Appraisal firms ‘likely to face scrutiny’ in securities litigation

BVWireIssue #73-5
October 29, 2008

“There are numerous potential parties on all sides of failed financial institution litigation,” says a new article, "Failed Financial Institution Litigation: Remember When?", by Richard Bernstein and John Oller, both partners with the international law firm of Willkie Farr & Gallagher, LLP.  “Possible plaintiffs run the gamut from the several federal agencies involved in the regulation of the banking industry to the DOJ, SEC and private shareholders of bank holding companies.” 

The list of potential defendants may run even longer, the authors say, from the obvious (officers and directors of the failed institutions) to the more creative: auditors, investment banks, attorneys, accountants—and yes, appraisers.

According to the piece, “Banks regulators during the S&L crisis often targeted professionals that serviced failed institutions, particularly audit firms, law firms, and appraisers.  It is unlikely that today’s regulators will be less aggressive with respect to these parties.  Appraisal firms are particularly likely to face scrutiny in the present environment given the housing slump and subprime crisis. Allegations of collusion between banks and appraisers have received attention in recent months.”

Is there a silver lining for BV experts? While the authors don’t differentiate between real estate and other appraisal disciplines, our recent poll of BV experts finds many of them agreeing there will be closer scrutiny of BV work product, both in future litigation and future engagements. 

“The problems today will be the basis of a lot of future litigation that will need valuation experts,” agrees Gilbert Matthews of Sutter Securities Incorporated.  Many of these cases will relate to the sub-prime crisis and its fallout.  “This crisis is more like a hand grenade than a rifle—it impacts lots of folks within the vicinity of where it hits.  A great deal of this litigation will relate to corporate and personal damages, and much of it will deal directly with valuation issues.”

Like so much in life, it’s both good and bad.  “I believe this litigation will be a two-edged sword for BV practitioners,” says Grant Thornton’s Neil Beaton.  ”On the good hand, BV practitioners who perform litigation support will most likely see increased demand for their services as more complex cases begin to enter the courts.  BV professionals with a financial services background such as banking or brokerage will benefit the most.  On the [other] hand,” he adds, “I believe we will see more litigation against BV practitioners who have performed FAS 142 impairment tests and got sideswiped by the crises.” 

For a complete round-up of all comments by BV experts—including industry insiders, like Bill Quackenbush, Jay Fishman, Jim Alerding, Jeffrey Tarbell and Ron Seigneur, see “What Will the Wall Street Meltdown Mean to the BV Profession?” in the November 2008 issue of Business Valuation Update™.

In addition, on November 20th, Mike Mard, a managing director of The Financial Valuation Group and Tony Yanez with Willkie Farr will jointly present on FASB Update: Convergence, Volatility and Potential Liabilities.  You can view the agenda and register for this special Teleconference here.

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