California’s lawsuit loansharks: When hedge funds profit from trauma

California rightly prides itself on standing up for victims of abuse and holding wrongdoers accountable. But a troubling trend threatens to undermine those goals, turning deeply personal trauma into a tradeable commodity and profit opportunity for hedge funds and Wall Street investors.

A recent investigation from the Los Angeles Times revealed how third-party litigation financiers are embedded in major sex-abuse lawsuits across California. “Records reviewed by the Times show law firms that have filed thousands of sex abuse claims in California are financially backed by private investors,” the Times reported.

These financiers provide upfront cash to plaintiffs or their attorneys in exchange for a cut of future awards.

On the surface, this may sound like a way to help survivors pursue justice when resources are scarce.

In reality, many of these arrangements operate like predatory high-interest loans – they’re opaque, aggressive and designed to enrich investors at the expense of the victim.

Victims deserve support, not exploitation. They deserve justice, not manipulation. Yet these shady financing deals can leave survivors owing substantial fees and interest, sometimes consuming a significant portion of any eventual award. These financial obligations can even create pressure to dismiss fair settlement offers in search of larger returns for investors.

That pressure distorts the justice system. Lawsuits should be driven by facts – not by investors’ profit targets. When hedge funds insert themselves into litigation, cases risk becoming financial instruments. Trauma is effectively securitized, bundled and monetized, with survivors bearing the consequences.

The public impact is just as troubling. Many of the cases financed by these lawsuit loansharks target school districts, local governments and public agencies – entities funded by taxpayers. When massive settlements are reached, the assumption is often that the money goes directly to victims. But that’s not always the case. Significant portions are diverted to lawyers’ fees and financial backers, while taxpayers shoulder the cost for decades through reduced services, higher taxes – or both.

What makes this system especially problematic is the lack of transparency. These financial arrangements are often not disclosed to courts, defendants or the public. Judges tasked with overseeing settlements may have no visibility into how much of an award is being siphoned off to third-party financiers, or how much pressure those financiers exert behind the scenes regarding potential settlements. That secrecy benefits investors – not victims or taxpayers.

This is not an argument against compensating survivors. Victims deserve to be fairly compensated for the harm they suffered. But fairness is not the same as financial exploitation. California should be deeply concerned when hedge funds – not survivors – emerge as the biggest winners in lawsuits with taxpayer dollars on the line.

Lawmakers and courts have a responsibility to act. At a minimum, hedge funds invested in lawsuits against California entities should be disclosed and subject to oversight. Stronger consumer protections are needed to ensure victims fully understand what they are signing and the long-term costs involved.

California policymakers must ask a hard question: who is this totally unregulated and secret system really benefiting?

Wall Street hedge funds shouldn’t be able to bet on lawsuit outcomes like they bet on a stock. If California allows these lawsuit loansharks to continue to turn trauma into a revenue stream, the losers will be clear: survivors, taxpayers and public trust in a system meant to protect the vulnerable.

Jaime Huff is the president and CEO of the Civil Justice Association of California.