Shadowy foreign financial interests are profiting off our legal system

OPINION – A loophole in federal and state financial laws allow for sanctioned Russian oligarchs and Vladimir Putin allies to make money off lawsuits filed in our court system.

Through a little known and understood investment instrument called “lawsuit financing,” foreign actors are manipulating our legal system for massive profits.

The idea is simple: a foreign actor – sometimes a sovereign wealth fund or a wealthy investor – loans a large sum of money to a law firm to cover litigation costs in return for a large portion of the lawsuit’s potential payout, or to use the litigation to push another exploitive agenda.

Most US loans and banking products are heavily regulated by state and federal governments and, therefore, less vulnerable to abuses. However, the act of financing lawsuits against American companies is mostly unregulated. Lawsuit financing largely occurs in the shadows, without transparency or accountability.  At present, lawsuit financing is not subject to basic regulations that apply to other types of lending done in California.

Because of the lack of accountability, lawsuit financing has become a vehicle for foreign interests to engage in unscrupulous activities. For example, a March 2024 Bloomberg Law investigation revealed that sanctioned Russian oligarchs utilized lawsuit financing to bypass U.S. sanctions.

This isn’t just a one-off occurrence. The lawsuit financing industry is exploding. A 2022 U.S. Government Accountability Office report highlighted that commercial lawsuit financing is now a $15 billion dollar industry that is growing rapidly. There are also reports of foreign actors increasingly using lawsuit financing to conduct patent trolling or steal trade secrets of U.S. companies.

The absence of regulation means that we have no means to even identify which foreign actors are active in this state, nor do we have the tools to address bad actors (like Russian oligarchs). There is nothing to stop other bad actors, like international criminal organizations, from exploiting our state’s legal system, draining financial resources from legitimate claimants, and driving up costs for California consumers.

In order to protect Californians and provide the type of transparency our residents expect and deserve, we must bring lawsuit financing out of the shadows and start to regulate it like any other risky financial product.

My bill, AB 743, would require any firm engaged in commercial lawsuit financing in California to obtain a license from the Department of Financial Protection and Innovation (DFPI). To obtain that license, a lawsuit financier would have to maintain a surety bond with the state, which protects consumers that might suffer losses or damages because of the interference of these firms in litigation.

AB 743 would allow civil penalties for willful violations, providing an enforcement tool to ensure compliance and deter bad actors from evading licensure and oversight, similar to what is already required of other financial sectors.

Sometimes big problems have simple solutions. Requiring a license is a simple but important solution to the growing problem posed by illicit foreign actors financing lawsuits. AB 743 will help bring lawsuit financing out of the shadows and into the light.

Assemblymember Michelle Rodriguez (D-Ontario) represents the 53^rd Assembly District.