LAS VEGAS (AP) — Rick Harrison hit the national spotlight with a hit reality TV show about his Las Vegas pawnshop.
But
another of Harrison's businesses, Sierra Settlement Funding Company
LLC, had him battling Nevada state regulators last year over the rules
governing an emerging litigation settlement finance industry.
In
spring 2009, the Nevada Financial Institutions Division issued and then
withdrew a cease-and-desist order against the company offering cash
advances to plaintiffs on an agreement to repay the money with interest
if a case settles.
Lawyers are prohibited by ethics rules from
giving clients money for anything but lawsuit-related costs. But
litigation finance companies have in recent years begun serving
plaintiffs who want cash before a case winds through court. Sierra
Settlement is one of several in the Las Vegas area.
According to the division, Harrison's company made loans, and by law, needed a license.
Harrison disagreed, and said so.
"When
we opened the business two years ago, we did our due diligence and
looked into whether we needed a license," he said. "The (division) told
us we didn't. Well, then they decided to come after us. But when they
realized they messed up, they backed off."
The state rescinded its order to Harrison.
But
Steven Kondrup, deputy director of the Financial Institutions Division,
said the case "brought to light some questions that needed answers."
One
key question: Are companies that gamble on the outcome of personal
injury and other lawsuits, with little or no recourse to collect a debt
if a plaintiff loses, actually in the business of lending money?
The division concluded the answer was no. But that might soon change.
Based
on the Sierra Settlement case, Nevada has become the latest state to
seek to regulate advance settlement funding companies, which often
charge high interest rates.
The state Financial Institutions
Division has drafted a new regulation intended to broaden the definition
of "lender" to include businesses that make loans "secured by an
interest in the outcome of a civil action, case or controversy" —
regardless of whether repayment is contingent on the outcome of a case.
Sierra Settlement put existing regulations to the test.
The
company's website advertises cash advances in personal injury cases:
"If you need money now and you can't wait until your lawsuit settles, we
can help by providing a cash advance against the future proceeds of
your lawsuit."
Harrison is identified as the manager of Sierra
Settlement by the Nevada secretary of state and the city of Las Vegas.
He said he doesn't oversee day-to-day operations.
"Pawn Stars,"
the History Channel show about the shop Harrison runs with his father
and son, premiered in July 2009, three months after the state issued the
cease-and-desist order against his other company.
Sierra Settlement operates from the same Gold & Silver Pawn Shop address on Las Vegas Boulevard South.
The
cease-and-desist order to Sierra Settlement provides a glimpse into the
field of lawsuit-based loans, though Harrison says that view is
probably inaccurate, given that the state issued the order erroneously.
"They got my name right, and that's about it," he said.
According
to regulators, Sierra Settlement, in one instance, bought a portion of a
lawsuit settlement for $1,000 with a monthly interest rate of 12.5
percent for the first 16 months. The contract between Sierra Settlement
and the plaintiff in that lawsuit also called for an additional $500
charge after the first day of the loan. Sierra Settlement received a
lien for the entire settlement in the case, which allowed it to take its
share and then pay out what remained to the plaintiff, according to
state documents.
State legislation passed in 2007 requires
companies that charge more than 40 percent annual interest on a loan to
limit the loan term to 35 days. After that, the interest rate must drop
to the prime rate plus 10 percent.
While a new regulation would
address the business aspect of the industry, questions still remain
about the involvement of lawyers in litigation financing. Critics of the
industry say the involvement of third-party lenders has the potential
to unduly influence the course of litigation and turns the pain and
suffering of personal injury into an "asset."
The Nevada Bar
Association prohibits lawyers from referring clients to litigation
finance companies or knowingly allowing third parties to make such
referrals. But if a client independently seeks out a lawsuit-based loan
company, the lawyer is required to pay out whatever amount the client
owes the company after a settlement.
Las Vegas attorney Mitch Cobeaga said clients can easily get in over their heads with lawsuit-based loans.
"I've
been doing personal injury cases for 36 years, and I still don't
understand exactly how it works," he said. "I just know they drip of
things I don't want to be involved with."
Documents unrelated to
the cease-and-desist order show that Sierra Settlement was due to get
$2,300 from a client of another Las Vegas lawyer in a case that settled
for $60,000 earlier this year.
Another client of the same lawyer
received a settlement memorandum in which Sierra Settlement was due $700
of a settlement of about $10,500.
Harrison said Sierra Settlement offers a valuable public service.
"Quite
frankly, people who get in car wrecks need a little cash to get by," he
said. "If a lawsuit is lost, we can't do anything to get the money
back. There's a large risk involved."
Perry Walton, a Las
Vegas-area man who conducted seminars in the 1990s on litigation
financing techniques, said he is proud of his role in popularizing the
industry.
"I really felt like I was helping the underdog," said
Walton, who is no longer in the business. "I just figured it was a way
to level the playing field for people."
A draft of the proposed
state regulation requires companies giving lawsuit-based loans to
maintain regular business hours at a clearly visible place of business.
It prohibits such companies from lending money over the Internet to
residents of other states, without appropriate business licenses for
those states.
The Financial Institutions Division is reviewing
language in the proposed regulation, which requires approval by the
Legislative Counsel Bureau.
Brian Garelli, the owner of a
Chicago-based litigation finance company, said he voluntarily obtained a
license three years ago to open an office of Preferred Capital Lending
in Las Vegas. He said he did so to avoid "getting caught in a gray
area."
"The state comes in and visits us at least once a year to
make sure we're compliant with all regulations," Garelli said, adding
that most, if not all, of his competitors in Nevada are unlicensed.
Harrison
recently opened a spinoff company, Sierra Medical Services LLC, whose
website poses the question: "Are you in need of medical treatment, but
waiting on a legal settlement to cover the cost?"
Assembly
Speaker Barbara Buckley, D-Las Vegas, who sponsored legislation that
closed loopholes in payday lending laws, said she thinks regulation of
the litigation finance industry would help weed out companies offering
"loans that are predatory in their terms."
If and when new regulation begins, Harrison said he will be happy to obtain the required licenses to operate his businesses.
Dan Polsenberg, a past president of the State Bar of Nevada, said details are important when it comes to lawsuit-based loans.
"Some
plaintiffs are desperate for money, and helping somebody get by can be a
good thing," he said. "But I would hate to see someone in a desperate
situation being taken advantage of."
