When the D. E. Shaw group, a global investment and technology development firm, decided to launch a dedicated litigation investing strategy in 2018, it turned to Sarah Johnson to build and lead the new team. Johnson was well suited to the task, having worked in the firm’s credit opportunities group for over a decade and bringing a combination of finance and legal acumen to the effort.
Johnson studied economics as an undergraduate at Duke University and worked on Wall Street as an analyst with Salomon Brothers before deciding to go back to law school. After earning a law degree from Columbia Law School, she worked as an associate in the Restructuring and Finance group of Wachtell, Lipton, Rosen & Katz. Seizing the opportunity to combine her finance background and love for the law, she joined the D. E. Shaw group’s credit trading desk in 2006. In that role, she primarily worked on distressed investments – including restructurings, opportunities in stressed equities, and bankruptcy liquidations – and learned how to apply her legal skills to underwriting investments. She also learned about the then nascent litigation finance industry, particularly the process of monetizing patents for distressed companies. Ultimately, this prompted her to encourage the firm to start exploring a more dedicated litigation investing strategy.
“Along the way, I pitched the idea of a litigation finance strategy,” she recalls. “I was asked to propose a business plan, and that eventually turned into my launching and leading the Litigation Investing team. I feel like it was in many ways a natural next step for me given my experience underwriting legal investments in the bankruptcy space.”
The D. E. Shaw group has more than $85B in assets under management, giving Johnson and the Litigation Investing team reliable access to capital. “We have the ability to do large and complex transactions, and we look for partnerships that can grow over time,” she notes.
Johnson is an honoree in the Lawdragon 100 Global Leaders in Litigation Finance.
Lawdragon: Did you always imagine that your career would be a mix of finance and the law?
Sarah Johnson: When I worked in banking, I applied to law school not knowing which way my career was going to go. I ended up loving law school, the challenges that the legal questions posed, and how the framework for legal analysis teaches you to solve complex problems by breaking them down and thinking through them logically. But I always enjoyed the work in finance, too, so I’d hoped to find a way to combine them one day.
I was lucky when an opportunity to join the credit trading desk at the D. E. Shaw group came along. They were looking for someone who understood finance but also had a bankruptcy law background. It matched my skill set and was an exciting opportunity for me to build on my previous work and educational experiences. There are many types of legal jobs and finance jobs, but the Venn diagram overlap of those universes is limited, and I was really excited to find a role where I could draw on both backgrounds.
LD: When did you first learn about litigation finance?
SJ: That was also an evolution. I spent my first 10 or so years at the D. E. Shaw group on our credit trading desk. I was focused on litigation-driven opportunities such as bondholder recoveries that came from intellectual property licensing deals or fraudulent conveyance actions brought by bankruptcy estates. I started to think about whether we could look at more litigation-driven investments that were not limited to distressed bonds or bank debt. Our firm’s leadership team encourages people to be entrepreneurial and come up with new business ideas, so I pitched the idea of a litigation finance strategy. The firm thought it was interesting enough to investigate, and, after a rigorous internal vetting process in collaboration with our Corporate Development team, the firm decided to give it a try, and I was asked to propose a business plan and eventually to build and lead the strategy.
Our firm’s leadership team encourages people to be entrepreneurial and come up with new business ideas, so I pitched the idea of a litigation finance strategy.
I’d been doing a specialized version of litigation investing in the credit and restructuring space. Instead of focusing on bankruptcy-related litigation, I had the opportunity to look at many different types of litigation – breach of contract, antitrust, intellectual property, mass torts and international cases. That breadth of the mandate and the challenge of building a team and strategy for the firm were energizing.
LD: What is the D. E. Shaw group’s approach to litigation finance?
SJ: Big picture, we invest broadly across the litigation finance spectrum. We look at all types of commercial litigation. We’ve invested in a wide variety of structures, ranging from more traditional debt-like structures to financings that have more equity-like returns.
As a funder, our approach to the litigation finance space is shaped by the strength and scale of the D. E. Shaw group at large, which has more than $85B in assets under management and roughly a dozen different but complementary strategies. As a large firm with reliable access to capital, we can do large and complex transactions and seek to develop long-term relationships with our partners and counterparties.
Another defining feature is our team’s global reach. Our firm and our team operate across the United States and internationally, with a particularly strong presence in the United Kingdom, and we have experience handling cross-border structures and regulatory considerations.
We provide not just capital and reach, but also partnership. As a collaborative firm, we take a team-oriented approach to both investing and building relationships with counterparties. With the expertise and experience of both our team and the broader firm, we help our counterparties identify and assess growth opportunities and scale their businesses. We have also been able to leverage our technology and data analytics capabilities to help evaluate pools of cases or assess damages methodologies, which we believe adds value not just to our investing process but also to our counterparties’ decision-making process.
Our best relationships are the ones where we’ve done multiple deals together and have built robust working relationships. We engage deeply with our counterparties to gain an understanding of what they are looking for when seeking financing and bigger picture, where they want to take their firm and business.
We can be creative in our approach to pricing and structuring investments. We have a range of financing solutions, and we tailor our financing options to meet our counterparty’s needs. We don’t have a one-size-fits-all approach to pricing; we price deals to reflect the risk inherent in them, which can range from lower-risk debt-like prices to higher-return equity-like investments. We’re not solely a credit shop either, so we’re not limited to saying, “oh, it has to be a loan,” or “we need a maturity date,” or “it needs to look a certain way.” Our focus is on alignment with our counterparties and appropriate compensation for risk sharing.
LD: What criteria do you use to evaluate a case and determine whether it makes sense to fund it?
SJ: We look at many opportunities and only fund a small percentage of them, which means we need to aggressively filter potential investments. We consider numerous factors when deciding which cases to finance.
We provide not just capital and reach, but also partnership.
Not surprisingly, we often start by looking at the size of the investment compared to the size of the damages and the defendant’s ability to pay. Even a great legal theory won’t be enough if the investment amount plus the projected return exceeds the expected settlement or damages. It’s also important to us that the lawyers and plaintiffs we are partnering with still have significant investment in the outcome of the case.
Next, we look at the strength of the legal arguments and the facts of the case. That’s a huge driver. Is there precedent for this type of case, and if so, how strong and clear is that precedent? And how do the facts of the case map onto the legal theory and precedent? If the case is going to a jury, how will it sound to them? We also look at the legal team’s track record. We are always interested in who the counsel is, regardless of whether we are funding the law firm or the plaintiff. Is this an area where the law firm has a good track record and expertise, or is this a newer area for them?
We consider jurisdiction – where the case is filed or likely to be filed – and the stage of the litigation – how early in the process the case is and whether it has passed certain legal milestones. We’ve invested across the continuum from very early-stage to late-stage cases, and pricing is often sensitive to the stage of litigation.
One of the most important questions is whether the defendant is motivated and likely to settle the case. We look at things like what the defendant’s track record for settlements is, since a settlement is important for understanding the risk profile of the case, and it also has a potentially significant impact on the timing and cost of fully litigating the case.
LD: I imagine that a really interesting part of the job is figuring out which matters to take on.
SJ: Agreed. It’s always interesting because every case is different. Sometimes, we work with an established law firm that’s very sophisticated and has used funding before. These firms are skilled at presenting a funding package describing their cases to funders and negotiating terms. Other times, we work with a startup law firm that needs operating capital to get off the ground, and in that scenario, you’re really building something with them and brainstorming from scratch. Every deal has its own story.
LD: How has the industry evolved since the D. E. Shaw group’s litigation investing strategy was launched in 2018?
SJ: In the earlier days, much of the focus was on educating counterparties – explaining what these deals look like to lawyers and plaintiffs and how they could work in practice. We focused on outreach to counterparties to build awareness of what litigation finance is and credibility for the industry and its financing options. Over time, as the market matured and more participants became familiar with these structures, the dynamic shifted. We began to see more inbound interest as potential partners sought us out. That evolution reflects how the industry and our business have grown to where they are today.
As time has gone by, I’ve seen more sophisticated law firms looking to do deals and much more complex financing structures. When I first started looking at litigation finance deals, a lot of them were with smaller law firms that needed the capital to pursue individual cases. The pricing was somewhat standardized and was either multiple-based or a percentage of damages. Now, I think a lot of larger law firms are looking at litigation finance as one of multiple financing options that they can pursue. This gives them the ability to offer their clients more flexible structures. Law firms that might otherwise only bill hourly may be able to offer clients a hybrid structure with part on contingency. We as funders can help law firms take on more contingency work than they otherwise might.
For individuals or smaller businesses that don’t have a lot of cash on hand, litigation funding can help them afford the legal costs to hold bad actors accountable.
We also now see a wide range of financing solutions, from more traditional multiple‑based pricing for single or small portfolios of cases to more credit‑like deals with set rates to structures that have tiered pricing depending on where a funder sits in a waterfall.
LD: Litigation finance can help increase access to justice by leveling the playing field. Is that a meaningful part of the work you do?
SJ: Absolutely. We’ve funded multiple cases where our involvement has helped level the playing field for the plaintiff. For individuals or smaller businesses that don’t have a lot of cash on hand, litigation funding can help them afford the legal costs to hold bad actors accountable for breaches of contract, theft of intellectual property or trade secrets, or a variety of other illegal actions.
In one case, we funded an entrepreneur who developed groundbreaking medical technology with the potential to improve patient outcomes on a significant scale. He approached several large companies to explore licensing opportunities, and some took the idea without permission and began commercializing it themselves – generating billions in revenue and cutting him out entirely. The entrepreneur had strong legal claims but lacked the resources to pursue the litigation against these large, well-funded defendants. The funding we provided allowed him to secure top-tier legal representation and bring the case forward. Without litigation finance, he wouldn’t have had the ability to enforce his rights.
LD: What’s your advice for lawyers or companies considering litigation finance for the first time?
SJ: The biggest piece of advice I have is to be transparent. The more that the lawyers or plaintiffs can share about their assumptions – how they’re thinking about the case and why they want funding – the faster and better we’ll be able to figure out a financing solution that we believe will work best for everyone.
Law firms often come to us at a stage where they’ve received a settlement offer from a defendant that they and the plaintiff don’t want to accept. The law firm may believe that the offer is too low, but they don’t have the resources to continue pursuing the case to get what they think is a fair result. We can provide a cash infusion in situations like this, but we want to know what the discussion has been so far and what exactly the law firm is looking for. We want to know why they think the offer is too low, at what point they think they’ll get a better offer, and how much it will cost to get there. These are things that we can figure out ourselves eventually, but it makes for a faster process for everyone when more information is transparently shared up front.
The other advice I would give is on alignment – making sure the recipient of funding understands what different funding structures mean for them in various case outcomes. Different funding structures shape how risks, costs and recoveries are shared, which directly impacts the alignment of incentives between the funder and the counterparty. It can also be a signal to us. If someone is looking to offload all the risk in a case, that naturally raises questions. The thinking is, “If you have such strong conviction in this case, shouldn’t you be willing to keep some of the risk?” After all, the plaintiffs and their lawyers know the case better than anyone.
LD: What do you appreciate about the D. E. Shaw group as a platform for the work you do?
SJ: There are many aspects of the D. E. Shaw group that I value, starting with its deeply collaborative, team-oriented culture, which is reflected in how we’ve built and operate our litigation investing business. I also appreciate the firm’s openness to innovative investment strategies, including litigation finance. That combination of innovative spirit with deep institutional knowledge and resources gives us a powerful platform.
