[Editor's note: This article has been updated to reflect the court's ruling on September 10.]

On November 20, 2012, Rex Wempen sat on the witness stand in London's High Court. The former U.S. Army Green Beret was testifying in a $1.65 billion case that his company, Excalibur Ventures, had brought against a group of oil businesses. The dispute stemmed from a soured oil exploration deal in Kurdistan that Excalibur had signed with a company called Texas Keystone Inc. While the trial was essentially about a business deal, a secondary theme arose during the litigation: How could Excalibur, which had virtually no assets, afford to bring such a complicated and expensive case?

Under cross-examination, Wempen was pressured to reveal who was behind Psari, an entity that was paying his lawyers at Clifford Chance.

"Who is Psari?" asked barrister Jonathan Gaisman, who was representing three of the defendant oil companies.

"They are a company, along with [a] New York hedge fund, who [sic] is standing behind us for litigation finance," Wempen responded.

"Who are the shareholders of Psari? Who are the parties of interest?" Gais­man demanded.

"I'm happy to write the names down on a piece of paper to share with the court," Wempen offered.

"It is not a question of writing it down on a piece of paper. Who are they?"

Wempen and Gaisman sparred for several minutes, and Wempen finally turned to Justice Christopher Clarke. "Am I supposed to write this down?" he asked.

"No, you are supposed to reveal it," Clarke instructed.

And so a reluctant Wempen disclosed that Psari was a litigation funding vehicle created by the Greek shipping magnates Adonis and Filippos Lemos. The next day Wempen further revealed that he was getting funding from the hedge fund Platinum Partners and the recently formed litigation funding firm BlackRobe Capital Partners, both in New York.

This was a rare admission in the secretive world of litigation finance, where outside parties invest in litigation in exchange for a cut of any recovery. Despite the growth of this controversial field, few funded cases have had their financial backing revealed. Not only does the Excalibur case stand out for the exposure of outside funding, but it also appears to be one of the largest matters ever funded, and one of the most expensive. Before the lengthy trial was over last spring, Excalibur's litigation funders were forced to put up staggering amounts of money—more than $43 million—for legal fees and other expenses.

It turned out to be a bad investment. On September 10 Clarke ruled for Texas Keystone and the other defendants, rejecting Excalibur's claims. In a brief ruling, he found that Excalibur didn't have any interest in the oil fields at the center of this dispute. The court will issue a more detailed ruling later.

The Excalibur case highlights the risks in the growing field of litigation finance, which is striving to gain more acceptance among Am Law 200 firms and their clients. The dispute, which was initially supposed to be resolved through arbitration, morphed into a cluster of court cases on both sides of the Atlantic, pitting Excalibur's lawyers at Clifford Chance against Jones Day, which represents defendant Texas Keystone, and the London law firm Memery Crystal, which is representing three other defendant oil companies. (Each side also retained separate groups of barristers to handle the London trial.)

For BlackRobe it was a particularly painful experience. The funder didn't survive to see the trial's outcome. BlackRobe announced that it was disbanding last May, less than two years after it was founded—a stunning failure for a firm created by three high-profile lawyers whose accomplishments, contacts, and range of experience pointed to a promising venture. John "Sean" Coffey Jr. had been a successful plaintiffs lawyer; Timothy Scrantom is one of the pioneers of the U.S. litigation funding business; and Michael Chepiga was a top partner at Simpson Thacher & Bartlett. Coffey moved on to work on the defense team for former Goldman Sachs & Co. banker Fabrice Tourre, who was found liable for violating securities laws in early August. Scrantom says he plans to continue in the litigation funding industry. All three declined to comment for this story. While it's not clear what role the suit played in BlackRobe's demise, this investment couldn't have been a happy experience.

Eric Wempen formed Excalibur in 2003, shortly after the start of the Iraqi War, with the goal of finding business opportunities in Iraq. Rex moved there, while his younger brother Eric—a tax lawyer who had worked at Baker & McKenzie—handled logistics from the United States. Rex had hoped to parlay his military and government contacts into a lucrative business. He touted his career as a Green Beret, and his experience working on Capitol Hill and for the U.S. Embassy in New Delhi. Over the years he had tried his hand at trading sugar and wheat, and developing power projects in Jordan and Algeria, but none of these ventures lasted long. His brother Eric claimed to have done counterintelligence work in the Army and to have worked at the Central Intelligence Agency before becoming a lawyer.

In 2006 Excalibur signed a collaboration agreement with Texas Keystone, a Pittsburgh-based oil company, to bid on oil concessions in the Iraqi province of Kurdistan. Excalibur would have a 30 percent stake in the venture; Texas Keystone, 70 percent. Texas Keystone is run by a colorful American named Todd Kozel, whose acrimonious divorce in 2011 involved allegations about a Ukrainian mistress, a $5,100 strip club tab, and an attempt by Kozel to hide assets from his wife, who reportedly wanted $100 million. (The couple settled.)

Texas Keystone secured drilling rights in Kurdistan in late 2008 along with a Bermuda company that Kozel had cofounded called Gulf Keystone Petroleum Limited. Excalibur wasn't included. The reason for this exclusion lies at the center of the dispute. The Wempens maintain that Kozel breached the contract and cut them out on the basis of pure greed. Kozel counters that Excalibur failed to come up with the money it needed to participate in a bid. Furthermore, Kozel claims that Rex Wempen had offended Kurdish authorities and that they refused to work with him.

In the summer of 2009 major oil reserves were discovered in an area called the Shaikan block that lay within Texas Keystone's concession, and the Wempens decided to bring legal action in early 2010.

To pay for their case, the brothers looked for litigation funders at the same time they were on the hunt for counsel. The pair offered investors the prospect of a big payoff. They claimed they were owed $550 million from their former business partners, a sum that would later rise to $1.65 billion. Like hedge funds, litigation funders seek rich returns: Terms vary, but they typically take 30–50 percent of a recovery after they've recouped the amount they've spent on legal fees and expenses for the litigation. In this case, the funders stood to make a couple hundred million dollars if all went well.

The Wempens interviewed several law firms in New York about taking their case, making it clear that they would need third-party funding to finance the litigation. Clifford Chance London partner Alex Panayides was interested, and had a connection to a financing source: His brother worked for the Lemos family. He put the Wempens in touch with the Lemoses, who were looking for high-return investment opportunities. Panayides declined to comment.

The Lemos brothers, through their funding entity Psari, stepped in as the first financial backer—agreeing to pay Clifford Chance's legal fees and expenses—followed later by Platinum Partners and BlackRobe. The details and terms of the funding agreement aren't public.

It's hard to evaluate the track record of the litigation funding industry because of the secrecy surrounding it. Both Burford Capital and Juridica Investments Limited, which are publicly traded in the United Kingdom, have reported healthy profits on modest revenue. Burford announced a profit of $32 million on litigation investment income for 2012; Juridica, $12 million.

Professor Maya Steinitz of the University of Iowa College of Law, who has written about litigation finance, says this business is "very high risk" and involves "extreme uncertainty." She compares investing in a legal claim to putting money into a start-up. "You hope it may be the next Amazon, but it may be the next Pets.com," Steinitz says. One problem is that there is "information asymmetry": The claimant has more information about the case than the funder, she notes. And if a claimant shares too much information with the funder, it risks waiving the attorney-client privilege. "They may know there's a really bad document they're sitting on, and may know somebody may be a bad witness, and the funder can't get at that information necessarily," Steinitz says.

The Excalibur litigation officially began on December 20, 2010. The Excalibur–Texas Keystone contract required the parties to settle disputes through arbitration under New York law. But, in an ambitious move, Excalibur's lawyers at Clifford Chance decided not to limit themselves to arbitration. They brought two actions simultaneously, targeting additional defendants. The first was an arbitration against Texas Keystone in New York that also named Gulf Keystone and two affiliates. The second was a court case in London against the same parties, basing jurisdiction on Gulf Keystone's listing on London's junior stock exchange. Clifford Chance claimed that all the "Keystone" companies were, in effect, Kozel's alter ego.

In the London action Excalibur sought a worldwide "freezing injunction" that isn't available under U.S. law. The injunction would prohibit the defendants from transferring assets that might be needed to satisfy Excalibur's claim. Jones Day, representing Texas Keystone, cried foul, as did Memery Crystal, which was representing the Gulf Keystone defendants. This dual filing was a pressure tactic to get a quick settlement, the defense lawyers claimed.

Excalibur's strategy backfired. Not only did the company fail to get the freezing injunction, it lost its New York arbitration forum. Jones Day, led by London partner Stephen Pearson, and Memery Crystal, led by partner Harvey Rands, convinced a London judge to issue a rare "antisuit injunction" in June 2011, which stopped the arbitration from going forward in New York against the Gulf defendants. In another unexpected move, Texas Keystone consented to have its claims tried in London with the Gulf defendants.

All this complicated wrangling meant that Excalibur had to try its case in the public courts of London, instead of a confidential arbitration in New York. And while arbitration isn't always a cheaper process, a trial in London presented one serious added risk: Britain's "loser pays" rules, which would force Excalibur's funders to reimburse most of the defendants' legal costs if they lost.

As the trial approached, the case took another bad turn for Excalibur. In March 2012, at the defendants' request, Justice Andrew Popplewell required Excalibur and its funders to put up security for 70 percent of the defendants' legal costs, to ensure they could pay this amount in the event they lost. This type of security order, which is rarely imposed, can be granted if the plaintiff doesn't appear to have substantial assets. The judge also ruled that Texas Keystone and the Gulf Keystone group were entitled to separate representation, which meant separate legal bills from each. The amount of security: £9.5 million ($14.5 million).

BlackRobe stepped into the funding group at this point, having been formed a year earlier by Coffey and Scrantom. Coffey is a retired Navy captain who was a partner at Latham & Watkins and Bernstein Litowitz Berger & Grossmann. He left the plaintiffs firm in 2009 to focus on a brief and unsuccessful run to be the Democratic candidate for New York State attorney general. Scrantom is a veteran of the litigation funding industry, having cofounded Juridica, and is also a nonpracticing English barrister. In a 2011 press release they described BlackRobe as the "next generation" of commercial claim investors that would be "pioneering the application of private equity principles to investments in legal claims." They would not just provide clients with funding, but would offer investigative, public relations, and strategic political services. In the press release, Coffey called it an "evolved, multidisciplinary approach."

Soon after, in April 2012, BlackRobe announced that Michael Chepiga, a litigator who had spent 30 years at Simpson Thacher, had become a full-time managing director. It was a bold move for Chepiga, a Yale Law School graduate who had been on Simpson Thacher's executive committee. But Chepiga isn't a conventional lawyer: He's also a playwright whose work Getting and Spending—a humorous play about an investment banker accused of insider trading—ran on Broadway in 1998. "I am delighted to join two acknowledged leaders, Tim and Sean, in this creative new enterprise," Chepiga said in a 2012 press release.

When the Excalibur trial began on October 15, 2012, it was watched by a coterie of Gulf Keystone investors who recounted each day's events on an online message board. One investor offered this sketch of adversaries Todd Kozel and Rex Wempen: "The first impression of Todd was of a big American with a big diamond on his index finger. . . . Rex Wempen was also supersized, with a shiny skull, and a suit which hadn't seen an iron for a while." Someone even went to the effort of creating an animated cartoon series about the trial and posted it on YouTube. In one episode, an observer expressed relief that there was no testimony about lap dancing that might embarrass Kozel. Mostly, this partisan group cheered every point scored by their team and mercilessly attacked and ridiculed the Wempen brothers and their lead barrister, Simon Picken. (In the U.K. only barristers may advocate in court, and their practices are separate from those of general litigators.)

The trial didn't start well for Eric Wempen, who had recently left a job as a tax lawyer for UBS AG. Gaisman, the barrister for the Gulf Keystone companies, confronted him with an email he had written from his UBS account to his brother Rex a month before the litigation began. "Do what you can do to Todd to mess him up personally, his wife, his kids, bury him," it said. "Nothing is sacred, he's cheated on his wife, civil fraud, he will settle." When this message was read in court, it prompted gasps from onlookers, according to the message board. Wempen denied on the stand that he was trying to blackmail Kozel. (The Wempens could not be reached for comment for this story.)

When Rex Wempen took the stand, he was confronted with an equally punishing exposure. Gaisman forced Wempen to admit that because of misconduct, he hadn't received a "standard discharge" from the Army, that he had been accused of forgery as a serviceman, and that he had tried to get his military record sealed.

Two months into the trial, Memery Crystal and Jones Day tightened the screws and asked their adversaries for more security, given the unexpected length of the proceedings. Clifford Chance, in turn, complained about the size of the defendants' legal team, to no avail. In February of this year, Justice Clarke ordered the funders to put up another £8 million ($12 million) in security, bringing the total security to £18 million ($27 million). By that point, the funders had already paid the Wempens' lawyers at Clifford Chance £11 million ($16.7 million), according to Clarke's ruling, bringing their total cash outlay to £29 million ($43.7 million).

The Gulf Keystone investors celebrated the judge's security ruling on their message board, some gloating mercilessly. "To watch the expression on [Picken's] face when the judge was reading out his decision was an absolute joy to watch," wrote one. "To say [Picken] looked sickened would be an understatement, and when he stood to respond to the judge with his papers in his hand, you could see the papers shake. To watch [Clifford Chance's Panayides] . . . behind him, head in his hands looking equally sickened, made my and several others' day."

The Wempens' lawyers told the court that the funders weren't sure if they'd put up more money. They wanted first to review the trial transcript. They eventually did come through. Although this case was costing more than expected, the potential recovery had also soared. Since the start of the litigation, the estimated value of the Shaikan oil field had roughly tripled, making Excalibur's claimed 30 percent interest now worth $1.65 billion.

The trial stretched on for 57 days, finally ending March 1. Two months later, before Clarke issued a ruling on the merits, BlackRobe announced that it was disbanding. The Wall Street Journal reported that BlackRobe faced difficulties raising capital. In an interview in May with The American Lawyer's Litigation Daily, Coffey attributed the firm's demise partly to "philosophical differences"; Scrantom cited "growing pains," and also said the partners differed on how long they would try to raise capital with their own re­sources.

On September 10 Clarke read out loud his summary decision in his court in London. It was an absolute victory for Texas Keystone and Gulf Keystone, with the justice rejecting every one of Excalibur's claims. The justice will issue a more detailed ruling later, and will also later determine if Excalibur owes additional money for the defendants' legal fees. In British courts, parties do not have the right to appeal. They must first get permission from the trial court or the appellate court.

Memery Crystal's Rands, who represents the Gulf Keystone defendants, says Excalibur and its lawyers were sunk by their own tactics: "The plaintiffs screwed up big-time. They made a fatal error to submit to jurisdiction in London. . . . If they had never come here in the first place, they could have had an arbitration in New York City. There would have been no security for costs." Rands also says that an arbitration would have been much simpler for Excalibur: "No arbitrator would have listened to this for 57 days. Excalibur would have had more scope to push its illusory case by written submissions."

Jones Day's Pearson said the firm is "extremely pleased" with the ruling. Texas Keystone director Robert Kozel (the brother of Todd Kozel) issued this statement: "We are extraordinarily happy with the outcome. . . . In truth this is a claim that should never have been brought and we were determined to fight it."

For Excalibur and its funders, it appears that the prospect of riches from Kurdistan will forever remain a sword stuck in a stone.