BVWire Issue #155-1 | August 5, 2015


What attorneys look for in a first-time expert witness

How can a valuation analyst become an expert witness if he or she has never done it before? It’s not easy, but it’s certainly doable. At several recent conferences, BVWire collected tips and insights from attorneys, judges, and valuators with experience as expert witnesses—and hiring them.

Specialize: You need to demonstrate that you have expertise in a niche. All of the top practitioners in business valuation have become specialized. A few ways to become known as a specialized expert is to speak at conferences, conduct webinars, and publish articles.

Most lawyers shy away from hiring fledgling expert witnesses. “We’re creatures of habit—we hire who we know,” says attorney Edward L. Kainen (Kainen Law Group PLLC), speaking at the AICPA Family Law Conference in Las Vegas. But if a valuator has what the attorney needs, then it’s possible to get the chance. “What I’m looking for is someone who has some degree of information on some area that I need.” He advises that often attorneys don’t recognize what valuation experts can bring to the table, so you need to make it clear to the attorney what specific specialties you have that the attorney may need when the right case comes along—and then just stay on the radar.

“I hire young people all the time,” says attorney Laurin D. Quiat (BakerHostetler LLP), also speaking at the AICPA event. He looks for people who have a little bit of creativity and a little spark in their eye. “I’ll sit down with a young valuator over a cup of coffee and ask: ‘What is it about you that is interesting and how can you translate that into being a good teacher?’ I need someone who can educate the court—and me,” he says.

For more tips, see the article “Insiders Reveal How to Get Into the Expert Witness Game—and Stay There” in the August issue of Business Valuation Update (subscription required).

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Be aware of this trade secret valuation paradox

One of the reasons a trade secret has value is because it’s secret—only a limited number of people have access to it. If a trade secret is stolen, litigation can be triggered. But the trade secret can be disclosed during the litigation, so doesn’t the existence of the litigation itself impact the valuation? It could, but the parties involved are aware of this phenomenon.

Under wraps: A number of different precautions are used to prevent the disclosure of the trade secret during litigation, according to attorney Barry Werbin (Herrick, Feinstein LLP). For example, a protective order can limit access to the information to just the attorneys. Also, the information can be submitted to the court “under seal,” and the court, after looking at it, can redact the sensitive information before releasing it to the public.

Most of the time, valuators are dealing with trade secrets in a litigation context, so valuation tools are being used to calculate economic damages, points out Craig Jacobson (GlassRatner Advisory & Capital Group LLC). In general, this is designed to put the parties in the position they would have been in “but for” the alleged wrongful act.

What to do: In a valuation engagement involving a trade secret, the analyst should investigate any prior litigation to see whether any disclosures could have increased the risk of impairment.

Werbin and Jacobson recently conducted a BVR webinar, Current Trends in Trade Secret Valuation and Damages.

Extra: A bipartisan group of leaders in the U.S. Senate and House of Representatives have introduced a bill that would protect valuable intellectual property and close a loophole in U.S. law by creating the first federal private right of action for the theft of trade secrets. The Defend Trade Secrets Act is aimed at preventing hundreds of billions of dollars in losses every year in the U.S. due to theft of corporate trade secrets.

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Fair value sparks changes to valuation profession

In a recent article in Accounting Today, Mark Zyla (Acuitas Inc.) says that recent trends in fair value measurement for financial reporting are changing the valuation profession in a variety of ways. These trends include:

  • Concerns expressed by the Securities and Exchange Commission about valuation professionals who measure fair value for public companies;
  • Alternative fair value measurement standards for private companies provided by the Private Company Council;
  • Increasing internationalization of the valuation profession and valuation standards as a consequence of cross-border mergers and acquisitions; and
  • Development of best practices by the valuation profession for fair value measurement in financial reporting.

Zyla is the author of Fair Value Measurement: Practical Guidance and Implementation, 2nd Edition, which is available here.

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Loss-causation model glitch throws multibillion-dollar award into limbo

How finely does an expert’s loss-causation model have to filter out non-fraud-related factors? This was the question at the heart of an unusual financial case.

Big award challenged: Securities fraud cases rarely make it to trial, but this one did. The plaintiffs (investors in Household International Inc.) filed suit alleging misrepresentation of the company’s lending practices, delinquency rates, and earnings from credit-card agreements. The jury found the defendants liable and, based on expert testimony, awarded them $2.46 billion—one of the largest judgments to date. In appealing the verdict to the 7th Circuit, the defendants essentially claimed the plaintiffs failed to prove loss causation, a critical element of a securities fraud claim. The plaintiffs must show that they bought the stock at an “inflated” price—a price higher than it would have been without the false statements—and that the stock price declined once the market learned of the deception.

As the 7th Circuit observed, calculating how much stock price inflation a false statement causes requires “sophisticated expert testimony,” Here, the plaintiffs hired “one of the best in the field.” At trial, the expert proposed two loss causation models. Under the specific-disclosure model, he identified each major disclosure event and then measured the disclosure's effect on the stock price on that specific day. He found the net effect of the disclosures was a decline of $7.97 in the stock price. Under the leakage model, he sought to account for the fact that some of the information in a major disclosure often leaks out to participants in the market before it is made public. The price impact based on this model was $23.94 per share.

Fly in the ointment: The crux was that, while both models adjusted for market-related factors, they did not account for the effect of company-specific, non-fraud-related information. When asked at trial, the expert testified that he carefully had looked for that kind of information. There were disclosures that “dealt with something other [than that which] was fraud related,” he acknowledged. But he did not find any significant trend of positive or negative information. The jury adopted the leakage model for its damages determination.

The defendants contended that, “to be legally sufficient, any loss-causation model must itself account for, and perfectly exclude, any firm-specific, non-fraud-related factors that may have contributed to the decline in stock price.”

Middle ground: The 7th Circuit considered that standard too high—it likely would doom the leakage model as a way to quantify loss causation. On the other hand, said the court, simply allowing an expert to make a conclusory statement would make it too easy for plaintiffs. There was a “middle ground.” If a plaintiff’s expert explains in nonconclusory terms that no firm-specific, non-fraud-related information contributed to the decline in stock price, the burden shifts to the defendant to identify contrary information that could have affected the stock price. If it can, then the burden shifts again to the plaintiff to account for the effect of that information.

Ultimately, the 7th Circuit remanded for a new trial to explore the issue of loss causation in accordance with its instructions.

Takeaway: While the court acknowledged flaws in the plaintiffs’ loss-causation model, it declined to throw out the baby with the bathwater. In this case, its burden-shifting approach may lower the award but likely won’t reduce damages to zero.

Find an extended discussion of Glickenhaus & Co. v. Household International, Inc., 2015 U.S. App. LEXIS 8424 (June 3, 2015), in the September issue of Business Valuation Update; the court’s opinion will appear soon at BVLaw.

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Defects in PwC audits include valuation issues

The PCAOB has just issued the public version of its latest annual inspection of audits conducted by PricewaterhouseCoopers LLP. The regulators found deficiencies in 17 of the 57 audits they inspected. Several of the audit deficiencies involve valuation issues, including goodwill impairment, the valuation of intangible assets acquired in a business combination, and the impairment of indefinite-lived assets.

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New research examines Delaware effect on cost of equity

A new study finds that firms incorporated outside their home state have a higher cost of equity than firms that incorporate in the state where they are located. The cost of equity can be 40 to 100 basis points higher than firms incorporated in their home state, say the authors of a new paper, “Incorporation Choice and Implied Cost of Equity.”

The authors also refute prior studies that document a “Delaware effect” on firm valuation. “Importantly, there is no statistical difference between Delaware incorporation and other non-home states of incorporation, which suggest the more important distinction is home state versus non-home state, rather than a Delaware effect.”

This paper was published on the Social Science Research Network. Economics and finance are social sciences, so this site contains all kinds of research, including issues related to business valuation. We urge readers to check it out.

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Global BV news:

EU audit change triggers valuation opportunity

Reform of the European Union audit market forces certain companies to periodically rotate their audit firms. The new regulations also created a blacklist of services that company auditors cannot perform—and it includes valuation services. The opportunity that this creates for valuation firms is reflected in the recent acquisition of American Appraisal Associates by Duff & Phelps, which gives the firm a greater presence in Europe. "Valuation is one of the offers that creates the most significant conflicts of interest with audit," says Yann Magnan, the firm’s European head of valuations in an interview with Accountancy Age. "Mandatory rotation is forcing market shares to switch; it creates uncertainty and an environment where clients of these auditors need to think how they deal with valuation." The continued push for more transparency and good governance means more requests for third-party appraisals, he points out.

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BV movers . . .

People: Victoria Bartlett, Bo Brault, and Scott Pearce have been promoted to shareholders at the St. Petersburg, Fla., firm Gregory, Sharer & Stuart … Heidi LaMarca has been elected managing partner of Windham Brannon, which is based in Atlanta … Conrad Lauten has joined the Boston-based valuation division of Gordon Brothers Group as director, business development, and will be based out of the Atlanta office and lead sales in the Southeast region … Robert Quarte, long-time partner and 35-year company veteran, was name to the newly created role of co-managing partner of the Long Island, N.Y., firm Albrecht, Viggiano, Zureck & Co., P.C. (AVZ); he will share responsibility for vision, direction, and leadership of the firm with Thomas Murray, who has served in the capacity of managing partner since 2001 … Tim Spadaro has joined the Albany, N.Y., firm Teal, Becker & Chiaramonte as a senior valuation analyst.

Firms: ASB Audit Co., based in St. Petersburg, Russia, has joined the global professional services group Russell Bedford … The Sri Lankan firm Baker Tilly Edirisinghe & Co. is the latest firm to join Baker Tilly International’s multidisciplinary global network … CohnReznick has been named the recipient of the American Woman’s Society of Certified Public Accountants’ (AWSCPA) “Innovation in Women’s Programming Award” for 2015 … Fuyun (Fuzhou) CPAs of Fuzhou City, China, and Rao & Emmar of Bangalore, India, have joined BKR InternationalGesellschaft für Aufsichtsrecht und Revision mbH (GAR) of Frankfurt has been named HLB Germany’s newest member firm.

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Cool CPE events for the hot summer

  • Goodwill in Physician Practices (August 17), with Stacey Udell (Gold Gerstein Group) and Stacy Preston Collins (Financial Research Associates). This is Part 3 of BVR's 2015 Special Series on Healthcare Valuation.

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 the editor, Andy Dzamba at: or (503) 291-7963 ext. 133
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In this issue:

Getting on the stand

Trade secret value

Fair value impact

Loss causation glitch

PwC audit trouble

Delaware effect

Global BV news

BV movers

CPE events












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