A numbers game: the challenge of
Cross examining financial experts

Winning the numbers game of cross examining a financial expert is less about math and more about details, according to a recent CLE program, “Cross Examination of Financial Experts.”  ABA-CLE and the ABA Section of Litigation produced the complimentary online course.

Linda Listrom, senior partner with Jenner & Block LLP, Chicago moderated the program, pointing out that there are three simple steps to follow in cross examining a financial expert.

As part of the program, other presenters played roles of a financial expert for the plaintiff, the defense lawyer, the financial expert for the defense and the plaintiff’s lawyer.  Taking these roles were Frank E. Emory, Hunton and William, Charlotte, N.C.; Elizabeth A. Evans, Analysis Group, Inc., Los Angeles; Geoffrey H. Osborne, Pricewaterhouse Coopers, Philadelphia; and Jeffrey Willis, Snell & Wilmer LLP, Tucson, Ariz.

In introducing the three steps of financial cross examination, Listrom said she learned in law school that in any business case, sooner or later the lawyer will have to talk about damages and that means talking numbers.  If the business case comes to trial, the lawyer may need to cross examine a financial expert, who often will have logged more courtroom hours than the lawyer.

The first step in winning the numbers game is to identify the assumptions used, Listrom explained, noting that the expert has to make predictions to show damages.  These assumptions show what the world would look like but for the alleged conduct.

For example, if the plaintiff is trying to show lost profit, the plaintiff’s expert can show a level of sales that would have existed but for the action of the defense.  “This but-for world does not exist and never has existed,” said Listrom.  “The expert has to create it for the court.”

To show lost sales, the expert might use the company’s historical sales data, industry averages or competitive information.  According to Listrom, making the choice of which assumption to use is up to the expert.  A financial expert for the defense likely will select different assumptions than those selected by the plaintiff.

The lawyer then needs to isolate each assumption, asking himself or herself why the expert decided to focus on that one, rather than another particular assumption.

Step number two, according to Listrom, is to evaluate each assumption.  “The lawyer needs to look at what type of supporting documentation is available with respect to each assumption to learn the basis for the expert’s conclusion that this data is reliable.”

In looking at sales, it is important to consider market conditions, whether the market is growing or declining, any new competitors or problems with the product along with the actual numbers.  Numbers that show an expert went beyond relying on company information to doing independent research can have more weight.

For example, in the case demonstrated during the program, the financial expert for the plaintiff used company provided information, but did not do an industry-wide evaluation. 

The goal with step two is to identify the assumptions that are the weakest, Listrom said.

The third step is to attack the weakest assumptions.  In taking this step, the lawyer needs to flush out the assumption, show the impact of a changed assumption, establish that there is little support for the expert’s assumption and help the jury see the deficiencies in the assumption.

Listrom suggests that lawyers planning cross examinations of financial experts should start with assumptions.  Knowing how to identify and pick apart the assumptions will allow lawyers to cross examine any financial expert.

The CLE includes an article by Listrom, “How to Cross Examine a Financial Expert,” as well as expert reports by the financial expert for the plaintiff and for the defense in the demonstration case.

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