Unwin: a light bulb went off
There is a correlation between a company’s success in litigation and its subsequent stock market performance, legal IT company Premonition has claimed.
The US-based start-up, which operates in the UK as well [1], operates an artificial intelligence system that mines big data to find out which litigators win and before which judges.
As part of its work in the US, it noticed that a particularly prolific foreclosure (repossession) lawyer produced an 83% win rate for one of his bank clients, while another was only winning 16% of their foreclosures, essentially the same case types.
“We couldn’t figure it out and had all kinds of foolish theories why,” said Premonition co-founder and inventor Toby Unwin. “A litigator visiting the office took one look at the numbers and told us ‘It’s the clients’.
“One client had solid chains of title, good documentation and was responsive to the lawyers handling their cases, while the other was just the opposite, a disorganised mess. One company’s cases couldn’t lose, the other’s couldn’t be won. A light bulb went off.”
He said Premonition concluded that courtroom results must eventually reflect in the company’s balance sheets and then in their stock prices. “Selling a basket of soon to be under performers short and buying a basket of out performers should produce significant, market-neutral stock market returns.”
It called in Desai Capital Management to build regressions and quantitative models around the data.
Chief executive Ashish Desai said: “It took several months to produce a final model because the amount of litigation data they had was so overwhelming… The briefest overview of the data showed the best litigation performers outperforming the litigation losers with high levels of statistical significance amongst the mortgage-concentrated stocks.
“Essentially we’re able to calculate relative stock market performance nine to 24 months in the future; the courts are a crystal ball.”
Guy Kurlandski, Premonition’s chief executive, said they believed the same approach could be applied to other areas of litigation, and were training the system to seek correlations in other investment areas.