Thought Leadership in Forensic Accounting, Special Investigations, and Economic Damages
Editor for This Issue: F. Dean Driskell III, CPAForensic 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.