N.Y. Feds Allege Litigation Funder Horror Story

Allegations don’t get much more despicable than the scheme Manhattan federal prosecutors laid out in an indictment and accompanying press release on Wednesday.

Prosecutors said a ring of conspirators – personal injury lawyers, doctors and a litigation funder – fleeced property owners and insurers out of $31 million by staging fake slip-and-falls; sending accident “victims” for extensive medical treatment, including surgery; and suing to recover for the fake victims’ unnecessary health care.

That wasn't the worst of it, though. The conspirators allegedly recruited their fake accident victims from homeless shelters -- poor people and drug addicts who, according to prosecutors, were often so needy that they didn’t have warm shoes or clothes and asked for food during their initial meetings with personal injury lawyers.

Prosecutors claimed that the conspirators would direct these “victims” to selected locations to stage accidents and claim injuries. After the staged falls, according to prosecutors, recruits were required to undergo surgery -- whether they needed it or not -- in order to proceed with personal injury lawsuits against owners of the properties where the fake accidents occurred.

The litigation funder who was indicted on Wednesday, Adrian Alexander, allegedly played a variety of parts in the scheme. He operated an MRI facility where many of the more than 400 phony plaintiffs received MRI tests, prosecutors said. He and other funders also allegedly paid an upfront “incentive” payment of $1,000 or $1,500 to recruits who agreed to undergo surgery.

And that's not all. Alexander supposedly paid co-conspirators a referral fee of as much as $2,500 for inducing fake accident victims to sign litigation funding deals. Those agreements, according to prosecutors, covered plaintiffs’ legal and medical costs – but imposed such exorbitant interest rates that when cases settled, most of the money went to funders and lawyers. Little if any was left over for the plaintiffs who had undergone surgeries.

Essentially, prosecutors are alleging that Alexander and his fellow conspirators paid desperate people a couple thousand dollars to subject themselves to surgery so that the schemers could collect millions from defendants in fraudulent personal injury suits.

Alexander’s role in the alleged enterprise was so lucrative, the government claimed, that he told investors his funding company’s annual returns topped 30%. At his initial appearance in federal court on Wednesday, according to the case docket, Alexander posted a $1 million personal recognizance bond secured by his Madison Avenue co-op.

Prosecutors, of course, haven’t yet proved their allegations. Alexander pleaded not guilty at yesterday’s court appearance. No one answered the phone at a number listed for Adrian Alexander in Manhattan. I emailed the lawyer who appears from the docket to be representing Alexander, James McGovern of Hogan Lovells, but did not receive a response.

Nor did I hear back from counsel for George Constantine, a personal injury lawyer who is also named in the indictment. (Constantine did not immediately respond to a voicemail message.) Defense lawyer Michael Bachner of Bachner & Weiner, who represents Alexander co-defendant Marc Elefant, said via email that Elefant filed slip-and-fall suits based on his good-faith belief that clients were telling the truth about their injuries. When Elefant learned in 2017 that some clients may have been lying, Bachner said, he withdrew as their attorney.

The indictment of Alexander, Constantine and Elefant isn’t the first time that New York prosecutors have targeted alleged conspirators who profited from pushing personal injury plaintiffs into surgery. Last month, Brooklyn federal prosecutors obtained guilty pleas from a surgeon and a patient recruiter involved in a bribery and kickback scheme to provide pelvic mesh removal surgery to women suing mesh manufacturers in order to boost the value of the women’s claims. That scheme also involved litigation funding.

The government alleged that women undergoing mesh removal surgery entered funding deals to cover their surgical costs, and that one of the defendants purchased and resold that debt for profit. (If you want more details on medical funding, I described how litigation funders profited from mesh patients’ surgical financing deals in a 2015 Special Report for Reuters.)

Obviously – and thankfully -- funders who engage in criminal conspiracies based on unnecessary surgeries to jack up the value of personal injury claims are a miniscule minority of the industry. But there’s already a lot of skepticism about the business of providing non-recourse funding to plaintiffs in personal injury litigation, and stories about alleged outliers like Alexander don’t help the industry’s image.

I asked Eric Schuller, the director of government and community affairs at the Alliance for Responsible Consumer Litigation Funding, what the industry is doing to weed out bad actors. Schuller said the best solution is state regulation of consumer litigation funders – which ARC supports. Schuller pointed to Oklahoma, where consumer funders must register with the state. Oklahoma regulators can conduct background checks on litigation financiers and have a right to examine the business’ records. If a funder fails to fulfill its obligations to consumers, including the duty to provide an easily-understandable description of funding terms, the state can yank its approval.

“It’s a big stick,” said Schuller, though he conceded that even state regulators might be hard-pressed to expose a wide-ranging fraud like the one alleged by Manhattan prosecutors without a plaintiff or a plaintiff's lawyer blowing the whistle on the funding scheme.

But one of the goals of regulation, Schuller said, is to scare away fraudsters by requiring initial registration. “We want to proactively make sure things don’t happen like what seems to have happened in New York,” he said.

If state-by-state registries would help prevent schemes that allow funders to profit from steering plaintiffs into unnecessary surgery, let's hope that every ethical business in the industry supports such regulation.