Just because a valuation method is "standard" doesn't mean you can't challenge it under Daubert


At least half a dozen new Daubert challenges to financial experts came in this month, each attacking the relevance and reliability of the valuation evidence (or the valuator’s qualifications).

In some complex bankruptcy and securities litigation cases, Daubert challenges are now even testing “standard” methods, from proven experts.  For example, an otherwise qualified expert valued a Chapter 11 debtor under a “levered” discounted cash flow (DCF) approach. The method simply adjusted the typical DCF elements to fit the debtor’s reorganization plan, the expert said. Specifically, he assumed zero projected cash flow until the debtor’s proposed sale in 2012, at which point he subtracted net debt and preferred stock (labeling this “terminal value”) and applied a discount rate (determined from cost of equity) to reach an equity value.

Although the expert may have used traditional terminology, there were “no substantive similarities between the generally accepted DCF method” and his “levered” method, the federal bankruptcy court found. Further, the expert made “multiple novel assumptions,” such as an assumed sale of the company, and a discount rate that failed to account for both the cost of debt and equity. It may have met the facts of the case, but his method failed to match the “intellectual rigor” required of an expert valuation, and the court disqualified the untested approach under Daubert. Read the complete digest of In re Young Broadcasting, Inc. (S.D.N.Y., April 19, 2010) as well as the full text of the court's opinion, on BVLaw™.

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