Causation presents one of the most vexing problems for damages experts. This much became clear during a very informative panel discussion at the 2017 AICPA FVS Conference in Las Vegas. The panel, Linking Causation to Damages, sought to impress on financial experts the need to engage with causation, rather than prepare a damages calculation based on the assumption that causation exists.
Not everyone was on board. One skeptical audience member repeatedly asked whether the panel was suggesting that experts had to prepare a causation analysis—as if to say that causation was a legal issue that lawyers dealt with.
Causation is a critical element in establishing a plaintiff’s cause of action. It links the defendant’s alleged misconduct to the plaintiff’s claimed economic harm. Broadly speaking, there are two types of causation requirements. The higher standard requires a showing that, “but for” the defendant’s conduct, the harm would not have occurred. A less rigid standard requires a showing that the alleged misconduct was at least a “substantial factor” in causing the harm.
No matter which requirement applies, panel members urged experts to develop a thorough understanding of the case and the alleged causes of action. This may mean studying the company’s financial history, the state of the industry, as well as the company’s position in the market in order to determine and weigh all the factors that could have contributed to the plaintiff’s claimed financial loss.
“Experts need to be part of the case preparations,” Christian Tregillis (Hemming Morse LLP), one of the panelists, said. He noted that it’s common for the retaining attorney to want to wall off the damages expert. Attorneys often ask experts simply to rely on the information or data the attorney or client provide. In complex cases, financial experts often are told to build their damages calculation on the conclusions a separate industry analyst provides.
Tregillis and the other panelists insisted that experts take a big risk if they simply go along with the attorney’s modus operandi. As they see it, the key is to educate the lawyer why there is a need for the financial expert to speak directly with company management or the designated industry analyst. The panelists also said they usually do their own industry analysis and they double down on revenue projections to ensure their calculations sufficiently account for all the variables in play.
If you are building your calculation on “but for” revenue projections, you better understand what’s behind the forecasts, the panel members warned.