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Expert Witnesses

DAUBERT CHALLENGES OF FINANCIAL EXPERTS UP SHARPLY

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 annual number of Daubert challenges to financial experts has increased by more than 100%. This, according to a recent study by PriceWaterhouseCoopers, available here.

The 2000-2007 Financial Expert Witness Daubert Challenge Study examines more than 2,354 federal and state court opinions from 2000 through 2007 in which Daubert challenges arose. The analysts identified 3,681 individual expert witness challenges, of which 635 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 2007, 116 financial experts were challenged, an increase of 9% over 2006.
• The percentage of Daubert challenges of financial experts which have been successful has varied widely over the past eight years, ranging from 29% in 2002 to 59% in 2005. The rate was 41% in 2007.
• Of all the financial experts challenged during 2000-2007, 29% were completely excluded, 18% were partially excluded and 50% 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 2000-2007, 70% were targeted at the plaintiff side.
• Over the 2000-2007 period, challenged plaintiff-side and defendant-side financial experts were excluded from testifying in almost equal proportion: 47% on the plaintiff side versus 46% on the defendant side.

In examining the reasons for expert disqualification, the analysts found that "lack of reliability" was the leading cause for exclusion, being found in 74% of cases resulting in exclusion, followed by "lack of relevance" in 40% and "lack of qualifications" in 22%.

A word of warning for procrastinators; eight 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) Another financial expert was given the hook for misuse of the Black-Scholes method of option valuation. (In re Med Diversified, Inc. 337 B. R. 89, 2005)

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.

Hempstead & Co. is an independent financial consulting firm specializing in the valuation of businesses and corporate securities. During our 30 years in the profession, we have prided ourselves on the high quality of our work. We would welcome the opportunity to be of assistance to you.