A heroic Australian judge recently held Standard & Poors liable for negligently assigning a triple-A rating (i.e., risk-free) to a security that was, in fact, fairly risky. That security was bought by several Australian municipalities, which bought in with the understanding that their investments were as close to risk-free as investments get. (Definitionally, this is what an AAA rating means.) Turns out, the securities did not perform as “expected,” and the municipalities went on to lose a lot of money. That the judge found S&P liable is a good thing, and deserving of a story all-to-itself.
Another related story is how these financially poor Australian municipalities were able to pay for a massive lawsuit against a financial powerhouse. Turns out, they… financed it! From another Felix Salmon article:
…all of the legal fees were paid by a litigation funder called IMF (Australia), which will take a cut of any proceeds. They write:
“Litigation finance is a critical mechanism to enable cases to be brought and litigated against large corporations, banks and other powerful institutions, often by small and mid-sized companies and entities.
"The Australian Federal Court’s finding yesterday — in favor of local municipalities — that S&P’s AAA ratings were “misleading and deceptive” could never have been achieved without litigation funding support from IMF (Australia), Bentham’s parent.”
The availability of this type of financing for lawsuits is a public good; it diminishes the ability of deep-pocketed litigants to use procedure to push around smaller parties who have legitimate claims, and generally levels the playing field. Oddly, litigation finance is far more popular overseas than in America, though my Civil Procedure professor helps run a fund.
Legal risk-sharing is just getting off the ground. Market-based mechanisms like litigation finance funds and insurance pools make a lot of sense. The next step is building more rigorous, quantitative assessment tools that take advantage of the massive amounts of available legal data. Someone who figures that out is going to become very rich.