnified by the parties ultimately held liable. Understanding the contractual relationships and limits of liability among all the players can present an opportunity to invest in and ride the stock bounce-back when and if companies are ultimately cleared of liability. We can quickly dig down to locate the companies which we believe should escape the punishment net.
The “edge” in evaluating litigation is often hiding in plain sight. Projecting litigation outcomes also depends on knowing the unique factors to look for, focus on and interpret as significant — whether it’s a particular pro-defense or pro-plaintiff tilt of a judge, or perhaps a leaning towards an attorney he/she knows from prior cases, good or bad legal precedent in a particular jurisdiction, the unique leanings of juries in one county vs juries in different counties just 5 miles away, or one party’s ultra-sensitivity to the market’s concerns about a case. Sometimes it can be a judge’s question or comment, or a party’s response during argument (captured in a transcript we will get but most others won’t know to ask for). The market, sell-side research and press are often unable to understand let alone shine a light on all possible “edge” factors — but a knowledgeable litigator can do so.
Almost every type of litigation against a company is like a “movie” plot that has previously played time and again over the years. Our combined litigator/investment perspective enables us to explain and project how these movies should end — potentially de-risking that litigation for interested investors.