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Category: Accounting Expert Witness

  • Accounting Expert Witness’ Report Indicated Missing Data Points

    Accounting Expert Witness’ Report Indicated Missing Data Points

    Between 1983 and 1986, MSI, a music company solely owned by Nealy, engaged a number of recording artists and created a catalog of popular sound recordings and musical compositions. MSI was administratively dissolved in 1986, and Nealy was arrested and later sentenced to a twenty (20) year prison term in late 1988. During Nealy’s first incarceration from 1988 to 2008, unbeknownst to and without authorization from Nealy, former MSI Vice President, producer, and recording artist, Tony Butler (“Butler”) began unlawfully transferring rights to use and exploit the Subject Musical Works.

    Defendant Artist Publishing Group LLC’s (“APG”) entered into a publishing agreement with the author of the compositions at issue in this case, Tony butler, through his wholly owned company, 321 Music, LLC, pursuant to which APG agreed, inter alia, to license certain musical compositions authored by Butler to third parties, for which APG was paid a percentage of the royalties earned from those efforts (the “APG/321 Music Agreement”).

    As part of a separate administration agreement between APG and Defendant Warner Chappell Music, Inc.’s (“WC”), WC assumed certain of APG’s duties in the APG/321 Music Agreement, including licensing the musical compositions to third parties in exchange for licensing fees and royalties. It was alleged that no monies earned from the licensing of the compositions at issue in this case were ever received by APG, other than the royalties it was entitled to receive as publisher pursuant to its publishing agreement with 321 Music, LLC. Those monies have been accounted to Plaintiffs in discovery in this case, totaling $125,738.81.

    Both WC and APG filed Daubert motions to exclude the testimony of John Menneci.

    Accounting Expert Witness

    John Menneci joined Gelfand, Rennert & Feldman (GRF) in 2001 and works out of its White Plains, New York office. He currently co-heads the New York arm of GRF’s New York Royalty Examination Group.

    John specializes in conducting royalty examinations on behalf of prominent recording artists, songwriters and merchandise licensors and has over 25 years of experience in this field. He has travelled across the globe to conduct examinations on behalf of the firm’s clients and has audited an array of different licensees in both the physical and digital space with great success. John also specializes in conducting due diligence and valuations in connection with copyright acquisitions and estate tax matters.

    Want to know more about the challenges John Menneci has faced? Get the full details with our Challenge Study report. 

    Discussion by the Court

    The Menneci Report formed the basis for two opinions: (1) Defendants received $410,920.10 in gross publishing income from copyright infringements and (2) Defendants, or parties connected to Defendants, received $54,960,000 in master recording income from copyright infringement of Plaintiffs’ works.

    Menneci’s conclusion that Defendants, or parties connected to Defendants, received $54,960,000 in master recording income from copyright infringement of Plaintiffs’ works must be excluded

    Starting first with the eye-popping damages figure of almost $55 million, the Court held that the Report did not specify how Menneci reached this conclusion. Indeed, when asked several different times at the Hearing to provide either the methodology or data utilized in reaching this astronomical figure, Plaintiffs’ counsel was unable to provide a response. Even when the Court broke the inquiry down further by asking Plaintiffs’ counsel to explain how Menneci calculated alleged foreign income through some sort of extrapolation, Plaintiffs’ counsel was simply unable to proffer or explain the methodology employed by his damages expert.

    Also, Menneci relied on whole album sales, despite the fact that only a handful of isolated tracks remain at issue in this case. In conclusion, Menneci’s calculation includes revenue generated from individual tracks not at issue here, as well as album versions that do not include a single track at issue in this case.

    Menneci’s conclusion that Defendants received $410,920.10 in gross publishing income from copyright infringements must also be excluded

    The Court noted that Menneci improperly included funds received by other entities in his calculations—apparently on a theory of contributory infringement by non-party Interscope Records.

    In addition to being premised on an incorrect theory of recovery, Menneci’s conclusion that Defendants received $410,920.10 in gross publishing income from copyright infringements is not based on sufficient facts and data or reliable principles or methods.

    Further, since these monies are not accounted for in the financial documentation produced by Warner Chappell, Menneci conceded that he “estimated” the songwriter’s share of performance income based on his “assumption” that “music publishing income is generally split 50/50 between the [song]writer and publisher.” Similarly, Menneci improperly assumed that Warner Chappell administered 100% of the musical composition for “Weekends”—when in reality, Warner only received 33% of the publishing monies. The Court held that such assumptions fail to meet the standard imposed by Rule 702 for expert testimony.

    However, the Court will bifurcate this trial as to liability and damages. During the initial liability phase, Plaintiffs may attempt to establish that Defendants
    should be held jointly and severally liable for the profits of other entities given the existence of a “practical partner” relationship. If the jury returns an initial verdict finding that Plaintiffs have established either a practical partnership or predicate act, the Court will hold a brief status conference with the parties as to how Plaintiffs intend to prove their joint and several damages and foreign profits damages, given that the Menneci Report is excluded in its entirety under Rule 702.

    Held

    The Court granted Warner’s Daubert motion to exclude the testimony of John Menneci but denied as moot APG’s Daubert motion.

    Key Takeaway:

    The Court decided that even a cursory review of the Menneci Report—which spans a mere five pages—indicated significant gaps in methodology and numerous missing data points. Menneci’s deposition did little to clarify his methods; on the contrary, the lack of reliable methodology was further exposed and made even more readily apparent.

    Case Details:

    Case Caption: Nealy Et Al V. Atlantic Recording Corp. Et Al
    Docket Number: 1:18cv25474
    Court: United States District Court, Florida Southern
    Order Date: July 17, 2024
  • Accounting Expert Witness Barred from Testifying because He Used Simple Addition to Derive Infringing Sales

    Accounting Expert Witness Barred from Testifying because He Used Simple Addition to Derive Infringing Sales

    Plaintiff, a prominent telecommunications service provider, has established the well-known marks “LIGHTSPEED” and “LIGHTSPEED VOICE” in connection with its telecommunications services. When Defendant opened a business called LIGHTSPEED CONSTRUCTION GROUP, Plaintiff alleged that the mark was nearly identical to its marks in connection with the offering of confusingly similar telecommunications services.

    Plaintiff added that such use creates a likelihood of confusion with Plaintiff’s customers.

    In this trademark infringement case, Plaintiff sought, among other things, disgorgement of Defendant’s profits during the period of alleged infringement.

    Plaintiff obtained an expert report from accountant Kevin Kwan. Defendant claimed that the report simply added two numbers together and filed a motion to exclude his testimony. 

    Accounting Expert Witness

    Kevin Kwan has over 23 years of experience providing consulting and expert witness services in various business disputes, complex commercial litigation matters, and financial investigations. Kevin’s experience includes development of complex financial models, as well as compilation, organization, and analysis of large volumes of historical data through the development of databases. 

    Want to know more about the challenges Kevin Kwan has faced? Get the full details with our Challenge Study report. 

    Discussion by the Court

    Defendant did not contest Kwan’s qualifications or reliability, but argued that his testimony would not be helpful to the factfinder.

    The Court found that Kwan’s relevant testimony is limited to calculating Defendant’s sales. He also opined that “disgorgement of Defendant’s profits appear[s] to be a reasonable measure of monetary relief in this matter.” But the appropriate form of relief in this case is a legal conclusion, and expert witnesses “may not offer legal conclusions” outside of exceptional circumstances.

    Since the Court has already determined that actual damages for injuries like lost profits are inappropriate, Kwan’s support for a disgorgement remedy was—at best—an unnecessary restatement. Besides, Kwan offered that conclusion because he “did not see any particular lost profits that could be claimed” by Plaintiff.

    In trademark cases, profits subject to disgorgement are calculated as the infringing sales less the incremental costs associated with those sales. Yet Kwan “did not perform an analysis of Defendant’s incremental costs associated with generating the infringing sales.” He also admitted that he has no opinion on Defendant’s costs. Kwan’s testimony is, therefore, limited to the amount of Defendant’s sales during the alleged infringement.

    Kwan’s estimate of Defendant’s infringing sales is the sum of two numbers. The numbers originated from two documents that Defendant produced to show their sales in 2022 and 2023. Kwan added these numbers together to derive Defendant’s total infringing sales. The Court held that simple addition is within the bailiwick of the average lay person and can be presented in closing arguments. Therefore, Kwan’s testimony does not merit admission.

    Held

    The Court granted Defendant’s motion to exclude the testimony of Kevin Kwan and excluded Kwan from testifying at trial.

    Key Takeaways:

    • The appropriate form of relief in this case is a legal conclusion, and expert witnesses “may not offer legal conclusions” outside of exceptional circumstances.
    • Simple addition is within the bailiwick of the average lay person and can be presented in closing arguments. Expert testimony generally will not help the trier of fact if it “offers nothing more than what lawyers for the parties can argue in closing arguments.”

    Case Details:

    Case Caption: Lightspeed Clec, Inc. V. Lightspeed Construction Group Llc
    Docket Number: 8:23cv97
    Court: United States District Court, Florida Middle
    Order Date: July 18, 2024
  • Accounting Expert Witness’ Analysis of Costs and Markups Admitted

    Accounting Expert Witness’ Analysis of Costs and Markups Admitted

    The Trade Group’s (“TTG”) is a full-service event marketing and creative design firm well known for its award-winning designs and client-centered service mentality. BTC Media, LLC (“BTCM”), a Bitcoin and blockchain media company approached TTG about managing, planning, and producing Bitcoin 2021, the world’s largest bitcoin conference held in Miami, Florida.

    After a successful Bitcoin 2021, BTCM enlisted TTG’s services again in connection with Bitcoin 2022, but on a much larger scale. This case centers around a dispute between TTG and BTC over the financial ramifications of their business interactions, particularly surrounding the Bitcoin 2022 event. At the heart are disagreements over alleged overcharges and lost profits in planning and hosting Bitcoin 2022 in Miami.

    TTG sought to exclude the expert testimonies of BTC CEO David Bailey and CFO Didier Lewis as well as Dr. Kelly Semrad and Gary Durham for various reasons.

    Accounting Expert Witness' Analysis of Costs and Markups Admitted

    Accounting Expert Witness 

    Gary Durham has been assisting clients with economic damages calculations, valuation, forensic accounting, financial forecasting, and financial issues in bankruptcy since 1993. Durham’s considerable experience preparing expert witness testimony includes damage calculations and other valuation-related financial analysis.

    Want to know more about the challenges Gary Durham has faced? Get the full details with our Challenge Study report. 

    Tourism And Travel Industry Expert Witness

    Dr. Kelly Martinez Semrad, currently serves as a faculty member at the University of Central Florida (UCF) in the Rosen College of Hospitality Management. She is the former associate director for the University of Florida’s Eric Friedheim Tourism Institute. She has also helped provide policy for tax reform and economic structural adaptations as well legislation for social and environmental justice in the tourism and hospitality industry.

    Discover more cases with Kelly Semrad as an expert witness by ordering her comprehensive Expert Witness Profile report.

    Cryptocurrency Expert Witness

    David Bailey is an early bitcoin adopter, entrepreneur, and a prominent figure in the Bitcoin community. He is also the CEO of BTC Media, which includes Bitcoin Magazine and the Bitcoin conference, as well as UTXO. 

    Efficiently evaluate if investing further resources into vetting David Bailey is merited based on the findings in our Preliminary Screening Report.

    Finance Expert Witness

    Didier Lewis is the Finance Director of BTC Media, LLC (“BTC”). As Finance Director, he also has oversight of BTC’s finances, including its accounts receivable, accounts payable, and invoices payable to BTC’s vendors.

    Start your due diligence on Didier Lewis quickly and affordably by first reviewing key insights in our Preliminary Screening Report.

    Discussion by the Court

    A. Gary Durham

    TTG sought to exclude Durham’s testimony on the grounds that it was unreliable and irrelevant.

    According to TTG, Durham’s opinions were based on incomplete information given Durham’s role was to verify the costs TTG claims it incurred and to assess the reasonableness of those costs. Although Durham had multiple opportunities to review TTG’s documents, TTG argued that he failed to accurately compile the costs, thereby rendering his opinions unreliable.

    The Court found that while Durham’s methodology, like most, could have possessed flaws, it was sufficiently reliable for the purposes of expert testimony. Durham reviewed numerous documents and provided a detailed analysis of the costs and markups. His methodology involved a thorough examination of TTG’s invoices and other financial records, and he explained the basis for his conclusions. Any perceived deficiencies in his methodology went to the weight of his testimony, not its admissibility.

    The Court held that highlighting the potential disconnect between TTG’s Google Sheet entries and the underlying accounting documents was vital because it could suggest TTG’s billing practices may have been designed to obscure true charges. This made Durham’s testimony all the more reliable and relevant.

    B. Kelly Semrad

    TTG sought to exclude the testimony of Semrad on the grounds that it was unreliable and irrelevant. TTG argued that Semrad’s opinions were based on insufficient facts and data, and that she lacked the necessary expertise to opine on the reasonableness of TTG’s markups. Despite Semrad admitting that she did not have access to certain critical information, the Court held that her testimony was particularly relevant because it set a benchmark for evaluating TTG’s markups for Bitcoin 2022. 

    By comparing TTG’s charges with industry standards, Semrad provided a clear framework for the jury to assess whether TTG’s pricing was reasonable. Her testimony offered the jury a critical reference point for determining if TTG’s practices deviated from industry norms. 

    The Court found that her analysis was based on sufficient data and reliable principles, aligning with the requirements of Rule 702. 

    C. David Bailey and Didier Lewis

    TTG sought to exclude the expert testimony of BTC’s CEO, David Bailey, and CFO, Didier Lewis, on the grounds that Bailey and Lewis were untimely disclosed.

    Appealing to Federal Rule of Civil Procedure 37(c)(1), TTG argued that BTC’s failure to timely disclose these expert witnesses was neither substantially justified nor harmless, warranting exclusion of their testimony.

    Further, TTG opined that BTC made multiple representations to the Court that they did not seek to designate experts for their counterclaims, the absence of a request to extend the Initial Designation deadline was prejudicial to TTG given their late disclosure.

    However, BTC has consistently maintained that Bailey and Lewis will offer lay opinions under Federal Rule of Evidence 701, which allows business owners or officers to testify about the value or projected profits of their business based on personal knowledge. Both Bailey and Lewis have extensive firsthand knowledge of BTC’s financial operations and can provide valuable insights into the company’s lost profits.

    TTG did not dispute Bailey and Lewis’ knowledge of the company’s finances but contended that their testimony constituted expert opinion requiring timely disclosure under Rule 26(a)(2). However, BTC supplemented their disclosures to include Bailey and Lewis as expert witnesses under Rule 702, likely anticipating potential objections from TTG.

    The Court held that any prejudice to TTG was minimal, given their extensive personal knowledge and the supplemental disclosures.

    Held

    The Court denied that The Trade Group’s three motions to exclude the testimony of BTC CEO David Bailey and CFO Didier Lewis as well as Dr. Kelly Semrad and Gary Durham.

    Key Takeaways:

    • The Court found Durham’s methodology sufficiently reliable because he reviewed numerous documents and provided a detailed analysis of the costs and markups.
    • Semrad’s testimony offered the jury a critical reference point for determining if TTG’s practices deviated from industry norms. The Court held that her testimony met the requirements of Rule 702.
    • The Court held that both Bailey and Lewis’ extensive firsthand knowledge of BTC’s financial operations will assist the jury in understanding the financial impact of the alleged damages and are therefore admissible.

    Case Details:

    Case Caption: The Trade Group, Inc. V. Btc Media, Llc
    Docket Number: 4:23cv555
    Court Name: United States District Court, Texas Northern
    Date: June 5, 2024

  • Defendant’s Objections against the Accounting Expert Witness’ Damages Calculations Overruled

    Defendant’s Objections against the Accounting Expert Witness’ Damages Calculations Overruled

    A district judge in North Carolina refused to exclude the accounting expert witness’ calculations of the Defendants’ revenues and profits earned in connection with their sales.

    Plaintiff and Defendants sell heat transfer systems to industrial customers. In 2016, Plaintiff sued Defendants for trade secret misappropriation, breach of contract, unfair competition, and patent claims. That litigation terminated with a 2018 settlement agreement. According to that agreement, Defendants assigned to Plaintiff patents related to the design of a first-generation Fluid Tracing System (“FTS”) product and pledged specifically to “remove all reference to the [FTS] on its web pages and advertisements and cease all use of any materials referencing the [FTS].”  Defendants also agreed not to sell products into the Sulphur field for an exclusionary period of three years, with exceptions granted for four contracts allegedly in place at the time the settlement agreement was executed (i.e., the “excepted contracts”).

    Following the settlement, Defendants developed a new heat transfer product, FTS Generation 2 (“Gen. 2”). As required under the settlement agreement, Defendants amended their marketing materials to remove references to the first-generation FTS.  Nonetheless, some of Defendants’ post-settlement marketing materials continued to depict FTS Gen. 1. Following the development of FTS Gen. 2, Defendants disseminated a chart indicating that the second-generation product performs better than FTS Gen. 1. Purporting to avail themselves of the excepted contracts provision of the 2018 settlement agreement, Defendants also sold their Gen. 2 product into the Sulphur field.

    Plaintiff again sued Defendants in 2021, raising claims of false advertising and false designation of origin under the Lanham Act; racketeering under RICO; common law fraud, civil conspiracy, and breach of contract; and unfair and deceptive trade practices under North Carolina Law.

    Expert Testimony

    Plaintiff retained Glenn Newman as an expert to calculate the revenues and profits earned by Defendants in connection with their sales into the Sulphur field and sales of FTS Gen. 2 products after the effective date of the settlement agreement. Defendants offered Carson Hannah, an employee of QMax Industries, LLC, to opine on tests he designed and performed in 2019 (before Plaintiff instituted this litigation) showing that Defendants’ Gen. 2 product performs better than the Gen. 1 product for which Plaintiff holds the patent. Each party moves to exclude the other’s expert under Federal Rule of Evidence 702. 

    Accounting Expert Witness

    Glenn Newman, a forensic accountant, has provided a variety of financial consulting and accounting services to attorneys, insurance companies, governmental agencies and public and private corporations since 1980. Newman has served as a Neutral and Special Master and has held numerous leadership positions with the American Institute of CPAs.

    Want to know more about the challenges Glenn Newman has faced? Get the full details with our Challenge Study report.

    Discussion by the Court

    Defendants moved to exclude Newman’s testimony as unreliable because he failed to establish a causal link between his damages calculations and Defendants’ alleged wrongdoing. Plaintiff contended that Hannah’s report has not “been subjected to peer review and publication,” and is not falsifiable because Hannah failed to record the amount of heat-transfer compound used.

    Defendants’ Motion to Exclude Newman

    They argued that a damages expert must establish causation by tracing ill-gotten gains to wrongdoing alleged in the complaint. Defendants contended that for an expert report to be admissible to prove disgorgement of profits under the Lanham Act, the expert must do more than assume a correlation between the alleged wrongdoing and the profits; the expert must instead examine causation between the alleged wrongdoing and the estimate of damages.

    The Court held that the Plaintiffs retained Newman to opine on merely damages; not causation.

    Defendants argued that an expert’s opinion as to damages must be causally related to the alleged harm. Assuming (as the Defendants might) that the jury accepts Plaintiff’s contention that the parties are direct competitors in a two-supplier market, the Court held that Newman’s disgorgement analysis is “causally related to the alleged harm.”

    Defendants added that the astronomical amount of profits Newman contended the Defendants owe intensified the unreliability of Newman’s opinion. The Court held that the Defendants’ objection concerned the weight accorded to Newman’s testimony, not its admissibility.

    Defendants argued that Newman’s report was unreliable because it did not apportion damages amounts to each of Plaintiff’s claims. According to the Defendant, an expert’s “failure to apportion the disgorgement of profits as to each claim renders his opinion unreliable because there is no way for the factfinder to differentiate which profits are attributable to which claims.”

    The Court recognized the merit of Defendants’ claim that Newman’s disgorgement analysis had the potential to mislead a jury, citing the Plaintiff’s lack of entitlement to a disgorgement remedy on all their claims. The Court will address this issue if it materializes at trial. However, the Court denied Defendants’ motion to exclude.

    Plaintiff’s Motion to Exclude Hannah

    Defendants offered Hannah, a QMax employee, to opine regarding a test that he performed to compare the performance of the Gen. 1 and Gen. 2 FTS products.

    Hannah only had to provide a disclosure stating “the subject matter on which [he] is expected to present evidence” and “a summary of the facts and opinions to which [he] is expected to testify” because he is a Rule 26(a)(2)(C) witness.

    Plaintiff moved to exclude Hannah on the basis that his conclusions “were not based on sufficient facts or data and were not the product of reliable principles and methods.”

    In 2019, before Plaintiff brought this suit, Hannah conducted a test apparently showing that Defendants’ Gen. 2 FTS product performed between 5% and 15% better (in terms of heat transfer) than the Gen. 1 FTS product. Hannah’s Rule 26(a)(2)(C) report did not contain any data from this test. When he conducted this test, Hannah failed to record the total amount of heat-transfer compound used to connect the FTS products to their respective process pipes, which could affect the performance of the FTS products. Hannah admitted that, based on his 26(a)(2)(C) report alone, it would be impossible to evaluate or recreate his analysis.

    Since Hannah’s report did not contain the data on which he based his conclusion, Plaintiff contended that “Hannah’s opinions are based on no facts or data—nevermind sufficient ones—and must therefore be excluded.”

    The Court held that the spreadsheets produced by Defendants in response to Plaintiff’s discovery requests, which apparently contain the data underlying the 2019 tests belied the Plaintiff’s contention that no such data existed.

    Also, the Court held that “vigorous cross-examination” and “presentation of contrary evidence” at trial instead of the Court’s gatekeeping function should address the the reliability of Hannah’s conclusions.

    Held

    The Court denied the parties’ motions to exclude. The Court held that the parties’ critiques were not without merit, but they ultimately concerned the weight, not the admissibility, of the relevant testimony. 

    Key Takeaways:

    • As per Daubert, that district court reliability assessments should focus “solely on principles and methodology, not on the conclusions that they generate” when Defendants added that the astronomical amount of profits Newman contended the Defendants owe intensified the unreliability of Newman’s opinion.
    • Peer review and publication—while one indicator of reliability—is hardly a requirement for admissibility under Daubert‘s gloss on Rule 702. 

    Case Details:

    Case Caption: Controls Southeast, Inc. V. Qmax Industries, Inc. Et Al
    Docket Number: 3:21cv302
    Court Name: United States District Court, North Carolina Western
    Order Date: May 14, 2024
  • Accounting Expert Witness’ Opinions on Due Diligence Procedures Admitted

    Accounting Expert Witness’ Opinions on Due Diligence Procedures Admitted

    A district judge in Mississippi held that the accounting expert witness was more than qualified to testify about the due diligence requirements in the stock purchase agreement in question.

    Facts of the case:

    Casey Morgan (“Morgan”) and Jimmy Ward (“Ward”) (collectively “Plaintiffs”) previously owned and operated Bigfoot Land Services, Inc. (“Bigfoot” or “the company”), an Oklahoma-based land services company. The Plaintiffs had a long-standing business history with the Defendants, specifically, Mr. Joseph Logan Sewell, Jr. (“Sewell”)—and in approximately 2021, the parties began discussing Sewell’s purchase of Bigfoot. The culmination of those negotiations was a Purchase and Sale Agreement dated June 3, 2022 (“Purchase and Sale Agreement” or “Contract”), where the Plaintiffs sold the entirety of their shares of stock in Bigfoot to Sewell Investments, LLC, Logan N. Sewell, and Colorado Buck Family, LP. The price tag for this stock purchase totaled Two Million Seven Hundred Seventy Thousand One Hundred Forty and 96/100 Dollars.

    After the acquisition, the Defendants realized that Bigfoot was operating at a loss and subsequently mailed a letter dated October 7, 2022, alleging that the Plaintiffs fraudulently misrepresented Bigfoot’s valuation and demanding that the Plaintiffs “rescind the Purchase and Sales Agreement and return all exchanged considerations on or before October 14, 2022.” 

    The Plaintiffs commenced this action against the Defendants on November 4, 2022, in the United States District Court for the Southern District of Mississippi, intending to enforce the Agreement.

    They asserted that the Defendants breached the Agreement by failing to pay the Plaintiffs $85,000 for work Bigfoot performed prior to the sale and making purchases on the company credit card under Morgan’s credit without authorization. The Plaintiffs further contended that the Defendants defaulted on the Promissory Note executed in Ward’s favor and repudiated the Agreement with their demand to rescind the Agreement via the Demand Letter dated October 7, 2022.

    Motion to exclude

    The Plaintiff’s retained expert Westley “Wes” Winborne intended to testify that the Defendants did not perform relevant tasks in order to validate that the Plaintiffs’ financial records could be relied on.

    The Defendants contended that Winborne’s testimony had to be based on not only experience but also some reliable, objective methodology. The Defendants also alleged that Winborne’s testimony would have been unfairly prejudicial and would have misled the jury because the testimony improperly placed a legal duty upon the Defendants that was not recognized under Oklahoma law.

    It was undisputed that Winborne’s opinions did not cite to any peer-reviewed publications, potential rates of error, or controls used. Nor did he appear to have considered alternative theories in reaching his opinion on the due diligence procedures. However, his procedures could be tested.

    Winborne’s relevant field is that of providing accounting services in the sale and purchase of a company, including “litigation support, contract costing, strategic planning and related services.” Winborne submitted that he employed the same kind of data and the same methodology as he had in assisting clients in the sale and purchase of similarly situated construction businesses.

    Accounting Expert Witness

    Wes Winborne is the managing partner of HORNE’s construction group where he offers financial guidance and advisory services to the construction industry. 

    Wes joined the firm in 2000 and has more than 20 years of experience providing audit, tax and client advisory services to contractors.  He has served on the boards of various local and national construction associations.

    Wes received his Bachelor of Accountancy and his Master of Accountancy from Mississippi State University.

    To learn about other cases where Wes Winborne has been involved as an expert witness, order an Expert Witness Profile report.

    Discussion by the Court

    Is Winborne qualified?

    According to Winborne’s Expert Witness Report, Winborne is a CPA with “over 20 plus years of experience providing audit, accounting and tax services to numerous small and medium sized businesses and their owners.” 

    These services included “litigation support, contract costing, strategic planning and related services.” Winborne also testified that he has provided services in transactions concerning the purchase and sale of construction businesses on approximately 80 different occasions.

    The Defendants argued that despite this experience, Winborne’s theories were based on what Winborne would have done and not based on objective and reliable methodology.

    Having considered the parties’ briefs on the qualifications of Winborne, the Court concluded at this stage that pursuant to Rule 702 he appeared to be qualified to render his opinions on the relevant due diligence performed in a stock purchase based on his education as well as his experience, skill, and knowledge gained from his role as a managing partner of a construction accounting firm.

    Is Winborne’s testimony relevant and reliable?

    In his report, Winborne laid out the due diligence procedures, based on his 20 years of experience as a certified public accountant and his review of financial documents provided by the Plaintiffs in relation to this matter.

    The Defendants’ objections to Winborne’s testimony concerned the credibility of his conclusions and the level of certitude of the procedures on which he relied. The Defendants further argued that Winborne’s testimony would impose a legal duty to perform due diligence not recognized by Oklahoma law.

    Upon reviewing the Expert Report, the Court was not convinced that this was the case; instead, it appeared that Winborne was only describing the due diligence procedures he performed, including the kinds of data and methodologies he relied on, in his day-to-day business, as he did when deriving his opinions in this case.

    The Court held that Winborne’s opinions were consistent with the facts of the case.

    The agreement included a clause indicating that the Defendants agreed to perform due diligence prior to the purchase and that the Plaintiffs would provide full access to Bigfoot’s books and records to assist in the due diligence process. Winborne is a certified public accountant with years of experience in the purchase and sale of similarly situated construction businesses. The very nature of Winborne’s testimony involved the due diligence he would have performed in his day-to-day business as the managing partner of a construction accounting firm. Accordingly, the Court concluded that Winborne’s opinions on due diligence procedures were relevant and reliable in this matter.

    Held

    After reviewing the Defendants’ arguments, the applicable law, and the evidence the Defendants sought to exclude, the Court found that Winborne’s proposed testimony appeared to be sufficiently relevant and reliable pursuant to Rule 702. Thus, the Court denied the Defendants’ motion to exclude the testimony of the Plaintiff’s expert Westley “Wes” Winborne.

    On January 23, 2024, both parties had filed dueling motions for partial summary judgment. The Plaintiffs’ allegations rested on the Defendants’ alleged breach and anticipatory repudiation of the Agreement. The Plaintiffs further averred that the Defendants failed to assert valid fraud claims to survive summary judgment. The Defendants’ Motion sought rescission of the Agreement, contending that the Plaintiffs had committed fraud by offering alleged materially false representations prior to the agreement. The Court denied both motions for partial summary judgment.

    Key Takeaway:

    An expert’s testimony “must be relevant, not simply in the sense that all testimony must be relevant, but also in the sense that the expert’s proposed opinion would assist the trier of fact to understand or determine a fact in issue.” Winborne is a certified public accountant with years of experience in the purchase and sale of similarly situated construction businesses. The very nature of Winborne’s testimony involves the due diligence he would perform in his day-to-day business as the managing partner of a construction accounting firm.

    Case Details:

    Case Caption: Morgan Et Al V. Sewell Et Al
    Docket Number: 5:22cv89
    Court Name: United States District Court, Mississippi Southern
    Order Date: April 24, 2024
  • Accounting Expert Witness Testimony Found to Lack Understanding of the Type of Business at Issue

    Accounting Expert Witness Testimony Found to Lack Understanding of the Type of Business at Issue

    James Swain Rieves, who operated Platinum Vapor, LLC, doing business as Cloud 9 Hemp faced legal trouble when the Town of Smyrna Police Department (hereinafter “SPD”) discovered the sale of Cannabidiol (CBD) products by the business in May 2017. The Smyrna Police Department
    raided Cloud 9’s premises and seized tens of thousands of dollars in
    inventory, along with other items. Despite the clear legality of industrial hemp products, including CBD, under Tennessee law, the SPD continued its investigation yet both Rutherford County and the Town of Smyrna failed to investigate the case during the four months and eighteen days they possessed the materials seized from CLOUD 9. This prolonged scrutiny caused significant harm to Rieves’ business, leading to severe emotional distress, loss of enjoyment of life, and a substantial decline in Cloud 9’s income. The reputation of the business and Rieves himself suffered irreparable damage during this ordeal.

    The Plaintiff, James Swain Rieves, enlisted the services of CPA Tom Price, an expert in damages and business valuation, to assess the financial impact on his business resulting from the events in question. The Defendants, Town of Smyrna, did not dispute the admissibility of Price’s opinions outlined in the Price Report. However, they countered the same with their own expert, CPA Robert Vance, who is a highly skilled forensic economist retained to challenge the foundations of Price’s conclusions and provide an alternative assessment of the Plaintiff’s damages. Rieves did not contest Vance’s qualifications or the relevance of his opinion but questioned the reliability of Vance’s conclusions as presented in the Vance Report.

    The Vance Report comprised two main sections. The first section critiqued the opinions presented in the Price Report, while the second section contained Vance’s own “Damage Calculation.” The Plaintiff raised objections to three opinions expressed by Vance in his critique of the Price Report, seeking their exclusion as unreliable. These included Vance’s assertions that Price’s calculations were unreliable due to the use of “national level statistics” which were applied to the Plaintiff’s “small, local CBD store and his online business”; that the Price Report failed to consider the lack of capital and credit in the damages analysis; and that it overlooked competition from local retail establishments in Smyrna and the potential impact of “big box” stores entering the CBD market when computing damages. Additionally, the Plaintiff contested Vance’s own damages calculation.

    Accounting Expert Witness

    Robert Vance is a highly skilled forensic CPA and forensic economist based in Memphis, Tennessee. His professional focus lies in various areas including business valuation, divorce litigation support, commercial lost profits, personal injury economic damage calculations, forensic investigations, and expert witness testimony. He earned his Bachelor of Science in Business Administration in Accounting from the University of Tennessee in 1985. With a wealth of credentials, Robert holds designations as a Certified Public Accountant (CPA), Accredited in Business Valuation (ABV), Certified in Financial Forensics (CFF), Certified Valuation Analyst (CVA), and Certified Financial Planner (CFP). Robert is the principal of Forensic & Valuation Services, PLC in Memphis, Tennessee.

    Discussion by the Court

    The Plaintiff contested Vance’s opinions on Price’s valuations, asserting that Vance failed to provide any reliable data sources to support his views. Instead, Vance relied on snippets from five online news articles, none of which claimed scholarly status or cited legitimate data sources. Furthermore, the Plaintiff argued that Vance’s opinions were flawed, as he mistakenly believed Rieves’ business was a “brick-and-mortar, local, storefront retailer” of CBD products, whereas it functioned as a manufacturer, wholesaler, and online retailer. Additionally, Vance erroneously assumed the business was primarily sold locally, whereas Rieves testified in his deposition, quoted by Vance himself, that only a small percentage of sales were to Tennessee residents. Based on these discrepancies, the Plaintiff contended that Vance’s opinion, suggesting a comparison to local retail businesses, lacked support from the record or the documents Vance relied upon and was not sufficiently reliable for jury consideration.

    The Court determined that Vance’s fundamental misconception of Rieves’ business as a small brick-and-mortar store with some online presence undermined and rendered his critiques of Price’s analysis unreliable. Vance’s mischaracterization of the business demonstrated a lack of understanding of its nature, customer base, and actual competitors. Specifically, Vance questioned Price’s analysis, citing differences between the “micro-level environment for small retail stores” and the “macro-level sales considerations of manufacturers of CBD products.” However, the Court noted that Rieves’ business was not a small retail store but, in fact, a manufacturer. 

    Furthermore, the Plaintiff highlighted that Vance’s citation of an article to support his claim that such types of establishments operate in different environments was merely an online piece by a “startup consultant.” This article broadly outlined “5 variables every business owner should pay attention to,” including competition, political climate, the economy, trends, and technology. The Plaintiff also noted that Vance criticized Price’s growth projections as “miraculous” without providing a basis for such criticism. Interestingly, one of the articles Vance cited referred to a “recent study out of Boulder, Colorado,” estimating a tenfold increase in the market for CBD products in the next five years. 

    Vance criticized the Price Report for purportedly neglecting to factor in competition in the area in his damages analysis. The Plaintiff testified that his business had minimal dependence on local establishments, with a very small percentage of sales coming from Tennessee. Additionally, Vance listed 52 retail establishments in Smyrna selling CBD products but failed to specify whether these were preexisting competitors or new entrants into the market. 

    The Plaintiff raised objections to Vance’s criticism of Price, claiming a failure to consider Mr. Rieves’ lack of capital and credit in the damages analysis. Vance supported this critique by citing an online article from CNBC.com outlining common reasons for small business failure, including “empty pockets” due to “poor cash flow.” However, the Plaintiff argued that Vance overlooked the alleged cause of Rieves’ cash flow and credit issues, claiming they have stemmed directly from the Defendants’ seizure of assets and shuttering his business twice. Additionally, the Plaintiff noted that the cited article lacked scholarly credibility and did not conduct any specific analysis to support Vance’s assertions. 

    The Court concluded that all of Vance’s critiques of Price’s analysis were deemed unreliable and inadmissible. This decision stemmed from Vance’s mischaracterization or misunderstanding of the business type involved and his reliance on non-scholarly and only tangentially relevant online articles. The Court also deemed these articles inadmissible. Importantly, it was emphasized that Vance’s critiques, largely based on common sense, did not necessitate an expert to cross-examine Price regarding perceived inadequacies and oversights in his opinions. 

    Vance presented his own valuation of the Plaintiff’s damages, relying on an analysis of the business’s actual income and expenses for eight months leading up to the initial seizure in September 2017. However, Vance used income figures from only the three months preceding the seizure to project future earnings and calculate “alleged damages” over a 25-month period, aligning with the Tom Price report spanning from September 2017 through September 2019. His analysis assumed no business growth over time due to factors such as a negative trendline, lack of capital, and increased competition. Vance also explained why he discounted the Plaintiff’s $91,000 claim for damages resulting from the seizure of inventory and materials, deeming it as double-dipping. According to Vance, the total damages arising from the Defendants’ actions amounted to $319,380, a considerable difference from Price’s assessment of total lost income at the “gross profit level,” ranging between $1.27 million and $2.33 million.

    The Plaintiff sought to exclude Vance’s damages calculation, deeming it unreliable. This objection arose from Vance’s use of only eight months of data, despite the Plaintiff’s yearly earnings being available since 2015. This approach led to Vance basing projections on a negative growth trend for the months of July through September 2017, instead of utilizing yearly earnings or even earnings for the entire eight months he purported to have reviewed that could have shown an upward trend. The Plaintiff also criticized the Vance Report for neglecting to consider significant market growth for CBD products, failing to analyze the impact of increased competition, and not providing an explanation for how low capital, combined with these factors, would have hindered the Plaintiff’s business growth over the next 25 months.

    The Court determined that the Plaintiff’s critiques of Vance’s damage calculation were more relevant to their weight rather than their admissibility. Citing In re Scrap Metal Antitrust Litig., 527 F.3d 517, the Court emphasized that the rejection of expert testimony is the exception rather than the rule. The traditional and appropriate means of challenging such evidence involve vigorous cross-examination, presenting contrary evidence, and providing careful instruction on the burden of proof. In Vance’s case, his damage calculation relied on data supplied by the Plaintiff and mathematical equations based on that data. His assumptions projecting no growth for the Plaintiff’s business were based on his own observation of the trendline for the Plaintiff’s business for the last three months for which data were available. 

    The Court concluded that the Plaintiff’s challenges to Vance’s damage calculation were more about their weight than their admissibility. The jury would not be presented with inaccurate facts but rather with a calculation based on assumptions that the jury may or may not agree with. Consequently, the motion to completely exclude Vance’s damage calculation was denied.

    Held

    The Court granted in part and denied in part the Plaintiff’s Motion in Limine to Exclude Expert Testimony of Defendants’ Retained Expert Robert Vance. The motion against Vance was granted to exclude the opinions presented in the first part of the Vance Report critiquing the Price Report and to exclude the five articles cited in support of those opinions. However, the motion was denied in so far as it sought to exclude Vance’s calculation of the Plaintiff’s damages.

    The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.

    Key Takeaways

    The Court granted the motion to exclude opinions presented by expert Robert Vance, critiquing the analysis of another expert, Tom Price. Vance’s mischaracterization of Rieves’ business type and reliance on non-scholarly articles led the Court to deem his critiques unreliable and inadmissible. The Court emphasized that rejecting expert testimony constituted an exception and directed that Vance’s damages calculation, while subject to challenges about its weight, was ultimately considered admissible, rooted in observable facts and data. This case underscores the importance of a thorough and accurate understanding of the type of business at issue when presenting expert opinions and the need for a reasonable factual basis in damages calculations.

    Case Details

    Case Caption Rieves v. Town of Smyrna
    Docket Number 3:18cv965
    Court United States District Court, Tennessee Middle
    Citation 2024 U.S. Dist. LEXIS 18626
    Order Date February 2, 2024
  • Accounting Expert Witness’ Two-Party Market Analysis Admitted

    Accounting Expert Witness’ Two-Party Market Analysis Admitted

    Hayward Industries, Inc. (the Plaintiff), a company in the pool industry, filed a complaint against competitors (the Defendants) over the sale of aftermarket replacement salt cells for use in Plaintiff’s chlorine generator systems. Chlorine generators, also known as “salt cell systems,” convert dissolved salt into chlorine to sanitize pools. Chlorine generator systems replace the need for liquid or tablet chlorine. The salt cell has a limited use life and is replaced by inserting a new salt cell into the overall system when the prior cell is exhausted. Hayward manufactures and sells pool chlorination systems, and the dispute centers around the Defendants’ alleged violations of the Lanham Act and other claims. The Plaintiff contends that the Defendants’ advertising is misleading and creates confusion among customers, making them believe that the aftermarket products are actually Hayward’s.

    The Plaintiff presented Juli Saitz’s expert report in the legal proceedings to bolster their damage claims, particularly focusing on her assessment of lost profits the Plaintiff is entitled to. Saitz conducted an analysis of the relevant market, characterizing it as a two-party market. This characterization suggested that Hayward, the Plaintiff, would have secured sales of replacement salt cells if not for the Defendants’ alleged false advertising and trademark infringement.

    The Defendants filed a Motion in Limine, pursuant to Federal Rules of Evidence 702, in order to exclude the testimony of the Plaintiff’s damages expert, Juli Saitz.

    Accounting Expert Witness

    Juli Saitz is a Certified Public Accountant with nearly 25 years of experience. She has been appointed as an expert in matters of forensic accounting on more than 20 occasions. Saitz has testified in both litigation and arbitration for disputed values in excess of $100 million. She has served as an expert in matters involving business divorces; shareholder disputes; fraud claims; breach of contract matters; patent, trademark, and copyright infringement; and royalty disputes.

    Saitz has a background in commercial disputes and financial consulting services related to financial analysis, investigations, and damage analysis. She is experienced across a range of industries including entertainment, real estate, hospitality, food and beverage, consumer products, financial services, and manufacturing.

    Discussion by the Court

    Federal Rules of Evidence 702 requires that an expert’s opinion testimony be “based on sufficient facts or data” and must be “the product of reliable principles and methods.” Daubert, as was held in Sardis v. Overhead Door Corp., 10 F.4th 268, 281 (4th Cir. 2021), provides non-exhaustive “guideposts” to aid in the required analysis as to whether an expert’s testimony is reliable: (1) whether the expert’s theory or technique “can be (and has been) tested”; (2) whether the theory or technique has been subject to prior review and publication; (3) “the known or potential rate of error” inherent in the expert’s theory or technique; and (4) whether the expert’s methodology is generally accepted in his field of expertise.

    The Defendants are seeking to exclude Saitz’s report, asserting three main arguments. Firstly, they claim that Saitz used a patent damages framework (the Panduit test) inappropriately for Lanham Act cases. Secondly, they argue that Saitz did not establish a connection between the Defendants’ alleged infringing conduct and the assumed transferred sales to Hayward, thus failing to show causation as required to support a lost profits award. Lastly, the Defendants assert that Saitz overlooked significant and undisputed evidence, including factors like pricing influencing consumer decisions, the market for the goods at issue—replacement salt cells for pool chlorination systems-not being a two-party structure as assumed, and issues related to Hayward’s supply chain disruptions and inventory during the relevant damages period.

    The Court has rejected the Defendants’ motion. The challenges raised by the Defendants regarding Juli Saitz’s expert report were deemed as concerns about the weight of her testimony rather than its admissibility. The Court acknowledged that Saitz’s methodology, which had been employed by other courts, is acceptable in cases involving essentially a two-party market. The ruling suggests that the Defendants can contest Saitz’s methodologies during cross-examination concerning damages but doesn’t deem them grounds for excluding her testimony.

    Held

    The Court denied Defendants’ motion to exclude Saitz’s expert report and testimony from trial. As of now, the Court has not reached a verdict in this case, as there are still pending issues that await resolution.

    Key Takeaways:

    The key takeaways from the court proceedings on expert testimony are grounded in the Federal Rules of Evidence, particularly Rule 702, which mandates that expert opinions must be based on sufficient facts and reliable principles and methods. The Daubert standard, as elucidated in Sardis v. Overhead Door Corp., provides guiding criteria to evaluate the reliability of expert testimony, including whether the theory or technique is testable, has undergone prior review, the potential rate of error, and general acceptance in the field.

    In this specific case, the Defendants sought to exclude the expert testimony of Juli Saitz, raising three primary objections. Firstly, they argued that Saitz improperly utilized a patent damages framework for Lanham Act cases. Secondly, they contended that Saitz failed to establish a connection between the alleged infringing conduct by the Defendants and the assumed transferred sales to Hayward, thereby lacking causation necessary for a lost profits award. Lastly, the Defendants asserted that Saitz overlooked crucial evidence, such as pricing influences on consumer decisions, the market structure not aligning with the assumed two-party framework, and issues related to Hayward’s supply chain disruptions.

    Despite these challenges, the Court denied the Defendants’ motion, emphasizing that the concerns raised pertained to the weight of Saitz’s testimony rather than its admissibility. The Court acknowledged the acceptance of Saitz’s methodology in similar contexts and allowed the Defendants to challenge her methodologies during cross-examination. Saitz, with nearly 25 years of experience, brings expertise in forensic accounting and has been involved in diverse disputes, ranging from business divorces to intellectual property matters. The Court’s decision underscores the importance of cross-examination in scrutinizing expert testimony, granting the Defendants an opportunity to challenge Saitz’s methodologies and findings while allowing her testimony to remain admissible.

    Case Details

    Case Caption Hayward Industries, Inc. V. Blueworks Corporation Et Al
    Docket Number 3:20cv710
    Court United States District Court, North Carolina Western
    Citation 2024 U.S. Dist. LEXIS 9511
    Order Date January 17, 2024
  • “Unexplained” Methodology employed by Accounting Expert Witness passes Daubert Test after Court notes that merits and drawbacks of the Methodology have been discussed

    “Unexplained” Methodology employed by Accounting Expert Witness passes Daubert Test after Court notes that merits and drawbacks of the Methodology have been discussed

    Plaintiffs BRP Colleague Inc. (“BRP Colleague”) and Baldwin Krystyn Sherman Partners, LLC (“BKS”) jointly referred to as “BRP,” had initiated legal proceedings against Defendants Edward (Teddy) Gillen (“Gillen”) and Edgewood Partners Insurance Center Inc. (“EPIC”) concerning Gillen’s prior association with BRP and his subsequent employment with EPIC, a direct competitor of BRP. BRP (together with BRP Group, Inc. and its affiliated entities, collectively “BRP Group”) offers insurance, benefits, and risk management solutions for individuals and businesses across the country, with a particular focus in the Southeast. EPIC is a direct competitor of BRP. It is an insurance brokerage and consulting firm selling property and casualty insurance, employee benefits insurance and specialty program insurance, including medical malpractice insurance.

    The basis of BRP’s claims revolved around alleged violations by Gillen of the Defend Trade Secrets Act, the Georgia Trade Secrets Act, and tortious interference with contractual and business relationships. The focal point was Gillen’s departure from BRP and his purported violation of a legally binding and enforceable restrictive covenant agreement known as the Employee Covenant Agreement (“Agreement”). Plaintiffs also claimed that EPIC had tortiously interfered with contract, business relationships, and expectancies by unlawfully taking Plaintiffs’ business for itself (and Gillen) after Plaintiffs rejected EPIC’s attempt to purchase Plaintiffs’ business. Plaintiffs sought attorney’s fees from both Gillen and EPIC.  

    Gillen, a former insurance producer for BRP specializing in the sale of medical malpractice insurance policies, was accused of breaching various legal obligations and engaging in actions detrimental to BRP’s interests. Notably, BRP contended that Gillen misappropriated confidential and proprietary information, including trade secrets, during his tenure with BRP. This misappropriation was alleged to have been utilized by Gillen to illicitly solicit and service BRP’s customers on behalf of, and to the advantage of, EPIC, his current employer.

    The crux of the matter lay in Gillen’s alleged theft of confidential and proprietary information, constituting trade secrets, and the subsequent utilization of these unlawfully obtained assets to serve EPIC’s interests. BRP contended that Gillen, in defiance of his restrictive covenants and applicable laws, had engaged in the solicitation and servicing of BRP’s clients for EPIC’s benefit.  

    EPIC, according to BRP’s assertions, was not a passive beneficiary of Gillen’s actions but actively participated in and facilitated the breach of Gillen’s legal obligations to BRP. BRP accused EPIC of knowingly benefiting from Gillen’s illicit conduct and further asserted that EPIC conspired with Gillen to undermine BRP’s contractual, statutory, and common law rights. This ongoing wrongful conduct by the Defendants, BRP argued, had resulted in irreparable harm and substantial damages to BRP.

    In response to the alleged misconduct, BRP sought both preliminary and permanent injunctive relief to halt and prevent the continued harm arising from the Defendants’ actions. Additionally, BRP sought monetary damages and other available relief as a remedy for the harm caused by Gillen and EPIC’s wrongful conduct. 

    The financial aspects of the case involved BRP’s claims for lost profits and unjust enrichment damages against the Defendants. BRP, supported by expert witnesses Joseph J. Egan and Myles D. Kaluzna, estimated its lost profits (both past and future) to amount to $991,755. Furthermore, BRP’s economics experts opined that EPIC had been unjustly enriched by $710,528 through its wrongful acts. Notably, Defendants had engaged J. Lester Alexander III (“Alexander”) to counter BRP’s expert report, suggesting a contested battleground over the quantification of damages.

    Plaintiff filed an initial motion to exclude the testimony of J. Lester Alexander III which was dismissed without prejudice by the Court on account of noncompliance with the local rules. After the Plaintiff’s re-filed the motion as per the Court’s directions, the Court addressed Plaintiffs’ Motion to Exclude Expert Report and Opinions of Alexander, which sought the exclusion of Defendants’ rebuttal damages expert, Alexander, under Federal Rule of Evidence 702 and Daubert. Plaintiffs asserted two primary reasons for the exclusion: first, that Alexander’s opinions were grounded in speculation and an unexplained methodology, and second, that his testimony would not contribute to the jury’s understanding of the evidence. 

    Accounting Expert Witness

    J. Lester Alexander III B.S., C.P.A., C.F.E. is the Executive Vice President of J.S. Held LLC. He has served as the Founder and Chief Executive Officer of AEA Group. He is a former partner of PwC and the former southeastern practice leader of one of its legacy firm’s consulting practices. Alexander practiced for more than three decades, performing audit, tax, and consulting services. In recent years, he concentrated his practice in the areas of economic research, financial investigations, forensic accounting, and valuation services. He had been admitted as an expert witness and testified in Federal and state courts on a variety of financial subjects.

    Discussions by the Court

    In response to the motion to exclude Alexander’s testimony, the Court had engaged in a comprehensive analysis of the admissibility of expert testimony, applying the standards set forth in Federal Rule of Evidence 702 and the Daubert framework. The Court had begun by outlining the criteria for admitting expert testimony under Rule 702, emphasizing that an expert’s testimony should assist the trier of fact in understanding the evidence or determining a factual issue. 

    The Court had acknowledged that Rule 702 required that expert testimony be based on sufficient facts or data, be the product of reliable principles and methods, and that the expert had reliably applied those principles and methods to the facts of the case. The Court then had turned to the Eleventh Circuit’s three-part test, as articulated in City of Tuscaloosa v. Harcros Chemicals, Inc., 158 F.3d 548, 562 (11th Cir. 1998), which mandated that the expert must be qualified, the methodology must be sufficiently reliable, and the testimony must assist the trier of fact in understanding the evidence or determining a fact in issue. Plaintiffs alleged that Alexander’s testimony was inadmissible under both the second and the third elements of the Harcos Chemicals test.

    The Plaintiff argued that Alexander’s testimony regarding the methodology he allegedly employed in preparing his calculation of Plaintiffs’ lost profits manifested his repeated reliance on his subjective viewpoint under the cloak of purported reliance on industry standards and publications. For instance, Alexander’s report and calculation of lost profits were based on the presumption that economic damages cannot exceed the total value of the lost business, but when asked to explain the basis for this assertion, he failed to cite a source. Although he mentioned publications like “Valuation Services Practice A for Lost Profits 2020” and the “Litigation Handbook” as supporting his methods, he did not specify which parts of those publications supported the propriety of his method.

    Due to his failure to cite all the sources he used, show his calculations, or even remember the numbers he used to calculate his final figures, Alexander’s findings were impossible to duplicate, confirm, or refute.

    Alexander engaged in speculation when calculating Plaintiffs’ lost profits. In reaching his final damages conclusion, Alexander multiplied Plaintiffs’ total 2021 lost revenue by a revenue multiple of 2.03 without providing support for the assertion that the revenue multiple was more reliable than other methods of calculating damages.

    Furthermore, Alexander chose his revenue multiple by taking the median revenue multiple
    of four transactions he pulled from DealStats. One of the four transactions is from the Pittsburgh
    market, while the other three are from Florida. With no analysis or investigation for this assertion,
    Alexander stated that the Atlanta and Pittsburgh markets were on par “from the point of view of
    profitability of an insurance agency.”

    The Plaintiffs noted Alexander’s reliance on alleged comparable transactions to calculate the revenue multiple without articulating a basis for his subjective definition of a comparable transaction. Alexander failed to adequately respond when confronted with the ways in which his transactions substantively differed from the business at issue in this case.

    The Plaintiffs further accused Alexander of failing to seek out and rely on relevant data, instead making unfounded assumptions. The Plaintiffs asserted this speculative approach rendered Alexander’s methodology unreliable.

    Finally, the Plaintiffs contended Alexander’s flawed methodology would not help the jury assess the validity of the Plaintiffs’ expert’s calculations. Rather, they argued his testimony would confuse the issues and prejudice the Plaintiffs by providing a veneer of expertise without a sound analytical basis.

    In response, the Defendants argued Alexander’s methodology was reliable and his testimony would aid the jury. They stated Alexander relied on established principles of valuation science and damages calculation. The Defendants stated that any questions regarding the credibility of Alexander’s methodology were reserved for the jury. The Defendants further argued Alexander’s decades of experience in the industry provided a sufficient basis for his choices.

    The Court agreed with the Defendants and denied the motion to exclude. It found Alexander sufficiently explained his methodology during his deposition. The Court held that while Plaintiffs’ selected quotes arguably implicated Alexander’s credibility as a witness, the context of those quotes demonstrated that Alexander’s testimony was based on more than mere speculation.

    Specifically, the Court noted Alexander based his opinions on his professional training and 2006 American Institute of Certified Public Accountants’ Guide, not just common sense. It also observed Alexander used a different methodology than the Plaintiffs’ expert, calculating damages using a market-based approach instead of an income-based approach. The Court stated Alexander extensively discussed his techniques in his deposition.

    The Court concluded Alexander’s methodology was sufficiently reliable under Daubert. It also found Alexander’s testimony would be relevant in assessing damages, meeting Rule 702’s low bar for assisting the trier of fact. 

    Held

    The Court denied Plaintiffs’ Motion to Exclude Expert Report and Opinions of Defendant’s expert, J. Lester Alexander, III. The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.

    Key Takeaways

    • The Court found that Alexander was sufficiently qualified based on his training and experience as an accountant. His methodology of using a market-based approach to calculate damages was deemed reliable, even if it differed from the Plaintiff’s expert’s income-based approach.
    • The Court determined that Alexander’s testimony regarding damages calculations would be helpful to the jury in understanding the evidence and determining facts at issue in the case. Therefore, it met the relatively low threshold for relevance and assisting the trier of fact.
    • While the Plaintiffs argued Alexander’s opinions were speculative, the Court found in the full context of his deposition he provided adequate explanation of his methodology grounded in accounting standards and training. Questions about his credibility were for the jury.
    • The Court denied the motion to exclude Alexander’s testimony, finding it met the qualifications, reliability, and helpfulness requirements for expert testimony under Rule 702 and Daubert. This provides a good overview of how courts assess expert witness admissibility.
  • Evidence of Causation Necessary to Support Damages Theory; Court Limits Clashing Expert Testimony on Economic Damages

    Evidence of Causation Necessary to Support Damages Theory; Court Limits Clashing Expert Testimony on Economic Damages

    This copyright infringement case was brought by JBrick, LLC (“JBrick”) against Chazak Kinder, Inc., Chazak Distribution, Inc., Marav USA LLC, and Yaacov Schwartz (collectively “Defendants”) in the United States District Court for the Eastern District of New York. JBrick alleged that the Defendants infringed on their copyright for a lego model of the Second Holy Temple by creating and selling a similar product.  

    JBrick was established in 2014 by Yitzchok and Channie Kasowitz with the goal of creating Jewish-themed custom lego sets, one of which was an accurately scaled lego model of the Second Holy Temple. In November 2018, Kasowitz displayed JBrick’s completed Second Holy Temple model at a convention where he met Defendant Schwartz. Shortly thereafter, Defendants began selling a model that JBrick alleged was nearly identical to their copyrighted Second Holy Temple model. 

    In May 2021, JBrick filed a complaint against the Defendants for copyright infringement. On April 25, 2022, Plaintiff filed its second amended complaint. On August 19, 2022, the parties completed expert discovery. JBrick hired a damages expert, Michael D. Pakter, to calculate the actual damages suffered by JBrick and any profits earned by the Defendants that were attributable to the alleged infringement. The Defendants retained their own rebuttal expert on damages, Trevor McClain-Duer.  Plaintiff moved to exclude certain of McClain-Duer’s opinions and testimony in response.

    After discovery concluded, the Defendants filed a motion to strike the expert opinions of Pakter. Specifically, Defendants had raised several objections to Pakter’s opinions. These objections included his assertion that Plaintiff would have sold an equal number of the copyrighted set as Defendants sold of the accused product, his claim that damages should encompass the Temple Mount Product and the unsold inventory of the Temple Mount Product, his evaluation of Defendants’ profits from the allegedly infringing product, and his suggestion that “JBrick can recover both its lost profits and a disgorgement of Defendants’ profits.” During that time, Plaintiff had maintained that Pakter’s opinions were grounded in “complex but transparent calculations” designed to help the jury comprehend the financial aspects underpinning the damages asserted in the case. 

    Accounting Expert Witnesses 

    Michael D. Pakter is a certified public accountant, registered and licensed in the State of Illinois, with over 40 years of experience in accounting and forensic accounting. He holds a Bachelor of Commerce and a Bachelor of Accountancy from Witwatersrand University, in South Africa. The American Institute of Certified Public Accountants has recognized him as “Certified in Financial Forensics” and as a “Chartered Global Management Accountant.” He has earned several other certifications including as a “Certified Valuation Analyst” and “Master Analyst in Financial Forensics” from the National Association of Certified Valuators and Analysts, and as a “Certified Insolvency and Restructuring Advisor” from the Association of Insolvency and Restructuring Advisors. Michael Pakter has over 20 years of experience in determining economic damages and performing business valuations. He is currently the Managing Member of Gould & Pakter Associates, LLC (“G&P”). He was retained on account of his extensive accounting experience to opine about the Plaintiff’s damages assuming Defendants’ liability. 

    Trevor McClain-Duer is a certified public accountant, registered and licensed in the State of Illinois. He holds a Bachelor of Business Administration from the University of Notre Dame and a Master’s Degree in Accounting from Ohio State University. He is a Chartered Financial Analyst with over 15 years of experience in valuation and determining economic damages. He is currently the Director of Valuation at Caliber Advisors, Inc., an expert valuation and economic consulting firm.  

    Discussions by the Court 

     The Court first examined Pakter’s qualifications and found he had significant accounting and damages calculation experience to serve as an expert on economic damages. Turning to the reliability of Pakter’s opinions, the Court addressed four disputed aspects of his testimony. 

    First, it denied striking Pakter’s opinion that JBrick would have sold an equivalent number of temple models as Defendants, despite the price difference between the products. Pakter had suggested that, assuming the Defendants’ liability, one possible method for calculating actual damages was to consider “JBrick’s lost profits for its Holy Temple product.” This calculation involved assuming that Plaintiff would have made all or various fractions of the infringing sales that Defendants had made. However, the Defendants had raised objections to this calculation, deeming it speculative. They pointed out a significant disparity in the sale price between the two products, with Plaintiff’s Second Holy Temple Product priced at $613 compared to the Defendants’ allegedly infringing product priced at $60. 

    Nonetheless, it was argued that nothing indicated that Pakter’s conclusion, which suggested that Plaintiff would have sold an equal number of its Second Holy Temple Product as Defendants, was so unrealistic or contradictory as to imply bad faith on his part. 

    Second, Plaintiff contended that its Second Holy Temple Product and a second product known as the “Temple Mount Product” were “directly related.” Consequently, they argued that Pakter could factor in the lost sales of the Temple Mount Product when calculating Plaintiff’s damages. The Temple Mount Product was designed to complement and enhance the educational value of the Second Holy Temple Product. Court determined that while such a damages theory was not inconceivable, the Plaintiff had failed to provide credible evidence of a clear relationship between the sales of the two products absent evidence of lost customers or canceled orders for the Temple Mount Product as a direct result of the alleged infringement. 

    Third, Defendants argued that Pakter’s calculation of their profits was not reliable. They pointed out that his use of a “per unit cost” figure and his failure to account for the total loss of 300 products donated by Defendants to charity were issues of concern. In response, the Plaintiff had maintained that Pakter’s methodology was indeed reliable. According to the Plaintiff, the core of the dispute between the parties revolved around whether profits and costs should be calculated on a per-unit bought-and-sold basis or based on all products manufactured at one time and the decisions made by the Defendants regarding the disposition of those products. Court held that the Defendants showed no authority proving Pakter’s approach was unreliable. At most, the parties disagreed on the appropriate profit analysis, weighing on Pakter’s credibility rather than admissibility. The Court ruled the jury should resolve this battle of the experts. 

    Fourth, Defendants argued that Pakter had inappropriately opined that the Plaintiff should be entitled to profits from Chazak’s downstream distributors. Furthermore, the Defendants had contended that Pakter’s opinion was based on the premise that the Plaintiff could not only recover for Chazak’s alleged infringement but also claim downstream profits resulting from the same alleged infringement of a single product. 

    However, the Court had determined that in cases where two or more individuals were involved in or contributed to a single infringement, they were all jointly and severally liable. In such instances, within a single infringement action, only a single set of statutory damages could be considered. This was because the Copyright Act allowed for only a single recovery for a single sale, and the Court’s decision addressed the issue of multiple parties and liability in the context of copyright infringement. 

    Plaintiff had sought the exclusion of specific opinions and testimony from McClain-Duer. Their basis for this exclusion request rested on the assertion that McClain-Duer lacked the qualifications to provide expert opinions on three key aspects: (i) the size of the market for JBrick’s Second Holy Temple Product; (ii) “price-point comparisons” related to the Second Holy Temple Product; and (iii) JBrick’s manufacturing capabilities. 

    In response to this request, the Defendants had argued that McClain-Duer was functioning as a rebuttal expert. His role was primarily focused on identifying deficiencies in Pakter’s report, specifically highlighting the Plaintiff’s failure to establish, using competent evidence, the size of the market for the Second Holy Temple Product and the manufacturing capabilities of JBrick. This dispute had centered on the qualifications and role of McClain-Duer in the case. 

    The Court found McClain-Duer qualified as an expert on economic damages but lacking in foundation to opine on the size of the market for JBrick’s product or its manufacturing capabilities. McClain-Duer was capable of identifying deficiencies in Pakter’s report. However, he was not qualified to go further and provide an opinion based on research indicating that lego branded sets from popular movies and TV shows sold for significantly less, indicating an insufficiently large market for the Temple product. Similarly, while McClain-Duer could point out that Pakter’s calculations assumed that the Plaintiff could have produced and sold over 15 times the number of sets he actually sold during the same time period, he lacked the qualifications to opine that the Plaintiff did not have the product manufacturing capabilities or capacity to manage such a significant increase in sales. This was because McClain-Duer did not possess the necessary expertise in the field more closely aligned with this opinion, which would be industrial engineering. 

    Therefore, the Court struck McClain-Duer’s testimony regarding the potential market for JBrick’s temple model, comparisons to other lego prices, and JBrick’s ability to meet higher production levels. It found these opinions exceeded McClain-Duer’s economic damages expertise and amounted to advocacy without qualification.  

    Court excluded the portions of Duer-McClain’s report and testimony purporting to describe the size of the market for JBrick’s Second Holy Temple Product, “price-point comparisons” related to the Second Holy Temple Product, and JBrick’s manufacturing capabilities. 

    Held 

    The Court granted in part and denied in part the Defendants’ motion to strike the opinions of Michael Pakter, and granted the Plaintiff’s motion to strike certain opinions and testimony of Trevor McClain-Duer.  The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution. 

    Key Takeaways 

    This case demonstrates the importance of scrutinizing the scope and reliability of expert witness testimony through Daubert motions. The Court served a gatekeeping role to restrict expert opinions to only what the witness was qualified to offer and exclude speculative or unsupported theories. 

    For Pakter, most of his damages calculations passed muster as grounded in reasonable methodology for the jury to assess. However, his assumption of losses on a non-infringed product went too far without evidence of causation. This highlights how courts will strike expansive expert opinions that lack factual support in the record.  

    Meanwhile, for McClain-Duer, his opinions on the size of the market for the Second Holy Temple Product and manufacturing capability of the Plaintiff required demonstration of expertise in the field more closely aligned to such opinions. This shows how rebuttal experts cannot provide opinions that go beyond the scope of their own expertise. 

    In summary, this case reinforces the principles that expert testimony must stay within the witness’s area of specialized knowledge and have a reliable factual basis.

  • FTX Founder’s Experts Face Exclusion in Cryptocurrency Fraud Case

    FTX Founder’s Experts Face Exclusion in Cryptocurrency Fraud Case

    FTX Trading Ltd. was a cryptocurrency exchange founded in 2019 by Sam Bankman-Fried. It quickly grew to become one of the largest crypto exchanges. Bankman-Fried also founded Alameda Research, a cryptocurrency trading firm. Federal prosecutors alleged that starting in 2019, Bankman-Fried orchestrated a scheme to defraud FTX customers by misappropriating their deposits to support Alameda’s trading activity.

    Specifically, he was accused of diverting billions in customer funds to Alameda without disclosing this practice. Alameda allegedly used the funds to make speculative crypto trades. Prosecutors said Bankman-Fried made false statements about FTX’s financial condition and operations to attract more customer deposits as well as investments into FTX and loans to Alameda.

    In November 2022, concerns about Alameda’s financial condition led to mass withdrawals from FTX. This caused a liquidity crunch at FTX, which did not have sufficient funds to meet withdrawal demands. FTX filed for bankruptcy on November 11, 2022. An estimated 1 million customers and investors suffered billions in losses.

    In December 2022, federal prosecutors filed criminal charges against Bankman-Fried, including wire fraud, commodities and securities fraud, and money laundering conspiracy. Bankman-Fried was arrested in the Bahamas and extradited to face charges in the United States. He pleaded not guilty. Jury selection for his trial is scheduled to begin on October 2, 2023, in New York. Bankman-Fried might face up to 115 years in prison if convicted.

    To summarize, Bankman-Fried is faced with 12 criminal charges, which will be spread across two trials scheduled to begin on October 2, 2023, and March 11, 2024. He has pleaded not guilty to all counts.

    Government Seeks to Exclude 7 Defense Experts in FTX Collapse Case

    Lawrence Akka

    The Government argued that the testimony of all seven experts should be excluded for various reasons. The Government contended that the testimony of Lawrence Akka, an English barrister, should be excluded because he intended to interpret FTX’s terms of service and opine on the legal obligations created by the contract which, according to the Government, usurped the role of the judge in instructing the jury on the law and the jury’s role in applying the law to the facts. The Government also argued that his testimony was also unreliable because it did not consider the full context for interpreting the agreement, and he had not reliably established that there was a uniform definition of “trust” that he could apply. The Government added that his testimony should also be excluded under Rule 403 because it was likely to mislead and confuse the jury about the relevant legal standards.

    Joseph M. Pimbley

    The Government also pushed for excluding the testimony of Joseph M. Pimbley concerning problems with FTX’s software infrastructure, specifically its database and computer code because considering the notice did not adequately disclose his opinions, his testimony would not be relevant to the issues at trial, and it would be an improper attempt to imply through an expert that Bankman-Fried lacked knowledge of alleged infrastructure deficiencies at FTX.

    Bradley A. Smith

    The Government also demanded the exclusion of the proposed testimony of Bradley A. Smith regarding campaign finance laws and practices because not only was it improper for an expert to testify about the legal framework that applied to political contributions at the federal level, it was also irrelevant since the campaign finance charges had been dropped, and his opinions about Defendant’s “good faith” compliance with campaign finance laws constituted inadmissible state of mind testimony under Rule 704(b).

    Pietro (Peter) Umberto Vinella

    The Government asserted that the proposed expert testimony of Pietro (Peter) Umberto Vinella warranted exclusion because he lacked qualifications to opine about cryptocurrency markets and FTX considering much of his proposed testimony was irrelevant or speculative, and his opinions about financial services industry customs and the reasonableness of FTX’s actions were misleading and unfairly prejudicial.

    Andrew Di Wu

    The Government challenged the background testimony of Andrew Di Wu on cryptocurrency’s history and markets which also drew comparisons between FTX and other cryptocurrency exchanges deeming it irrelevant, speculative, and dismissive of the Court’s legal instructions.

    Moreover, the Government also argued that the testimony of Thomas E. Bishop and Brian Y. Kim should be excluded because the defense failed to provide sufficient disclosure about their anticipated expert opinions and the bases for those opinions, as required by Rule 16. The notices for these two experts only identify general topics but do not state any actual opinions or analysis.

    In summary, the Government argued that the seven proposed defense experts had either failed to provide adequate notice of their opinions, intended to provide irrelevant or improper legal opinions and testimony on industry practice, lacked qualifications, or intended to provide speculative and unreliable testimony that was substantially more unfairly prejudicial than probative. For these reasons, Daubert hearings were requested to assess relevance, qualifications, and reliability.

    As the start date of the trial of FTX co-founder Sam “SBF” Bankman-Fried approached, new court filings indicated that SBF could pay his expert witnesses more than $1,000 an hour should they testify on his behalf.

    Some of the witnesses, such as former Federal Election Commission Chairperson Bradley Smith, charged SBF’s legal team $1,200 an hour to testify about issues such as the United States’ campaign finance laws and straw donors, according to a court filing on August 28. Bradley Smith clarified that he had no financial stake in the case’s outcome. He was receiving compensation solely for his time and services, billed at a rate of $1,200 per hour. He emphasized that his compensation was not based on the opinions he provided in the case or on the final outcome of the legal proceedings.

    Additional expert witnesses, such as Akka and Pimbley, might charge £800 (equivalent to $1,000) and $720 per hour, respectively, if they testify, as indicated in the court filings. The hourly rates for other potential expert witnesses for SBF’s case vary, ranging from $400 to $650.

    On the other hand, Peter Easton, an accounting professor at the University of Notre Dame, who is a proposed witness for the prosecution, would charge $1,175 per hour as per the court data.

    SBF seeks to request a trial postponement. If the request is submitted by September 1 and is approved, SBF’s trial will be rescheduled to March 11, 2024.

    Key Takeaways:

    • Experts cannot testify to legal conclusions, interpret contracts, or opine on whether the Defendants had the requisite mental state to commit the crimes. This improperly usurps the role of the judge and jury.
    • Experts noticed by the defense failed to provide adequate disclosure of their opinions and analysis as required by the rules of evidence. Vague topics are insufficient.
    • Proposed testimony on background information, industry practices, actions of third parties, and regulatory uncertainty from several experts is irrelevant to the issues the jury must decide. It is also likely to mislead and confuse the jury.
    • Testimony opining that the Defendants acted reasonably or in good faith compliance with laws and regulations is impermissible state of mind evidence.
    • Some experts lack qualifications to testify about cryptocurrency markets and exchanges. Their opinions are unreliable and speculative.
    • Expert testimony that is cumulative of facts that can be established through percipient witnesses is unnecessary and improper. In summary, the government argues the proposed experts either lack proper qualifications, offer legal opinions and testimony irrelevant to the facts at issue, or provide unreliable and prejudicial opinions. The testimony should therefore be excluded or limited through Daubert hearings.