Financing The Cost Of The Asset Recovery Process - Part 1

Article by Martin Kenney

& Elizabeth

O'Brien

Financing Litigation Generally

The cost of large scale asset recovery inquiries and

associated litigation is a factor which often deters victims of

economic crime from pursuing their rights, preferring instead

to abandon any hope for recovery. It is ironic that in civil

suits against those who have misappropriated assets, the key to

success for the wrongdoer is often access to large amounts of

ill-gotten laundered cash with which to pay for the very best

in legal and asset protection services that money can buy.

Thus, wrongdoers use their victims' resources to intimidate

them into going away.

In many asset location and recovery litigations, the process

is very expensive because:

the assets misappropriated have typically been

transferred through several jurisdictions, many of them

offshore financial centres, before arriving in their current

physical location;

there is usually a need for work to be carried out by

forensic accountants, investigators and lawyers in a number

of jurisdictions;

the defendants are often able to use the misappropriated

monies to hire experienced defence legal teams. Even in

circumstances where they find 'their' assets tied up

pursuant to a Mareva injunction or other similar

restraining order, there will, absent exceptional

circumstances, be a generous provision or allowance to enable

the defendant to mount a defence ;

the litigation will typically need to be conducted in a

number of jurisdictions simultaneously, and appropriate use

will need to be made of interim reliefs such as freezing and

tracing orders and their equivalents; and

courts may require the posting of substantial security to

support cross-undertakings in damages or costs, particularly

in the case of litigants from overseas, to permit interim

relief such as freezing injunctions to stay in place pending

a final end to the litigation.

The cost of mounting a legal action for the recovery of

assets may be divided into legal costs, court fees and the

costs of evidence gathering by forensic accountants and

investigators. In smaller cases, lawyers may agree with their

client not to be paid until the outcome of the case is known,

but few firms of lawyers are likely to be able to take on

larger cases, on a one-off basis, without being paid by their

clients on an ongoing basis, given the investment of human and

financial capital required.

In addition, the costs incurred in respect of forensic

accountants and investigators are likely to be incurred at the

beginning of any inquiry, when the evidence and assets are

being sought. Again these professionals will expect payment

early on either from the client or from the instructing lawyer,

which is an additional reason why a funding mechanism should be

put in place at the outset. 1

Larger firms of lawyers, forensic accountants and other

professionals may be prepared to carry out some initial work,

particularly of an investigative nature, in exchange for a

fixed or reduced fee, in order to begin to ascertain whether

their client's case has any reasonable prospect of success

- if they believe that the case may ultimately prove to

be profitable. However, the extent of such initial work is

likely to be limited. There are very few firms which specialize

in the field.

The market for the finance of concealed asset claims is

inefficient because of the absence of a wide acceptance or

understanding that something meaningful can be done to manage

the risks of the asset recovery process. Thus, capital is

scarce. The failure of most asset recovery projects is due to

their under-capitalization with the right people and the right

amount of money. The authors' experience shows that the

risks can be managed - and very substantial assets

recovered - if sufficient resources are committed to a

project.

Assuming initial investigations show that assets of a

meaningful value are capable of being discovered to levy

against, it will be necessary to put in place funding to bring

the investigation and litigation processes through to

completion. Methods of funding asset recovery actions include

the following:

conditional fees (U.K.);

contingent fees (U.S. and Canada);

after the event litigation costs insurance (U.K.);

venture capital / third party investment; and

sale of shares in a company that owns the right to

litigate.

There are many examples that show that a sustained

commitment to establishing the facts and the whereabouts of the

proceeds of a fraud has taken what, at the beginning, looked

like a very difficult situation, into one that was righted.

With the right team of people and commitment from a claim

holder or his backers, each stake-holder in the case can take

confidence in the process.

The recovery of concealed assets involves the need to manage

risk. Experience has taught the authors the following about

risk:

Investigations conducted in a factually tangled and

difficult environment, and directed towards a person who has

conducted himself (or herself) in a dishonest and harmful

manner over a long period, represent very complex and dynamic

work.

To be effective, the work must be undertaken within a

fluid and lateral-thinking environment. Restated, the work

must move laterally around the dishonest obligor's

strengths. Such an obligor expects to see a conventional or

orthodox approach - devoid of imagination, sustained

financial commitment and the unexpected. The rigours of

budgetary projections for this type of work are not applied

easily. However, breaking an inquiry down into elements and

phases helps to establish sign posts and decision points to

manage risk.

The quantum of the cost of the process is not a function

of the measure of value of the obligation sought to be

enforced, or the economic size of the problem - once

the amount of value 'handled' by the subject exceeds,

say, $10 million. Thus, the cost of pursuing an inquiry

involving the apparent mis-management or misappropriation of

$10 million is often roughly the same, in absolute terms, as

the cost of pursuing a US$100 million one.

In general terms, as more capital is spent on the

process, the risk associated with a complete failure in the

investigation declines. In other words, with each step, there

is ordinarily greater access to objective fact with which to

support moving forward to the next step. The process of

mitigating the risk of a total failure in the inquiry is thus

incremental.

The cost of locating $10- to $100 million of wealth most

usually ranges between $250,000 and $2.5 million. Most of the

capital that is required to recover substantial value is not

spent on the critically important 'finding' and

'attribution' of concealed wealth part of the process

(which is the most speculative aspect). Rather, the most

substantial resources are spent in the recovery litigation

that follows from the freezing of value. Seen in this light,

risk is a prism. Looking into the prism of risk from the

beginning of a concealed asset case, most analysts experience

fear and concern - as it is hard to discern where we

are going and how we are going to get there. Thus, the cost

of finding and attributing the assets (so as to ready them

for the pre-emptive freeze), may look to some to be a foolish

and highly speculative wager. However, once the initial

phases have been completed, that prism of risk is

flipped-over onto it head. To the inexperienced analyst, it

is as if the risk profile of the process moves from the

highly speculative to the highly rational, on the sudden. The

day of execution of pre-emptive asset freezing orders granted

worldwide - freezing, say, $100 million of value is,

objectively, a transforming event. Risk has now moved to a

point where all who are involved can more readily measure the

probability of success.

Thus, where it once looked daunting to spend $2 million

of capital to locate and be in a position to pre-emptively

preserve $100 million of concealed wealth - all who are

involved in the process can say that it is rational to spend

upwards of $5- or $6 million in litigation costs to complete

the process of obtaining a judgment and liquidating the value

thus frozen.

However, although the date of execution of pre-emptive

relief to freeze concealed wealth is, to a non-expert in the

field, a sudden and transforming event to the risk profile of

the case; to those who understand how results are achieved in

our work, it is accepted that the process of managing risk is

truly an incremental one -that the big result is built

on a multitude of minor ones flowing out of a long series of

sequential steps.

There exists an inefficient market for 'distressed'

claims, judgments and debts. Claims fall into the

'distressed' category when, in part, it would appear

that assets have been misappropriated by fraud, and concealed

from the claim holder.

The market for this type of claim is inefficient

because:

those who own and value such claims lack an appropriate

multi-jurisdictional, critical analytical framework, for

properly discerning their value. Restated, those who are

responsible for concluding that a claim is effectively

unenforceable have, as a general rule, little or no learning

in multi-jurisdictional asset location, arrest and recovery.

Such claim...