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Dell Appraisal Spawns a Multitude of Valuation Approaches

February 2017 | Issue 84 Introduction A Delaware Chancery appraisal case involving computer company Dell Inc. gave rise to a multitude of valuation measurements.  It is instructive to see how the court sorted through them in coming up with its final appraisal conclusion.  The case is In re Appraisal of Dell Inc., 2016 Del. Ch. LEXIS […] More...

Future Expected Investment Strategy Determines Value of FLP Interest

January 2016 | Issue 83 The estate of Helen P. Richmond held a 23.44% interest in Pearson Holding Co. (“PHC”), a family investment company.  The estate valued this holding at $3,150,000, later adjusted to $5,046,000.  The IRS valued it at $7,330,000.  This difference of opinion was aired in US Tax Court in a case called Estate […] More...

Do Attached Strings Affect the Value of a Gift?

October 2015 | Issue 82 Steinberg v. Commissioner, 145 T.C. No. 7 (Sept. 16, 2015) explores how a contingent liability accepted by a donee can impact the value of a gift for gift tax purposes. Introduction In 2007, Petitioner Jean Steinberg, age 89, entered into a net gift agreement under which she gave her four […] More...

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Daubert Challenges of Financial Experts Up Sharply

February 2009 | Issue 34

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.