Most people are aware of the litigious nature of our culture, and are clear on the notion that people are increasingly willing to play the “blame game” in the courts. At the risk of stating the obvious, when confronted with circumstances wherein the pursuit of a monetary damages claim is appropriate, it is first and foremost essential that one engage experienced legal counsel. Secondly, engaging a capable financial expert that can provide key insights to legal counsel early in the game is essential. In that regard, your financial expert should possess credentials that address a wide spectrum of knowledge, including corporate finance, quantitative economics, valuation, solvency and fairness, intellectual property and financial forensics. These skills, amongst other things, will lead to a supportable conclusion as to the quantum of the prize with “reasonable certainty;” a conclusion that will take into account all of the possible factors that might arise in the courtroom setting, whether they favor or disfavor one’s position.
In two recent cases in which we were called upon to provide expert services we detected material omissions which would certainly sway the opinion of the trier of fact, and likely would have informed the opinion of counsel in the decision to pursue litigation. In both cases the theory of damages was the destruction of a business enterprise, which is an unusual claim, and very difficult to prove.
In both cases we showed by way of detailed forensic financial analyses that the allegedly destroyed enterprises were on the path to failure prior to the alleged breach, in each case exhibiting strong signs of insolvency and a lack of management depth. In the larger case, an alleged violation of a distributorship agreement (federal jurisdiction), it was clear from the financial records and deposition testimony of others that the company was continuously undercapitalized and mismanaged, and not capable of meeting its obligations to the manufacturer. In the smaller case, a repossession action by a lender was alleged to have prevented a site contractor from continuing its work. Not only was the company insolvent at the time of the repossession, but the economy had recently imploded in what we now refer to as the Great Recession of 2007, and the operant builders for which the company worked had halted the projects that the company was working on. These issues were simply ignored by the plaintiff’s financial experts. Additionally, the actual methods of analysis employed and the reports themselves were so flawed as to rise to the level of a violation of business valuation standards.
In both matters the suits were ultimately dismissed, one with prejudice, but only after a lot of time and money was wasted. If the respective counsels for the complainants had been provided an accurate assessment of the facts they might have decided not to pursue the matters in the first instance.
As in these two cases, we regularly review the work of others in the context of litigation, performing forensic financial analysis, and sometimes cringe at what we see, or don’t see. All too often we have detected the existence of facts and circumstances, clearly material to arriving at a cogent conclusion, that were not considered in adequate depth, and in some cases not at all. The responsibility of financial experts is to bring all factors, good and bad, to light. The job of the expert is to educate, not advocate.
When the time comes to play the “blame game” hire an independent minded professional to support you, not an advocate. Your position in court can only be enhanced by having an even-handed expert. Responsible professionals don’t play “now you see it, now you don’t.” True valuation professionals are advocates for nothing more than value that stands on its own merits.