‘Pawn Star’ Harrison clashed with state regulators

A hit reality TV show about his Las Vegas pawnshop put Rick Harrison in the national spotlight, but another of his businesses got him caught up in drama last year with state regulators over the rules governing a controversial industry.

In spring 2009, the Nevada Financial Institutions Division issued and then quickly withdrew a cease-and-desist order against Harrison's Sierra Settlement Funding Company LLC, which offers plaintiffs in lawsuits cash that is repaid with interest if a case settles.

Ethics rules prohibit lawyers from giving clients money for anything but lawsuit-related costs. But because plaintiffs often need cash before a case winds through court, litigation finance companies have proliferated in recent years. Sierra Settlement is one of several in the Las Vegas Valley.

According to the division, Harrison's company made loans, and by law, required a license.

Harrison disagreed and let the state know it.

"When we opened the business two years ago, we did our due diligence and looked into whether we needed a license," Harrison 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."

Harrison's objections prompted the state to rescind the order. But the case also "brought to light some questions that needed answers," said Steven Kondrup, deputy director of the Financial Institutions Division.

The most fundamental of those questions: Are companies such as Harrison's 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?

Of this moment, the answer is no, the division concluded. 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 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, who is identified as the manager of Sierra Settlement by the Nevada secretary of state and the city of Las Vegas, said he doesn't oversee day-to-day operations of the business.

"Pawn Stars," the History Channel show about the shop that 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 address as the Gold & Silver Pawn Shop 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's 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 forbids 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.

Local 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. 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 in line to get $2,300 from a client of local attorney Adam Kutner in a case that settled for $60,000 earlier this year. Another of Kutner's clients received a settlement memorandum in which Sierra Settlement was due $700 out of a settlement of about $10,500.

The plaintiff in one of those cases, a car accident victim who spoke to the Review-Journal on the condition she not be identified, said her experience with Sierra Settlement was positive.

"We needed money to pay our rent and expenses while our case was being settled," she said. "We knew the interest was high, but we had no choice."

The woman, who borrowed $1,500 and paid back $2,300, said Kutner referred her to Sierra Settlement. Kutner didn't return phone calls seeking comment.

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 Valley 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 the appropriate business licenses for those states.

The Financial Institutions Division has statutory authority to address this issue with a regulation. The 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?"

If and when the new regulation is in place, 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 the "devil's in the details" 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."

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."

Contact reporter Alan Maimon at amaimon@reviewjournal.com or 702-383-0404.