Know The Perils of Financial Testimony by Owners and Employees

By Robert H. Alexander, CPA/ABV/CFF, ASA

Owners, executives, and other key employees sometimes testify in litigation involving lost profits or valuation issues. But beware: Layperson testimony that crosses over into expert witness territory is at risk of being excluded from evidence. And sometimes the lay witness is just a bad witness.

Lay vs. Expert Testimony

Rule 701 of the Federal Rules of Evidence (FRE) governs opinion testimony by lay witnesses. A nonexpert’s opinion is limited to one that is:

• Rationally based on the perception of the witness,
• Helpful to a clear understanding of the witness’s testimony or the determination of a fact at issue, and
• Not based on scientific, technical or other specialized knowledge within the scope of Rule 702, which governs expert testimony.

Personal Experience

Several years ago, I was a defense expert in a trial in Memphis. Through a Daubert motion, the plaintiff’s expert opinion of value of the plaintiff’s business had been excluded. Rather than allowing this to ruin their case, the plaintiffs called the company’s owner to use his particular knowledge of his business to give testimony on what he thought the value of the business was. Up to this point no one had any concept of what his testimony would be, how he might have come to the business value or anything else he might say.

When the judge allowed the owner to testify, the jury was cleared from the court room, so the attorneys and judge could hear what he was going to say. He certainly cleared the hurdle of not being an expert – it wasn’t even close. After he testified to what he thought the value of the business was, I observed that oddly it was within a hundred dollars of what his expert had determined. Naturally, he was then asked how he had arrived at that value. After seeming somewhat evasive in several attempts to answer the question, he finally said, “the truth is I was driving to the court this morning and pulled over on the shoulder of the road, and I took this calculator and I put in the cash flow of the business and then I multiplied by eight.”

After a prolonged silence, the defense asked for a recess. After a relatively short huddle, the defense came back and asked for mistrial, which the judge granted. The retrial featured a reconstituted expert opinion of value, and a business owner who was shown perjuring himself on multiple occasions when his video depositions were played back saying the opposite of what he had just testified to. The jury quickly ruled unanimously for the defense.

The moral of this, is that you should know your client. Some clients can be great witnesses and others can do you more harm than good. Regardless, of the rules on lay testimony common sense can often be your best guide.

The Technical Rules Regarding Lay Testimony on Financial Matters

The opinions of lay witnesses on lost profits and other financial matters may be allowed in certain situations, however. According to the FRE Advisory Committee’s notes, “Most courts have permitted the owner or officer of a business to testify to the value or projected profits of the business, without the necessity of qualifying the witness as an accountant, appraiser, or similar expert… . Such opinion testimony is admitted not because of experience, training or specialized knowledge within the realm of an expert, but because of the particularized knowledge that the witness has by virtue of his or her position in the business.”

For example, in a lawsuit for unpaid equipment rentals (United States ex rel. Technica, LLC v. Carolina Cas. Ins. Co.[1]), the company’s CEO was permitted to testify as a lay witness regarding the reasonableness of re-rental charges because of his “particularized knowledge gained from years of experience within his field.”

But when testimony requires more complex financial or valuation knowledge, courts are likely to require an expert. For example, in Ruhr v. Immtech International, Inc.[2], the court rejected testimony from the plaintiff’s president regarding lost profits because it involved a new product in a complex market — financial matters outside of his personal knowledge or perception.

Takeaway

A witness’ testimony may be excluded if he or she qualifies as an expert — for example, the witness is a CPA or credentialed valuation analyst — but was not disclosed as such. Or a layperson may be disqualified because he or she does not possess the required scientific, technical or other specialized knowledge to testify on a particular subject. The key is that lay testimony cannot be based on “scientific, technical or other specialized knowledge” within the scope of Rule 702 and conversely, expert testimony must be.

Published on LinkedIn November 9, 2018

[1] United States ex rel. Technica, LLC v. Carolina Cas. Ins. Co., No. 08-CV-01673-H (KSC), S.D. Cal., April 11, 2012

[2] Ruhr v. Immtech International, Inc., 570 F.3d 858, 7th Cir., June 30, 2009