January, 2008 | Issue 24
In 1999, the US Supreme Court, in its Kumho Tire ruling, extended to non-scientific expert testimony the Daubert admissibility criteria. These criteria were designed to keep “junk science” out of the courtroom. Since then, the number of Daubert challenges to financial experts has increased by more than 89%. This, according to a recent study by PriceWaterhouseCoopers, available here.
The 2000-2006 Financial Expert Witness Daubert Challenge Study examines more than 2,100 federal and state court opinions from 2000 through 2006 in which Daubert challenges arose. The analysts identified 2,977 individual witness challenges, of which 519 were addressed to financial experts. Some interesting results of the study are the following:
- The number of Daubert challenges to financial experts has been rising every year since 2001. In 2006, 106 financial experts were challenged, an increase of 14% over 2005.
- The percentage of successful challenges has varied widely over the past seven years, ranging from 29% in 2002 to 59% in 2005. The rate was 44% in 2006.
- Of all the financial experts challenged during 2000-2006, 30% were completely excluded, 18% were partially excluded and 49% were admitted. In the remaining 3% of cases, no decision was made. This breakdown was similar to that for experts of all types.
- Plaintiff-side financial experts were challenged much more frequently than defendant-side financial experts. Among all challenges to financial experts during 2000-2006, 70% were targeted at the plaintiff side.
In examining the reasons for expert disqualification, the analysts found that “lack of reliability” was the leading cause for exclusion, being found in 76% of cases resulting in exclusion, followed by “lack of relevance” in 39% and “lack of qualifications” in 19%.
A word of warning for procrastinators; seven financial experts had their evidence excluded for other factors, including “missed deadlines.”
In two business valuation cases, experts’ work was excluded for failure to consider or employ the discounted cash flow (DCF) method of valuation. (In re Med Diversified, Inc., 334 B. R. 89, 2005 and Lippe v. Bairnco Corp., 288 B. R. 678, 2003)
The results of this excellent study underscore the importance of conducting a “Daubert review” when selecting a financial expert and when selecting the methods of financial analysis to be used in court.