Financial Experts in Litigation Support
By Randall Scott

Early in Ronald Reagan’s first presidential campaign, one of my friends chided, “That guy always gives simple answers to complex questions.” To some extent, isn’t that what is wanted from an expert witness? If he can communicate his findings and conclusions in an accurate, concise and understandable way, will he not have a better chance of holding the court’s attention and be more convincing than if he offers up a brain-numbing dissertation certain to mend the most incurable insomniac? And if his enduring popularity is a gauge, it worked quite well for old Ronnie. It is not unusual for the legal profession to encounter complex financial or tax issues. Business valuations, economic damages, fraud and theft loss, personal injury/wrongful death awards, and various divorce issues are all areas where the financial expert can play a helpful role. Regardless of the task assigned to the financial expert, there are certain steps that are common to many litigation support engagements. They generally fall into the categories of the initial meeting/discussion with the attorney, data gathering, data analysis, and reporting.

Initial contact
When you first discuss or meet with the prospective expert, certain matters will arise that are common to many of the different types of litigation support engagements. Among them are the conflict check, his curriculum vitae, hourly rates, retainer and billing policies, and the engagement letter. Conflict checks for firms of even modest size typically involve inquiries of other members of their staff. Relationships often have broad-reaching tentacles, so the answer may be briefly delayed if the firm is even modest in size.
There will likely be a discussion of rates, retainers, billing, and collection. The good ones are highly educated, trained, and experienced, so they do not work cheaply. Most will want a retainer. Hourly billing rates will vary among their staff members. Some litigation support engagements, like asset tracing or lost profits analysis, involve long hours performing somewhat clerical tasks. These include number crunching, sorting, organizing or other duties that can be performed by a proficient paraprofessional at a much lower billing rate than that of the expert. Assurance should be given that all work is performed by the expert or under their supervision and that he or she takes full responsibility for all facets of the engagement.

Data gathering
After you have engaged the expert and presented him with an overview of the situation he will likely submit a document request and an interview questionnaire. If a business is involved he may want to visit the premises. Some of the information sought may have to be obtained through deposition. His requests can be voluminous but providing the expert with as much information as possible is critical to the satisfactory completion of the engagement. In life we do not always get what we want and are lucky if we get some of what we need. This also applies to financial litigation experts. The expert will lose credibility with the court if on cross-examination or in deposition he is forced to acknowledge item after item that he was unable to review, or question that went unanswered.
Because litigation support engagements vary widely it is impossible to offer an all-inclusive list of what the expert might request in the way of documents. The more typical items are several years of tax returns and financial statements (preferably audited), budgets, forecasts, contracts, leases, buy-sell agreements, non-compete/employment separation agreements, prenuptial agreements, wills, trusts, insurance policies, bank statements, credit card statements, and brokerage statements. Responses to initial requests are very likely to lead to follow-up requests and questions.

Data analysis
Space does not permit a discussion of all areas of data analysis, but a couple of key topics will be addressed. This phase will usually consume at least half of the time spent on the engagement. A general awareness of what the expert is doing during this period may provide counsel insight into what documents, facts and information he will deem relevant or attach importance.
Central to many litigation support engagements is the income normalization of the subject company. This common thread could be expected to be found in a business valuation, a determination of lost profits, an economic damages calculation, and even alimony and child support litigation if a business is a factor. A vital element of the expert’s conclusion will be his reliance on the dollar amount of the earnings of the subject business as providing a true picture of the those earnings. The expert will usually begin with the tax returns or financial statements and undertake a “cleansing.” This involves making various adjustments with the objective being a set of income and expense figures that are entrenched in economic reality.
In an matter involving a small business or professional practice adjustments, discretionary items often constitute a significant portion of the adjustments in the normalization process. Owners’ compensation, perquisites, automobile expenses, rent, entertainment, interest and compensation paid to family members are all common items appearing on the company’s tax returns and financial statements that often can not be accepted at face value.
Owners’ compensation can vary widely between the same or similar positions when it comes to small businesses. Their salaries will be influenced by what the officers need to live, what their accountants tell them to pay themselves in order to minimize taxes, and the lack of separation between the intangible value of an owner to his business from the value of his services (especially true in professional practices).
It is common for any resemblance between an owner’s salary and what is reasonable compensation to be purely coincidental. I could recite several horror stories of owner abuses in this area. I once observed two shareholders admit to colluding with a third minority shareholder two years in advance of his planned divorce by capping his salary at an artificially low level. Their aim, of course, was to minimize the alimony and child support he would be required to pay his future ex-wife. Reasonable compensation is one of the really gray areas with which the financial expert routinely must deal. There are various sources to offer the expert some guidance on reasonable compensation. But often it comes down to this: If you as an investor were going to buy this business, how much would you have to pay to replace present management?
Some needed adjustments for the income normalization process may not be apparent from the documentation obtained. For example, consider a company operating out of two comparable buildings but pays no rent on one of them because it is shareholder owned. Without adequate inquiry and/or physical inspection this could easily be overlooked when reviewing tax returns or financial statements. Without an adjustment for the unpaid rent on the second building company earnings would be overstated. The impact of such an omission could impact significantly on a business valuation, lost profits determination or economic damages calculation.
It is during the data gathering and analysis phase of the engagement that the expert and the attorney should communicate regularly. A single case can span many months or even years. A common complaint that I hear from other experts is their frustration at not being kept apprised of new information or developments in the case that would affect their work. A true war story told at a recent convention illustrates this.
Brown, a 20 percent partner in the law firm of Smith, Jones & Brown, had billed one of the firm’s key clients $18,000 during a period when Brown was incommunicado as he vacationed in the south of France. A couple of months later this was discovered by the law firm’s managing partner. She promptly disclosed the matter to the client and refunded the charge. But as a direct result of Brown’s action, the client terminated its relationship with Smith, Jones & Brown. The firm’s partners then pressured Brown out. No agreement could be reached on the value of Brown’s interest and litigation ensued. The law firm hired a nationally renowned expert to value the 20 percent interest and Brown’s counsel did likewise. The court even appointed its own appraiser. Surprisingly all three experts testified to valuations loosely clustered around $150,000. The jury awarded Brown $700,000 for his interest! Why had all three experts been so out of tune with the jury? Because no one had provided any of them with a copy of a letter the jury got to see. It was written by the managing partner of Smith, Jones and Brown to its client regarding the $18,000 billing and included the following, “We apologize for Partner X having fraudulently billed you $18,000 while out of the country on vacation.” All of us are very busy, but your financial expert can be a really great asset if the lines of communication are kept open.

Report
A well written expert report will occasionally win a case or, more commonly, hasten a favorable settlement. The different types of reports can vary based upon the needs and budget of the client. If the matter is being litigated, Federal or state law will dictate some of its form and content. Some experts like to use FRCP 26(a)(2)(B) to guide them on all their reports.
Key items typically included in a report will be a description of the issue or subject of the report, a conclusion, the approach and methods utilized, sources of information, assumptions, and the expert’s qualifications. Experts who have toiled numerous hours in arriving at their conclusion have to guard against getting too verbose in their report. Though it may be well-written, judge and jury have a finite amount of time that can be spent reading it. But it’s a safe bet that both opposing counsel and expert will scrutinize every single word!
Visual graphics like charts and pictures are good communication tools and are excellent for reinforcing testimony. An accountant droning on and on with numbers will anesthetize many people. A good visual illustration used to convey a salient point stands an excellent chance of being etched in a juror’s memory during deliberations.

Expert as consultant
A few final comments should be made about the expert as a consultant. Most enjoy this assignment as it is usually less formal in nature and frequently can be performed for a fraction of the cost. They will often note pertinent matters with just a cursory review of a tax return or financial statement. Their experience with business and accounting records usually provides them with the unique ability to readily understand complex transactions, ownership flow, tax ramifications and their impact on your case. But one of the best bangs for the client’s buck may be to give them the opposition expert’s report and watch them go to work.

Randall Scott, CPA/ABV, CVA, CFE, CFFA, PFS is managing member of the Las Vegas CPA firm of Randall L. Scott, CPA LLC. In addition to litigation support, the majority of his 25 years of public accounting experience has been spent providing various accounting and tax services to medium and small-sized businesses and their owners. He is also an AICPA peer reviewer of CPA firms for the AICPA’s Peer Review Program. In 2008 Mr. Scott was the national winner of the NACVA’s annual business valuation report writing award.

Nevada Limited Partnerships: Rules for New (and Old) Limited Partnerships
By Jordan Pinjuv 

In 2007, the Nevada legislature adopted a new set of rules governing the formation, operation and dissolution of limited partnerships based on the Uniform Limited Partnership Act (2001) or ULPA (2001). Those newer rules, which are codified in Chapter 87A of the Nevada Revised Statutes (NRS), presumptively apply to limited partnerships established after October 1, 2007, while the original Nevada limited partnership rules contained in Chapter 88 of NRS presumptively apply to limited partnerships formed before that date. However, limited partnerships formed on any date can voluntarily elect to be governed by the non-presumptive set of limited partnership rules if the limited partnership so chooses. Understanding the differences between the statutory frameworks is crucial to properly advising clients who may be considering a limited partnership as a business entity.

What is a limited partnership?
Both chapter 87A and 88 of the NRS define a limited partnership as a business entity “having one or more general partners and one or more limited partners.” The general partners manage the business, and are liable for the debts and obligations of the partnership. Limited partners are passive investors, with little or no involvement in the day-to-day operations of the partnership. The liability of the limited partners is limited to their original investment in the entity. Typically, the general partner of a limited partnership is itself an entity with limited liability, such as a corporation or a limited-liability company.

NRS Chapter 87A Limited Partnership Act
According to the National Conference of Commissioners on Uniform State Laws (NCCUSL)—the drafters of the Uniform Limited Partnership Act (2001)—the rules adopted in Chapter 87A are intended to reflect the modern day uses of limited partnerships. Specifically, the new rules have been drafted for the use of the limited partnership in the context of manager-entrenched commercial deals and family limited partnerships. In light of the highly specialized purposes of the limited partnership, as noted in the NCCUSL’s summary, the default rules reflect a preference for strong, centralized management and passive investors with little capacity to exit the entity. Among the areas in which the new limited partnership act makes significant changes are the liability of partners, the fiduciary duties owed to partners, and the duration of and withdrawal from the limited partnership. Additionally, the new limited partnership statute is completely de-linked from the general partnership rules found in Chapter 87. In contrast, the pre-2007 limited partnership statute provides that in any case where the chapter is silent, the general partnership rules will govern.

Liability of limited partners
Some of the most significant changes to the limited partnership rules are the additional limitations on liability contained in the new act. Under the old rules, a limited partner could be held liable for the debts of the partnership if he participated in the control of the business and a third party engaged in business with the partnership under the belief that the limited partner was a general partner. The new rules provide a full shield against limited partner liability on the basis of limited partnership status, despite limited participation in the management of the limited partnership. NRS 87A.330. Additionally, the Uniform Limited Partnership Act (2001) made the limited-liability limited partnership available to shield general partners from liability, though these provisions were already codified prior to the 2007 adoption of the ULPA (2001).

Fiduciary duties
The new limited partnership act rules also specify and limit the fiduciary duties owed by general partners to the limited partnership. General partners owe a duty to account for and hold property derived from limited partnership’s activities as a trustee for the limited partnership. NRS 87A.385(2)(a). General partners must also refrain from self-dealing with and competing against the limited partnership in limited circumstances. NRS 87A.385(2)(b) and (c). The duty of care owed to the limited partnership is limited to refraining from negligent or reckless conduct, intentional conduct, or a knowing violation of the law. NRS 87A.385(3). The fiduciary duties of general partners were not explicitly defined under the pre-2007 limited partnership rules and were therefore left open to interpretation under the general partnership rules. General partners operating without the benefit of the new specified and limited fiduciary duties may likely owe a greater duty to their limited partners, one that requires as then-Judge Cardozo put it, “Not honesty alone, but the punctilio of an honor the most sensitive.” Meinhard v. Salmon, 164 N.E. 545 (1928).

Duration and dissolution
The new limited partnership rules also change the procedures for the duration and dissolution from the partnership. Whereas the original rules provide that the duration of the limited partnership is to be specified in the certificate of limited partnership, the new rules provide that a limited partnership shall continue as a perpetual entity. NRS 87A.155. The original limited partnership statute provides that a decision to dissolve the limited partnership requires the unanimous consent of all partners. NRS 88.550(3). The new statute provides that only the consent of all the general partners and those limited partners owning a majority of the rights to receive distributions as limited partners are needed to dissolve the partnership, essentially concentrating more power with the general partners. NRS 87A.435

Use of limited partner’s name
Under Chapter 88.320, the use of a limited partner’s name in the name of the limited partnership is disallowed except under certain circumstances. Under the new rules, a limited partnership may now use a limited partner’s name in the name of the limited partnership. NRS 87A.175.

Making a choice
Limited partnerships new and old need to make an informed decision regarding which limited partnership act will apply to the entity’s business. Generally, in the specialized circumstances in which a limited partnership is the chosen investment vehicle, the new rules found in Chapter 87A are more likely to be appropriate. Clients who formed a limited partnership before October 1, 2007 should take a long look at the potential benefits of opting-into the new statutory framework.

Jordan Pinjuv is an associate at Kummer Kaempfer Bonner Renshaw & Ferrario where he focuses on corporate and securities laws and transactions. He can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it