Known or Knowable Front and Center

SEC v. Bluepoint Inv. Counsel, 2022 U.S. Dist. LEXIS 92776

In a recent ruling from a U.S. District Court for the Western District of Wisconsin, the court¹ denied a motion in limine from the defendants regarding the potential testimony of a witness testifying to valuations of a business. The motion asserted that plaintiff SEC’s witness utilized information that was not known and could not be known by the defendants when they prepared their valuations on the same company.

The court determined that the SEC expert had followed “a generally accepted method of business valuation,” and, thus, the court denied the motion to exclude her testimony. While the ruling is short and to the point, it shines a light, once again, on the application of the known or knowable concept.

The defendants contended that the SEC expert’s valuations should be based on information that the defendants actually knew at the time of their valuations. The court further notes that it agrees that only information known or knowable is appropriate and that the defendants can pursue that point on cross-examination. But the court does not necessarily agree that only information actually known by the defendants at the time of the valuations will meet the known or knowable standard. It appears that the court is looking to whether the defendants “could” have known certain information.

To me, it appears that the court has a good understanding of the known or knowable standard so that the final determination at trial is likely to revolve around testimony on that issue. However, the defendants do raise another point. What if something could have been known but was not actually known by the defendants at the time of the valuations? To what extent and what effort must a party go to uncover all of what “could” have been known?

For the valuation professional, and perhaps this could help the court with this case, the AICPA issued a Subsequent Events Toolkit.² Within that “toolkit” is a definition of “known or knowable” as follows:

The valuation analyst should consider only facts and circumstances existing at the valuation date and events occurring up to the valuation date that could have been reasonably known, foreseen, understood or comprehended. For illustrative purposes, consider whether an agreement executed shortly after the valuation date with a new major customer would likely be known or knowable at the valuation date. It was most likely in the works at the valuation date and, therefore known or knowable at that point. On the other hand, a major storm that causes major damage to the business and its facilities shortly after the valuation date would not have been known or knowable and, therefore, should not be considered in the valuation.

We will be following this suit to see how this issue plays out in the courtroom. Another question comes to mind. Would this testimony have been allowed if the new proposed Rule 702 changes, which would tighten the exclusion rules to encourage courts to exclude more testimonies than under the current rules, were in effect?³

¹ SEC v. Bluepoint Inv. Counsel, 2022 U.S. Dist. LEXIS 92776.

²  VS Section 100 Toolkit (access to this toolkit this is an FVS section member benefit).

³ See blog post from May 3, 2022, Rule 702 and Daubert – Admissibility – Jim Alerding, CPA/ABV.