Contents

• Bankruptcy Round-Up: Experts Prove Key to Distressed Company Values
• Checklist: Make Sure Your Expert Survives a Daubert Challenge
• Valuing stock options? What will the IRS say?
• Ten Steps to Value Law Firm Contingency Cases

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Michael J. Young,
CPA/ABV, CVA
Director
(410) 403-1513
Over 27 years of experience; serves as expert witness in litigation issues including economic damages, patent infringement, valuation, and fraud matters in Federal and state courts.

Nathan E. DiNatale,
CPA/ABV, CVA, CFE
Senior Manager
(410) 403-1521
Over 15 years of experience; focuses on business valuations, valuations for financial reporting, litigation support and economic damage calculations. Serves as expert witness in valuation and litigation cases.

Valuations Insights, May, 2010

Checklist: Make Sure Your Expert Survives a Daubert Challenge

Why do experts get excluded from court? Lack of reliability is the leading cause under the Daubert standard, followed by lack of relevance and lack of qualifications, according to the most recent studies. Methodological flaws caused by the misuse of accepted financial and/or economic methods are also a frequent basis for denying financial expert testimony. And, of course, any new or untested approach will receive heightened scrutiny, under Daubert's by now familiar four-part test:

• Has the theory or technique been scientifically tested?
• Has the methodology been peer-reviewed and published in professional journals?
• Does it have a known error rate, with established standards to control its use?
• Is the methodology generally accepted by the relevant professional community?

Thirteen questions for your expert.

Nearly 18 years after the U.S. Supreme Court's decision in Daubert (1993), only about half of states apply the federal standard. The remaining apply the "general acceptance" test of Frye v. U.S. (D.C. Cir. 1923), or some hybrid or independent standard. Thus it's important for attorneys to know their local court rules, to understand how high they have set the admissibility hurdles for expert testimony. For those jurisdictions that apply Daubert or a similar standard, the following 13-point checklist will help you evaluate your financial experts prior to litigation. If the experts can't answer any one question to a satisfactory degree, perhaps they shouldn't be retained in the case.

1. Do you have the requisite background, training, and experience required to gain acceptance by a court if a Daubert hearing is held?
2. Is it realistic to expect that your testimony will be admissible?
3. Has anyone performed a review of your work to see if it appears reasonable? "I'm lucky—I have the luxury of asking folks in my office to help me," Costello said. When he was a solo/small firm practitioner, he would pay his peers to review his report.
4. Have you followed all relevant professional standards? These can include the standards promulgated by the American Society of Appraisers, the AICPA, The Appraisal Foundation (Uniform Standards of Professional Appraisal Practice), etc.
5. Have you used proven, commonly accepted valuation methodologies? Is the method generally endorsed by experts in the field? Can you cite relevant publications to support them?
6. If you apply an unusual or novel method, has it been peer-reviewed? If so, is there a basis on which the method would gain general acceptance in the BV professional community?
7. Does your work fit the case? Are your assumptions reasonable, given the underlying facts? (Attorneys: Make sure to clarify which facts will be admissible at trial.)
8. Is the underlying data reliable? Did you take reasonable steps to ensure the accuracy of the information before deriving your conclusions?
9. Have you considered alternative scenarios? This is especially critical in lost profits and economic damages cases, in which causation plays such a critical role.
10. Are your assumptions consistent with the facts?
11. How have you dealt with facts that are inconsistent with the ones you used?
12. Are you familiar with the relevant statutes and case law to assist in developing a damages or other economic theory?
13. Have you considered the track record of the relevant industry and the performance of comparable companies within that industry? Note: In the current economy, make sure your expert understands how the subject company and its comparables are faring.

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