CFO as own firm's financial expert in tortious interference lawsuit

Fox in the hen house?

In business cases, some attorneys like to use the CFO or other financial person from the company that is claiming damages as an damages expert. Clearly, there are advantages. Very few persons will know the company's books as well as the CFO or similar persons. However on the flip side the issue of credibility must be weighed against those advantages.

Below is a case study of a case where the plaintiff in a tortious interference case used the CFO of the injured firm as their sides expert.

The report

In the case the plaintiffs alleged that the defendant undertook a number of illegal actions and unrightfully stole some of the plaintiff's clients. To calculate the damages in the case, the plaintiff's expert, the company's CFO, based the damages on the the previous year's revenue from the customers that the defendant allegedly stole. The CFO took the income for the customers that they identified (it was about 17 firms) and calculated the the percentage of the unit's revenue that the 17 firms comprised. She found that the 17 firms comprised about 83% of the unit's revenue.

The CFO then subtracted the unit's share of the direct expenses from the total revenue to arrive at the yearly damages. She assumed that the expenses that were attributable to the 17 firms was equal to the firms % share of the units total revenue. That is she assumed that the cost to service the 17 firms was equal to 83% of the unit's total measured direct cost.

She estimated that the plaintiffs damages were $6.56 million per year. She then multiplied the damages by 9, 12, and 15 years to arrive at her final damage analysis. Her implicit assumption was that the clients that the defendant allegedly stole would have been long term clients.

The problems


There are several problems with the CFO's analysis.

1. There was no explanation as to how the 17 firms were selected. According to the defendant not all of the firms, actually only 5 of the 17, ultimately ended up as clients. It is not clear where the 12 other firms went.

2. For the 5 clients that ended up with the defendant, most had not been long term clients before the alleged illegal acts took place. Some had only been clients for less than 1 year. In short it is not clear where the justification is for the assumption that they were long term clients

3. There was no discounting of the alleged damages. In damages cases, all future losses must be discounted. The discount factor, which takes into account of the risk associated with the future revenue stream, is in excess of 20% per year. Using the discount factor lowers the damages.

4. It is not clear all cost were accounted for. After a quick review of the income statements, it appeared some of the cost that were being classified as indirect (i.e. overhead) are related to the unit in question's operation. The CFO esential took out all overhead cost and did not allocate any to the unit in question. If damages are approriate then the net income, not the ad-hoc net income measure of the CFO.

5. It is not clear that the ratio approach to calculating the cost and expenses is appropriate. It may be more correct to use industry standards instead of the ad-hoc assumption the CFO used

6. Most importantly, an average of revenue needs to be used. Using the last year is problematic because the 17 firms that were identified had account balances that were higher in the previous year than in previous years. Using an average will account for this issue.