Editor: Please give us an overview of the financial aspects of litigation. Where can surprise costs arise?
Mukamal: The key financial aspects of litigation obviously include legal fees and ancillary costs, such as travel, court reporters and expert witness fees; however, parties often overlook third-party legal fees or the cost of potentially bad publicity or embarrassment as issues are uncovered during litigation. Unlike car repairs, for example, litigation can’t be handed off wholesale to a third party; it requires a substantial investment of time and money, and it disrupts normal business activities. The key point is to understand what resources are required and vet all possible costs during the early stages of case evaluation.
Brown: From a forensic perspective – that is, using financial knowledge and skill in conjunction with investigative techniques – I would stress the value of conducting a cost/benefit analysis as a tool for both plaintiffs and defendants to determine whether the litigation is worth pursuing at all. Toward that goal, we routinely provide an estimate for our time as it relates to the forensic work and testimony required for a specific matter.
Surprise costs also can arise from litigation gamesmanship, such as extensive motion practice or discovery requests. Depositions and the trial process itself can easily cost more than originally expected, and “scope creep” sometimes comes into play, where initially we’re engaged for one task that ultimately evolves into multiple unique tasks not accounted for in our original estimate.
Editor: Data management has emerged as an enterprise-wide issue. What’s your perspective on controlling discovery costs?
Brown: In terms of data management and discovery issues, electronic discovery is here to stay, as are its often overwhelming costs. The good news is that technology can make information a more manageable, even valuable, asset and enable forensic accountants to do our jobs efficiently. In my experience, while witnesses might end up making your case, it’s always imperative that all knowable facts be learned, and electronic discovery has helped us to achieve that goal. While e-discovery is a factor in the cost/benefit analysis, generally it’s a good strategy to embrace today’s data volumes rather than fight them. It is pennywise but pound foolish to consider those costs in a vacuum.
Mukamal: I agree and would add that technology can also be an obstacle inasmuch as the access to information it provides may trigger costly gamesmanship tactics. For instance, motions to compel discovery are of no use when your adversary lacks the technical ability to comply. And the mere fact that information exists does not guarantee that it is properly indexed or that compelling its production from a third party will be worth the cost. This is distinct from situations in which a party willfully destroys information, but there are forensic methods for detecting spoliation, as opposed to a party’s bona fide inability to produce.
Editor: Time is a critical aspect of litigation costs. Can forensic investigation serve to uncover issues during the early stages?
Brown: Absolutely. Our early-stage work often produces results that cause parties to think about avoiding litigation and perhaps look to some form of alternate dispute resolution. Sometimes, however, these are not matters of money but rather of emotion, leading to irrational decisions about pursuing litigation at all cost.
My perspective is different from that of an attorney, who is the client’s advocate. As an expert witness, for instance, I am an advocate of my opinion, and I might not know all the nuances of a case because my attention has been purposely focused on one particular area. The truth is that clients never complain that they weren’t billed enough, and for most, litigation costs are of paramount concern and subject to defined budgets. Freewheel spending is not productive toward settlement of any kind, and depending on the nature and timeframe of a litigation, we certainly might suggest a move toward settlement negotiations early on.
Editor: What are some examples of useful pre-litigation assessments?
Mukamal: While these tend to be matter-specific determinations, one common strategy is to identify and never lose sight of your endgame, not only as a cost-saving measure but also as a factor in molding effective strategy before going through the paces of litigation.
Take for example a competitor that raids your employee base in spite of noncompete agreements, which causes you to lose clients. Is your endgame to get retribution, to drive them out of business, to send a warning message, or to be compensated for lost business? It’s important to define your goal upfront and avoid unrealistic expectations, such as disgorging profits from a company that isn’t in good financial shape.
On the other hand, maybe your noncompete contract is out-of-date or unenforceable in light of recent legal developments or faulty drafting. Is there a risk from your end in this instance, and if so, should you handicap for that weakness or perhaps consider an informal mediation as a “pre-sue” step? I always try to look for informal settlement conferences first – take the temperature of the other side and determine my strengths and weaknesses.
Editor: What are the important aspects of assessing the damages sought by a plaintiff?
Brown: The damages amount certainly will dictate the cost of the litigation, and a key challenge for me is managing a plaintiff’s expectations. Sometimes the litigants are just too emotional or too close to a matter, and I would say that 90 percent of the damages work we do involves unrealistic expectations, such as setting damages at $100,000 when we might anticipate litigation costs of three times that number. Notwithstanding any skin they may already have in the game, we work with attorneys and clients to ensure that the damages picture is explained in plain language and to provide an independent opinion as to the real financial stakes.
Editor: Do you play a similar role in court, with juries and judges as well as with the parties?
Brown: On a daily basis. Managing different perspectives and emotional factors is a familiar challenge; I liken it to the role of a CFO who knows that helping CEOs attain their aspirations sometimes involves moderating their expectations.
Mukamal: And of course, this all ties in with the goal of managing costs. Take for example a Daubert challenge, which essentially creates two trials to manage and pay for. These common situations add risk for the client and a level of complexity for us as expert witnesses.
With or without a Daubert challenge, the substance of our job and our professional duty remain unchanged. Further to Michael’s point about managing expectations, I had a situation in which a plaintiff client insisted that I not discount a future cash-flow stream for determining a present value of a claimed loss because it would lower the damages. However, discounting future cash flow was essential to providing an accurate opinion, so I did it anyway. Part of our job is to help the client understand that we can’t be malleable. We’ll get bounced out of court, and then the client will have spent time and money and end up with no financial expert for the case.
Brown: Daubert challenges are part of the gamesmanship of litigation and something we deal with on a regular basis. The issue is not whether you’ve been challenged but how you handled it and how well your work stands up when you are challanged. Our credibility depends on producing an admissible report that is supported by the facts and is within our realm of expertise. It takes a lifetime to build a reputation, and no case is worth putting that in jeopardy.
Editor: Please talk about services you provide that assist with trial preparation, such as producing demonstrative evidence.
Brown: From a demonstrative standpoint, a picture is worth a thousand words. You could present dry sales performance numbers in columns on a page that certainly point to downward trends; however, when you show that same information as a graph, a jury, judge or arbitrator can see the trend, which has a stronger impact. I also spend time preparing direct or cross-examination questions for trial and questions for depositions. The latter are critical because those answers dictate how our report will flow, so we focus on drawing out the witnesses for our particular purpose.
Mukamal: Video depositions also can be used with great impact. For instance, we can show clips of the video deposition along with another frame that shows the document that’s being discussed or pictures of a construction site. This allows people to make a deeper connection with the evidence that’s being presented verbally. The selection of demonstrative evidence is a case-specific decision, and it often depends on your audience, i.e., jury versus judge. Nevertheless, visuals have a strong influence, and judges and juries like to be entertained like anyone else.
Editor: In your experience as certified fraud examiners (CFEs), how do fraud investigations play into litigation processes?
Brown: Financial frauds are often the root cause of our involvement in a litigation matter. The CFE designation combines investigative skills and accounting, and it focuses on four core areas: fraud prevention and deterrence, fraudulent types of financial transactions, fraud investigations, and legal elements of fraud. Many of my engagements involve malfeasance, for example, when a breakdown in internal controls allows an employee to take advantage of company assets. Also, in turbulent financial times, honest employees may stray into fraudulent activities out of desperation, so understanding both the psyche and the would-be mechanisms of a fraudster assists in our work.
Mukamal: These issues often are not apparent, so a forensic or fraud examination is needed when suspicions arise. It’s important to note that a fraud examination provides a totally different perspective from a financial statement audit and may be needed in addition.
Editor: Barry, we understand that you are a Chapter 7 panel trustee in the Southern District of Florida. Given that controlling legal costs is critical during the bankruptcy process, can you talk through the litigation issues in this context?
Mukamal: Bankruptcy litigation involves a lot more face time with the courts than with other areas of dispute. Hearings are scheduled very quickly, and the courts are very efficient. On the other hand, relatively few bankruptcy matters end up going to trial, so the bulk of the litigation can be segregated into various buckets, such as preferences paid prior to a bankruptcy filing, fraudulent transfers – i.e., clawbacks – or core matters resulting from breach of contract, dissipated assets, or removal of a debtor in possession and replacing him or her with a trustee. So there’s a constant flow of litigation.
I may have 300 to 400 asset cases at any given time, which could involve everything from simply cutting a deal with the debtor to a full-fledged trial for a director breach of fiduciary duty claim. It runs the gamut. Since my goal is to bring money into the estate to pay off the creditor, I am constantly weighing litigation costs against the ultimate result – and my real advantage is in not being emotionally involved.
Editor: Do you have any closing thoughts for our readers?
Brown: We welcome the opportunity to work with counsel on active cases and in less formal preliminary discussions about what type of expert is needed, or to provide an accountant’s viewpoint of the case strategy and potential endgame. We might do an assessment of recoverable assets or potential damages, or perhaps a sensitivity analysis that explores multiple angles and assumptions to help determine a range of possible damages.
Mukamal: Most forensic accountants are very glad to get involved at any point during a case to provide specific advice on an issue or maybe an opinion on the matter generically, even if they are not retained in the matter. I’ve been doing this for 35 years and always look forward to face time with counsel. So it’s a win-win.