The Model Contract and the Securities Laws Part III

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Q:  The draft model contract currently heavily restricts the transfer of the litigation proceed rights; transferees have to join the Agreement, for example. What regulations are implicated if transfer restrictions are eased, to facilitate secondary markets in litigation proceed rights?

A:  If Litigation Proceed Rights are transferable, federal and state regulation of securities and commodities exchanges and other trading platforms will be an issue, as will the potential for expanded anti-fraud liability of issuers of Litigation Proceed Rights to persons buying and selling in these secondary markets.

First, if Litigation Proceed Rights are easily transferable, trading markets could emerge and pose additional problems for the original seller.   Material misstatements or omissions that mislead investors in secondary trading markets under some circumstances can be actionable just as are material misstatements or omissions that mislead the original investors.

Second, anyone involved in organizing or operating a trading platform for exchange of Litigation Proceed Rights may need to register as an exchange with the SEC and/or the CFTC depending upon the type of trading platform and the type of contract being traded on it.  The possibility of there being derivative instruments linked to Litigation Proceed Rights introduces additional complications.

Third, any secondary trading market in Litigation Proceed Rights or a derivative product tied to Litigation Proceed Rights is vulnerable to manipulation and/or trading on inside information, particularly by persons involved with or close to the underlying litigation.    Anti-fraud statutes and other areas of the law, such as mail fraud and wire fraud and perhaps even attorney ethics and insider trading law, could be implicated.

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