The Role of the Financial Forensic Expert in Dispute Resolution

Changes in the Methods of Dispute Resolution

In this article, Steven I. Platt, a retired Maryland Circuit Court judge, founder of The Platt Group, Inc., and QuickRead’s newest editorial board member, shares with readers the changes he sees affecting civil court proceedings, rise of alternative dispute resolutions, and opportunities that are becoming available to credentialed business valuation and financial forensic professionals.

Traditionally, our citizens have had their disputes (legal and factual) resolved by a judge or jury in a courtroom. There, the role of the “Expert” has historically focused on assisting the trier of fact, be it a judge or jury, to understand the evidence. Traditionally, those experts have neither worked for the court nor been paid by the court. Rather, they have worked for and been paid by the parties. Therefore, their opinions are, at least initially, been viewed by both judges and juries as suspect. Experts reading this article may have encountered that impression, if not overt cynicism to their opinions being received and found persuasive.

That is changing. For one thing, in valuation cases, courts are beginning to hire their own valuation experts. Most state courts have the authority to do that, and more and more courts are open to exercise that authority. That opens a new market for NACVA’s members’ services. It is a market of judges and court administrators, most do not know “who you are, what you do, how you do it, and why everyone who is a CPA cannot do it as well as you can.” I encourage you to introduce yourselves to this new market of judges and court administrators. In doing so, however, you must educate this new market. As a caution, do not assume a basic knowledge of valuation standards and or the credentialing process. The exception to the latter is found amongst the few experienced business court judges; the few are familiar with the terminology including valuation techniques, particularly of intellectual property, businesses (distressed and other), as well as intangibles and other forensic accounting issues.

What I see is vastly different from what I saw from the bench in the last quarter of the 20^th Century 1978–1999, and the first decade of the 21^st Century 2000–2007. Like every other institution of government, the judiciary, as well as the private dispute resolution sector is rapidly changing. “Evolving” connotes too slow a process to be an accurate description of what is going on. Technology and globalization are rapidly transforming rules of civil procedures, the forums and techniques of dispute resolution and, with them, the paradigms of the administration of civil justice.

These modifications of existing governmental institutions, corporate organizations, as well as new financial products and devices, result from rapid technological development and globalization. These trends will, notwithstanding some source of the subliminal messages from recent elections, not be reversed. So, therefore, the role of “the financial forensics experts” must necessarily expand and diversify to accommodate these changes and trends.

Courts are also increasingly utilizing financial forensic experts as receivers and Special Magistrate. Most state courts and all federal courts give their judges the authority and discretion to appoint whomever they want, including non-lawyers. The standard is “abuse of discretion.” Appointing someone with knowledge of the issues and industry before the courts and who can make informed and educated recommendations or even run a company for the court, having the experience to do so, is clearly not an “abuse of discretion.”

Finally, courts are increasingly utilizing Special Magistrates and settlement administrators a/k/a “claims adjudicators” to administer and manage settlements of high stakes, multi-party litigation, particularly class action cases and mass tort cases. Court appointed Special Magistrates and settlement administrators are most of the time authorized by rule and/or court order to employ “such professionals, experts, and consultants as they deem necessary” to conduct their court ordered duties, which will include recommending the allocation of damages, expert fees, and attorney’s fees to the court. That is you—members of NACVA. Those settlement administrators, Special Magistrate, and receivers are a market which, if currently unexplored, should be on your marketing screen shortly.

The best-known example of this recent phenomenon and “The Man” is of course, Ken Feinberg of 9-11 Fund, BP Gulf Oil Spill, and Virginia Tech fame, to name a few. In each of these cases, and others, the roles of financial forensic experts, which we will call you generically, has been to perform among other functions:

1. Develop formulas and algorithms to determine the allocation of economic damages based on severity indexes established by the terms of the settlement agreement and data collected to support it.
2. Explain to the Special Magistrate, the administrator, and/or the court, those formulas and the allocation of damage awards based thereon.
3. Explain to the recipients of the distinct categories and amounts of damage the basis for the differentiations in the size of their distribution or award.
4. Supervise the transfer and application of data from investigations, interviews, and records to the administrators formulating and implementing the settlement.

I, myself, have been involved in this process more than once as a Special Magistrate and settlement administrator, and I can tell you that the market for these financial forensic experts who are qualified to, and willing to perform these functions is growing, but the number of potential experts who are qualified to do so by education and experience is not large, or at least not known.

This is fertile field for NACVA members to expand their expertise and their marketing.

The Use of Experts in ADR

Furthermore, the non-traditional use of experts, particularly financial forensic experts in what is known as alternative dispute resolution (ADR), is growing. As I have said, these new roles derive from the traditional role of assisting a judge or jury but are expanded to include or substitute persuading other players in the dispute. For example, in mediation, the expert can be most effective by assisting the opposing party, opposing counsel, or even the opposing expert in understanding the issues from your client’s perspective or how a court would understand it. There is an old saying in the litigation world: “Don’t play in the other guy’s analytical ballpark.” However, in a mediation, you do play in the other guy’s analytical ballpark. That is how you persuade him/her. If successful, it is likely that you will have a winner.

In an arbitration, explaining to a single arbitrator or a three-arbitrator panel the methodology which is appropriate to value market share to determine (as in asbestos cases) the percent of allocation of damages between defendants; or in the newly emerging cannabis industry, with which I am familiar, the percentage of revenue or profits to which a consultant is entitled are examples. Here, the success of the expert’s client will very much depend on the expert’s ability to persuade the arbitrator that the methodology utilized is appropriate, i.e., in accordance with Daubert v Merrill, and individualized to the valuation of the real, personal, or even intellectual property at issue in the case and not just a one-size-fits-all formula developed by the industry, particularly the insurance industry.

Finally, it is useful to understand that in the new paradigm, the expert opinions that will be sought from you will, to a certain extent, depend on the dispute resolution forum and technique being utilized by the parties and counsel. In litigation and arbitration, your opinion as to the specific quantification of damages will be sought utilizing the theory of the case, and the valuation theory selected by the hiring authority. In a mediation or neutral case evaluation, your opinion is most likely sought to aid in a risk analysis designed to leverage the possible settlement of the case.

I hope I have been helpful and have described the comparatively new world that you, as the premiere financial forensic experts, have been or will shortly be operating in. As we look to the future of the field of dispute resolution and the administration of justice and specifically to your role as experts in that system, perhaps the best guidance that I can provide in conclusion is the advice of Abraham Lincoln which we would all do well to heed today: “The dogmas of the quiet past are inadequate for the stormy present and future. As our circumstances are new, we must think anew and get anew.”

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Judge Platt served as a judge in the Maryland Courts for over 25 years, with 17 years on the Circuit Court. While serving as a Circuit Court Judge, responsible for management of all “Complex Civil Non-Family Cases” in the Court, which included the supervision of all settlement conferencing, mediating and scheduling of these medical malpractice, legal malpractice, business litigation, and products liability cases. Has also presided over many of these cases. Experience as a judge also includes employment matters involving discrimination, wage and hour disputes and the right to strike under collective bargaining contracts. Acknowledged architect of the Maryland Businesses Technology Case Management Program, which was cited as a model for the nation in articles appearing in The Business Lawyer, a publication of the Section of Business Law of the American Bar Association, in Case in Point, the periodical of the National Judicial College, and in The Maryland Bar Journal.

Upon retirement from the bench in early 2007, established The Platt Group, Inc., and is currently engaged in mediation, arbitration and neutral case evaluation of complex civil litigation including legal malpractice cases, medical malpractice cases, product liability cases, business disputes, real estate matters, and other civil cases. Judge Steven I. Platt (Ret.) is a member of the National Academy of Distinguished Neutrals (NADN) after a thorough peer review by the Board of Directors of that “invitation only” organization which selects only the top 10% of Neutrals in the country. He is also on the Judicial, Commercial, Employment, Large Complex Case, and Construction Panels of the American Arbitration Association (AAA), the International Institute for Conflict Prevention and Resolution (CPR) and Resolute Systems (RS). He has taught the use of mediation and arbitration in resolving Business Disputes to Judges and Lawyers both in Maryland and nationally through both The Judicial Education Program of The American Enterprise Institute (AEI) Brookings Joint Center for Regulatory Studies (served on Judicial Advisory Board), and through The American College of Business Court Judges (Past- President).

Judge Platt is the current author of the legal blog “A Pursuit of Justice – Examining the Intersection of Business, Law, and Politics” – www.apursuitofjustice.com where he discusses a wide variety of issues that intersect multiple business and legal disciplines. Judge Platt has served on several judicial committees, held numerous teaching positions, authored a number of publications, and received many awards and accolades. Judge Platt’s full biography can be found at www.theplattgroup.com.

Judge Platt (Ret.) may be contacted at (410) 280-0908 or by e-mail to info@theplattgroup.com.