Federal prosecutors are investigating the fast-growing business of finance companies that provide cash advances to plaintiffs in personal injury and other lawsuits, according to five lawyers briefed on the investigation.
Dozens of firms offer money to plaintiffs who are desperate for cash and don’t want to wait to collect on settlements or damages they might receive through their lawsuits. Critics of the practice say the advances are the equivalent of payday loans because their high annual interest rates — as much as 100 percent — can trap recipients in deepening cycles of debt.
The industry has recently been moving to tap into an anticipated wave of lawsuits alleging workplace sexual harassment.
In recent months, federal prosecutors in Manhattan sent out subpoenas to finance firms and other players in the industry, said the five lawyers, who weren’t authorized to speak publicly about the investigation.
They said the prosecutors were seeking information about the business relationships between the cash-advance firms and the trial lawyers who sometimes refer their clients to the firms. They said prosecutors appeared to be looking into whether there were formal financial arrangements between the parties, which could be construed as illegal kickbacks.
Many of the cash-advance firms — some of them founded by personal-injury lawyers — rely on other lawyers to send them financially unsophisticated clients who are waiting to collect on legal settlements.
It’s not uncommon for the companies to woo lawyers with gifts baskets and invitations to lavish parties. In 2013, a former part-owner of one such company pleaded guilty in federal court to engaging in a kickback scheme with a brokerage firm that recruited litigants looking for cash advances ahead of their settlements.
Dawn Dearden, a spokeswoman for the United States attorney’s office in Manhattan, declined to comment.
The lawyers declined to name any of the parties that had received subpoenas. They said that the inquiry appeared to be in its early stages and that it was unclear whether any charges would ever be filed.
Hedge funds and private equity firms have poured money into the industry, lured by its fat profits. Some of the financing firms are allowing wealthy investors to get a piece of the action via online fund-raising platforms. The settlement-advance industry is an appealing area of inquiry for prosecutors in part because of its rapid growth.
The firms have moved beyond simple cash advances. Some now provide financing, at high interest rates, for surgery for plaintiffs who were injured in accidents and are suing to recover damages.
The industry contends that it is providing a crucial service, allowing customers to afford basic expenses and to hold out for potentially more attractive settlements instead of automatically accepting defendants’ initial offers.
The industry argues that the advances are technically not loans — the money is paid back only if the plaintiff wins a settlement or a jury award — and therefore are exempt from state usury laws. Companies say he high interest rates are necessary to cover the certainty that some funds will never be repaid.
The better-known part of the litigation finance industry — providing money to bankroll long-running, complex commercial litigation — doesn’t appear to be under scrutiny by prosecutors.
Selvyn Seidel, founder and chairman of Fulbrook Capital Management, a firm that advises commercial litigation finance firms, said an investigation into some corners of the business was overdue. He said some cash-advance firms took advantage of unsuspecting consumers.
“The funders in this industry, some are very good and some are very bad,” Mr. Seidel said. “They have an audience that is vulnerable. They are poor and desperate, and that is a recipe for disaster.”
A handful of states have imposed ceilings on the interest rates on settlement advances. State legislators in New York have introduced similar legislation.
Last year, the Consumer Financial Protection Bureau and the New York attorney general sued RD Legal, a New Jersey firm, claiming that it took advantage of former N.F.L. players who expected to receive money in the league’s landmark concussion settlement. The authorities claimed that RD Legal had tricked the players “into costly advances on settlement payouts.” RD Legal is contesting the matter.
A representative for RD Legal said the company had not received a subpoena from the Manhattan prosecutors.
Representatives and lawyers for several funding firms said they were unaware of the inquiry.