Jeffrey Dorman: Statistical Evidence is a Powerful Weapon, Not a Magic Bullet

 Written by Tom Hagy

 

There are endless uses for statistical evidence.  It is great for estimating damages, providing quantitative proof of the extent to which conduct had an impact, or rebutting or cross examining an expert.  But, attorney Jeffrey Dorman says, “Just as important to knowing how to use statistical evidence is knowing when not to use it.”

 

Speaking on a live recording for Mealey’s Litigation Conferences and Business Valuation Resources LLC, Dorman said statistical evidence is not a magic bullet that should be used in every case.  “Sometimes it’s inappropriate, irrelevant or even inadmissible.” 

 

And if anyone should know it would be Dorman.  In addition to being a 30-year litigator and a partner with Freeborn & Peters LLP, he has extensive training and experience in statistical estimation, mathematical modeling, parametric estimating, system dynamics programming, and financial analysis. 

 

As a general rule it is only necessary to use damages experts when it is necessary to estimate damages, Dorman said.  In many cases there is no need to estimate, such as in cases of liquidation.  When a contract is broken, the damages generally comprise the cost of covering the contract.  In the case of theft, generally speaking it is the cost of the item stolen, unless it is something rare or unique.  In both cases, damages can usually be computed directly, without the need for estimation, and can be presented through a fact witness, as opposed to an expert witness.

 

In contrast, where damages depend upon future economic variables like profits, sales, demand and cost, or future commissions, competitive harm, or patent infringement, there is no way to avoid the use of a damages expert, he said.

 

In between these categories you have the cusp, Dorman said, like a class action where back pay is involved and data are available to directly calculate the lost back pay of each class member.  When in this situation, he said, if feasible, you should perform the direct calculation of damages; this will be better than a class-wide estimate based on regression sample because even a good approximation will miss the true value in virtually every instance.  A properly chosen random sample, while methodologically acceptable, will have sampling errors. 

 

Dorman warned:  If you chose to base your damages calculation on a sample and the opposing party correctly performs a direct calculation, there will be credibility problems because “an estimate is just that – an estimate.”  However, if the class members are in the tens of thousands so that it is impractical to perform a direct calculation, the use of a sample might be the only practical way to assess damages. 

 

It is a judgment call as to whether to perform a direct calculation or estimation, he went on.  You have to look at what data are needed, whether the data are available, and whether there is someone who can perform the direct calculation.  You also need to examine the cost and the likelihood that the opposing party will perform a direct calculation. 

 

Besides expenses there are other tactical reasons to consider when employing a financial expert.  You need to weigh the necessity against the impact on discovery  – the subject of another post.   

 

Dorman spoke for Mealey’s Litigation Conferences and BVR along with Dr. G. William Kennedy PhD, CPA/ABV with Anders Minkler & Diehl, LLP.   This is an excerpt from the session.  To receive more information about how to receive a copy of the recording, the materials and transcript of the presentation, contact Customer Service at (888) BUS-VALU, (503) 291-7963 or write to me directly at tom.hagy@bvresources.com.  I also own a phone and know how to use it:  610-312-4754.

 

James Dugan on Testifying & Consulting Experts

 

By Tom Hagy

 

An important decision in selecting a financial expert in complex commercial litigation is whether you pick a “testifying” expert or a “consulting” expert. 

 

Speaking on a teleconference for Mealey Litigation Conferences, James C. Dugan of Willkie Farr & Gallagher cited Federal Rule of Civil Procedure 26(a)(2)(B), which, he explained, offers very broad discovery parameters for testifying experts and materials exchanged in preparing for trial. 

 

In the case of a testifying expert, “assume everything you send to your expert will end up in the hands of the jury,” he said.  While most lawyers want to see drafts of expert reports, like everything else, “those drafts will probably have to be disclosed and may create issues for you and your expert.”  The other side will pore over these materials methodically in an effort to call your witness’ credibility into question. 

 

In some cases you will want to work with a consulting expert, someone who will not testify and never get before a jury, Dugan explained.     In this arrangement the materials exchanged between you and your expert are protected as attorney work product, he said.  That’s not to say the other side may not challenge you, he said, but typically they won’t be successful in breaking through the work product shield.  When you are going through rounds of drafts, you will want a consulting expert, not a testifying expert, to work with you to best position your analysis. 

 

Dugan said this is especially true where different damages theories are at issue.  You will want to investigate those thoroughly and fully prepare with your consulting expert before you work with your testifying expert.  “You don’t want to put your testifying expert in that position,” Dugan said, since this could throw their conclusions into question.

 

This is from audio recordings and materials available on CD from Mealey’s Litigation Conferences and BVR.  These packages — “Effective Timing & Use of Financial Experts” and “Compelling Statistical Evidence: Mining, Modeling, & Presenting Quantitative Financial Evidence to Juries” – contain audio, presentations and transcripts. For more information, write to me directly: tom.hagy@bvresources.com.

 

 

Statistical models can make all the difference

Just how important are statistical models?   Just take a look at some recent cases where effective statistical analysis, including market event studies, became the “make or break” evidence, especially in cases concerning securities litigation and lost profit/economic damages:

• Expert’s market event study helps support loss causation claims and class action certification in large securities litigation; In re Flag Telecom Holdings, Ltd. Securities Litigation, (U.S. District Court, S.D.N.Y., 2007)
• Sophisticated event study shows efficient market and convinces court to certify class of litigants in a “fraud on the market” theory; In re Xcelera.com Securities Litigation (1st Cir., 2005)
• Delaware Chancery Court rejects lost profits computation based on an event study analysis that failed to consider all possible events that may have contributed to the loss; In Penn Mart Supermarkets, Inc. v. New Castle Shopping, LLC, (2005)
• Delaware Chancery Court favors “shared synergies” and actuarial analysis in the fair value appraisal of an insurance conglomerate’s merger; Highfields Capital, Ltd. v. AXA Financial, Inc. (2007)
• Federal court defines market efficiency, the five factors that prove it—and the statistical financial analysis that does (and does not) meet the burden of proof; In re Polymedica Corporation Securities Litigation (U.S. District Court, Mass., 2006)
• In context of shareholder seeking access to company books, Delaware Chancery Court approves unique statistical methodology for testing whether stock option backdating has occurred; Louisiana Municipal Police Employees’ Retirement System v. Countrywide Financial Corp. (2007)
• Court reverses $1.45 billion jury verdict based on lack of “fraud-free” valuation of securities; Morgan Stanley & Co. Inc. v. Coleman Holdings Inc.(Fla. App., 2007)

The last case was—until its reversal for lack of reliable statistical evidence, the largest jury award for economic damages ever.  All of these case—especially in light of the securities and loss litigation that is certain to come out of the current economic spiral—demonstrate just how important it is for valuation analysts to present compelling and understandable statistical models to a judge or jury (and assist their attorneys in preparing the evidence for deposition and trial). Reminder: Copies of all cases are available at BVLaw™, and the case abstracts are available by subscription at BVLibrary™.)

LEARN MORE.   To refresh and refine your use of statistical models, regression analysis, and market event studies, be sure to tune into BVR’s next teleconference, “Compelling Statistical Evidence: Mining, Modeling, and Presenting Quantitative Financial Evidence to Juries,” featuring William Kennedy, Ph.D, CPA/ABV of St. Louis’ Anders Minkler & Diehl, LLP, and Jeffrey Dorman, Esq. with the Chicago office of law firm Freeborn & Peters, LLP.  The teleconference takes place Wednesday October 22, 2008; to register, click here. 

Compiled and written by the fine staff at Business Valuation Resources in the latest issue of their free eZine, the BV Wire.

Fierce Daubert Challenge Fails, Court Says Wait for Trial

A recent case out of federal court in Louisiana isn’t groundbreaking or unusual, but is illustrative of how attorneys swat at financial expert witnesses like low-hanging piñatas. 

 

In a case where the value of an engineering firm came into play, the plaintiff aimed its Daubert challenge at defense expert Kim Early CPA, MBA, calling him unqualified and his testimony irrelevant, based on the wrong methodology and not supported by facts.  The court determined, however, that even though Early had not taught in the BV field, is not published and holds no BV certifications, he is not required to have these to testify.   The plaintiff said Early didn’t know enough about the claims in the litigation, but the court said this and other issues relating to the value of stock are relevant to damages and available for scrutiny during cross-examination.  The plaintiff took issue with Early’s methodology, his lack of a publishing history and the fact that the engineering firms he used for comparisons weren’t the same size.  Based on an email exchange between counsel and the expert, plaintiff also questioned whether the defendant’s in-house counsel overly influenced the witness’ conclusions. 

 

Feelings

 

The defense even took issue with the way Early started his sentences, several of which began with phrases such as “we think” or “we feel” or “we estimated.”  

 

The court rejected the challenge and gave Early the green light to testify, saying it is required to look at a witness’ principals and methodology, not just his conclusions.  The court repeated its view that the plaintiff was free to address its concerns during cross-examination.

 

Willis v. TRC Cos., 2008 U.S. Dist. LEXIS 38573 (W.D. La. May 12, 2008).  Note:  In case you’re interested, I see that Lexis posted 10 motions and other documents leading up to this decision. Good stuff.