AICPA National Forensic Accounting
Conference
Daubert : Case Law Update
Cliff Hutchinson
K & L Gates LLP
September 24, 2009
The Swan Hotel, Orlando, Florida
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Daubert: “Law west of the Pecos”
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National Archives
Daubert Challenges
PWC 2000-07 Study – 3,681 challenges
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635 directed to financial experts,
17%
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116 in 2007 alone
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In 2007, 41% excluded in whole or
in part
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57% of exclusions based on
reliability
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Nightmare on Cadman Plaza
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Nightmare on Cadman Plaza
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In re Med Diversified, Inc., 334 B.R. 89 (E.D.N.Y. 2005);
346 B.R. 621 (E.D.N.Y. 2006).
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Qualifications
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Reliance on Staff
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Reliability
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In re Med Diversified
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Qualifications
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No “peer-granted” certifications in BV
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No formal education or training in BV
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No “substantial articles”
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Little experience in health care industries
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In re Med Diversified
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Reliance on Staff
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“This Court is not prepared to admit an Expert Report
submitted by a corporate entity.”
Reliability
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Failure to use DCF approach
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Failure to explain choice of discounts
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Procedural Cases
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The Expert Report
Rule 26 – “a written report – prepared and signed by the
witness . . . a complete report of all opinions the witness
will express and the basis and reasons for them.”
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Who Writes the Report?
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Who Writes the Report?
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Welch v. Eli Lilly, 2009 WL 700199 (S. D. Ind. Mar. 16,
2009).
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“evidence of spoonfeeding of both specific language
and conclusions”
Expert “served more as a hired mouthpiece than as
an independent expert”
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Can Counsel Write the Report?
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Who Writes the Report?
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Compare:
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Southwire v. J. P. Morgan Chase, 528 F. Supp.2d 908 (W. D.
Wis. 2007)
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“the fact that plaintiffs’ counsel drafted [expert’s] initial and revised
declarations is not ground for excluding his report and testimony”
Elm Grove Coal v. OWCP, 480 F.3d 278 (4th Cir. 2007)
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“The fact that a lawyer has participated in the preparation of his
testifying expert’s report does not bar the use of the expert’s
opinion, or necessarily even impeach the expert’s reliability.”
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Identifying the Writer – Discovery of Drafts and
Communications
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South Yuba River Citizens League v. Nat’l Marine
Fisheries Svc., 2009 WL 1287919 (E.D. Cal. May 6,
2009).
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“all things communicated to [a testifying] expert and
considered by the expert in forming an opinion must
be disclosed even if it constitutes opinion otherwise
protected as work product.”
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Identifying the Writer – Discovery of Drafts and
Communications
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Compare:
In re Teleglobe Communications, 392 B.R. 561 (D.
Del. 2008)
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“any comments received by the Plaintiffs’ experts
from Plaintiffs’ counsel or non-testifying expert are
protected by the attorney work product doctrine and
did not have to be produced.”
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Rule 26 Amendments
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Report must set out “facts or data” considered by expert
Non-report witnesses – subject matter and summary of facts and opinions
Privilege for
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Drafts of Reports
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Communications with attorney, except for
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Compensation
Facts or data provided and considered
Assumptions provided and relied upon
Timetable:
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2/17/09 – Comments
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6/09 – Committee review
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5/10 – Supreme Court must act
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12/10 – Effective if no act by Congress
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Substance of Report: How Complete?
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Rule 26: “a complete statement of all opinions and the basis and
reasons for them”
Ciomber v. Cooperative Plus, Inc., 527 F.3d 635 (7th Cir. 2008) –
Rule does not allow cure “by supplementing with later deposition”
In re Oracle Corp., 2009 WL 1709050 (N.D. Cal.) – Supplemental
report cannot be used to add analysis to “shore up” earlier opinion.
Great White Bear v. Mervyns, 2008 WL 2220662 (S.D.N.Y. 2008) –
“the report must supply actual calculations with detailed and complete
information elucidating how the expert arrived at the damage figure.”
Toomey v. Nextel Communic., 2004 WL 5512967 (N. D. Cal. 2004) –
Omission harmless because party had opportunity to depose.
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Production of Prior Reports
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Standards:
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Control, not possession
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Matter relevant to the claim or defense of any party
Dering v. Service Experts Alliance, 2007 WL 4299968 (N. D. Ga. 2007) –
subpoena for previous reports on lost profits and means of calculating lost
profits
Saugatuck Harbor Yacht Club v. Westport, 2008 WL 5156311 (Conn.
Super. 2008) – valuation inconsistent with expert’s prior appraisal
Compare:
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Trunk v. Midwest Rubber, 175 F.R.D. 664 (D. Colo. 1997) – no prior
reports
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Phillips v. Raymond Corp., 213 F.R.D. 521 (N. D. Ill. 2003) – party is
entitled to “chapter and verse” of expert’s prior opinions
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Challenges to Qulifications?
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Challenges to Qualifications
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Helft v. Allmerica Financial Life Ins., 2009 WL 815451 (N.D.N.Y. 2009) – CPA with
ABV, CBA, and Series 7 held unqualified re stock losses.
Baldwin v. Bader, 2008 WL 2875351 (D. Me. 2008) – CPA with CVA, ABV
unqualified to value personal guaranty
Seitz v. Envirotech Systems Worldwide, 2008 WL 656513 (S.D. Tex. 2008) –
Experience in industry not sufficient for opinion on lost profits from infringement
Compare:
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Willis v. TRC Companies, 2008 WL 3911040 (W.D. La. 2008) –CPA qualified
by experience though had not taught or published and had no valuation
certifications
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Investor Resource Svcs. v. Cato, 2009 WL 1798616 (Miss.) – Lapsed CPA
license does not bar testimony
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Toomey v. Nextel Communic., 2004 WL 5512967 (N.D. Cal. 2004) – Damages
expert qualified by experience though lacking degree in economics,
econometrics or accounting.
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Issues with Assumptions
“I came to Casablanca for the waters.”
Rick Blaine, Casablanca, 1942
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Issues With Assumptions
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“Proposed testimony must be supported by appropriate
validation – i.e., ‘good grounds,’ based on what is
known.”
Daubert, 509 U.S. at 590.
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Reliance on Others
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Reliance on Others
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Auto Industries Supplier ESOP v. SNAPP Systems,,
2008 WL 5383372 (E. D. Mich.) -- Expert relied on client
and client’s consultant without independent verification.
Lyman v. St. Jude Medical, 580 F. Supp.2d 719 (E.D.
Wis. 2008) – Reliance on sales summary provided by
counsel.
MDG Int’l v. Australian Gold, 2009 WL 1916728 (S.D.
Ind.) – Reliance on counsel without independent
verification.
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Reliance on Others
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Platypus Wear, Inc. v. Clarke Modet & Co., 2008 WL
4533914 (S.D. Fla.) – Reliance on client’s income
ledgers: “an expert witness is not a private investigator
hired to investigate the accuracy of each report or
document he uses in creating his report.”
Taylor, Bean & Whitaker v. GMAC Mortgage, 2008
WL 3819752 (M.D. Fla.) – Reliance on independent
MIAC indices.
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Reliance on Staff
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Reliance on Staff
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Med Diversified, 334 B.R. 89 (E.D.N.Y. 2005) – Expert relied
“upon members of his support staff who are certified business
valuators for their input. . . . Defendants did not call the persons
who provided those inputs to testify.”
Wolkowitz v. Lerner, 2008 WL 1885770 (C.D. Cal.) – Expert
may use assistants in performing work “so long as those
assistants do not ‘exercise professional judgment that is beyond
the expert’s ken.’”
Adani Exports v. AMCI, 2008 WL 4925647 (W.D. Pa.) – Expert
allowed to use research assistant to gather information for report
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Toxic Expert Practices #1
Changing Deposition Testimony
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Changing Deposition Testimony
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Standards:
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Rule 30(e) – witness can review and make “changes in form
or substance”
Are changes “contradictory”?
Dering v. Service Experts Alliance, 2007 WL 4299968 (N. D.
Ga. 2007) – allowing two-page list of items for supplementation.
Chemfree Corp. v. J. Walter Inc., 2008 WL 5234247 (N. D. Ga.
2008) – no evidence of “obvious confusion” to allow
contradictory errata.
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Toxic Expert Practices #2
Accepting an Untimely Engagement
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Accepting an Untimely Engagement
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Corey Airport Svcs. v City of Atlanta, 2008 WL
4452386 (N. D. Ga.) –
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The expert “completed his research, conducted
his economic analysis and drafted his report in just
eleven days.”
Although not conclusively demonstrating that
methodology is unreliable, facts do explain “why
expert failed to do the required analysis.”
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Toxic Expert Practices #3
Using a “Novel” Methodology
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“Novel” Methodologies
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In re Williams Securities, 558 F.3d 1130 (10th Cir.
2009) – Leakage theory of loss causation.
Baldwin v. Bader, 2008 WL 2875351 (D. Me.) –
Personal guaranty risk equivalent to equity risk.
United Co. v. Keenan, 2007 WL 4260930 (W. D. Va.) –
Purported offer equal to FMV of company
In re Nellson Nutraceutical, 356 B.R. 364 (D. Del.
2006) – DCF analysis using EBITDA minus Cap Ex to
determine terminal value.
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Divorce Cases
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Wright v. Wright, 2009 WL 724153 (Ala. Civ. App.) – Minority
shareholder’s interest in retained earnings of S corp.
Cummings v. Cummings, 2009 WL 331436 (Ark. App.) – No
goodwill assigned to husband for commercial business
Gaskill v. Robbins, 282 S.W.3d 306 (Ky. 2009) – (1) Court must
separate enterprise and personal goodwill; (2) averaging of methods
is tantamount to no method.
Grelier v. Grelier, 2008 WL 5265056 (Ala. Civ. App.) – Minorityinterest and marketability discounts applied to husband’s real estate
interests.
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Whither the PCAOB?
Boot Hill
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Free Enterprise Fund v. PCAOB
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Constitution, Article II, sec. 2 –
“[The President] shall appoint . . . All other Officers of the
United States, . . But the Congress may by law vest the
Appointment of such inferior Officers, . . In the Heads of
Departments.”
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Certiorari granted May 18, 2009
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Free Enterprise Fund v. PCAOB
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Arguments:
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PCAOB members have “massive power”
PCAOB members are appointed and removable by
SEC
President has no oversight
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Are PCAOB “Officers of the United States”?
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Are PCAOB “inferior Officers”?
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Are SEC Commissioners “Heads of Department”?
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Can SOX survive without a severability provision?
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AICPA National Forensic Accounting
Conference
Daubert : Case Law Update
Cliff Hutchinson
K & L Gates LLP
September 24, 2009
The Swan Hotel, Orlando, Florida
Insert Your Logo Here