hedge fund influence

A bipartisan package of bills aimed at punishing unethical attorneys and hedge funds that have flourished within California’s legal industry is headed to Gov. Gavin Newsom’s desk.

The two bills would bar lawyers from prioritizing the desires of private investors who fund lawsuits, and ramp up penalties for lawyers who scout for clients at hospitals, jails and accident sites.

Assemblymember Rick Chavez Zbur (D-Los Angeles), one of the bill authors, said the legislation is intended to police the state’s bruised legal profession in response to “a wave of inappropriate attorney conduct” reported by The Times.

Times investigations last year found some clients within L.A. County’s $4-billion sex abuse settlement said they were paid to sue and, in some cases, fabricate claims.

“When attorneys are exploiting vulnerable people, including paying folks to file fraudulent claims, they’re not just breaking the law, they really undermine the credibility of the legal system and every attorney,” Zbur said.

Both bills were sponsored by the Consumer Attorneys of California, a powerful trial lawyer trade group that says it wants to beef up punishment for misconduct.

“If we are going to demand that corporations, government, and powerful institutions be held accountable, we must be — and we are — willing to hold ourselves to that same standard,” Doug Saeltzer, head of the association, said in a statement.

California law already bans a practice known as capping, in which non-attorneys directly solicit or procure clients to sign up for lawsuits with a law firm.

Zbur’s legislation, Assembly Bill 2039, would require that attorneys lose their license if they’re convicted of felony capping or a misdemeanor capping conviction in which they “acted knowingly and for financial gain.” The lawyers could also be fined $25,000 per violation.

The bill also creates whistleblower protections for law firm employees who report misconduct, and would enact new restrictions on loans that attorneys give their clients. California is one of the few states where lawyers can lend money directly to plaintiffs.

Lawyers who use the loans to sway the client’s decision-making around “legal strategy, settlement decisions, or continued representation” can be fined $15,000 per offense.

The second bill aims to bar private investors from influencing a case — for example, telling a lawyer how many clients to take on or when to settle — in lawsuits they fund.

California allows lawyers to take high-interest rate loans from investors, such as private equity firms or hedge funds, who expect to profit from the payout when a case is settled. Critics of this litigation funding claim investors sometimes exert themselves in legal strategy to the detriment of the clients, such as requiring a case to settle prematurely so the law firm can repay the loan faster.

“We don’t want them having any influence in the outcome of a case,” said Assemblyman Ash Kalra (D-San José), who authored AB 2305. “We want the lawyers to be able to represent their clients, and then not have those financial pressures play any role.”

A spokesperson for Newsom’s office said they don’t comment on pending legislation.

Lawyers already are barred under State Bar rules from allowing a third party to dictate case strategy. Kalra has said the goal of the bill is to provide additional “clear statutory safeguards.”

Law firms would also be barred from using money from private investors to market for cases, Kalra said. The State Bar would be tasked with disciplining lawyers that flout the rule.

A Times investigation last year found law firms that have filed thousands of sex abuse claims in California are funded by private investors, meaning an unknown chunk of the $4-billion settlement will go into the pockets of opaque funders.

It’s unclear how violations of the law would come to the attention of the State Bar. Litigation funding agreements are typically private between the funder and the law firm, and clients often don’t know their cases are being funded by private investors.

Jaime Huff, the head of the Civil Justice Assn. of California, which advocates for lawsuit reform on behalf of business interests, said her group — a frequent foe of California trial lawyers — ultimately pulled their support from the bill because they found it toothless.

“I don’t trust the State Bar to tie their own shoes in the morning, much less govern this stuff,” said Huff. “It’s basically gaslighting the public into thinking, ‘Yes, they’ve done something.’”

“It’s like the mall cop of self-policing,” she added.

Kalra said the point was to send a blunt message to the state’s legal bar.

“There may be loopholes that folks find in this one, and they have to follow up and close those loopholes,” he said. “But ultimately, it makes a very clear rule as to how that funding can be used. Once that rule is in place, it’s the law. And lawyers have to follow the law.”