Scourge Of The Corporate Courtroom Goes Global
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IMF has been involved in several high-profile cases, including the largest class action in Australian history, launched against ANZ Bank over fees it charged more than 43,500 customers.
Litigation funder Bentham IMF Limited (IMF) is a metaphorical ambulance-chaser, unashamedly. The company funds legal action in exchange for a share of any judgment or settlement: if the litigant loses, it does not have to repay IMF. Capitalised at $320 million, Bentham IMF funds commercial/corporate litigation claims with a claim value of at least $5 million; arbitration claims with a claim value of at least $10 million; and large-scale personal injury claims.
Class-actions are a particular speciality, with banks, insurance companies, utilities and large corporates often in the sights. IMF’s business model is simple: it backs its judgement to get $3 back for every $1 it invests in its portfolio of court cases. It wins some, it loses some, but it believes wins will outweigh losses over the long term.
It seems to work. At June 30 2013, IMF had commenced and completed 149 cases since listing with an average investment of 2.3 years. 95 cases were settled, 14 were won, five were lost and there were 35 withdrawals. The litigation portfolio had generated revenue of $1.28 billion, with $849 million of that going to clients, and $429 million to IMF: of that, $148 million represented reimbursement of costs, and $281 million net revenue to IMF. The lost cases and withdrawn cases each consumed less than 1% of IMF’s revenue.
At the end of 2013, the value of the company’s case investment portfolio – IMF’s best-estimate of claim value of the 30 cases on hand – stood at $1.94 billion, up 29%.
Listed in October 2001, IMF’s reputation has grown around the world.
It backed the first legal action against S&P and ABN Amro in Australia, where the case it filed in the Federal Court marked the first time a ratings agency had faced trial over the AAA credit-rating assigned to complex structured credit investment products – widely cited as one of the factors that triggered the 2008 global financial crisis.
IMF funded a case brought by a group of Australian municipal councils, whose investment rules mandated only investments in high credit-rated products: the councils alleged that the credit derivatives they bought should never have been given AAA ratings, and that S&P and ABN Amro (now Royal Bank of Scotland) had deceived the investors.
In November 2012 the Federal Court found that S&P and ABN Amro had acted deceptively in issuing collateralised debt obligations (CDOs) worth $13 million to 13 Australian councils, the first such judgement in any jurisdiction. Bentham IMF made $8 million from the judgement, and is now funding a similar case in the Netherlands.
In March, IMF announced an expansion into Europe, establishing a joint venture with Elliott Management Corporation, a US-based investment advisory firm, and funds Elliott manages, to fund cases throughout Europe (in particular, the United Kingdom and the Netherlands). In return, IMF offered Elliott the opportunity to jointly fund cases in the Asia-Pacific region.
In May, IMF received the go-ahead for its first case in Hong Kong, with the High Court of Hong Kong granting leave to liquidators to enter into a funding agreement with IMF for a claim against an auditor.
IMF also operates in the USA through its wholly owned subsidiary Bentham Capital LLC. In recognition of the fact that it is growing in international scope, the company – which was formerly known as IMF Australia Limited – added ‘Bentham’ to its name at the end of last year: the company says the name ‘Bentham’ recognises the memory of Jeremy Bentham, the nineteenth century jurist and social reformer who was among the first proponents of litigation funding, as a means to open up access to litigation by people who could otherwise not afford it.
In the financial year 2012-13, IMF saw litigation income fall 62% to $27.6 million, and net profit drop 68% to $13.8 million. A fully franked dividend of 5 cents a share was paid, all of it from the second half.
Subsequently, for the half-year to December 2013, IMF generated total income from litigation contracts of $33.5 million, up 63%, and net profit from continuing operations of $9.13 million, also up 63%. Earnings per share rose by 47% to 6.7 cents a share, enabling a fully franked dividend of 5 cents a share to be paid, versus no interim dividend last year.
This year, IMF has been involved in several high-profile cases, including the largest class action in Australian history, launched against ANZ Bank over fees it charged more than 43,500 customers. ANZ was found to have illegally charged late payment fees to its customers. On the back of this judgement, IMF is foreshadowing a possible $440 million in case completions in the June half.
In conjunction with class-action specialist law firm Maurice Blackburn, IMF is currently advertising for aggrieved shareholders in Forge Group and Treasury Wine Estates. The Forge case seeks to claim compensation for losses incurred when Forge collapsed earlier this year.
Between 28 November 2013 and 29 January 2014 Forge announced three profit write-downs and earnings guidance downgrades relating mainly to problems with two power station contracts, which together led to a fall in the company’s market capitalisation of more than $300 million. In February, Forge announced that its lenders had withdrawn support for the company, and it had appointed administrators. The shareholder action will allege Forge knew or should have known about, and disclosed, problems with the power station contracts from early 2013.
The Treasury Wine Estates claim relates to the company’s actions in 2013, when it reported a 50% slump in net profit and warned that it would have to make write-downs of $160 million for 2012-13, to reduce excess inventories – including tipping down the drain $35 million worth of wine that its US business could not sell. Treasury’s share price fell by 22% in total after two damaging announcements in July and August. The claim will allege that Treasury knew – or ought to have known – that the write-downs were inevitable, and the ASX should have been informed earlier.
The company is also funding a Maurice Blackburn class action that seeks compensation for financial loss or damage caused by the negligent operation of Wivenhoe and Somerset dams in Queensland, in the lead-up to and during the January 2011 flood. The class action will allege that the negligence of the dam operators contributed significantly to the downstream flooding experienced in Brisbane, Ipswich and surrounding areas: it will cover people, businesses, charities, associations and other organisations that suffered financial loss or damage as a result of water inundation downstream of Wivenhoe Dam between 7 and 24 January 2011.
The key to IMF’s performance is picking its cases well – time will tell whether these cases, and the rest of the case portfolio, will work well for investors. The recent track record of the stock is good, but not great: its total return (capital gain plus dividends) for the last 12 months is 8.9%, over three years it is running at 12.1% a year, and over five years, IMF has returned 10.4% a year.
At the current share price of $1.955, the stock is trading on a prospective FY14 price/earnings (P/E) ratio of 20 times earnings, which implies that healthy growth is expected, and that is borne out by the consensus target price expected by analysts, who are looking for IMF to attain $2.26 – implying a discount of a touch over 13%. On top of this, the forecast 9 cent dividend for FY14 implies a fully franked yield of 4.6%. Investors have to be clear that they are backing IMF’s management to choose its cases well; which, arguably, it has demonstrated a strong track record of so doing. The international expansion ups the ante in terms of the importance of case choice, but it is also potentially a major growth path for IMF.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au