Options for Funding Fraud Recovery Litigation

At the 2013 International Financial Crimes Investigators Conference hosted by the Toronto Police Fraud Squad this year, a speaker from TD Bank discussed the threshold loss numbers required before they would engage their external lawyers or instruct their internal counsel to pursue a recovery from a fraud loss. It is best that these numbers are not published for public consumption or passed along to the fraud schools run informally by inmates by our penal institutions, but suffice it to say the threshold numbers are surprisingly high. One of the primary reasons for this is that institutions such as banks and insurers operate on a purely economic cost-benefit model, and when cost estimates of litigation eclipse the estimated recovery, the loss is simply written off. Often little thought is given to the principle of retribution, or to seeking out creative fraud recovery funding as offered by some litigation boutiques.

The cost of litigation has increasingly become a topic of discussion in the legal industry. For example, in an article entitled “Skin in the Game” published in the June 2013 issue of Canadian Lawyer InHouse (written by Jennifer Brown), it was reported that:

Complex litigation has traditionally been viewed as a team sport largely waged by one external law firm’s roster of top litigators versus another. The battle was funded by the companies who engaged them and few asked many questions about how the job would get done. In some cases that’s still the way the game is played, but over the last few years, especially at banks and insurance companies, as the pressure has built to bring legal costs under control, corporate legal departments have been asking their external firms to come up with creative ideas to keep the bills more predictable. That means the team now involves in-house counsel to a far greater degree and they are making more decisions around the rules of engagement and how firms are ultimately compensated for the work they do and the playbooks they put forward.

Brown reports that RBC’s law group has been instituting creative ways to engage external counsel for complex litigation files. For example, when legal fees for a file are anticipated to cross a certain threshold, RBC requires that a RFP be circulated to its external lawyer list. Another option is seeking estimates for the various phases of the litigation. A third option is a risk-return model where firms are paid half their hourly rates on an on-going basis and then can make submissions for their full rates at the conclusion of the litigation after the recovery is completed. Obviously disbursements can be a major overhead cost in complex litigation matters, and often it is appropriate that disbursements be paid on an on-going basis as well, but only after approval is given by in-house counsel or the individual to whom reports are made.

While contingency retainers (such as those employed by the personal injury bar), are usually not appropriate in fraud recovery cases, innovative law firms with a higher risk threshold (operating under lower overheads in a boutique firm environment) may offer a deferred fee arrangement. Such arrangements allow an institutional client (such as TD mentioned above) to have a law firm review their files that they would otherwise write off to determine if the law firm will take on the risk of seeking a recovery. Under this arrangement the law firm carries their billable hours and the disbursements to the recovery, and takes their full fee from what is collected. If nothing is collected, nothing is billed. Under such an arrangement, the law firm has discretion to settle files on an economic basis. The client is on the hook in the event of adverse cost awards and is responsible for producing all its documents and for having its witnesses attend court or examinations to provide the evidence to support the case.

Thus far this article has focused on institutional clients. Similar arrangements can be considered for established corporations such as in the retail industry. For individuals and smaller less-established companies, partial deferred fee arrangements may be contemplated, requiring the client to pay the cost of researching and drafting a claim, and then switching the remainder of the claim to a deferred fee or fee for phase of litigation approach. This approach may be considered to protect a fraud victim from limitation period issues. In some cases, the risks related to recovery are so high that only a traditional fee for service arrangement is appropriate.

Whatever the arrangement, clients who are not familiar with the litigation process should be advised of limitation period issues – that they have two years to sue from the date of discovery of the loss or their claim is written off by statute. Further, clients who are not savvy with the litigation process should compare the hourly rates between law firms (large firms versus boutique firms), and inquire how many lawyers will be providing services to the file, as numerous lawyers on a file often inflates the legal invoice to the client. Fraud victims should be aware that fees that law firms may charge for similar quality legal work can vary drastically. The other major factor in controlling the escalating cost of litigation is a more pro-active bench as described by Justice Brown in York University v. Markicevic et al. (2013 CarswellOnt 8851), a topic more fully described in our blog post entitled Access to Justice and Dealing with Fraudster Obstruction Tactics.
At Investigation Counsel PC, we are open to discussing funding options for fraud victims. For further information, contact us at www.investigationcounsel.com.

Article by Norman Groot, LLB, CFE, CFI

About the Author:
Profile: Based on his police experience and his experience thereafter as a litigator, Norman has joined forces with other lawyers with police experience and created the law firm Investigation Counsel Professional Corporation.

Norman’s practice is focused on fraud recovery litigation for retailers, insurers, private companies and individuals who have incurred losses to rogue employees, officers or directors, or due to failed investments or contractual arrangements with ill intentioned third party service providers or others. Norman also provides Independent Supervising Solicitor (ISS) services for other law firms that obtain Anton Piller orders (civil search warrants). Norman’s practice also consists of representing police and private sector investigators in criminal, civil and regulatory actions.

Norman is counsel to the Canadian Association of Special Investigation Units, the Canadian Independent Adjusters Association and the Canadian Association of Private Investigators on fraud and investigation matters, and on the board of directors of the Association of Certified Forensic Investigators of Canada

Education: Norman was a police officer from 1985 to 1992. He graduated with distinction from Wilfrid Laurier University in Economics in 1995 and thereafter completed various programs with the Canadian Securities Commission. Norman completed his law degree at the University of Western Ontario Law School in 1998, articles at Fraser Beatty LLP in 1999 and was called to the Bar of Ontario in 2000. Norman obtained the Certified Fraud Examiner (CFE) designation in 2001 and the Certified Forensic Investigator (CFI) designation in 2012. From 2001 to 2006 Norman practiced law as an associate at McCague Peacock LLP. In 2007, Norman founded Investigation Counsel PC.

Publications and Speeches: In 2001, Norman authored the first text on Canadian law and private investigations, (Canadian Law and Private Investigations, Irwin Law Inc.). Norman is a sought after speaker who has provided numerous presentations and written numerous articles on fraud and investigation matters for various fraud and investigative associations, insurers, corporations and their service providers from coast to coast and internationally.

Professional and Business Affiliations: Canadian Bar Association, Bar Association of Ontario, Association of Certified Forensic Investigators, Association of Certified Fraud Examiners, Council of International Investigators, Council of Private Investigators, Canadian Association of Independent Adjusters, and the Canadian Association of Special Investigation Units.