Autumn 2019
Thought Leadership in Forensic Accounting, Special Investigations, and Economic Damages
Editor for This Issue: F. Dean Driskell III, CPA
Forensic Accounting and Special Investigations Thought Leadership
Conducting Forensic Accounting and Internal Investigations
F. Dean Driskell III, CPA
Performing forensic analyses can be some of the most rewarding, but also the most
challenging, work for a professional accountant. This discussion provides a practical guide to
conducting forensic accounting and internal investigations. This discussion summarizes some
of the real-world experiences of a seasoned forensic accountant.
The State of Domestic Self-Settled Asset Protection Trusts
Tish McDonald, Esq.; Emily Newton, Esq.; and James Graessle, Esq.
This discussion sets out the general provisions of self-settled asset protection trusts, such as
the requirement for a spendthrift provision. Additionally, this discussion demonstrates the
differences of law between the states that allow for such trusts (most notably the allowance
of revocable self-settled asset protection trusts in Oklahoma). Finally this discussion
addresses the potential upside and downside of specific provisions in such trusts, such as
(1) the potential asset protection from creditors and (2) the grantor/beneficiary losing
control over his or her assets.
Thought Leadership Discussion:
Reasonable Certainty of Lost Profits in a New Business or Venture
Brandon L. McFarland, John C. Kirkland, and Kristine D. Taylor
The controversy over the existence of lost profits related to new businesses has long been
debated among legal counsel and forensic analysts. Regarding this issue, the view of most
federal and state courts has shifted from a rule of law to a rule of evidence. Whereas the
concept of lost profits for unestablished businesses was previously dismissed, the Modern
New Business Rule grants new businesses potential credibility in recovering damages.
This discussion (1) reviews the Modern New Business Rule along with its endorsement
of reasonable certainty and (2) summarizes judicial decisions in which the standard of
reasonable certainty is used in the measurement of lost profits damages.
Best Practices Discussion:
Understanding Your Projections in a Lost Profits Damages Analysis
Scott R. Miller
Financial projections are one of the (if not the) most important inputs when measuring
lost profits in an economic damages measurement analysis. Often, the damages analyst
(“analyst”) is confronted with multiple conflicting sets of financial projections, financial
projections with questionable credibility, or, in some cases, no financial projections at all.
This discussion addresses some of the typical projection-related issues that the analyst is
confronted with when conducting damages measurement analyses. This discussion also
summarizes damages-related judicial decisions where the analyst successfully implemented
and scrutinized financial projections in the damages analysis—and where the analyst was
unsuccessful in doing so.
Trends in Securities and Derivative Litigation: Record Filings and Novel Theories
Jessica Corley, Esq., and Peter Starr, Esq.
When a company’s stock price decreases, shareholder litigation often ensues. That is
nothing new. However, in recent years, there has been a significant uptick in the number
of cases filed and a corresponding expansion in the types of claims pursued by plaintiffs.
This discussion analyzes this increase in judicial claims, providing an overview of the types
of cases being filed, the corporate defendants being sued, and the amounts claimed in
damages. Finally, this discussion examines the trends in securities and derivative litigation
that underlie those statistics.
Landis v. Tailwind Sports Corp.—Armstrong Pays $5 Million Settlement to the USPS in Fraud Case
Thomas M. Eichenblatt
This discussion reviews the United States litigation against Tailwind Sports Corp. Specifically,
the discussion (1) describes the facts of the case, (2) explains the damages measurement
analyses and the corresponding challenges to the expert witnesses, and (3) concludes with
commentary on damages measurement issues and still unanswered questions raised as a
result of this litigation.
Analysis of Fraudulent Conveyance Actions
F. Dean Driskell III, CPA
Disputes over allegedly fraudulent conveyances have become more common in bankruptcy
cases. Fraudulent transfer allegations are also common in transactions such as leveraged
buy-outs and recapitalizations. Analysts are frequently asked to provide expert opinions in
these actions for trustees, debtors-in-possession, creditors, and other third-party plaintiffs. The
law in this area is contained in the United States Bankruptcy Code and is centered around
the avoidance powers granted to trustees and other relevant parties, specifically Section
548 fraudulent transfers and obligations. Generally, the analysis of fraudulent conveyances
involves the determination and testing of whether a transfer meets the criteria of either actual
or constructive fraud. This discussion summarizes these criteria and describes some of the
relevant tests conducted in fraudulent conveyance analyses. This discussion also summarizes
a possible badges of fraud analysis often applied to prove fraudulent intent in conveyance
actions.
The Role of the Royalty Base and the Royalty Rate in Determining Economic Damages Using
Reasonable Royalties in Patent Infringement Litigation
Andrew M. Fisher
A damages analyst (“analyst”) may be engaged to opine on economic damages arising
from cases of patent infringement. In patent infringement litigation, the analyst may
estimate a reasonable royalty to measure the amount of damages to compensate the
afflicted party. The analyst is tasked with navigating this process, which may include
the selection of the appropriate royalty base and royalty rate. While the process can be
somewhat ambiguous, judicial decisions establish precedent. Such precedent provides the
analyst with a general framework to navigate the reasonable royalty process. This discussion
focuses on two variables that are used to determine a reasonable royalty, namely: the
royalty base and the royalty rate. In addition, this discussion summarizes the hypothetical
negotiation analysis and the Georgia-Pacific factors. Finally, this discussion explores how
the selection of the royalty base and the royalty rate have been interpreted by the courts
through a review of two recent decisions by the U.S. Court of Appeals for the Federal Circuit.
Working with Testifying Experts and Consulting Experts
Lerry A. Suarez and Jason M. Bolt
This discussion considers the process of selecting an expert (whether a testifying expert or a
consulting expert) to assist in litigation. This discussion summarizes (1) the role for which
the expert may be hired, (2) the necessary qualifications for the expert, (3) the party that
hires the expert, and (4) the challenges faced by a testifying expert. This discussion should
assist both legal counsel seeking to retain an expert and analysts that may be looking to
serve as testifying experts.
Summary of Financial Projection Issues in Recent ESOP Litigation
Kyle J. Wishing; Frank “Chip” Brown; Chelsea Mikula, Esq.; and Khatija Sajid
his discussion identifies issues with management-prepared financial projections that have
been raised by the U.S. Department of Labor (the “DOL”) and by private plaintiffs in
employee stock ownership plan (“ESOP”) litigation. The objective of this discussion is to
inform ESOP advisers, ESOP sponsor companies, and prospective ESOP sponsor companies
of the factors to consider when preparing and assessing company management’s financial
projections. This discussion includes a review of (1) conversations with representatives of
the DOL, (2) fiduciary process settlement agreements, and (3) recent ESOP litigation.
ESOP Financial Feasibility Analysis Procedures
Robert F. Reilly, CPA
Employee stock ownership plans (“ESOPs”) are occasionally involved in litigation and
other regulatory challenges. The regulatory challenges may be brought on by the U.S.
Department of Labor (“the DOL”) or the Internal Revenue Service (the “Service”). The
litigation claims may be filed by the DOL or by the ESOP participants themselves. The
DOL may allege that the ESOP participants paid more than adequate consideration for
the sponsor company stock or that the sale of the sponsor company stock to the ESOP
was a prohibited transaction. Occasionally, the sponsor company noncontrolling selling
shareholders may proceed with litigation claims—typically against the sponsor company
controlling shareholder who initiated the ESOP formation. These noncontrolling shareholders
may allege that they did not receive a fair price for the stock they sold to the ESOP. While it
will not eliminate all litigation claims, an ESOP financial feasibility analysis is an important
procedure in the process of installing an ESOP at a sponsor company. Such an ESOP
financial feasibility analysis provides evidence regarding (1) the selling shareholders’ and
the company board’s due diligence procedures and (2) the controlling shareholder’s and the
board’s exercise of its business judgment.