September 2006 Newsletter
Exclusion of Expert Opinion
Civil Action No. 04-cv-01224-PSF-CBS U.S.D.C. Colorado deals with the problem of an expert unable to support an opinion without undisclosed, confidential data. The case was brought by a relator, also serving as an expert witness, for the United States claiming Kerr McGee underpaid Federal royalties. Addressing a challenge to the relator’s pricing methodology, the court did not require a generally accepted methodology but instead a “good grounds” measure of reliability coupled with the later opportunity for cross-examination.
However, as to the challenge of the expert opinion that the alleged violations were “the worst” the expert had seen, the court said there needs to be “a traceable, analytical basis in objective fact”, not ipse dixit. Perhaps it was more clear to the court that the superlative offered by the expert was simply without support in contrast to the pricing methodology that apparently created an argument over interpretation of facts. The court went on to say that unless the expert produced the allegedly confidential files of other companies upon which the superlative was based, the opinion would likely be disallowed. This distinction between difference of opinion versus absence of any objective fact forms an important distinction when disallowing expert testimony.
The growth of alternative investments, including the well-publicized hedge funds, has increased the need to provide standards to value private, as opposed to public, equity investments.
Sources of information generally about private equity valuation include Private Equity Industry Guidelines Group (www.PEIGG.org), Institute Limited Partners Association (www.ILPA.org) and International Private Equity and Venture Capital Valuation Guidelines (www.privateequityvaluation.org). Traditionally, the implied price per share from the latest round of equity contributions has been used to value private equity investments. This is called the "last dollar" approach.
The Financial Accounting Standards Board may soon issue GAAP regarding the valuation of private equity. These standards are expected to require fair value calculation and presentation using actual prices if there are arm's transactions. If there are not more recent transactions, the last dollar would be used with the requirement to update that price for recent information indicating changes in value up or down.
If the fund managers believe there has been a value change, they should look to comparable company transactions, market multiple for comparable companies or "other" valuation methodologies.
The establishment of valuation policy committees is expected to mitigate the subjectivity and volatility in using the proposed fair value measure.
State v. Target Corp., Texas 10th Court of Appeals, 10-04-00326-CV
In this case, the State seized land from Target to widen Highway 6. A portion of the land seized contained parking spaces. Because Target was not satisfied with the monetary award determined by commissioners, the case went to trial, and a jury awarded Target a much larger amount.
In trial, the court granted Target’s motion to exclude testimony of the State’s experts. The basis of the motion was that testimony by the State’s experts relied on information supplied by persons whose identity had not been timely disclosed. The Court of Appeals determined that the State’s expert report was timely and complete in substance. Moreover, Target had ample opportunity to explore the sources of State’s experts’ information in their depositions. By Rule 193.6, since the State’s supplementation did not unfairly surprise Target, the State’s expert testimony should not have been suppressed. The case was sent back to trial court for a new trial.
Andrews v. DuPont, 7th Circuit Court of Appeals, 04-2882
Steven Andrews was transporting eighteen totes (portable tanks) of ink for DuPont, weighing more than 40,000 pounds in total, when his semi trailer rolled over in Illinois. Andrews maintained that DuPont had loaded the totes into the semi improperly. Andrews retained an expert to explain the physics in the case. Because the expert derived his testimony from data from the wrong highway ramp, the expert’s calculations were based on incorrect data and so were themselves invalid. The Court of Appeals upheld the trial court’s ruling that the testimony was inadmissible.
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