Michele Miles: When Picking a Financial Expert, Beware of Hormonal Imbalances

By Tom Hagy

 

 

Battle metaphors are frequent when talking about litigation and trials.  Verbs like kill, shoot, crush, and destroy are not uncommon.  Michele G. Miles, both a J.D. and accredited business appraiser, sees a danger in taking the macho metaphors too far, especially when they affect the conduct of a financial expert. 

 

Miles said you need to avoid what she calls “testosterone poisoning,” and urges you to learn the signs.

 

First, she said during the recording of a Mealey’s Litigation Conference / BVR audio, that you do not want a witness who is going to pick a fight.  Instead, she said, you want one who is proud of their process – “so proud that he will be glad to go through it again and again.”  This will give counsel an indicator that the expert will exude credibility.

 

But what are the signs of a testosterone-poisoned witness?  Miles said such a character may refer to a place in their office as a “war room” where they store and summarize documents.  They may be inclined to place a photo of themselves in their expert report.  They tend to come to you with checklists, suggesting rigidity in their process.  They may have trademarked some of their terms or processes.

 

If you want someone to pass Daubert review, she said, you do not want to show “personally developed methods” were used in place of “real world” methods.  

 

Testosterone-engorged experts may also have a tendency to read or interpret case law for the attorney.  If case law makes its way into the expert’s report “something is badly broken,” Miles warns.  If an expert must discuss a case in his report, he should refer to a treatise written by an authority on the subject, something everyone agrees is authoritative. 

 

A testosterone imbalance also can lead to a decision to have one expert to attack another, something Miles cautions against.  “Don’t use your expert as a paid assassin,” she said.  “Your witness can’t testify on his own opinion while throwing rocks as someone else’s.”   She said to stick to the process and avoid getting into past conflicts. 

 

Not only should an expert not be an assassin, they should not be a “crutch” for an attorney making his way through new subject matter.   “Do your learning behind the scenes,” she advises.  “Ask dumb questions behind the scenes.”

 

Miles warned against appearing to be too close to your witnesses.  Never take your expert out for “show and tell,” she said.  Do not pass notes during hearings, do not take him to depositions, and do not hang out during trial.  “Don’t treat them as part of the team,” she said.   

 

“What you want is an expert that, when he leaves, prompts everyone to say ‘and we never even got a chance to thank him,’” she said, recalling romanticized heroes from the Old West. 

 

You can hear more from Michele Miles, who also is former executive director of the Institute for Business Appraisal, plus commercial litigator James Dugan of Willkie Farr & Gallagher and financial expert Steven Schroeder of Schwartz & Associates LLC,  on the CD package entitled “Effective Timing & Use of Financial Experts.”   For more information, write to me directly at tom.hagy@bvresources.com.

 

Daubert Attacks Go Beyond Experts to the Supporting Data

OCALA, FLA. – In an interesting twist to what’s becoming the standard Daubert challenge, the party opposing the financial expert in this case not only attacked the reliability of his opinions but also moved to exclude the mortgage pricing data on which he based his calculations, claiming that the provider should have been disclosed as a separate expert under the federal rules. 

 

The case raises an important distinction: the fine line between an expert offering a qualified opinion and his impermissible conclusion of law or fact.

 

In this suit between two mortgage companies, the plaintiff challenged the defendant’s financial expert in a pre-trial, Daubert-based motion.  To determine this preliminary matter, the court did not recite the facts of the case but it did summarize the expert’s findings in his report, including 1) that the defendant overpaid the plaintiff for certain mortgage servicing rights (MSRs); and 2) that the overpayment totaled $20 million.  To calculate the $20 million damages, the expert relied on data provided by the Mortgage Industry Advisory Corporation (MIAC)—in particular, its price indices for mortgage servicing rights.

 

The plaintiff argued that the MIAC data constituted such an “essential” aspect of the expert’s opinion that the provider qualified as an additional expert, requiring disclosure under Rules 26 of the Federal Rules of Civil Procedure (FRCP).  Because the defendant had failed to disclose MIAC, the plaintiff argued, its “opinions” should be excluded from the expert’s report pursuant to Rule 37 FRCP.

 

The court found the defendant had disclosed its expert’s use of the MIAC data.  “Moreover, there is no suggestion that MIAC created its indices or generated any other data based upon the specific details of this case,” it said.  Rather, the expert relied on the compilation of data that MIAC routinely provides the public.  An MIAC representative did give the expert “general guidance” on using the data, the court said, but that “does not, in and of itself, make MIAC an expert in this case.”   Instead, MIAC was a source of data, comparable to the federal Bureau of Labor Statistics, and the defendant’s expert did not rely on anyone else’s analysis or calculations but his own.

 

Further, the court found that even though the expert did not “understand every detail” of how MIAC calculated its data, the pricing indices were the type on which experts in the mortgage servicing industry reasonably relied.  The expert’s timely disclosures permitted the plaintiff sufficient opportunity to conduct its own research and analysis regarding the reliability of the MIAC data, the court held, and denied the motion based on any failure to disclose.

 

For the rest of this article and the opinion, go to BVRLegal.com.

 

Taylor, Bean & Whitaker Mortg,. Corp. v. GMAC Mortg. Corp., 2008 WL 3819752 (M.D. Fla.)(Aug. 12, 2008) or  Taylor, Bean & Whitaker Mortg. Corp. v. GMAC Mortg. Corp., 2008 U.S. Dist. LEXIS 59900 (M.D. Fla. Aug. 6, 2008)

 

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.     

Lack of Very Specific Experience Beats Expert’s Knowledge, Diligence in Painstaking Daubert Review

Baldwin v. Bader, 2008 U.S. Dist. LEXIS 56236 or 2008 WL 2875351

PORTLAND, Me.—This is the Maine federal court’s second look at what it called a close and difficult question—the valuation of personal guaranties given by company insiders to secure financing.  The first review came on a motion to exclude expert testimony that valued personal guaranties by comparing them to the risks borne by equity investors.   After the previous judge retired and other issues were raised, the court reconsidered Daubert matters, with added references to the just-released Cost of Capital: Application and Examples (3d ed. 2008) by Shannon P. Pratt and Roger Grabowski.  The opinion makes for provocative reading for appraisers and attorneys alike, especially on the novel and “hard-fought” issue how to value guaranties separate from valuing the business.

One issue was whether an excerpt from Cost of Capital was admissible at a Daubert hearing if the expert didn’t rely on it.  U.S. Magistrate Judge John H. Rich III saw no such requirement.  “[N]one of the authorities that the plaintiff cites . . . can be read to stand for the proposition that a proponent of expert testimony is confined to defending against a Daubert challenge solely on the basis of the authorities the expert used to formulate his or her opinion . . . .By contrast,” the judge added, “my own research indicates that . . .  it is permissible for proponents of expert testimony to rely on authorities other than those explicitly relied on by the expert to establish the reliability of the expert’s methodology.”  He added that the exhibit is probative at least relating to whether Pratt “subscribed to the view that there was no published study quantifying the risk premium added by provision to a personal guaranty.”

Novel Methodologies, ‘Tried & True,’ and Ipse Dixit

Whether defense expert John T. Gurley’s  testimony passed Daubert muster was a “close question,” the court commented.  Despite a “combined depth of accounting experience of some 70 years,” it said, neither Gurley nor the plaintiff expert had ever valued a personal guaranty.  The plaintiff attacked Gurley’s testimony as based solely on his ipse dixit.  Daubert says novel methodologies can be reliable and old ones can be applied in new ways, the judge observed, “yet novelty does not relieve the burden of proving reliability” and the defendants did not carry that burden.  While acknowledging all the ardent study, analysis and independent research Gurley undertook, the magistrate judge said he could not conduct his gate keeping from “too generalized a perspective.”  Did Gurley arrive at the “particular conclusion” that the risk of personal guaranties was comparable to the risk of equity investment?   In the end, despite his efforts and experience—perhaps, even, following “tried-and-true” BV practices—the court excluded Gurley’s testimony on personal guaranties because he never valued one before and because of questions raised by the competing expert about Gurley’s methodology.  

The decision was handed down on July 23.  It is available in BVR’s Business Valuation Litigation Database.   Portland law firms were Marcus, Clegg & Mistretta for Baldwin and Bernstein Shur for Bader.

(Editor’s Disclosure: Shannon Pratt is the founder and former owner of Business Valuation Resources, publisher of BV LEGALWire.)