n july last year trial lawyer john h ruiz triumphantly declared his medicare and medicaid litigation and technology firm msp recovery to be worth a whopping 326 billion as he announced plans to go public by merging with a special purpose acquisition company the catch coral gables floridabased msp recovery which uses its “proprietary algorithms” to identify medical claims that should have been paid by other insurers instead of the governmentfunded healthcare programs had no revenue on tuesday msp recovery completed its reverse merger with lionheart acquisition corporation ii – the alreadylisted blank check company – and began trading on the nasdaq under the ticker mspr but it wasn’t an auspicious start shares plummeted 53 from lionheart’s 1078 close on monday to the newly listed msp’s 506 at the close of trading on tuesday despite the drop it was still a good deal for founder and ceo ruiz whose 65 stake in the company is worth around 108 billion as of tuesday’s market close chief legal officer frank quesada’s 27 stake is worth around 45 billion the spac sponsor ophir sternberg ceo and chairman of lionheart capital who coowns the miamibased luxury powerboat company cigarette racing with ruiz put in 25000 upfront for shares now worth around 277 million “every stock is down pretty much especially the technology ones” ruiz told forbes on tuesday afternoon “its just market conditions the interest rates global issues pertaining to russia and ukraine it’s just a lot more that has nothing to do with just the company itself” but the percentage drop of msp recovery shares on tuesday far outpaced that of the stock market indices the nasdaq fell 25 while the sp 500 index closed down 08 the spac boom of 2021 has turned into a spac bust this year far fewer blank check companies are going public following a wave of poor performance by many of the spacmergers from last year the sec has also stepped up scrutiny of spacs the agency has indicated it plans to crack down on the trend by proposing new rules related to disclosures conflict of interest and dilution suggesting the financial vehicles have been used as an alternative to the traditional ipo with less scrutiny and protection for investors in 2021 msp recovery reported a net loss of 33 million on 146 million in revenue going forward it’s pursuing two business lines neither of which has generated any substantial revenue the first is to gather medical claims from medicare advantage medicaid and commercial insurers and identify where it believes another insurer like an auto policy or worker’s compensation is actually responsible in these cases there can be a huge difference between what the provider billed and what the government paid which is the arbitrage opportunity msp is looking to exploit it then tries to collect on the difference through lawsuits and settlement agreements plus double damages for some cases its second business line involves a combination of biometric and medical records software that aims to help identify the correct insurer at the point the patient receives care so these incorrect payments aren’t made in the first place the company says it is sitting on a 15 trillion portfolio of billed claims with 87 billion in “potentially recoverable claims” but there is no guarantee of success as it notes in the proxy statement risk factors “msp has a limited history of actual recoveries to date as a result of cases that are still in litigation and there are risks associated with estimating the amount of revenue that msp will recognize from potential recoveries” this gets to the central tension of msp’s narrative how exactly do you place a monetary value on the potential future settlements associated with a bunch of medical claims that haven’t been litigated “what is the value of the claim i think that is the ultimate question that nobody has an answer to” says suneal bedi an assistant professor at indiana university’s kelley school of business who has studied the rise of litigation finance whereby third parties help finance lawsuits in exchange for a portion of the settlement “the issue is the variability of valuing these lawsuits is so high not just because theyre risky but also because its very difficult to really place the value of the risk” ruiz insists that what msp is doing is different from other publiclytraded litigation finance firms such as buford capital or omni bridgeway rather than funding lawyers to litigate cases msp “takes on ownership rights that our competitors do not” according to its proxy filing “we are the plaintiff in any action filed in connection with such claims and therefore have total control over the direction of the litigation” the result is generally a 5050 split between the insurer who wrongfully paid the claim and msp recovery in whatever funds are recovered the irony is that the original investors may have no interest in figuring out whether msp is a viable business that’s because they have the option to redeem their investment in the spac ipo after the target is announced and prior to the completion of the reverse merger in theory the original investors are putting money into the deal because they trust that the sponsors will make a good decision on a target to acquire but increasingly hedge funds are using spac ipos to park cash generate a return and get out before the merger goes through leading to the rise of the socalled spac mafia the median redemption rate among a group of 47 spacs from january 2019 to june 2020 was 73 according to an analysis coauthored by nyu law professor michael ohlrogge ruiz says around 90 of investors in the initial lionheart ipo redeemed prior to the merger with msp recovery a week and a half before the closing lionheart authorized cantor fitzgerlad one of the deal’s two underwriters to buy 35 million shares not redeem them and get paid back after the merger was completed according to an 8k filing ostensibly to increase the amount of cash that would remain available given the very high rate of expected redemptions “i myself am of the opinion that it should be considered a breach of the spac boards fiduciary duties to go through with a merger that so clearly seems to be vastly overvalued an indication of which is that the spac needs to resort to desperate measures to close the deal” nyu’s ohlrogge wrote in an email regarding the maneuver “that notion of spac board breach of duty has yet to be tested in courts although it will be interesting to see if that changes some time in the next year or two” ruiz says the cantor transaction made sense because “we wanted to keep as much money in trust as possible” insisting this was all “standard stuff” and there was nothing “eyepopping” about the deal he reiterated his position that it would take time for everything to stabilize “this isnt a sprint” he says “this is a marathon”