The role of a consulting expert in financial litigation

Dec 10, 2018
Financial consulting

When most attorneys consider using an expert to testify at trial, they may be thinking about someone who can testify with specialized knowledge about key issues in the case. However, litigators in the know recognize that experts can be useful for so much more. Enter the litigation consulting expert.

Litigation consulting experts have the same specialized skills as testifying experts (e.g., accounting and finance) but they work behind the scenes advising counsel and providing case-relevant guidance. These situations may include, for example, assessing the appropriateness of an entity’s accounting methods, whether there are indications that earnings may have been manipulated to achieve or exceed preannounced targets, or if there is sufficient evidence to indicate assets have been misappropriated. In short, a consulting expert can help counsel and its client evaluate the strengths and weakness of its positions and be an advisor from the pre-litigation phase up through trial, all while maintaining privilege.

We have all heard stories of lawsuits against large companies involving a C-suite executive alleged to have “cooked the books” or inappropriately adjusted financial results to improve the company’s perception in the market. Many times, top executives come under fire for their alleged (1) active role in adjusting financial results, or (2) lack of attention in correcting any inappropriate activities of their subordinates. A consulting expert can review the accounting and financial records of the company, emails and other information to assess such claims, and if needed, help identify who may have known about the inappropriate adjustments, and how to present those facts to a trier-of-fact. For the CEO and chief financial officer who must certify to the reasonableness of the company’s financial information under Sarbanes-Oxley 302,1 the potential consequences associated with a known misstatement can be significant, including potential incarceration.

The forensic accounting capabilities of a consulting expert set them apart from other accounting and finance professionals. When it comes to investigating potential Ponzi schemes or other financial crimes, forensic accountants have a distinct perspective to review and investigate a situation and unravel all the pieces and parts to show a complete picture of what took place.

Benefits to working with a consulting expert

There are several notable benefits to working with consulting experts, but perhaps the most valuable benefit is their ability to assess if the case has legs (i.e., will your client’s position pass the smell-test?). To provide an informed recommendation, a consulting expert will consider the following questions, among others:

  1. Are the asserted damage claims founded with credible, defensible data, or largely subjective and exposed to challenge by an opposing expert?
  2. Based on the consulting expert’s prior experience with similar fact patterns, is the strategy for the case likely to play out in the desired manner?
  3. What specific issues are the opposing parties likely to raise….and can we sufficiently neutralize them?
  4. Are our positions strong enough to move forward with the case and incur the cost of litigation?

Consider the following fact pattern in which the early involvement of a consulting expert can be beneficial. A group of investors claim they lost $50 million of capital through the inappropriate investment actions of a fund manager. The investors want their attorney to assert at least $65 million in damages to include what they feel they “would have earned” had the fund manager properly followed the fund’s stated investment plan (i.e., the original $50 million invested plus at least $15 million of reasonably expected returns). The alleged “inappropriate” investment activity may include, for example, investing fund assets in education sector stocks in contrast to the fund’s stated investment objective to invest only in technology sector securities. Before preparing and filing its complaint, counsel might want to have a consulting expert review the facts and circumstances of the case. If the consulting expert is only able to identify that $5 million of original investor capital was inappropriately invested in education stocks, with the remainder being appropriately invested in technology securities that lost value due to a market downturn, this might put into question the validity of the claims.

Working with a consulting expert also affords counsel the opportunity to freely discuss all aspects of the case, including potential stress points and related strategies, with the benefit of having such communications be non-discoverable. Additionally, a consulting expert can be invaluable in assisting counsel with depositions by helping prepare witness outlines, lists of questions to be asked and lists of follow-up questions to anticipated deponent responses.

Saving time and money

A consulting expert, especially one hired early in the process and who is involved as the case develops, can also save time and money by helping the litigation team hone in on key issues and identify potential problem areas. As mentioned, a consulting expert can first review the merits of the case to understand the potential strategy to defend an individual or entity accused of wrongdoing, its potential effectiveness, and the impact that strategy may have on considerations at trial related to plea agreements, chance to prevail, or the overall cost of mounting a defense. This allows the litigation team to set appropriate expectations with the client, and potentially save them money on trial, experts and proceedings, and how those costs relate to potential fines, penalties and potential incarceration.

In situations where opposing litigants do battle in part by swamping each other with thousands of pages of extraneous discovery, a consulting expert, with assistance from forensic technology professionals, can expeditiously identify the most relevant documents, often without the laborious work of first having a team of junior lawyers and paralegals read and categorize every single document. A good consulting expert knows what type of documents are going to yield useful information.

As an example, say a client believes that someone has been misappropriating money from the company. An individual in the finance department has found some irregularities that suggest a fraudulent act may have occurred. The “whistleblower” submits information through the company’s hotline and the company subsequently retains outside counsel to investigate. Your first thought may be to do a widespread and time-consuming analysis. However, that can hamper the ability to quickly identify relevant documents (financial, email and other) and may not uncover well-disguised fraud. Instead, you could leverage a consulting expert with specialized knowledge of forensic procedures and processes that will yield a rapid, more accurate picture of the facts and circumstances. A consulting expert can identify if funds have gone missing or if someone is simply using unorthodox accounting methods and all assets can be accounted for. If funds are being misappropriated, the consulting expert can help counsel develop a strategy to explain the potential fraud in a less technical, easy-to-understand, manner.

Lastly, a consulting expert can play an important role when it comes to your testifying expert. The consulting expert can take the first crack by investigating several avenues to help determine which items are relevant to the trial strategy, and which information is irrelevant and may only serve to confuse the facts at hand.  The consultant can then help the testifying expert to focus and clarify her report and testimony by introducing only those elements and items that are most relevant to the case and provide clarity to the key points at issue.

Without a deep understanding of the accounting and financial facts at play in a case, a team of attorneys can find themselves chasing their own tails through some of the financial nuances of discovery, interviews, document review and deposition testimony. A good consulting expert can help litigators avoid costly blind alleys that don’t yield useful information, and keep the case focused on the most viable and valuable issues.

1. Sarbanes-Oxley Act, section 302: Corporate Responsibility for Financial Reports.

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