In legal disputes involving financial projections, the credibility of management forecasts is a critical battleground. For attorneys, understanding how these forecasts are built, scrutinized, and either validated or discredited can significantly influence case outcomes. Success hinges on a combination of expert witness diligence, judicial scrutiny, and the power of documentary evidence. These practices can not only strengthen the case but also align with professional forensics and valuation standards, as well as judicial expectations.
The Expert Witness Burden: Credibility & Diligence
Financial expert witnesses cannot simply accept a management forecast at face value. In a litigation context, an expert witness must “own” the opinion, making sure this opinion is objective and free from speculation. This requires a diligent evaluation of all inputs and assumptions. Professional skepticism is crucial, especially when a projection is developed after a dispute has begun, as it may carry inherent bias. Expert witnesses must analyze a forecast’s historical accuracy, internal consistency, and alignment with broader market conditions. A history of missed targets or overly optimistic, “hockey stick” growth curves can quickly undermine the credibility of a projection and the expert witness relying on it.
In the Eyes of the Court: What Makes a Forecast Defensible?
Courts often rigorously examine financial forecasts for reasonableness and supportability. As highlighted in cases like Sargon Enterprises, Inc. v. University of Southern California, where a projection showing a 2000× profit increase over the projection period was rejected, judges are quick to dismiss projections that appear speculative or lack a solid analytical foundation. Similarly, in Bruno v. Bozzuto’s, Inc., growth projections that defied historical performance and market trends were deemed unreliable. Courts tend to favor forecasts created contemporaneously with business operations prior to the litigation, viewing them as less likely to be influenced by the pressures of litigation. The key takeaway is that projections must be grounded in reality, supported by robust analysis of competitive landscapes, and consistent with known or knowable information at the valuation date.
The Power of Discovery: Unearthing Documentary Support
The discovery process is pivotal in preparing to substantiate or challenge a forecast. Documentary evidence, including internal emails, board minutes, and planning documents, can provide invaluable context. For example, an Excel file where the preparer refers to projection inputs as “wild guesses” can be a powerful tool to dismantle an opponent’s argument. Conversely, discovering that the opposing party had previously endorsed a forecast, or utilized it for business activities such as a loan application, can bolster its credibility. Attorneys should work closely with their financial team from the outset to tailor discovery requests that unearth these crucial documents, which can either fortify a claim or expose the speculative nature of an opposing position.
How Forvis Mazars Can Help
At Forvis Mazars, we have decades of practical dispute and litigation resolution experience. We offer innovative forensic technology resources for an ever-evolving marketplace. Want to learn more? Reach out to one of our Forensics professionals today.