The 1993 Daubert case says that an attorney is permitted to challenge an expert witness’s credentials, and if successful, the expert will not be allowed to testify. One case before the U.S. Court of Federal Claims shows how an expert can successfully defend their qualifications and methodologies when they’re subjected to a Daubert challenge.

SSE Case: Not All Daubert Challenges Succeed

This important case involved a dispute over gift and income tax refunds filed by stockholders in Schwan’s Sale Enterprises, Inc.(SSE) a company that produced food products. The IRS disallowed the valuation of stock gifts made by SSE and assessed tax deficiencies against each of the owner’s children.

The plaintiffs made a Daubert challenge at trial against an IRS expert, Dr. Herbert Spiro. Dr. Spiro was called to offer a valuation of non-voting SSE shares. (Okerlund v. United States, US Ct. of Fed. Claims, 99-133T &99-134T )

In their Daubert challenge, the plaintiffs argued that the expert’s had insufficient qualifications, didn’t spend much time working on the valuation, and delegated most of the work to his assistants, and therefore should not be allowed to testify. The court found these arguments unconvincing for several reasons:

• Education. Dr. Spiro held a doctorate in business economics and finance from the University of California at Los Angeles. He had been a tenured professor at California State University and had taught many courses in business policy and finance.
• Professional credentials. The expert managed a consulting firm that specialized in financial valuation and economic analysis. He had been an expert witness on many prior occasions.
• Hours spent on this valuation. The court determined that although the assistants had billed far more work on the case did not mean Dr. Spiro was not a certified expert. The court noted that Dr. Spiro supervised his assistants’ work and was well acquainted with the conclusion and methodologies used in the case.
• Methodology. The court also dismissed the notion that Spiro’s methodologies did not meet general acceptance standards, as required by Daubert. The opposing experts did disagree on the specific pricing multiples and discounts taken for lack of marketability, however they both used the same generally-accepted methodologies for appraising the value of the closely-held stock.

This case provides useful guidance for firms preparing for trial. Experienced financial experts with the requisite professional credentials and education are well suited to defend against Daubert challenges. For more information about valuations and financial experts, make an appointment with Filler & Associates.