1 CONTEXT AND PURPOSE

As a young industry, third-party funding exists in an embryonic regulatory state. This is especially striking with regard to "corporate governance" rules and regulations. Industry-specific corporate governance rules are nowhere to be found in this industry as they are in established industries. That will change, however, and this paper anticipates the important changes to come.

Two threshold questions in this vast and complex area are: 1) Where to start? and 2) Who will take the lead in developing industry-specific corporate governance rules?

This paper suggests that the initial steps should be limited in scope but wide-ranging in impact. They should take two key aspects of governance and create applicable rules. Two excellent candidates for such initial rules are the Securities and Exchange Commission (SEC) rules prohibiting public "stock price manipulation" and those prohibiting "insider trading".

The paper also suggests that financing of international arbitrations could well be the most productive area to begin with. A recent case in the United Kingdom, Oxus Gold v. Uzbekistan, where a funder financed an international arbitration against a sovereign, illustrates the need for corporate governance rules, and supports the prediction that they will soon be arriving, from one source or another. This case is actually a wake-up call for the industry.

In fact, since international arbitration has its own specific rules, including those of confidentiality which can create a tension with corporate governance rules, international arbitration might well be a pacesetter in the development of rules in this area. Further, the arbitration area, because of its relative newness in the commercial funding environment and openness to rule making and guideline setting, coupled with its being a dispute area which is predicated on the fact that the contract between the parties should govern the relationship with only modest influence from courts and court-established public policy, provides a relatively clean slate to build a solid infrastructure and a rich field to develop wise rules. Moreover, since financing of international arbitrations is on a spiral upwards, along with the likelihood of public companies needing funding, covering this area would be covering one that has importance within the market and industry.

As to who should take the lead in developing these rules, the signs point to the industry itself. That assumes, of course, that the industry includes the other stakeholders in its work, such as the plaintiffs' lawyers, the defendants and their representatives.

The grounds for these suggestions are discussed below. Some proposed initial rules are suggested at the end of the paper.

2 "GOVERNANCE" RULES, IN GENERAL

a. Some basics

Corporate directors and officers, charged with governing a public company's activities, must follow rules for good "governance".1 These rules take various forms, both public and private.2 The goal is to ensure that systems and guidelines are in place which require those with the responsibility to govern to do so properly, for the benefit of investors and other stakeholders.3

The scope and variety of governance rules are boundless, limited only by the needs and resources of the enterprise that adopts them. Such rules may also be established through private efforts by one or any number of such enterprises, as well as through legislation, regulation, court decisions, and industry codes.4

b. "Risk" and "compliance" - the supporting cast

Governance requires a supporting cast of at least two proactive members. First, there are a number of "risks" to be assessed when establishing appropriate governance rules and practices to address the risks. These rules and practices allow the organization to weigh positive and negative aspects of potential initiatives, and avoid costly mistakes.5

Second, there are "compliance" procedures to support the governance guidelines, both private and governmental.6 Indeed, organizations now routinely have separate compliance units, headed by compliance officers. At the industry level, there is an array of monitory responses.7 The magazine Compliance Week is a compendium of such actions.

c. Governance rules extend to third parties

Third parties can fall within the ambit of the rules and enforcement efforts. They can have primary liability as a principal - acting either alone and without the knowledge of the company - or in concert with the principal as a partner or other aligned entity.

They can also become liable as an agent; accountants and lawyers are often are caught this way. Legal principles used for this capture include those relating to co-conspirators, aiders and abettors, and principal-agents.8

d. Two important illustrations - "stock price manipulation" and "insider trading"

In the U.S., two key, illustrative rules profoundly affect corporate governance of public companies: those prohibiting "stock price manipulation"9 and/or "insider trading."10

Under the first, the offender, through fraud or otherwise, manipulates the price of a stock up or down to levels not justified by market conditions, buying or selling before the movement so as to turn a profit on its movement. Under the second, the offender obtains inside information - unknown to the public - indicating in which direction the stock will move (with or without manipulation), and trades with the benefit of such information to make an illegal profit.

e. Members of the governance family

Governance rules have been adopted in a wide variety of situations. Those pertaining to "corporate governance" are the most well-known.11 Yet, there are many other regimes, such as those governing, for example, insurance;12 pensions;13 banking;14 and hedge funds.15

More are waiting in the wings. One of those is, or should be, third-party funding governance. That is the central topic of this paper.

3 FORMAL INDUSTRY-SPECIFIC "GOVERNANCE" IS COMING TO THIRD-PARTY FUNDING, AND THE INDUSTRY SHOULD LEAD THE WAY

We argue that the third-party funding industry will, as discussed below, become the future focus of specific and formal governance rules.16 It is therefore in everyone's interest, especially the industry's, to get out in front of that trajectory and help to create rules that are effective and fair. We also suggest that a good place to start is financing of international arbitration claims. Here, there are considerations, like competing considerations of confidentiality, which make the area a good area to start with, since approaches in this area should be more readily useable in other areas. Moreover, given the swift development in financing of international arbitrations, it will be particularly useful here.

One hope of this paper is to stimulate the third-party funding industry to think about governance. That should lead to the creation of basic guidelines for the industry, as well as more specific rules to regulate a number of key areas. Starting with funding situations, for example, could give rise to stock price manipulation and insider trading. If this takes place, it will open the door to broader coverage, and fill a void in industry governance rules.

Since the scope of the topic is virtually boundless, much like the topic of "governance" itself, this paper can only touch on some of the most pronounced concerns. It will only analyze the funding of a US public company claimant. It will, moreover, emphasize only two important areas: stock price manipulation and insider trading.

The paper will not cover issues arising if the funder and/or the defendant is public. Its scope is, therefore, and by necessity, limited. 17

But, within that scope, it is intended to shed some much-needed light. Moreover, it is intended to initiate a much longer journey by the industry itself into many other aspects of funding governance.

4 THIRD-PARTY FUNDING SUMMARIZED

18

a. Funding described

In the simplest and most general terms, a third-party funder is an entity unrelated to a lawsuit or its parties that underwrites the plaintiff's prosecution costs.19 In return, the funder typically receives a share of any recovery (or some other compensation, such as a multiple of the capital invested). If the claim fails, the costs are for the funder's account alone.

For the most part, the industry currently serves financially distressed holders of meritorious claims - a huge and expanding population. But it is also steadily growing to serve claimants that can afford the prosecution but prefer to offload the risk and cash drain, while at the same time enhancing the claim's chances of success. It is also beginning to serve defendants. Its purposes and uses are growing, and will continue to grow beyond the current boundaries.

As already noted, the industry is young. In the U.S. and UK, it has for the most part emerged over the last ten to fifteen years. As it has become better known, its growth has rapidly increased, especially since 2010. Much of that growth can be traced to nothing more than its becoming better known.

The biggest third-party funding markets are the U.S. and U.K., the two major litigation centers in the world. Nonetheless, its most active venue on a per capita basis, is perhaps Australia, where the industry was born more than a generation ago.

The funding industry has to date faced a number of criticisms, such as claims that it:

• leads to multiplication of unjustifiable claims;

• overloads the courts;

• is riddled with conflicts;

• is illegal and/or unethical on champerty-related or other grounds;

• includes "bad apple" funders seeking to rip off the public.

These challenges have been keenly debated, and have been answered adequately enough so that the industry continues to grow and gain in credibility. In fact, these debates have allowed the industry to become better known, and have in this way spurred the industry's growth.

b. Third-party funding of a public company claimant

Public companies are increasingly seeking funding. The trend has many causes, not least of which, as noted above, is the simple fact that more potential claimants are learning about third party finance.20 This phenomenon, coupled with the funding industry's growth, indicates that it will not be long until "governance" comes to funding.

c. Some unique features of the industry that complicate governance

In this emerging industry, many confidentiality practices have developed to protect the interests of the various parties and stakeholders.21 While these practices are supposed to be intended to serve an industry/market purpose - this supposition has been attacked both in specific instances and in general - they can collide with requirements applicable to public companies, as well as with such companies' strategic objectives. Moreover, many of these practices are unsettled, embryonic even. These facts add yet further complications to establishing guidelines and rules.

Beyond this, at the heart of this industry lies yet another complication: litigation has a reputation for being unpredictable. There are little in the way of governance rules for litigation, as observed below; this is a sign that litigation and related industries are not easily subject to rules and regulations that other industries might be subject to. As discussed below, there are a number of relatively recent and important cases addressing the issue of whether statements made by a party about a litigation amount to the type of fraud that triggers common law fraud violations and federal Rule 10b-5 requirements.

This perception has actually spawned complications within the litigation industry. For example, rules issued by the Financial Accounting Standards Board prohibit evaluating and listing a claim as an asset. A funder invests vast sums that do not correspond to any asset carried on its books. Auditing such a company presents, in itself, a whole other set of challenges.

Another aspect of litigation is a complication: it has an ongoing and usually up-and-down life, keeping everyone on their toes and perhaps requiring ongoing comments or disclosures at different points. The perceptions and realities illustrated above complicate the funding industry. Plainly, it makes funder regulation harder.

One possible consequence, in the U.S at least, has been to inhibit growth of funding governance rules. On the other hand, the funding industry is doing its part to debunk some of the myths about all litigation being in all cases inherently unpredictable. The mixture of the two is still working its way through various aspects of litigation and funding, and their impact on governance.

5 DISCUSSION

Oxus Gold v. Republic of Uzbekistan, http://italaw.com/sites/default/files/casedocuments/ita0589.pdf, is a recent and excellent example of an environment where governance issues can surface concerning claims of stock price manipulation or insider trading. The case is discussed below.

a. The Oxus Gold case

In August 2011, Oxus Gold, a British public corporation, began arbitration proceedings against the Uzbek government. The claim was that the government had treated the company and its subsidiaries unfairly, and that it had failed to provide full protection and security for a gold mine built and operated by Oxus Gold in Uzbekistan. Oxus Gold demanded damages of at least $400 million. The Uzbek government countered with a claim in British courts for around $10 million.

In March, 2012, the company announced - with considerable trade press attention - that a litigation funder had agreed to underwrite the costs of the arbitration proceeding. The funder was to receive a "material" portion of any settlement, depending upon a number of variables. The company further stated that under the agreement, Oxus would retain control of the proceeding.22

The company's shares, which had been faring badly, as had the company itself, soared almost 50%. As Proactive Investors reported on March 14, 2012:

"The problem Oxus faced [when it began the arbitration proceeding] was that its limited cash position meant it was in a weak position to bargain for any kind of early cash settlement and similarly the costs associated with mounting a potentially protracted legal case should have been prohibitive. However, an innovative funding deal earlier this month [announced March 1, 2012] provided investors with a glimmer of hope."

On May 30, Proactive Investors further reported that:

"The funding deal with [the litigation funder] gave a boost to the Company's share price, which has more than doubled so far in 2012…"

By the end of June, the company had received over $1 million in funding to help pay its legal fees. In September, it announced it was "extremely confident" that it would be awarded just compensation.

In a pronouncement of November 2012, the company remained optimistic, even though by that time its losses had been calculated to be higher than before, well in excess of the $400 million originally claimed.

Despite the company's optimism, its stock price had fallen considerably to a little more than half of what it had been a few months earlier. Indeed, as noted in endnote 23, the slide has not been alleviated, even by the company's most recent statement, where the Executive Chairman noted on May 17, 2013 that Oxus Gold "remains willing to consider offers from the Uzbek Government to settle our claims on a fair and equitable basis taking into account the independent valuation of the assets misappropriated." 23

b. Issues

While in Oxus the funder is well-respected, and no known questions have been raised concerning governance or compliance with applicable rules, the case's fact pattern illustrates how funding of public companies might generate questions that should be anticipated and addressed when a funder finances a public company's claim. Ever-present potential questions could include:

• Does a particular funding of a public company claimant give rise to a claim for stock price manipulation?

• Is there a potential for insider trading?

In this connection, can accusations, however unsupported, be made that there was stock manipulation because:

• There was a failure to adequately disclose the situation to protect shareholders or potential shareholders?

• If so, did the failure stem from negligence or recklessness, or even calculated misconduct?24

Further, can accusations be anticipated that there was insider trading because one or more individuals working for the company, or the funder, decided to buy the stock before the information went public?

Insider trading accusations present a particularly difficult problem for a funder because of the number of individuals who might need to be consulted - both internally and many times by individual experts and others outside the funder who are independent of the funder. Moreover, many or most of those consulted may not be lawyers, and thus may lack applicable ethical and legal training.

Nor, in any case, is it clear what impact a disclosure of funding might or might not have, because:

• the industry is new;

• most of the funders are early stage, not well known, and often vary dramatically from one to the next;

• there are infinitely differing terms that can exist in different situations, some important in one situation, but unimportant in another;

• the nature of the claimant, and that of the defendant, play a big part in the drama;

• the special rules and practices applying to funding are sometimes

- as with the rules and practices as to confidentiality in the industry

- in conflict with governance rules;

• and so on.

Further - and of pivotal importance - the picture can entirely change in a nanosecond, such as when a smoking gun surprisingly surfaces at a deposition, or a dispositive motion is successful. The situation throughout a typical litigation is alive and evolving, requiring at any juncture that governance and compliance rules kick in, and that action be taken immediately.

Any governance rules need to allow for the current realities and complexities in the industry. At this stage, the rules should be more understanding, with more flexibility for the industry and market and - perhaps - much more understanding. There is plenty of work that needs to be done, but there are also some useful cases to work from, although they were not generated in a funding situation.25 In each case, the central question comes back to whether - because of disclosures or nondisclosures involving litigation - investors could be considered victims of securities fraud under Rule 10b-5.

6 FOR THE FUNDER, AT LEAST TWO LEVELS OF CONCERN

Before and during the litigation, a funder must be alert to at least two levels of concern.

a. Two levels described

First, a funder must take internal governance and compliance steps on its own to prevent and/or reduce the risk of illegal conduct by the funder. Second, it may need to take steps to assure itself that the claimant has taken, and continues to take, proper precautions against illegal activity.

Guidelines should be established for the claimant and the funder alike. While rules now exist for a public company regarding stock price manipulation and insider trading, and internal compliance practices augment these rules, no procedures currently directly address the special situation of a claimant regarding funded claims. There are, also, no specific rules for the funder.

This gap needs to be closed. To do so, there needs to be an understanding of the dangers that may lurk. These are discussed below.

b. Dangers illustrated

There are a host of threshold dangers to be addressed. Many of these have been dealt with in other contexts, yet the learning and rules developed there have bearing here.

One important issue is whether and when there should be disclosure that a case is funded. Should there be disclosure in some circumstances of a claimant's consideration for the funding? Is it relevant to know if funding has been declined? What is the danger if premature comment is made about the funding or the potential funding?

To what extent do the rules in other situations, and their family of concerns, yield insights for the funding situation? For example, what about disclosure rules relating to mergers and acquisitions? Restructuring? Bankruptcy? Insurance? Hedge Funds? Starting a new major lawsuit?

Assuming some disclosure is necessary, what specifically should be communicated? On the one hand, there cannot be a need to disclose all the details about the funding terms, and the funder.

On the other hand, the market will want to learn enough to satisfy sensible needs to understand certain basics concerning the relationship between the funder, the claimant, and the claim, especially how the destiny of the claim might be impacted and its outcome. Does that mean the name of the funder should be disclosed? Or the amount of funding and related conditions, or at least sufficient indications? Or the amount that will be paid to the funder on success, or at least a specific indication? What about the funder's "control" over the claim and its course through resolution?

As to each of these illustrative questions, one obviously has to ask what detail or corresponding reticence is required relative to a specific situation. Does the market involved have a bearing on these questions? How aware is the market of the industry? What about other factors relating to the market and the industry?

How do the rules play out as the litigation progresses? Is there a need for additional rules relating to developments in the litigation's progress?

c. Potential conflicts between governance and industry/ market rules

As noted above, tricky issues exist in the funding industry because there are already a number of rules as to disclosure and non-disclosure, encircled by a number of debates. Disclosure/non-disclosure - related to larger issues of transparency/opacity - involves particular policy and practice factors that are themselves subject to discussion and debate. Such factors may, in various situations, be adverse to public policy requirements.

One important and pressing example is this: what should or must be disclosed to an arbitrator or a court concerning a funded case?26 The issue arises at the very start when the arbitrator being considered for appointment needs to be a person free of conflicts. (This issue of disclosure varies of course depending on its purpose and the stage of the transaction).

In various instances, the industry has resisted disclosure. This is, in part, because when a funding becomes known, there is too often an immediate attack on the industry, and on the use of funding in the particular case, in ways that funders and claimants have found abusive. It is in part due to confidentiality that relates to the industry, and some other factors. Where the market sides with the need for disclosure, this could cause a serious clash.

The arbitration area is a particularly fertile area to illustrate these clashes. By its very nature, arbitration is designed to be, and derives so much of its value (and for so many reasons) from, its strict confidentiality. Most parties that choose this method of dispute resolution depend heavily on this feature. As a result, commercial international arbitrations are almost impossible to learn anything about, and even international arbitrations against sovereigns, governed by treaties and with less strict confidentiality rules, put a premium on confidentiality.

When rules are proposed, therefore, there may thus be duels between the public and members of the industry. Conflicting policies and issues will need to be harmonized to the extent possible. This conflict is complicated by the fact that funding guidelines in the public arena do not yet formally exist. The challenge, then, is a clear and present one.

The funder has to rely significantly on the claimant to know the law and understand the facts, so that the claimant can comply with any governance rules. That reliance, however, needs to be well founded. That is the funder's job to determine. The claimant's responsibility in this regard would extend to informing the funder of what the funder needs to know so as to be satisfied sufficiently that the claimant is in compliance, and that the funder is as well.27

d. Governance issues as to litigation and arbitration claims, as a part of funder governance issues

1. In General

Litigation claims are at the core of litigation funding. Unfortunately, the rules governing litigation claims are, as noted above, anything but easy, and have not been comprehensively analyzed.

Although recent scholarship argues that in some areas of law litigation outcomes are "predictable," litigation claims, as noted above, are commonly regarded as inherently "unpredictable".28 For example, in the accounting profession litigation claims usually cannot be assigned to value and carried as an asset on the company's books.29 What is particularly lamentable is that the litigation governance area has itself received comparatively little attention. One cannot find much specific to the industry, even in the vast universe of litigation literature. One exception, at least in its title, is John C. Coffee, Jr., "Litigation Governance," supra, n. 26. (although some might quarrel with how comprehensive the coverage is in this article on the topic). Beyond that, there is little that has been identified.30 Is this due, at least in good part, to an intractable uncertainty embedded in the litigation world? How much can, and should, be said about litigation claims governance? And when?

As noted, there has been almost nothing specific published in this area. It is an area that itself needs attention and development. Funding governance depends on this occurring. To an extent, development in one sphere will cause development in the other.

2. Insider trading and stock-price manipulation

Insider trading issues and rules, addressed in other contexts, are relevant in funding governance. Many analyses and guidelines in corporate governance can, and should, be borrowed for guidance in funding governance.

A real priority is to establish a platform that enables each funder to adopt policies and practices to educate stakeholders regarding:

• what is allowed/disallowed under insider trading laws;

• mandatory rules exist relating to notices, circulars, and practice manuals, to ensure that internal personnel, as well as anyone else who works on funding a claim, will be aware of the rules and restrained by them; and

• adequate precautions to prevent insider trading.

7 CONCLUSIONS AND PROPOSALS

a. Conclusions

While concepts of governance have made significant strides in corporate and other areas, they have not in any organized and specific way reached funding. Funding governance is thus at the starting gate. Its principles will inevitably evolve since it is developing in the United States and some other jurisdictions such as the United Kingdom. At this time, Australia might be argued to be a frontrunner in addressing the area.

In any event, the need is there. Funding is developing steadily and is becoming increasingly important to public company claimants.

Funding is also being used against public defendants. Some funders are themselves public. The policy issues and concerns in these areas themselves need development.

In this context, obvious questions come up, such as:

• What does the act of funding, by itself and with regard to the specific funder, indicate to investors and others related to the claimant? That the claim is good? Excellent? So strong that it should be considered the same as or similar to an asset?

• Should the rules allow a company under certain circumstances to list a claim as an asset?31

• Are the fact of funding and related details of limited significance? Do they create complications that make rule making itself hazardous, and requiring precautions?

• What about the funder's duties to the claimant? What happens if the funder mistakenly evaluates the case as a good and fundable one, when it is actually not meritorious? Are there established guidelines in comparable areas, such as litigation?

Public interests as well as private interests are therefore in play.

It is in the funder's decided interest to have rules for guidance. Now is the time to turn to them and to related concerns - at least to get the ball rolling, if nothing else.

Indeed, we have already had one case, the Oxus Gold case, tell us that corporate governance rules are needed. More and more international arbitrations, private and public arbitrations of public companies, will be financed. We can use that case as a case study to shove off from.

If the funding industry does not turn to the needs of corporate governance guidelines and rules, it can rest assured that others will soon turn their hand to them. This may then not only cause harm through surprise and industry unpreparedness, but those in the front of rule-making will have the upper hand (and one that may not be sufficiently informed and/or objective), at least in the early crucial days, in shaping what the rules will look like.

Quite possibly, some funders have already carried out analysis in the area. If so, this can be expanded into an industry-wide effort to create and propose acceptable guidelines. If not, some funders should step in.

b. Limited proposals

To start the process, we offer limited proposed rules or guidelines to consider, challenge, and possibly use so as to identify important early issues, as well as the efforts needed to tackle the broader topic. They might well be placed within the context of an international arbitration. They are:

1. A funder has no responsibility for determining what the public claimant must do to protect against stock price manipulation and insider trading, before, during, and after funding, except as provided in Rules 2 and 3 below.

2. The funder must take reasonable steps in these areas to satisfy itself that the claimant knows what it must do and has taken reasonable steps to do so.

3. The funder must not undertake to start the funding process unless it is prepared, and able to do what it may need to do to meet the requirements of Rules 1 and 2.

After the industry develops rules and policies with which it is comfortable, the next step should be disclosure to and working with selected important rule-making authorities, and addressing suggestions and concerns they may have. The SEC is one obvious key authority. Others could of course be cited.

The defendant community also of course needs a full voice and vote. At a suitable point, it must be given a seat at the table.

Regardless of whether starting with these proposals is the best way forward, the bottom line is that there has to be a start. The funding community can, by taking the first steps, steal a march on enacting governance rules and guidelines.

The industry's best interests call for such an effort. So do the interests of the market, the defendant community, and the regulators.

It is not too early to start. Rather, it is already late - but not yet too late to catch up. Joining hands across interest lines is the quickest and best way to make progress. The first step is for the industry to advance to the head of the line to take up the cause and a leadership role.

* We are grateful to Professor Maya Steinitz of the Iowa School of Law for her encouragement and time throughout our writing this paper, but most of all for her exceptionally astute thinking and comments, which so many of us in the industry have come to take for granted. We also benefited from the opportunity to publish a condensed version of our thoughts on the pioneering blog that Professor Steinitz recently launched on third-party finance, entitled "The Third-Party Funding Contract". We are also grateful to Professor Richard Painter of the University of Minnesota for his generous support and excellent observations and suggestions. While both indisputably contributed great value to this paper, neither of them necessarily agree with any particular statement or position put forward in this paper.

1
See SEC rules at http://www.sec.gov/about/laws/secrulesregs.htm. For a discussion of these rules, see American Institute of CPAs website, http://www.aicpa.org/InterestAreas/ CenterForAuditQuality/Resources/SEC/SECRules andRegulations/Pages/Rules and Regulations.aspx; The American Law Institute's Principles of Corporate Governance (2008, updated 2012) and the OECD Principles of Corporate Governance (2004). For a widely cited classic in the field, see Margaret Blair, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century (1995). There is substantial legislation in this area, such as the Foreign Corrupt Practices Act, 15 U.S.C. §78dd-1 et. seq., and the array of securities laws dealing with such matters as stock fraud and insider trading (see e.g., In re Tri-River Trading, LLC, 329 B.R. 252 (8th Cir. B.A.P. 2005), noting that "Missouri's limited liability statute codifies the principle of corporate governance that managers owe a duty of care to the shareholders by providing that the manager of a limited liability company must discharge his duties 'in good faith, with the care a corporate officer of like position would exercise in similar circumstances.'" See also In re Johnson & Johnson Derivative Litigation, 865 F. Supp. 2d 545, 559 (D.N.J. 2011), observing that "'all good corporate governance practices include compliance with statutory law and case law establishing fiduciary duties.'" In Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 530 (1984), the Supreme Court recognized the importance of corporate governance rules, noting that "derivative actions brought by minority shareholders could, if unconstrained, undermine the basic principle of corporate governance that the decisions of a corporation - including the decision to initiate litigation - should be made by the board of directors or the majority of shareholders."

2
Thus in addition to "statutory law and case law," cited supra at n. 1, a number of companies have their own extensive corporate governance guidelines and best practices recommendations. Virtually all such guidelines contain some version of the requirements set out in Section III of Google's Corporate Guidelines (2012): "The fundamental responsibility of the directors is to exercise their business judgment to act in what they reasonably believe to be the best interests of Google and its stockholders. It is the duty of the Board to oversee management's performance to ensure that Google operates in an effective, efficient and ethical manner in order to produce value for Google's stockholders."

3
Generally, "stakeholders" include, among others, customers, lenders, and suppliers, that is, those individuals and constituencies that contribute to a corporation's wealth-creating capacity and activities, and are therefore its potential beneficiaries or risk-bearers. Inclusion of such stakeholders under the governance umbrella is a new concept, replacing older notions focused solely on stockholders. See generally, James Post et al., Redefining the Corporation: Stakeholder Management and Organizational Wealth (Stanford: Stanford University Press, 2002). Governance rules also have an impact beyond the company and its stakeholders. Investors' rights often implicate third parties doing business with the company, for example where the company is an acquisition target, and the deal is aborted because it is unfair to shareholders of the intended acquirer.

4
See Wikipedia, "Corporate Governance" as to its discussion of how corporate governance regimes are adopted, domestically and internationally.

5
"Risk assessment" involves the determination of the qualitative and quantitative value of risk related to a concrete situation and particular threat. Some high-risk industries - food, finance, and public health - perform risk assessment on a continual basis.

6
See SEC rules at http://www.sec.gov/about/laws/secrulesregs.htm. For a discussion of these rules, see American Institute of CPAs website, http://www.aicpa.org/InterestAreas/CenterForAuditQuality/ Resources/SEC/SECRulesandRegulations/Pages/ Rules%20and%20Regulations.aspx.

7
See generally, the Generally Accepted Accounting Principles (GAAP), which are long-standing, whereas still others are more recent, or are still taking shape in response to an evolving business environment. The Financial Accounting Standards Board, which has no enforcement authority, is also influential in determining best corporate practices, and is frequently relied on both by the SEC and the courts. Though the core principles of good governance have stability in general, new challenges will require modifications, and also the adoption of new rules to uphold governance principles.

8
See, e.g., SEC v. Benger, 697 F. Supp. 2d 932 (N.D. Ill, 2010), holding allegations sufficient to state a claim against corporation's distribution agents and attorneys/escrow agents, for "aiding and abetting" a fraud under §10(b)(5). Among the courts findings were that the attorneys played an integral part in completing sales to investors, and thus substantially assisted in the securities fraud. See also Ponce v. SEC, 345 F. 3d 722 (9th Cir. 2003), holding that the SEC properly found an accountant guilty of aiding and abetting a securities law violation. Among other transgressions, the accountant's valuation of the corporation's license designs and his certification of financial statements containing those valuations was reckless, thus violating §10(b)(5).The best summary of how far the insider trading rules extend beyond corporate directors, officers, and other obvious "insiders" is U.S. v. O'Hagan, 521 U.S. 642 (1997). The case involved a lawyer whose firm was retained by Grand Met, a company seeking to make a tender offer for Pillsbury stock. The lawyer, who did not work on the representation, misappropriated nonpublic information involved in the representation to purchase call options and stock in Pillsbury, from which he profited. Because he did not work on the case himself, and did not have a fiduciary duty either to Pillsbury or Grant Met, he claimed that he was not liable for insider trading under §10(b)(5). The Court held otherwise, finding him criminally liable on grounds that he owed a duty to his law firm and its client from which he obtained the information.The Court explained that under Dirks v. SEC, 463 U.S. 646 (1983), insider trading rules apply not just to corporate insiders - e.g. directors, officers, and large share-holders - but to attorneys, accountants, consultants, and others who "temporarily" become fiduciaries of the corporation. This is the "classical" theory, which already implicates those who do not directly work in the company or hold a large stake in it. The misappropriation theory of liability announced in O'Hagan is complementary; it is intended to reach those who, while not fiduciaries of the corporation or its buyers or sellers, are entrusted with nonpublic information by those to whom they owe a fiduciary duty. The rule is intended to protect the market in securities, even where no fiduciary duty is owed directly to share-holders. Had O'Hagan informed his law firm and its client that he intended to trade on the information, he could have avoided liability. The government conceded on oral argument that the insider trading charge would not have stuck if he had told the client he was trading. See Richard W. Painter et. al, Don't Ask, Just Tell: Insider Trading After US v. O'Hagan, 84 Va. L. Rev. 153 (1998).For an excellent discussion of aiding and abetting, see GAO-11-664 (2011), Security Fraud Liability of Secondary Actors, http://www.gao.gov/assets/330/321617.html.

9
Stock price manipulation rules, administered by the Securities and Exchange Commission (SEC), implement 15 U.S. C. §78i and appear at 17 C.F.R. §240.10b-5. For a detailed description of market manipulation, see http://www.law.cornell.edu/uscode/text/15/78i.

10
For a discussion of the insider trading rules, as well as access to the rules, see the SEC guidance to investors, http://www.sec.gov/answers/insider.htm.

11
Corporate governance rules have existed in the U.S. since the 19th century, and were expanded significantly following the Great Depression. With the spread of globalization after WW II, they became increasingly complex, taking account of a new, international managerial class.

12
See OECD Guidelines on Insurer Governance (2011), http://www.oecd.org/ finance/insurance/48071279.pdf; Governance Issues in Health Insurance Exchanges, http://www.nasi.org/sites/default/files/research/Health%20Policy %20Brief%20No%201.pdf; and International Assoc. of Insurance Supervisors, Insurance Core Principles, Standards, Guidance, and Assessment Methodology (2011), http://www.iaisweb.org/ICP-material-adopted-in-2011-795.

13
See OECD Guidelines for Pension Governance (2009), http://www.oecd.org/ insurance/privatepensions/34799965.pdf.

14
See an important study issued by the World Bank (2010), http://rru. worldbank.org/documents/CrisisResponse/Note13.pdf, stating on p.1 that "Principles of good governance have been a major component of international financial standards and are seen as essential to the stability and integrity of financial systems."

15
See, e.g., Castle Hall Alternatives and Orchard Harbour, Redefining Corporate Governance: Towards a New Framework for Hedge Fund Directors, https://www.castlehallalternatives.com/ upload/publications/0553_201204 RedefiningCorpGovernance(Web).pdf; Meridian Fund Services, Corporate Governance Best Practices for Hedge Funds (2011), http://www.meridian fundservices.com/CGBP_Website_June_2011.pdf,

16
Third-party funding is one aspect of the vast array of activities that comprise finance. It thus has affinities to investment banking, hedge funds, and venture capital. Since all of these businesses, at one time or another, have caught the attention of regulatory authorities, it is fairly safe to assume that third-party funding will somehow do the same.

17
This paper does not directly deal with the situation where the claimant is private, or the defendant, or the funder, is public. Nor does it go outside the U.S. in scope, although it touches on the U.K. but little on Australia which in ways is likely a jurisdiction advancing in this and other areas. Similarly, it does not go in and into conflict considerations when, say, the U.K may regulate the same area as the U.S., but in a different way. Further, it focuses mainly on rules about market price manipulation and insider trading, not beyond. In time those areas will attract their own students and proponents.

18
Third-party funding is used in this paper to refer to institutional funding, that is, an institution which has its own or available capital devoted to investing in a diverse number of commercial claims and on a portfolio basis. It is not used to refer to hedge fund and other financial institution or individual investments on a one-off basis. Nor is it used to refer to contingency fee lawyers who principally invest their time, nor insurance companies who through subrogation or otherwise financially support claims.

19
Different names have been used to describe such parties, including third party financiers, litigation funders, litigation financing entities, alternative dispute funders. The precise and permanent name has not yet been settled.

20
It is also true that litigation costs in some areas (e.g. patents) are staggering. The American Intellectual Property Owners Association estimates that where the amount in controversy is $25 million or more, costs will be at least $6 million even before any appeal. Costs will be almost $3 million where the amount in controversy is between $2 million and $25 million. Many litigants who either do not have these sums or do not want to "front" them are turning to funders.

21
Gerchen Keller, a recent entrant into the industry, includes a detailed discussion on its website, www.gerchenkeller.com, outlining confidentiality practices that largely mirror those in the industry. A very recent case may have set a precedent that will be followed by other courts. That is, in Devon IT, Inc. v. IBM Corp., 2012 WL 4748160 (E.D. Pa., Sept. 27, 2012), the court held that Burford Group, LLC, a third-party litigation funder, did not need to turn over documents subpoenaed by the defendant since these documents remained privileged under the "common interest" doctrine. The court stated that "It is quite evident that the subpoenas seek the production of documents that were prepared by counsel for Devon in anticipation of and during litigation and are protected by the work-product doctrine. . . . Moreover, the production of the items subpoenaed would intrude upon attorney-client privilege under the 'common interest' doctrine. The 'common interest' doctrine protects communications between parties with a shared common interest in litigation strategy [citation omitted]. Here, Burford and Devon now have a common interest in the successful outcome of the litigation. . . ." See, e.g., National Union Fire Insurance Co. of Pittsburgh v. Porter Hayden Co. (2012 WL 4378160 (D. Md. Sept. 24, 2012), denying two insurers' joint motion to compel production of attorney work-product that policyholder had shared with current and future claimants' representatives. The court held that the policyholder and the representatives had a common legal interest when they shared the documents, such that the documents remain privileged. See also In re Velo Holdings, Inc., 473 B.R. 509 (S.D.N.Y. 2012), applying common interest doctrine to protect from discovery documents and communications shared with debtors' agent and related to debtors' financial results, liquidity, restructuring plans. But see Leader Technologies, Inc. v. Facebook, Inc., C.A. No. 08-062-JJF (D. Del. 2010), where Facebook sought to compel disclosure of documents that Leader shared with potential litigation funders and that Leader withheld under the common interest privilege. The district court affirmed the magistrate judge's ruling that Leader must produce the documents it shared with the potential funders on the grounds that no funding agreement was ever consummated, there was no common interest shared by Leader and the potential funders, and Leader had thus waived the attorney-client privilege. The issue of whether a funding arrangement should itself be disclosed was recently addressed in New Zealand. In Contractors Bonding Limited v. Waterhouse [2012] NZCA 399, the Court of Appeal held that the litigant whose case is funded must disclose 1) the identity and location of the funder, 2) its financial standing and viability, 3) its amenability (if relevant) to the jurisdiction of New Zealand courts, and 4) the terms on which funding could be withdrawn and the consequences of withdrawal. Significantly, the court did not require disclosure of the funder's ability to control the litigation process.

22
See the March 1 announcement at http://www.bloomberg.com/article/2012-03-01/aCcBlL9FPAE0.html.

23
For a graphic depiction of the rise and fall of Oxus' stock price (from about 1.5 to almost 6 to about 1.5 again), with a corresponding increase and decrease in sales volume, see http://investing.businessweek.com/research/ stocks/snapshot/snapshot.asp?ticker=OXS:LN.

24
The Oxus announcement emphasized two key factors that balance each other in terms of how the market is likely to react: 1) the payment scheme, which indicates that a good portion of the recovery will be paid out to the funder, although the ultimate payment will depend on a set of variables, and 2) the degree of control retained by the company, which indicates, among other things, that the funder will not be able to push the company towards a quick but less profitable settlement. Any funding governance scheme would likely want to publish requirements to disclose relevant terms of the payout and how much control the funder will have over the litigation. That was done in Oxus. Other information may in various cases have to be disclosed.

25
A few cases have addressed issues surrounding the disclosure of pending litigation by defendants. In Rosenbaum Capital v. Boston Comm. Group, 445 F. Supp. 2d 170 (D. Mass. 2006), when sued for patent infringement, the defendant claimed that it did not infringe, that it had meritorious defenses, and that the patent was invalid based on prior art. The court held that investors adequately pled that the company acted with the requisite scienter (intent to defraud, deceive, and manipulate) to support a Rule 10b-5 claim based on the company's public statements about the potential outcome of the litigation, and where investors alleged that the company hired experts to draft a variation of its allegedly infringing device (including additional unnecessary components so that it would appear to differ from the patented system), sought legal opinions that were neither thorough nor based on a review and analysis of relevant factors that could shield against claims of willful infringement, and that a jury had entered a verdict of willful infringement. In Eshelman v. Orthoclear Holdings, 2009 WL 506864 (N.D. Cal. 2009), the court found that there was very clear warning concerning the outcome of pending litigation, and hence did not find any violation of Rule 10b-5. The court noted, however, that the investors were sophisticated, leaving open the question of whether even more stringent standards might apply where the investors were less experienced. In re H&R Block Securities Litigation, 527 F. Supp. 2d 922 (W.D. Mo. 2007), held that in light of all the information on the market regarding the corporation's potential liability for allegedly selling an illegal product, the corporation's failure to disclose its own alleged belief as to such illegality did not violate Rule 10b-5 where the corporation made multiple disclosures regarding pending litigation over the illegality, and warned investors that litigation posed a significant financial risk.

26
With regard to whether funding should be disclosed to courts or arbitration panels, see, e.g., John C. Coffee, Jr., "Litigation Governance: Taking Accountability Seriously," 110 Col. L. Rev. 288 (2010)., Bert Huang, "Litigation Finance: What Do Judges Need to Know?" 45 Col. J. L. & Soc. Probs. 525 (2012), Eric. De Brabandere and Julia Lepeltak, "Third Party Funding in International Investment Arbitration," Grotius Centre Working Paper No. 2012/1, and Maxi Scherer, "Out in the Open? Third-Party Funding in Arbitration," http://www.cdr-news.com/ categories/expert-views/out-in-the-open-third-party-funding-in-arbitration (July, 2012).

27
The funder has its own governance rules to follow insofar as disclosure and other requirements are concerned relating to its investors and others stakeholders.

28
Intellectual property, securities law, and construction claims - all widely diverse and subject to different "predictability" factors - have been the focus of important studies, which in each instance provide methodologies for determining how cases will likely turn out. See, e.g., "Risk Analysis for Intellectual Property Litigation" (2011), http://nlp.stanford.edu/pubs/icail11.pdf, where the authors demystify the supposed black box of litigation prediction by relying on masses of data relating to quantifiable phenomena. They conclude that "this work essentially argues (with empirical support) that intellectual property litigation is a problem fit for forecasting." They also state that their methodology can be further "improved," a claim with which funders would agree because of the extensive consultations that underlie their choice of any case.Another important paper, written by four law and business school professors, is Predicting Securities Fraud Settlements and Amounts: A Hierarchical Bayesian Model of Federal Securities Class Action Suits, 9 Journal of Empirical Legal Studies 482 (2012), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2048437#captchaSection. While the mathematics may seem daunting, the underlying point is clear: the outcome of some securities cases may well be amenable to prediction (as may the outcome of a number of other cases). A new company, Lex Machina, provides analytical and "predictive" data for use in IP litigation, and may soon expand its capabilities to other fields. See www.lexmachina.com.

29
See FASB 5, concerned with accounting for contingencies. On the other hand, this same guideline states that a defendant for various claims as a contingent debt must make provisions, and reserves set up in appropriate amounts. FASB 5 contains a long discussion concerning the bias of the accounting profession towards conservatism, thereby justifying this asymmetry.

30
One possible contributing factor is that litigation in the U.S. is already so blanketed by rules. Countless rules and regulations relate directly to litigation - such as the Federal Rules of Civil Procedure and their counterparts in all 50 states, further interpreted by the Federal Rules Decisions and their state counterparts. In addition, there are bar association opinions, reports by the judiciary, and independent studies recommending procedural revisions.At the same time, there are rules created in other professions, such as the accounting field, impacting so much in the litigation field. Respect must also be given to the rights of the parties in their private disputes. The fact that litigation carries some uncertainties needs to be recognized.

31
Any attempt to promote such allowance would, of course, challenge FASB 5, and might produce a conflict between funders and the firms that audit them.