BVWire Issue #164-2 | May 11, 2016


Daubert favors ‘parsing’ of expert testimony over wholesale exclusion

The 2nd Circuit Court of Appeals recently revived a securities fraud class action involving the drug giant Pfizer that had died following the district court’s exclusion of the plaintiffs’ loss causation and damages expert.

‘Inflation-maintenance’ theory: Shareholders in Pfizer sued the company, alleging it made fraudulent misrepresentations about the safety of its Celebrex and Bextra drugs— nonsteroidal anti-inflammatory drugs to treat chronic pain and inflammation. According to the plaintiffs, even though Pfizer and the prior owners of the drugs knew about the drugs’ dangerous side effects as early as 1998, they kept touting the drugs’ safety to keep the public’s misperception going and cash in on the drugs’ commercial success.

The issue for the plaintiffs was how to show whether Pfizer’s fraud, as opposed to the fraud by previous owners of the drugs, caused Pfizer’s stock price to fall. The plaintiffs presented an “inflation-maintenance” theory of liability, which said that, even though during part of the class period (2000-2005) Pfizer did not yet own the drugs, it was liable for all of the misrepresentations because it had control over the statements the then-owners made. Pfizer also made its own misrepresentations and engaged in fraudulent omissions.

The plaintiffs hired one of the most prominent experts working in the field to prove the fraud actually caused losses and compute the extent of the loss. He performed an event study to determine whether and to what degree Pfizer’s stock price changed when investors discovered the risks associated with the two drugs. He explained he was asked to assume liability in step with the plaintiffs’ theory and was hired to identify the “artificial inflation” in the company’s stock resulting from the alleged fraud. Pfizer offered rebuttal testimony only. Its expert “overall” did not have “any major criticism” of the event study but objected to certain assumptions the opposing expert made about certain corrective disclosures.

Court ‘went astray’: Almost a decade into the litigation, the district court granted Pfizer’s request to exclude the plaintiffs’ expert under Federal Rule of Evidence 702 and Daubert. It found two irremediable flaws in the testimony. One was an insufficiently explained adjustment the expert made to his stock price inflation calculation in response to the court’s earlier rulings; the other was the expert’s failure to “disaggregate” the effects of Pfizer’s alleged misrepresentations from the effects of statements from the prior owners of the drugs. Without the testimony, the plaintiffs had no more case, and the district court granted judgment in favor of Pfizer.

The 2nd Circuit Court of Appeals said the district court “went astray.” Its point about the need to disaggregate was based on a “misapprehension” of the plaintiffs’ theory of liability, under which it did not matter which company made the misrepresentations at what point. The expert’s loss causation model assumed that Pfizer’s misrepresentations repeated the same false messages and served to maintain Pfizer’s stock price at a constant, inflated level.

The appeals court allowed that the expert’s explanation of the adjustment to the inflation calculation was inadequate and made this aspect of the testimony unreliable. However, this “was but one small part of an extensive economic analysis,” the Court of Appeals noted. “When faced with expert testimony that contains both reliable and unreliable opinions, district courts often exclude only the unreliable testimony.” Here, the expert’s error did “not render the remainder of his analysis useless.”

Excluding the entire opinion was an abuse of discretion, the 2nd Circuit concluded and remanded the case “for further proceedings consistent with this opinion.”

Takeaway: According to the 2nd Circuit, “parsing” expert testimony and excising the unreliable testimony from the reliable testimony accords with the “liberal admissibility standards” of Daubert and Rule 702.

Find a detailed discussion of Showers v. Pfizer, Inc. (In re Pfizer Inc. Sec. Litig.), 2016 U.S. App. LEXIS 6622 (April 12, 2016), in the June edition of Business Valuation Update; the court’s opinion will appear soon at BVLaw.

Extra: A big part of the analysis in this case involved an event study. A new chapter on event studies is included in the just-published Comprehensive Guide to Economic Damages, 4th edition. Also, BVR recently conducted a webinar on event studies.

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D&P secures rights to SBBI Classic Yearbook

Duff & Phelps recently acquired the rights to the SBBI Classic Yearbook from Morningstar, James Harrington (Duff & Phelps) tells BVWire. It will be published by John Wiley & Sons and an announcement regarding the availability of the 2016 version will be forthcoming, he says. The SBBI Classic Yearbook is a history of the returns on the capital markets (i.e., “Stocks, Bonds, Bills, and Inflation”) in the United States from 1926 to the present. The book has been published for over 30 years, most recently by Morningstar (Chicago) from 2006 through 2015. Look for more details to come from BVR in future issues of BVWire.

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Celebs layer in publicity value to boost damages claims

Last week’s BVWire included an item about the value of the right of publicity, a topic of interest after the death of Prince. This concept also figured into the case of Erin Andrews, the former ESPN sportscaster who was videotaped naked through a hotel peephole by a stalker. She sued both the hotel and the stalker, and a jury awarded her $55 million.

According to a blog post, Andrews had filed an amended complaint during the case, citing additional damages she suffered from the “unauthorized use of her image and likeness.” Her damages claim went from $10 million to $75 million. “With those seven magic words, the damages increased more than seven-fold,” writes Justin Hibbard (DZH Phillips LLP), a damages expert and forensic accountant. “No longer was the case just about mental and emotional harm—it was also about a highly paid celebrity’s right of publicity.

A new lawsuit filed by Hulk Hogan related to his sex video case suggests that economic damages may be based partly on the right of publicity, Hibbard writes. Hogan had won a $150.1 million verdict against Gawker Media LLC and is now suing other parties, alleging a conspiracy to profit from releasing still images, audio, and transcripts from the video.

Hibbard notes: “Rights of publicity are becoming a common measure of damages in cases dealing with the unauthorized use of a celebrity’s image.”

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Pepperdine surveys private cost of capital, appraiser methods

Business appraisers report increases in the number of engagements, fees for services, competition, and improved general business conditions over the last 12 months, according to the 2016 Private Capital Markets Report from Pepperdine University Graziadio School of Business and Management. The survey of 168 business appraisers was done in January 2016. They also say that domestic economic uncertainty is the most important issue facing privately held business today. The appraisers also expect decreases in all general business characteristics over the next year except cost of capital and discounts for lack of marketability. Other key findings include:

  • The most popular business valuation methods used by respondents were discounted future earnings method (33%), capitalization of earnings method (27%), and guideline company transactions method (16%);
  • Recast (adjusted) EBITDA multiple is the most popular when using multiple valuation method;
  • Respondents use an average risk-free rate of 2.99% and a market (equity) risk premium of 6.35%; and
  • Average long-term terminal growth is estimated at 3.11%.

The survey also presents cost of capital data for each major capital type and its segments. The data reveal that loans have the lowest average rates while capital obtained from angels has the highest average rates.

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FASB vs. IASB lease standards

In a video, Anne-Lise Vivier (Thomson Reuters) gives a good explanation of some of the differences in the lease accounting standards under U.S. GAAP and IFRS. U.S. companies will be required to add leases to their balance sheets under an overhaul of the lease accounting rules by the FASB. Accounting Standards Update (ASU) No. 2016-02, Leases, will apply to both capital (aka finance) and operating leases. Up to now, GAAP has required only capital leases to be recognized on lessee balance sheets. The International Accounting Standards Board (IASB) also recently issued a final lease standard (IFRS 16, Leases) that will require companies to bring leases onto the balance sheet. The IASB and FASB agree on many points, including the requirement that all leases of more than 12 months be recognized on lessee balance sheets. But they diverge in some respects, including lease classification. The FASB standard uses a dual-reporting model for lessees, while the IASB standard uses a single-classification model that requires lessees to account for all leases as capital (finance) leases.

The FASB standard will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. For all other organizations, the ASU on leases will take effect for fiscal years beginning after Dec. 15, 2019, and for interim periods within fiscal years beginning after Dec. 15, 2020. Early application will be permitted for all organizations.

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Global BV news:
Construction trademark values

For most construction trade services, marketing and branding are merely just side issues. Nevertheless, creating awareness and reputation for quality and reliability is important to establish and grow a trade business. Customer relations are characterized by one-off contractual agreements, and repeat business is rather rare. Thus, the corporate name is important to generate future business with new customers.

This month’s peer group analysis from Markables illustrates trademark comparable data for 46 businesses from 10 countries engaged in construction and installation services (i.e., electrical, network, HVAC, plumbing, solar). Some of the larger businesses include Norland, Norfold, PSAV, and Kidde, among others. Trademark royalty rates for the sector range from 0.5% to 1.4% on revenues, with a median rate of 1.0% (see table). Based on these royalty rates, trademark accounts for 10% of enterprise value. Average enterprise value multiples for the sector are 0.75x revenues.

Just for comparison, trademark royalty rates for installation service businesses are twice as high as for strongly advertised airlines (see last month’s sector snapshot), which can be explained with better excess profitability above required returns on net book value.

Two takeaways: First, the bandwidth of the different ratios in this peer group is rather narrow. Obviously, such business is based on similar asset structures and value-generating strategies, so there is little room for strategies of differentiation. Second, the large majority of the businesses have a finite life, illustrating once more the delicate issue of indefiniteness of the brand asset.

Speaking of HVAC firms, BVR will be presenting a webinar tomorrow, May 12, Feel the Heat! Valuations of HVAC Companies with Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos PC).

Markables, based in Switzerland, now has a database of over 8,200 trademark valuations published in financial reporting documents of listed companies from all over the world. The database reports value solely for the use of trademarks (not bundled with other rights).

(Click on image to view full size)

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Wine and beer on the menu

BVR has released two new titles in the What It’s Worth series of valuation guides that focus on the valuation of specific industries and types of firms. What It’s Worth: Brewery Value and What It’s Worth: Winery Value include advice from top experts who work directly with these types of firms and study valuation issues associated with their respective industries. The guides also present the latest trends, firm value drivers, benchmark data, and important court cases.

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ASA launches new on-demand USPAP update course

The American Society of Appraisers has released an on-demand update course on USPAP. The seven-hour course is specifically related to business valuation and focuses primarily on recent changes and major sections of the current edition of the standards. Carla Glass, FASA, and Jay E. Fishman, FASA, developed the course in response to new USPAP requirements for business valuers. For information on the course, click here.

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BV movers . . .

People: Henric Adey joined the New York City office of EisnerAmper and will lead the firm’s transfer pricing practice … Shelley Drury has joined the Tacoma, Wash.-based Doty Group as principal, leading the business valuations practice … Eric Harlovic has joined the Pittsburgh firm Grossman Yanak & Ford as an associate in its business valuation and litigation support services group … Ben Peeler was named partner at Eide Bailly; he’s based out of the firm’s Salt Lake City location … Rebecca Simpson has joined English, Lucas, Priest & Owsley LLP in Bowling Green, Ky., as a senior attorney. Her practice will include family law and business valuation including divorce, parent relocation, and property division, among other services.

Firms: Baker Tilly International has strengthened its Latin American capabilities with the addition of three new firms in Brazil and Paraguay. The two firms added, 4 Partners and Controle, both are based in Sao Paolo, Brazil, and Abaco Public Accountants, is based in Asuncion, Paraguay … Expanding into the U.K., Crowe Horwath added the London-based insurance risk consulting firm BaxterBruce Ltd. … For the fifth year in a row, the Indiana Chamber of Commerce honored the Indiana CPA Society as one of the “Best Places to Work in Indiana” … Swenson Advisors, a San Diego-based firm, launched the Swenson Children's Foundation, to support children's health, mitigate child abuse, and help homeless children and their families … Dionne Warwick will be performing at the New York State Society of CPAs’ May 19 gala to support the Society’s Career Opportunities in the Accounting Profession (COAP) program … Milwaukee-based Wipfli LLP has acquired Brittenford Systems, a firm based in Reston, Va., that provides accounting system, enterprise performance management, and CIO advisory services to small and midsize businesses and nonprofit organizations.

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CPE events for the rest of May

BVR’s special webinar series on healthcare valuation kicks off this month with a focus on important changes to valuing urgent care centers. Plus, don’t miss your chance to learn techniques from top appraisers on valuing HVAC and trucking companies.

Feel the Heat: Valuations of HVAC Companies (May 12), with Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos, P.C.)

Discounts: Beyond DLOC and DLOM (May 18), with Lance Hall (FMV Opinions).

Extra:  Five Question Quiz:  Test your DLOM knowledge now.

Changes in Urgent Care Center Valuation: Are you keeping pace? (May 24), with Elliot Jeter (VMG Health) and Corey Palasota (VMG Health). This is Part 1 of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance and Valuation.

Advanced Rebuttals Using Financial Forensic Techniques (May 25), with Darrell Dorrell (Financial Forensics).

Valuing Trucking Companies: Assessing Risk and Return (May 31), with Erin Hollis (Marshall & Stevens) and Andy Manchir (Katz, Sapper & Miller).

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at:
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In this issue:

Exclusion rejected

SBBI Yearbook

Publicity value

Private capital

Lease rules

Global BV news

Wine and beer

USPAP online course

BV movers

CPE events



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