The Big Problem With The Trans

Investor state dispute settlement an integral part of the Trans Pacific Partnership trade deal allows companies to sue entire countries for costing them money when laws or regulations change. Cases are decided by extrajudicial tribunals composed of three corporate lawyers. Buzzfeed, in a multi part investigationlaunched Sunday, called it "the court that rules the world."

Although the ISDS process has existed for years,TPP would drastically expand it. The most common criticisms of the system are that it's secret, that it's dominated by unaccountable big firm lawyers, and that global corporations use it to change sovereign laws and undermine regulations. That's all true.

The ISDS system which is now written into over 3,000 international trade treaties, including NAFTA was designed to solve a specific problem. When corporations invest abroad, they fear that their factories might be nationalized or their products expropriated by governments that also control the local courts. ISDS is meant to give companies confidence that if a country seizes their accounts or factories, they'll have a fair, neutral place to appeal.

But instead of helping companies resolve legitimate disputes over seized assets, ISDS has increasingly become a way for rich investors to make money by speculating on lawsuits, winning huge awards and forcing taxpayers to foot the bill.

Here's how it works: Wealthy financiers with idle cash have purchased companies that are well placed to bring an ISDS claim, seemingly for the sole purpose of using that claim to make a buck. Sometimes, they set up shell corporations to create the plaintiffs to bring ISDS cases. And some hedge funds and private equity firms bankroll ISDS cases as third parties just like billionaire Peter Thiel bankrolled Hulk Hogan in his lawsuit against Gawker Media. housing debt for pennies on the dollar. As The Huffington Post reported in May, the financiers were betting they could use lawsuits and lobbying to influence the political system in favor of the creditors like them and reap huge rewards.

Indeed, the damage of ISDS goes far beyond the money that investors manage to extract from public coffers and extends to the corruption of a political system by investors who buy off scholars, economists and politicians in pursuit of whatever policy outcome leads to a payoff. And there's nothing stopping plutocrats with agendas that go beyond profit making from getting involved again the way Thiel did with Gawker. That alone changes the power dynamic: If you're the government of Thailand, the billionaire you're negotiating with has one extra threat at his disposal.

So called third party funding of "international arbitration against foreign sovereigns"has been expanding quickly, according to Selvyn Seidel, a pioneer in the litigation finance industry and now CEO of the advisory firm Fulbrook Capital Management.

"You can get an award for billions of dollars when that award would never come out in domestic law," said Gus van Harten, a professor at Osgoode Hall Law School at York University in Toronto. "It's just a jackpot for speculators."

Here's an example. In 2008, the Spanish government, under pressure from the eurozone to cut its budget during the financial crisis, began to reverse generous subsidies for solar energy. Spain reduced support for solar in stages. It changed the definition of its replica van cleef diamond ring main solar incentive program in 2008, reduced the subsidies through two measures in 2010, placed a moratorium on subsidies for new solar plants in 2011, and added further restrictions in 2013.

Renewable energy activists could only shout into the air. But a group of investors hatched a plan.

Between November 2011 and December 2013, 22 different companies sued Spain in seven different cases over the subsidy changes not in Spanish courts, but using ISDS.

RREEF, an investment fund subsidiary of Germany's Deutsche Bank, and Antin, a private equity firm owned by French bank BNP Paribas, purchased their Spanish solar thermal power plants in 2011, three years after the country began to roll back subsidies. But when they went to ISDS, they claimed they had expected subsidies to continue not to continue declining.

"It feels like they acquired [the solar plants] in order to sue," said , a campaigner for Corporate Europe Observatory, a Brussels based research organization. Those two cases are still pending; a tribunal order allowed the RREEF case to advance in June.

The facts suggest that these investment funds made their purchases based not on the potential success or failure of the business they bought, not out of a concern for climate change and its consequences, but with the expectation that the Spanish government would continue its subsidy rollback, allowing the funds to sue in a special court unavailable to Spanish citizens. (To be fair, HuffPost can't prove this to a certainty.) ISDS represented the purpose of the investment or, to phrase another way, the use of ISDS was an asset building strategy. Spain's renewable energy subsidies have not been restored. Instead, a cash strapped government is being forced to spend scarce resources defending a decision that was forced upon it.

Spain isn't the only government defending these sorts of ISDS claims. Potov Banka of the Czech Republic bought sovereign debt from Greece in early 2010, well after rating agencies haddowngraded the nation's bonds. Two years later, after European leaders forced a restructuring of all Greek government bonds, Potov and its shareholder, Istrokapital of Cyprus, filed an ISDS claim, contending that the restructuring cost them millions.

Maybe Potov bought the distressed bonds knowing that it could use arbitration as a fallback. Or maybe it bought the bonds with the intent to sue and gain a favorable return on its money through ISDS.

In several other cases, investors appeared to opportunistically purchase a company that had the ability to file an ISDS claim at exactly the right time.

In 2004, through one of its investment funds, the French bank Socit Gnrale purchased a 50 percent stake in a public private partnership to distribute electricity in the Dominican Republic. The purchase included intermediary companies from California, Delaware, Nevada and the Cayman Islands, and the corporate structure is nearly impossible to ascertain. (SocGen explained to arbitrators that it also arranged a "deferred purchase fee"). And the heart of the dispute the Dominican Republic's alleged failure to pay negotiated compensation occurred years before SocGen made its purchase, according to the country, which argued SocGen was merely "buying a claim."

Nonetheless, an ISDS tribunal ruled that "the principal objective of the transaction was the potential profitability of the investment." It found that the Dominican Republic's violations were ongoing and, through a settlement, awarded SocGen $26.5 million.

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of Corporate Europe Observatory

Since Greek and Roman times, the wealthy have placed bets on the outcomes of court cases. Under English common law, financing someone else's lawsuit, known as champerty, was illegal. But the modern version of that,litigation finance which began in Australia in the 1960s has spread widely over the past two decades. Investors seeking higher returns on their savings have looked to courtrooms instead of stocks or bonds, agreeing to bankroll cases and taking a portion of the cash awards if they win.

Third party funding replica van cleef arpels ring shields corporations from the upfront costs of litigation, making it easier to sue. Since companies generally don't have to disclose that they've received third party funding for an ISDS case, and since international arbitration usually proceeds in comparative secrecy, pursuing a claim through ISDS can shield companies from the public criticism that accompanies challenging a law in regular courts. "You can actually ask for enormous amounts of money without anybody criticizing you," said Verheecke of Corporate Europe Observatory.

With ISDS permitted under some 3,000 treaties,there are a huge number of opportunities to sue. And "unlike some other legal systems, the default remedy is a cash payment," said Todd Tucker, a fellow at the Roosevelt Institute with a decade of experience researching trade and investment policy. The awards are also uncapped, meaning they can be enormous. If a corporation sought damages on future profits in perpetuity and the arbitrators agreed, the sovereign would have no recourse. Dozens of cases have resulted in awards of over $100 million, according to afrom van Harten, the law professor.

Defenders of ISDS argue that the outcome of any case is uncertain and that companies win only about one quarter of the time. But that's only the cases that have been publicly identified and it doesn't include settlements, where the corporation can also extract a monetary award. If funding ISDS suits was really such a bad bet, the industry probably wouldn't be expanding so quickly.

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