As every bankruptcy litigator knows, the outcome of many complex bankruptcy matters is dependent on the analysis and testimony of the financial expert. We have been fortunate to work with many exceedingly capable bankruptcy attorneys. While the strategies and approaches used in managing experts frequently differ, we have observed a number of common elements used by lawyers who maximize the effectiveness of their expert's testimony. The following guide represents several decades worth of amassed experience. It includes what we perceive to be the 10 Commandments of financial expert management. Interestingly, we find these rules to be applicable across a broad range of bankruptcy cases.

1. Hire Early: Do Not Succumb to the False Economy of Delay

When is the best time to hire a financial expert in a bankruptcy case? Over and over, we have come to realize that the answer is early in the case; in particular, early in the discovery process. An expert's analysis is only as effective as the information that he/she has. The expert should work closely with the attorney on compiling the document request. The experienced expert will know where to search for information necessary to build a concise case. For example, a scientist's speech can provide clues about a firm's target market; unsuccessful loan applications can provide information relevant to the debtor's anticipated market size, and board minutes can illustrate dissension within the debtor's board. An experienced expert will typically have a list of potentially useful documents in order to obtain differing types of information. By hiring an expert early on in the case, the expert can obtain and make use of information that otherwise might be unavailable.

2. Do Not Fall for the Back of the Envelope

We cannot tell you how often we have been asked to do a back-of-the-envelope solvency analysis or damages estimation. On occasion, an attorney might ask us to do a "quick and dirty" analysis of a topic that ordinarily might take several months to complete. While in theory the approach has merit, we find that virtually each time we move down the path of "quick and dirty," we cover the same ground again with a more detailed analysis at a future point in time. Rather than saving money, significant duplication of funds are now allocated to properly analyze the issues. The quick-and-dirty approach can easily miss key factors such as contingent liabilities, untapped credit lines or hidden assets. The quick-and-dirty can sometimes be downright misleading and result in burdensome, additionally incurred work.

3. Hire a Communicator

A good expert can communicate with a judge or jury. While this sounds simple enough, it is not uncommon to find and hire a technically proficient but ineffective finance expert. We have frequently encountered accountants who speak debits and credits, finance professors who sound like they are teaching a doctoral seminar in stochastic processes, and actuaries who sound like mathematicians. The ability to communicate is vital. Making the complex understandable to a judge or jury is often an integral part of the expert's job. Yet frequently, the attorney seeks to hire a knowledgeable expert, ignoring the key communication skills of the potential expert. If the expert is a financial practitioner, what experience does the expert have communicating to a non-sophisticated audience? If the expert is a professor, what are his/her teacher ratings? Success in the classroom is often a key indicator of the expert's likely courtroom effectiveness. The courtroom, like the classroom, requires the effective dissemination of complex information.

4. Does the Expert's Game Plan Fit With Yours?

As you are interviewing experts, find out how they would attack the problem at hand. Remember, the expert's credibility becomes of utmost importance. Does the expert's background give him/her sufficient credibility to analyze the matter at hand? Does the expert plan to keep it simple? It is not unusual to find an expert who solves the problem with all the artillery available as opposed to the simplest tool to do the job. Consider, for example, a scholarly professor who wants to use a complex stochastic algorithm rather than a simple iteration of an Excel spreadsheet. Make sure the expert plans to address the issues for which you require testimony, not the interesting but irrelevant problem relating to his/her research agenda.

5. Do Not Hire Two Experts Where One Will Suffice

We recently testified in the case of a bankrupt company where valuation at the time of a transaction was paramount. We testified using traditional discounted cash flows and appropriate multiples. Our adversaries used several experts. One of them used a little-known and infrequently used concept of harmonic mean. It results in a mean value consistently lower than the ordinary average of a set of numbers. In other words, if you were calculating the harmonic mean of the numbers three and five, you would get a number less than four. The expert using the harmonic mean touted its importance in finance and well-known applicability. A second expert testifying on related subject matter, disclosed he had never heard of the harmonic mean and was not familiar with any applications of this supposedly important tool. The message is that two or more experts testifying on related material can easily and inadvertently contradict each other's testimony. However, we often find that an industry expert, in addition to a finance expert, can add a valuable industry knowledge in particular situations. Similarly, multiple experts sometimes provide a more complete analysis in certain situations where both liability and damages are at issue.

6. Where Possible, Avoid the Single-bullet Expert

Many areas of testimony in bankruptcy are amenable to several types of analysis. To the extent that the expert can bolster his/her analysis by using several alternative methodologies, the power of testimony is increased. For example, discounted cash flows may be an entirely appropriate method of determining value. However, if a similar value can be obtained using other approaches (e.g., comparable companies or comparable acquisitions), the financial foundation of the testimony is bolstered. Should the adversarial party determine weaknesses in one of the methodologies, the other methodologies still support the expert's valuation.

7. Do Not Let the Expert's Prior Testimony Be Your Waterloo

Attorneys virtually always ask whether there is any contradictory prior testimony on the record. Most of the time, they ask after the expert is already engaged and preparing for deposition or trial. At that time, it is usually too late to remedy the potential damage. Consider this recent case: The expert was hired to value a company at some point prior to a bankruptcy. The attorney was attempting to prove the company was solvent. A key variable integral to the analysis was the marketability discount assumed by the expert. To make the company solvent required an unusually small discount. The expert's report produced a solvent company justified by the unusually small marketability discount. However, on numerous other occasions, the expert testified in cases where it was advantageous for his position to have a large marketability discount. A careful reading of his prior testimonies revealed significant contradictions and discrepancies. The engagement process, not the preparation for testimony, is the time to learn about the expert's paper trail.

8. Avoid Surprises: Meet Frequently With Your Expert

You do not want to control or put words into your expert's mouth, but you do want to manage him/her. You should know what your expert is planning to analyze as well as the results of any analyses to date. Such careful monitoring ensures that the attorney is kept appraised of the expert's work and can correct any misunderstandings or misinformation the expert may have. It is important that the final work product and conclusions be those of the expert, but it is also important that the attorney and expert having a working relationship throughout the preparation of the expert's report.

9. Provide Information to Your Expert Promptly

Often when a case begins, we will request a broad range of documents from the attorneys. Generally we are provided information as promptly as it is available. However, delayed remittance of information occurs with enough frequency to be mentioned here. Remember that the expert is limited in his/her analysis by the information available. If the expert is trying to develop conclusions based on incomplete data, it is costly both to the client and potentially to the quality of the work. In some cases, we see a decidedly uneven flow of information. The closer to the report date, the more information we receive. (We are not talking about documents produced late, but documents that were available early on.) We notice the same phenomenon as we approach a deposition or trial date. During the week before the trial, it is not uncommon to find ourselves deluged with thousands of pages of documents and deposition testimony. This uneven flow of information to the expert sometimes makes it nearly impossible to give proper attention to the documents received just prior to a report or testimony. Clearly, early remittance of key documents will enable your expert to be better prepared as well as deliver a more complete report and well thought-out and conceived deposition and trial testimony.

10. Get Your Expert Paid Promptly

Experts, like attorneys, like to be paid promptly. There are several reasons why it is beneficial for your case that your expert is paid with reasonable promptness. You do not want your expert to be spending more of his/her time worrying about payment than worrying about the matter at hand and delivering the most appropriate and effective report and testimony. After many years of practice, we have also concluded that one of the best ways to avoid the charge that the payment to the expert is contingent is to make certain that all fees and expenses are current at the time of both the deposition and trial.

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Footnotes

¹ The authors are professors at Boston University's School of Management and Managing Directors of The Michel/Shaked Group. Return to article