Time To Stop Predatory Foreign Investors

When President Trump says other countries are “ripping us off,” he is referring to more than trade or currency manipulation. He is also talking about predatory investors overseas — foreign-based hedge funds and sovereign wealth funds — that have devoted staggering amounts of money to bankroll frivolous lawsuits in American courts. Why? Their aim is to pocket a significant portion of any verdict or settlement. If successful, these litigation gamblers not only secure a sizable return on their investment, they also walk away without having to pay any taxes.

It is unfair to American companies, consumers, and taxpayers. 

There is, however, a real opportunity to stop this litigation abuse through the budget negotiations currently underway in Congress. Foreign investors are using our U.S. court systems to punish American companies and citizens while enriching themselves. Since litigation is so costly, risky, and time consuming, many companies often agree to settle even when the case lacks real merit, because the risk of going to trial is simply too high.

The lawsuit funding landscape has become akin to the wild west. Foreign investors take advantage of loopholes to avoid paying taxes on their judgments or settlements even if the plaintiffs they are bankrolling are required to pay taxes. One reason this practice is not better known is very few jurisdictions require investors to disclose their involvement in cases or the terms of their agreements.

Allowing foreign-based investors to operate in the shadows, cloaked in anonymity, raises a host of legal, ethical, and even national security concerns. How are judges to know if they need to recuse themselves if they do not have access to all the facts? Who are the attorneys acting on behalf of the plaintiffs or the investors? Is the often-confidential information obtained during the discovery process about American citizens and companies at risk of being turned over to foreign funders, some of whom may hold views antithetical to our national interests? What are the real motivations for these lawsuits? Is it about justice or achieving other geopolitical goals?

Clearly, this practice is cloaked in secrecy. And while there is much the American people still do not know, they know enough to understand it’s both unfair and a serious threat. At least $15 billion is devoted to this dubious practice as of today. We also know Russian oligarchs have dodged sanctions by investing in lawsuits in American courts and investors based in China have used litigation financing arrangements to target tech companies.

The good news? There is a remedy at the ready.

Senator Thom Tillis (R-NC) and Congressman Kevin Hern (R-OK) introduced the Tackling Predatory Litigation Funding Act, a bill which cracks down on the misuse and abuse of our courts by ending investors’ preferential tax treatment and creating much-needed deterrence. This legislation will, at a minimum, make investors think twice before targeting a successful American company with a frivolous claim.

The Tillis-Hern Tackling Predatory Litigation Funding Act takes the “for sale” sign off of American courthouses and amends the tax code to impose a new “tax on income from litigation which is received by third-party entities that provided financing for such litigation.”

Income from lawsuits is just that – income; just as American taxpayers have to pay taxes on the money they make, so too should foreign investors who use our court systems as a casino.

President Trump’s Reconciliation Bill passed the House last month and now awaits consideration in the Senate. While it contains a permanent extension of the Trump tax cuts, No Tax on Tips, and billions for immigration enforcement – the Senate also has a chance to fix the equity and tax issues associated with predatory foreign litigation investing. In addition, the Tillis-Hern Tackling Predatory Litigation Funding Act would crack down on foreign intrusions in our courts, safeguard national security interests, and generate new tax revenues to fund other commonsensical American priorities.

This is an ideal time and a good legislative vehicle to stop foreign investors from using U.S. courts to harm and punish American taxpayers, and this Reconciliation Bill can accomplish just that.

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Trey Gowdy represented South Carolina’s 4th District in the U.S. House of Representatives from 2011 until 2019.

The views expressed in this piece are those of the author and do not necessarily represent those of The Daily Wire.

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