Court KOs two experts—along with lost profits award
Reliance (blind?) on another expert’s work can cost a damages expert dearly, as a recent 4th Circuit Court of Appeals decision illustrates. This case has sparked a spirited discussion among members of LinkedIn’s Forensic Accounting group.
Here’s the story. A startup company (plaintiff) launched a prepaid consumer gas program and used the defendants’ payment network. As soon as the company publicly announced it, thousands of people signed up for membership. Then, the defendants publicly distanced themselves from the program, claiming they had no relationship at all with the plaintiff. A deluge of negative publicity followed. The program stopped accepting new members and issued some refunds to existing members. The defendants authorized a retraction to the remarks they had made, but the program subsequently failed.
The plaintiff sued on a number of legal theories, including defamation. To show damages, it presented two experts whose testimony the defendants unsuccessfully tried to exclude in a Daubert challenge. The first expert was a professor of marketing who taught courses in advertising, marketing research, digital marketing, and consumer behavior but admitted she had no sales forecasting expertise. She used a “funnel approach” to project the plaintiff’s future membership and profits from the number of persons aware of the company’s brand, traffic to its website, actual sign-ups, and a projected growth rate and attrition. She also benchmarked the plaintiff’s growth against some of the most successful companies in the industry, including Apple, Costco, and Netflix, but not startups. Over a three-year period, the plaintiff could have signed up about 3.3 million members, she concluded. The damages expert was a CPA. He used the first expert’s membership projections to determine that the plaintiff had suffered $208 million in lost profits.
Giant blunder. The jury awarded $4 million, without specifying whether damages were general or special. The Court of Appeals agreed with the defendants that the award was excessive and based on inadmissible testimony. The first expert used only “industry giants” as benchmarks for the plaintiff’s growth without considering whether the company had the resources or experience necessary to ensure that degree of growth or “indeed, even as necessary to carry out its own business plan.” In a “puzzling omission,” she failed to consider what would happen if gas prices dropped, the court said. Her projections “ignored business realities” and were “sheer speculation.” Because the second expert’s lost profits calculation hinged on the excludable testimony, it, too, was speculative and inadmissible. The appellate court struck down the award and remanded for a new damages trial.
Can an expert guard against this situation? What do you think? Find an extended discussion of MyGallons LLC v. U.S. Bankcorp, 2013 U.S. App. LEXIS 11004 (May 31, 2013) in the August Business Valuation Update and at BVLaw.
New legal briefing. Get an update on the most pressing court cases of the past few months in Quarterly Case Update: A One Hour Briefing, with expert James Alerding (Alerding Consulting) and our very own legal editor, Sylvia Golden. This new educational format will present the newest cases, their legal implications, and what they mean for business appraisers and financial experts.
FASB votes for relief on ESOP valuation disclosures
The Financial Accounting Standards Board has voted to give ESOP companies an indefinite deferral on the requirement to disclose quantitative information on how they value nontraded securities, including securities of the sponsoring company. The indefinite deferral applies to significant unobservable inputs used in Level 3 fair value measurement but does not apply to plans that are subject to SEC filing requirements. The concern here was that proprietary information would be divulged through disclosures that are made public by the Department of Labor on Form 5500, which posts the information online. BVWire applauds the FASB for acting quickly on this matter because the deadline for the Form 5500 is July 31 (October 15 with an extension).
FASB will soon release an Accounting Standards Update, Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04, that will include the latest change. Effective date: Upon release for all financial statements that have not yet been issued.
Caution. Plans will still have to disclose qualitative information, meaning the valuation method and key inputs. It could be argued that proprietary information could be gleaned from this information using public data. Therefore, the disclosures need to be done with care and in close collaboration.
Latest BVR/SPU Valuation Challenge a big success
Budding valuators competed in the Second Annual BVR/SPU Valuation Challenge at Seattle Pacific University (SPU). Four teams of students were given a real-world company to appraise by public accounting firm Moss Adams. Then, armed with tools supplied by BVR, they competed for the best valuation presentation.
Three specialists from Moss Adams’s valuation practice—Wayne Fjeld (senior manager), Kaori Packard (manager), and Miranda Rickert (financial analyst)—evaluated the presentations and selected the "Women in Finance" team as the best.
Dr. Herbert Kierulff, SPU professor who runs the event, shared these comments he received from Fjeld: “All teams did a good job and we enjoyed being a part of the process. Not having had a class like yours when I went through the system, I would have really appreciated and benefited from a project like the one you are spearheading, so congratulations to you as well.”
Kierulff has begun work on the Third Annual Valuation Challenge, which will involve other universities. It will be held in June 2014.
BVR congratulates all of the students who competed in this year’s challenge and is pleased other organizations are getting involved. If your firm is interested in supporting a similar learning experience for local university students that harnesses the power of BVR’s data, contact Adam Manson, BVR’s financial research manager, at firstname.lastname@example.org.
New special report examines the market approach
Do you know the common errors that pop up in applying the market approach, or how to improve your comparable transaction analysis? Get up-to-date on this generally accepted—although controversial—business valuation method with The Market Approach Then and Now: What Appraisers Need to Know, A BVR Special Report. You will learn new techniques on how to apply and work with transaction data, what you should take into account when valuing businesses in varying economic climates, and get an update on the latest views of the courts. Jam-packed with practical guidance and articles from top valuation experts, this is a must-have for your business valuation library.
Sizzling summer CPE events
On June 27, BVR welcomes expert Mark Zyla (Acuitas Inc.) for Valuation of Know-How: Patents, Proprietary Technology and IPR&D. This 100-minute webinar will address how to properly assess and report the value of the ever-growing bundle of intellectual properties that are becoming a more important component of a firm’s value.
Damages in M&A and Purchase Price Disputes, featuring Jeff Litvak (FTI Consulting) and Ken Mathieu (Mesirow Financial Consulting), on July 9, is the fifth installment of BVR’s 2013 Online Symposium on Economic Damages. Join Litvak and Mathieu to learn how to assess, quantify, and defend claims for damages resulting from M&A disputes.
Whether practicing under SSVS, USPAP, or any other standard, the choice between a valuation and a calculation can have serious implications for the scope and definition of an appraiser’s job. On July 11, BVR welcomes Linda Trugman (Trugman Valuation Associates), Edward Dupke (AICPA), and Curtis Kimball (Willamette Management Associates) for Valuations vs. Calculations: Advice & Guidance from Professional Standards, an intensive discussion of what professional standards say about valuations and calculations and how appraisers can best comply with those guidelines.
BVWire will be taking a brief break for the July 4 holiday next week. We will resume publication on July 10. Have a safe, happy holiday!
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