The use of Monte Carlo simulations in court

BVWireIssue #150-2
March 11, 2015

During a recent BVR webinar on using Monte Carlo simulations for valuing distressed companies, a listener asked about the use of the method in bankruptcy court or other court settings. Another listener offered up a case, Lyondell Chemical Co. v. Occidental Chemical Corp., 608 F.3d 284 (5th Cir. 2010), involving environmental cleanup costs, in which the Monte Carlo method successfully withstood a Daubert challenge.

In a 2012 valuation case, a court approved the use of Oracle’s Crystal Ball method (which uses Monte Carlo) for Daubert purposes despite a strong challenge from the other side. The case is RMD, LLC v. Nitto Americas, Inc., 2012 U.S. Dist. LEXIS (Nov. 5, 2012).

Jim Alerding (Alerding Consulting LLC), who was a speaker during the webinar along with Matthew Bernstein (Dixon Hughes Goodman LLP), commented that the Monte Carlo method is an acceptable statistical method to use in court. However, you need to be careful with what you put into the model.

Watch your inputs: In a recent valuation case, the Monte Carlo method itself was not attacked, but rather the inputs were the issue. The judge invalidated the analysis because the expert based it on the wrong assumptions. The case was Myservice Force v. American Home Shield, 2014 U.S. Dist. LEXIS 61207 (May 2, 2014).

The RMD and Myservice cases are available at BVLaw.

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